ITEM 1. BUSINESS
Background
Exchange Transaction
The Company was organized under the laws of the State of Nevada on December 11, 2006 for the purpose of acquiring and developing mineral properties. The Company was unable to generate any revenues from its business operations and unable to raise additional funds to implement its operations. As a result, on July 31, 2012 (the “Closing Date”), the Company closed a voluntary share exchange transaction with Digitally Distributed Acquisition Corp., a Delaware corporation (“DDAC”) and the shareholders of DDAC (“Selling Shareholders”) pursuant to a Share Exchange Agreement dated as of July 31, 2012 (the “Exchange Agreement”) by and among the Company, DDAC, and the Selling Shareholders.
In accordance with the terms of Exchange Agreement, on the Closing Date, the Registrant issued 20,000,000 shares of its common stock to the Selling Shareholders in exchange for 100% of the issued and outstanding capital stock of DDAC (the “Exchange Transaction”). As a result of the Exchange Transaction, the Selling Shareholders acquired 21.39% of our issued and outstanding common stock, DDAC became our wholly-owned subsidiary, and the Company acquired the business and operations of DDAC. From and after the Closing Date, our primary operations consist of the business and operations of DDAC. In the Exchange Transaction, or reverse acquisition, the Company is considered to be the accounting acquiree and DDAC is the accounting acquirer. Immediately after the Exchange Transaction, the Company had 93,500,000 shares of common stock issued and outstanding. In connection with the terms of the Exchange Transaction, certain shares of our common stock were subsequently cancelled.
Prior to the Exchange Transaction, we were a public reporting “shell company,” as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended and the rules and regulations promulgated thereunder (“Exchange Act”). On August 6, 2012, pursuant to the requirements of Item 2.01(a)(f) of Form 8-K, the Company filed a Form 8-K (the “Super 8-K”) with the Securities and Exchange Commission containing the information that would be required if the Registrant were filing a general form for registration of securities on Form 10 under the Exchange Act, for the Registrant’s common stock, which is the only class of its securities subject to the reporting requirements of Section 13 or Section 15(d) of the Exchange Act upon consummation of the Exchange Transaction. A more detailed description of the Exchange Transaction, and the transactions contemplated thereunder, may be found in the Super 8-K.
DDAC Transaction
On July 31, 2012, DDAC entered into an agreement to acquire from Digitally Distributed, LLC, a Delaware limited liability company (“DDLLC”), certain tangible and intangible property including certain intellectual property related to a web-based multi-tiered billing infrastructure and software and other means of syndicating and encoding media content, in exchange for the issuance by DDAC to DDLLC of 13,500,000 shares of DDAC common stock pursuant to a subscription agreement by and between DDAC and DDLLC dated July 31, 2012. It was represented to DDG that DDAC’s technology and assets were focused on the opportunity presented by over-the-top (“OTT”) home entertainment media, which targets DVD players, video game consoles, Smart TVs and stand-alone internet connected devices which delivers content such as Video-on-Demand (“VOD”) services by connecting to users’ internet protocol (“IP”) services. It was further represented to DDG that DDAC’s technology will help content owners distribute and monetize their products by delivery to OTT devices.
OTT Market & Strategy
We are focused on the opportunity presented by OTT content, which is defined as the online delivery of video and audio to consumer devices without the Internet Service Provider (“ISP”) being involved in the control or distribution of the content itself.
OTT content is a fast growing market and one that we believe presents opportunities for media content providers to deliver such media to the consumer for a monthly subscription fee. Cisco had forecasted that the sum of all video will exceed 91 percent of global consumer Internet traffic by 2014. The Diffusion Group estimated that by the same year, OTT television revenues would reach $5.6 billion. This was supported by such findings as the fact that as of 2009, sixty two percent (62%) of Americans have watched online video on sites such as YouTube and Hulu, and projections that both fixed and mobile broadband subscribers on a global basis would grow from 585 million as of 2009 to more than 1 billion by 2013.
Consumers may access OTT content through a variety of Internet connected devices, ranging from desktop computers to laptops, tablets, televisions with set top boxes from Roku, Google and Apple, smartphones, and gaming consoles including Microsoft’s Xbox, Sony PlayStation and Nintendo Wii. This lends itself to creating additional channels for content consumption, and additional opportunities to repackage and/or repurpose existing intellectual property to maximize its value for the rights holder(s).
We believe that driving visitors to visit dedicated websites or even to tune in to television programming on a fixed broadcast schedule is becoming more difficult and an outdated concept, as consumers are increasingly adopting a mindset of an on-demand model - essentially, getting what they want, when they want it, and not having this dictated to them.
We intend to occupy an attractive and valuable niche as a service provider of digitization services, digital content management solutions, and distribution services. We aim to occupy a space managing the relationships between content owners and the various internet TV platforms.
Industry
According to Internet World Stats, Internet penetration in North America as of 2011 has reached 78.6 percent, with Internet service reaching more than 273 million people. The International Telecommunications Union (“ITU”) reports that as of 2010, there were more than 85.7 million fixed broadband Internet subscriptions in the U.S., ranking it second behind China (with more than 126.3 million fixed broadband subscriptions).
The rise of mobile broadband and proliferation of smartphones, tablets, laptops and other portable devices which can be used for consuming content has provided additional distribution channels and opportunities for repurposing existing content from the owner’s libraries as well as creating brand new content optimized for specific formats and delivery channels. This phenomenon, while most prevalent in developed, consumer-oriented nations, is also permeating into developing nations such as China, which now accounts for nearly 25 percent of the world’s Internet users. As of 2011, 35 percent of the global population is online (up from only 18 percent in 2006), and 45 percent of these users are under age 25, a demographic which historically has spent considerable time online and engaging with digital media. There are 5.9 billion mobile cellular subscriptions, of which more than 1.2 billion are broadband mobile as illustrated below:
Mobile broadband subscriptions have grown 45 percent over the past four years and exceed fixed (wired) broadband subscriptions considerably. Currently, per ITU, 45 percent of the globe has mobile 3G coverage, with 90 percent of the world covered by 2G cellular.
We believe that the opportunity for the Company is global in scale. While the United States is a leader when it comes to producing entertainment content, and that content has strong global appeal (global theatrical film box office sales equaled $32.6 billion in 2011. This increase in revenues is powered by the continuing growth in international markets, up from $22.4 billion in 2010, and increasing despite the fact the North American theatrical box office gross dropped to $10.2 billion in 2011 from $10.6 billion in 2010). The U.S. lags behind many other nations in terms of infrastructure capabilities, particularly with regard to broadband access speeds.
According to the data presented in the following chart from ITU, as of 2011, the U.S. ranked 16th for fixed broadband subscriptions per 100 inhabitants (27.6), trailing much of Scandinavia and some key European and Asian countries, and was ranked 24th for active mobile broadband subscriptions per 100 inhabitants (54.0).
Management understands that with a population exceeding 300 million, the U.S. is larger than other countries ranking higher in the above statistics, but it is Management’s view that the failure to continually invest in and update much of the U.S. telecommunications infrastructure is clearly risking its competitive capabilities as well as potentially limiting revenue opportunities. This is another reason why we are keeping an international perspective regarding potential customers for its technology in the future.
Keys to Success
Management has identified the following as critical to the successful execution of our vision:
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Leverage Business Contacts: Management has significant experience in both the entertainment and technology industries and will utilize long-standing relationships to secure beneficial deals with strategic technology partners and potential customers.
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Robust and Scalable Proprietary Solution: We have developed our own proprietary system which is intentionally designed to be scalable and flexible, providing a full-service, seamless integrated content delivery, monetization, billing and administration platform that can serve the needs and budgets of small content providers and enterprise level applications.
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Access to Significant Original Content Library: We own and have licensed an intellectual property portfolio of more than 4,000 Titles, of which we are in the process of creating niche programming for the “OTT” players, as part of a syndication strategy which will drive revenues for the Company from subscription and ad based models.
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Experienced Management Team: We have a very capable senior management team with the experience and proven ability to execute in the market.
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Proven Partners & Technology Flexibility: The Company’s platform was intentionally designed to support multiple media formats, with a backend that supports PHP, .NET, Python, ColdFusion, Ruby, HTML 5 and Flash; utilizes storage solutions provided by industry leaders Limelight and Rackspace; and provides automated encoding of video content and allows streaming to all of the popular devices, including Apple’s suite of iPhones and iPads.
Mission Statement
Imagine the ability to deploy any type of media content with robust campaign management to every living room set top box in the world. Package this into one single log-in account and you understand our Company.
Business Opportunity
Netflix - the leading provider of OTT content, delivered over a billion hours of content in the month of June 2012, making it a larger provider of content than any cable company in the United States.
However, Netflix has maintained its focus on studio driven films that are also available on other similar services such as Hulu. Our strategy is not to compete with these other services but offer niche content such as its recently licensed content of the “Something Weird library”. We also offer consumers and content owners the ability to monetize their content in a variety of methods.
Although Netflix and similar providers have created a large library of content only a small percentage has been migrated to OTT platforms. Given current Management’s history and contacts, we believe we are poised to be the leader in providing owners of niche content a robust platform to re-purpose and monetize their content on an international scale.
The “OTT” platforms like Roku, Apple TV, Boxee etc. each require a customized format for the data encryption and streaming. Facilities may charge upwards of $800 dollars per platform to convert the digital master into the required format.
Currently, content owners are required to pay for all of these conversions in order to get distribution. Many content owners are not interested in making the large upfront investment to take niche content online. This has created the opportunity for our Company.
Business Model
We will use our team of seasoned content acquirers to offer content owners a unique partnership opportunity. We will offer the content owner a transaction whereby the content owner will be able to migrate content to OTT distribution with no upfront expenses and in some cases an advance against future revenues generated by the content
Products and Services
We have created a proprietary solution which is capable of delivering high quality OTT content across multiple platforms, and handling all billing and administrative functionality, including reporting, analytics and integrated digital rights management. Our first “channel” was launched in December 2012.
Monetization methods supported by the platform include(s):
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Paid Subscriptions (supporting credit card payments, PayPal, etc.)
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Pay-Per-View (PPV) (Pendin)
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Free & VIP Subscriptions
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Discounts & Coupons (Pending)
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Video Ads in Any Format
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Interactive Product Placement (Pending)
We give the power back to the content owner, as well as empower the consumers, and create a symbiotic direct-to-consumer relationship for the content owners/distributors without the involvement of other middlemen (such as ISPs or network operators) which can devalue content. We have recently moved to a One-Price Format which allows subscribers to view ALL of our published content for one low monthly subscription fee. As a result and coupled with the launch of our All-In-One Roku App, our subscriber base grew by 67% in one month.
Live, up-to-date reporting allows us to view metrics including:
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Social media engagement
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Video analytics
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Financial reporting
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Content syndication analysis
Click to Buy Video Media Store Application
One of the “holy grails” for internet-delivered content has been the potential to create impulse buying opportunities for consumers when they view products featured in the online programming. This notion of “click to buy” has certainly been previously attempted, but when handled poorly tends to turn off consumers, who often wish to engage in the passive activity of simply watching their favorite film, television or other programming uninterrupted and without constant “calls-to-action” cluttering the screen. We will be designing and developing a system that will enable impulse buying without overly engaging or distracting the consumer; the consumer will have the control to turn this feature on or off, which when activated, provides the customer with a personalized shopping experience. The system is intended to provide insight into consumer behavior and preferences, which may also be utilized to drive more relevant advertising and commerce opportunities.
Intellectual Property
We regard our trademarks, service marks, copyrights, patents, domain names, trade dress, trade secrets, proprietary technologies and similar intellectual property as important to our success. We will use a combination of patent, trademark, copyright and trade secret laws and confidential agreements to protect our proprietary intellectual property. Our ability to protect and enforce our intellectual property rights is subject to certain risks and from time to time we encounter disputes over rights and obligations concerning intellectual property. We cannot provide assurance that we will prevail in any intellectual property disputes.
Sales
We intend to use internal resources combined with commission based consultants to identify, negotiate and contract for content. Our sales team, led by our Chief Executive Officer, Martin Greenwald, has decades of experience in securing the distribution rights for content. We believe that our experienced and qualified sales force is crucial in the success of the Company and we believe that past success in securing these rights indicates a bright future. At this time, we have not achieved any sales.
Employees
The Company currently has 9 full time employees, all of whom have contracts and signed confidentiality agreements.
Name Change
We have recently changed our website and Roku Name from Digidev.tv to The Movie & Music Network. The new name better encapsulates what we have to offer: A Network of Movie, Music, Special Interest, Late Night and other Channels.
Available Information
Our annual and quarterly reports, along with all other reports and amendments filed with or furnished to the SEC are publicly available free of charge on the Investor section of our website at www.movieandmusicnetwork.com/corporate as soon as reasonably practicable after these materials are filed with or furnished to the SEC. Our Code of Ethics is also posted within this section of the website. The information on our website is not part of this or any other report we file with, or furnish to, the SEC. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC. The address of that site is www.sec.gov. In addition the SEC maintains a Public Reference Room where you can obtain these materials, which is located at 100 F Street, N.E., Washington, D.C. 20549. To obtain more information on the operation of the Public Reference Room call the SEC at 1-800-SEC-0330.
ITEM 1A.
ITEM 1A. RISK FACTORS
This report includes forward-looking statements about our business and results of operations that are subject to risks and uncertainties. See "Forward-Looking Statements," above. Factors that could cause or contribute to such differences include those discussed below. In addition to the risk factors discussed below, we are also subject to additional risks and uncertainties not presently known to us or that we currently deem immaterial. If any of these known or unknown risks or uncertainties actually occur, our business could be harmed substantially.
Risks Related to Our Business and Industry
We are a development stage company with a limited operating history on which to evaluate our business or base an investment decision.
Our business prospects are difficult to predict because of our limited operating history, early stage of development, unproven business strategy and unproven product. We are a development stage company that only generated a limited amount of revenue. As a development stage company, we face numerous risks and uncertainties in the competitive markets. In particular, we have not proven that we can: develop our product offering in a manner that enables us to be profitable and meet our customers’ requirements; develop and maintain relationships with key customers and strategic partners that will be necessary to optimize the market value of our products; raise sufficient capital in the public and/or private markets; or respond effectively to competitive pressures. If we are unable to accomplish these goals, our business is unlikely to succeed and you should consider our prospects in light of these risks, challenges and uncertainties.
If we fail to raise additional capital, our ability to implement our business model and strategy could be compromised.
We have limited capital resources. To date, our operations have been funded mainly from the proceeds from equity and debt financings. We expect to require substantial additional capital in the near future to develop and market new products, services and technologies. If we are unable to raise capital when needed, our business, financial condition and results of operations would be materially adversely affected, and we could be forced to reduce or discontinue our operations.
If we are unable to compete effectively, our business will be adversely affected.
The market for content distribution is intensely competitive and subject to rapid change. New technologies and evolving business models for delivery of entertainment video continue to develop at a fast pace. The growth of Internet-connected devices, including TV’s, computers and mobile devices has increased the consumer acceptance of Internet delivery of entertainment video. Through these new and existing distribution channels, consumers are afforded various means for consuming entertainment video. The various economic models underlying these differing means of entertainment video delivery include subscription, pay-per-view, ad-supported and piracy-based models. All of these have the potential to capture meaningful segments of the entertainment video market. Most of our competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we do. They may secure better terms from suppliers, adopt more aggressive pricing and devote more resources to technology, fulfillment, and marketing. New entrants may enter the market with unique service offerings or approaches to providing entertainment video and other companies also may enter into business combinations or alliances that strengthen their competitive positions. If we are unable to successfully or profitably compete with current and new competitors, programs and technologies, our business will be adversely affected, and we may not be able to increase or maintain market share, revenues or profitability.
Changes in consumer viewing habits, including more widespread usage of video-on-demand or other similar on demand methods of entertainment video consumption could adversely affect our business.
The manner in which consumers view entertainment video is changing rapidly. Digital cable, wireless and Internet content providers are continuing to improve technologies, content offerings, user interface, and business models that allow consumers to access entertainment video-on-demand with interactive capabilities including start, stop and rewind. The devices through which entertainment video can be consumed are also changing rapidly. Today, content from cable service providers may be viewed on laptops and content from Internet content providers may be viewed on TVs. Although we will provide our own Internet-based delivery of content allowing our customers to stream certain programs and movies to their Internet-connected televisions and other devices, if other providers of entertainment video address the changes in consumer viewing habits in a manner that is better able to meet content distributor and consumer needs and expectations, our business could be adversely affected.
If we are not able to manage our growth, our business could be adversely affected.
We are currently engaged in an effort to expand our operations both domestically and internationally, as well as grow our content base and develop our technology platform across more devices. Many of our systems and operational practices implemented now at our development stage with limited resources will require undertaking efforts to migrate the vast majority of our systems to cloud-based processors. As we undertake all these changes, if we are not able to manage the growing complexity of our business, including improving, refining or revising our systems and operational practices, our business may be adversely affected.
If the market segment for consumer paid commercial free Internet streaming of programs and movies saturates, our business will be adversely affected.
The market segment for consumer paid commercial free Internet streaming of programs and movies has grown significantly. Much of the increasing growth can be attributed to the ability of consumers to stream TV shows and movies on their TVs, computers and mobile devices. A decline in the rate of growth could indicate that the market segment for online subscription-based entertainment video is beginning to saturate. While we believe that this segment will continue to grow for the foreseeable future, if this market segment were to saturate, our business would be adversely affected.
If our efforts to build strong brand identity and improve customer satisfaction and loyalty are not successful, we may not be able to attract or retain customers, and our operating results may be adversely affected.
We must continue to build and maintain strong brand identity. We believe that strong brand identity will be important in attracting customers and content providers who may have a number of choices from which to obtain services we provide. If our efforts to promote and maintain our brand are not successful, our operating results and our ability to attract customers or content providers may be adversely affected. To the extent dissatisfaction with our service is widespread or not adequately addressed, our brand may be adversely impacted and our ability to attract and retain customers or content providers may be adversely affected. With respect to our planned international expansion, we will also need to establish our brand and to the extent we are not successful, our business in new markets would be adversely impacted.
The increasingly long-term and fixed-cost nature of our content acquisition licenses may adversely affect our financial condition and future financial results.
In connection with obtaining content, particularly for streaming content, we will typically enter into multi-year, fixed-fee licenses with content providers, studios and distributors. Furthermore, we plan on increasing the level of committed content licensing in anticipation of our service and customer base growing. To the extent customer and/or revenue growth do not meet our expectations, our liquidity and results of operations could be adversely affected as a result of these content licensing commitments and our flexibility in planning for, or reacting to changes in our business and the market segments in which we operate could be limited.
If we become subject to liability for content that we distribute through our service, our results of operations would be adversely affected.
As a distributor of content, we face potential liability for negligence, copyright, patent or trademark infringement or other claims based on the nature and content of materials that we distribute. If we become liable, then our business may suffer. Litigation to defend these claims could be costly and the expenses and damages arising from any liability could harm our results of operations. We cannot assure that we are insured or indemnified to cover claims of these types or liability that may be imposed on us.
If we do not respond effectively and on a timely basis to rapid technological change, our business could suffer.
Our industry is characterized by rapidly changing technologies, industry standards, customer needs and competition, as well as by frequent new product and service introductions. We must respond to technological changes affecting both our customers and content providers. We may not be successful in developing and marketing, on a timely and cost-effective basis, new services that respond to technological changes, evolving industry standards or changing customer requirements. Our success will depend, in part, on our ability to accomplish all of the following in a timely and cost-effective manner:
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Effectively developing, using and integrating new technologies;
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Continuing to develop our technical expertise;
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Enhancing our engineering and system designs;
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Developing products that meet changing customer needs;
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Advertising and marketing our products; and
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Influencing and responding to emerging industry standards and other changes.
Growth of internal operations and business may strain our financial resources.
We intend to significantly expand the scope of our operating and financial systems in order to build and expand our business. Our growth rate may place a significant strain on our financial resources for a number of reasons, including, but not limited to, the following:
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The need for continued development of our financial and information management systems;
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The need to manage strategic relationships and agreements with content providers; and
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Difficulties in hiring and retaining skilled management, technical and other personnel necessary to support and manage our business.
We cannot give you any assurance that we will adequately address these risks and, if we do not, our ability to successfully expand our business could be adversely affected.
Current global economic conditions may adversely affect our industry, business and result of operations.
The recent disruptions in the current global credit and financial markets has included diminished liquidity and credit availability, a decline in consumer confidence, a decline in economic growth, an increased unemployment rate, and uncertainty about economic stability. There can be no assurance that there will not be further deterioration in credit and financial markets and confidence in economic conditions. These economic uncertainties affect businesses such as ours in a number of ways, making it difficult to accurately forecast and plan our future business activities. The current adverse global economic conditions and tightening of credit in financial markets may lead consumers to postpone spending, which may cause our customers to cancel, decrease or delay their existing and future orders with us. We are unable to predict the likely duration and severity of the current disruptions in the credit and financial markets and adverse global economic conditions. If the current uncertain economic conditions continue or further deteriorate, our business and results of operations could be materially and adversely affected.
If we are not able to adequately protect our intellectual property, we may not be able to compete effectively.
Our ability to compete depends in part upon the strength of our proprietary rights in our technologies, brands and content. We expect to rely on a combination of U.S. and foreign patents, copyrights, trademark, trade secret laws and license agreements to establish and protect our intellectual property and proprietary rights. The efforts we have taken and expect to take to protect our intellectual property and proprietary rights may not be sufficient or effective at stopping unauthorized use of our intellectual property and proprietary rights. In addition, effective trademark, patent, copyright and trade secret protection may not be available or cost-effective in every country in which our products are made available. There may be instances where we are not able to fully protect or utilize our intellectual property in a manner that maximizes competitive advantage. If we are unable to protect our intellectual property and proprietary rights from unauthorized use, the value of our products may be reduced, which could negatively impact our business. Our inability to obtain appropriate protections for our intellectual property may also allow competitors to enter our markets and produce or sell the same or similar products and services. In addition, protecting our intellectual property and other proprietary rights is expensive and diverts critical managerial resources. If we are otherwise unable to protect our intellectual property and proprietary rights, our business and financial results could be adversely affected.
If we are forced to resort to legal proceedings to enforce our intellectual property rights, the proceedings could be burdensome and expensive. In addition, our proprietary rights could be at risk if we are unsuccessful in, or cannot afford to pursue, those proceedings. In addition, the possibility of extensive delays in the patent issuance process could effectively reduce the term during which a marketed product is protected by patents.
We may also need to obtain licenses to patents or other proprietary rights from third parties. We may not be able to obtain the licenses required under any patents or proprietary rights or they may not be available on acceptable terms. If we do not obtain required licenses, we may encounter delays in development or find that the development, manufacture or sale of products and services requiring licenses could be foreclosed. We may, from time to time, support and collaborate in research conducted by universities and governmental research organizations. We may not be able to acquire exclusive rights to the inventions or technical information derived from these collaborations, and disputes may arise over rights in derivative or related research programs conducted by us or our collaborators.
Assertions against us by third parties for infringement of their intellectual property rights could result in significant costs and cause our operating results to suffer.
Our industry is characterized by vigorous protection and pursuit of intellectual property rights and positions, which results in protracted and expensive litigation for many companies. Other companies with greater financial and other resources than us have gone out of business from costs related to patent litigation and from losing a patent litigation. We may be exposed to future litigation by third parties based on claims that our technologies or activities infringe the intellectual property rights of others. Although we try to avoid infringement, there is the risk that we will use a patented technology owned or licensed by another person or entity and be sued for patent infringement or infringement of another party’s intellectual property or proprietary rights. If we or our products and services are found to infringe the intellectual property or proprietary rights of others, we may have to pay significant damages or be prevented from making, using, selling, and offering for sale or importing such products or services or from practicing methods that employ such intellectual property or proprietary rights.
Further, we may receive notices of infringement of third-party intellectual property rights. Specifically, we may receive claims from various industry participants alleging infringement of their patents, trade secrets or other intellectual property rights in the future. Any lawsuit resulting from such allegations could subject us to significant liability for damages and invalidate our proprietary rights. These lawsuits, regardless of their success, would likely be time-consuming and expensive to resolve and would divert management time and attention. Any potential intellectual property litigation also could force us to do one or more of the following:
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stop selling content or services or using technology that contain the allegedly infringing intellectual property;
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pay damages to the party claiming infringement;
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attempt to obtain a license for the relevant intellectual property, which may not be available on commercially reasonable terms or at all; and
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attempt to redesign those products or services that contain the allegedly infringing intellectual property with non-infringing intellectual property, which may not be possible.
The outcome of a dispute may result in our need to develop non-infringing technology or enter into royalty or licensing agreements. We may agree to indemnify certain customers for certain claims of infringement arising out of the sale of our products. Any intellectual property litigation could have a material adverse effect on our business, operating results or financial condition.
Confidentiality agreements with employees and others may not adequately prevent disclosure of our trade secrets and other proprietary information.
Our success depends upon the skills, knowledge and experience of our technical personnel, our consultants and advisors as well as our licensors and contractors. Because we operate in a highly competitive field, we rely almost wholly on trade secrets to protect our proprietary technology and processes. However, trade secrets are difficult to protect. We enter into confidentiality and intellectual property assignment agreements with our corporate partners, employees, consultants, outside scientific collaborators, developers and other advisors. These agreements generally require that the receiving party keep confidential and not disclose to third parties confidential information developed by us during the course of the receiving party’s relationship with us. These agreements also generally provide that inventions conceived by the receiving party in the course of rendering services to us will be our exclusive property. However, these agreements may be breached and may not effectively assign intellectual property rights to us. Our trade secrets also could be independently discovered by competitors, in which case we would not be able to prevent use of such trade secrets by our competitors. The enforcement of a claim alleging that a party illegally obtained and was using our trade secrets could be difficult, expensive and time consuming and the outcome would be unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets. The failure to obtain or maintain meaningful trade secret protection could adversely affect our competitive position.
If studios and other content owners or distributors refuse to license content to us upon acceptable terms, our business could be adversely affected.
Our ability to distribute content or provide our customers with content they can watch instantly depends on studios and other content owners or distributors licensing us content specifically for Internet delivery. The license periods and the terms and conditions of such licenses vary. If the studios and other content distributors change their terms and conditions or are no longer willing or able to license us content, our ability to distribute content or stream content to our customers will be adversely affected. Streaming content is not subject to the First Sale Doctrine. As such, we are completely dependent on the studio or other content distributor to license us content in order to access, distribute, sublicense and stream content. Many of the licenses provide for the studios or other content distributor to withdraw content from our service relatively quickly. Because of these provisions as well as other actions we may take, content available through our service can be withdrawn on short notice. In addition, the studios and other content distributors have great flexibility in licensing content. They may elect to license content exclusively to a particular provider or otherwise limit the types of services that can deliver streaming content. If we are unable to secure and maintain rights to streaming content or if we cannot otherwise obtain such content upon terms that are acceptable to us, our ability to distribute content will be adversely impacted, and our customer acquisition and retention could also be adversely impacted. As streaming content license agreements expire, we must renegotiate new terms which may not be favorable to us. If this happens, the cost of obtaining content could increase and our margins may be adversely affected. As we grow, we will have to spend an increasingly larger amount for the licensing of streaming content. Any failure to secure content will manifest in lower customer acquisition and retention. Given the multiple-year duration and largely fixed nature of content licenses, if we do not experience customer acquisition and retention as forecasted, our margins may be impacted by these fixed content licensing costs. To the extent that we are unable to resolve any of these issues in an amicable manner, our relationship with the studios and other content distributors or our access to content may be adversely impacted.
Any significant disruption in our technology platform or those of third-parties that we utilize in our operations could result in a loss or degradation of service and could adversely impact our business.
Customers and potential customers access our service through our Web site or their TVs, computers, game consoles or mobile devices. Our reputation and ability to attract, retain and serve our customers is dependent upon the reliable performance of our technology platform and those of third-parties that we utilize in our operations. Interruptions in our ability to deliver content, or with the Internet in general, including discriminatory network management practices, could make our service unavailable or degraded or otherwise hinder our ability to deliver streaming content. Much of our software is proprietary, and we rely on the expertise of our engineering and software development teams for the continued performance of our software and computer systems. Service interruptions, errors in our software or the unavailability of computer systems used in our operations could diminish the overall attractiveness of our service to existing and potential customers.
Our servers and those of third-parties we use in our operations are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions and delays in our service and operations as well as loss, misuse or theft of data. Our Web site may periodically experience directed attacks intended to cause a disruption in service. Any attempts by hackers to disrupt our service or our internal systems, if successful, could harm our business, be expensive to remedy and damage our reputation. We do not have insurance to cover expenses related to attacks on our Web site or internal systems. Efforts to prevent hackers from entering our computer systems are expensive to implement and may limit the functionality of our services. Any significant disruption to our service or internal computer systems could result in a loss of customers and adversely affect our business and results of operations.
If government regulations relating to the Internet or other areas of our business change, we may need to alter the manner in which we conduct our business, or incur greater operating expenses.
The adoption or modification of laws or regulations relating to the Internet or other areas of our business could limit or otherwise adversely affect the manner in which we currently conduct 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 adoption of any laws or regulations that adversely affect the growth, popularity or use of the Internet, including laws limiting Internet neutrality, could decrease the demand for our services and increase our cost of doing business. For example, in late 2010, the Federal Communications Commission adopted so-called net neutrality rules intended, in part, to prevent network operators from discriminating against legal traffic that transverse their networks. The rules are currently subject to legal challenge. To the extent that these rules are interpreted to enable network operators to engage in discriminatory practices or are overturned by legal challenge, our business could be adversely impacted. As we expand internationally, government regulation concerning the Internet, and in particular, network neutrality, may be nascent or non-existent. Within such a regulatory environment, coupled with potentially significant political and economic power of local network operators, we could experience discriminatory or anti-competitive practices that could impede our growth, cause us to incur additional expense or otherwise negatively affect our business.
Our reputation and relationships with customers would be harmed if our customer data, particularly billing data, were to be accessed by unauthorized persons.
We will maintain personal data regarding our customers, including names and, in many cases, mailing addresses. With respect to billing data, such as credit card numbers, we will rely on licensed encryption and authentication technology to secure such information. We will take measures to protect against unauthorized intrusion into our customers’ data. If, despite these measures, we, or our payment processing services, experience any unauthorized intrusion into our customers’ data, current and potential customers may become unwilling to provide the information to us necessary for them to become customers, we could face legal claims, and our business could be adversely affected. Similarly, if a well-publicized breach of the consumer data security of any other major consumer Web site were to occur, there could be a general public loss of confidence in the use of the Internet for commerce transactions which could adversely affect our business.
If we are unable to protect our domain names, our reputation and brand could be adversely affected.
We currently hold various domain names relating to our brand, including www.digidev.com. Failure to protect our domain names could adversely affect our reputation and brand and make it more difficult for users to find our Web site and our service. The acquisition and maintenance of domain names generally are regulated by governmental agencies and their designees. The regulation of domain names in the United States may change in the near future. Governing bodies may establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we may be unable to acquire or maintain relevant domain names. Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear. We may be unable, without significant cost or at all, to prevent third-parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights.
In the event of an earthquake or other natural or man-made disaster, our operations could be adversely affected.
Our executive offices and data centers are located in the Los Angeles area, an earthquake sensitive area. Our business and operations could be adversely affected in the event of an earthquake or other natural disaster, as well as from electrical blackouts, fires, floods, power losses, telecommunications failures, break-ins or similar events. We may not be able to effectively shift our operations to handle disruptions in service arising from these events. Because Los Angeles is located in an earthquake-sensitive area, we are particularly susceptible to the risk of damage to, or total destruction of, our executive offices and data centers. We are not insured against any losses or expenses that arise from a disruption to our business due to earthquakes and may not have adequate insurance to cover losses and expenses from other natural disasters.
We may lose key employees or may be unable to hire qualified employees.
We rely on the continued service of our senior management, including our Chief Executive Officer and Chairman, Martin Greenwald and members of our executive team and other key employees and the hiring of new qualified employees. In our industry, there is substantial and continuous competition for highly skilled business, product development, technical and other personnel. We may not be successful in recruiting new personnel and in retaining and motivating existing personnel, which may be disruptive to our operations.
Risks Relating to our Securities and our Status as a Public Company
The relative lack of public company experience of certain members of our management team may put us at a competitive disadvantage.
Certain members of our management team lack public company experience and are generally unfamiliar with the requirements of the United States securities laws and U.S. Generally Accepted Accounting Principles, which could impair our ability to comply with legal and regulatory requirements such as those imposed by Sarbanes-Oxley Act of 2002. Some of these individuals who now constitute our senior management team have never had responsibility for managing a publicly traded company. Such responsibilities include complying with federal securities laws and making required disclosures on a timely basis. Our senior management may not be able to implement programs and policies in an effective and timely manner that adequately responds to such increased legal, regulatory compliance and reporting requirements. Our failure to comply with all applicable requirements could lead to the imposition of fines and penalties and distract our management from attending to the growth of our business.
Shares of our common stock that have not been registered under the Securities Act of 1933, as amended, regardless of whether such shares are restricted or unrestricted, are subject to resale restrictions imposed by Rule 144, including those set forth in Rule 144(i) which apply to a “shell company.” In addition, any shares of our common stock that are held by affiliates, including any received in a registered offering, will be subject to the resale restrictions of Rule 144(i).
Pursuant to Rule 144 of the Securities Act of 1933, as amended (“Rule 144”), a “shell company” is defined as a company that has no or nominal operations; and, either no or nominal assets; assets consisting solely of cash and cash equivalents; or assets consisting of any amount of cash and cash equivalents and nominal other assets. As such, we may be deemed a “shell company” pursuant to Rule 144 prior to the Exchange, and as such, sales of our securities pursuant to Rule 144 are not able to be made until a period of at least twelve months has elapsed from the date on which our Current Report on Form 8-K is filed with the Commission reflecting our status as a non- “shell company.” Therefore, any restricted securities we sell in the future or issue to consultants or employees, in consideration for services rendered or for any other purpose will have no liquidity until and unless such securities are registered with the Commission and/or until a year after the date of the filing of our Current Report on Form 8-K and we have otherwise complied with the other requirements of Rule 144. As a result, it may be harder for us to fund our operations and pay our employees and consultants with our securities instead of cash. Furthermore, it will be harder for us to raise funding through the sale of debt or equity securities unless we agree to register such securities with the Commission, which could cause us to expend additional resources in the future. Our previous status as a “shell company” could prevent us from raising additional funds, engaging employees and consultants, and using our securities to pay for any acquisitions (although none are currently planned), which could cause the value of our securities, if any, to decline in value or become worthless. Lastly, any shares held by affiliates, including shares received in any registered offering, will be subject to the resale restrictions of Rule 144(i).
We will be required to incur significant costs and require significant management resources to evaluate our internal control over financial reporting as required under Section 404 of the Sarbanes-Oxley Act, and any failure to comply or any adverse result from such evaluation may have an adverse effect on our stock price.
As a smaller reporting company as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, we are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). Section 404 requires us to include an internal control report with the Annual Report on Form 10-K. This report must include management’s assessment of the effectiveness of our internal control over financial reporting as of the end of the fiscal year. This report must also include disclosure of any material weaknesses in internal control over financial reporting that we have identified. Failure to comply, or any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on the trading price of our equity securities. Management believes that its internal controls and procedures are currently not effective to detect the inappropriate application of U.S. GAAP rules. Management realize there are deficiencies in the design or operation of our internal control that adversely affect our internal controls which management considers to be material weaknesses including those described below:
i)
As of December 31, 2013, the Company did not have a separate functioning audit committee.
ii)
Due to the significant number and magnitude of out-of-period adjustments identified during the year- end closing process, management has concluded that the controls over the period-end financial reporting process were not operating effectively. A material weakness in the period-end financial reporting process could result in us not being able to meet our regulatory filing deadlines and, if not remedied, has the potential to cause a material misstatement or to miss a filing deadline in the future. Management override of existing controls is possible given the small size of the organization and lack of personnel.
iii)
There is no system in place to review and monitor internal control over financial reporting. The Company maintains an insufficient complement of personnel to carry out ongoing monitoring responsibilities and ensure effective internal control over financial reporting
Achieving continued compliance with Section 404 may require us to incur significant costs and expend significant time and management resources. We cannot assure you that we will be able to fully comply with Section 404 or that we and our independent registered public accounting firm would be able to conclude that our internal control over financial reporting is effective at fiscal year-end. As a result, investors could lose confidence in our reported financial information, which could have an adverse effect on the trading price of our securities, as well as subject us to civil or criminal investigations and penalties. In addition, our independent registered public accounting firm may not agree with our management’s assessment or conclude that our internal control over financial reporting is operating effectively.
If we lose our key management personnel, we may not be able to successfully manage our business or achieve our objectives, and such loss could adversely affect our business, future operations and financial condition.
Our future success depends in large part upon the leadership and performance of our executive management team and key consultants. If we lose the services of one or more of our executive officers or key consultants, or if one or more of them decides to join a competitor or otherwise compete directly or indirectly with us, we may not be able to successfully manage our business or achieve our business objectives. We do not have “Key-Man” life insurance policies on our key executives. If we lose the services of any of our key consultants, we may not be able to replace them with similarly qualified personnel, which could harm our business. The loss of our key executives or our inability to attract and retain additional highly skilled employees may adversely affect our business, future operations, and financial condition.
The elimination of monetary liability against our directors, officers and employees under Nevada law and the existence of indemnification rights to our directors, officers and employees may result in substantial expenditures by our company and may discourage lawsuits against our directors, officers and employees.
Our Articles of Incorporation contain a provision permitting us to eliminate the personal liability of our directors to our company and shareholders for damages for breach of fiduciary duty as a director or officer to the extent provided by Nevada law. The foregoing indemnification obligations could result in the Company incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup. These provisions and resultant costs may also discourage our company from bringing a lawsuit against directors and officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our shareholders against our directors and officers even though such actions, if successful, might otherwise benefit our company and shareholders.
Our stock is categorized as a penny stock. Trading of our stock may be restricted by the SEC’s penny stock regulations which may limit a shareholder’s ability to buy and sell our stock.
Our stock is categorized as a penny stock. The SEC has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) less than US$ 5.00 per share or an exercise price of less than US$ 5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and accredited investors. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.
FINRA sales practice requirements may also limit a shareholder’s ability to buy and sell our stock.
In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
To date, we have not paid any cash dividends and no cash dividends will be paid in the foreseeable future.
We do not anticipate paying cash dividends on our common stock in the foreseeable future and we may not have sufficient funds legally available to pay dividends. Even if the funds are legally available for distribution, we may nevertheless decide not to pay any dividends. We presently intend to retain all earnings for our operations.
A limited public trading market exists for our common stock, which makes it more difficult for our stockholders to sell their common stock in the public markets.
Our common stock is currently traded under the symbol “DIDG” but currently with low volume, based on quotations on the “OTC Markets,” meaning that the number of persons interested in purchasing our common stock at or near bid prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company which is still relatively unknown to stock analysts, stock brokers, institutional investors, and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our stock until such time as we became more viable. Additionally, many brokerage firms may not be willing to effect transactions in the securities. As a consequence, there may be periods of several days or more when trading activity in our stock is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that trading levels will be sustained.
If we issue additional shares in the future, it will result in the dilution of our existing shareholders.
Our articles of incorporation authorize the issuance of up to 200,000,000 shares of common stock with a par value of $0.001 per share. Our Board of Directors may choose to issue some or all of such shares to acquire one or more companies or properties and to fund our overhead and general operating requirements. The issuance of any such shares may reduce the book value per share and may contribute to a reduction in the market price of the outstanding shares of our common stock. If we issue any such additional shares, such issuance will reduce the proportionate ownership and voting power of all current shareholders. Further, such issuance may result in a change of control of our corporation.
We may not qualify to meet listing standards to list our stock on an exchange.
The SEC approved listing standards for companies using reverse acquisitions to list on an exchange may limit our ability to become listed on an exchange. We would be considered a reverse acquisition company (i.e., an operating company that becomes an Exchange Act reporting company by combining with a shell Exchange Act reporting company) that cannot apply to list on NYSE, NYSE Amex or Nasdaq until our stock has traded for at least one year on the U.S. OTC market, a regulated foreign exchange or another U.S. national securities market following the filing with the SEC or other regulatory authority of all required information about the merger, including audited financial statements. We would be required to maintain a minimum $4 share price ($2 or $3 for Amex) for at least thirty (30) of the sixty (60) trading days before our application and the exchange’s decision to list. We would be required to have timely filed all required reports with the SEC (or other regulatory authority), including at least one annual report with audited financials for a full fiscal year commencing after filing of the above information. Although there is an exception for a firm underwritten IPO with proceeds of at least $40 million, we do not anticipate being in a position to conduct an IPO in the foreseeable future. To the extent that we cannot qualify for a listing on an exchange, our ability to raise capital will be diminished.
We may not have the ability to pay our promissory notes when due. The Company has issued convertible and other promissory notes in the amount of approximately $2,286,869 as of December 31, 2013. The Company does not have sufficient capital to repay the notes as of the date of this report, and may not have sufficient capital to repay the notes when due. The Company’s inability to repay the notes when due would permit the note holders to exercise their default remedies against the Company which could have a material adverse effect on the Company. Additionally, many of the note holders have the right to declare entire amount of the outstanding debt immediately due and payable upon the occurrence of events of default, which include events such as our late filing of this Annual Report on Form 10-K.
Conversion of our convertible notes into common stock could result in additional dilution to our stockholders. We have issued numerous convertible notes which are convertible into shares of our common stock at conversion prices which are at a discount to the then current trading price of our common stock. Additionally, upon the occurrence of certain events of default (including conditions outside of our control) the note holders are entitled to increased repayment and interest rates, as well as other remedies. For example, our late filing of this Annual Report on Form 10K entitled several of the note holders to increased repayment amounts and interest rates. Also, some of the note holders have anti-dilution and conversion reset provisions which are triggered by the issuance of lower priced securities. As shares of our common stock are issued due to conversion of some or all of the convertible notes, the ownership interests of existing stockholders are being diluted. As of March 31, 2013, there were 61,783,716 shares outstanding, and this amount increased to 106,340,371 shares outstanding as of March 31, 2014, which was partly as the result of the issuance of shares of Company common stock resulting from the conversion of convertible notes outstanding. The Company expects that note holders will continue to convert and the number of outstanding shares to continue to increase significantly.
We do not have the ability to pay the Ironridge arbitration award and subsequent judgment. On May 24, 2013, the Arbitrator in the JAMS arbitration announced an interim award to Ironridge in the amount of $850,000 plus attorney fees and costs, and on July 10, 2013 the Arbitrator ruled the interim award to be final, and awarded Ironridge an additional $110,168 in attorneys’ fees and costs. That award was reduced to a Judgment by the Los Angeles Superior Court on April 1, 2014. The Company does not have adequate cash to pay the judgment. Such judgment will adversely affect the business, future operations and the financial condition of the Company, and may cause the Company to default under its existing loan obligations which would provide the lenders with the right for immediate repayment, and/or cause the Company to file for protection under the United States Bankruptcy Code or similar proceedings which could cause all the shareholders to lose the entire value of their investment in the Company.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
Our corporate offices are located at 6630 West Sunset Blvd., Los Angeles, California 90028, where we lease approximately 5,000 square feet of office space. The lease term, which began on July 1, 2012, expired on November 15, 2013,and is now a month-to-month lease. The average monthly rental payment including utilities and operating expenses for the facility is approximately $6,000.00 per month. We believe the leased office space is in good condition and adequate to meet our current and anticipated requirements.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Effective December 19, 2012, the Company terminated the Securities Purchase Agreement, Registration Rights Agreement and Debenture dated November 6, 2012 (the “Financing Documents”) with Ironridge Media Co., a division of Ironridge Global IV, Ltd. (“Ironridge”), for the sale of up to $3,000,000 of Convertible Subordinated Debentures and Series A Preferred Stock. Subsequent to the termination, Ironridge submitted a claim with JAMS, Inc. in Santa Monica, California for binding arbitration under the Financing Documents and requested that it be awarded damages relating to the termination of the Financing Documents. The Company submitted counter-claims in the JAMS arbitration claiming that it was fraudulently induced to enter into the Financing Documents, and that a fully performed oral stock purchase agreement caused the Financing Documents to be abandoned by the parties, justifying rescission of the financing documents. On May 24, 2013, the Arbitrator in the JAMS arbitration announced an interim award to Ironridge in the amount of $850,000 plus attorney fees and costs. On July 10, 2013, the Arbitrator ruled the interim award to be final, awarded Ironridge an additional $110,168 in attorneys’ fees and costs On April 1,2014, the Los Angeles Superior Court reduced such award to a judgment in that about (including the attorney’s fees and costs). The Company does not have adequate cash to pay the arbitration award. The judgment resulting from the arbitration award will adversely affect the business, future operations and the financial condition of the Company, and may cause the Company to default under its existing loan obligations which would provide the lenders with the right for immediate repayment.
On February 25, 2014, John Knight obtained a Small Claims judgment against the Company for $10,000.00. Mr. Knight has commenced collection procedures which have been wholly ineffective as to this date. The Company will attempt to resolve such judgment with Mr. Knight.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is currently trading on the OTC Markets under the symbol “DIDG”. The table below lists the high and low closing prices per share of our common stock since our stock was first traded on April 5, 2012 through December 31, 2013, as quoted on the OTC Markets and the Over-the-Counter Bulletin Board maintained by the Financial Industry Regulatory Authority (“FINRA”). Prior to that time, there was no public market for our common stock.
Trading in our common stock has been sporadic and the quotations set forth above are not necessarily indicative of actual market conditions. All prices reflect inter-dealer prices without retail mark-up, mark-down, or commission and may not necessarily reflect actual transactions.
Holders
As of March 31, 2014, there were approximately 45 shareholders of record of our common stock based upon the shareholders’ listing provided by our transfer agent. Our transfer agent is Action Stock Transfer Corp. located at 2469 E. Fort Union Blvd, Suite 214, Salt Lake City, Utah 84121 and its phone number is (801) 274-1088.
Dividends
We have never paid cash dividends on our common stock. We intend to keep future earnings, if any, to finance the expansion of our business, and we do not anticipate that any cash dividends will be paid in the foreseeable future. Our future payment of dividends will depend on our earnings, capital requirements, expansion plans, financial condition and other relevant factors that our board of directors may deem relevant. Our retained earnings deficit currently limits our ability to pay dividends.
Recent Sales of Unregistered Securities
On October 21, 2013, the Company issued 554,324 shares of common stock to Tonaquint, Inc. in consideration of their conversion of $10,000 under the terms of their convertible promissory note dated March 2, 2013.
On October 21, 2013, the Company issued 1,300,000 share of common stock to 4 accredited investors for a purchase price of $.02 per share.
On October 24, 2013, the Company issued 1,500,000 shares of Company common stock to Quickloan Funding/JMJ Financial in consideration of their conversion of $9,000 under the terms of their convertible promissory note dated March 13, 2013.
On November 14, 2013, the Company issued 2,500,000 shares of Company common stock to Quickloan Funding/JMJ Financial in consideration of their conversion of $8,250 under the terms of their convertible promissory note dated March 13, 2013.
On December 2, 2013, the Company issued 3,685,503 shares of common stock to Tonaquint, Inc. in consideration of their conversion of $26,376 under the terms of their convertible promissory note dated March 2, 2013.
On December 6, 2013, the Company issued 3,457,065 shares of common stock to Tonaquint, Inc. in consideration of their conversion of $18,839 under the terms of their convertible promissory note dated March 2, 2013.
On December 11, 2013, the Company issued 3,200,000 shares of Company common stock to Quickloan Funding/JMJ Financial in consideration of their conversion of $10,560 under the terms of their convertible promissory note dated March 13, 2013.
On December 23, 2013, the Company issued 2,000,000 shares to each of their legal counsel in consideration for payment of $20,000 in outstanding legal fees due.
Each of the above issuances of shares was made in reliance on the exemption provided by Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”) for the offer and sale of securities not involving a public offering.
Securities Authorized for Issuance Under Equity Compensation Plans
On September 14, 2012, our board of directors approved the adoption of The Digital Development Group Corp. 2012 Equity Incentive Plan (the “2012 Plan”). The 2012 Plan is intended to aid The Digital Development Group Corp. (the “Company”) in recruiting and retaining key employees, directors or consultants and to motivate them by providing incentives through the granting of awards of stock options or other stock based awards. The 2012 Plan is administered by the board of directors. Directors, employees and consultants of the Company and its affiliates are eligible to participate under the 2012 Plan. A total of 4,400,000 shares of common stock have been reserved for awards under the 2012 Plan. The summary of the 2012 Plan described above is qualified in its entirety by reference to the 2012 Plan which is filed as an exhibit to this Annual Report.
On January 3, 2013, our board of directors approved the adoption of The Digital Development Group Corp. 2013 Equity Incentive Plan (the "2013 Plan”). The 2013 Plan is intended to aid The Digital Development Group Corp. (the “Company”) in recruiting and retaining key employees, directors or consultants and to motivate them by providing incentives through the granting of awards of stock options or other stock based awards. The 2013 Plan is administered by the board of directors. Directors, officers, employees and consultants of the Company and its affiliates are eligible to participate under the 2013 Plan. A total of 3,700,000 shares of common stock have been reserved for awards under the 2013 Plan. The summary of the 2013 Plan described above is qualified in its entirety by reference to the 2013 Plan which is filed as an exhibit to this Annual Report.
On January 10, 2014, our board of directors approved the adoption of The Digital Development Group Corp. 2014 Equity Incentive Plan (the "2014 Plan”). Such plan was amended on February 28, 2014. The 2014 Plan is intended to aid The Digital Development Group Corp. (the “Company”) in recruiting and retaining key employees, directors or consultants and to motivate them by providing incentives through the granting of awards of stock options or other stock based awards. The 2014 Plan is administered by the board of directors. Directors, officers, employees and consultants of the Company and its affiliates are eligible to participate under the 2014 Plan. A total of 6,000,000 shares of common stock have been reserved for awards under the 2014 Plan as amended. The summary of the 2014 Plan described above is qualified in its entirety by reference to the 2014 Plan and Amendment which is filed as an exhibit to this Annual Report.
Equity Compensation Plan Information
The table below sets forth information as of December 31, 2014 with respect to compensation plans under which our common stock is authorized for issuance:
Plan Category
Number of securities to be issued upon exercise of outstanding options warrants and rights
Weighted-average exercise price of outstanding options
Number of securities remaining available for future issuance under equity compensation plans
Equity Compensation Plans Approved By security holders
None
None
None
Equity Compensation Plans Not Approved By security holders
N/A
N/A
N/A
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
As a smaller reporting company we are not required to provide the information required by this item.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our consolidated financial statements and the notes presented herein. See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." below. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed in this report. See "Forward-Looking Statements," above.
Overview and Financial Condition
Discussions with respect to our Company’s operations included herein refer to our operating subsidiary, Digitally Distributed Acquisition Corp., a Delaware corporation (“DDAC”). Our Company purchased DDAC on July 31, 2012. We have no operations other than those of DDAC. Information with respect to our Company’s nominal operations prior to the acquisition of DDAC is not included herein.
Results of Operations
Revenues
Our Company had no revenues for the period from January 25, 2012 (inception) to December 31, 2012, and had $60,311 in revenues for the year ending December 31, 2013. Our activities to date have been primarily centered on establishing relationships with our content suppliers and purchasing content, recruiting personnel, further development of our technology platform, and launching our internet TV channels. Going forward, we plan to continue to purchase content and launch channels. While we are optimistic about the prospects for our Company, since this is a relatively new service offering (and we have not recognized significant revenues to date), there can be no assurance about whether or when our services will generate sufficient revenues with adequate margins in order for our Company to be profitable.
Net Loss and Operating Loss
Our operating loss for the period from January 25, 2012 (inception) to December 31, 2012 was $1,725,086. Our operating loss for the year ended December 31, 2013 was $4,881,849. Our net loss for the period from January 25, 2012 (inception) to December 31, 2012 was $1,558,650. Our net loss for the year ended December 31, 2013 was $10,597,529. Our net loss for the year ended December 31, 2013 consisted of $1,345,414 of interest expense and $4,370,266 loss due to derivative liabilities associated with our convertible notes and warrants.
Selling, general and administrative expenses
Selling, general and administrative expenses totaled $1,725,086 for the period from January 25, 2012 (inception) to December 31, 2012, and 4,942,160 for the year ending December 31, 2013. Included in these expenses for the year ending December 31, 2013 were payroll and related expenses of $1,070,511, stock based compensation expense totaled $921,145, share issued for services totaled $557,599, loss in litigations of $960,000 and professional expenses of $200,179.
Interest expense
Interest expense totaled $682,554 during the period from January 25, 2012 (inception) to December 31, 2012, and totaled $1,345,414 during the year ended December 31, 2013. Interest expense was primarily the result of amounts accrued and debt discount amortized under notes payable.
Gain on derivative liability
Gain on derivative liability totaled $848,990 during the period from January 25, 2012 (inception) to December 31, 2012, and loss on derivative liability totaled $4,370,266 during the year ended December 31, 2013. The gain was mainly related to the decrease in fair value of the derivative liability which was the result of a decline in our stock prices.
Liquidity and Capital Resources
We have primarily financed our operations through the sale of unregistered equity, warrants and convertible notes payable. As of December 31, 2013, our Company had cash totaling $6,371, current assets totaling $223,657 and total assets of $308,468. We had total liabilities of $8,968,784, contingent liabilities of $1,137,708 and working capital deficit of $7,607,419. Stockholders’ deficit at December 31, 2013 was $8,660,316.
Net cash used in operating activities was $1,360,343 for the period from January 25, 2012 (inception) to December 31, 2012, and was $1,451,420 during the year ended December 31, 2013. The net cash used by operating activities was related to increased activities incurred in ramping up our business operations over the previous period from inception.
Net cash used in investing activities was $303,442 for the period from January 25, 2012 (inception) to December 31, 2012, and was $82,467 during the year ended December 31, 2013. The net cash used in investing activities was mainly attributable to purchase of content.
Net cash provided by financing activities was $1,664,616 for the period from January 25, 2012 (inception) to December 31, 2012, and was $1,539,427 during the year ended December 31, 2013. The net cash provided by financing activities was mainly attributable to proceeds from the issuance of convertible notes, notes payable, and warrants.
Based on our need to raise additional funds to implement our business plans for the next twelve months, we have included a discussion concerning the presentation of our financial statements on a going concern basis in the notes to our financial statements and our independent public accountants have included a similar discussion in their opinion on our financial statements through December 31, 2013. We will be required in the near future to issue debt or sell our Company’s equity securities in order to raise additional cash, although there are no arrangements in place for any such financing at this time. We cannot provide any assurances as to whether we will be able to secure the necessary financing, or the terms of any such financing transaction if one were to occur. The failure to secure such financing could severely curtail our plans for future growth or in more severe scenarios, the continued operations of our Company.
Capital Expenditures
Our current plans do not call for our Company to expend significant amounts for capital expenditures for the foreseeable future beyond relatively insignificant expenditures for office furniture and information technology related equipment as we add employees to our Company.
Critical Accounting Policies Involving Management Estimates and Assumptions
Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements. The preparation of the 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, liabilities and equity and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include those related to the allowance for doubtful accounts; valuation of inventories; valuation of goodwill, intangible assets and property and equipment; valuation of stock based compensation expense, the valuation of warrants and conversion features; and other contingencies. On an on-going basis, we evaluate our estimates. 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 value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates under different assumptions or conditions.
The following is a discussion of certain of the accounting policies that require management to make estimates and assumptions where the impact of those estimates and assumptions may have a substantial impact on our financial position and results of operations.
Impairment of Long-Lived Assets:
Purchased intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets, which range from five to ten years. Purchased intangible assets determined to have indefinite useful lives are not amortized. Long-lived assets, including intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
Income Taxes:
We account for income taxes using the asset and liability method, which recognizes deferred tax assets and liabilities, determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established to reduce deferred tax assets when, based on available objective evidence, it is more likely than not that the benefit of such assets will not be realized. In addition, FASB guidance requires us to recognize in the consolidated financial statements only those tax positions determined to be more likely than not of being sustained.
Derivative Financial Instruments
We do not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks.
We review the terms of convertible debt and equity instruments it issues to determine whether there are embedded derivative instruments, including the embedded conversion option, that are required to be bifurcated and accounted for separately as a derivative financial instrument. In circumstances where the convertible instrument contains more than one embedded derivative instrument, including the conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument. Also, in connection with the sale of convertible debt and equity instruments, we may issue freestanding warrants that may, depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity.
Bifurcated embedded derivatives are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported as non-operating income or expense. When the convertible debt or equity instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds allocated to the convertible host instruments are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the convertible instruments themselves, usually resulting in those instruments being recorded at a discount from their face amount.
The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to interest expense, using the effective interest method.
Stock Based Compensation:
We measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized in the Consolidated Statement of Operations over the period during which the employee is required to provide service in exchange for the award - the requisite service period. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The grant-date fair value of employee share options and similar instruments is estimated using option-pricing models adjusted for the unique characteristics of those instruments.
Recent Accounting Pronouncements
See “Note 1 - Description of Business and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" of Part II of this report.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of the year ended December 31, 2012, nor do we have any as of the date of this Annual Report.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company we are not required to provide the information required by this item.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements are included beginning on page of this report:
Page
Report of Independent Registered Public Accounting Firms
Consolidated Balance Sheets as of December 31, 2013 and 2012
Consolidated Statements of Operations for the years ended December 31, 2013 and 2012
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2013 and 2012
Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012
Notes to Consolidated Financial Statements
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to provide reasonable assurances that material information related to our company is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer have determined that as of December 31, 2013, our disclosure controls were not effective at that "reasonable assurance" level.
Management's Annual Report on Internal Controls over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under that framework, our management concluded that our internal control over financial reporting was not effective as of December 31, 2013.
This annual report does not include an attestation report of the company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the company's registered public accounting firm pursuant to temporary rules of the SEC that permit the company to provide only management's report in this annual report.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or internal controls over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Changes In Internal Controls over Financial Reporting.
No changes were made in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of our current directors and executive officers, the principal offices and positions held by each person:
Name
Age
Position
Since
Martin W. Greenwald
Chairman, Chief Executive Officer, Interim Chief Financial Officer and Acting President
David Altshuler
Corporate Secretary
Bryan Subotnick
Director
Martin W. Greenwald, Chairman, Chief Executive Officer, Interim Chief Financial Officer, Acting President
Mr. Greenwald has been our Chairman, Chief Executive Officer and Interim Chief Financial Officer since June 28, 2012. Mr. Greenwald has extensive experience with licensing content in the entertainment industry. Mr. Greenwald is currently the Chairman of the Board and Chief Executive Officer of DDAC, positions he has held since January 25, 2012, and Chairman of the Board and Chief Executive Officer of Public Media Works Inc. (which is currently in reorganization under Chapter 11 of the bankruptcy code), positions he has held since August 2010. Mr. Greenwald previously served as Chairman of the Board of Image Entertainment, Inc. (“Image”) (OTCQB:DISK), a position he held from 1981 through 2010. From 1981 to 2008, Mr. Greenwald also served as President and Chief Executive Officer of Image where he helped lead operations focused on laserdisc and DVD content production, development and acquisition.
Mr. Greenwald has been a guest lecturer at the USC Marshall School of Business and UCLA Anderson School of Management, and has been a guest speaker or panelist at numerous home video entertainment events. From 1990 to 1998, Mr. Greenwald served on the board of directors of The Entertainment Industry Foundation. He has been honored with the Visionary Award from the Entertainment AIDS Alliance, has served as director of the Permanent Charities Committee of the Entertainment Industries, and is an active supporter of Cedars Sinai Hospital’s United Hostesses Charities and Didi Hirsch Community Mental Health Centers. Mr. Greenwald is a graduate of Fairleigh Dickinson University. We believe that Mr. Greenwald’s extensive business experience in the media and entertainment industry will aid the Company in achieving its business objectives.
David Altshuler, Corporate Secretary
Mr. Altshuler has been our Corporate Secretary since June 28, 2012. Mr. Altshuler is an attorney who has practiced since 1973 and has operated a solo practice from 1987 to the present. His solo practice focuses on representing and counseling entrepreneurial clients and small to mid-cap companies in various industries and market sectors, including wireless communications, wireless device manufacturing, manufacturing, distribution, warehousing, logistics, entertainment, secured lending, and real estate construction. He also assists with the re-structuring of financially challenged businesses. From 1985 to 1986, Mr. Altshuler was general counsel and chief operating officer of a Budget Rent-A-Car franchisee. From 1983 to 1984, Mr. Altshuler was general counsel and chief operating officer for Style Companies, Ltd., a small, growth oriented multi-national clothing manufacturing company. He was previously a tax partner with the Cohen & Ziskin law firm from 1981 to 1983. Mr. Altshuler received a B.A. in Social Science from the University of California, Irvine in 1970, a J.D. from California Western School of Law in 1972, and an L.L.M. in Taxation from New York University School of Law in 1973. Mr. Altshuler’s broad legal experience is expected to provide the Company with beneficial legal perspectives regarding the Company’s operations and regulatory compliance.
Bryan Subotnick, Director
Effective February 3, 2014, Bryan Subotnick was appointed to the Board of Directors of the Company. Mr. Subotnick previously served on the Board of Directors of the Company from August 2012 until March 25, 2013. Mr. Subotnick has served as the Chief Executive Officer and President of NYCe pLAy, LLC, a Los Angeles based technology company that develops, markets and sells smartphone applications, since the founding of the company in 2010. From 2007 to 2010, Mr. Subotnick was engaged with personal matters. Since 2004, Mr. Subotnick has also been an active investor in a variety of investments including a telecommunications service provider and several internet start-ups in the entertainment, advertising and medical industries. From 1995 to 2004, Mr. Subotnick was Executive Vice President of Big City Radio, a Los Angeles based owner of radio stations, where he helped grow the company from 4 regional stations to 16 national stations and to become listed on the American Stock Exchange. While at Big City Radio, Mr. Subotnick managed many aspects of company operations, including acquisitions, programming, budgeting and client relations, and assisted in raising over $33 million in the company’s initial public offering and $174 million in a public debt offering. From 1994 to 1995, Mr. Subotnick was Vice President and General Counsel of Papamarkou & Company, an SEC registered asset management company based in New York, New York. Mr. Subotnick was a founder and general partner of Shanker & Subotnick, a law firm which concentrated on entertainment law. Mr. Subotnick was a Kings County Assistant District Attorney in New York, New York from 1991 to 1992, and worked in the Bear Stearns & Company bond trading and sales program from 1986 to 1988. Mr. Subotnick received his Bachelor of Science in Finance from Syracuse University, and his Juris Doctor from the Brooklyn Law School. Mr. Subotnick’s broad legal and investment experience is expected to bring financial and strategic acumen to management and the Board.
Terms of Office
The Company’s directors are appointed for a one-year term to hold office until the next annual general meeting of the Company’s shareholders or until removed from office in accordance with the Company’s bylaws and the provisions of the Nevada Revised Statutes. The Company’s directors hold office after the expiration of his or her term until his or her successor is elected and qualified, or until he or she resigns or is removed in accordance with the Company’s bylaws and the provisions of the Nevada Revised Statutes.
The Company’s officers are appointed by the Company’s Board of Directors and hold office until removed by the Board.
Committees of the Board
We do not currently have standing nominating or compensation committees, or committees performing similar functions. Due to the size of our board, our Board of Directors believes that it is not necessary to have standing nominating or compensation committees at this time because the functions of such committees are adequately performed by our Board of Directors. We do not have a nominating or compensation committee charter as we do not currently have such committees. We do not have a policy for electing members to the board. Of our current directors, either of them is an independent director as defined in the NASD listing standards.
It is anticipated that the Board of Directors will form separate compensation and nominating committees, and appoint members to the audit committee, including an audit committee financial expert.
Audit Committee
Our Board of Directors has established a separate audit committee within the meaning of Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Charter of the Audit Committee of the Board of Directors sets forth the responsibilities of the Audit Committee. The primary function of the Audit Committee is to oversee and monitor the Company’s accounting and reporting processes and the audits of the Company’s financial statements.
Our Audit Committee is currently vacant, and our Board of Directors performs the services of an audit committee. None of our current or former directors can be considered an “audit committee financial expert.” We will have to attract an individual with the qualification of an audit committee expert to our Audit Committee. At this time, we have not identified such an individual.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive officers, and shareholders holding more than 10% of our outstanding Common Stock to file with the SEC initial reports of ownership and reports of changes in beneficial ownership of our Common Stock. Executive officers, directors, and persons who own more than 10% of our Common Stock are required by SEC regulations to furnish us with copies of all Section 16(a) reports they file.
Based solely upon a review of Forms 3, 4, and 5 delivered to us as filed with the SEC during our most recent fiscal year ended December 31, 2011, none of our executive officers and directors, and persons who own more than 10% of our Common Stock failed to timely file the reports required pursuant to Section 16(a) of the Exchange Act.
Nominations to the Board of Directors
Our directors take a critical role in guiding our strategic direction and oversee the management of the Company. Board candidates are considered based upon various criteria, such as their broad-based business and professional skills and experiences, a global business and social perspective, concern for the long-term interests of the shareholders, diversity, and personal integrity and judgment.
In addition, directors must have time available to devote to Board activities and to enhance their knowledge in the growing business. Accordingly, we seek to attract and retain highly qualified directors who have sufficient time to attend to their substantial duties and responsibilities to the Company.
In carrying out its responsibilities, the Board will consider candidates suggested by shareholders. If a shareholder wishes to formally place a candidate’s name in nomination, however, he or she must do so in accordance with the provisions of the Company’s Bylaws. Suggestions for candidates to be evaluated by the proposed directors must be sent to the Board of Directors, c/o The Digital Development Group Corp., 6630 West Sunset Blvd., Los Angeles, CA, 90028.
Board Leadership Structure and Role on Risk Oversight
Mr. Martin W. Greenwald currently serves as the Company’s principal executive officer and chairman. The Company determined this leadership structure was appropriate for the Company due to our small size and limited operations and resources. The Board of Directors will continue to evaluate the Company’s leadership structure and modify as appropriate based on the size, resources and operations of the Company.
Compensation Committee Interlocks and Insider Participation
No interlocking relationship exists between our board of directors and the board of directors or compensation committee of any other company, nor has any interlocking relationship existed in the past.
Director Qualifications
In evaluating director nominees, our Company considers the following factors:
·
The appropriate size of the Board;
·
Our needs with respect to the particular talents and experience of our directors;
·
The knowledge, skills and experience of nominees;
·
Experience with accounting rules and practices; and
·
The nominees’ other commitments.
Our Company’s goal is to assemble a Board of Directors that brings our Company a variety of perspectives and skills derived from high quality business, professional and personal experience. Other than the foregoing, there are no stated minimum criteria for director nominees. Specific talents and qualifications that we considered for the members of our Company’s Board of Directors are as follows:
·
Mr. Greenwald has extensive prior public company experience as well as industry experience and experience with content licensing. As the former Chief Executive Officer of Image Entertainment Inc., Mr. Greenwald oversaw its growth to over $120 million in revenues.
·
Mr. Subotnick has has extensive prior public company experience as well as content and media industry experience.
Family Relationships
There are no family relationships between or among the directors, executive officers or persons nominated or chosen by us to become directors or executive officers.
Code of Ethics
On July 31, 2012, our Board of Directors adopted an Amended and Restated Code of Ethics (the “Code”). Our Code embodies our commitment to ethical principles and sets forth the responsibilities of the Company and its officers and directors to its shareholders, employees, customers, lenders and other organizations. Our Code addresses general business ethical principles and other relevant issues and applies to our Chief Executive Officer, President, Chief Financial Officer, Chief Accounting Officer, Secretary and Treasurer of the Company. A copy of our code of ethics will be provided to any person without charge, upon written request sent to us at our offices located at 6630 Sunset Blvd., Los Angeles, California, 90028.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Board Compensation
We have no standard arrangement to compensate directors for their services in their capacity as directors. Directors are not paid for meetings attended. However, we intend to review and consider future proposals regarding board compensation. All travel and lodging expenses associated with corporate matters are reimbursed by us, if and when incurred.
Executive Compensation - Executive Officers
The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to the named persons for services rendered in all capacities during the noted periods. No other executive officers received total annual compensation in excess of $100,000.
SUMMARY COMPENSATION TABLE
Salary
Bonus
Stock Awards
Option Awards
Non-Equity Incentive Compensation
Change in Pension Value and Non-Qual. Deferred Compensation Earnings
All Other Compensation
Total
Position
Year
($)
($)
($)
($)
($)
($)
($)
($)
Martin Greenwald
29,560
29,560
(1)CEO/Interim
245,260
245,260
CFO/Director
Joe Q. Bretz
138,960
138,960
(2)President
245,260
245,260
(1)
Mr. Greenwald was appointed as our Company’s Chief Executive Officer and Interim Chief Financial Officer on June 28, 2012.
(2)
Mr. Bretz was appointed as our President on April 25, 2012. Effective January 31, 2014, Joe Q. Bretz resigned from the Board of Directors of the Company and also terminated his employment agreement and position as President of the Company.
The above amounts with respect to compensation from option awards equaled the amounts that were recognized as compensation expense in our financial statements for the year ended December 31, 2013. The option award amounts were calculated in accordance with generally accepted accounting principles concerning share based payments.
Potential Payments Upon Termination or Change-in-Control
SEC regulations state that we must disclose information regarding agreements, plans or arrangements that provide for payments or benefits to our executive officers in connection with any termination of employment or change in control of the Company. Please see the section entitled “Employment Agreements” below for a discussion of management compensation in the event of a termination of employment or change in control of the Company.
Employment Agreements
Our wholly-owned subsidiary, DDAC, entered into employment agreements with Messrs. Martin W. Greenwald, Richard Verdoni and Bruce Venezia (Mr. Venezia resigned in or about June, 2013), each effective May 1, 2012 (the “Effective Date”) (each a “DDAC Employment Agreement,” and together the “DDAC Employment Agreements”). The following are summaries of the DDAC Employment Agreements with the above-mentioned officers and directors.
Martin W. Greenwald
DDAC entered into a DDAC Employment Agreement with Mr. Martin W. Greenwald effective May 1, 2012, pursuant to which Mr. Greenwald will serve as a member of DDAC’s Board of Directors and as Chief Executive Officer of DDAC. The term of Mr. Greenwald’s appointment commences on the Effective Date and terminates on April 30, 2015 (the “Term”). Mr. Greenwald’s annual salary is $10,000 per month from the Effective Date to April 1, 2012. Commencing April 1, 2012, Mr. Greenwald’s annual compensation is $250,000 payable in periodic installments in accordance with DDAC’s standard payroll practices. In addition, Mr. Greenwald shall be entitled to be paid $50,000, representing deferred compensation accrued from the Effective Date, upon successful completion or one or more transactions resulting in DDAC realizing $3,000,000 of capital through a sale of DDAC’s securities and/or debt. Mr. Greenwald shall also be entitled to be paid an incentive bonus, in cash, equal to one percent (1%) of DDAC’s gross revenues during each calendar quarter. In addition, Mr. Greenwald shall be entitled to participate in certain employer benefit plans, including any qualified retirement plans, deferred compensation plans, stock option and incentive plans, life insurance plans, disability income plans, retirement plans, vacation plans and medical reimbursement plans, if and when adopted by DDAC. DDAC may terminate Mr. Greenwald’s employment for cause effective immediately by a vote of 66 2/3% of the Board of Directors of DDAC. “Cause” constitutes any act committed by Mr. Greenwald against DDAC or any of its affiliates which involves fraud, willful misconduct, gross negligence or insubordination; or the commission by Mr. Greenwald of, or indictment for, a felony or any misdemeanor involving moral turpitude, deceit, dishonesty or fraud. Mr. Greenwald’s employment can be terminated without cause upon not less than fifteen (15) days prior written notice.
If Mr. Greenwald’s employment is terminated for any reason during or upon expiration of the Term, DDAC shall pay or provide to Mr. Greenwald (i) any earned but unpaid salary; (ii) accrued bonuses earned but not yet paid; (iii) any unpaid expense reimbursements; (iv) any accrued but unused vacation; and (v) any unvested benefits under DDAC’s employer benefit plans (collectively, the “Greenwald Accrued Compensation”). In the event of termination of Mr. Greenwald’s employment without cause, DDAC shall provide Mr. Greenwald, in addition to the Greenwald Accrued Compensation, continuation of Mr. Greenwald’s salary and continuation of any executive health and group health benefit plans in accordance with federal law (the “Greenwald Termination Benefits”). The foregoing Greenwald Termination Benefits shall continue for a period of time equal to the longer of (a) the remainder of the Term or (b) twelve (12) months from the effective date of termination.
Richard Verdoni
DDAC entered into a DDAC Employment Agreement with Mr. Richard Verdoni effective May 1, 2012, pursuant to which Mr. Verdoni will serve as Chief Technology Officer of DDAC. The term of Mr. Verdoni’s appointment commences on the Effective Date and terminates two (2) years from the Effective Date (the “Term”). Mr. Verdoni’s annual compensation is $150,000 payable in periodic installments in accordance with DDAC’s standard payroll practices. Mr. Verdoni shall also be entitled to be paid an incentive bonus, in cash, equal to one half percent (0.05%) of DDAC’s gross revenues during each calendar quarter. In addition, Mr. Verdoni shall be entitled to participate in certain employer benefit plans, including any qualified retirement plans, deferred compensation plans, stock option and incentive plans, life insurance plans, disability income plans, retirement plans, vacation plans and medical reimbursement plans, if and when adopted by DDAC. DDAC may terminate Mr. Verdoni’s employment for cause effective immediately by a vote of the Board of Directors of DDAC or by the Chief Executive Officer of DDAC. “Cause” constitutes any act committed by Mr. Verdoni against DDAC or any of its affiliates which involves fraud, willful misconduct, gross negligence or insubordination; or the commission by Mr. Verdoni of, or indictment for, a felony or any misdemeanor involving moral turpitude, deceit, dishonesty or fraud. Mr. Verdoni’s employment can be terminated without cause upon not less than fifteen (15) days prior written notice.
If Mr. Verdoni’s employment is terminated for any reason during or upon expiration of the Term, DDAC shall pay or provide to Mr. Verdoni (i) any earned but unpaid salary; (ii) accrued bonuses earned but not yet paid; (iii) any unpaid expense reimbursements; (iv) any accrued but unused vacation; and (v) any unvested benefits under DDAC’s employer benefit plans (collectively, the “Verdoni Accrued Compensation”). In the event of termination of Mr. Verdoni’s employment without cause, DDAC shall provide Mr. Verdoni, in addition to the Verdoni Accrued Compensation, continuation of Mr. Verdoni’s salary and continuation of any executive health and group health benefit plans in accordance with federal law (the “Verdoni Termination Benefits”). The foregoing Verdoni Termination Benefits shall continue for a period of time equal to the lesser of (a) the remainder of the Term or (b) six (6) months from the effective date of termination.
Bruce Venezia
DDAC entered into a DDAC Employment Agreement with Mr. Bruce Venezia effective May 1, 2012, pursuant to which Mr. Venezia will serve as Vice President - Content Acquisition of DDAC. The term of Mr. Venezia’s appointment commences on the Effective Date and terminates two (2) years from the Effective Date (the “Term”). Mr. Venezia’s annual compensation is $60,000 payable in periodic installments in accordance with DDAC’s standard payroll practices. Mr. Venezia shall also be entitled to be paid an incentive bonus, in cash, equal to one half percent (0.05%) of DDAC’s gross revenues during each calendar quarter. In addition, Mr. Venezia shall be entitled to participate in certain employer benefit plans, including any qualified retirement plans, deferred compensation plans, stock option and incentive plans, life insurance plans, disability income plans, retirement plans, vacation plans and medical reimbursement plans, if and when adopted by DDAC. DDAC may terminate Mr. Venezia’s employment for cause effective immediately by a vote of the Board of Directors of DDAC or by the Chief Executive Officer of DDAC. “Cause” constitutes any act committed by Mr. Venezia against DDAC or any of its affiliates which involves fraud, willful misconduct, gross negligence or insubordination; or the commission by Mr. Venezia of, or indictment for, a felony or any misdemeanor involving moral turpitude, deceit, dishonesty or fraud. Mr. Venezia’s employment can be terminated without cause upon not less than fifteen (15) days prior written notice.
If Mr. Venezia’s employment is terminated for any reason during or upon expiration of the Term, DDAC shall pay or provide to Mr. Venezia (i) any earned but unpaid salary; (ii) accrued bonuses earned but not yet paid; (iii) any unpaid expense reimbursements; (iv) any accrued but unused vacation; and (v) any unvested benefits under DDAC’s employer benefit plans (collectively, the “Venezia Accrued Compensation”). In the event of termination of Mr. Venezia’s employment without cause, DDAC shall provide Mr. Venezia, in addition to the Venezia Accrued Compensation, continuation of Mr. Venezia’s salary and continuation of any executive health and group health benefit plans in accordance with federal law (the “Venezia Termination Benefits”). The foregoing Venezia Termination Benefits shall continue for a period of time equal to the lesser of (a) the remainder of the Term or (b) six (6) months from the effective date of termination.
Master Services Agreement - Alex Frejrud
Effective July 1, 2012, we entered into a Master Services Agreement (the “MSA”) with Alex Frejrud pursuant to which Mr. Frejrud will provide certain professional services to the Company in accordance with a Statement of Work (“SOW”) attached to the MSA. This agreement was mutually terminated in 2013 by Mr. Frejrud and the Company in return for the payment of $6,000.00. Both the Company and Mr. Frejrud released each other of any and all claims against the other.
Outstanding Equity Awards
The following table sets forth information concerning unexercised options, stock that has not vested, and equity incentive plan awards for each named executive officer as of December 31, 2013:
(1)
Options expire between the first to occur of (i) 90 days of termination of employment with the Company or (ii) 10 years after the date of grant.
Option Exercises
During the fiscal year ended December 31, 2013, there were no option exercises by our named executive officers.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information as of March 31, 2014, with respect to the beneficial ownership of our common stock for (i) each director and officer, (ii) all of our directors and officers as a group, and (iii) each person known to us to own beneficially five percent (5%) or more of the outstanding shares of our common stock. As of March 31, 2014, there were 106,340,371 shares of common stock outstanding.
To our knowledge, except as indicated in the footnotes to this table or pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to the shares of common stock indicated.
Name and Address of Beneficial Owner(1)
Shares Beneficially Owned
Percentage Beneficially Owned
Directors and Executive Officers
Martin W. Greenwald, Chairman, Chief Executive Officer, Interim Chief Financial Officer
0(2)
0%
6630 West Sunset Blvd.
Los Angeles, CA 90028
Bryan Subotnick
6630 West Sunset Blvd.
Los Angeles, CA 90028
David Altshuler, Corporate Secretary
500,000(3)
.47%
15332 Antioch Street, #840
Pacific Palisades, CA 90272
5% Shareholders
Stuart Subotnick
17,062,034(4)
16,04%
c/o Metromedia Company
810 Seventh Avenue, 29th Floor
New York, New York 10019
*
Less than 1%.
(1)
Beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act. Pursuant to the rules of the SEC, shares of common stock which an individual or group has a right to acquire within 60 days pursuant to the exercise of options or warrants are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be beneficially owned and outstanding for the purpose of computing the percentage ownership of any other person shown in the table.
(2)
Includes 1,000,000 shares of common stock underlying stock options which are exercisable within 60 days of March 31, 2014.
(3)
Includes _______ shares of common stock underlying stock options which are exercisable within 60 days of March 31, 2014.
(4)
Includes (i) 9,931,034 shares issuable upon conversion of a convertible promissory note which promissory note is currently exercisable and (ii) 800,000, 75,000, 93,000, 102,000 and 90,000 shares issuable upon exercise of warrants which warrants are currently exercisable.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain Relationships and Related Transactions
There are no family relationships between any of our former directors or executive officers and new directors or new executive officers. Mr. Greenwald and Mr. Bretz were officers and directors of DDAC and the Company prior to the Closing of the Exchange Transaction. Other than the foregoing, none of the new directors and executive officers were directors or executive officers of the Company prior to the Closing of the Exchange Transaction, nor did any hold any position with the Company prior to the Closing of the Exchange Transaction, nor have been involved in any material proceeding adverse to the Company or any transactions with the Company or any of its directors, executive officers, affiliates or associates that are required to be disclosed pursuant to the rules and regulations of the SEC.
In accordance with the Exchange Agreement, upon the effectiveness of the Exchange Transaction, the Selling Shareholders of DDAC received approximately 21.39% of the issued and outstanding common stock of the Company. Messrs. Martin Greenwald, our Chief Executive Officer, Joe Q. Bretz, our President, David Altshuler, our Corporate Secretary, and Bryan Subotnick, a member of our Board of Directors, were Selling Shareholder of DDAC. Accordingly, each of the foregoing officers and directors of the Company was issued certain shares of our Common Stock in connection with the Exchange Transaction in exchange for their equity interests in DDAC.
In connection with the Company’s Letter of Intent with DDAC dated April 10, 2012, between April 10, 2012 and September 30, 2012, an aggregate of $927,000 was advanced to DDAC and DDG in accordance with our form of Convertible Promissory Note (the “Convertible Notes”). The funds for said advances were provided to the Company in exchange for our issuance of the Convertible Notes to the holder. Per the Company’s direction as set forth in the Convertible Notes, the funds were advanced directly to DDAC and after July 31, 2012 to DDG. The Convertible Notes bear interest at a rate of one percent (1%) per month until the Closing Date, and thereafter, at three percent (3%) per annum. The Convertible Notes are payable by the Company to the holder on demand at any time following the Closing Date. The Convertible Notes may be converted into shares of the Company’s common stock, at the option of the holder, at the lower of $0.50 per share or the price per share at which shares of capital stock of the Company are sold in any financing occurring within twenty four (24) months after Closing. The issuance of the Convertible Notes to the holder was exempt from registration in reliance upon Regulation D of the Securities Act as the holder is an “accredited investor,” as such term is defined in Rule 501(a) under the Securities Act.
On September 11, 2012 the Company issued a Convertible Promissory Note to Stuart Subotnick an un-affiliated entity in the amount of $240,000. The Note is convertible into equity at the rate of $0.30 per share and additionally a warrant to purchase an additional 800,000 shares at $0.30 per share. The share price is subject to change under certain financing conditions. The use of proceeds for all money raise was for general working capital.
Between April 12, 2012 and June 11, 2012, DDAC issued its form of Promissory Note to the Company for an aggregate amount of $350,000 (the “Notes”). The Notes are payable on demand and bear no specific interest. Upon the Closing of the Exchange Transaction, the loans evidenced by the Notes became intercompany loans and were cancelled in their entirety. As noted above, Messrs. Greenwald, Bretz and Altshuler were officers, directors and shareholders of DDAC.
On November 14, 2012, the Company issued a Convertible Note in the principal amount of $138,000 to Europa Capital AG of Belize. The Convertible Note bears interest at a rate of at three percent (3%) per annum. The Convertible Note is payable by the Company to the holder on demand at any time following the date which is 36 months after the date of the Convertible Note. The Convertible Note may be converted into shares of the Company’s common stock, at the option of the holder, at the conversion price of $.24 per share. The issuance of the Convertible Note to the holder was exempt from registration in reliance upon Regulation D of the Securities Act as the holder is an “accredited investor,” as such term is defined in Rule 501(a) under the Securities Act.
On January 30, 2013, the Company entered into a Promissory Note with Martin W. Greenwald, the Company’s Chief Executive Officer, pursuant to which Mr. Greenwald has agreed to loan the Company up to $250,000 to fund Company operations. The Promissory Note provides that Mr. Greenwald may advance funds to the Company from to time to time, up to the amount of $250,000. The amounts advanced shall be due within one year from the date of the promissory note and shall accrue interest at 3% per annum. As of December 31, 2013, the amount outstanding under the promissory note was $126,160.
Other than the transactions, including the Exchange Transaction, noted above, there are no transactions, since the beginning of the Company’s last fiscal year, or any currently proposed transaction, in which the Company was or is to be a participant and the amount involved exceeds the lesser of $120,000 or one percent of the average of the Company’s total assets at year-end for the last three completed fiscal years, and in which any of the current directors or officers had or will have a direct or indirect material interest. There is no material plan, contract or arrangement (whether or not written) to which any of the current directors or officers is a party or in which they participate that is entered into or material amendment in connection with our appointment of any of the current directors or officers, or any grant or award to any of the current directors or officers or modification thereto, under any such plan, contract or arrangement in connection with our appointment of any of the current directors or officers.
Other than as set forth above, none of our current officers or directors have been involved in any material proceeding adverse to the Company or any transactions with the Company or any of its directors, executive officers, affiliates or associates that are required to be disclosed pursuant to the rules and regulations of the SEC.
Review, Approval or Ratification of Transactions with Related Persons
Although we have adopted a Code of Ethics, we rely on our board to review related party transactions on an ongoing basis to prevent conflicts of interest. Our board reviews a transaction in light of the affiliations of the director, officer or employee and the affiliations of such person’s immediate family. Transactions are presented to our board for approval before they are entered into or, if this is not possible, for ratification after the transaction has occurred. If our board finds that a conflict of interest exists, then it will determine the appropriate remedial action, if any. Our board approves or ratifies a transaction if it determines that the transaction is consistent with the best interests of the Company.
Director Independence
During the year ended December 31, 2013, we did not have any independent directors on our board. We evaluate independence by the standards for director independence established by applicable laws, rules, and listing standards including, without limitation, the standards for independent directors established by The New York Stock Exchange, Inc., the NASDAQ National Market, and the Securities and Exchange Commission.
Subject to some exceptions, these standards generally provide that a director will not be independent if (a) the director is, or in the past three years has been, an employee of ours; (b) a member of the director’s immediate family is, or in the past three years has been, an executive officer of ours; (c) the director or a member of the director’s immediate family has received more than $120,000 per year in direct compensation from us other than for service as a director (or for a family member, as a non-executive employee); (d) the director or a member of the director’s immediate family is, or in the past three years has been, employed in a professional capacity by our independent public accountants, or has worked for such firm in any capacity on our audit; (e) the director or a member of the director’s immediate family is, or in the past three years has been, employed as an executive officer of a company where one of our executive officers serves on the compensation committee; or (f) the director or a member of the director’s immediate family is an executive officer of a company that makes payments to, or receives payments from, us in an amount which, in any twelve-month period during the past three years, exceeds the greater of $1,000,000 or two percent of that other company’s consolidated gross revenues.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
(1)
Audit Fees
The aggregate fees billed for professional services rendered by the principal accountants for the audit of the registrant's annual financial statements and review of financial statements included in the registrant's Form 10-K or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for the fiscal year ended December 31, 2013 were $18,000.00.
(2)
Audit-Related Fees
There were no fees billed during the two years ended December 31, 2013 for assurance and related services by the principal accountants that are reasonably related to the performance of the audit or review of the registrant's financial statements and are not reported under item (1).
(3)
Tax Fees
No aggregate fees were billed for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning for the fiscal year ended December 31, 2013 and December 31, 2012.
(4)
All Other Fees
No aggregate fees were billed for professional services provided by the principal accountant, other than the services reported in items (1) through (3) for the two years ended December 31, 2013.
(5)
Audit Committee
The Company’s Board of Directors, which serves as the Company’s Audit Committee, have approved the principal accountant's performance of services for the audit of the registrant's financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for the fiscal year ended December 31, 2013. Audit-related fees, tax fees, and all other fees, if any, were approved by the Board of Directors performing the functions of the Audit Committee.
(6)
Work Performance by others
The percentage of hours expended on the principal accountant's engagement to audit the registrant's financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant's full-time, permanent employees was less than 50 percent.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
Documents filed as part of this Report:
(1)
Financial Statements-all consolidated financial statements of the Company as set forth under Item 8, on page of this Report.
(2)
Financial Statement Schedules- As a smaller reporting company we are not required to provide the information required by this item.
(3)
Exhibits
Number
Description
2.1(a)
Share Exchange Agreement dated July 31, 2012(1)
2.1(b)
Subscription Agreement by and between Digitally Distributed, LLC and Digitally Distributed Acquisition Corp. dated July 31, 2012(1)
3.1
Certificate of Incorporation(2)
3.2
Articles of Incorporation(2)
3.3
Certificate of Correction(2)
3.4
Text of Amendment to Articles of Incorporation(3)
3.5
By-laws(2)
10.1
Letter of Intent by and between Regency Resources, Inc. and Digitally Distributed Acquisition Corp., dated April 10, 2012(4)
10.2
Form of Convertible Promissory Note(1)
10.3
Form of Indemnification Agreement(1)
10.5
Master Services Agreement by and between the Registrant and Alex Frejrud, dated July 1, 2012(1)
10.6
2012 Equity Incentive Plan(5)
10.7
Securities Purchase Agreement with Ironridge dated November 6, 2012(6)
10.8
Debenture issued to Ironridge dated November 6, 2012(6)
10.9
Registration Rights Agreement with Ironridge dated November 6, 2012(6)
10.10
2013 Equity Incentive Plan(7)
10.11
Promissory Note dated January 30, 2013 with Martin W. Greenwald(8)
10.12
Securities Purchase Agreement dated April 2, 2013 with Tonaquint, Inc.(9)
10.13
Convertible Promissory Note in the principal amount of $340,000 dated April 2, 2013 with Tonaquint, Inc.(9)
10.14
Security Agreement dated April 2, 2013 with Tonaquint, Inc.(9)
10.15
Deed of Trust dated April 2, 2013 with Tonaquint, Inc.(9)
10.16
Warrant dated April 2, 2013 with Tonaquint, Inc.(9)
10.17
Confession of Judgment dated April 2, 2013 with Tonaquint, Inc.(9)
10.18
Tonaquint, Inc. Deed of Trust Note #1 dated April 2, 2013(9)
10.19
Tonaquint, Inc. Deed of Trust Note #2 dated April 2, 2013(9)
10.20
Promissory Note in the principal amount of $150,000 dated April 16, 2013 with Charlie Sheen(10)
10.21
Promissory Note dated March 13, 2013 with QuickLoan Funding(11)
10.22
Agreement with Charlie Sheen dated March 26, 2013(11)
10.23
Convertible Promissory Note in the principal amount of $138,000 dated November 14, 2012 with Europa Capital AG of Belize(11)
10.25
Securities Purchase Agreement dated July 22, 2013 with Asher Enterprises, Inc.(12)
10.26
Convertible Promissory Note dated July 22, 2013 with Asher Enterprises, Inc.(12)
10.31
Securities Purchase Agreement dated December 10, 2013 with GEL Properties LLC(13)
10.32
Form of 10% Convertible Promissory Note with GEL Properties LLC(13)
10.33
Securities Purchase Agreement dated December 10, 2013 with LG Capital Funding, LLC(13)
10.34
Form of 10% Convertible Promissory Note with LG Capital Funding, LLC(13)
14.1
Amended and Restated Code of Ethics(1)
List of Subsidiaries*
23.1
Consent of Anton & Chia, LLP*
Power of Attorney*
Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended, by the Chief Executive Officer and Chief Financial Officer
Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer and Chief Financial Officer
101.INS**
XBRL Instance Document
101.SCH**
XBRL Taxonomy Extension Schema Document
101.CAL**
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**
XBRL Taxonomy Extension Label Linkbase Document
**
Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
*
Filed herewith
(1)
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on August 6, 2012.
(2)
Incorporated by reference to the Registrant’s Registration Statement on Form S-1 filed on March 19, 2009.
(3)
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on May 2, 2012.
(4)
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on April 11, 2012.
(5)
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on September 21, 2012.
(6)
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on November 13, 2012.
(7)
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on January 8, 2013.
(8)
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on February 4, 2013.
(9)
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on April 9, 2013.
(10)
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on April 16, 2013.
(11)
Incorporated by reference to the Registrant’s Annual Report on Form 10-K filed on July 15, 2013.
(12)
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed on August 19, 2013.
(13)
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on December 17, 2013.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
The Digital Development Group Corp.
(Registrant)
Date: May 2, 2014
/s/ Martin W. Greenwald
By:
Martin W. Greenwald
Title:
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Signature
Title
Date
/s/ MARTIN W. GREENWALD
Martin W. Greenwald
Chief Executive Officer, Interim Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) Director (Principal Executive Officer) and Acting President
May 2, 2014
/s/ BRYAN SUBOTNICK
Bryan Subotnick
Director
May 2, 2014
THE DIGITAL DEVELOPMENT GROUP CORP.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2013 and 2012
Consolidated Statements of Operations for the year ended December 31, 2013 and the period from January 25, 2012 (Inception) through December 31, 2012
Consolidated Statements of Changes in Stockholders' Deficit for the period from January 25, 2012 (Inception) through December 31, 2013
Consolidated Statements of Cash Flows for the year ended December 31, 2013 and the period from January 25, 2012 (Inception) through December 31, 2012
Notes to Consolidated Financial Statements
To the Board of Directors
Digital Development Group Corp
We have audited the consolidated balance sheets of Digital Development Group Corp (the "Company") as of December 31, 2013 and 2012, and the related statements of operations, changes in stockholders’ deficit and cash flows for the year ended December 31, 2013 and for the period from January 25, 2012 (Inception) through December 31, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company was 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 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 financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the year ended December 31, 2013 and for the period from January 25, 2012 (Inception) through December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.
The consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has experienced recurring operating losses, negative cash flow, and has had an accumulated deficit of $12,156,179 since inception. As described in Note 8, the Company is in default of its debt agreements. These conditions, among others, raise substantial doubt about the Company’s ability to continue as a going concern. Management's plans concerning these matters are also described in Note 3, which includes the raising of additional equity financing or merger with another entity. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Anton & Chia LLP
Newport Beach, CA
April 30, 2014
The Digital Development Group Corp.
CONSOLIDATED BALANCE SHEETS
(1) The December 31, 2012 capital accounts of the Company have been retroactively restated to reflect the equivalent number of common shares based on the exchange ratio of the merger transaction. See Note 2.
The accompanying notes are an integral part of these consolidated financial statements.
The Digital Development Group Corp.
CONSOLIDATED STATEMENTS OF OPERATIONS
(2)
The capital accounts of the Company have been retroactively restated to reflect the equivalent number of common shares based on the exchange ratio of the merger transaction in determining the basic and diluted weighted average shares. See Note 2.
The accompanying notes are an integral part of these consolidated financial statements.
The Digital Development Group Corp.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
The accompanying notes are an integral part of these consolidated financial statements.
The Digital Development Group Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements
The Digital Development Group Corp.
Notes to Consolidated Financial Statements
1. ORGANIZATION
Digital Development Group Corp. (the “Company”) (originally Regency Resources Inc.) was incorporated under the laws of the State of Nevada on December 11, 2006, with authorized capital stock of 200,000,000 shares at $0.001 par value. The Company was originally organized for the purpose of acquiring and developing mineral properties. Subsequent to a merger transaction described below, the Company ceased mineral exploration activities.
The Company entered into a binding letter of intent with Digitally Distributed Acquisition Corp., a Delaware corporation (“DDAC”), effective April 10, 2012 (the “LOI”), in connection with a proposed reverse acquisition transaction by and between the Company and DDAC whereby the Company acquired all of the shares of outstanding capital stock of DDAC in exchange for the issuance of a certain ownership interest in the Company to the shareholders of DDAC (the “Share Exchange”). DDAC is expected to have certain valuable products and intellectual property rights comprised of a web-based multi-tiered billing infrastructure and related to proprietary software and other means of syndicating and encoding media content that it will acquire from Digitally Distributed, LLC, (DDLLC), a Delaware limited liability company prior to or concurrently with the closing of the transaction.
On July 31, 2012, DDAC acquired from Digitally Distributed, LLC, a Delaware limited liability company ("DDLLC") (the “Merger”), certain tangible and intangible property including certain intellectual property related to a web-based multi-tiered billing infrastructure and to software and other means of syndicating and encoding media content, in exchange for the issuance by DDAC to DDLLC of 13,500,000 shares of DDAC common stock pursuant to a Subscription Agreement by and between DDAC and DDLLC dated July 31, 2012.
In accordance with the terms of Exchange Agreement, on the Closing Date, the Registrant issued 20,000,000 shares of its common stock to the Selling Shareholders in exchange for 100% of the issued and outstanding capital stock of DDAC (the "Exchange Transaction"). As a result of the Exchange Transaction, the Selling Shareholders acquired 21.39% of our issued and outstanding common stock, DDAC became our wholly-owned subsidiary, and the Registrant acquired the business and operations of DDAC.
The Company amended its Articles of Incorporation to change its name from Regency Resources, Inc. to the Digital Development Group Corp., effective May 2, 2012.
2. REVERSE MERGER ACCOUNTING
The Merger was accounted for as a reverse-merger and recapitalization in accordance with generally accepted accounting principles in the United States (“GAAP”). DDAC is the acquirer for financial reporting purposes and Digital Development Group Corp. is the acquired company. DDAC was incorporated on January 25, 2012 (“Inception”). Consequently, the assets and liabilities and the operations that are reflected in the historical financial statements prior to the Merger are those of DDAC from Inception and are recorded at the historical cost basis of DDAC, and the consolidated financial statements after completion of the Merger include the assets and liabilities of the Company and DDAC; and historical operations of DDAC and the Company since the closing date of the Merger. Common stock and the corresponding capital of the Company pre-merger have been retroactively restated as capital stock shares reflecting the exchange ratio in the Merger. In conjunction with the Merger, DDAC received no cash and assumed no liabilities from Digital Development Group Corp.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying audited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and include all the notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation of the consolidated financial statements have been included.
Going Concern
The Company has minimal revenue and has incurred losses since its inception on January 25, 2012 to December 31, 2013. The Company's continuation as a going concern is dependent on its ability to generate sufficient cash flows from operations to meet its obligations, which it has not been able to accomplish to date, and /or obtain additional financing from its stockholders and/or other third parties.
These consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to meet its obligations and continue its operations for the next fiscal year. The continuation of the Company as a going concern is dependent upon financial support from its stockholders and the ability of the Company to obtain necessary equity financing to continue operations.
There is no assurance that the Company will ever be profitable. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.
Principles of Consolidation
The consolidated balance sheets include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
In preparing these consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates and assumptions included in the Company’s consolidated financial statements relate to the estimated life of equipment, valuation of long-lived assets, accruals for potential liabilities and valuation assumptions related to share based payments and the derivative liability related to the convertible notes payable.
Revenue Recognition
Revenues are recognized on monthly basis when subscriber sign up the services on the Company’s website.
Cash & Cash Equivalents
We consider cash equivalents with original maturities of 90 days or less to be cash equivalents. As of December 31, 2013 and 2012, we have no cash equivalents.
Prepaid Expense
Prepaid expenses represent prepaid services issued by shares to a consultant and amounts paid as an advance royalty to different content owners to obtain the rights to stream this content on the Company’s platform. Royalties are paid to the content owner as a percentage of revenues generated by the Company from streaming the licensed content. When the Company subsequently collects the subscription fees from customers, the advance royalties are recovered. Further participation in revenue is typically not paid to the content owner until such advances have been fully recovered.
Equipment
Equipment are stated at cost. Major improvements and betterments are capitalized. Maintenance and repairs are expensed as incurred. Depreciation is computed using the straight-line method over an estimated useful life of three years. The Company’s equipment were fully depreciated as of December 31, 2013. Depreciation expense for the year ended December 31, 2013 and the period from January 25, 2012 (Inception) through December 31, 2012 amounted to $32,847 and $40,871, respectively.
Intangible Assets
Costs related to the development of the Company’s proprietary video and content delivery service over the internet are capitalized. As of December 31, 2013, the internal use software is still under development and not placed in service.
We amortize the cost of intangible assets over their estimated useful lives, which range up to three years, unless such lives are deemed indefinite. Our domains and IP development has been amortized because the Company began its production in the first quarter of 2013. Amortization expenses for the year ended December 31, 2013 and the period from January 25, 2012 (Inception) through December 31, 2012 amounted to $90,993 and $0, respectively. The Company also amortized an additional $221,198 of intangible assets costs related to development cost during 2013.
Intangible assets are tested in each fiscal year for impairment, or more often if indicators warrant. There were no impairment charges related to intangible assets for the year ended December 31, 2013 and the period from January 25, 2012 (Inception) through December 31, 2012.
Fair Value of Financial Instruments
When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, we consider the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. We use the following three levels of inputs in determining the fair value of our assets and liabilities, focusing on the most observable inputs when available:
·
Level 1 -Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
·
Level 2 -Quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.
·
Level 3 -Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed is determined based on the lowest level input that is significant to the fair value measurement. The Company’s financial instruments include cash, prepaid expense and accrued liability. The estimated fair value of these instruments approximates its carrying amount due to the short maturity of these instruments.
Accounts Receivable Factoring
On October 1, 2013, the Company entered into an accounts receivable purchase agreement (the “Agreement”) with Summit Capital Investors, LLC (“Summit”), with an initial term of five years and renewing annually thereafter. The Company may obtain advances up to $300,000 from Summit and shall establish a separate merchant bank account in the name of Summit (the “Lockbox”) into which all of the Company’s monthly membership or accounts receivable shall be deposited. The funds in the lockbox account will be used to pay 120% of each advance received from Summit plus any other fees or costs. During 2013, total advances received from Summit amounted to $90,000 and total accounts receivable deposited in the lockbox account amounted to $23,593. As of December 31, 2013, the Company has payable related to this factoring agreement of $84,407 which was calculated based on 120% of advances received reduced by total accounts receivable deposited into the lockbox. All revenue from the Company will be paid directly into this bank account which is not under the Company’s ownership until the advances are paid off.
Income Taxes
The Company follows ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The Company’s deferred tax assets primarily consist of net operating loss carry-forwards and stock-based compensation. However, the Company established a full valuation allowance for these deferred tax assets as the Company has determined that it is more likely than not to fully realize these deferred tax assets prior to their expiration.
Stock Based Compensation
We may periodically grant stock options and issue warrants to employees and non-employees in non-capital raising transactions for services rendered and to obtain financing. We account for stock option grants and warrant issuance to employees based on Financial Accounting Standards Board (FASB) ASC Topic 718, “Compensation - Stock Compensation”, whereas the award is measured at its fair value at the date of grant and is amortized ratably over the vesting period. We account for stock option grants and warrant issued to non-employees in accordance with ASC Topic 505, “Equity”, whereas the value of the stock compensation is based upon the measurement date as determined at either (a) the date at which a performance commitment is reached, or (b) at the date at which the necessary performance to earn the equity instruments is complete.
Net Loss per Common Share
The Company computes net loss per share in accordance with ASC 260, "Earnings per Share". ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using the treasury stock method, and convertible preferred stock, using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential common shares if their effect is anti-dilutive.
Recent Accounting Pronouncements
Adopted
Effective January 2013, we adopted FASB ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (ASU 2011-11). The amendments in ASU 2011-11 require the disclosure of information on offsetting and related arrangements for financial and derivative instruments to enable users of its financial statements to understand the effect of those arrangements on its financial position. Amendments under ASU 2011-11 will be applied retrospectively for fiscal years, and interim periods within those years, beginning after January 1, 2013. The adoption of this update did not have a material impact on the consolidated financial statements.
Effective January 2013, we adopted FASB ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive (ASU 2013-02). This guidance is the culmination of the FASB’s deliberation on reporting reclassification adjustments from accumulated other comprehensive income (AOCI). The amendments in ASU 2013-02 do not change the current requirements for reporting net income or other comprehensive income. However, the amendments require disclosure of amounts reclassified out of AOCI in its entirety, by component, on the face of the statement of operations or in the notes thereto. Amounts that are not required to be reclassified in their entirety to net income must be cross-referenced to other disclosures that provide additional detail. This standard is effective prospectively for annual and interim reporting periods beginning after December 15, 2012. The adoption of this update did not have a material impact on the consolidated financial statements.
Not Adopted
In February 2013, the FASB issued ASU No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. The amendments in ASU 2013-04 provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this Update is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance in this Update also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. The amendment in this standard is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. We are evaluating the effect, if any, adoption of ASU No. 2013-04 will have on our consolidated financial statements.
In April 2013, the FASB issued ASU No. 2013-07, Presentation of Financial Statements (Top 205): Liquidation Basis of Accounting. The objective of ASU No. 2013-07 is to clarify when an entity should apply the liquidation basis of accounting and to provide principles for the measurement of assets and liabilities under the liquidation basis of accounting, as well as any required disclosures. The amendments in this standard is effective prospectively for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. We are evaluating the effect, if any, adoption of ASU No. 2013-07 will have on our consolidated financial statements.
In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Top 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The objective of ASU No. 2013-11 is to provide guidance on the financial statement presentation of an unrecognized tax benefit when a net loss carryforward, similar tax loss, or tax credit carryforward exists. The amendments in this standard is effective for all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists for fiscal years, and interim periods beginning after December 15, 2013. We are evaluating the effect, if any, adoption of ASU No. 2013-11 will have on our consolidated financial statements.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the United States Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.
4. PREPAID EXPENSES
The components of prepaid expense were as follows:
5. EQUIPMENT, NET
Equipment consists of the following:
6. INTANGIBLE ASSETS, NET
The components of intangible assets were as follows:
7. OTHER ASSETS
The Company recorded an amount of $127,214 debt issuance cost as other assets from the issuance of a convertible promissory note payable to Stuart Subotnik of $240,000; and will be amortized over the term of the note to interest expense. Amortization expense for the year ended December 31, 2013 and the period from January 25, 2012 (Inception) through December 31, 2012 amounted to $42,404 and $0, respectively. The balance of debt issuance costs as of December 31, 2013 and 2012 are $84,810 and $127,214, respectively.
8. NOTES PAYABLE, NET
Notes payable consisted of the following:
Coventry Capital, LLC Note
During 2012, the Company issued a total of $950,000 convertible notes payable to Coventry Capital, LLC. These convertible promissory notes are payable on demand and carried an interest rate of 1% per month (simple interest), until the closing of the voluntary share exchange transaction contemplated under the letter of intent. Thereafter, the interest rate shall adjust to 3% per year, simple interest. Upon closing of the voluntary share exchange transaction contemplated under the letter of intent, the unpaid principal and any accrued and unpaid interest shall be immediately due and payable upon written demand by the holder at any time.
At any time on or before the maturity date, the holder, at its sole discretion may elect to have all or part of the principal and the accrued and unpaid interest thereon, converted into a number of shares of common stock of the Company determined by dividing (i) the unpaid principal and any accrued and unpaid interest thereon, as of the conversion date, by (ii) the lower of (a) the price per share at which shares of capital stock of the Company are sold in any financing, or (b) $0.50 per share. A "financing" means the sale of shares of capital stock of the Company occurring within twenty four (24) months after the closing.
The embedded conversion feature of these notes was recorded as a derivative liability due to the down-round protection of the conversion price. The Company recorded a debt discount of $714,077, representing the value of the embedded conversion feature. The Company recognized $714,077 and $0 of interest expense for the amortization of the discount during the year ended December 31, 2013 and the period from January 25, 2012 (Inception) through December 31, 2012, respectively.
In January 2013, the Company borrowed an additional $10,000 from Coventry Capital, LLC.
Stuart Subotnik Notes
On September 10, 2012, the Company issued a $240,000 convertible note payable to Stuart Subotnik. This note was issued with 800,000 warrants and exercisable into the Company’s common stock. The warrants have a three year term and the exercise price is $0.30. The embedded conversion feature of this note and related warrants was recorded as a derivative liability due to the down-round protection of the conversion prices. The Company recorded a debt discount of $118,619, representing the value of the embedded conversion feature and additional debt discount of $121,381 for the fair value of the warrants. The Company recognized $66,399 and $40,802 of interest expense for the amortization of the discount during the year ended December 31, 2013 and the period from January 25, 2012 (Inception) through December 31, 2012, respectively.
This convertible promissory note and unpaid interest are payable upon the earlier of i) at any time after three year anniversary of the issue date of this note at the written request of the holder to the Company or ii) when, upon or after the occurrence of an event of default. The note carries an interest rate of 8% per annum (simple interest).
At any time on or before the maturity date, the holder, at its sole discretion may elect to have all or part of the principal and the accrued and unpaid interest thereon, converted into a number of shares of common stock of the Company. The conversion price is $0.30 per share.
At any time which the volume weighted average pricing “VWAP” for the common stock is $1.00 or greater for a period of twenty consecutive trading days, then at the election of the Company in its sole discretion may elect to convert all of the outstanding amount of principal and accrued interest into shares of the common stock at $1.00 per share.
During the last quarter of 2012, the Company issued additional notes payable to Mr. Subotnik in the aggregate amount of 140,000, These notes accrue interest at rates ranging from 8% to 12%.
QuickLoan Funding
On March 13, 2013, The Company, entered into a Convertible Promissory Note (the “Convertible Promissory Note”) with QuickLoan Funding, an accredited lender (the “Lender”). Under the terms of the Promissory Note, the Lender paid $110,000 to the Company upon execution of the Convertible Promissory Note, and the Lender may fund additional amounts in such amounts and at such dates as the Lender may choose in its sole discretion, up to an additional $150,000 above the initial $110,000 funded. Thereafter, the Lender may provide additional amounts only by mutual agreement with the Company, up to a total principal sum of $400,000. All amounts advanced by Lender are subject to a 10% original issue discount such that the total amount funded to the Company would be $360,000 if the Lender advances all funds under the Convertible Promissory Note. The maturity date is one year from the effective date of each payment by the Lender, and all outstanding principal and interest is due and payable by the Company on the maturity date. If the Company repays the Note in full within the first ninety days after the effective date, then the interest rate is zero percent. If the Company does not repay the Note in full within the first 90 days after the effective date, then a one-time interest charge of twelve percent shall be applied to the unpaid principal. In the second quarter of 2013, the Company received additional $20,700 from the lender. The original issue discount charged by the lender on the two advances made during 2013 totaled $14,522. Additionally, during the year ended December 31, 2013 the lender converted an amount of $38,610 into Company’s common stock.
The Lender has the right, at any time from 180 days after the effective date, at its election, to convert all or part of the outstanding and unpaid principal and accrued interest under the Convertible Promissory Note into shares of Company common stock at the conversion price. The conversion price is the lesser of $0.20 per share, or 60% of the lowest trade price of the Company’s common stock in the 25 trading days prior to the date of conversion. The Lender also has piggyback registration rights to have the shares it would receive upon conversion of the Promissory Note included within the next registration statement which the Company may file with the Securities and Exchange Commission.
The embedded conversion feature of these notes was recorded as a derivative liability due to the down-round protection of the conversion price. The Company recorded a debt discount of $130,700, representing the value of the embedded conversion feature. The Company recognized $89,098 and $0 of interest expense for the amortization of the discount during the year ended December 31, 2013 and the period from January 25, 2012 (Inception) through December 31, 2012, respectively.
Charlie Sheen
On April 16, 2013, the Company executed a Promissory Note (the “Promissory Note”) in favor of celebrity actor, Charlie Sheen, pursuant to which Charlie Sheen has loaned the Company $150,000. Under the terms of the Promissory Note, the principal accrues interest at the rate of 6% per annum and is due and payable on April 10, 2015, with interest only payments of $750 per month to commence on November 1, 2013. During the three months ended September 30, 2013, the Company borrowed an additional $360,000 from Mr. Sheen under the same terms as the Promissory Note.
Tonaquint Convertible note
On April 3, 2013, the Company, entered into a Securities Purchase Agreement, Secured Convertible Promissory Note, Security Agreement, Warrant, Deed of Trust, Deed of Trust Notes, Confession of Judgment and ancillary agreements (the “Financing Documents”) with Tonaquint, Inc., (the “Buyer”).
Under the terms of the Financing Documents, the Buyer entered into the Secured Convertible Promissory Note in the principal amount of $340,000.00 (the “Note”). The Company is obligated to commence repayment of the Note on the 180th day after the Note issuance date by making monthly installments of $28,333. Provided certain equity conditions are met, the Company may repay the monthly installment payments through the issuance of Company common stock at the market price (the “Market Price”) which means 60% of the arithmetic average of the three (3) lowest volume weighted average pricing “VWAP” of the shares of Common Stock during the twenty (20) consecutive trading day period immediately preceding the date of repayment. Additionally, if the Company pays the installment payment in Company common stock, then 23 days following the installment payment date the Buyer shall receive additional shares of Company common stock if the Market Price on the 23 rd day is less than the Market Price on the installment payment date. The entire outstanding balance under the Note is due and payable 17 months after the date of issuance. The Note bears interest at the rate of eight percent (8%) per annum, provided that upon the occurrence of an event of default, interest shall accrue on the outstanding balance both before and after judgment at the rate of twenty-two percent (22%) per annum. The Note carries an original issue discount of $30,000. In addition, the Company agreed to pay $10,000 to the Buyer to cover the Buyer’s legal fees, accounting costs, due diligence, monitoring and other transaction costs, all of which amount is included in the initial principal balance of the Note.
In consideration for the Note, the Buyer paid the Company (i) $100,000, and (ii) issued to the Company two Buyer Deed of Trust Notes in the amount of $100,000 each, one which will be prepaid by Buyer within 2 months and 4 months, respectively, of April 3, 2013 provided that an equity conditions failure has not occurred under the Note. The Note is secured by a Security Agreement executed by the Company and listing the Buyer Deed of Trust Notes as security for the Company’s obligations under the Financing Documents (the “Security Agreement”). Each of the Buyer Deed of Trust Notes is secured by a Deed of Trust (the “Deed of Trust”). The outstanding balance under the Note may be converted by the Buyer at any time into shares of Company common stock at the rate of $0.20 per share (the “Conversion Price”), subject to adjustment in the event of certain issuances of variable price or unrestricted securities by the Company after the date of the Note. Upon an event of default, the outstanding balance under the Note shall increase to 135% and will be immediately due and payable, and the Buyer may convert the outstanding balance into shares of Company common stock at the lower of the Conversion Price then in effect and the Market Price. The buyer also issue additional $10,660 note and converted $55,215 principal balance to common stock for the year ended December 31, 2013.
The Company also issued Buyer a warrant to purchase up to 1,400,000 shares of Company common stock at an exercise price of $0.20 per share, subject to adjustment in the event of certain issuances of variable price and unrestricted securities by the Company after the date of the Note. The Warrants may be exercised for a term of 5 years and have a “cashless exercise” provision.
The embedded conversion feature of this note and related warrants was recorded as a derivative liability due to the down-round protection of the conversion prices. The Company recorded a total debt discount of $111,412 representing the value of the embedded conversion feature of $23,804, additional debt discount of $47,608 for the fair value of the warrants, and $40,000 original issue discount and fees. The Company recognized $97,581 and $0 of interest expense for the amortization and write off of the discount during the year ended December 31, 2013 and the period from January 25, 2012 (Inception) through December 31, 2012, respectively.
Asher Enterprises Note
During 2013 the Company entered into several Note Purchase Agreement and Convertible Promissory Note with Asher Enterprises, Inc. pursuant to which Asher purchased a $183,000 Convertible Promissory Note (the “Asher Notes”). The Asher Notes accrues interest at the rate of 8% per annum; is due and payable in several dates in 2014; and may be converted by Asher at any time after 180 days of the date of issuance into shares of Company common stock at a conversion price equal to 60% of the market price (as determined in the Asher Note) calculated at the time of conversion. The Asher Note Purchase Agreement and Note also contain certain representations, warranties, covenants and events of default. The Company is in default in this note because the Company did not file the 10-K on time according to SEC filing requirements.
Other Notes Payable
During the year ended December 31, 2013, the Company borrowed a net total of $240,044 from several individuals under notes payable.
Related Party Note Payable
Effective January 30, 2013, the Company entered into a Promissory Note with Martin W. Greenwald, the Company’s Chief Executive Officer, pursuant to which Mr. Greenwald has agreed to loan the Company up to $250,000 to fund Company operations. The Promissory Note provides that Mr. Greenwald may advance funds to the Company from to time to time, up to the amount of $250,000. The amounts advanced shall be due within one year from the date of the promissory note and shall accrue interest at 3% per annum. The Company has $126,160 outstanding under the loan agreement as December 31, 2013.
NOTE 9 - RELATED PARTY TRANSACTIONS
The Company entered into two employment agreements with Martin W. Greenwald and Joe Bretz, the CEO and President of the Company, respectively, since May 1, 2012 for an annual salary of $250,000 per year. The Company has outstanding payroll liabilities owed to them and recorded under accrued liabilities for $288,858 as of December 31, 2013.
The Company also hire Martin W. Greenwald’s daughter as a consultant and paid $18,983 for the year ended December 31, 2013.
NOTE 10 - DERIVATIVE LIABILITY
In April 2008, the FASB issued a pronouncement that provides guidance on determining what types of financial instruments or embedded features in instrument held by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in the pronouncement on accounting for derivatives. This pronouncement was effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of these requirements can affect the accounting for warrants and many convertible instruments with provisions that protect holders from a decline in the stock price (or “down-round” provisions). For example, warrants or conversion features with such provisions are no longer recorded in equity. Down-round provisions reduce the exercise price of a warrant or convertible instrument if a company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new warrants or convertible instruments that have a lower exercise price.
We evaluated whether convertible debt and warrants issued to acquire stock of the Company contained provisions that protect holders from declines in the stock price or otherwise could result in modification of the exercise price under the respective convertible debt and warrant agreements. We determined that the conversion feature in the convertible notes issued during the year contained such provisions and we recorded the beneficial conversion features as derivative liability. Derivative liabilities were initially valued using the weighted-average Black-Scholes-Merton option pricing model, which approximates the Monte Carlo and other binomial valuation techniques, with the following assumptions; (i) dividend yield of 0%; (ii) expected volatility range of 114% - 175%; (iii) risk free rate range of 0.10% - 0.17% and (iv) expected term of 1 year.
The following table represents the Company’s derivative liability activity for both the embedded conversion features and the warrants for the period from January 25, 2012 to December 31, 2013:
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Contingent liability
On December 19, 2011, DDLLC entered into two promissory notes with an accredited investor pursuant to which the Company issued two 14% convertible promissory notes (the "Notes") to advance of up to $280,000 to the Company. As of this date, the Company has only received $118,000 of the agreed to $280,000.
The Notes were offered and sold in reliance on the exemption from registration afforded by Rule 506 of Regulation D promulgated under Section 4(2) of the Securities Act of 1933, as amended. The Notes have a six-month term due June 16, 2012, and are convertible by the holder into Common Stock of a contemplated merger or acquisition and a subsequent newly formed company ("Acquireco") at a price of $0.10 per share. The Company may prepay all or a portion of the outstanding principal and interest under the Notes upon 10 days' written notice without penalty. The amount due under the Notes will become immediately due and payable if the Company fails to pay unpaid principal on the maturity date of June 16, 2012, any representation or warranty made by the Company is false, incorrect, incomplete or misleading, or the Company dissolves, liquidates, ceases operations, is unable to pay its debts when due, a receiver or trustee is appointed or bankruptcy proceedings are instituted. While any amount of the Note is outstanding, the borrower is obligated to the covenants of (i) paying no dividends
The Company is in default of these notes because it did not repay principal and accrued interest on the maturity date of June 16, 2012. Due to the default provisions of the Note, the Company will begin accruing interest at the default rate of 29% per annum from the maturity date going forward. In July 2012, the Company tried to begin negotiations with the investor; however, it has been unsuccessful in contacting the investor to date. The Company has recorded a contingent liability of $177,708 as of December 31, 2013, to reflect the obligation that it believes it owes to investor. The investor is claiming that the Company owes an additional $162,000 plus accrued interest but the Company never received the additional funds as described under the Notes and intends to defend against any position that the investor takes pertaining to the additional $162,000. The Company has treated this matter as a contingent liability because at this time the Company is uncertain as to how and when this matter will be resolved. The Company believes it has accrued its estimate in the consolidated financial statements of the most likely amount to be settled with the investor.
Ironridge
Effective December 19, 2012, the Company terminated the Securities Purchase Agreement, Registration Rights Agreement and Debenture dated November 6, 2012 (the “Financing Documents”) with Ironridge Media Co., a division of Ironridge Global IV, Ltd. (“Ironridge”), for the sale of up to $3,000,000 of Convertible Subordinated Debentures and Series A Preferred Stock. On January 11, 2013, Ironridge submitted a claim with JAMS, Inc. in Santa Monica, California for binding arbitration under the Financing Documents and requested that it be awarded damages relating to the termination of the Financing Documents. The Company submitted counter-claims in the JAMS arbitration claiming that it was fraudulently induced to enter into the Financing Documents, and that a fully performed oral stock purchase agreement caused the Financing Documents to be abandoned by the parties, justifying rescission of the financing documents. In May 2013, the Arbitrator in the JAMS arbitration announced an interim award to Ironridge shall recover from the Company in the amount of $850,000 plus attorney fees and costs. On July 10, 2013, the Arbitrator made the interim award final, and awarded Ironridge an additional $110,168 in attorneys’ fees and costs. The Company does not have adequate cash to pay the final arbitration award. The judgment resulting from the arbitration award would adversely affect the business, future operations and the financial condition of the Company, and may cause the Company to default under its existing loan obligations which would provide the lenders with the right for immediate repayment. The Company recorded an accrual of $960,000 under contingent liability in the accompanying consolidated balance sheet as of December 31, 2013 related to this case.
Sheen Agreement
On March 25, 2013, the Company entered into an Agreement with celebrity actor, Charlie Sheen, pursuant to which he has agreed to work with the Company to develop and promote his own channel and original content, and to promote and endorse the Company and its channels through various media. Under the terms of the Agreement, Mr. Sheen’s involvement with the Company is to include his creation of original content; his promotion and endorsement of the Company’s channels and the creation and promotion of the Charlie Sheen Channel; his personal appearances; the use of Mr. Sheen’s name, voice and likeness for promotional purposes; and the promotion of the Company and its channels across social media, including postings on Facebook and Twitter. The Agreement has a term of twelve months, unless extended as provided in the Agreement.
In consideration for his services, the Company has agreed to pay Charlie Sheen a $300,000 fee payable in installments. In addition, the Company has agreed to pay Mr. Sheen a percentage of Company gross revenues generated by the distribution and sale of original programming featuring Mr. Sheen and his affiliates, including gross revenues from the Charlie Sheen Channel and other pay per view events and episodes. In consideration of Mr. Sheen’s obligations, the Company has also agreed to issue to Mr. Sheen options to purchase up to seven million shares of the Company’s common stock as follows: options to purchase one million shares of the Company’s common stock vested upon the date of the Agreement, and options to purchase the remaining six million shares of the Company’s common stock shall vest in equal installments of one million shares every six months after the date of the Agreement, each exercisable at an exercise price of $0.10 per share. The Company and Charlie Sheen are in mutual dispute with regards to this agreement.
Operating lease
The Company leases office space under an operating lease, which began on July 1, 2012 and expired on November 15, 2013. The average rental payment including utilities and operating expenses for the facility is approximately $5,935 per month. Rent expense for the year ended December 31, 2013 and the period from January 25, 2012 to December 31, 2012 amounted to $46,945 and $33,210, respectively. Currently the Company is under a month-to-month payment term with the landlord.
NOTE 12 - COMMON STOCK
On July 31, 2012 (the "Closing Date"), the Company closed a voluntary share exchange transaction with Digitally Distributed Acquisition Corp., a Delaware corporation ("DDAC") and the shareholders of DDAC ("Selling Shareholders") pursuant to a Share Exchange Agreement dated as of July 31, 2012 (the "Exchange Agreement") by and among the Company, DDAC, and the Selling Shareholders.
In accordance with the terms of Exchange Agreement, on the Closing Date, the Registrant issued 20,000,000 shares of its common stock to the Selling Shareholders in exchange for 100% of the issued and outstanding capital stock of DDAC (the "Exchange Transaction"). As a result of the Exchange Transaction, the Selling Shareholders acquired 21.39% of our issued and outstanding common stock, DDAC became our wholly-owned subsidiary, and the Registrant acquired the business and operations of DDAC. Immediately after the Exchange Transaction, the Registrant had 93,500,000 shares of common stock issued and outstanding.
In connection with the closing of the previously announced Share Exchange Agreement dated as of July 31, 2012 by and among The Digital Development Group Corp. (the “Company”), Digitally Distributed Acquisition Corp. (“DDAC”), and the shareholders of DDAC, the Company cancelled a total of 37,550,000 shares of Company common stock effective as of September 10, 2012.
In December 2012, the Company issued a total of 1,100,000 shares of common stock to two individuals for services rendered. The Company recognized expenses of $56,333 for the value of the shares issued and record $216,667 as prepaid expense.
In 2013 the Company issued 8,730,682 common shares for services provided, these shares were valued at 557,599 and was recorded as professional and consulting fees in the accompanying statements of operations.
In 2013 the Company issued 2,134,067 commons shares for cash, total proceeds received amounted to $87,237.
In 2013 the Company issued a total of 18,665,692 common shares upon conversion of debt with a total amount of $170,825.
As of December 31, 2013, the Company has received $65,000 in stock subscription for the purchase of its common stock.
NOTE 13 - STOCK-BASED COMPENSATION
On January 3, 2013, our board of directors approved the adoption of The Digital Development Group Corp. 2013 Equity Incentive Plan (the "2013 Plan”). The 2013 Plan is intended to aid the Company in recruiting and retaining key employees, directors or consultants and to motivate them by providing incentives through the granting of awards of stock options or other stock-based awards. The 2013 Plan is administered by the board of directors. Directors, officers, employees and consultants of the Company and its affiliates are eligible to participate under the 2013 Plan.
Effective January 30, 2013, the Company approved the re-pricing of all of the 3,370,000 previously granted options under the Company’s 2012 Equity Incentive Plan from $0.451 per share to $0.11 per share. All of the other terms of the options remained unchanged. The fair value of the these options after re-pricing was lower than the fair value before re-pricing and accordingly the Company will continue to amortize the original fair value over the remaining vesting period in accordance with US GAAP.
On January 30, 2013, the Company granted a total of 950,000 options to employees under the 2012 Plan. The options have an exercise price of $0.11 per share; 400,000 of the options vested immediately and the remaining 550,000 options vest 1/12 monthly over a period of one year, and vest immediately upon a change of control of the Company; and have a 10 year term.
On March 25, 2013 and in connection with the Sheen Agreement, the Company has agreed to issue to Mr. Sheen options to purchase up to seven million shares of the Company’s common stock as follows: options to purchase one million shares of the Company’s common stock vested upon the date of the Agreement, and options to purchase the remaining six million shares of the Company’s common stock shall vest in equal installments of one million shares every six months after the date of the Agreement, each exercisable at an exercise price of $0.10 per share and have a 5 year term.
The fair value of each option award is estimated on the date of grant using the Black-Scholes valuation model and the assumptions in the following table. The expected volatility is based on the daily historical volatility of comparative companies, measured over the expected term of the option. The risk-free rate is based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term closest to the expected term of the option. The dividend yield reflects that the Company has not paid any cash dividends since inception and does not intend to pay any cash dividends in the foreseeable future.
The following assumptions were used to determine the fair value of the options at date of grant:
Total stock-based compensation expense included in general and administrative expense for the period from January 1, 2013 to December 31, 2013 was $921,145.
As of December 31, 2013, there was $349,781 of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted average period of 1 year. The Company’s current practice is to issue new shares to satisfy option exercises. Compensation expense for all stock-based compensation awards is recognized using the straight-line method.
A summary of stock option activity is as follows:
NOTE 14 - INCOME TAXES
Our provisions for income taxes for the years ended December 31, 2013 and 2012, respectively, were as follows (using our blended effective Federal and State income tax rate of 35.0%):
Deferred tax assets at December 31, 2013 and 2012 consisted of the following:
Internal Revenue Code Section 382 and similar California rules place a limitation on the amount of taxable income that can be offset by net operating loss carryforwards (“NOL”) after a change in control (generally greater than a 50% change in ownership). Transactions such as planned future sales of our common stock may be included in determining such a change in control. These factors give rise to uncertainty as to whether the net deferred tax assets are realizable. We have approximately $12,156,000 in NOL at December 31, 2013 that will begin to expire in 2031 for federal and state purposes and could be limited for use under IRC Section 382. We have recorded a valuation allowance against the entire net deferred tax asset balance due because we believe there exists a substantial doubt that we will be able to realize the benefits due to our lack of a history of earnings and due to possible limitations under IRC Section 382. A reconciliation of the expected tax benefit computed at the U.S. federal and state statutory income tax rates to our tax benefit for the years ended December 31, 2013 and 2012 is as follows:
We file income tax returns in the U.S. with varying statutes of limitations. Our policy is to recognize interest expense and penalties related to income tax matters as a component of our provision for income taxes. There were no accrued interest and penalties associated with uncertain tax positions as of December 31, 2013 and 2012. We have no unrecognized tax benefits and thus no interest or penalties included in the consolidated financial statements.
NOTE 15 - SUBSEQUENT EVENTS
On January 27, 2014, The Digital Development Group Corp., a Nevada corporation (the “Company”), entered into a Debt Conversion Agreement (the “Debt Conversion Agreement”) with Cemblance LTD (“Cemblance”) pursuant to which the Company and Cemblance agreed to convert $150,000 of outstanding Company debt into 4,000,000 shares of Company common stock.
On March 12, 2014, The Digital Development Group. Corp. (the “Company”) executed a Subscription Agreement with Stuart Subotnick pursuant to which the Company sold him 5,000,000 restricted shares of Company common stock in consideration for $75,000. Mr. Subotnick is an affiliate of the Company by nature of the percentage of shares of Company common stock which he beneficially owns. The issuance of shares was made in reliance on the exemption provided by Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”) for the offer and sale of securities not involving a public offering, and Regulation D promulgated under the Securities Act. The Company’s reliance upon Section 4(2) of the Securities Act in issuing the securities was based upon the following factors: (a) the issuance of the securities was an isolated private transaction by us which did not involve a public offering; (b) there was only one recipient; (c) there were no subsequent or contemporaneous public offerings of the securities by the Company; (d) the securities were not broken down into smaller denominations; (e) the negotiations for the issuance of the securities took place directly between the individual and the Company; and (f) the recipient of the shares was an accredited investor.
On March 13, 2014, the Company used the proceeds from the above-referenced sale of Company securities to repay QuickLoan Funding the remaining balance of $68,78.89 outstanding of the $110,000 loaned to the Company on March 13, 2013.