Item 1
Business
History
Organization
On December 14, 2009, America’s Suppliers, Inc., a Delaware corporation (“ASI” or the “Company”), became the holding company of Insignia Solutions plc, a public limited company incorporated in England and Wales (“Insignia”), pursuant to a scheme of arrangement under Section 897 of the UK Companies Act of 2006 that was approved by the Insignia stockholders on November 30, 2009 and the High Court of Justice in England and Wales on December 14, 2009 (the “Scheme of Arrangement”). Pursuant to the Scheme of Arrangement, every ordinary share, 1 pence par value per share, of Insignia (the “Ordinary Shares”) was exchanged and cancelled at a ratio of ten Ordinary Shares for one share of common stock, $.001 par value per share (the “Common Stock”), of ASI (the “Exchange Ratio”). All outstanding Insignia options and warrants were assumed by ASI, adjusted as per the Exchange Ratio, and such options and warrants became exercisable for shares of ASI Common Stock. At that time Insignia became a wholly-owned subsidiary of ASI. The securities issued in the transaction were issued in reliance on an exemption from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 3(a)(10) promulgated thereunder.
Insignia was incorporated under the laws of England and Wales on November 20, 1985 under the name Diplema Ninety Three Limited. The Company changed its name to Insignia Solutions Limited on March 5, 1986 and commenced operations on March 17, 1986. Until April 2007, Insignia developed, marketed and supported software technologies that enabled mobile operators and phone manufacturers to update, upgrade and configure the firmware of mobile devices using standard over-the-air (“OTA”) data networks.
In April 2007, Insignia sold substantially all of its assets to Smith Micro Software, Inc. From April 2007 until June 23, 2008, Insignia did not generate any revenues from operations and operated as a shell company.
Prior to the Scheme of Arrangement being effected, on June 23, 2008, DollarDays International LLC (“DollarDays LLC”) entered into a series of transactions to effect a reverse merger with Insignia (the “Merger”). These transactions consisted of the following:
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DollarDays was formed as a Delaware limited liability company on November 5, 2001. On June 20, 2008, DollarDays LLC contributed all of its assets and liabilities to DollarDays International, Inc., a Delaware corporation, (“DDI Inc.” or “DollarDays”) pursuant to a contribution agreement. In return for DollarDays LLC’s assets and liabilities, DDI Inc. issued 100% of its common stock to DollarDays LLC. Following the contribution, DDI Inc. became the operating company, and DollarDays LLC had no assets or liabilities except for the DDI Inc. common stock issued to it.
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DDI Inc. merged with Jeode, Inc., a Delaware corporation and a wholly-owned subsidiary of Insignia, whereby DDI Inc. was the surviving corporation and a wholly-owned subsidiary of Insignia. In exchange for all of the DDI Inc. capital stock, Insignia was required to: (1) issue 73,333,333 American Depository Shares (“ADSs”) to DDI Inc. stockholders, (2) issue a warrant to purchase 8,551,450 ADSs with an exercise price of $.01 per ADS to Peter Engel, the then-existing Chief Executive Officer of DDI Inc., (3) issue a warrant to purchase 3,603,876 ADSs with an exercise price of $.13 per ADS to a financial advisor of DDI Inc. and (4) issue options to purchase 7,360,533 ADSs, in replacement of DDI Inc. options.
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The combined entity was to issue an aggregate of 7,682,926 ADSs to a new investor DollarDays (“Amorim”) in exchange for $550,000 in cash and conversion of a $450,000 note.
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Under the agreement and plan of merger, Insignia shareholders maintained approximately 37.1% ownership of the combined company, DDI Inc. shareholders obtained 56.7%, and Amorim obtained 6.2% of the combined company stock. The Merger is accounted for as a reverse merger whereby DDI Inc. is the accounting acquirer resulting in a recapitalization of DDI Inc. equity.
The above share amounts in the Merger transaction have been exchanged according to the Exchange Ratio resulting in 7,333,333 shares to DDI Inc. stockholders, 855,145 warrants to Peter Engel, 360,387 warrants to a financial advisor to DDI Inc., 736,053 options in replacement of DDI Inc. options, and 768,292 shares to Amorim.
In 2010, ASI established a majority-owned subsidiary, WowMyUniverse Inc. (“Wow”). On October 1, 2010, this subsidiary became wholly-owned as we acquired the non-controlling interest in exchange for our interest in an unconsolidated subsidiary.
As a result of the Merger and the organization of Wow the Company has two wholly owned subsidiaries, being DDI Inc. and Wow, and we primarily conduct our business operations through those subsidiary companies.
Operations
The Company develops software programs that allow the Company to provide general merchandise to resale businesses and retail consumers through the websites of its wholly-owned subsidiaries, DDI Inc. and Wow. The website of DDI Inc. is intended to serve as a one-stop, discount, on-line shopping destination for general merchandise for smaller distributors, retailers and non-profit organizations nationwide that are seeking single and small cased-sized lots at bulk prices. The Wow website is intended to be a retail website that offers a range of merchandise at discounted prices to consumers. Merchandise sold through our websites is shipped directly from the manufacturer or importer to the retailer or customer, and the Company never takes physical possession of any merchandise.
The website operated by DDI Inc. is referred to in this report as the “DollarDays website”.
DollarDays
We launched the DollarDays website to sell merchandise in October 2001. The site offers customers an opportunity to shop for bargains conveniently, while offering our suppliers an alternative sales channel. We believe the DollarDays website offers a unique benefit to smaller businesses in that they are able to purchase goods from wholesalers and importers in single and small case-sized lots, with no minimum purchase requirements, at discounted prices. We believe the prevailing reason DollarDays has been able to obtain bulk pricing for single case-sized lots is our ability to reach smaller distributors, retailers and non-profits that most general merchandise suppliers cannot economically reach. We provide all the logistics and customer support to serve this sales channel and grow DollarDays’ customer base.
We attempt to continually add new products to DollarDays’ website in order to create an atmosphere that encourages customers to visit frequently and purchase products before the inventory sells out. Through our Internet catalog, we offer approximately 270,000 products, including up to 10,000 closeout items at further discounted prices. Closeout merchandise is typically available in inconsistent quantities and prices.
We accept orders, either online or via telephone, collect payment in the form of credit or debit card, PayPal or similar means, and coordinate with manufacturers, importers and close-out specialists regarding delivery particulars. PayPal refers to the online payment platform located at
www.paypal.com
and its localized counterparts. Our proprietary software and service procedures allow us to sell merchandise to a single customer, and bill as a singer order, items purchased and delivered from multiple suppliers. We typically do not take possession of inventory, but we are responsible for processing customer claims and returns.
DollarDays’ website has a registered base of approximately 230,000 small businesses and receives approximately 3 million monthly page views. We receive an average of approximately 5,000 orders per month. Our target customers are smaller businesses and not-for-profit companies.
Our historical success has resulted largely from the size of our community of active users. We had approximately 25,000 unique customers place an order with us in 2013 which was in-line with the approximately 25,000 unique customers who placed an order with us in 2012. We believe our sales and marketing efforts make inefficient markets more efficient because:
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The website includes more than 270,000 items on any given day and makes available to our users a wide variety of goods; and
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We bring buyers and sellers together for lower costs than traditional intermediaries.
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WowMyUniverse.com
During 2010, we established Wow as a majority-owned subsidiary to develop a retail online business to sell directly to consumers. On October 1, 2010, this subsidiary became wholly owned as we acquired the non-controlling interest in exchange for our interest in an unconsolidated subsidiary.
During 2010, most of our activities related to WowMyUniverse.com consisted of website development and marketing activities. While we experienced limited sales through test marketing in 2010 and early 2011, Wow engaged in limited operations until 2011 when it then began full operations. The Company is continuing to attempt to develop and grow Wow’s operations, although there can be no assurance the Company’s efforts will be successful.
Products and Services
Manufacturer, Supplier and Distribution Relationships
It is difficult to establish wholesale and closeout buying relationships with manufacturers and vendors as trust and experience gained through past interactions are important. We enter into standardized contracts with each of our suppliers. Our supplier relationships provide us with both private label and recognized brand-name products. The table below identifies some of the brand names often sold through the DollarDays website and Wow’s website:
Avon
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Fruit of the Loom
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3M
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Black & Decker
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Gillette
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Tommy Hilfiger
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Calvin Klein
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Revlon
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Tonka
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Colgate
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Kellogg’s
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Victoria
’s Secret
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Disney
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NFL
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Ziploc
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Our manufacturer and supplier relationships are based on historical experience with manufacturers, vendors and liquidation wholesalers. We are not obligated or entitled to receive merchandise on a longterm or short-term basis, nor do our contractual terms guarantee the availability of merchandise. We control the terms on which products are sold through our websites.
Online Products
Our customers can locate products on our websites by utilizing our proprietary search function or by navigating through online departments. The departments section is currently organized into approximately 37 main categories.
These categories change as our business evolves and from time to time we need to add or subtract categories to better serve our suppliers and customers. Each of the departments has multiple categories that more specifically define the products offered within that department.
Categories are typically further divided into subcategories to facilitate product identification. Individual products can be accessed and viewed from the category or subcategory pages. These specific product pages include product descriptions, color photographs and pricing information.
The number of total products we offer through both the DollarDays website and Wow’s website has grown from less than 5,000 in 2001, to more than 270,000 products in 2013. The number of products and product categories change throughout the year, as we periodically reorganize our departments and/or categories to better reflect our current product offerings.
Sales and Marketing
We use a variety of methods to target our consumer audience, including online campaigns, direct marketing, and trade-shows. However, our primary marketing consists of online marketing, including advertising through portals, keywords, search engines, affiliate marketing programs, banners, and email campaigns. We seek to identify and eliminate campaigns that do not meet our expectations. We generally develop these campaigns internally.
Marketing
Our marketing initiatives include, but are not limited to, the following:
Web Positioning
: In order to maintain favorable positioning and to increase the likelihood of our websites being “found” by customers looking for wholesale and/or discount merchandise, we maintain a proactive search engine optimization effort to assure continued high search engine placement. We currently have over 450,000 web pages indexed in various search engines, including Google, Bing, Yahoo, MSN and AOL. Part of the continuing search engine optimization program involves evolution of page content and product descriptions for maximum indexing and rank possibilities. We believe our newer categories and higher priced products in existing categories help to increase search engine visibility and should, therefore, increase visitor counts. Approximately 75% of our gross sales in 2013, 2012, and 2011, came from “organic” (i.e., unpaid) search engine traffic.
Website Design
: We continually evaluate the DollarDays website and Wow’s website and make improvements as deemed necessary. Periodically, we intend to re-design the websites as market factors and technological advances necessitate.
Banner Ads
: We place banner ads in many relevant wholesale directories.
Pay-Per-Click Advertising
: Pay-per-click companies provide advertising space on various relevant websites and charge us based on actual user clicks on our ads. We monitor the results of our various pay-per-click programs and evaluate alternative advertising outlets.
Promotions
: We offer both universal promotions on our websites available to all users, and targeted promotions transmitted via email directly to select customers. Promotions include, but are not limited to, price discounts, free merchandise or premiums, discount coupons, free shipping, and combinations of different promotions. Free shipping promotions have been our most popular campaigns.
E-mail Campaigns
: We send approximately 3 million emails per month offering a variety of promotions, as previously discussed.
Platinum Program
: By paying a subscription fee customers can receive a number of discounts and savings on goods, services, freight and other products sold on our website. Our platinum program participants purchase more products through our website than non-participants and made purchases more frequently than prior to participating in the program.
Affiliates
: We pay sales commission to affiliates for customers they directed to our website. Approximately 700 affiliates have DollarDays’ banners on their websites.
Distributors
: We encourage Internet entrepreneurs to “clone” our website under the respective entrepreneurs’ names. These “clones” reflect our website at
www.DollarDays.com
in every aspect except for the difference in name. We have approximately 300 distributors who promote their websites, while we handle all related sales, promotional efforts, customer service, collection and other back office matters in the same manner we handle orders pertaining to our own website. We pay distributors a commission on all sales generated through their independent websites.
Sales
No single customer accounts for more than 5% of our sales. We utilize internal staffing and outsourced resources to have sales and support coverage 24 hours per day, seven days a week. The primary function of the sales staff is to field incoming calls and make outgoing calls to solicit new customers, obtain additional sales from infrequent purchasers and re-contact lapsed customers.
To facilitate our sales process, as part of our overall software program we have implemented a vendor management system (“VMS”), which is an interface between us and our vendors. The VMS is the primary platform for a vendor to place and remove its product on our website, as well as providing inventory tracking ability for the vendor. Once a product is listed on the website, customers and sales staff are able to place and fulfill orders.
We have established the DollarDays Institute, which coordinates with our vendors, via regular telephone seminars, on how to better describe and illustrate their products and how to best utilize our VMS to their advantage. Management believes the visual and verbal depiction of the products on our website is crucial to sales and establishing a loyal consumer base. We believe the DollarDays Institute enables our vendors to better promote their products, and consequently, increase sales.
Our product mix changes daily based on the availability of the products we buy and sell.
Our primary distribution channel is online sales to small businesses, non-profits and home-based businesses located in the United States. During 2013 and 2012, sales to domestic customers accounted for approximately 99% and 93% of our net sales, respectively.
Vendor Relations
Our ability to service our customers quickly and efficiently is contingent upon vendor response time in fulfilling orders for in-stock merchandise and promptly informing us of out-of-stock products. To facilitate our vendor relationships, we enter into agreements with them whereby they agree to the following:
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Participation in the VMS program to automatically convey information about out-of-stock items, price changes, new products, changes in product description and other important information to be reflected by the vendor on our website;
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Use of one of our pre-approved shippers; and
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Payment of a 2.5% marketing fee, which is automatically deducted from their invoice.
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Our merchandising department monitors vendors for compliance with the terms of their respective agreements. In the event a vendor does not comply with the terms of the agreement, such vendor’s products may be removed from our website and replaced with products from a more suitable vendor.
We have over 400 vendors and no single vendor accounts for more than 10% of our sales.
Customer Service and Sales
We are committed to providing superior customer service. We staff our customer service and sales department with dedicated in-house professionals who respond to phone and e-mail inquiries on products, ordering, shipping status and returns. Our customer service and sales staff processes approximately 2,500 calls per week and up to approximately 3,000 calls per week during peak periods.
Technology
We use our internally developed software to support our operations. We have developed intuitive user interfaces and customer tools to create a user-friendly website and have developed transaction processing, database and network applications that help enable our users to reliably and securely complete transactions on our sites. Our technology infrastructure simplifies the storage and processing of large amounts of data, eases our operation, and automates much of the administration. Our Internet hosting provider utilizes a distributed protection system to catch and mitigate attacks launched against our servers in addition to regular vulnerability testing. The application sites are hosted using multiple virtual machines spread across multiple physical servers for performance, stability, and protection from hardware failure. Static files such as imagery are mirrored to a content distribution network for low latency delivery to visitors.
We also use a third-party application to provide search, navigation and merchandising techniques to guide customers through our website. We currently employ two full-time IT engineers to monitor and maintain the functionality of our website with domain specialists available in an on-call basis.
We have also developed a web-based e-commerce property specially tailored for vendors listing products on our website. The technology is designed to permit our vendors to list their own products on our website, subject to our approval, and remove such products once the respective inventory is depleted. This technology eases the burden on merchandising personnel to maintain accurate product information and available quantities. The system also provides a means for vendors to provide immediate tracking and short-ship information to speed collection of funds from customers.
Essential systems are backed up on a regular basis mirrored to multiple secure off-site locations for disaster recovery.
We are continually improving our technology to enhance the customer experience and increase efficiency, scalability, and security.
Competition
The online wholesale and discount retail sales market is rapidly evolving, intensely competitive and has relatively low barriers to entry, as new competitors can launch websites at relatively low costs. We believe competition in the online wholesale and discount retail market is based predominately on:
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product quality and selection;
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ease of shopping experience;
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order processing and fulfillment;
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company brand recognition.
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The DollarDays website and Wow’s website compete with other online retailers and traditional wholesalers, liquidation “brokers”, importers and manufacturers that sell general merchandise, some of which may specifically adopt our methods and target our customers. We currently, or potentially, compete with a variety of companies that can be divided into several broad categories:
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local wholesalers tailored to service and supply small independent retailers that carry “fast-selling” general brands, provide personal delivery and who often have interpersonal relations with smaller retailers;
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catalog sellers, including suppliers from whom we purchase product, such as SMC;
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online general retailers with discount departments such as Amazon.com, Inc., eBay, Inc. and Buy.com, Inc.;
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online specialty retailers such as BlueNile and BackCountry; and
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traditional wholesalers such as Costco Wholesale Corporation.
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As the on-line retail market and the market for online wholesale and liquidation grows, we believe that companies involved in online retail, as well as traditional retailers and liquidation brokers, will increase their efforts to develop services that compete with our online services. We are unable to anticipate which other companies are likely to offer products and services in the future that will compete with us.
In addition, many of our current and potential competitors have greater brand recognition, longer operating histories, larger customer bases and significantly greater financial, marketing and other resources than we do, and may enter into strategic or commercial relationships with larger, more established and well-financed companies. Some of our competitors could devote greater resources to marketing and promotional campaigns and devote substantially more resources to their websites and systems development than we can. New technologies and the continued enhancement of existing technologies also may increase competitive pressures. We cannot ensure that we will be able to compete successfully against current and future competitors or address increased competitive pressures.
Intellectual Property
We own the rights associated with the trademarks “America’s Suppliers”, “DollarDays”, “DollarDay$” and the logo for DollarDays. We previously filed trademark applications with the United States Patent and Trademark Office seeking registration of certain service marks and trademarks. We regard our domain names and similar intellectual property as critical to our success. We rely on a combination of laws and contractual restrictions with our employees, customers, suppliers, affiliates and others to establish and protect our proprietary rights. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our intellectual property without authorization. There can be no assurance that our efforts will be successful or that we will be able to secure significant protection for our service marks or trademarks in the United States or elsewhere. In addition, we cannot ensure that others will not independently develop similar intellectual property. Although we have registered and are pursuing the registration of our key trademarks in the United States and internationally, some of our trade names are not eligible to receive trademark protection. In addition, effective trademark protection may not be available or may not be sought by us in every country in which our products and services are made available online, including the United States.
Third parties may in the future recruit our employees who have had access to our proprietary technologies, processes and operations. These recruiting efforts expose us to the risk that such employees will misappropriate our intellectual property.
Legal Matters
From time to time, we may receive claims of and become subject to consumer protection, employment, intellectual property and other commercial litigation related to the conduct of our business. Also, we may receive related inquiries from state and federal agencies which might relate to our business practices, or the activity of our customers or suppliers. Such regulatory matters and commercial litigation could be costly and time consuming and could divert our management and key personnel from our business operations. The uncertainty of litigation increases these risks. In connection with such litigation or regulatory inquiries, we may be subject to significant damages or equitable remedies or fines relating to the operation of our business and the sale of products on our website. Any such litigation may materially harm our business, prospects, results of operations, financial condition or cash flow. As of the date of this report, although we are involved in certain on-going litigation, we do not believe that that litigation, should we suffer an adverse outcome, would have a material adverse effect on our financial condition or results of operations. Further, we are not aware of any threatened litigation that would be expected to have a material adverse effect on our financial condition or results of operations.
These and other types of claims could result in increased costs of doing business through legal expenses, adverse judgments, settlements or require us to change our business practices.
We could become involved in litigation in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Any litigation, regardless of outcome or merit, could result in substantial costs and diversion of management and technical resources, any of which could materially harm our business.
Government Regulation
Our business is subject to federal and state consumer protection laws, including laws protecting the privacy of non-public consumer information and regulations prohibiting unfair and deceptive trade practices. In particular, under federal and state financial privacy laws and regulations, we must provide notice to consumers of our policies on sharing non-public information with third parties, provide advance notice of any changes to our policies and, with limited exceptions, give consumers the right to prevent sharing of their non-public personal information with unaffiliated third parties. Furthermore, the growth and demand for online commerce could result in more stringent consumer protection laws that impose additional compliance burdens on online companies. These consumer protection laws could result in substantial compliance costs and could interfere with the conduct of our business.
In many states there is currently uncertainty whether or how existing laws governing issues such as property ownership, sales and other taxes, libel and personal privacy apply to the Internet and commercial online services and whether additional laws and regulations will be enacted. In addition, new state tax regulations may subject us to additional state sales and income taxes. New legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business, or the application of existing laws and regulations to the Internet and commercial online services could result in significant additional taxes on our business. These taxes could have an adverse effect on our cash flows and results of operations. Furthermore, there is a possibility we may be subject to significant fines or other payments for any past failures to comply with these requirements.
The Consumer Product Safety Improvement Act (the “Act”) became effective February 10, 2009. This law prohibits resellers from selling children’s’ products that exceed specified levels of lead and certain other chemicals. Resellers are not required to test the products themselves. However, if they do sell such products, they could be subject to civil and/or criminal penalties. Since the merchandise sold through our website it is shipped directly from the manufacturer/importer to the retailer, we never take physical possession of any merchandise and could not test the products. Accordingly, to minimize our risk, we have undertaken the following steps:
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We have discontinued all items which, in our judgment, have any significant likelihood of being out of compliance with the Act. The limited exception to this is that certain closeouts may date back to a period before testing was commonplace. We have discontinued all items we believe constitute a significant risk of containing inappropriate chemicals; and
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We have requested that all our vendors certify that the products they sell are in compliance with the Act. They have all complied except for certain vendors of close-outs who cannot know whether the products they are buying may have been produced before these maximum levels of permissible lead and other chemicals were established.
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Employees
As of December 31, 2013, we had a total of 35 full-time employees, all of which are employees of ASI. We have never had a work stoppage, and none of our employees are represented by a labor union. We consider our employee relationships to be positive.
Reports to Security Holders
We file reports with the Securities and Exchange Commission, or SEC, including annual reports, quarterly reports and other information we are required to file pursuant to US federal securities laws. You may read and copy materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information from the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, which is
http://www.sec.gov
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Item 1A
Risk Factors
We have a history of significant losses. If we do not achieve and/or maintain profitability, our financial condition and our stock price could suffer.
We have a history of losses and accumulated deficit. In certain of our fiscal years we have had generated positive cash flows from our operations; however, we may not be able to consistently achieve profitability or otherwise sustain profitability on a quarterly or annual basis in the future. If our revenues grow more slowly than we anticipate, or if our operating expenses exceed our expectations, our financial results would be harmed.
We will continue to incur significant operating expenses and capital expenditures to continue to improve our software and technologies, and otherwise operate our business, such as to:
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enhance our distribution and order fulfillment capabilities;
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improve our order processing systems and capabilities;
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expand our customer service capabilities to better serve our customers’ needs;
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expand or modify our product offerings;
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increase our general and administrative functions to support our operations; and
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maintain or increase our sales, branding and marketing activities, including maintaining existing, or entering into new online marketing or marketing analytics arrangements, and continuing or increasing our direct mail campaigns.
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Because we may incur many of these expenses before we receive any achieve revenues from these efforts, our losses may be greater than the losses we would have incurred had we not attempted to improve our business operations. Further we base our expenses in large part on our operating plans and future revenue projections. Many of our expenses are fixed in the short term, and we may not be able to quickly reduce spending if our revenues are lower than we project. Therefore, any significant shortfall in revenues would likely harm our business, prospects, operating results and financial condition. In addition, we may find that these efforts are more expensive than we currently anticipate, which would further increase our losses. Also, the timing of these expenses may contribute to fluctuations in our quarterly operating results.
A downturn in general economic conditions may adversely affect our results of operations.
The success of our operations depends to a significant extent upon a number of factors relating to discretionary consumer spending, including economic conditions affecting disposable consumer income such as employment, business conditions, interest rates and taxation. There can be no assurance that consumer spending will not be adversely affected by economic conditions, thereby impacting our growth, financial condition and results of operations.
We may experience significant fluctuations in our operating results.
We may not be able to accurately forecast our operating results. We base our expense levels and expenditures on sales estimates. A significant portion of our expenses and expenditures are fixed, and we may not be able to adjust our spending quickly enough if our sales are less than expected.
Our revenue growth may not be sustainable, and our percentage growth rates (when applicable) may decrease. Our revenue and whether or not we are able to realize an operating profit depends on the demand for our products and services, and our business is affected by general economic and business conditions worldwide. A softening of demand, whether caused by changes in customer preferences or a weakening of the U.S. or global economies, may result in decreased revenue or growth.
Our net sales and operating results will also fluctuate for many other reasons, including but not limited to, the risks described elsewhere in this report and the following:
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our ability to retain and increase sales to existing customers, attract new customers and satisfy our customers’ demands;
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our ability to expand our network of vendors;
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our ability to access vendor merchandise and fulfill orders;
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the introduction of competitive websites, products and services;
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changes in usage of the Internet and e-commerce, both domestically and internationally;
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timing, effectiveness and costs of expansion and upgrades to our systems and infrastructure;
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the success of our geographic, service and product line expansions;
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variations in the mix of products and services we sell;
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variations in our level of merchandise and vendor returns;
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the extent to which we offer free shipping, continue to reduce product prices worldwide, and provide additional benefits to our customers;
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increases in the prices of fuel and gasoline, as well as increases in the prices of other commodities like paper and packing supplies;
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the extent to which operators of networks between our customers and our websites charge fees to grant our customers unimpaired and unconstrained access to our online services;
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our ability to collect amounts that may become owed to us;
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the extent to which use of our services is affected by spyware, viruses, “phishing” and other spam emails, “denial of service” attacks, data theft, computer intrusions and similar events; and
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terrorist attacks and armed hostilities.
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We are dependent on a limited number of shipping companies.
We rely on a limited number of shipping companies to deliver completed orders to our customers. If we are not able to negotiate acceptable terms with these companies or they experience performance problems or other difficulties, it could negatively impact our operating results and customer experience. In addition, our ability to ship completed orders to customers may be negatively affected by inclement weather, fire, flood, power loss, earthquakes, labor disputes, acts of war or terrorism, acts of God and similar factors. Third parties either drop-ship or otherwise fulfill our customers’ orders, and we are increasingly reliant on the reliability, quality and future procurement of their services. The inability of these other companies to accurately forecast product demand would result in unexpected costs and other harm to our business and reputation.
Our business could suffer if we are unsuccessful in making, integrating and maintaining acquisitions and investments.
Subject to our financial resources and business projections, we may acquire, or invest in or enter into joint ventures with third parties. Should we complete any such transitions they create risks such as:
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disruption of our ongoing business, including loss of management focus on existing businesses;
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problems retaining key personnel;
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additional operating losses and expenses of the businesses we acquired or in which we invested;
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the potential impairment of amounts capitalized as intangible assets as part of the acquisition;
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the potential impairment of customer and other relationships of the company we acquired or in which we invested or our own customers as a result of any integration of operations;
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the difficulty of incorporating acquired technology into our offerings and unanticipated expenses related to such integration;
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the difficulty of integrating a new company’s accounting, financial reporting, management, information, human resource and other administrative systems to permit effective management, and the lack of control if such integration is delayed or not implemented;
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the difficulty of implementing the controls, procedures and policies appropriate for a larger public company;
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potential unknown liabilities associated with a company we acquire or in which we invest; and
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for foreign transactions, additional risks related to the integration of operations across different cultures and languages, and the economic, political, and regulatory risks associated with specific countries.
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Finally, as a result of future acquisitions, merger or other strategic relationships, we may need to issue additional equity securities, spend our cash, or incur debt, contingent liabilities, or amortization expenses related to intangible assets, any of which could reduce our profitability and harm our business.
We may not be able to adequately develop WowMyUniverse.com.
During 2010, we made investments in a retail website, WowMyUniverse.com. We may continue to experience negative cash flows from Wow in the future as we continue to develop this business. We may not have adequate cash flows from our other operations to continue to fund and attempt to grow this business. Our experience in developing online businesses is limited to the wholesale marketplace, and our relative lack of experience in retail commerce may prove to be detrimental to the success of WowMyUniverse.com. We may face exposure to business conditions and risks that are unforeseen as a result of this lack of experience.
The loss of key senior management personnel could negatively affect our business.
We depend on our senior management and other key personnel, including our Chairman and Chief Executive Officer. The loss of these individuals or any of our other current or future executive officers or key employees could harm our business, future operating prospects and results of operations.
Additionally, we do not currently maintain “key person” life insurance policies on the lives of any of our executive officers. This lack of insurance means that we may not have adequate compensation for the loss of the services of these individuals.
Our vendor relationships subject us to a number of risks.
We have significant vendors that are important to the sourcing, manufacturing and related ongoing servicing of merchandise and content offered and sold through our websites. We do not have long-term arrangements with most of our vendors to guarantee availability of merchandise, content, components, or services. If our current vendors were to stop selling merchandise, components or services to us on acceptable terms, we may be unable to procure adequate replacements from other vendors in a timely and efficient manner or on acceptable terms, or at all.
We depend on our relationships with third party vendors for the products that we sell on our websites. If we fail to maintain these relationships, our business will suffer.
At December 31, 2013, we had fulfillment partner relationships with approximately 400 vendors whose products we offer for sale on our websites. We depend on our fulfillment partners to provide the product selection we offer. We plan to continue to expand the number of fulfillment partner relationships and the number of products offered for sale by our fulfillment partners on our websites. In general, we agree to offer the third parties’ products on our websites and these third parties agree to provide us with information about their products, honor our customer service policies and ship the products directly to the customer. If we do not maintain our existing relationships or build new relationships with third parties on acceptable commercial terms, we may not be able to offer a broad selection of merchandise, and customers may refuse to shop at our website. In addition, manufacturers may decide not to offer particular products for sale on the Internet. If we are unable to maintain our existing fulfillment partner relationships, or build new ones, or if other product manufacturers refuse to allow their products to be sold via the Internet, our business and prospects would suffer severely.
We depend upon third-party delivery services to deliver our products to our customers on a timely and consistent basis. Deterioration in our relationship with these third parties could decrease our ability to track shipments, cause shipment delays and increase shipping costs.
We rely upon multiple third parties for the shipment of our products. We cannot be sure these relationships will continue on terms favorable to us, if at all. Unexpected increases in shipping costs or delivery times could harm our business, prospects, financial condition and results of operations. If our relationships with these third parties are terminated or impaired or if these third parties are unable to deliver products for us, whether through labor shortage, slow down or stoppage, deteriorating financial or business condition, responses to terrorist attacks or for any other reason, we would be required to use alternative carriers for the shipment of products to our customers. In addition, conditions such as adverse weather can prevent carriers from performing their delivery services, which can have an adverse effect on our customers’ satisfaction with us. In any of these circumstances, we may be unable to engage alternative carriers on a timely basis, upon favorable terms, or at all. Changing carriers would likely have a negative effect on our business, operating results and financial condition. Potential adverse consequences include:
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reduced visibility of order status and package tracking;
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delays in order processing and product delivery;
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increased cost of delivery, resulting in reduced gross margins; and
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reduced shipment quality, which may result in damaged products and customer dissatisfaction.
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A significant number of merchandise returns could harm our business, financial condition and results of operations.
We allow our customers to return products. If merchandise returns are significant, our business, prospects, financial condition and results of operations could be harmed. We modify our policies relating to returns from time to time and any policies intended to reduce the number of product returns may result in customer dissatisfaction and fewer repeat customers.
If the products that we offer on our websites do not reflect our customers’ tastes
and preferences, our revenues may decrease.
Our success depends in part on our ability to offer products that reflect consumers’ tastes and preferences. Consumers’ tastes are subject to frequent, significant and sometimes unpredictable changes. Because some of the products we sell consist of manufacturers’ and retailers’ excess inventory, we have limited control over some of the specific products we are able to offer for sale. If our merchandise fails to satisfy customers’ tastes or respond to changes in customer preferences, our sales could suffer. In addition, any failure to offer products in line with customers’ preferences could allow our competitors to gain market share. This could have an adverse effect on our business, prospects, results of operations and financial condition.
We will have to attract and retain customers.
Our success depends on our ability to attract and retain customers. We have relationships with online services, search engines, directories and other website and e-commerce businesses to provide content, advertising banners and other links that direct customers to our websites. We rely on these relationships as significant sources of traffic to our websites and to generate new customers. If we are unable to develop or maintain these relationships on acceptable terms, or to develop suitable alternatives, our ability to attract new customers may be impaired and our financial condition could be harmed. We cannot assure you we will be able to increase our revenues, if at all, in a cost-effective manner.
Further, many online advertisers on whom we may wish to, or presently do, rely on for services, may be reluctant to enter into or maintain relationships with us because our competitors may be more attractive advertising clients. Additionally, failure to achieve sufficient traffic or generate sufficient revenue from purchases originating from online advertisers may cause online advertisers to terminate their relationship with us. Without these relationships, our revenues, business, prospects, financial condition and results of operations could suffer.
We may not be able to compete successfully against existing or future competitors.
The online liquidation services market is rapidly evolving and intensely competitive. Barriers to entry are minimal, and current and new competitors can launch new websites at a relatively low cost. Further, we compete against local and national discount stores that sell products in traditional store settings.
We expect the online liquidation services market to become even more competitive as traditional liquidators and online retailers develop services that compete with ours. In addition, manufacturers and retailers may decide to create their own websites to sell their own excess inventory and the excess inventory of third parties. Competitive pressures created by any one of our competitors, or by our competitors collectively, could harm our business, prospects, financial condition and results of operations.
Further, as a strategic response to changes in the competitive environment, we may from time to time make certain pricing, service or marketing decisions or acquisitions that could harm our business, prospects, financial condition and results of operations. To the extent we enter new lines of businesses, we expect that we would be competing with many established businesses.
Many of our current and potential competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we do. In addition, online retailers and liquidation e-tailers may be acquired, receive investments from or enter into other commercial relationships with larger, well-established and well-financed companies. Some of our competitors may be able to secure merchandise from manufacturers on more favorable terms, devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing or inventory availability policies and devote substantially more resources to website and systems development than we do. Increased competition may result in reduced operating margins, loss of market share and a diminished brand. We cannot assure you we will be able to compete successfully against current and future competitors.
Our operating results depend on our websites, network infrastructure and transaction-processing systems. Capacity constraints or system failures would harm our business and reputation.
Any system interruptions that result in the unavailability of our websites or reduced performance of our transaction systems would reduce our transaction volume and the attractiveness of our services to both our customers and vendors and can be expected to harm our business, prospects, operating results and financial condition.
We use internally developed software and systems for our website and certain aspects of our transaction processing systems. We have experienced periodic systems interruptions due to server failure, which we believe will continue to occur from time to time. If the volume of traffic on our website or the number of purchases made by customers substantially increases, we will need to further expand and upgrade our technology, transaction processing systems and network infrastructure.
Our transaction processing systems and network infrastructure may be unable to accommodate increases in traffic in the future. We may be unable to project accurately the rate or timing of traffic increases or successfully upgrade our systems and infrastructure to accommodate future traffic levels. In addition, we may be unable to upgrade and expand our transaction processing systems in an effective and timely manner or to integrate any newly developed or purchased functionality with our existing systems. Any such difficulties with our transaction processing systems or other difficulties upgrading, expanding or integrating various aspects of our systems may cause unanticipated system disruptions, slower response times, and degradation in levels of customer service, additional expense, impaired quality and speed of order fulfillment or delays in reporting accurate information.
If the facility where substantially all of our computer and communications hardware is located fails, our business, results of operations and financial condition will be harmed.
Our success, and in particular, our ability to successfully receive and fulfill orders and provide customer service, largely depends on the efficient and uninterrupted operation of our computer and communications systems. We have computer and communications hardware located in the eastern and western United States that are backed up regularly. Although we have designed our back-up system in an effort to be able to provide limited back-up website functionality in the event of a failure of our main facility, our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, terrorist attacks, acts of war, break-ins, earthquake and similar events, and our back-up systems are not designed to handle the volume of transactions normally handled by our primary systems. Our disaster recovery plan may be inadequate, and our business interruption insurance may be insufficient to compensate us for losses that may occur. Despite the implementation of network security measures, our servers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays, loss or public disclosure of critical data or the inability to accept and fulfill customer orders. The occurrence of any of the foregoing risks could harm our reputation, business, prospects, financial condition and results of operations.
We may be unable to protect our proprietary technology or keep up with that of our competitors.
Our success depends to a significant degree upon the protection of our software and other proprietary intellectual property rights. We may be unable to deter misappropriation of our proprietary information, detect unauthorized use or take appropriate steps to enforce our intellectual property rights. In addition, our competitors could, without violating our proprietary rights, develop technologies that are as good as or better than our technology.
Our failure to protect our software and other proprietary intellectual property rights or to develop technologies that are as good as our competitors’ could put us at a disadvantage to our competitors. These failures could harm our business, results of operations and financial condition.
We may be accused of infringing intellectual property rights of third parties.
Third parties may claim we infringe their intellectual property rights. The ready availability of damages, royalties and potential for injunctive relief has increased the defense litigation costs of patent infringement claims. Such claims, whether or not meritorious, may result in significant expenditure of financial and managerial resources, and the payment of damages or settlement amounts. Additionally, we may become subject to injunctions prohibiting us from using software or business processes we currently use or may need to use in the future, or requiring us to obtain licenses from third parties when such licenses may not be available on terms acceptable to us or at all. In addition, we may not be able to obtain on favorable terms, or at all, licenses or other rights with respect to intellectual property we do not own in providing e-commerce services.
If we do not respond to rapid technological changes, our services could become obsolete and we could lose customers.
To remain competitive, we must continue to enhance and improve the functionality and features of our websites. We may face material delays in introducing new services, products and enhancements. If this happens, our customers may forgo the use of our website and use those of our competitors. The Internet and the online commerce industry are rapidly changing. If competitors introduce new products and services using new technologies or if new industry standards and practices emerge, our existing website and our proprietary technology and systems may become obsolete. Our failure to respond to technological change or to adequately maintain, upgrade and develop our computer network and the systems used to process customers’ orders and payments could harm our business, prospects, financial condition and results of operations.
Our business and reputation may be harmed by the listing or sale of pirated, counterfeit or illegal items by third parties.
We have received in the past, and we anticipate we will receive in the future, communications alleging that certain items listed or sold through our website infringe third-party copyrights, trademarks and trade names or other intellectual property rights or that we have otherwise infringed third parties’ past, current or future intellectual property rights.
We may be unable to prevent third parties from listing unlawful goods, and we may be subject to allegations of civil or criminal liability for unlawful activities carried out by third parties through our website. Any costs incurred as a result of liability or asserted liability relating to the sale of unlawful goods could harm our revenues, business, prospects, financial condition and results of operations.
Resolving litigation or claims regarding patents or other intellectual property, whether meritorious or not, could be costly, time-consuming, cause service delays, divert our management and key personnel from our business operations, require expensive or unwanted changes in our methods of doing business or require us to enter into costly royalty or licensing agreements, if available. As a result, these claims could harm our business. Negative publicity generated as a result of the foregoing could damage our reputation, harm our business and diminish the value of our brand name.
We may be liable if third parties misappropriate our customers’ personal information.
If third parties are able to breach our network security or otherwise misappropriate our customers’ personal information or credit card information, or if we give third parties improper access to our customers’ personal information or credit card information, we could be subject to liability. This liability could include claims for unauthorized purchases with credit card information, impersonation or other similar fraud claims or damages for alleged violations of state or federal laws governing security protocols for the safekeeping of customers’ personal information. This liability could also include claims for other misuses of personal information, including unauthorized marketing purposes. Liability for misappropriation of this information could adversely affect our business. In addition, we could incur additional expenses if new regulations regarding the use of personal information are introduced or if government agencies investigate our privacy practices.
We rely on encryption and authentication technology licensed from third parties to provide the security necessary to effect secure transmission of confidential information such as customer credit card numbers. We cannot assure you that advances in computer capabilities, new discoveries in the field of cryptography or other events or developments will not result in a compromise or breach of the algorithms we use to protect customer transaction data. If any such compromise of our security were to occur, it could harm our reputation, business, prospects, financial condition and results of operations. A party who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. We may be required to expend significant capital and other resources to protect against such security breaches or to alleviate problems caused by such breaches. We cannot assure you that our security measures will prevent security breaches or that failure to prevent such security breaches will not harm our business, prospects, financial condition and results of operations.
Our success is tied to the continued use of the Internet and the adequacy of the Internet infrastructure.
Our future revenues and profits, if any, substantially depend upon the continued widespread use of the Internet as an effective medium of commercial business. Factors which could reduce the widespread use of the Internet include:
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actual or perceived lack of security of information or privacy protection;
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possible disruptions, computer viruses or other damage to Internet servers or to users’ computers;
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significant increases in the costs of transportation of goods; and
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governmental regulation.
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Credit card fraud could adversely affect our business.
We do not carry insurance against the risk of credit card fraud, so the failure to adequately control fraudulent credit card transactions could reduce our net revenues and our gross margin. We have implemented technology to help us detect the fraudulent use of credit card information. However, we may in the future suffer losses as a result of orders placed with fraudulent credit card data even though the associated financial institution approved payment of the orders. Under current credit card practices, we may be liable for fraudulent credit card transactions because we do not obtain a cardholder’s signature. If we are unable to detect or control credit card fraud, our liability for these transactions could harm our business, results of operation or financial condition.
If one or more states successfully assert that we should collect sales or other taxes on the sale of our merchandise or the merchandise of third parties that we offer for sale, our business could be harmed.
We do not currently collect sales or other similar taxes for physical shipments of goods into states, other than Arizona. One or more local, state or foreign jurisdictions may seek to impose sales tax collection obligations on us even though we are engaged in online commerce, and have no physical presence in those jurisdictions. The location of our fulfillment centers and customer service center networks, or any other operations of the Company, establishing a physical presence in states where we are not now present, may result in additional sales and other tax obligations. Our business could be adversely affected if one or more states or any foreign country successfully asserts that we should collect sales or other taxes on the sale of our merchandise.
Government regulation is evolving and unfavorable changes could harm our business.
We are subject to general business regulations and laws, as well as regulations and laws specifically governing the Internet, e-commerce, electronic devices, and other services. Existing and future laws and regulations may impede our growth. These regulations and laws may cover taxation, privacy, data protection, pricing, content, copyrights, distribution, mobile communications, electronic device certification, electronic waste, electronic contracts and other communications, competition, consumer protection, web services, the provision of online payment services, unencumbered Internet access to our services, the design and operation of websites, and the characteristics and quality of products and services. It is not clear how existing laws governing issues such as property ownership, libel, and personal privacy apply to the Internet, e-commerce, digital content, and web services. Jurisdictions may regulate consumer-to-consumer online businesses, including certain aspects of our seller programs. Unfavorable regulations and laws could diminish the demand for our products and services and increase our cost of doing business.
Laws or regulations relating to privacy and data protection may adversely affect the growth of our Internet business or our marketing efforts.
We are subject to increasing regulation at the federal, state and international levels relating to privacy and the use of personal user information. For example, we are subject to various telemarketing laws that regulate the manner in which we may solicit future suppliers and customers. Such regulations, along with increased governmental or private enforcement, may increase the cost of growing our business. In addition, many jurisdictions have laws that limit the uses of personal user information gathered online or offline or require companies to establish privacy policies. The Federal Trade Commission has adopted regulations regarding the collection and use of personal identifying information obtained from children under the age of 13. Proposed legislation in this country and existing laws in foreign countries require companies to establish procedures to notify users of privacy and security policies, obtain consent from users for collection and use of personal information, and/or provide users with the ability to access, correct and delete personal information stored by us. Additional legislation regarding data security and privacy has been proposed in Congress. These data protection regulations may restrict our ability to collect demographic and personal information from users, which could be costly or harm our marketing efforts, and could require us to implement new and potentially costly processes, procedures and/or protective measures.
We may be subject to product liability claims if people or property are harmed by the products we sell or if the products do not comply with government regulations.
Although we do not take legal title to any of the merchandise sold on our websites, some of the products we sell may expose us to product liability claims relating to personal injury, death or property damage, and may require product recalls or other actions. If the products we sell do not comply with government regulations, we may also be exposed to product liability claims. Although we maintain liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. In addition, some of our agreements with vendors and sellers do not indemnify us from product liability.
We are subject to payment related risks.
We accept payments using a variety of methods, including credit card, debit card, credit accounts (including promotional financing), gift certificates, direct debit from a customer’s bank account, physical bank check and payment upon delivery. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower our profit margins. We rely on third parties to provide payment processing services, including the processing of credit cards, debit cards, electronic checks, and promotional financing, and it could disrupt our business if these companies become unwilling or unable to provide these services to us. We are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from our customers, process electronic funds transfers, or facilitate other types of online payments, and our business and operating results could be adversely affected.
The market for our common stock may be illiquid, and the price of our common stock might be volatile.
Shares of our common stock are currently traded on the Pink Sheets, and it is not expected that our Common Stock will be traded on a national securities exchange like the New York Stock Exchange or NASDAQ in the near future. Historically, the market for securities traded on the OTC Pink Sheets has been less liquid than the markets for securities traded on national securities exchanges. Because of such illiquidity and the fact that our Common Stock would be valued by market-makers (if a material market develops) based on market forces which consider various factors beyond our control, there can be no assurance that the market value of the shares at any given time would be the same or higher than the public purchase price of our shares. In addition, the market price, if a material market develops, could decline if the yields from other competitive investments exceed dividends paid by us on our shares (if any). The market price of our Common Stock may be volatile in the future based on a variety of factors, including changes in general economic conditions, developments in securities and other financial markets, our operating results, and other factors discussed in this report and/or currently unknown to the Company.
Our common stock may be subject to the “penny stock” rules as promulgated under the Exchange Act.
In the event that no exclusion from the definition of “penny stock” under the Securities Exchange Act of 1934, as amended, is available, then any broker engaging in a transaction in our Common Stock will be required to provide its customers with a risk disclosure document, disclosure of market quotations, if any, disclosure of the compensation of the broker-dealer and its sales person in the transaction, and monthly account statements showing the market values of our securities held in the customer’s accounts. The bid and offer quotation and compensation information must be provided prior to effecting the transaction and must be contained on the customer’s confirmation of sale. Certain brokers are less willing to engage in transactions involving “penny stocks” as a result of the additional disclosure requirements described above, which may make it more difficult for holders of our Common Stock to dispose of their shares.
Control of our stock by current stockholders is expected to remain significant.
Currently, our officers and directors beneficially own a majority of our outstanding common stock. As a result, these affiliates have the ability to exercise significant influence over matters submitted to our stockholders for approval, including the election and removal of directors, amendments to our certificate of incorporation and bylaws and the approval of any business combination. This concentration of ownership may also have the effect of delaying or preventing a change of control of our company or discouraging others from making tender offers for our shares, which could prevent our stockholders from receiving a premium for their shares.
It is not likely that we will pay dividends.
We currently intend to retain our future earnings to support operations and to finance expansion and, therefore, we do not anticipate paying any cash dividends to holders of our common stock in the foreseeable future.