PROSPECTUS
GAMEZNFLIX, INC.
5,836,435,851 SHARES OF
COMMON STOCK
This prospectus relates to the resale by the selling
stockholder of up to 5,836,435,851 shares of our common stock,
including up to 5,816,096,751 shares of common stock underlying
convertible debenture and up to 20,339,100 issuable upon the exercise
of common stock purchase warrants. The convertible debenture is
convertible into the number of our shares of common stock equal to the
dollar amount of the debenture being converted multiplied by 110, less
the product of the conversion formula multiplied by 100 times the
dollar amount of the debenture being converted, which is divided by
the conversion formula. The conversion formula for the convertible
debenture is the lesser of (i) $0.20, (ii) 82% of the average of the
thee lowest volume weighted average prices during the twenty trading
days prior to the conversion or (iii) 82% of the volume weighted
average price on the trading day prior to the conversion. The warrant
is exercisable into 20,339,100 shares of common stock for a period of
three years at an exercise price of $1.09 per share. The selling
stockholder may sell common stock from time to time in the principal
market on which the stock is traded at the prevailing market price or
in negotiated transactions. The selling stockholder may be deemed an
underwriter of the shares of common stock, which it is offering. We
will pay the expenses of registering these shares.
Our common stock is registered under Section 12(g) of the
Securities Exchange Act of 1934 and is listed on the Over-The-Counter
Bulletin Board under the symbol "GMFX". The last reported sales price
per share of GameZnFlix's common stock as reported by the Over-The-
Counter Bulletin Board on May 30, 2008, was $0.0002.
The shares offered hereby are highly speculative and involve a
high degree of risk to public investors and should be purchased only
by persons who can afford to lose their entire investment; see "Risk
Factors" on page 6.
These securities have not been approved or disapproved by the
securities and exchange commission or any state securities commission
nor has the securities and exchange commission or any state
securities commission passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
Information contained in this document is subject to amendment.
The registration statement relating to the securities has been filed
with the U.S. Securities and Exchange Commission and declared
effective on April 13, 2006. This prospectus shall not constitute an
offer to sell or the solicitation of an offer to buy nor shall there
be any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such State.
Dated: May 30, 2008
Table Of Contents
Prospectus Summary 3
Risk Factors 6
Use of Proceeds 16
Selling Stockholder 16
Plan of Distribution 20
Legal Proceedings 22
Directors, Executive Officers, Promoters and Control Persons 22
Security Ownership of Certain Beneficial Owners and Management 24
Description of Securities 25
Interest of Named Experts and Counsel 26
Disclosure of Commission Position on Indemnification
for Securities Act Liabilities 26
Description of Business 28
Management's Discussion and Analysis of Financial Condition
and Results of Operations 37
Description of Property 46
Certain Relationships and Related Transactions 47
Market for Common Equity and Related Stockholder Matters 49
Executive Compensation 53
Financial Statements 55
Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 56
Legal Matters 56
Experts 56
Available Information 57
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by detailed
information appearing elsewhere in this prospectus. Each prospective
investor is urged to read this prospectus in its entirety.
The Company.
We are primarily an on-line DVD and video game rental business
dedicated to providing customers a quality rental experience through
our website, www.gameznflix.com. Our service is an alternative to
store based gaming rentals. We currently provide rental services to
our subscribers, as well as the option to purchase new video game and
DVD titles at a discounted price. We seek to provide our customers
with a large selection of video game rental choices on a monthly
subscription basis. Customers can sign-up via the web page to rent
DVD and/or video games of their choice. The titles are then shipped
to the customer via first class mail once they have made their
selection(s). Active subscribers can retain the games or DVD's for an
indefinite amount of time as long as they are active paying
subscribers. Customers can exchange their selections at anytime by
returning their game(s) or DVDs in the pre-addressed package provided.
Since November 2004, when we commenced keeping track of our customer
base, we have consistently maintained a monthly customer base of 8,800
customers.
Our monthly burn rate is approximately $50,000. As of March
31, 2008, we had $10,566 in cash. Historically, we have satisfied our
burn rate either through the use of cash on hand, cash generated from
the convertible debenture issued to Golden Gate Investors, Inc., cash
generated from sales of securities or the issuance of shares in
consideration for services. Pursuant to the Golden Gate financing, we
currently have warrants convertible into 14,652,400 shares of common
stock that are exercisable at $1.09 per share and a total of $146,524
in convertible debenture outstanding.
We are a Nevada corporation with our principal offices
located at 1535 Blackjack Road, Franklin, Kentucky 42134. Our
telephone number is: (270) 598-0385.
The Offering
Common stock offered by selling stockholder Up to 5,836,435,851 shares,
including up to 5,816,096,751
shares of common stock
underlying convertible
debenture and up to 20,339,100
issuable upon the exercise of
common stock purchase warrants
at an exercise price of $1.09
per share, based on current
market prices and assuming full
conversion of the convertible
debenture and the full exercise
of the warrants (includes a
good faith estimate of the
shares underlying convertible
debenture to account for price
protection adjustments)
Common stock to be outstanding
after the offering Up to 2,356,672,764 shares
assuming the full exercise of
our warrants and conversion of
our convertible debentures
(there are 1,471,277,514 shares
left to be issued out of the
total amount of 5,836,435,851
shares originally registered in
this offering). The amount
remaining to be issued
represents approximately 166%
of the outstanding shares at
May 30, 2008.
Use of proceeds We will not receive any
proceeds from the sale
of the common stock. However,
we will receive up to
$22,169,619 upon exercise of
the warrants by the selling
stockholder. We expect to use
the proceeds received from the
exercise of the warrants, if
any, for general working
capital purposes. We received
an aggregate of $203,391 in
connection with the issuance of
the convertible debenture to
the selling stockholder. We
used the $203,391 for the
general working capital
purposes and the payment of
professional fees.
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The above information regarding common stock to be outstanding
after the offering is based on 885,395,250 shares of common stock
outstanding as of May 30, 2008 and assumes the subsequent conversion
of issued convertible debenture and exercise of warrants by the
selling stockholder.
To obtain funding for our ongoing operations, we entered into a
Securities Purchase Agreement with Golden Gate Investors, Inc.
("Golden Gate") on November 11, 2004 for the sale of (i) $150,000 in
convertible debenture and (ii) a warrant to purchase 15,000,000 shares
of our common stock. In January 2006, we entered into an amendment of
the Securities Purchase Agreement with Golden Gate in which the
debenture was increased to $300,000 and we issued an additional
15,000,000 warrants to purchase shares of common stock. This
prospectus relates to the resale of the common stock underlying these
convertible debenture and warrants. The investors provided us with an
aggregate of $300,000 as follows:
- $100,000 was disbursed to us in November 2004;
- $50,000 has been retained for services provided to our company
by various professionals, which was disbursed upon effectiveness
of the prior registration statement; and
- $150,000 was disbursed in January 2006.
The debenture bears interest at 4 3/4%, mature three years
from the date of issuance, and are convertible into our common stock,
at the selling stockholder's option. The convertible debentures are
convertible into the number of our shares of common stock equal to the
dollar amount of the debentures being converted multiplied by 110,
less the product of the conversion formula multiplied by 100 times the
dollar amount of the debenture being converted, which is divided by
the conversion formula. The conversion formula for the convertible
debentures is the lesser of (i) $0.20, (ii) 82% of the average of the
thee lowest volume weighted average prices during the twenty trading
days prior to the conversion or (iii) 82% of the volume weighted
average price on the trading day prior to the conversion.
Accordingly, there is in fact no limit on the number of shares into
which the debenture may be converted. However, in the event that our
market price is less than $0.005, we will have the option to prepay
the debenture at 150% rather than have the debenture converted. If we
elect to prepay the debenture, Golden Gate may withdraw its conversion
notice. In addition, the selling stockholder is obligated to exercise
the warrant concurrently with the submission of a conversion notice by
he selling stockholder.
The original warrant was exercisable into 20,339,100 shares
of common stock at an exercise price of $1.09 per share. As a result,
if Golden Gate elects to convert a portion of the convertible
debenture, it must also exercise a pro-rata portion of the warrant at
the same time regardless of the fact that the warrant is exercisable
at $1.09 per share and our closing market price as of May 30, 2008 was
$0.0002.
As of May 30, 2008, $146,524 of the convertible debenture was
still outstanding and 14,652,400 shares of common stock were still
issuable upon exercise of the warrants.
For example, if Golden Gate elects to convert $2,500 of the
convertible debenture, this would result in the issuance of
1,676,579,268 shares of common stock based on a current conversion
price of $0.000164 (82% of the closing price of $0.0002 as of May 30,
2008). However, Golden Gate will not be entitled to convert the
convertible debenture unless it also exercises a pro rata portion of
the warrant. In this situation, Golden Gate will be required to
exercise approximately 248,137 warrants at an exercise price of $1.09
resulting in $270,469 in funding for our company.
The selling stockholder has contractually agreed to restrict
its ability to convert or exercise its warrants and receive shares of
our common stock such that the number of shares of common stock held
by them and their affiliates after such conversion or exercise does
not exceed 9.9% of the then issued and outstanding shares of common stock.
See the "Selling Stockholders" and "Risk Factors" sections for a
complete description of the convertible debentures.
RISK FACTORS
This investment has a high degree of risk. Before you invest you
should carefully consider the risks and uncertainties described below
and the other information in this prospectus. If any of the following
risks actually occur, our business, operating results and financial
condition could be harmed and the value of its stock could go down.
This means you could lose all or a part of your investment.
Risks Relating to the Business.
We Have a History of Losses That May Continue.
We incurred net losses of $10,501,867 for the year ended
December 31, 2007 and $10,840,259 for the year ended December 31,
2006, and a net loss of $212,931 for the three months ended March 31,
2008. We cannot provide assurance that it can achieve or sustain
profitability on a quarterly or annual basis in the future. If
revenues grow more slowly than anticipated, or if operating expenses
exceed expectations or cannot be adjusted accordingly, we will
continue to incur losses. We will continue to incur losses until we
are able to establish significant rentals of DVD's and video games
over the Internet. Our possible success is dependent upon the
successful development and marketing of its website and products, as
to which there is no assurance. Any future success that we might
enjoy will depend upon many factors, including factors out of our
control or which cannot be predicted at this time. These factors may
include changes in or increased levels of competition, including the
entry of additional competitors and increased success by existing
competitors, changes in general economic conditions, increases in
operating costs, including costs of supplies, personnel and equipment,
reduced margins caused by competitive pressures and other factors.
These conditions may have a materially adverse effect upon us or may
force us to reduce or curtail operations.
Ability to Attract and Retain Subscribers Will Affect Our Business.
We must continue to attract and retain subscribers. To succeed,
we must continue to attract subscribers who have traditionally used
video and game retailers, video and game rental outlets, cable
channels, such as HBO and Showtime and pay-per-view. Our ability to
attract and retain subscribers will depend in part on our ability to
consistently provide its subscribers a high quality experience for
selecting, viewing or playing, receiving and returning titles. If
consumers do not perceive the service offering to be of quality, or if
we introduce new services that are not favorably received, it may not
be able to attract or retain subscribers. If the efforts to satisfy
our existing subscribers are not successful, we may not be able to
attract new subscribers, and as a result, revenues will be adversely
affected.
We must minimize the rate of loss of existing subscribers while
adding new subscribers. Subscribers cancel their subscription to our
service for many reasons, including a perception that they do not use
the service sufficiently, delivery takes too long, the service is a
poor value and/or customer service issues are not satisfactorily
resolved. We must continually add new subscribers to replace
subscribers who cancel and to grow the business beyond the current
subscriber base. If too many subscribers cancel our service, or if we
are unable to attract new subscribers in numbers sufficient to grow
the business, operating results will be adversely affected. Further,
if excessive numbers of subscribers cancel the service, we may be
required to incur significantly higher marketing expenditures than
currently anticipated to replace these subscribers with new subscribers.
Subscribers to the service can view as many titles and/or play
games as they want every month and, depending on the service plan, may
have out between three and six titles at a time. With our use of nine
shipping centers and the associated software and procedural upgrades,
we have reduced the transit time titles. As a result, subscribers
have been able to exchange more titles each month, which has increased
operating costs. As we established additional planned shipping
centers or further refines its distribution process, it may see a
continued increase in usage by subscribers. If subscriber retention
does not increase or operating margins do not improve to an extent
necessary to offset the effect of increased operating costs, operating
results will be adversely affected.
Subscriber demand for titles may increase for a variety of other
reasons beyond our control, including promotion by studios and
seasonal variations in movie watching. Subscriber growth and retention
may be affected adversely if we attempt to increase monthly
subscription fees to offset any increased costs of acquiring or
delivering titles and games.
The "GameZnFlix" brand is young, and we must continue to build
strong brand identity. To succeed, we must continue to attract and
retain a number of owners of DVD and video game players who have
traditionally relied on store-based rental outlets and persuade them
to subscribe to its service through its website. We may be required
to incur significantly higher advertising and promotional expenditures
than currently anticipated to attract numbers of new subscribers. We
believe that the importance of brand loyalty will increase with a
proliferation of DVD and game subscription services and other means of
distributing titles. If these efforts to promote and maintain its
brand are not successful, operating results and ability to attract and
retain subscribers will be affected adversely.
Inability to Use Current Marketing Channels May Affect Our Ability to
Attract New Subscribers.
We may not be able to continue to support the marketing of our
service by current means if such activities are no longer available or
are adverse to the business. In addition, we may be foreclosed from
certain channels due to competitive reasons. If companies that
currently promote our service decide to enter this business or a
similar business, we may no longer be given access to such channels.
If the available marketing channels are curtailed, our ability to
attract new subscribers may be affected adversely.
Selection of Certain Titles by Subscribers.
Certain titles cost us more to acquire depending on the source
from whom they are acquired and the terms on which they are acquired.
If subscribers select these titles more often on a proportional basis
compared to all titles selected, DVD or game acquisition expenses
could increase, and gross margins could be adversely affected.
Mix of Acquisition Sources May Affect Subscriber Levels.
We utilize a mix of incentive-based and fixed-cost marketing
programs to promote its service to potential new subscribers. We
obtain a portion of our new subscribers through online marketing
efforts, including third party banner ads, direct links and an active
affiliate program. While we opportunistically adjusts our mix of
incentive-based and fixed-cost marketing programs, it attempts to
manage the marketing expenses to come within a prescribed range of
acquisition cost per subscriber. To date, we have been able to manage
its acquisition cost per subscriber; however, if it is unable to
maintain or replace sources of subscribers with similarly effective
sources, or if the cost of existing sources increases, subscriber
levels may be affected adversely and the cost of marketing may increase.
Competition.
The market for on-line rental of DVD's and video games
is competitive and we expect competition to continue to increase. In
addition, the companies with whom it has relationships could develop
products or services, which compete with our products or services.
Also, some competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, and
greater brand recognition. We also expect to face additional
competition as other established and emerging companies enter the
market for on-line rentals. To be competitive, we believe that we
must, among other things, invest resources in developing new
products, improving current products and maintaining customer
satisfaction. Such investment will increase our expenses and affect
our profitability. In addition, if we fail to make this investment,
we may not be able to compete successfully with our competitors,
which could have a material adverse effect on our revenue and future
profitability.
Any Significant Disruption in Service on the Website Could Result in
Loss of Subscribers.
Subscribers and potential subscribers access our service through
our website, where the title selection process is integrated with the
delivery processing systems and software. Our reputation and ability
to attract, retain and serve subscribers is dependent upon the
reliable performance of the website, network infrastructure and
fulfilment processes. Interruptions in these systems could make the
website unavailable and hinder the ability to fulfil selections.
Service interruptions or the unavailability of the website could
diminish the overall attractiveness of the subscription service to
existing and potential subscribers.
Our servers utilize a number of techniques to track, deter and
thwart attacks from computer viruses, physical or electronic break-
ins and similar disruptions, which could lead to interruptions and
delays in the service and operations as well as loss, misuse or theft
of data. We currently use both hardware and software to secure our
systems, network and, most importantly, its data from these attacks.
This includes several layers of security in place for our protection
and that of our members' data. We also have procedures in place to
ensure that the latest security patches and software are running on
the servers - thus maintaining another level of security.
Any attempts by hackers to disrupt the website service or
internal systems, if successful, could harm the business, be
expensive to remedy and damage our reputation. We do not have an
insurance policy that covers expenses related to direct attacks on
the website or internal systems. Any significant disruption to the
website or internal computer systems could result in a loss of
subscribers and adversely affect the business and results of operations.
Potential Delivery Issues Could Result in the Loss of Subscribers.
We rely exclusively on the United States Postal Service ("USPS")
to deliver DVD's and games from its shipping centers and to return
DVD's and games from subscribers. We are subject to risks associated
with using the public mail system to meet shipping needs, including
delays caused by bioterrorism, potential labor activism and inclement
weather. Our DVD's and games are also subject to risks of breakage
during delivery and handling by the USPS. The risk of breakage is
also impacted by the materials and methods used to replicate DVD's and
games. If the entities replicating DVD's and games use materials and
methods more likely to break during delivery and handling or we fail
to timely deliver DVD's and games to subscribers, subscribers could
become dissatisfied and cancel the service, which could adversely
affect operating results. In addition, increased breakage rates for
DVD's and games will increase our cost of acquiring titles.
There May be a Change in Government Regulation of the Internet or
Consumer Attitudes Towards Use of the Internet.
The adoption or modification of laws or regulations relating to
the Internet or other areas of the business could limit or otherwise
adversely affect the manner in which we currently conducts our
business. In addition, the growth and development of the market for
online commerce may lead to more stringent consumer protection laws,
which may impose additional burdens on us. If we are required to
comply with new regulations or legislation or new interpretations of
existing regulations or legislation, this compliance could cause us to
incur additional expenses or alter our business model.
The manner in which Internet and other legislation may be
interpreted and enforced cannot be precisely determined and may
subject either us or our customers to potential liability, which in
turn could have an adverse effect on the business, results of
operations and financial condition. The adoption of any laws or
regulations that adversely affect the popularity or growth in use of
the Internet could decrease the demand for our subscription service
and increase the cost of doing business.
In addition, if consumer attitudes toward use of the Internet
change, consumers may become unwilling to select their entertainment
online or otherwise provide us with information necessary for them to
become subscribers. Further, we may not be able to effectively market
our services online to users of the Internet. If we are unable to
interact with consumers because of changes in their attitude toward
use of the Internet, subscriber acquisition and retention may be
affected adversely.
Any Required Expenditures as a Result of Indemnification Will Result
in an Increase in Our Expenses.
Our bylaws include provisions to the effect that we may
indemnify any director, officer, or employee. In addition,
provisions of Nevada law provide for such indemnification, as well as
for a limitation of liability of directors and officers for monetary
damages arising from a breach of their fiduciary duties. Any
limitation on the liability of any director or officer, or
indemnification of any director, officer, or employee, could result
in substantial expenditures being made by us in covering any
liability of such persons or in indemnifying them.
Our Success Is Largely Dependent on the Abilities of Our Management
and Employees.
Our success is largely dependent on the personal efforts and
abilities of our senior management. The loss of certain members of
our senior management, including our chief executive officer, could
have a material adverse effect on our business and prospects.
Risks Relating to the Financing Arrangements.
There are a Large Number of Shares Underlying the Convertible
Debenture and Warrants; Sale of These Shares may Depress the Market
Price of Our Common Stock.
On November 11, 2004, we entered into a Securities Purchase
Agreement with Golden Gate Investors, Inc. for the sale of (i)
$150,000 convertible debenture and (ii) a warrant to purchase
15,000,000 shares of common stock.
The debenture bears interest at 4 3/4%, matures three years
from the date of issuance, and is convertible into common stock, at
Golden Gate's option. The debenture is convertible into the number of
shares of common stock equal to the principal amount of the debenture
multiplied by 110, less the product of the conversion price multiplied
by 100 times the dollar amount of the debenture, and the entire
foregoing result shall be divided by the conversion price. The
conversion price for the debenture is the lesser of (i) $0.20, (ii)
82% of the average of the three lowest volume weighted average prices
during the twenty trading days prior to the conversion, or (iii) 82%
of the volume weighted average price on the trading day prior to the
conversion. The warrant is exercisable into 15,000,000 shares of
common stock at an exercise price of $1.09 per share.
On January 17, 2006, we entered into an Addendum to Convertible
Debenture and Warrant to Purchase Common Stock with Golden Gate in
which the debenture was increased to $300,000 and an additional
warrant to purchase 15,000,000 shares of common stock was issued
(also exercisable at $1.09 per share).
As of May 30, 2008, we had 885,395,250 shares of common stock
issued and outstanding balance of the debenture as of that date of
$146,524 that may be converted into an estimated 98,263,640,243 shares
of common stock based on the closing price of $0.0002 (conversion
price is 82% of that amount: $0.000164) as of that date, and
outstanding warrants to purchase 14,652,400 shares of common stock.
In addition, the number of shares of common stock issuable upon
conversion of the outstanding debenture may increase if the market
price of the common stock declines. All of the shares, including all
of the shares issuable upon conversion of the debenture and upon
exercise of the warrants, may be sold without restriction. The sale
of these shares may adversely affect the market price of the common stock.
The continuously adjustable conversion price feature of the
debenture could require us to issue a substantially greater number of
shares, which will cause dilution to existing stockholders.
Our obligation to issue shares upon conversion of the debenture
to Golden Gate Investors, Inc. is essentially limitless. The
following is an example of the amount of shares of common stock that
are issuable, upon conversion of the balance of the debenture of
$146,524 as of May 30, 2008 (excluding accrued interest), based on
market prices 25%, 50% and 75% below the closing market price as of
May 30, 2008 of $0.0002:
Effective Number % of
0% Below Price Per Conversion of Shares Outstanding
Market Share Price Issuable Stock (1)
25% $0.0015 $0.000123 131,022,829,268 99.32%
50% $0.0010 $0.000082 196,541,926,829 99.55%
75% $0.0005 $0.000041 393,098,512,195 99.77%
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(1) Based on outstanding shares of common stock of 885,395,250 as of
May 30, 2008
As illustrated, the number of shares of common stock issuable upon
conversion of the debenture will increase if the market price of the
stock declines, which will cause dilution to existing stockholders.
The Continuously Adjustable Conversion Price Feature of the Debentures
May Encourage Short Selling of the Common Stock.
Golden Gate is contractually required to exercise its
warrants and convert its debenture on a concurrent basis, subject to
certain conditions. The issuance of shares in connection with the
exercise of the warrants and conversion of the debenture results in
the issuance of shares at an effective 18% discount to the trading
price of the common stock prior to the conversion. The significant
downward pressure on the price of the common stock as Golden Gate
converts and sells material amounts of common stock could encourage
short sales by investors. This could place further downward pressure
on the price of the common stock. Golden Gate could sell common stock
into the market in anticipation of covering the short sale by
converting its securities, which could cause the further downward
pressure on the stock price. In addition, not only the sale of shares
issued upon conversion or exercise of debenture and warrants, but also
the mere perception that these sales could occur, may adversely affect
the market price of the common stock.
The Issuance of Shares upon Conversion of the Debenture and Exercise
of the Warrants May Cause Dilution to Existing Stockholders.
The issuance of shares upon conversion of the debenture and
exercise of the warrants may result in substantial dilution to the
interests of other stockholders since Golden Gate may ultimately
convert and sell the full amount issuable on conversion. Although
Golden Gate may not convert the debenture and/or exercise the warrants
if such conversion or exercise would cause it to own more than 9.9% of
our outstanding common stock, this restriction does not prevent Golden
Gate from converting and/or exercising some of its holdings and then
converting the rest of its holdings. In this way, Golden Gate could
sell more than this limit while never holding more than this limit.
There is no upper limit on the number of shares that may be issued
which will have the effect of further diluting the proportionate
equity interest and voting power of holders of the common stock.
If We are Unable to Issue Shares Upon Conversion of Debenture,
Penalties are Required to be Paid to Golden Gate.
If we are unable to issue shares of common stock upon
conversion of the debenture as a result of the inability to increase
the authorized shares of common stock or as a result of any other
reason, If we required to:
- pay late payments to Golden Gate for late issuance of common
stock upon conversion of the debenture, in the amount of $100 per
business day after the delivery date for each $10,000 of
debenture principal amount being converted.
- in the event we are prohibited from issuing common stock, or fail
to timely deliver common stock on a delivery date, or upon the
occurrence of an event of default, then at the election of Golden
Gate, we must pay to Golden Gate a sum of money determined by
multiplying up to the outstanding principal amount of the
debenture designated by Golden Gate by 130%, together with
accrued but unpaid interest thereon.
- if ten days after the date we are required to deliver common
stock to Golden Gate pursuant to a conversion, Golden Gate
purchases (in an open market transaction or otherwise) shares of
common stock to deliver in satisfaction of a sale by Golden Gate
of the common stock which it anticipated receiving upon such
conversion (a "Buy-In"), then we are required to pay in cash to
Golden Gate the amount by which its total purchase price
(including brokerage commissions, if any) for the shares of
common stock so purchased exceeds the aggregate principal and/or
interest amount of the convertible debenture for which such
conversion was not timely honored, together with interest
thereon at a rate of 15% per annum, accruing until such amount
and any accrued interest thereon is paid in full.
In the event that we are required to pay penalties to Golden
Gate or redeem the debenture held by Golden Gate, we may be required
to curtail or cease its operations.
Repayment of Debentures, If Required, Would Deplete Available
Capital.
Any event of default under the debenture with Golden Gate could
require the early repayment of the debenture at a price equal to 125%
of the amount due under the debenture. We anticipate that the full
amount of the debenture, together with accrued interest, will be
converted into shares of its common stock, in accordance with the
terms of the debenture. If we are required to repay the debenture,
we would be required to use its limited working capital and/or raise
additional funds. If we were unable to repay the debenture when
required, Golden Gate could commence legal action against us and
foreclose on assets to recover the amounts due. Any such action may
require us to curtail or cease operations.
Risks Relating to the Common Stock.
Our Common Stock Price May Be Volatile.
The trading price of our common stock may fluctuate
substantially. The price of the common stock may be higher or lower
than the price paid for the shares, depending on many factors, some
of which are beyond our and may not be directly related to its
operating performance. These factors include the following:
- Price and volume fluctuations in the overall stock market from
time to time;
- Significant volatility in the market price and trading volume of
securities of business development companies or other financial
services companies;
- Changes in regulatory policies with respect to business
development companies;
- Actual or anticipated changes in earnings or fluctuations in
operating results;
- General economic conditions and trends;
- Loss of a major funding source; or
- Departures of key personnel.
Due to the continued potential volatility of the stock price, we
may be the target of securities litigation in the future. Securities
litigation could result in substantial costs and divert management's
attention and resources from the business.
Absence of Cash Dividends May Affect Investment Value of Our Common Stock.
The board of directors does not anticipate paying cash dividends
on the common stock for the foreseeable future and intends to retain
any future earnings to finance the growth of our business. Payment
of dividends, if any, will depend, among other factors, on earnings,
capital requirements and our general operating and financial
conditions, as well as legal limitations on the payment of dividends
out of paid-in capital.
No Assurance of a Public Trading Market and Risk of Low Priced
Securities May Affect Market Value of Our Common Stock.
The Securities and Exchange Commission ("SEC") has adopted a
number of rules to regulate "penny stocks." Such rules include Rule
3a51-1 and Rules 15g-1 through 15g-9 under the Securities Exchange Act
of 1934, as amended. Because our securities may constitute "penny
stocks" within the meaning of the rules (as any equity security that
has a market price of less than $5.00 per share or with an exercise
price of less than $5.00 per share, largely traded in the Over the
Counter Bulletin Board or the Pink Sheets), the rules would apply to
us and to our securities.
The SEC has adopted Rule 15g-9 which established sales practice
requirements for certain low price securities. Unless the transaction
is exempt, it shall be unlawful for a broker or dealer to sell a penny
stock to, or to effect the purchase of a penny stock by, any person
unless prior to the transaction: (i) the broker or dealer has approved
the person's account for transactions in penny stock pursuant to this
rule and (ii) the broker or dealer has received from the person a
written agreement to the transaction setting forth the identity and
quantity of the penny stock to be purchased. In order to approve a
person's account for transactions in penny stock, the broker or dealer
must: (a) obtain from the person information concerning the person's
financial situation, investment experience, and investment objectives;
(b) reasonably determine that transactions in penny stock are suitable
for that person, and that the person has sufficient knowledge and
experience in financial matters that the person reasonably may be
expected to be capable of evaluating the risks of transactions in
penny stock; (c) deliver to the person a written statement setting
forth the basis on which the broker or dealer made the determination
(i) state in a highlighted format that it is unlawful for the broker
or dealer to effect a transaction in penny stock unless the broker or
dealer has received, prior to the transaction, a written agreement to the
transaction from the person; and (ii) state in a highlighted format
immediately preceding the customer signature line that (iii) the
broker or dealer is required to provide the person with the written
statement; and (iv) the person should not sign and return the written
statement to the broker or dealer if it does not accurately reflect
the person's financial situation, investment experience, and
investment objectives; and (d) receive from the person a manually
signed and dated copy of the written statement. It is also required
that disclosure be made as to the risks of investing in penny stock
and the commissions payable to the broker-dealer, as well as current
price quotations and the remedies and rights available in cases of
fraud in penny stock transactions. Statements, on a monthly basis,
must be sent to the investor listing recent prices for the penny stock
and information on the limited market.
There has been only a limited public market for our common
stock. This common stock is currently traded on the Over the Counter
Bulletin Board ("OTCBB"). As a result, an investor may find it
difficult to dispose of, or to obtain accurate quotations of the
market value of the common stock. The regulations governing penny
stocks, as set forth above, sometimes limit the ability of broker-
dealers to sell our common stock and thus, ultimately, the ability of
the investors to sell their securities in the secondary market.
Our potential stockholders should also be aware that, according
to SEC Release No. 34-29093, the market for penny stocks has suffered
in recent years from patterns of fraud and abuse. Such patterns
include (i) control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer; (ii)
manipulation of prices through prearranged matching of purchases and
sales and false and misleading press releases; (iii) "boiler room"
practices involving high-pressure sales tactics and unrealistic price
projections by inexperienced sales persons; (iv) excessive and
undisclosed bid-ask differential and markups by selling broker-
dealers; and (v) wholesale dumping of the same securities by promoters
and broker dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices
and with consequent investor losses.
Failure To Remain Current In Reporting Requirements Could Result In
Delisting From The Over The Counter Bulletin Board.
Companies trading on the OTCBB, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as
amended, and must be current in their reports under Section 13, in
order to maintain price quotation privileges on the OTCBB. If we fail
to remain current in our reporting requirements, we could be delisted
from the OTCBB.
In addition, the National Association of Securities Dealers,
Inc., which operates the OTCBB, has been approved by the SEC to
implement a change to its Eligibility Rule. The change makes those
OTCBB issuers that are cited for filing delinquency in their Forms 10-
KSB/Form 10-QSB three times in a 24-month period and those OTCBB
issuers removed for failure to file such reports two times in a 24-
month period ineligible for quotation on the OTCBB for a period of one
year. Under this rule, a company filing within the extension time set
forth in a Notice of Late Filing (Form 12b-25) would not be considered
late. This rule does not apply to a company's Current Reports on Form 8-K.
As a result of these rules, the market liquidity for our
securities could be severely adversely affected by limiting the
ability of broker-dealers to sell our common stock and the ability of
stockholders to sell their securities in the secondary market.
Failure to Maintain Market Makers May Affect Value of Company's Stock.
If we are unable to maintain Financial Industry Regulatory
Authority member broker/dealers as market makers, the liquidity of
our common stock could be impaired, not only in the number of shares
of common stock which could be bought and sold, but also through
possible delays in the timing of transactions, and lower prices for
the common stock than might otherwise prevail. Furthermore, the lack
of market makers could result in persons being unable to buy or sell
shares of the common stock on any secondary market. There can be no
assurance we will be able to maintain such market makers.
Shares Eligible For Future Sale.
All of the shares currently held by management have been issued
in reliance on the private placement exemption under the Securities
Act of 1933. Such shares will not be available for sale in the open
market without separate registration except in reliance upon Rule 144
under the Securities Act of 1933. In general, under Rule 144 a
person (or persons whose shares are aggregated) who has beneficially
owned shares acquired in a non-public transaction for at least one
year, including persons who may be deemed our affiliates (as that
term is defined under that rule) would be entitled to sell within any
three-month period a number of shares that does not exceed 1% of the
then outstanding shares of common stock, provided that certain
current public information is then available. If a substantial
number of the shares owned by these stockholders were sold pursuant
to Rule 144 or a registered offering, the market price of the common
stock at that time could be adversely affected.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may
be offered and sold from time to time by the selling stockholder. We
will not receive any proceeds from the sale of shares of common stock
in this offering. However, we will receive the sale price of any
common stock we sell to the selling stockholder upon exercise of the
warrants, up to $16,350,000. We received an aggregate of $300,000 in
connection with the issuance of the convertible debenture to the
selling stockholder. We have used the $300,000 for the general
working capital purposes and the payment of professional fees. We
expect to use the proceeds received from the exercise of the
warrants, if any, for general working capital purposes.
SELLING STOCKHOLDER
The table below sets forth information concerning the resale of
the shares of common stock by the selling stockholder. Assuming all
the shares registered below are sold by the selling stockholder, the
selling stockholder will not own any shares of our common stock.
The following table also sets forth the name of each person who
is offering the resale of shares of common stock by this prospectus,
the number of shares of common stock beneficially owned by each
person, the number of shares of common stock that may be sold in this
offering and the number of shares of common stock each person will
own after the offering, assuming they sell all of the shares offered:
Name Total Shares Total Shares of Beneficial Percentage Beneficial Percentage
of Common Percentage Common Ownership of Ownership of
Stock of Common Stock Before the Common After the Common
Issuable Stock Included in Offering (2) Stock Offering(3) Stock
Upon Assuming Prospectus(1) Owner Owned
Conversion Conversion Before the After the
of Up To Offering(2) Offering(3)
Debenture Amount
and Remaining
Warrants In
Registration
Statement
Golden
Gate
Investors
Inc. (4) 1,471,277,514 (5) 62.43% Up to 97,285,371 9.99% -- --
5,836,435,851
|
The number and percentage of shares beneficially owned is determined
in accordance with Rule 13d-3 of the Securities Exchange Act of 1934,
and the information is not necessarily indicative of beneficial
ownership for any other purpose. Under such rule, beneficial
ownership includes any shares as to which the selling stockholder has
sole or shared voting power or investment power and also any shares,
which the selling stockholder has the right to acquire within 60
days. The actual number of shares of common stock issuable upon the
conversion of the convertible debentures is subject to adjustment
depending on, among other factors, the future market price of the
common stock, and could be materially less or more than the number
estimated in the table.
(1) Includes a good faith estimate of the shares issuable upon
conversion of the convertible debentures and exercise of warrants,
based on the current market prices as of the effective date of this
registration statement (April 5, 2006). Because the number of shares
of common stock issuable upon conversion of the convertible
debentures is dependent in part upon the market price of the common
stock prior to a conversion, the actual number of shares of common
stock that will be issued upon conversion will fluctuate daily and
cannot be determined at this time. Under the terms of the
convertible debentures, if the convertible debentures had actually
been converted on May 30, 2008, the conversion price would have been
$0.000164, and this would require a total of 98,263,640,243 shares to
be issued). The actual number of shares of common stock offered in
this prospectus, and included in the registration statement of which
this prospectus is a part, includes such additional number of shares
of common stock as may be issued or issuable upon conversion of the
convertible debentures and exercise of the related warrants by reason
of any stock split, stock dividend or similar transaction involving
the common stock, in accordance with Rule 416 under the Securities
Act of 1933. However the selling stockholder has contractually
agreed to restrict its ability to convert their convertible
debentures or exercise their warrants and receive shares of common
stock such that the number of shares of common stock held by it in
the aggregate and its affiliates after such conversion or exercise
does not exceed 9.99% of the then issued and outstanding shares of
common stock as determined in accordance with Section 13(d) of the
Exchange Act. Accordingly, the number of shares of common stock set
forth in the table for the selling stockholder exceeds the number of
shares of common stock that the selling stockholder could own
beneficially at any given time through their ownership of the
convertible debentures and the warrants. In that regard, the
beneficial ownership of the common stock by the selling stockholder
set forth in the table is not determined in accordance with Rule 13d-
3 under the Securities Exchange Act of 1934, as amended.
(2) These columns represent the aggregate maximum number and
percentage of shares that the selling stockholder can own at one time
(and therefore, offer for resale at any one time) due to the 9.99%
limitation.
(3) Assumes that all securities registered will be sold.
(4) The selling stockholder is an unaffiliated third party. In
accordance with rule 13d-3 under the Securities Exchange Act of 1934,
Norman Lizt may be deemed a control person of the shares owned by the
selling stockholder.
(5) This amount represents what is remaining to be issued under this
registration statement (even though this would not represent a full
conversion of the remaining amount of the debenture and the warrants,
the remaining amount of each would require 98,263,640,243 shares to be
issued).
Terms of Convertible Debenture.
To obtain funding for our ongoing operations, we entered into a
Securities Purchase Agreement with Golden Gate on November 11, 2004
for the sale of (i) $150,000 in convertible debenture and (ii) a
warrant to purchase 15,000,000 shares of our common stock. In January
2006, we entered into an amendment of the Securities Purchase
Agreement with Golden Gate in which the debenture was increased to
$300,000 and we issued an additional 15,000,000 warrants to purchase
shares of common stock. This prospectus relates to the resale of the
common stock underlying these convertible debentures and warrants.
The investors provided us with an aggregate of $300,000 as follows:
- $100,000 was disbursed to us in November 2004;
- $50,000 has been retained for services provided to our company
by various professionals, which was disbursed upon effectiveness
of the prior registration statement; and
- $150,000 was disbursed in January 2006.
The debenture bears interest at 4 3/4%, mature three years
from the date of issuance, and are convertible into our common stock,
at the selling stockholder's option. The convertible debenture is
convertible into the number of our shares of common stock equal to the
dollar amount of the debenture being converted multiplied by 110, less
the product of the conversion formula multiplied by 100 times the
dollar amount of the debenture being converted, which is divided by
the conversion formula. The conversion formula for the convertible
debenture is the lesser of (i) $0.20, (ii) 82% of the average of the
thee lowest volume weighted average prices during the 20 trading days
prior to the conversion or (iii) 82% of the volume weighted average
price on the trading day prior to the conversion. Accordingly, there
is in fact no limit on the number of shares into which the debenture
may be converted. However, in the event that our market price is less
than $0.005, we will have the option to prepay the debenture at 150%
rather than have the debenture converted. If we elect to prepay the
debenture, Golden Gate may withdraw its conversion notice. In
addition, the selling stockholder is obligated to exercise the warrant
concurrently with the submission of a conversion notice by he selling
stockholder.
The original warrant was exercisable into 20,339,100 shares
of common stock at an exercise price of $1.09 per share. As a result,
if Golden Gate elects to convert a portion of the convertible
debenture, it must also exercise a pro-rata portion of the warrant at
the same time regardless of the fact that the warrant is exercisable
at $1.09 per share and our closing market price as of May 30, 2008 was
$0.0002.
As of May 30, 2008, $146,524 of the convertible debenture was
still outstanding and 14,652,400 shares of common stock were still
issuable upon exercise of the warrants.
For example, if Golden Gate elects to convert $2,500 of the
convertible debenture, this would result in the issuance of
1,676,579,268 shares of common stock based on a current conversion
price of $0.000164 (82% of the closing price of $0.0002 as of May 30,
2008). However, Golden Gate will not be entitled to convert the
convertible debenture unless it also exercises a pro rata portion of
the warrant. In this situation, Golden Gate will be required to
exercise approximately 248,137 warrants at an exercise price of $1.09
resulting in $270,469 in funding for our company.
The selling stockholder has contractually agreed to restrict
its ability to convert or exercise its warrants and receive shares of
our common stock such that the number of shares of common stock held
by them and their affiliates after such conversion or exercise does
not exceed 9.9% of the then issued and outstanding shares of common stock.
Sample Conversion Calculation.
The number of shares into which the debenture may be converted
is equal to the dollar amount of the debenture being converted
multiplied by 110, minus the product of the conversion price
multiplied by 100 times the dollar amount of the debenture being
converted, and the entire foregoing result shall be divided by the
conversion price.
The conversion price for the debenture is the lesser of (i)
$0.20, (ii) 82% of the average of the three lowest volume weighted
average prices during the twenty trading days prior to the
conversion, or (iii) 82% of the volume weighted average price on the
trading day prior to the conversion. For example, assuming
conversion of the remaining balance of $146,524 of the debenture on
May 30, 2008, a conversion price of $0.000164 (82% of the closing
price of $0.0002 on that date), the number of shares issuable upon
conversion would be:
($146,524 x 110) - ($0.000164 x (100 x $146,524)) = 16,115,237 /$0.000164 =
98,263,640,243
The continuously adjustable conversion price feature of the
debenture could require us to issue a substantially greater number of
shares, which will cause dilution to existing stockholders.
Our obligation to issue shares upon conversion of the debenture
to Golden Gate Investors, Inc. is essentially limitless. The
following is an example of the amount of shares of common stock that
are issuable, upon conversion of the balance of the debenture of
$146,524 as of May 30, 2008 (excluding accrued interest), based on
market prices 25%, 50% and 75% below the closing market price as of
May 30, 2008 of $0.0002:
Effective Number % of
% Below Price Per Conversion of Shares Outstanding
Market Share Price Issuable Stock (1)
25% $0.00015 $0.000124 131,022,829,268 99.32%
50% $0.00010 $0.000082 196,541,926,829 99.55%
75% $0.00005 $0.000041 393,098,512,195 99.77%
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(1) Based on outstanding shares of common stock of 885,395,250 as of
May 30, 2008
As illustrated, the number of shares of common stock issuable upon
conversion of the debenture will increase if the market price of the
stock declines, which will cause dilution to existing stockholders.
PLAN OF DISTRIBUTION
The selling stockholder and any of its pledgees, donees,
assignees and other successors-in-interest may, from time to time,
sell any or all of their shares of common stock on any stock
exchange, market or trading facility on which the shares are traded
or in private transactions. These sales may be at fixed or negotiated
prices. The selling stockholder may use any one or more of the
following methods when selling shares:
ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
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;
broker-dealers may agree with the selling stockholder to sell a
specified number of such shares at a stipulated price per share;
through the writing of options on the shares;
a combination of any such methods of sale; and
any other method permitted pursuant to applicable law.
The selling stockholder may also sell shares under Rule 144
under the Securities Act, if available, rather than under this
prospectus. The selling stockholder shall have the sole and absolute
discretion not to accept any purchase offer or make any sale of
shares if they deem the purchase price to be unsatisfactory at any
particular time.
The selling stockholder or its pledgees, donees, transferees or
other successors in interest, may also sell the shares directly to
market makers acting as principals and/or broker-dealers acting as
agents for themselves or their customers. Such broker-dealers may
receive compensation in the form of discounts, concessions or
commissions from the selling stockholder and/or the purchasers of
shares for whom such broker-dealers may act as agents or to whom they
sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market
makers and block purchasers purchasing the shares will do so for
their own account and at their own risk. It is possible that a
selling stockholder will attempt to sell shares of common stock in
block transactions to market makers or other purchasers at a price
per share which may be below the then market price. The selling
stockholder cannot assure that all or any of the shares offered in
this prospectus will be issued to, or sold by, the selling
stockholder. The selling stockholder and any brokers, dealers or
agents, upon effecting the sale of any of the shares offered in this
prospectus, may be deemed to be "underwriters" as that term is
defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and
regulations under such acts. In such event, any commissions received
by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions
or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of
counsel to the selling stockholder, but excluding brokerage
commissions or underwriter discounts.
The selling stockholder, alternatively, may sell all or any part
of the shares offered in this prospectus through an underwriter. No
selling stockholder has entered into any agreement with a prospective
underwriter and there is no assurance that any such agreement will be
entered into.
The selling stockholder may pledge its shares to its brokers
under the margin provisions of customer agreements. If the selling
stockholder defaults on a margin loan, the broker may, from time to
time, offer and sell the pledged shares. The selling stockholder and
any other persons participating in the sale or distribution of the
shares will be subject to applicable provisions of the Securities
Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These
provisions may restrict certain activities of, and limit the timing
of purchases and sales of any of the shares by, the selling
stockholder or any other such person. In the event that the selling
stockholder is deemed affiliated purchasers or distribution
participants within the meaning of Regulation M, then the selling
stockholder will not be permitted to engage in short sales of common
stock. Furthermore, under Regulation M, persons engaged in a
distribution of securities are prohibited from simultaneously
engaging in market making and certain other activities with respect
to such securities for a specified period of time prior to the
commencement of such distributions, subject to specified exceptions
or exemptions. In regards to short sells, the selling stockholder is
contractually restricted from engaging in short sells. In addition,
if a such short sale is deemed to be a stabilizing activity, then the
selling stockholder will not be permitted to engage in a short sale
of our common stock. All of these limitations may affect the
marketability of the shares.
We have agreed to indemnify the selling stockholder, or its
transferees or assignees, against certain liabilities, including
liabilities under the Securities Act of 1933, as amended, or to
contribute to payments the selling stockholder or its pledgees,
donees, transferees or other successors in interest, may be required
to make in respect of such liabilities.
If the selling stockholder notifies us that they have a material
arrangement with a broker-dealer for the resale of the common stock,
then we would be required to amend the registration statement of
which this prospectus is a part, and file a prospectus supplement to
describe the agreements between the selling stockholder and the
broker-dealer.
LEGAL PROCEEDINGS
From time to time, we may become party to litigation or other
legal proceedings that we consider to be a part of the ordinary
course of the business. There are no material legal proceedings to
report, except as follows:
On February 8, 2008, an action was filed in the United States
District Court, Western District of Pennsylvania, entitled Mobile
Satellite Communications v. GameZnFlix, Inc. et al. In this action,
the plaintiff claims that it was damaged as a result of the
termination of the agreement covering leased television channels by
GNF Entertainment, LLC. We have filed an answer and this matter is
now in the discovery stage.
Management believes we have meritorious claims and defenses to
the plaintiff's claims and ultimately will prevail on the merits.
However, this matter remains in the early stages of litigation and
there can be no assurance as to the outcome of the lawsuit.
Litigation is subject to inherent uncertainties, and unfavorable
rulings could occur. Were unfavorable rulings to occur, there exists
the possibility of a material adverse impact of money damages on our
financial condition, results of operations, or liquidity of the period
in which the ruling occurs, or future periods.
On February 15, 2008, an action was filed in the United States
District Court, District of Kentucky (Bowling Green Division),
entitled Peppe v. GameZnFlix Inc. et al. In this action, a past
employee of our claims damages in connection with an employment
agreement with us. On March 11, 2008, we filed an answer and counter
claim in this action for breach of the employment agreement. The
parties have reached a settlement whereby we have agreed with Mr.
Peppe for a cash settlement of $2,300.00 and is pending final filing.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS
The names, ages, and respective positions of our directors and
executive officers are set forth below. The directors named below
will serve until the next annual meeting of stockholders or until
their successors are duly elected and have qualified. Directors are
elected for a term until the next annual stockholders' meeting.
Officers will hold their positions at the will of the board of
directors, absent any employment agreement, of which none currently
exist or are contemplated.
There are no family relationships between any two or more of the
directors or executive officers. There are no arrangements or
understandings between any two or more of the directors or executive
officers. There is no arrangement or understanding between any of the
directors or executive officers and any other person pursuant to
which any director or officer was or is to be selected as a director
or officer, and there is no arrangement, plan or understanding as to
whether non-management stockholders will exercise their voting rights
to continue to elect the current board of directors. There are also
no arrangements, agreements or understandings between non-management
stockholders that may directly or indirectly participate in or
influence the management of our affairs. There are no other
promoters or control persons of us. There are no legal proceedings
involving our executive officers or directors.
John J. Fleming, Chief Executive Officer/Secretary/Director.
Mr. Fleming, age 59, was the managing partner of AFI Capital,
LLC, a venture capital company, located in San Diego, California for
the 5 years (before joining GameZnFlix in September 2002). Before
AFI Capital, Mr. Fleming managed Fleming & Associates, a business-
consulting firm that provided services to companies looking to create
business plans and/or review current plans in order to move forward
with fund raising from both private and public sectors. He has been
chief executive officer of the company and a director since September
12, 2002.
Mark Crist, Director.
Mr. Crist, 49, has a widely varied background in business
development, and has been a director of the company since September
12, 2002. In 1979, he founded Manufacturer's Revenue Service, a
commercial collection agency located in Tustin, California. In 1984
he negotiated the sale of that business to a division of Dunn &
Bradstreet and thereafter left to become a partner in the marketing
services firm of Jay Abraham & Associates. In 1985, he founded the
Computer Trivia Fan User Group (CTFUG) as a public benefit, non-
profit organization to promote the playing of online trivia contests.
Mr. Crist held the position of chief executive officer and
president of GamesGalore.com from 1996 to 2001, a company that among
other things supplies trivia contest content to users of America
Online. Since May of 2001, he has served as president and director
of Diamond Hitts Production, Inc. (Pink Sheets: DHTT). Mr. Crist is
an alumnus of California State University at Northridge.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Beneficial Ownership Table.
The following table sets forth information regarding the
beneficial ownership of shares of our common stock as of May 30, 2008
(885,395,250 issued and outstanding) by (i) all stockholders known to
us to be beneficial owners of more than 5% of the outstanding common
stock; (ii) each director and executive officer; and (iii) all
officers and directors of us as a group. Each person has sole voting
power and sole dispositive power as to all of the shares shown as
beneficially owned by him
Title of Class Name and Address Amount and Nature Percent of
of Beneficial Owner of Beneficial Class
Owner(1)
Common Stock John Fleming 7,078,743 (2) 0.80%
1535 Blackjack Road
Franklin, Kentucky 42134
Common Stock Mark Crist 0 0.00%
1535 Blackjack Road
Franklin, Kentucky 42134
Common Stock Shares of all directors and 7,078,743 0.80%%
executive officers as a group
two persons)
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(1) Except as noted below, none of these security holders has the
right to acquire any amount of the shares within sixty days from
options, warrants, rights, conversion privilege, or similar
obligations. Applicable percentage ownership of common stock is
based on 885,395,250 shares issued and outstanding on May 30,
2008 divided into the total common stock for each beneficial
owner. Beneficial ownership is determined in accordance with
the rules and regulations of the SEC. In computing the number
of shares beneficially owned by a person and the percentage
ownership of that person, shares of common stock subject to
options or convertible or exchangeable into such shares of
common stock held by that person that are currently exercisable,
or exercisable within 60 days, are included.
(2) Included within this amount is an option covering 5,000
shares of common stock, exercisable from the date of grant
(December 31, 2004) at $0.007 per share (expiring on December
31, 2014) (changed from an option for 5,000,000 shares as a
result of the 1 for 1,000 reverse split of our common stock on
September 6, 2007).
DESCRIPTION OF SECURITIES
General Description.
The securities being offered are shares of common stock. Our
authorized capital consists of 25,000,000,000 shares of common stock,
$0.001 par value per share. The holders of common stock shall:
have equal ratable rights to dividends from funds legally
available therefore, when, as, and if declared by our board of
directors
are entitled to share ratably in all of the assets of GameZnFlix
available for distribution upon winding up of our affairs.
are entitled to one cumulative vote per share on all matters on
which shareholders may vote at all meetings of shareholders.
The shares of common stock do not have any of the following rights:
special voting rights
preference as to dividends or interest
preemptive rights to purchase in new issues of Shares
preference upon liquidation, or
any other special rights or preferences.
In addition, the shares of common stock are not convertible into
any other security. There are no restrictions on dividends under any
loan other financing arrangements or otherwise. We do not have any
preferred stock authorized under our current articles of incorporation.
Dividends.
We do not currently intend to pay cash dividends. Because the
company does not intend to make cash distributions, potential
shareholders would need to sell their shares to realize a return on
their investment. There can be no assurances of the projected values
of the shares, or can there be any guarantees of our success.
A distribution of revenues will be made only when, in the
judgment of our board of directors, it is in the best interest of the
company's stockholders to do so. The board of directors will review,
among other things, the financial status of the company and any
future cash needs of us in making our decision.
Transfer Agent.
We have engaged the services of Interwest Transfer Co., Inc.,
1981 East Murray Holliday Road, Suite 100, Salt Lake City, Utah
84117, to act as transfer agent and registrar.
INTEREST OF NAMED EXPERTS AND COUNSEL
Other than as set forth below, no named expert or counsel was
hired on a contingent basis, will receive a direct or indirect
interest in us, or was a promoter, underwriter, voting trustee,
director, officer, or employee of us.
Brian F. Faulkner, A Professional Law Corporation, our counsel
as giving an opinion on the validity of the securities being
registered, has previously received shares of our common stock
pursuant to our Non-Employee Directors and Consultants Retainer Stock
Plan, as amended, under Form S-8's in exchange for legal services
previously rendered, and to be rendered in the future, to us under
attorney-client contracts. These legal services consist of advice
and preparation work in connection with our reports filed under the
Securities Exchange Act of 1934, and other general corporate and
securities work for us.
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES
The following is a summary of the relevant provisions in the
articles of incorporation, bylaws, and Nevada law with regard to
limitation of liability and indemnification of our officers,
directors and employees. The full provisions are contained in such
documents.
Limitation of Liability.
Articles of Incorporation and Bylaws.
There are no provisions in our articles of incorporation or
bylaws with regard to liability of a director
Nevada Revised Statutes.
Nevada Revised Statutes provide that a director or officer is not
individually liable to the corporation or its stockholders for any
damages as a result of any act or failure to act in his capacity as a
director or officer unless it is proven that his act or failure to act
constituted a breach of his fiduciary duties as a director or officer,
and his breach of those duties involved intentional misconduct, fraud
or a knowing violation of law.
Indemnification.
Articles of Incorporation and Bylaws.
There are no provisions in the articles of incorporation with
regard to indemnification. Our bylaws provide that the company shall
indemnify to the fullest extent permitted by law each person that
such law grants the company the power to indemnify.
Nevada Revised Statutes.
Nevada laws also provide that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to
any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, except an
action by or in the right of the corporation, by reason of the fact
that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as
a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against
expenses, including attorneys' fees, judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection
with the action, suit or proceeding if he:
has exercised his powers in good faith and with a view to the
interests of the corporation; or
acted in good faith and in a manner which he reasonably believed
to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was
unlawful.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its
equivalent, does not, of itself, create a presumption that the person
is liable or did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of
the corporation, or that, with respect to any criminal action or
proceeding, he had reasonable cause to believe that his conduct was
unlawful.
To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense
of any action, suit or proceeding, or in defense of any claim, issue
or matter therein, the corporation shall indemnify him against
expenses, including attorneys' fees, actually and reasonably incurred
by him in connection with the defense.
Any discretionary indemnification, unless ordered by a court or
advanced, may be made by the company only as authorized in the
specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances.
The determination must be made:
by the stockholders;
by the board of directors by majority vote of a quorum
consisting of directors who were not parties to the action, suit
or proceeding;
if a majority vote of a quorum consisting of directors who were
not parties to the action, suit or proceeding so orders, by
independent legal counsel in a written opinion; or
if a quorum consisting of directors who were not parties to the
action, suit or proceeding cannot be obtained, by independent
legal counsel in a written opinion.
A corporation may purchase and maintain insurance or make other
financial arrangements on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture,
trust or other enterprise for any liability asserted against him and
liability and expenses incurred by him in his capacity as a director,
officer, employee or agent, or arising out of his status as such,
whether or not the corporation has the authority to indemnify him
against such liability and expenses.
Undertaking.
We undertake the following:
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors,
officers and controlling persons of the small business issuer under
the foregoing provisions, or otherwise, the small business issuer has
been advised that in the opinion of the U.S. Securities and Exchange
Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the
payment by GameZnFlix of expenses incurred or paid by a director,
officer or controlling person of GameZnFlix 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, GameZnFlix will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court
of 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.
DESCRIPTION OF BUSINESS
Business Development.
We were formed in Delaware in June 1997 under the name SyCo
Comics and Distribution Inc. and are the successor to a limited
partnership named SyCo Comics and Distribution formed under the laws
of the Commonwealth of Virginia on January 15, 1997, by Sy Robert
Picon and William Spears, our co-founders and then principal
stockholders. On February 17, 1999, SyCo Comics and Distribution Inc.
changed its name to Syconet.com, Inc. With the filing of Articles of
Merger with the Nevada Secretary of State on April 12, 2002, we
redomiciled from Delaware to Nevada, and our number of authorized
common shares was increased to 500,000,000. On November 21, 2002, we
amended our articles of incorporation changing our name to Point
Group Holdings, Incorporated. On March 5, 2003, we again amended our
articles of incorporation so that (a) an increase in the authorized
capital stock can be approved by the board of directors without
shareholder consent; and (b) a decrease in the issued and outstanding
common stock (a reverse split) can be approved by the board of
directors without shareholder consent. On July 11, 2003, we amended
our articles of incorporation to increase the number of authorized
common shares to 900,000,000. On January 26, 2004, our name was
changed to "GameZnFlix, Inc" by the filing of amended articles of
incorporation. On December 16, 2004, we amended our articles of
incorporation to increase the authorized common stock to
2,000,000,000 shares. On July 19, 2005, the articles of
incorporation were further amended to increase the number of
authorized common shares to 4,000,000,000, and on March 21, 2006
increased to 25,000,000,000.
During the period of July 2002 to September 2002, we acquired
AmCorp Group, Inc., a Nevada Corporation, and Naturally Safe
Technologies, Inc. also a Nevada corporation. Currently, Naturally
Safe is current with its incorporation with the State of Nevada, but
does not have any business operations. In February 2005, AmCorp
amended its articles of incorporation, changing its name to
GameZnFlix Racing and Merchandising, Inc. AmCorp provided services
to companies that desired to be listed on the Bulletin Board and
Naturally Safe held patents on a product that assisted Christmas
trees in retaining water. During the fiscal year ended December 31,
2002, AmCorp generated 26% of revenues and Naturally Safe generated
approximately 74% of revenues. During the fiscal year ended December
31, 2003, AmCorp generated 2% of revenues and Naturally Safe
generated approximately 88% of revenues. In May 2003, we ceased
operation of Prima International, LLC, a wholly owned subsidiary of
Naturally Safe. In September 2003, we acquired Veegeez.com, LLC, a
California limited liability company.
Our Business.
Veegeez.com provided its subscribers with access to its video
games library. In March 2004, we launched our website,
http://www.gameznflix.com. However, we did not fully commence
operations in the online DVD and video game rental until September
2004. In May 2004, the Veegeez web site ceased operations and all
traffic has been directed to the www.gameznflix.com web site.
We currently provide subscribers with access to a comprehensive
library of Microsoft Xbox, Xbox 360, Sony Playstation3, Playstation
Portable, Playstation 2, Playstation, Nintendo Wii, Nintendo
Gamecube, and DVD's (hereinafter "titles"). We believe our service
is an alternative to store based gaming rentals and that we offer a
high level of customer service, quality titles and product
availability. The subscription plans allow subscribers to have three
to eight titles out at the same time with no due dates, shipping
charges or late fees for $8.99 per month to $16.99 per month (for a
three-title package), and a $249.00 annual membership (applicable tax
is collected for California residents). Subscribers can enjoy as
many titles as they wish during their subscription time. Titles are
selected on the website www.gameznflix.com via the queue system. The
titles are shipped by first-class mail and can be returned at their
convenience using the enclosed prepaid mailer. When a game and DVD
has been returned, the subscriber's next available selection is
mailed to them.
Management believes that we are in a good position to take
advantage of the following market conditions:
- start-up opportunities in the on-line video game rental
business;
- the need for use of efficient distribution and financial
methods;
- under-served market that has growth opportunity; and
- existing video game rental companies' uneven track record in
providing customer service.
Our internally developed software enables us to customize our
website to meet customer needs and provide vital business information.
Our online interface with customers eliminates the need for costly
retail outlets and allows it to serve a national customer base with
low overhead costs.
We currently provide rental services to our subscribers. In
addition, we also sell new titles to subscribers as well as non-
members visiting the website. Plans are in place to expand and
provide sales of used DVD titles at a discounted price and new video
gaming accessories. The development of this portion of the website is
nearly completed. Management believes that adding these additional
services will complement the rental service by increasing cash flow
and capitalizing on impulse sales to current subscribers.
We seek to provide its customers with a large selection of video
game rental and DVD movie choices on a monthly subscription basis.
Customers can sign-up via the website to rent titles of their choice.
The titles are then shipped to the customer via first class mail once
they have made their selection(s). Active subscribers can retain the
titles for an indefinite amount of time as long as they are active
paying subscribers. Customers can exchange their selections at
anytime by returning their title(s) in the pre-addressed package provided.
From November 2004, when we commenced tracking our customer base,
through December 2005, we have consistently maintained a monthly
customer base of approximately 3,000. During 2006, the average number
of active subscribers per month approximated 13,000. As of December
31, 2007, we had approximately 18,700 subscribers; this growth can be
attributed to our increased public awareness. For the year ended
December 31, 2007, the amount of revenues that have been generated
from these subscriptions has totaled approximately $3,600,000.
Part of this public awareness resulted from a service agreement
entered into with Circuit City Stores, Inc. in October 2005 that
provided for a pilot program in 27 retail stores and on the Circuit
City website to promote our services. On March 24, 2006, we entered
into a definitive co-marketing agreement with Circuit City that
called for a scheduled rollout of services to all the Circuit City
stores that began in May 2006 and was completed in December 2006.
Although the overall number of subscribers obtained from the initial
pilot program was not considered significant in relation to the
overall number of new subscribers through the end of 2006, we believe
that our relationship with Circuit City brought us more prominence
and recognition. In March 2007, the relationship with Circuit City
was ended by Circuit City as it reorganized its management teams.
In August 2006, we entered into an agreement with the U.S. Army
& Air Force Exchange ("AAFES") to provide video game and movie
rentals to all current and retired members of the Army and Air Force
personnel through the AAFES website. This agreement with AAFES gives
us access to more than 11 million military personnel, retirees and
their families. In late 2007, the relationship with AAFES expanded
by adding pre-paid membership cards in the military base locations
under AAFES.
We intend to continue to seek similar arrangements with
nationally known companies or agencies to further brand our name.
Product and Service Description.
We offer DVD movie and video game rental services and the ability
to purchase new DVD movie and video game titles to our subscribers.
In addition, we also sell new DVD movie and video game titles to non-
members. Members can choose from rental packages of three to eight
titles outstanding at one time on a monthly subscription basis with
unlimited replacement of products as long as they are an active
subscriber.
We currently own approximately 30,000 titles and approximately
281,000 copies. In March 2004, we signed a supply agreement with an
entertainment distributor. The supply agreement was designed to
enable us to access the most current DVD and video game titles for
purposes of meeting rental requests as well as all purchases. We own
all titles that are rented to our subscribers. Titles are purchased
based on membership requests for a title and inventory is being built
in this way. In the event that a title is purchased through the
website, if we do not already own the title, then that title is
purchased to fulfill the request. We purchase inventory from Video
Products Distribution, Alliance and Ingram Entertainment, Inc., for cash.
Our proprietary queue system and dynamic web server-based
database system automatically select the next title a customer
receives based on factors such as the subscriber's next title
preferences, title availability, length of time a subscriber has been
with us, and the subscriber's subscription plan level.
All DVD's and games sold are offered to current subscribers at a
discount from the manufacturer's suggested retail price. In the
future, used titles will be sold and will be priced based on the
length of time the title has been in service, the current market rate
(as determined by on-line sites like Amazon.com, and EBGames.com), and
customer demand to maximize profit. For example, most new games are
sold for $49.99 at retail stores and for $49.99 plus shipping from on-
line stores. We offer games for $46.99 plus shipping charges paid by
the customer. We currently charge a flat rate of $3.00 per order for
shipping. Most online competitors utilize multiple shipping rates,
which incorporates a per piece charge as part of their shipping
calculations.
Like some of our competitors, we offer a toll free customer
service phone number 12 hours per day, five days per week (Monday -
Friday). We also take customer inquiries and requests via e-mail and
maintain a policy to answer each e-mail within 24 - 48 hours of receipt.
Competition.
(a) Game Rentals.
Our competition for game rentals comes in two main forms:
- Chain rental stores - Our indirect competitors include
traditional retail stores that offer video game rentals such as
Blockbuster, Hollywood Video, and other national and local video
rental stores. These companies are formidable, established
competitors for video game rentals. The primary business of
these companies is the renting of movies and not video games.
Additionally, late returns are assessed stringent daily late
fees by some of these chain rental stores for relatively short
rental periods.
- Online competitors - Currently there are approximately 12 direct
competitors that provide online video game rentals. Some
competitors include AngelGamer.com, DVDAvenue.com, Gamez2go.com,
Govojo.com, Midwest-games.com, RedOctane.com, Rent-a-realm.com,
Gamefly.com, and Videogamealley.com. Each of these competitors
offers rental packages on a monthly subscription basis with
offerings of one to eight games available at varying prices.
We compete on product availability, customer service and product
availability information.
DVD Rentals.
Our competition for DVD rentals comes in the following forms:
- Chain rental stores - there are a number of retail stores
located across the country that rent DVD's. These retail stores
have a national image, high volume, multiple locations and
general familiarity.
- Other local video rental stores - the number and size of these
competitors varies, but is not substantial. They are competing
against the chains in an attempt to offer lower prices and a
more customer friendly staff.
- Online competitors - the number of online competitors is
growing. Management is aware of 12 other online services, such
as NetFlix.com (the dominant force in this sector). Competitors
vary in their service offerings.
In summary, management believes that in order to be successful
we must provide our subscribers with the best possible renting
experience and a willingness to develop a long-standing relationship.
We must offer a high level of customer service, reliable product
availability, and a responsive and efficient website to deliver the service.
Sale of DVD's and Games.
In November 2004, we commenced selling new DVD and video games.
The offering of these products for sale has been integrated with the
existing website and has accounted for approximately 42% of revenue
on a monthly basis. Management believes these new offerings will
complement the current rental service as many subscribers have
indicated that they rent games to decide which games they would like
to buy in the future.
Chain rental stores and other local rental stores also sell
DVD's. In addition, DVD's are sold by large retailers, including Wal
Mart, Target, and Best Buy.
Fulfillment.
In February 2005, we ceased using the services of National
Fulfillment, Incorporated to meet fulfillment needs and internalized
the fulfillment. During the fourth quarter of 2007, we re-designed
our distribution network so that now makes use of seven United States
Postal Service ("USPS") centers located in California (2), Florida,
Maryland, Massachusetts, Texas, and Washington. These USPS postal
drop centers, which have been developed with the cooperation of the
USPS, are strategically located to service the subscriber base in each
of their respective regions. There are two warehousing centers located
in Colorado and Kentucky that house the inventory of video games and
DVD titles for shipment
Delivery of the titles is provided by first class mail. During
2005, we were able to negotiate a new mailer envelope with the USPS
that reduced overall postage cost and decreased the delivery
turnaround time from 7 to 2 days. The average cost, after the new
mailer, of delivery for the shipment is $1.38. The delivery of each
subsequent game costs $0.69 for shipment to the customer and $0.69 for
each return.
Each workday, our distribution centers process the titles to be
shipped for that day. Each distribution center delivers the outgoing
titles to the USPS by a cutoff time established by the local USPS
office in order to make the mail on that day. After dropping off the
outgoing titles, the personnel receive the return titles and then
process the returned titles back into inventory through the use of
scanners. Each return title is verified to be the correct title,
matches the member who returns it and that the title is in good
working condition.
Technology.
All orders are taken by credit card via website at GameZnFlix.com
and processed through Authorize.Net and our Humboldt Bank merchant
account. Data resulting from customer sales transactions is
transferred to the proprietary database system. This database system
provides the necessary information for accounting, sales, customer
service, inventory management, and marketing information needs and is
accessible directly through any Internet connection.
Marketing.
Our target market for games is the hard core gamer that purchases
and rents games on a regular basis. We also target the DVD movie
rental market similar to NetFlix.com and Blockbuster.com. We are
targeting subscribers of other services through our affiliate program,
which is a commission based referral program that is administered
through an affiliate tracking software. These affiliates consist of
websites that drive consumers to our website for a fee. The
participants in this program are not affiliated with us outside of
their participation in the affiliate program. Participants in the
affiliate program can receive up to $70.00 for each new subscriber
directed to us that affiliate that elects to use the service. The
commission schedule is tied to the type of account the subscriber whom
the affiliate sends to us (a $70 commission would be for an annual
membership signup). In addition, there are other programs where we
pay a range from $10.00 to $25.00 per member based on the volume the
affiliate provides us.
We also have a special program offered to the U.S. military,
including active duty, veterans, reservists, National Guardsmen, DOD
employees and their dependents. These individuals receive roughly a
10% discount on the standard rates. They are also offered shipping to
any military base throughout the world.
Since the target market for game rentals is already renting games
from traditional rental stores, the most important market needs are a
higher level of support and service, a greater value for the money
they spend, and greater product availability. One of the key points
of our strategy is the focus on hard-core gamers that know and
understand these needs and are looking to pay less, and spend less
time to have them filled.
We believe the most obvious and important trend in the market is
an increase in the number of people playing video games. Management
also believes that video game players are becoming more and more
unsatisfied with the current video game rental stores due to late
fees, short rental times and a general lack of customer service
support are all strong reasons why video game players are looking for
an alternative.
We believe a third trend is ever-greater connectivity, with more
people on the Internet and purchasing more items over the Internet.
Items such as computer hardware, apparel, consumer electronics, office
supplies, toys, movies, and video games are all experiencing an
increasing number of online sales.
An estimated 15% of the current subscriber base is college
students. Advertisement in school newspapers, on college websites,
and other advertising media will be placed at college campuses in
targeted cities. We also intend to participate in direct marketing
opportunities in conjunction with back-to-school events on these
campuses. Our first opportunity in this regard will be with the
universities in the vicinity of Nashville, Tennessee.
In February 2004, we retained the services of AdSouth Partners,
Inc., a national ad agency, to assist in the launch and marketing of
the website http://www.gameznflix.com. Through AdSouth Partners, we
commenced a direct television response advertising campaign that
covered 13 different national television channels with five different
commercials, starring Dennis Coleman (a television and movie actor)
and Ben Curtis (the former star of Dell television commercials). The
prepaid television ad campaign covered the period from April 2004 to
February 2005 on a monthly basis. The last advertisement in this
campaign was a commercial that aired during the 4th quarter of the
2005 Super Bowl on three local television stations. In 2005, we did
not have any major television advertising campaigns planned and ended
our relationship with AdSouth Partners. Due to software issues, we
are unable to determine the effect that this advertising had on
subscriptions and revenue.
In 2005, we continued to market online through the affiliate
program and expanded it to assist in membership growth. Our other
advertising and marketing programs will move away from national
advertising and focus on areas in the proximity of distribution
centers. We intend to utilize media such as print, radio, outdoor and
others where appropriate. This marketing program was launched in
Nashville, Tennessee and expanded to other markets throughout 2005.
We will also be utilizing "grass-roots" tactics that may include
local market sponsorships, direct marketing opportunities via kiosks,
corporate gift programs, employee benefits program, member referral
programs and other areas that will help us penetrate target markets.
In February 2005, we commenced marketing activities through our
wholly owned subsidiary GameZnFlix Racing and Merchandising, Inc. In
connection with these activities, we sponsored a local drag racing car
that covered the local Kentucky and Tennessee areas. In accordance
with the drag racing team, we paid entry fees and pre-approved travel
expenses to attend races in consideration for the placement of our
name on the racecar, trailer and tow vehicle. We also received half
of all winnings and reimbursement of expenses.
In September 2006, we launched a cross-country tour visiting 12
cities in a motor coach "wrapped" in GameZnFlix advertisements (mobile
advertising). We believe this cross-country tour provided a
successful grass roots marketing campaign of GameZnFlix around the
country. We anticipate running a similar marketing campaign in 2007
and will strive to secure affiliate relationships for cross
advertisements of each other's products/services.
Research and Development.
During the fiscal year ended December 31, 2007, we engaged in
research and development activities, including the development of
online games, broadband delivery of rental inventory and satellite
television. The portion of our operating costs that is allocable to
research and development is immaterial and the results of these
activities are GNF Entertainment and GNFDigital.com.
During 2006, we launched GNF Entertainment Network, a 24/7
proprietary first run and off-network programming broadcasted on IA-5
Transponder 5 and Transponder 27 Intel Sat System and can be viewed
online at www.gnfent.com. GNF provided two channels for network
programming: the movie channel and game and music channel. GNF
Entertainment Network was closed after being unable to reach its
financial projections.
Our GNFDigital.com was an online retail site offering movies and
premium video programs for digital download. GNFDigital enabled
consumers to preview, purchase and download movies on-demand. Using
Microsoft's Windows Media digital rights management system, we
controlled whether individual titles are offered for electronic sell-
through, digital rental (48 hours), or limited use (e.g., 10 plays).
We closed down GNFDigital.com due to personnel resigning and not being
able to support the website.
Strategy and Implementation Summary.
In order to successfully implement our business plan, we must:
- emphasize service and support;
- differentiate its service from the competition;
- establish its service offering as a clear and viable alternative
to time period rentals;
- build a relationship-oriented business;
- become subscribers' video game rental site of choice; and
- ensure that all orders are delivered timely and accurately.
Employees.
We currently have 14 employees. The employees operate in the
following areas:
- purchasing (2 employees)
- customer service (4 employees)
- general business operations and management (2 employees)
- website operations (2 employees)
- warehouse operations (4 employees)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following management's discussion and analysis of financial
condition and results of operations is based upon, and should be read
in conjunction with, our financial statements and related notes
included elsewhere in this Form SB-2, which have been prepared in
accordance with accounting principles generally accepted in the
United States.
Overview.
We are, through our websites www.gameznflix.com and
www.gnfgames.com, an online video game and DVD movie rental business
dedicated to providing subscribers a quality rental experience. We
offer subscribers a reliable, web-based alternative to traditional
store-based DVD and video game rentals on a national scale with an
extensive library of video game and DVD titles. We offer subscribers
several different subscription plans ranging from $8.99 per month to
$16.99 per month. Our more popular $16.99 per month subscription plan
allows subscribers to have up to three DVD and video game titles out
at the same time with no due dates, late fees, or shipping charges.
Subscribers select titles at our websites that are then sent via U.S
mail with a prepaid return mailer. We offer a high level of customer
service, quality DVD and video game titles, and superior product
availability.
In March 2004, we launched our website, www.gameznflix.com, and
became fully operational in September 2004. In conjunction with the
website, we run ad campaigns designed to create awareness among our
target consumers and generate traffic to the website.
In May 2007, we joined Mid-Night Gaming, a McDonald's restaurant
cross-country tour visiting 10 cities in a motor coach "wrapped" in
GameZnFlix advertisements (mobile advertising). At each chosen
McDonald's location the group of sponsors (Nintendo, Coke Cola, 1UP,
Best Buy, 2K Sports, IPlay and Spike) of the Mid-Night Gaming
completion setup and allowed the public experience video gaming.
We anticipate running a similar marketing campaign in 2008 and
will strive to secure affiliate partnerships for cross advertisements
of each other's products/services.
During the first quarter of 2007, we retained Moroch, an
advertising and marketing firm, to perform data collection, focus
groups and market analysis of the current console video game and DVD
rental market as well as our position within that market. The results
of this study confirmed management's position that we have evolved
into a gamer-driven source for console video games and DVD rentals.
The report included a number of strategies to better position us
within our target market, as well as ways to better serve and
communicate with existing members.
We have taken the strategies and applied them to business model.
This included a complete redesign of the website, development of new
United States Postal Service ("USPS") mailer and marketing plan.
For us to see an increase growth will require us to make more
significant capital investment in library content. Management
continues to seek investment opportunities with the financial
communities to meet this need. Our current infrastructure will allow
us to service approximately 150,000 monthly subscribers before such
significant investment would be required. We closely monitor our
monthly growth rate to properly anticipate the timing of additional
investment in library content, distribution infrastructure, and
technology.
During the fourth quarter of 2007, we re-designed our
distribution network so that now makes use of seven USPS centers
located in California (2), Florida, Maryland, Massachusetts, Texas,
and Washington. These USPS postal drop centers, which have been
developed with the cooperation of the USPS, are strategically located
to service the subscriber base in each of their respective regions.
There are two warehousing centers located in Colorado and Kentucky
that house the inventory of video games and DVD titles for shipment.
During the fourth quarter of 2007, this system underwent testing
and the distribution network achieved its goals of 100% order
fulfillment on a daily basis, 100% processing of returned mailers on a
daily basis and overall success upgrading the integrity and rental
ability of the inventory. The results of this re-design have allowed
us to reduce our employees by 31, and to operate with 14 employees and
reduce related warehouse expenses.
We have evaluated and continue to evaluate our operations and
operational needs. During 2005, we were able to negotiate a new
mailer envelope with the USPS that reduced overall postage cost and
decreased the delivery turnaround time from seven to two days.
During the last quarter of 2007, our membership continued a
steadily decrease and has become stable as the end of the first
quarter 2008. Management recognizes that although growth did happen
as it had in the previous quarter; this was primarily result of not
being to purchase new inventory at the levels demanded by our members.
Results of Operations.
Three Months Ended March 31, 2008 Compared to Three Months Ended
March 31, 2007.
Revenues.
We had gross revenues of $380,226 for the three months ended
March 31, 2008 compared to $954,002 for the three months ended March
31, 2007, a decrease of $573,736 or approximately 60%. Gross revenues
decreased significantly during the during the quarter ended March 31,
2008 compared to the prior period primarily due to a smaller
subscriber base compared to same period in 2007 by a monthly
subscriber base average of 9,800 compared to 23,000 in the prior
quarter fueled by economic conditions and our slower inventory purchasing
As of the end of March 31, 2008, we had approximately 9,800 total
subscribers. We continue to focus on growing our subscriber base
through marketing and an affiliate partnership program. Our churn
rate is approximately 30% for the quarter ended March 31, 2008 as
compared with the three months ended March 31, 2007 of approximately
30%. Churn rate is calculated by dividing customer cancellations in
the period by the sum of beginning subscribers and gross subscriber
additions, and then divided by the number of months in the period.
Customer cancellations during the quarter ended March 31, 2007
includes cancellations from gross subscriber additions, which is
included in the gross subscriber additions in the denominator.
Cost of Revenues.
We had cost of revenues of $172,799 for the three months ended
March 31, 2008 compared to $485,723 for the three months ended March
31, 2007, a decrease of $312,924 or approximately 64%. Cost of
revenues decreased as a percentage to gross revenues during 2008
compared to 2007 primarily due to us not purchasing new inventory.
Advertising.
We had advertising expenses of $17,409 for the three months ended
March 31, 2008 compared to $581,626 for the three months ended March
31, 2007, a decrease of $564,217 or approximately 3,341%. Such
advertising consisted of a decrease in direct marketing through print,
radio and online Internet advertising.
Selling, General and Administrative Expenses.
We had selling, general and administrative expenses of $342,197
for the three months ended March 31, 2008 compared to $1,360,378 for
the three months ended March 31, 2007, a decrease of $1,018,181 or
approximately 75%. The decrease in selling, general and administrative
expenses was principally due to us downsizing compared to the same
period in 2007
Consulting Fees.
We had consulting fees of approximately $12,390 for the three
months ended March 31, 2008 compared to $154,824 for the three months
ended March 31, 2007, a decrease of $142,434 or approximately 92%.
Decrease in consulting fees during the quarter ended March 31, 2008
compared to the prior period was primarily a result of decreased need
of business consultants which was widely utilized during 2007 to aid
in developing a more effective marketing program and continued
development of the business. We do not anticipate needing the same
level of consulting fees related to development of the business and
believes such related expenses will decrease further in 2008.
Net Loss.
We had a net loss of $212,931 for the three months ended March
31, 2008 compared to a net loss of $2,728,526 for the three months
ended March 31, 2007, a decrease of $2,515,595 or approximately 92%.
The decrease in net losses is the result of the factors mentioned
above. We anticipate having a recurring net loss during the remainder
of 2008.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006.
Revenues.
We had gross revenues of $3,597,028 for the year ended December
31, 2007 compared to $1,884,678 for the year ended December 31, 2006,
an increase of $1,712,350 or approximately 91%. Gross revenues
increased significantly during the year ended December 31, 2007
compared to the prior year primarily due to a greater subscriber base
compared to same period in 2006 by a monthly subscriber base average
of 18,700 compared to 13,000 in the prior year fueled by more market
awareness of our services and brand do to an advertising campaign run
during the first quarter of 2007. This campaign while it drove an
increase in memberships during the first quarter also depleted the
budgets for the entire year of 2007 and has placed us in a weak
financial position.
As of December 31, 2007, we had approximately 18,530 total
subscribers. We continue to focus on growing our subscriber base
through marketing and an affiliate partnership program. Our churn rate
is approximately 25% for the year ended December 31, 2007 as compared
with the year ended December 31, 2006 of approximately 73%. Churn
rate is calculated by dividing customer cancellations in the period by
the sum of beginning subscribers and gross subscriber additions, and
then divided by the number of months in the period. Customer
cancellations during the year ended December 31, 2007, includes
cancellations from gross subscriber additions, which is included in
the gross subscriber additions in the denominator. The decrease in
churn rate is attributed to adding telephone customer service support
and buying of inventory to meet current demand.
Cost of Revenues.
We had cost of revenues of $5,734,261 for the year ended December
31, 2007 compared to $3,366,147 for the year ended December 31, 2006,
an increase of $2,368,114 or approximately 70%. Cost of revenues
increased as a percentage to gross revenues during 2007 compared to
2006 primarily due to a change of expensing inventory as requested by
the SEC accounting department to bring our reporting in line with
other reporting companies within the video rental industry.
Advertising.
We had advertising expenses of $1,649,739 for the year ended
December 31, 2007 compared to $2,407,505 for the year ended December
31, 2006, a decrease of $757,766, or approximately 31%. Such
advertising consisted of direct marketing through print, radio and
online Internet advertising.
Selling, General and Administrative Expenses.
We had selling, general and administrative expenses of $5,103,844
for the year ended December 31, 2007 compared to $3,927,104 for the
year ended December 31, 2006, an increase of $1,176,740 or
approximately 30%. The increase in selling, general and administrative
expenses was principally due to the writing off of accounts
receivables and ending of various projects and an increase in related
payroll expenses during the first quarter of 2007. The related
payroll expenses have been reduced during the second through fourth
quarters of 2007 as we down sized to offset the higher expenses of the
first quarter.
Consulting Fees.
We had consulting fees of $1,386,380 for the year ended December
31, 2007 compared to $3,042,320 for the year ended December 31, 2006,
a decrease of $1,655,940 or approximately 54%. Decrease in consulting
fees during the year ended December 31, 2007 compared to the prior
year was primarily a result of decreased need of business consultants
which was widely utilized during 2006 to aid in developing a more
effective marketing program and continued development of the business.
The Company does not anticipate needing the same level of consulting
fees related to development of the business and believes such related
expenses will decrease further in 2008.
Net Loss.
We had a net loss of $10,501,867 for the year ended December 31,
2007 compared to $10,840,259 for the year ended December 31, 2006, a
decrease of $338,392 or approximately 3%. The decrease in net losses
is the result of the factors mentioned above. We anticipate having a
recurring net loss during 2008.
Operating Activities.
The net cash used in operating activities was $86,438 for the
three months ended March 31, 2008 compared to $446,169 for the three
months ended March 31, 2007, a decrease of $359,731 or approximately
81%. This change is attributed to many changes from period to
period, including the reduction in depreciation and amortization and
a reduction in the accounts payable and accrued expenses.
The net cash used in operating activities was $1,188,150 for the
year ended December 31, 2007 compared to $8,494,173 for the year
ended December 31, 2006, a decrease of $7,306,023 or approximately
86%. This decrease is attributed to many changes from period to
period, including an increase in depreciation and amortization, the
payment of stock based compensation, and an increase in accounts
payable and accrued expenses.
Investing Activities.
Net cash used in investing activities was $13,708 for the three
months ended March 31, 2008 compared to $846,614 for the three months
ended March 31, 2007, a decrease of $832,906 or approximately 98%.
This decrease resulted primarily from reduced purchases of DVD's,
games, and films.
Net cash used in investing activities was $1,695,514 for the
year ended December 31, 2007 compared to $6,138,661 for the year
ended December 31, 2006, a decrease of $4,443,147 or approximately
72%. This decrease resulted from decreased purchases of DVD's and
games, film library, and other fixed assets.
Liquidity and Capital Resources.
As of March 31, 2008, we had total current assets of $285,580
and total current liabilities of $3,380,013, resulting in a working
capital deficit of $3,094,433. Our cash balance as of March 31, 2008
totaled $10,566. Overall, cash and cash equivalents for the three
months ended March 31, 2008 decreased by $14,411.
Net cash provided by financing activities was $85,735 for the
three months ended March 31, 2008 compared to $1,206,829 for the
three months ended March 31, 2007, a decrease of $1,121,094 or
approximately 93%. This decrease resulted from a reduction of funds
provided by Golden Gate Investors, Inc. as a result of the Addendum
to Convertible Debenture and Warrant to Purchase Common Stock,
between that firm and us (as discussed below)
As of December 31, 2007, we had total current assets of $297,252
and total current liabilities of $3,105,723 resulting in a working
capital deficit of $2,808,471. The cash balance as of December 31,
2007 totaled $24,976. Overall, cash and cash equivalents for the
year ended December 31, 2007 decreased by $317,658.
Net cash provided by financing activities was $2,566,006 for the
year ended December 31, 2007 compared to $9,073,073 for the year
ended December 31, 2006, a decrease of $6,507,067 or approximately
72%. This decrease resulted from a reduction of funds provided by
Golden Gate Investors, Inc. as a result of the Addendum to
Convertible Debenture and Warrant to Purchase Common Stock, between
that firm and us (as discussed below)
Our current cash and cash equivalents balance will not be
sufficient to fund its operations for the next twelve months.
Therefore, our continued operations, as well as the full
implementation of its business plan (including allocating resources
to increase library content, distribution infrastructure and
technology) will depend upon its ability to raise additional funds
through bank borrowings and equity or debt financing in addition to
the financing arrangement with Golden Gate.
We entered into a financing arrangement with Golden Gate: A
Securities Purchase Agreement with Golden Gate on November 11, 2004
for the sale of (i) $150,000 in convertible debenture and (ii) a
warrant to buy 15,000,000 shares of common stock.
The debenture bears interest at 4 3/4%, matures three years from
the date of issuance, and is convertible into our common stock, at
Golden Gate's option. The debenture is convertible into the number
of shares of common stock equal to the principal amount of the
debenture multiplied by 110, less the product of the conversion price
multiplied by 100 times the dollar amount of the debenture, and the
entire foregoing result shall be divided by the conversion price.
The conversion price for the convertible debenture is the lesser of
(i) $0.20, (ii) 82% of the average of the three lowest volume
weighted average prices during the twenty trading days prior to the
conversion, or (iii) 82% of the volume weighted average price on the
trading day prior to the conversion. Accordingly, there is in fact
no limit on the number of shares into which the debenture may be
converted. However, in the event that the market price of our common
stock is less than $0.015, we will have the option to prepay the
debenture at 150% rather than having the debenture converted. If we
elect to prepay the debenture, Golden Gate may withdraw its
conversion notice. In addition, Golden Gate is obligated to exercise
the warrant concurrently with the submission of a conversion notice.
The warrant is exercisable into 15,000,000 shares of common
stock at an exercise price of $1.09 per share. As of March 31, 2008,
a total of 45,639 (post reverse split) shares have been issued
related to the warrant providing us approximately $7,884,800.
Golden Gate has contractually agreed to restrict its ability to
convert the debenture and/or exercise its warrants and receive shares
of our common stock such that the number of shares of common stock
held by its and its affiliates after such conversion or exercise does
not exceed 9.99% of the then issued and outstanding shares of common stock.
We filed another registration statement under Form SB-2 during
the first quarter of 2006 related to an amendment of the Securities
Purchase Agreement with Golden Gate in which the debenture was
increased to $300,000 and an additional warrant for 15,000,000 shares
of common stock was issued (also exercisable at $1.09 per share into
20,339,100 shares of common stock, providing future funding of
approximately $16,350,000). In connection with the increased
debenture, $150,000 was disbursed to us in January 2006. As of March
31, 2008, a total of 49,391 (post reverse split) shares have been
issued related to this new warrant, providing us approximately $7,100,000.
Under another Addendum to Convertible Debenture and Warrant to
Purchase Common Stock, dated May 24, 2007, Golden Gate agreed to
deliver an aggregate of $825,000 in cash and other transferable
rights and obligations to us ("GGI Prepayment"). The GGI Prepayment
represents a prepayment towards the future exercise of warrant shares
under the two warrants. Under this Addendum, Golden Gate delivered
to us $275,000 of the GGI Prepayment in cash ("First Prepayment"),
and upon the earlier to occur of (i) the date that $100,000 or less
of the First Prepayment remains outstanding after the application of
the remaining amount of the First Prepayment to the exercise of
warrant shares under the warrants pursuant to the terms of this
Addendum, or (ii) the date that is thirty days from the date of the
Addendum, Golden Gate is to transfer the RMD Advance and the RMD
Documents (as defined under Risk Factors) to us. Such transfer of
the RMD Advance from Golden Gate to us constituted $250,000 of the
GGI Prepayment ("Second Prepayment"). For so long as any amount of
the First Prepayment remains outstanding, such sums from the First
Prepayment are first applied to any exercise of warrant shares under
the warrants by Golden Gate, as set forth thereunder, until all of
the First Prepayment shall be so applied.
Upon the earlier to occur of (i) the date that $100,000 or less
of the Second Prepayment remains outstanding after the application of
the remaining amount of the Second Prepayment to the exercise of the
warrant shares under the warrants pursuant to the terms of this
Addendum, or (ii) the date that is thirty days from the date hereof,
Golden Gate delivered the remaining $300,000 of the GGI Prepayment in
cash ("Third Prepayment") to us. Such transfer of the Third
Prepayment constituted the final payment due from Golden Gate to us.
For so long as any amount of the Second Prepayment remains
outstanding, such sums from the Second Prepayment are first applied
to any exercise of the warrant shares under the warrants by Golden
Gate prior to any amount of the Third Prepayment being applied to
such exercises, until all of the Second Prepayment is so applied.
In the event that any portion of the GGI Prepayment remains
outstanding and not applied to the exercise of warrant shares by
Golden Gate under the Warrants (including any portion of the GGI
Prepayment for which warrant shares have not been delivered to GGI
upon an exercise by Golden Gate under the warrants) upon or after the
date that is nine months from the date of this Addendum, we will,
upon written request from Golden Gate, refund all such outstanding
amounts of the GGI Prepayment to Golden Gate within five days from
the date of Golden Gate's delivery to us of the written request of
such refund.
In connection only with each Conversion under the Debenture that
is associated with any of the GGI Prepayment (as defined herein)
(such Conversions collectively referred to herein as the "Subsequent
Conversions") the Discount Multiplier for the Subsequent Conversions
shall be equal to the lesser of (i) $0.20, or (ii) 90% of the average
of the 3 lowest Volume Weighted Average Prices during the 20 Trading
Days prior to Holder's election to convert, or (iii) 90% of the
Volume Weighted Average Price on the Trading Day prior to Holder's
election to convert.
On May 29, 2007, we and Golden Gate entered into an Assignment
and Assumption Agreement in connection with the assignment and
transfer to us all of RMD's rights, obligations, interests and
liabilities under the RMD Transaction.
On June 15, 2007, we and Golden Gate entered into another
Addendum to Convertible Debenture and Warrant to Purchase Common
Stock. Under this Addendum, Golden Gate delivered an aggregate of
$175,000 in cash to us within three days of the date of this Addendum
("GGI June Prepayment"). The GGI June Prepayment represents a
prepayment towards the future exercise of warrant shares under the
warrants.
In the event that any portion of the GGI June Prepayment remains
outstanding and not applied to the exercise of warrant shares by
Golden Gate under the warrants (including any portion of the GGI June
Prepayment for which warrant shares have not been delivered to Golden
Gate upon an exercise by Golden Gate under the warrants) upon or
after the date that is nine months from the date of this Addendum, we
will, upon written request from Golden Gate, refund all such
outstanding amounts of the GGI June Prepayment to Golden Gate within
five days from the date of Golden Gate's delivery to us of the
written request of such refund. This did not occur and since the
nine-month period expired, we and Golden Gate extended the due date
for this debenture to January 1, 2009.
On September 17, 2007, we and Golden Gate entered into a
Rescission Agreement in connection with a rescission of the
Assignment and Assumption Agreement, dated as of May 29, 2007. This
rescission was made due to certain issues that arose in connection
with the involvement of RMD Technologies, Inc. in this transaction.
On November 1, 2006, we entered into a separate convertible
debenture with Golden Gate totaling $100,000 that matures November
2011, is unsecured and bears an annual interest rate of 4.75%. The
convertible debenture is convertible into shares of common stock
equal to the principal amount of the debenture being converted
multiplied by 110, less the product of the conversion price
multiplied by 100 times the dollar amount. The conversion price is
based on the lesser of $0.20 per share or 82% of the average of the
lowest volume weighted average prices during the 20 trading days
prior to the Golden Gate's election to convert such unpaid balances.
Additionally, Golden Gate is entitled to a warrant to purchase 10,000
shares of common stock at an exercise price of $1.09 per share.
Golden Gate does not have the right and we do not have the obligation
to convert any portion of the convertible debenture that will cause
Golden Gate to be a deemed beneficial owner of more than 9.99% of the
then outstanding shares of our common stock.
Whereas we have been successful in the past in raising capital,
no assurance can be given that these sources of financing will
continue to be available to it and/or that demand for equity/debt
instruments will be sufficient to meet its capital needs, or that
financing will be available on terms favorable to us. The financial
statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be
necessary should the we be unable to continue as a going concern.
If funding is insufficient at any time in the future, we may not
be able to take advantage of business opportunities or respond to
competitive pressures, or may be required to reduce the scope of
planned product development and marketing efforts, any of which could
have a negative impact on business and operating results. In
addition, insufficient funding may have a material adverse effect on
our financial condition, which could require us to:
- curtail operations significantly;
- sell significant assets;
- seek arrangements with strategic partners or other parties that
may require us to relinquish significant rights to products,
technologies or markets; or
- explore other strategic alternatives including a merger or sale
of us.
To the extent that we raise additional capital through the sale
of equity or convertible debt securities, the issuance of such
securities may result in dilution to existing stockholders. If
additional funds are raised through the issuance of debt securities,
these securities may have rights, preferences and privileges senior
to holders of common stock and the terms of such debt could impose
restrictions on our operations. Regardless of whether cash assets
prove to be inadequate to meet our operational needs, we may seek to
compensate providers of services by issuance of stock in lieu of
cash, which may also result in dilution to existing stockholders.
Inflation.
The impact of inflation on costs and the ability to pass on cost
increases to our customers over time is dependent upon market
conditions. We are not aware of any inflationary pressures that have
had any significant impact on operations over the past quarter, and
we do not anticipate that inflationary factors will have a
significant impact on future operations.
Off-Balance Sheet Arrangements.
We do not maintain off-balance sheet arrangements nor do we
participate in non-exchange traded contracts requiring fair value
accounting treatment.
Critical Accounting Policies.
The SEC has issued Financial Reporting Release No. 60,
"Cautionary Advice Regarding Disclosure About Critical Accounting
Policies" ("FRR 60"), suggesting companies provide additional
disclosure and commentary on their most critical accounting policies.
In FRR 60, the SEC has defined the most critical accounting policies
as the ones that are most important to the portrayal of a company's
financial condition and operating results, and require management to
make its most difficult and subjective judgments, often as a result
of the need to make estimates of matters that are inherently
uncertain. Based on this definition, our most critical accounting
policies include: use of estimates in the preparation of financial
statements; non-cash compensation valuation; revenue recognition; and
impairment of long-lived assets. The methods, estimates and judgments
we use in applying these most critical accounting policies have a
significant impact on the results we report in the financial statements.
Use of Estimates in the Preparation of Financial Statements.
The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate
these estimates, including those related to revenue recognition and
concentration of credit risk. We base our estimates on historical
experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions
or conditions.
DVD's and Video Games Libraries.
As of March 31, 2008, we have invested approximately $6,789,000
in its DVD and video game libraries resulting in approximately 50,000
DVD and video game titles available for rental. The Company acquires
DVD and video games from distributors through a direct purchase
agreement. Such purchases are recorded at the historical cost. We
depreciate our DVD and video games libraries on a straight-line basis
over a twelve-month period. We have not assigned a salvage value
since it is its intention to not sell the libraries. In the event
that we do sell a portion of our libraries as a result of slow moving
title rentals, we will re-evaluate the policy of depreciation in
relation to the salvage value.
Revenue Recognition and Cost of Revenue.
Subscription revenues are recognized ratably during each
subscriber's monthly subscription period. Refunds to subscribers are
recorded as a reduction of revenues. Revenues from sales of DVD's and
video games are recorded upon shipment.
Cost of subscription revenues consists of fulfillment expenses,
and postage and packaging expenses related to DVD's and video games
provided to paying subscribers. Revenue sharing expenses are
recorded as DVD's subject to revenue sharing agreements are shipped
to subscribers. Cost of DVD sales include the net book value of the
DVD's sold and, where applicable, a contractually specified
percentage of the sales value for the DVD's that are subject to
revenue sharing agreements.
Non-Cash Compensation Valuation.
We intend to issue shares of common stock to various individuals
and entities for management, legal, consulting and marketing
services. These issuances will be valued at the fair market value of
the services provided and the number of shares issued is determined,
based upon the open market closing price of common stock as of the
date of each respective transaction. These transactions will be
reflected as a component of selling, general and administrative
expenses in the statement of operations.
Forward Looking Statements.
Information in this Prospectus contains "forward looking
statements" within the meaning of Rule 175 of the Securities Act of
1933, as amended, and Rule 3b-6 of the Securities Act of 1934, as
amended. When used in this Prospectus, the words "expects,"
"anticipates," "believes," "plans," "will" and similar expressions
are intended to identify forward-looking statements. These are
statements that relate to future periods and include, but are not
limited to, statements regarding the adequacy of cash, expectations
regarding net losses and cash flow, statements regarding growth, the
need for future financing, dependence on personnel, and operating expenses.
Forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially
from those projected. These risks and uncertainties include, but are
not limited to, those discussed above. These forward-looking
statements speak only as of the date hereof. The Company expressly
disclaims any obligation or undertaking to release publicly any
updates or revisions to any forward-looking statements contained
herein to reflect any change in expectations with regard thereto or
any change in events, conditions or circumstances on which any such
statement is based.
DESCRIPTION OF PROPERTY
As a March 31, 2008, we owned $548,806 in fixed assets, $281,361
($7,643,907 less amortization of $7,362,546) of DVD and video game
inventory and $1,313,531 ($1,572,750 less amortization of $259,219)
of film libraries. Our corporate office is located in Franklin,
Kentucky at the chief executive officer's home-based office; we do
not pay rent for this office. The Company's leased properties are
located at:
California (north): 4600 Roseville Road, Suite 160, North
Highlands, California 95660; three year pre-paid lease
(commenced in July 2006), with a rent of $1,700 per month for a
1,096 square foot space.
California (south): 20705 South Western Avenue, Suite 209,
Torrance, California 98032; three year pre-paid lease (commenced
in September 2006), with a rent of $893 per month for a 703
square foot space.
Colorado: 18234 County Road 24, Sterling, Colorado 80751; 2,600
square foot space being provided rent free to Company.
Florida: 600 South North Lake Boulevard, #270, Altamonte
Springs, Florida 32701; three year pre-paid lease (commenced in
April 2006), with a rent of $1,244 per month for a 950 square
foot space.
Kentucky: 130 West Kentucky Avenue, Franklin, Kentucky 42134;
five year lease (commenced in January 2006), with a rent of
$4,150 per month for a 5,600 square foot space.
Massachusetts: 12 Harvard Street, Front Suite, Worcester,
Massachusetts; two year pre-paid lease (commenced in March
2006), with a rent of $800 per month for a 950 square foot space.
Texas: 4747 Irving Boulevard, Suite 243, Dallas, Texas 75247;
one year pre-paid lease (commenced in July 2006), with a rent of
$2,400 per month for a 1,440 square foot space.
Washington: 6627 South 191st Place, #F101, Kent, Washington
98032; two year pre-paid lease (commenced in September 2006),
with a rent of $1,090 per month for a 505 square foot space.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Other than as set forth below, during the last two fiscal years
there have not been any relationships, transactions, or proposed
transactions to which was or is to be a party, in which any of the
directors, officers, or 5% or greater stockholders (or any immediate
family thereof) had or is to have a direct or indirect material interest.
(a) On August 1, 2005, we entered into a new Consulting
Services Agreement with De Joya & Company, Inc. (see Exhibit 10.3).
This agreement also covers the services provided to us by Mr. De Joya
as chief financial officer. Under this agreement, we agreed to pay
$3,000 each month and 5,000,000 free trading shares of common stock
to be issued at the end of each quarter for a total of four quarters.
The monthly fee is to increase by 10% beginning on each anniversary
date of this agreement. On December 2, 2005, we issued 5,000,000
shares of common stock to Mr. De Joya under the Non-Employee
Directors and Consultants Retainer Stock Plan in compliance with that
agreement. These shares were valued at $24,500 ($0.0049 per share).
On each of February 26, 2006, July 31, 2006, and September 20,
2006, we issued 5,000,000 shares of free trading common stock to Mr.
De Joya for his services under this agreement. These 15,000,000
shares were valued at $82,500 ($0.0055 per share).
(b) On September 25, 2005, we entered into an Employment
Agreement with Mr. Fleming, our chief executive officer (see Exhibit
10.4). Under the terms of this agreement, we agreed to pay Mr.
Fleming an annual salary of $200,000 (with a 15% annual increase
during the term of the agreement as established by the board of
directors) and provide certain benefits as set forth in the
agreement. In the event that the board of directors votes to remove
Mr. Fleming from our employment, he would receive certain
compensation, including restricted shares of our common stock.
(c) On August 1, 2006, we entered into a new Consulting
Services Agreement with De Joya & Company, Inc. (see Exhibit 10.9);
this agreement replaces the prior agreement, dated August 1, 2005.
This agreement covers the services provided to us by Mr. De Joya as
our chief financial officer. Under this agreement, we agreed to pay
$5,000 each month and 1,250,000 free trading shares of common stock
to be issued at the end of each quarter for a total of four quarters,
both effective on August 1, 2006. The monthly fee is to increase by
10% beginning on each anniversary date of this agreement. No shares
have yet been issued under the agreement.
(d) At the time of us entering into the Addendum to
Convertible Debenture and Warrant to Purchase Common Stock, dated May
24, 2007, which involved the transfer and assignment of the RMD
Technologies Inc. debenture and other documents to us, Mr. Fleming
was an affiliate stockholder of RMD Technologies. Please see Risk
Factors for a complete description of this transaction, and its
subsequent rescission.
(e) On August 1, 2007, we entered into a new Consulting
Services Agreement with De Joya & Company, Inc. (see Exhibit 10.10);
this agreement replaces the prior agreement, dated August 1, 2006.
This agreement covers the services provided to us by Mr. De Joya as
our chief financial officer. Under this agreement, we agreed to pay
$5,000 each month and 1,250,000 free trading shares of common stock
to be issued at the end of each quarter for a total of four quarters,
both effective on August 1, 2006. The monthly fee is to increase by
10% beginning on each anniversary date of this agreement. No shares
have yet been issued under the agreement. The Company accepted the
resignation of Mr. De Joya and De Joya and Company, Inc. on December
14, 2007, thereby terminating this agreement.
(f) Our corporate office is located in Franklin, Kentucky
at the chief executive officer's home-based office (which is provided
to us without cost).
For each of the transactions noted above, the transaction was
negotiated, on our part, on the basis of what is in our best
interests and those of our stockholders. In addition, in each case
the interested affiliate did vote in favor of the transaction;
however, the full board of directors did make the determination that
the terms in each case were as favorable as could have been obtained
from non-affiliated parties.
Certain of our officers and directors are engaged in other
businesses, either individually or through partnerships and
corporations in which they have an interest, hold an office, or serve
on a board of directors. As a result, certain conflicts of interest
may arise between us and such officers and directors. We will
attempt to resolve such conflicts of interest in its favor.
MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Information.
Our common stock began trading on the Over the Counter Bulletin
Board under the symbol "SYCD". With the change in name to "Point
Group Holdings, Incorporated", the symbol changed to "PGHI" on
December 13, 2002. The symbol was changed to "GZFX" effective on
February 6, 2004 with the change in our name to "GameZnFlix, Inc."
With the reverse split of our common stock on September 6, 2007, the
symbol was changed to "GMFX." The range of closing prices shown
below is as reported by this market.
The quotations shown reflect inter-dealer prices, without retail
mark-up, markdown or commission and may not necessarily represent
actual transactions, and are shown to reflect the 1 for 1,000 reverse
split of the common stock that occurred on September 6, 2007.
Per Share Common Stock Bid Prices by Quarter
For the Fiscal Year Ended on December 31, 2007
High Low
Quarter Ended December 31, 2007 $0.10 $0.0017
Quarter Ended September 30, 2007 $0.40 $0.20
Quarter Ended June 30, 2007 $0.80 $0.40
Quarter Ended March 31, 2007 $1.80 $0.70
Per Share Common Stock Bid Prices by Quarter
For the Fiscal Year Ended on December 31, 2006
High Low
Quarter Ended December 31, 2006 $5.00 $1.00
Quarter Ended September 30, 2006 $6.00 $4.00
Quarter Ended June 30, 2006 $15.00 $5.00
Quarter Ended March 31, 2006 $16.00 $7.00
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Holders of Common Equity.
As of March 31, 2008, we had approximately 347 stockholders of
record of our common stock. The number of registered stockholders
excludes any estimate of the number of beneficial owners of common
shares held in street name.
Dividend Information.
We have not declared or paid a cash dividend to stockholders
since we were organized. The board of directors presently intends to
retain any earnings to finance the operations and does not expect to
authorize cash dividends in the foreseeable future. Any payment of
cash dividends in the future will depend upon our earnings, capital
requirements and other factors.
Securities Authorized for Issuance under Equity Compensation Plans.
We have adopted four equity compensation plans (none of which
has been approved by our stockholders):
(a) Stock Incentive Plan.
On April 25, 2003, we adopted a Stock Incentive Plan (we adopted
Amendment No. 4 to this plan on July 13, 2005). This plan is intended
to allow directors, officers, employees, and certain non-employees of
us to receive options to purchase its common stock. The purpose of
this plan is to provide these persons with equity-based compensation
incentives to make significant and extraordinary contributions to our
long-term performance and growth, and to attract and retain
employees. As of December 31, 2004, all 600,000,000 shares of common
stock authorized under this plan have been registered as a result of
Form S-8's filed with the Securities and Exchange Commission.
Options granted under this plan are to be exercisable at whatever
price is established by the board of directors, in its sole
discretion, on the date of the grant.
During 2003, we granted options for 25,000,000 shares to two
non-employee consultants (one at an exercise price equal to 75% of
the market price on the date of exercise and the other at 50% of the
market price on the date of exercise), all of which were exercised in
2004. During August 2004, we granted options for 42,042,294 shares
to three non-employee consultants (at an exercise price equal to 50%
of the market price on the date of exercise), all of which were
exercised in 2004. During December 2004, we granted options for
30,000,000 shares to eight non-employee consultants (at an exercise
price equal to 50% of the market price on the date of exercise), none
of which have been exercised as of December 31, 2006. During 2005,
we granted options for 302,957,706 (incorrectly reported in the 2005
Form 10-KSB as 540,000,000) shares to various consultants (at an
exercise price equal to 50% of the market price on the date of
exercise), all of which were exercised in 2005 resulting in proceeds
to us of $3,032,000; there were no options remaining to be issued as
of that date. As of December 31, 2007, there were options for 30,000
(30,000,000 pre split) shares that remain unexercised, which result
in 30,000,000 shares remaining to be issued under this plan (the
registered amount was not reduced by the reverse split).
(b) 2006 Non-Employee Directors and Consultants Retainer Stock Plan.
On January 6, 2006, we adopted the 2006 Non-Employee Directors
and Consultants Retainer Stock Plan. The purposes of the plan are to
enable us to promote our interests by attracting and retaining non-
employee directors and consultants capable of furthering our business
and by aligning their economic interests more closely with those of
our stockholders, by paying their retainer or fees in the form of
shares of common stock. All 150,000,000 shares of common stock under
this plan have been registered as a result of a Form S-8 filed with
the SEC. As of December 31, 2007, 65,580,440 shares remain unissued
under this plan.
(c) 2006 Stock Incentive Plan.
On January 6, 2006, we adopted the 2006 Stock Incentive Plan.
This plan is intended to allow our directors, officers, employees,
and certain non-employees to receive options to purchase shares of
common stock. The purpose of this plan is to provide these persons
with equity-based compensation incentives to make significant and
extraordinary contributions to our long-term performance and growth,
and to attract and retain employees. All 250,000,000 shares of
common stock under this plan have been registered as a result of a
Form S-8 filed with the SEC. Options granted under this plan are to
be exercisable at whatever price is established by the board of
directors, in its sole discretion, on the date of the grant. As of
December 31, 2007, all shares of common stock under this plan
remained unissued.
(d) 2007 Stock and Option Plan.
On February 1, 2007, we adopted the 2007 Stock and Option Plan,
which registered 400,000,000 shares under a Form S-8 filed on
February 14, 2007. This plan is intended to allow our designated
directors, officers, employees, and certain non-employees, including
consultants (all of whom are sometimes collectively referred to
herein as "Employees") and those of our subsidiaries to receive
options to purchase our common stock and to receive grants of common
stock subject to certain restrictions. The purpose of this plan is
to promote our interests and those of our stockholders by attracting
and retaining employees capable of furthering our future success and
by aligning their economic interests more closely with those of our
stockholders. As of December 31, 2007, 215,988,954 shares were
issued under this plan, resulting in 184,011,326 shares remaining to
be issued.
Equity Compensation Plan Information
December 31, 2007
Number of
securities
remaining
Number of available for future
securities to be issuance under
issued upon Weighted-average equity
exercise of exercise price Of compensation
outstanding outstanding plans (excluding
options, warrants options, warrants securities reflected
and rights and rights in column (a)
Plan category (a) (b) (c)
Equity
compensation plans
approved by security
holders 0 0 0
Equity compensation
plans not approved by
security holders 30,000,000 $0.0075 per share 2006 Director's and
Consultant's
Stock Plan:
65,580,440;
2006 Stock
Incentive
Plan:
250,000,000;
2007 Stock
and Option Plan:
184,011,326
Total 30,000,000 $0.0075 per share 2006 Director's and
Consultant's
Stock Plan:
65,580,440;
2006 Stock
Incentive Plan:
250,000,000;
2007 Stock
and Option Plan:
184,011,326
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EXECUTIVE COMPENSATION
Summary Compensation Table.
The following table presents compensation information for the year
ended December 31, 2007 for the persons who served as principal
executive officer and each of the two other most highly compensated
executive officers whose aggregate salary and bonus was more than
$100,000 in such year.
Nonqualified
Non-Equity Deferred All
Name and Stock Option Incentive Plan Compensation Other
principal Year Salary Bonus Awards Award(s) Compensation Earnings Compensation Total
position ($) ($) ($) ($) ($) ($) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
John Fleming, 2007 $135,833 - - - - - - $153,833
CEO (1) 2006 $263,250 - - - - - - $263,250
2005 $200,000 - - - - - - $200,000
Donald N. 2007 $100,625 - - - - - - $100,625
Gallent, 2006 $200,000 - - - - - - $200,000
former 2005 $175,000 - $140,000(3) - - - - $315,000
Pres. (2)
Arthur De 2007 $ 60,000 - - - - - - $ 60,000
Joya, CFO (4) 2006 $ 46,000 - $ 82,500 - - - - $128,500
2005 $ 30,000 - $ 24,500 - - - - $ 54,500
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(1) Mr. Fleming was appointed chief executive officer and a
director on September 12, 2002.
(2) Mr. Gallent was appointed president and a director on
February 3, 2005. He resigned both positions on May 24, 2007.
(3) On March 11, 2005, we issued 20,000,000 restricted shares of
common stock to Mr. Gallent as an employment incentive. These shares
were valued at $140,000 ($0.007 per share).
(4) Mr. De Joya was appointed chief financial officer on July 9,
2004. He resigned this position on December 14, 2007.
Executive Officer Contracts.
John Fleming.
On September 25, 2005, we entered into a three-year employment
agreement with Mr. Fleming in his capacity as chief executive officer
(see Exhibit 10.4). Under this agreement, he agrees that he will at
all times faithfully, industriously, and to the best of his ability,
experience, talents, and training perform all the duties that may be
required of and from him pursuant to the express and implicit terms
hereof, to our reasonable satisfaction. The agreement provides a
minimum base salary of $200,000 per year with fifteen percent annual
increases and participation in other employee benefit plans. Mr.
Fleming is entitled to stock options at the discretion of our board
of directors.
Should our board of directors vote to remove Mr. Fleming from
employment by us, he will be entitled to receive the following: (a)
balance of wages outlined in this agreement from the date of the
board's vote to the end of the agreement; (b) 100,000,000 restricted
shares of our common stock; and (c) continue health/medical plan
insurance benefits for the balance of the agreement under the
existing health/medical plan. This agreement may not be terminated
by either party, except that we may terminate Mr. Fleming for cause
in the event any of the following enumerated events occur: (a) he
fails to work for us at a level of competency satisfactory to the
board of directors; (b) he engages in any activity that brings
disrepute and harm to us; (c) he fails a drug test (that is, he tests
positive for the use of illegal drugs or substances); and (d) he has
become permanently disabled for a period in excess of six months.
As an integral part of this agreement, Mr. Fleming agrees that
for a period of three years from the date his employment with us is
terminated, he will not, directly or indirectly, in any manner or
capacity, as principal, agent, partner, officer, director, employee,
stockholder, guarantor, consultant, investor, creditor, member of any
association, or otherwise, engage in any facet of the business that
had been conducted by us, anywhere in the United States of America,
except with the our prior written consent.
Outstanding Equity Awards at Fiscal Year-End (December 31, 2007) Table.
Option Awards Stock Awards
Equity
Equity Incentive
Equity Incentive Plan Awards
Incentive Plan Awards Market or
Plan Awards Market Number of Payout Value
Number of Number of Number of Number of Value of Unearned of Unearned
Securities Securities Securities Share or Share or Shares, Units Shares, Units
Underlying Underlying Underlying Units of Units of or other or other
Unexercised Unexercised Unexercised Option Stock That Stock That Rights That Rights That
Name and Options Options Unearned Exercise Option Have Not Have Not Have Not Have Not
principal Exercisable Unexercisable Options Price Expiration Vested Vested Vested Vested
position (#) (#) (#) ($) Date (#) ($) (#) (#)
(a) (b) (c) (d) (e) If) (g) (h) (i) (j)
John Fleming
CEO 5,000,000 - - $0.007 12/31/14 - - - -
Donald N.
Gallent,
Pres. 5,000,000 - - $0.007 12/31/14 - - - -
Arthur
De Joya,
CFO 5,000,000 - - $0.007 12/31/14 - - - -
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(1) Underlying share amounts reduced from 5,000,000 each due to the
1 for 1,000 reverse stock split of our common stock on September 6, 2007.
Other Compensation.
There are no plans that provide for the payment of retirement
benefits, or benefits that will be paid primarily following
retirement, including but not limited to tax-qualified defined
benefit plans, supplemental executive retirement plans, tax-qualified
defined contribution plans and nonqualified defined contribution
plans. In addition, there are no contracts, agreements, plans or
arrangements, whether written or unwritten, that provide for
payment(s) to a named executive officer at, following, or in
connection with the resignation, retirement or other termination of a
named executive officer, or a change in control of us or a change in
the named executive officer's responsibilities following a change in
control, with respect to each named executive officer.
Compensation of Directors.
We provide compensation of $2,500 per quarter to its independent
director, Mr. Crist.
FINANCIAL STATEMENTS
Unaudited financial statements for the three months ended March
31, 2008 and 2007, and audited financial statements as of and for the
years ended December 31, 2007 and 2006, are presented in a separate
section at the end of this prospectus.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Effective on January 1, 2006, Smith & Company, the independent
registered public accounting firm who was previously engaged as the
principal accountant to audit our financial statements, changed its
accounting practice from a corporation to a professional limited
liability company named Child, Van Wagoner & Bradshaw, PLLC. As this
is viewed as a separate legal entity, we terminated our accounting
arrangement with Smith & Company. The decision to change principal
accountants was approved by our Audit Committee and subsequently
approved by the Board of Directors.
Smith & Company audited our financial statements for the fiscal
years ended December 31, 2004 and 2003. This firm's report on these
financial statements was modified as to uncertainty that we will
continue as a going concern; other than this, the accountant's report
on the financial statements for those periods neither contained an
adverse opinion or a disclaimer of opinion, nor was qualified or
modified as to uncertainty, audit scope, or accounting principles.
During the fiscal years ended December 31, 2004 and 2003, and
the subsequent interim period preceding such change, there were no
disagreements with Smith & Company on any matter of accounting
principles or practices, financial statement disclosure, or auditing
scope or procedure. In addition, there were no "reportable events"
as described in Item 304(a)(1)(iv)(B)1 through 3 of Regulation S-B
that occurred during the fiscal years ended December 31, 2004 and
2003, and the subsequent interim period preceding such change.
On January 1, 2006, we engaged Child, Van Wagoner & Bradshaw,
PLLC, as successor to Smith & Company, as our independent registered
public accounting firm to audit our financial statements. During the
fiscal years ended December 31, 2004 and 2003, and the subsequent
interim period prior to engaging this firm, neither we (nor someone on
our behalf) consulted the newly engaged accountant regarding any matter.
LEGAL MATTERS
Brian F. Faulkner, A Professional Corporation, San Juan
Capistrano, California, has issued an opinion with respect to the
validity of the shares of common stock being offered hereby.
EXPERTS
Child, Van Wagoner & Bradshaw, PLLC, independent registered
public accounting firm, has audited, as set forth in their report
thereon appearing elsewhere herein, our financial statements at
December 31, 2007 and December 31, 2006, and for the years then
ended, that appear in this prospectus. The financial statements
referred to above are included in this prospectus with reliance upon
the auditors' opinion based on their expertise in accounting and auditing.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement on Form SB-2 under
the Securities Act of 1933 with respect to the shares of common stock
offered by this prospectus. This prospectus does not contain all of
the information set forth in the registration statement and the
exhibits and schedules filed with the registration statement. Certain
items are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to World Am and the
common stock offered by this prospectus, reference is made to the
registration statement and the exhibits and schedules filed with the
registration statement. Statements contained in this prospectus as to
the contents of any contract or any other document referred to are
not necessarily complete, and in each instance, reference is made to
the copy of such contract or other document filed as an exhibit to
the registration statement, each such statement being qualified in
all respects by such reference.
A copy of the registration statement, and the exhibits and
schedules filed with it, may be inspected without charge at the
public reference facilities maintained by the Commission at 100 F
Street, N.E., Washington, D.C. 20549, and copies of all or any part
of the registration statement may be obtained from such offices upon
the payment of the fees prescribed by the Commission. The public may
obtain information on the operation of the public reference room by
calling the Commission at 1 (800) SEC-0330. The Commission maintains
a World Wide Web site that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission, including Barter. The address of
the site is http://www.sec.gov. The registration statement, including
all its exhibits and any amendments, has been filed electronically
with the Commission.
FINANCIAL STATEMENTS
GAMEZNFLIX, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 2008 December 31, 2007
(Unaudited) (Audited)
ASSETS
Current assets
Cash $ 10,566 $ 24,976
Accounts receivable 77,186 77,235
Inventory 23,028 23,028
Prepaid expenses 34,800 15,000
Other assets 140,000 157,013
Total current assets 285,580 297,252
DVD's and video games library, net of accumulated
amortization of $7,362,546 for both periods 295,069 281,361
Fixed assets, net of accumulated depreciation of
$453,544 and $405,875, respectively 526,903 548,806
Film library, net of accumulated amortization of
$308,489 and $259,219, respectively 1,270,100 1,313,531
Other assets 3,650 3,650
Total assets $ 2,381,302 $ 2,444,600
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 1,805,211 $ 1,778,092
Bank overdraft -- 49,203
Deferred revenue 30,227 30,227
Current portion of note payable 595,052 535,552
Customer deposits --
Notes payable 201,397 191,351
Advance from Golden Gate Investors, Inc. 571,986 521,298
Total current liabilities 3,203,873 3,105,723
Note payable, less current portion of $535,552 100,497 100,497
Convertible debenture, net of unamortized debt
discounts of $71,742 and $76,725, respectively 75,643 70,660
Total liabilities 3,380,013 3,276,880
Stockholders' equity
Common stock; $0.001 par value; 5,000,000,000 shares
authorized, 411,970,250 and 185,848,250 issued and
outstanding, respectively 411,970 185,848
Additional paid-in capital 42,894,543 43,091,665
Stock subscriptions receivable -- (25,000)
Prepaid fees paid with common stock (7,500) --
Accumulated deficit (44,297,724) (44,084,793)
Total stockholders' equity (998,711) (832,280)
Total liabilities and stockholders' equity $ 2,381,302 $ 2,444,600
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See Accompanying Notes to Consolidated Financial Statements
GAMEZNFLIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months
Ended March 31,
2008 2007
Revenues $ 380,266 $ 954,002
Cost of revenues 172,799 485,723
Gross profit 207,467 468,279
Operating expenses
Advertising 17,409 581,626
Consulting and professional fees 12,390 154,824
Depreciation and amortization 47,670 1,107,794
Selling, general and administrative 342,197 1,360,378
Total operating expenses 419,665 3,204,977
Loss from operations (212,198) (2,736,343)
Other income (expense)
Interest expense (4,983) (1,291)
Interest income 4,250 14,037
Other income (expense) -- (4,929)
Total other income (expense) (733) 7,817
Loss before provision for income taxes (212,931) (2,728,526)
Provision for income taxes -- --
Net loss $ (212,931) $(2,728,526)
Loss per common share - basic and diluted $ (0.00) $ (0.00)
Weighted average common shares outstanding -
basic and diluted 411,970,250 5,787,264 (1)
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(1) Adjusted for a 1 for 1,000 reverse split of the common stock
effective on September 6, 2007.
See Accompanying Notes to Consolidated Financial Statements
GAMEZNFLIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months
Ended March 31,
2008 2007
Cash flows from operating activities:
Net loss $ (212,931) $(2,728,526)
Adjustments to reconcile net loss to net
cash used in operating activities:
Debt discount amortization related to convertible debenture 4,983 4,929
Depreciation and amortization 65,334 1,107,794
Changes in operating assets and liabilities:
Change in accounts receivable 48 88,276
Change in prepaid expenses (27,300) (984)
Change in other assets 17,013 46,975
Change in accounts payable and accrued expenses 37,416 1,035,367
Net cash used in operating activities (115,437) (446,169)
Cash flows from investing activities:
Purchase of DVD's & games libraries (13,708) (749,478)
Purchase of film library -- (62,000)
Purchase of fixed assets -- (35,136)
Net cash used in investing activities (13,708) (846,614)
Cash flows from financing activities:
Payments on notes payable 10,047 --
Proceeds from advances from Golden Gate Investors, Inc. 50,688 60,000
Proceeds from stock issuances 54,000 1,146,829
Net cash provided by investing activities 114,735 1,206,829
Net change in cash and cash equivalents (14,410) (85,954)
Cash, beginning of period 24,976 342,634
Cash, end of period $ 10,566 $ 256,680
|
See Accompanying Notes to Consolidated Financial Statements
GAMEZNFLIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
GameZnFlix, Inc. ("Company") have been prepared in accordance with
Securities and Exchange Commission requirements for interim financial
statements. Therefore, they do not include all of the information and
footnotes required by accounting principles generally accepted in the
United States for complete financial statements. The financial
statements should be read in conjunction with the Form 10-K of the
Company for the year ended December 31, 2007.
The interim financial statements present the balance sheet,
statements of operations, and cash flows of the Company. The
financial statements have been prepared in accordance with accounting
principles generally accepted in the United States.
The interim financial information is unaudited. In the opinion of
management, all adjustments necessary to present fairly the financial
position as of March 31, 2008, and the results of operations and cash
flows presented herein have been included in the financial
statements. All such adjustments are of a normal and recurring
nature. Interim results are not necessarily indicative of results of
operations for the full year.
The Company provides online digital video disk ("DVD") movie and
video game rentals to subscribers through its Internet website
www.gameznflix.com. Aside from having a comprehensive movie library
of titles, the Company also provides subscribers with access to a
comprehensive games library of Xbox, Playstation 2, Playstation, and
Nintendo Gamecube titles. Subscribers of the Company are located
within the United States of America. The Company maintains its
headquarters in Franklin, Kentucky.
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates - The preparation of consolidated financial
statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ
from those estimates.
DVD's and Video Games Libraries - DVD's and video games are recorded
at historical cost and depreciated using the straight-line method over
a twelve-month period. The Company has no immediate plans to have any
part of its DVD's and video games libraries sold and accordingly no
salvage value is provided. However if the Company does sell any of
its DVD's and video games libraries, the Company will re-evaluate its
depreciation policy in terms of the salvage value.
Because of the nature of the business, the Company experiences a
certain amount of loss, damage, or theft of its DVD's and video games.
This loss is shown in the cost of sales section of the accompanying
consolidated statement of operations. Any accumulated depreciation
associated with this item is accounted for on a first-in-first-out
basis and treated as a reduction to depreciation expense in the month
the loss is recognized.
Inventory - Inventory consists of DVD and video game products for
sale. All inventory items are stated at the lower of cost (first-in,
first-out) or market value.
Revenue Recognition and Cost of Revenue - Subscription revenues are
recognized ratably during each subscriber's monthly subscription
period. Refunds to subscribers are recorded as a reduction of
revenues. Revenues from sales of DVD's and video games are recorded
upon shipment.
Cost of subscription revenues consists of referral expenses,
fulfillment expenses, and postage and packaging expenses related to
DVD's and video games provided to paying subscribers. Revenue sharing
expenses are recorded as DVD's subject to revenue sharing agreements
are shipped to subscribers. Cost of DVD sales include the net book
value of the DVD's sold and, where applicable, a contractually
specified percentage of the sales value for the DVD's that are subject
to revenue share agreements.
Revenue from proprietary software sales that does not require further
commitment from the Company is recognized upon shipment. Consulting
revenue is recognized when the services are rendered. License revenue
is recognized ratably over the term of the license.
The cost of services, consisting of staff payroll, outside services,
equipment rental, communication costs and supplies, is expensed as
incurred.
3. LEGAL PROCEEDINGS.
From time to time, the Company may become party to litigation or
other legal proceedings that the Company considers to be a part of
the ordinary course of the business. There are no material legal
proceedings to report, except as follows:
(a) On February 8, 2008, an action was filed in the United States
District Court, Western District of Pennsylvania, entitled Mobile
Satellite Communications v. GameZnFlix, Inc. et al. In this action,
the plaintiff claims that it was damaged as a result of the
termination of the agreement covering leased television channels by
GNF Entertainment, LLC. The Company has filed an answer and this
matter is now in the discovery stage.
Management believes the Company has meritorious claims and defenses to
the plaintiff's claims and ultimately will prevail on the merits.
However, this matter remains in the early stages of litigation and
there can be no assurance as to the outcome of the lawsuit.
Litigation is subject to inherent uncertainties, and unfavorable
rulings could occur. Were unfavorable rulings to occur, there exists
the possibility of a material adverse impact of money damages on the
Company's financial condition, results of operations, or liquidity of
the period in which the ruling occurs, or future periods.
(b) On February 15, 2008, an action was filed in the United States
District Court, District of Kentucky (Bowling Green Division),
entitled Peppe v. GameZnFlix Inc. et al. In this action, a past
employee of the Company claims damages of approximately $265,000.00
in connection with an employment agreement with the Company. On
March 11, 2008, the Company filed an answer and counter claim in this
action for breach of the employment agreement. This matter has
reached a settlement whereby the Company has agreed with Mr. Peppe
for a cash settlement of $2,300.00 and is pending final filing.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
GameZnFlix, Inc.
We have audited the accompanying consolidated balance sheet of
GameZnFlix, Inc. and Subsidiaries (a Nevada corporation) as of
December 31, 2007, and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for the
years ended December 31, 2007 and 2006. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States of America).
Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included
consideration of internal control over financial reporting, as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of
GameZnFlix, Inc. and Subsidiaries as of December 31, 2007 and the
results of its operations, changes in stockholders' equity, and its
cash flows for the years ended December 31, 2007 and 2006, in
conformity with accounting principles generally accepted in the
United States of America.
/s/ Child, Van Wagoner & Bradshaw, PLLC
Child, Van Wagoner & Bradshaw, PLLC
Certified Public Accountants
Salt Lake City, Utah
March 26, 2008
|
GAMEZNFLIX, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2007
ASSETS
Current assets
Cash $ 24,976
Accounts receivable 77,235
Inventory 23,028
Prepaid expenses 15,000
Other assets 157,013
Total current assets 297,252
DVD and video game libraries, net 281,361
Fixed assets, net 548,806
Film library, net 1,313,531
Other assets 3,650
Total assets $ 2,444,600
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued expenses $ 1,778,092
Bank overdraft 49,203
Deferred revenue 30,227
Note payable - related party 191,351
Customer deposits --
Current portion of note payable 535,552
Advance from Golden Gate Investors, Inc. 521,298
Total current liabilities 3,105,723
Long-term liabilities
Note payable, less current portion of $535,552 100,497
Convertible debenture, net of unamortized debt
discounts of $76,725 70,660
Total liabilities 3,276,880
Stockholders' deficit
Common stock; $0.001 par value; 5,000,000,000
shares authorized, 185,848,250 (1) issued
and outstanding 185,848
Additional paid-in capital 43,091,665
Stock subscription receivable (25,000)
Accumulated deficit (44,084,793)
Total stockholders' deficit (832,280)
Total liabilities and stockholders' deficit $ 2,444,600
|
(1) Adjusted for a 1 for 1,000 reverse split of the common stock
effective on September 6, 2007.
See accompanying Notes to Consolidated Financial Statements
GAMEZNFLIX, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2006
ASSETS
Current assets
Cash $ 342,634
Accounts receivable 154,394
Inventory 27,828
Note receivable 770,000
Prepaid expenses 429,926
Other assets 301,535
Total current assets 2,026,317
DVD and video games libraries, net 2,250,096
Fixed assets, net 578,721
Film library 1,158,198
Other assets 700,162
Total assets $ 6,713,494
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 68,524
Deferred revenue 149,124
Note payable - related party 175,000
Customer deposits --
Advance from Golden Gate Investors, Inc. 466,515
Total current liabilities 859,163
Long-term liabilities
Convertible debenture, net of unamortized
debt discounts of $96,714 3,286
Total liabilities 862,449
Commitments and contingencies --
Stockholders' equity
Common stock; $0.001 par value; 25,000,000,000
shares authorized, 5,189,494,029
issued and outstanding 5,189,494
Additional paid-in capital 35,244,476
Stock subscriptions receivable (1,000,000)
Prepaid fees paid with common stock --
Accumulated deficit (33,582,925)
Total stockholders' equity 5,851,045
Total liabilities and stockholders' equity $ 6,713,494
|
See accompanying Notes to Consolidated Financial Statements
GAMEZNFLIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
December 31,
2007 2006
Revenues $ 3,597,028 $ 1,884,678
Cost of revenues 5,734,261 3,366,147
Gross profit (2,137,233) (1,481,469)
Operating expenses
Advertising 1,649,739 2,407,505
Consulting and professional fees 1,386,380 3,042,320
Depreciation and amortization 211,165 205,306
Selling, general and administrative 5,103,844 3,927,104
Total operating expenses 8,351,128 9,582,235
Loss from operations (10,488,361) (11,063,704)
Other income (expense)
Interest expense (30,370) (15,913)
Interest income 16,864 236,820
Other income (expense) -- 2,538
Total other income (expense) (13,506) 223,445
Loss before provision for income taxes (10,501,867) (10,840,259)
Provision for income taxes -- --
Net loss $(10,501,867) $(10,840,259)
Loss per common share - basic and diluted $ (0.50) $ (2.55)
Weighted average common shares outstanding
- basic and diluted (1) 20,798,150 4,243,800
|
(1) Adjusted for a 1 for 1,000 reverse split of the common stock
effective on September 6, 2007.
See accompanying Notes to Consolidated Financial Statements
GAMEZNFLIX, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
Additional Stock Prepaid Total
Common Stock Paid-In Subscrip Consulting Accumulated Stockholders'
Shares(1) Amount Capital Receivable Expenses Deficit Equity
Balance,
December 31, 2005 3,291,733 $ 3,292 $33,065,117 $(3,187,500) $ (95,833) (22,742,667) $ 7,042,409
Issuance of
common stock
for services,
weighted average
price of $0.008 17,000 17 133,883 -- -- -- 133,900
Issuance of
common stock
related to
exercise of options,
weighted average
price of $0.01 306,520 307 2,993,797 (1,000,000) -- -- 1,994,104
Issuance of
common stock
related to debt
conversion totaling
$65,474 and exercise
of related stock
warrants at $1.09 per
share - Golden Gate
Investors, Inc. 1,674,241 1,674 7,135,885 -- -- -- 7,137,559
Cancellation
of stock
subscriptions
receivable (100,000) (100) (2,999,900) 3,000,000 -- -- --
Proceeds from
stock
subscriptions
receivable -- -- -- 187,500 -- -- 187,500
Beneficial
conversion
feature related
to
convertible debt -
Golden Gate
Investors, Inc. -- -- 100,000 -- -- -- 100,000
Expense of prepaid
consulting fees -- -- -- -- 95,833 -- 95,833
Net loss -- -- -- -- -- (10,840,259) (10,840,259)
Balance,
December 31, 2006 5,189,494 5,189 40,428,782 (1,000,000) -- (33,582,926) 5,851,045
Issuance of
common stock for
services,
weighted average
price of $0.001 109,695,034 109,695 1,261,361 -- -- -- 1,371,056
Issuance of
common stock for
cash 40,367,862 40,368 136,332 (25,000) -- -- 151,700
Issuance of
common stock
related to debt
conversion and
exercise of
related stock
warrants -
Golden Gate
Investors, Inc. 30,745,665 30,746 2,265,040 -- -- -- 2,295,786
Cancellation of
stock
subscriptions
receivable (149,805) (150) (999,850) 1,000,000 -- -- --
Net loss -- -- -- -- -- (10,501,867) (10,501,867)
Balance,
December 31, 2007 185,848,250 185,848 43,091,665 (25,000) - (44,084,793) (832,280)
|
(1) Adjusted for a 1 for 1,000 reverse split of the common stock
effective on September 6, 2007.
See accompanying Notes to Consolidated Financial Statements
GAMEZNFLIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
December 31,
2007 2006
Cash flows from operating activities:
Net loss $(10,501,867) $(10,840,259)
Adjustments to reconcile net loss to net
cash used in operating activities:
Stock-based compensation 1,371,056 946,504
Debt discount amortization related to
convertible debenture 19,989 53,224
Depreciation and amortization 3,916,832 2,793,008
Bad debt expense 520,000 --
Changes in operating assets and liabilities:
Change in accounts receivable 77,159 (91,894)
Change in inventory 4,800 (72,880)
Change in prepaid expenses 414,926 (381,097)
Change in other assets 713,034 (862,183)
Change in accounts payable and accrued expenses 2,345,616 (131,228)
Change in bank overdraft 49,203 --
Change in deferred revenue (118,898) 92,632
Net cash used in operating activities (1,188,150) (8,494,173)
Cash flows from investing activities:
Purchase of DVD & game libraries (1,551,691) (3,933,401)
Purchase of film library (99,750) (1,223,000)
Purchase of fixed assets (44,073) (212,260)
Investment in note receivable -- (770,000)
Net cash used in investing activities (1,695,514) (6,138,661)
Cash flows from financing activities:
Proceeds from advances from Golden Gate Investors, Inc. 54,783 166,515
Proceeds from convertible debenture 51,020 --
Proceeds from related party notes payable 16,351 --
Proceeds from stock issuances 2,443,852 8,906,558
Net cash provided by financing activities 2,566,006 9,073,073
Net change in cash and cash equivalents (317,658) (5,559,761)
Cash, beginning of period 342,634 5,902,395
Cash, end of period $ 24,976 $ 342,634
|
See accompanying Notes to Consolidated Financial Statements
GAMEZNFLIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies of GameZnFlix, Inc.
and subsidiaries ("Company") is presented to assist in understanding
the Company's consolidated financial statements. The financial
statements and notes are representations of the Company's management,
which is responsible for their integrity and objectivity. These
accounting policies conform to generally accepted accounting
principles and have been consistently applied in the preparation of
the financial statements.
Organization.
The Company was originally formed under the laws of the State of
Delaware in June 1997 under the name SyCo Comics and Distribution
Inc. and is the successor to a limited partnership named SyCo Comics
and Distribution, formed under the laws of the Commonwealth of
Virginia on January 15, 1997. On February 17, 1999, SyCo Comics and
Distribution Inc. changed its name to Syconet.com, Inc. On April 12,
2002 the Company adopted an Agreement and Plan of Merger for the
purpose of redomiciling the Company to the State of Nevada. The
Company then discontinued its operations as Syconet.com, Inc. and
changed its name to Point Group Holding, Incorporated effective
November 21, 2002. On November 21, 2003, the Company changed its name
to GameZnFlix, Inc.
Nature of Business.
The Company provides online movie (also referred to as a "DVD") and
video game rentals to subscribers through its Internet website
www.gameznflix.com. Aside from having a comprehensive movie library
of titles, the Company also provides subscribers with access to a
comprehensive games library of Xbox, Playstation 2, Playstation, and
Nintendo Gamecube titles. All titles in the libraries used to provide
rentals to subscribers are owned by the Company and are further
described in these Notes in the section titled "DVD's and Video Game
Libraries." In March 2004, the Company launched its website,
www.gameznflix.com, and began operating in the online movie and video
game rental industry. Subscribers of the Company are located within
the United States of America. The Company maintains its headquarters
in Franklin, Kentucky with shipping facilities in Kentucky and
Colorado, and seven receiving center locations throughout the United
States.
Basis of Presentation.
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries that include Naturally Safe
Technologies, Inc. ("NSTI"), GameZnFlix Entertainment, Inc. and
GameZnFlix Racing and Merchandising, Inc. All intercompany balances
and transactions have been eliminated.
Use of Estimates.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Because of the use
of estimates inherent in the financial reporting process, actual
results could differ significantly from those estimates.
Reclassifications.
Certain amounts reported in previous years have been reclassified to
conform to the current year presentation.
Fair Value of Financial Instruments.
The fair value of the Company's cash, accounts receivable, accounts
payable, accrued expenses and notes payable approximates their
carrying value due to their short maturity.
Cash and Cash Equivalents.
The Company maintains cash balances in non-interest-bearing accounts
that currently do not exceed federally insured limits. For the
purpose of the statements of cash flows, all highly liquid
investments with an original maturity of three months or less are
considered to be cash equivalents. There were no cash equivalents as
of December 31, 2007.
Inventory.
Inventory consists of DVD and video game products for sale. All
inventory items are stated at the lower of cost (first-in, first-out)
or market value.
Property, Plant, and Equipment.
Property and equipment are carried at cost less accumulated
depreciation. Depreciation is calculated using the straight-line
method over the shorter of the estimated useful lives of the
respective assets, generally from three years to five years, and
forty years for a building.
Impairment of Long-Lived Assets.
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-
Lived Assets," long-lived assets such as property and equipment and
intangible assets subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset group may not be recoverable.
Recoverability of assets groups to be held and used is measured by a
comparison of the carrying amount of an asset group to estimated
undiscounted future cash flows expected to be generated by the asset
group. If the carrying amount of an asset group exceeds its
estimated future cash flows, an impairment charge is recognized by
the amount by which the carrying amount of an asset group exceeds
fair value of the asset group.
DVD and Video Game Libraries.
DVD's and video games are recorded at historical cost and depreciated
using the straight-line method over a twelve-month period. The
Company has no immediate plans to have any part of its DVD's and
video game libraries sold and accordingly no salvage value is
provided. However if the Company does sell any of its DVD and video
game libraries, the Company will re-evaluate its depreciation policy
in terms of the salvage value.
Because of the nature of the business, the Company experiences a
certain amount of loss, damage, or theft of its DVD's and video
games. This loss is shown in the cost of sales section of the Income
Statement. Any accumulated depreciation associated with this item is
accounted for on a first-in-first-out basis and treated as a
reduction to depreciation expense in the month the loss is
recognized.
Revenue Recognition and Cost of Revenue.
Subscription revenues are recognized ratably during each subscriber's
monthly subscription period. Refunds to subscribers are recorded as a
reduction of revenues. Revenues from sales of DVD's and video games
are recorded upon shipment.
Cost of subscription revenues consists of referral expenses,
fulfillment expenses, and postage and packaging expenses related to
DVD's and video games provided to paying subscribers. Cost of DVD
sales include the net book value of the DVD's sold and, where
applicable, a contractually specified percentage of the sales value
for the DVD's that are subject to revenue share agreements. DVD
sales are considered non-significant and an incidental part of the
business. Therefore, sales and related expenses were not separately
accounted for.
Revenue from proprietary software sales that does not require further
commitment from the Company is recognized upon shipment. Consulting
revenue is recognized when the services are rendered. License revenue
is recognized ratably over the term of the license.
The cost of services, consisting of staff payroll, outside services,
equipment rental, communication costs and supplies, is expensed as
incurred.
Fulfillment Expenses
Fulfillment expenses represent those costs incurred in operating and
staffing the Company's fulfillment and customer service centers,
including costs attributable to receiving, inspecting and warehousing
the Company's DVD and video game libraries.
Advertising Costs
The Company expenses all costs of advertising as incurred.
Advertising costs for the years ended December 31, 2007 and 2006 were
approximately $1,650,000 and $2,408,000, respectively.
Income Taxes
The Company accounts for income taxes using the asset and liability
method. Deferred income taxes are recognized by applying enacted
statutory tax rates applicable to future years to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
credit carry forwards. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. The measurement of deferred
tax assets is reduced, if necessary, by a valuation allowance for any
tax benefits for which future realization is uncertain.
At December 31, 2007, the Company has net operating loss carry
forwards totaling approximately $44,085,000. The carry forwards begin
to expire in fiscal year 2017. The Company has established a
valuation allowance for the full tax benefit of the operating loss
carryovers due to the uncertainty regarding realization.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income
(loss) by the weighted-average number of outstanding shares of common
stock during the period. Diluted net income (loss) per share is
computed by dividing the weighted-average number of outstanding
shares of common stock, including any potential common shares
outstanding during the period, when the potential shares are
dilutive. Potential common shares consist primarily of incremental
shares issuable upon the assumed exercise of stock options and
warrants to purchase common stock using the treasury stock method.
The calculation of diluted net income (loss) per share gives effect
to common stock equivalents; however, potential common shares are
excluded if their effect is antidilutive, as they were during 2007
and 2006. During 2007 and 2006, the number of potential common shares
excluded from diluted weighted-average number of outstanding shares
was 30,000 and 30,000, respectively.
Dividends
The Company has not yet adopted any policy regarding payment of
dividends. No dividends have been paid or declared since inception.
Segment Reporting
The Company follows SFAS No. 130, "Disclosures About Segments of an
Enterprise and Related Information." The Company operates as a
single segment and will evaluate additional segment disclosure
requirements as it expands its operations.
Stock-Based Compensation
Up through December 31, 2004, the Company accounted for stock-based
awards to employees in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations and has adopted the disclosure-only
alternative of SFAS No. 123, "Accounting for Stock-Based
Compensation." Options granted to consultants, independent
representatives and other non-employees are accounted for using the
fair value method as prescribed by SFAS No. 123.
Recent Pronouncements
In February 2007, the Financial Accounting Standards Board ("FASB")
issued Statement No. 159, "The Fair Value Option for Financial Assets
and Financial Liabilities - Including an amendment to FASB Statement
No. 115". This statement permits companies to choose to measure many
financial instruments and other items at fair value. The objective is
to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having
to apply complex hedge accounting provisions. This Statement is
expected to expand the use of fair value measurement of accounting
for financial instruments. This statement applies to all entities,
including not for profit. The fair value option established by this
statement permits all entities to measure eligible items at fair
value at specified election dates. This statement is effective as of
the beginning of an entity's first fiscal year that begins after
November 15, 2007. The Company is currently assessing the impact
adoption of SFAS No. 159 will have on its consolidated financial
statements.
In December 2006, the FASB issued SFAS No. 157 "Fair Value
Measurements," which defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and
expands disclosure about fair value measurements. The statement
clarifies that the exchange price is the price in an orderly
transaction between market participants to sell the asset or transfer
the liability in the market in which the reporting entity would
transact for the asset or liability; that is, the principal or most
advantageous market for the asset or liability. It also emphasizes
that fair value is a market-based measurement, not an entity-specific
measurement, and that market participant assumptions include
assumptions about risk and effect of a restriction on the sale or use
of an asset. The provisions are effective for fiscal years beginning
after November 15, 2007. The Company is currently assessing the
impact of the statement.
In December 2007, the FASB issued SFAS No.141 (revised 2007),
"Business Combinations", SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements." These statements aim to improve,
simplify, and converge internationally the accounting for business
combinations and the reporting of noncontrolling interests in
consolidated financial statements. The provisions of SFAS No. 141 (R)
and SFAS No. 160 are effective for our fiscal year beginning January
1, 2009. The Company is currently assessing the impact of these
statements.
NOTE 2 - DVD'S AND VIDEO GAME LIBRARIES
DVD and video game libraries as of December 31, 2007 consisted of the
following:
DVD and video game libraries $ 7,643,907
Less accumulated amortization (7,362,546)
DVD and video game libraries, net $ 281,361
|
NOTE 3 - FIXED ASSETS
Fixed assets as of December 31, 2007 consisted of the following:
Computers and software $ 318,318
Furniture and fixtures 53,119
Vehicles 245,665
Office building 337,579
954,681
Less accumulated depreciation (405,875)
Fixed assets, net $ 548,806
|
NOTE 4 - FILM LIBRARY
Film library at December 31, 2007 consists of various films acquired
throughout 2006. The Company amortizes the film library over the
estimated useful life of eight years. The film library consisted of
the following:
Film library $1,572,750
Less accumulated amortization (259,219)
Film library, net $1,313,531
|
NOTE 5 - NOTE PAYABLE - RELATED PARTY
Note payable - related party as of December 31, 2007 consists of a
promissory note payable totaling $175,000 to an investor, due on
demand (past due maturity and in default), secured by assets of NSTI
and bears no interest; and $16,351 to the Company's Chief Executive
Officer, due on demand, unsecured and bearing no interest.
NOTE 6 - CONVERTIBLE DEBENTURES
(a) On November 1, 2006, the Company entered into a convertible
debenture totaling $100,000 that matures November 2011, is unsecured
and bears an annual interest rate of 4.75%. The convertible debenture
is convertible into shares of common stock equal to the principal
amount of the debenture being converted multiplied by 110, less the
product of the conversion price multiplied by 100 times the dollar
amount. The conversion price is based on the lesser of $0.20 per
share or 82% of the average of the lowest volume weighted average
prices during the 20 trading days prior to the debt holder's election
to convert such unpaid balances. Additionally, the debt holder is
entitled to a warrant to purchase 10,000 shares of common stock at an
exercise price of $1.09 per share. The debt holder does not have the
right and the Company does not have the obligation to convert any
portion of the convertible debenture that will cause the debt holder
to be a deemed beneficial owner of more than 9.99% of the then
outstanding shares of the Company's common stock.
In accordance with EITF No. 00-27, the Company has determined the
value of the convertible debenture and the fair value of the
detachable warrant issued in connection with this debt. The
estimated value of the warrants of $12,567 was determined using the
Black-Scholes option pricing model under the following assumptions:
life of 1 year, risk free interest rate of 5.15%, a dividend yield of
0% and volatility of 349%. The face amount of the debt of $100,000
was proportionately allocated to the convertible debt and the warrant
in the amounts of $88,836 and $11,164, respectively. The value of the
note was then allocated between the debt and the beneficial
conversion feature, which the entire portion of $88,836 was allocated
towards the beneficial conversion feature. The combined total
discount is $100,000, which is being amortized over the term of the
convertible debt using the effective interest method. For the years
ended December 31, 2007 and 2006, the Company has amortized a total
of $17,581 and $3,826.
(b) On November 11, 2004, the Company entered into a convertible
debenture totaling $150,000 that matured in November 2007, is
unsecured and bears an annual interest rate of 4.75%. The convertible
debenture is convertible into shares of common stock equal to the
principal amount of the debenture being converted multiplied by 110,
less the product of the conversion price multiplied by 100 times the
dollar amount. The conversion price is based on the lesser of $0.20
per share or 82% of the average of the lowest volume weighted average
prices during the 20 trading days prior to the debt holder's election
to convert such unpaid balances. Additionally, the debt holder is
entitled to a warrant to purchase 15,000 shares of common stock at an
exercise price of $1.09 per share. The debt holder does not have the
right and the Company does not have the obligation to convert any
portion of the convertible debenture that will cause the debt holder
to be a deemed beneficial owner of more than 9.99% of the then
outstanding shares of the Company's common stock.
In accordance with EITF No. 00-27, the Company has determined the
value of the convertible debenture and the fair value of the
detachable warrants issued in connection with this debt. The
estimated value of the warrants of $44,870 was determined using the
Black-Scholes option pricing model under the following assumptions:
life of 1 year, risk free interest rate of 3.5%, a dividend yield of
0% and volatility of 207%. The face amount of the debt of $150,000
was proportionately allocated to the convertible debt and the
warrants in the amounts of $105,130 and $44,870, respectively. The
value of the note was then allocated between the debt and the
beneficial conversion feature, which attributed to $27,333 and
$77,797, respectively. The combined total discount is $122,667, which
is being amortized over the term of the convertible debt using the
effective interest method. During the year ended December 31, 2006,
debt holder converted the entire remaining debt balance. For the
year ended December 31, 2006, the Company has amortized a total of
$50,939.
NOTE 7 - ADVANCE FROM GOLDEN GATE INVESTORS, INC.
An advance from Golden Gate Investors, Inc. totaling $521,298 at
December 31, 2007 relates to funds advanced to the Company for future
exercise of warrants as discussed in Note 6.
NOTE 8 - COMMON STOCK
On September 6, 2007, the Company implemented a 1,000-to-1 reverse
stock split which has been applied to the accompanying financial
statements on a retroactive basis.
NOTE 9 - STOCK COMPENSATION PLANS
(a) Stock Incentive Plan.
On April 25, 2003, the Company adopted a Stock Incentive Plan (the
Company adopted Amendment No. 4 to this plan on July 13, 2005). This
plan is intended to allow directors, officers, employees, and certain
non-employees of the Company to receive options to purchase its
common stock. The purpose of this plan is to provide these persons
with equity-based compensation incentives to make significant and
extraordinary contributions to the long-term performance and growth
of the Company, and to attract and retain employees. As of December
31, 2004, all 600,000,000 shares of common stock authorized under
this plan have been registered as a result of Form S-8's filed with
the Securities and Exchange Commission. Options granted under this
plan are to be exercisable at whatever price is established by the
board of directors, in its sole discretion, on the date of the grant.
During 2003, the Company granted options for 25,000,000 shares to two
non-employee consultants (one at an exercise price equal to 75% of
the market price on the date of exercise and the other at 50% of the
market price on the date of exercise), all of which were exercised in
2004. During August 2004, the Company granted options for 42,042,294
shares to three non-employee consultants (at an exercise price equal
to 50% of the market price on the date of exercise), all of which
were exercised in 2004. During December 2004, the Company granted
options for 30,000,000 shares to eight non-employee consultants (at
an exercise price equal to 50% of the market price on the date of
exercise), none of which have been exercised as of December 31, 2006.
During 2005, the Company granted options for 302,957,706 (incorrectly
reported in the 2005 Form 10-KSB as 540,000,000) shares to various
consultants (at an exercise price equal to 50% of the market price on
the date of exercise), all of which were exercised in 2005 resulting
in proceeds to the Company of $3,032,000; there were no options
remaining to be issued as of that date. As of December 31, 2007,
there were options for 30,000 (30,000,000 pre split) shares that
remain unexercised, which result in 30,000,000 shares remaining to be
issued under this plan (the registered amount was not reduced by the
reverse split).
(b) 2006 Non-Employee Directors and Consultants Retainer Stock Plan.
On January 6, 2006, the Company adopted the 2006 Non-Employee
Directors and Consultants Retainer Stock Plan. The purposes of the
plan are to enable the Company to promote the interests of the
Company by attracting and retaining non- employee directors and
consultants capable of furthering the business of the Company and by
aligning their economic interests more closely with those of the
Company's stockholders, by paying their retainer or fees in the form
of shares of common stock. All 150,000,000 shares of common stock
under this plan have been registered as a result of a Form S-8 filed
with the SEC. As of December 31, 2007, 65,580,440 shares remain
unissued under this plan.
(c) 2006 Stock Incentive Plan.
On January 6, 2006, the Company adopted the 2006 Stock Incentive
Plan. This plan is intended to allow directors, officers, employees,
and certain non-employees of the Company to receive options to
purchase shares of common stock. The purpose of this plan is to
provide these persons with equity-based compensation incentives to
make significant and extraordinary contributions to the long-term
performance and growth of the Company, and to attract and retain
employees. All 250,000,000 shares of common stock under this plan
have been registered as a result of a Form S-8 filed with the SEC.
Options granted under this plan are to be exercisable at whatever
price is established by the board of directors, in its sole
discretion, on the date of the grant. As of December 31, 2007, all
shares of common stock under this plan remained unissued.
(d) 2007 Stock and Option Plan.
On February 1, 2007, the Company adopted the 2007 Stock and Option
Plan, which registered 400,000,000 shares under a Form S-8 filed on
February 14, 2007. This plan is intended to allow designated
directors, officers, employees, and certain non-employees, including
consultants (all of whom are sometimes collectively referred to
herein as "Employees") of the Company and its subsidiaries to receive
options to purchase the Company's common stock and to receive grants
of common stock subject to certain restrictions. The purpose of this
plan is to promote the interests of the Company and its stockholders
by attracting and retaining employees capable of furthering the
future success of the Company and by aligning their economic
interests more closely with those of the Company's stockholders. As
of December 31, 2007, 215,988,954 shares were issued under this plan,
resulting in 184,011,326 shares remaining to be issued.
The Company has adopted only the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." Therefore, the
Company continues to account for stock-based compensation under APB
Opinion No. 25, under which no compensation cost has been recognized.
Had compensation cost for the stock based compensation been
determined based upon the fair value of the awards at the grant date
consistent with the methodology prescribed by SFAS No. 123, the
Company's net loss and loss per share would not have been changed.
With respect to options granted to outside consultants, the Company
uses the Black-Scholes method of calculating the fair value for
purposes of recording compensation. Because the eventual exercise
price of the options was so much higher than the market price of the
stock on the grant date, there is no value to assign to the options,
and no compensation has been recognized.
5,836,435,851 SHARES
COMMON STOCK
PROSPECTUS
May 30, 2008
You should rely only on the information contained in this prospectus.
We have not authorized anyone to provide you with information
different from that which is set forth in this prospectus. The selling
stockholders are offering to sell shares of our common stock and
seeking offers to buy shares of our common stock only in jurisdictions
where offers and sales are permitted. 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 any sale of
these securities. Our business, financial condition, results of
operation and prospects may have changed after the date of this prospectus.