ITEM 1. BUSINESS
We offer a comprehensive suite of online marketing and reporting solutions, including lead generation (prospect email, performance display, mobile marketing); performance media (PPC, SEO, social media, retargeting); and affiliate marketing, as well as other related web services and consultation. We plan to generate revenue by delivering measurable marketing results to clients.
Online lead generation is typically generated as clicks from websites or email. Our goal is to engage Internet visitors with targeted media and to connect our marketing clients with their potential clients on line.
We use world-class technology solutions to create advertising campaigns for clients to target potential customers, optimize those campaigns in real time and track tangible results. Through a single advertising budget, we enable our clients to reach customers -whether using traditional computing devices or mobile devices-across the Internet, including through all of the major search engines and leading general interest and vertically focused online publishers.
Our retargeting and display marketing solutions target consumers that have recently search for a client's business keywords as well as those who have recently visited their website. We continue to expand our platform to include additional advertising products designed specifically for the needs of our clients. Our website solutions are designed to help client turn more of their website visitors into leads, manage those leads more effectively and convert more of them into customers.
We focus on serving clients in large, information-intensive industry verticals where relevant, targeted media and offerings help visitors make informed choices, find the products that match their needs, and thus become qualified customer prospects for our clients.
Products/Services
We combine advanced, publisher-agnostic technology and an experienced, digitally sophisticated direct sales force to provide clients with a single, easy to use and cost-effective solution to acquire, maintain and retain customers using digital and traditional media.
Artec owns or accesses targeted databases and utilizes proprietary technology to create local, regional and national marketing campaigns on demand providing clients with the ability to acquire new customers. We run advertisements or other forms of marketing messages and programs through multiple channels (i.e. Email, Direct Mail, Social Media, SMS, radio and telecommunication) to create responders for client offerings. We optimize client matches and media yield such that we achieve desired results for clients and a sound financial outcome for Artec.
We deliver cost-effective marketing results to our clients, predictable and scalable, most typically in the form of a qualified lead, click or call. These leads, clicks or calls can then convert into a customer or sale for the client at a rate that results in an acceptable marketing cost to them. We get paid by clients primarily when we deliver qualified results as defined in our agreements. Typically, leads are routed through a call center or other offline acquisition process. Online leads are usually generated as clicks from websites. Our marketing services include but are not limited to:
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Affiliate and performance marketing,
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Search advertising,
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Display advertising,
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Telecommunications
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Retargeting,
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Email marketing,
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Lead generation,
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Creative design, and
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Consulting services.
For advertisers our platform allows us to connect clients to multiple online publishers. For publishers our platform provides access to a significant advertiser base to gain access to a broader range of advertising inventory. The combination of these end-to-end online marketing capabilities enables us to offer clients the simplicity of a single advertising budget that meets their marketing objectives.
Our search product is focused on assuring that our clients' advertisements appear prominently among the search results when local consumers enter certain keywords on leading local search sites such as Google, Yahoo! and Bing and social networks such as Facebook and LinkedIn.
Our display product is primarily focused on maximizing the exposure for clients that want to broadcast a message to a specific target online audience.
Our remarketing and search retargeting products allow us to target consumers who have previously visited a specific client's website, either through a search marketing campaign or a display marketing campaign, or who have previously searched for a client's keywords. When the potential customer visits any other site within our remarketing network, we can remarket to the target customer on behalf of that client.
Our lead conversion helps clients manage their leads and convert more of them into customers.
Our capabilities:
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Software-based solution that provides back-end automation and optimization technologies to manage advertising spend across a broad array of online publishers and media outlets;
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For advertisers interested in search engine marketing, automation of build-up of keyword search criteria for the leading search engines;
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Seting and optimization of bids for keywords based on client products and services;
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Placement of display advertisements on websites selected in accorance with custom profiles;
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Integration with leading social media sites;
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Proprietary algorithms multiple times a day to evaluate each publisher and keyword, dynamic shifting of spend to continuously optimize and improve campagin performance;
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Proprietary reverse proxy technology that automatically tracks campaign-generated activity; and
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Access to multiple publishers and advertisers.
Our student loan debt relief consultation services earn a contracted fee upon the completion of our services. Leads for this service are through two company owned websites, www.NSLRelief.com and www.NSLAlliance.com. Through these websites, prospective clients can request information, receive a free consultation and contact a student loan counselor.
Consulting
We work with clients on a consultative basis to help them achieve their marketing objectives, educating and guiding them through the opportunities arising from and the mechanics of online advertising. Our consulting services provide clients access to technology and media that they could not access by themselves and proven in ways they understand.
Scale and Experience
Our scale and experience in purchasing online advertising from publishers allows us to make more efficient and effective purchasing decisions on behalf of our clients. In addition, our platform enables us to connect our clients to a wide array of online publishers. Our platform not only allows us to expand the reach of our publisher network, but also allows us quickly to test and identify better performing advertising options for our clients.
Client Relationships
As new online advertising opportunities emerge, such as mobile, video and social media, we believe that having a direct client relationship will enable us to offer additional products and services to our clients.
Technology
Running thousands of online advertising campaigns simultaneously across multiple publishers poses significant technical challenges. While technologies exist to help larger companies manage and optimize their online marketing spend, we believe that such solutions are too expensive and too complex to scale down to many of our clients' monthly advertising budget. We have built our services, systems and networks for maximum scalability and flexibility to manage these types of campaigns, and we have invested heavily in automation technologies that reduce the level of human intervention required to support these campaigns. This automation is critical to our ability to scale our business and deliver moderately budgeted campaigns in a cost-effective manner.
Strategy
We generate revenue by providing marketing and advertising solutions for our clients through direct sales and our online marketing platform. We sell our marketing products based on a consultative approach to discover customer needs and build pricing and packages which provide a positive return on their investment. While we do not commit to a specific set of results, we work with our clients to meet their marketing objectives. Clients primarily pay us for leads that they can convert into customers. Typically, leads are routed through a call center or other offline customer acquisition process. Online leads are usually generated as clicks from websites or email. In brief, Artec helps clients communicate their message to potential new customers by delivering compelling offers through the use of proprietary products, media channels and distribution platforms.
We believe that we are in the early stages of a large and long-term business opportunity presented by the shift from traditional media formats to digital media formats. Our strategy for pursuing this opportunity includes the following key components:
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Expand Media Offerings. We have developed a platform that enables us more easily to connect our client advertisers to a broader array of online publishers and, in the future, to reach customers through new formats such as mobile and video. Our plan has been, and continues to be, to fulfill, track and optimize a client's entire digital media plan, regardless of media property or format.
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Develop Digital Marketing Software Solutions. Our current products target our clients' needs to acquire customers through online media buying. We believe that there will be continued movement towards digital platforms in the other segments of our clients' marketing activities, such as marketing automation, lead conversion and customer relationship management. To address these and other needs, we plan to continue investing in the internal development or potential acquisition of products and services in these adjacent segments.
Affiliate and Performance Marketing Key Trends and Drivers
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One of the most effective ways to enter new markets (pay-for-performance model represents low risk and low overhead while also providing access to local marketing experts without having to bring on full-time staff),
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Growth of mobile,
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With the rise in multi-channel retailing, expect a tighter integration of marketing channels. Performance marketing, for example, will be more closely aligned with retargeting and display,
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Big data solutions that include affiliate program data will enable more targeted, timely ads and offers to be delivered at the right audience at the right time on the right device.
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Aligned with the way that consumers shop and behave,
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It's a proven acquisition channel for new customers and provides a low risk opportunity to try new ideas, and
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Deal-driven consumers turn to affiliate sites first and frequently, because they believe offers from affiliate sites are better than those presented on a retailer's
We differentiate ourselves by utilizing our marketing platform to attract large multi-location organizations. These organizations have seen dramatic cuts to their marketing departments over the last few years forcing them to work more with less. We help centralize and streamline marketing initiatives for these large decentralized organizations allowing them, in many cases for the first time in years, to stop playing defense and become offensive in the management and implementation of their marketing efforts. In essence, we allow independent field offices, franchise owners, sales agents to have access to easy to utilize fortune 500 type marketing services at their disposal 24/7. We have proven our services lower client acquisition costs, increase the overall spend of client initiatives, creating more loyal and profitable clients.
Our Market
Digital ad spending is a $67 billion annual industry in the U.S. Our content marketing services are focused on driving traffic to client website destinations in key markets, including small business lending, consumer debt relief and student lending.
Small Business Lending
Small businesses are the backbone of the U.S. economy, accounting for more than 99% of employer firms in the United States.[1] Total value of small business loans in 2013 was $585.3 billion.
Value of Small Business Loans Outstanding (CRE and C&I), 2008-2013
(billions of dollars, nominal)
Source :FDIC, Statistics on Depository Institutions, June 2008 through June 2013.
Small business lending below $100,000 is ranged from $119 to $141 billion over the 2008-2013 time frame. Key limiting factors on the supply side include caution amongst lenders about extending debt, in addition to increased scrutiny by regulators over the performance of existing outstanding loans. Increased bank capital requirements along with tightening lending standards and policies have reduced the amount available for borrowing and reduced the pool of small business owners deemed creditworthy.
We provide alternative lending providers with lead generation and affiliate marketing services designed to drive small businesses in need of lending solutions to our customers' websites.
Debt Settlement
Debt collection is a $13.7 billion dollar industry that employs more than 130,000 people across approximately 6,000 collection agencies, impacting millions of Americans each year.[2] The Urban Institute reports that 35% of Americans, more than 77 million people, had a trade line on their credit reports indicating some type of debt in collections - including financial, healthcare, retail and telecom debt.[3]
This dynamic continues to drive growth amongst debt settlement providers offering products and services designed to provide consumers ways to reduce their debt and payment obligations.
We provide debt settlement providers with lead generation and affiliate marketing services designed to drive online consumer traffic to our customers' websites.
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1 Victoria Williams. "Small Business Lending in the United States 2013". Office of Advocacy U.S. Small Business Administration, December 2014.
2 Fair Debt Collection Practices Act, CFPB Annual Report 2016.
3 Caroline Ratcliffe et. al. "Delinquent Debt in America." Urban Institute, July 2014.
Student Debt
Between 2000 and 2014, the total volume of outstanding federal student debt nearly quadrupled to surpass $1.1 trillion, the number of student loan borrowers more than doubled to 42 million, and default rates among recent student loan borrowers rose to their highest levels in twenty years.[4] In 2010, student debt surpassed credit cards to become the second largest form of household debt after mortgages, whereas, prior to 2008, the student debt was the smallest of household debts.[5]
We work with third party lending partners to design lead generation solutions targeted to consumers burdened with student debt seeking to offer repayment alternatives.
Content Marketing - Lead Generation and Affiliate
A recent Content Marketing Institute B2B Content Marketing benchmark report showed the following key trends:
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Only 30% of B2B marketers say their organizations are effective at content marketing, down 38% from 2015;
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44% of B2B marketers say their organization is clear on what content marketing success or effectiveness looks like; 55% are unclear or unsure;
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Lead generation (85%) and sales (84%) will be the most important goals for B2B content marketers over the next 12 months; and
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Over the last six years, B2B marketers have consistently cited website traffic as their most often used metric. The most important metrics are sales lead quality (87%), sales (84%), and higher conversion rates (82%).
Competitive Landscape
The market for online advertising solutions is intensely competitive and rapidly changing, and with the introduction of new technologies and market entrants, we expect competition to intensify in the future. Many of our current and potential competitors enjoy substantial competitive advantages, such as greater name recognition, longer operating histories and larger marketing budgets, as well as substantially greater financial, technical and other resources. In addition, many of our current and potential competitors have established marketing relationships and access to larger customer bases.
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4 Adam Looney et. al. "A Crisis in Student Loans? How Changes in the Characteristics of Borrowers and in the Institutions They Attended Contributed to Rising Loan Defaults." Brookings Papers on Economic Activity. September 10-11, 2015.
5 Meta Brown et. al. "Measuring Student Debt and Its Performance." Federal Reserve Bank of New York Staff Reports. April 2014.
Our competitors include:
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Internet Marketing Providers. We compete with large Internet marketing providers such as Google, Yahoo! and Microsoft. These providers typically offer their products and services through disparate, online-only, self-service platforms. We compete with these companies on the basis of our product offerings and our publisher-agnostic services to our clients. Although we compete against the self-service offerings of these large providers, we also have business relationships with them. We also believe that we provide a valuable service to these companies by connecting them to a large number of clients, which are generally disinclined to purchase online advertising via self-service platforms
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Traditional, Offline Media Companies. We compete with traditional yellow page and newspaper companies with large, direct sales forces. While these traditional media companies have made investments to address the migration of advertising expenditures away from their existing print products, we believe that they face the prospect of cannibalizing their existing higher margin products that they own and the challenge of re-training and restructuring their sales forces, most of whom have only sold print products and many of whom still receive the majority of their income from selling those products. We compete with these companies on the basis of the strength and breadth of our technology platform and product offering and our focus exclusively on Internet advertising.
Intellectual Property
We have developed a few different very important software/applications, which we consider to be proprietary including a custom gateway that runs real-time analytics and tracking on all campaigns powered by our resources. This software helps us manage and mitigate exposure to fraud, while enabling us to purchase media more intelligently, with better control over our advertiser's budget in order to maximize campaign efficiency and effectiveness. In addition, we have developed Email Service Provider ("ESP") and Message Transfer Agent ("MTA") software, which allows clients to log in and manage their own mailings directly. We have also developed dialer/phone systems to maximize efficiency with respect to telecommunication client management.
Governmental Approval and Regulation
We are subject to various federal and state law and regulation relating to our business. The regulation currently focuses on data collection, privacy, social networking, user generated content, information security and online behavioral marketing. Because of the increasing popularity of the Internet and the growth of online services, there are regular initiatives at both the federal and state level to expand the scope of regulation as problems and perceived problems arise and develop. Although much of the regulation is well founded, it does have an impact on how we conduct our business and may have an impact on our financial results if we are limited in our business activities or there are additional costs associated with compliance. We do not believe there to be any specific environmental regulation that will have a material impact on our business operations or financial results.
In the United States, the Federal Trade Commission, or the FTC, enforces rules and regulations enacted pursuant to the Children's Online Privacy Protection Act of 1998, or COPPA, imposing restrictions on the ability of online services to collect information from minors under the age of 13. During 2009, the FTC actively enforced COPPA through civil penalties and consent orders. As a part of our efforts to comply with these requirements, we do not knowingly collect online personally identifiable information from any person under 13 years of age and have implemented age screening mechanisms on certain of our websites in an effort to prohibit persons under the age of 13 from registering. The restrictions are likely to dissuade some percentage of our potential customers from using such websites, which may adversely affect our business. If it turns out that one or more of our websites is not COPPA compliant, we may face enforcement actions by the FTC, complaints to the FTC by individuals, or face a civil penalty, any of which could adversely affect our reputation and business. Laws on the state level protecting the identity of personal information of children online have been enacted or are under consideration. For example, Michigan and Utah have established registries where parents and others may register instant messenger IDs, mobile text messaging and fax numbers in addition to e-mail addresses to prevent certain types of messages from reaching children in those states. Such laws could have an adverse impact on how we will be able to conduct our business in the future and may limit access to an important segment of the target markets our clients seek.
A number of government authorities, both in the United States and abroad, and private parties are increasing their focus on privacy issues and the use of personal information. Well-publicized breaches of data privacy and consumer personal information have caused state legislatures to enact data privacy legislation. Forty-five states, including New York, California and Pennsylvania, have enacted data privacy legislation, including data breach notification laws, and laws penalizing the misuse of personal information in violation of published privacy policies. Certain states have also enacted legislation requiring certain encryption technologies for the storage and transmission of personally identifiable information, including credit card information, and more states are considering enactment of information security regulations and may require the adoption of written information security policies that are consistent with state laws if businesses have personal information of residents of their states. Data privacy and information security legislation is also being considered at the federal level, which if enacted, could adversely affect our business. In addition to the specific data privacy and data breach statutes, the FTC and attorneys general in several states have investigated the use of personal information by some Internet companies under existing consumer protection laws. In particular, an attorney general or the FTC may examine privacy policies to ensure that a company fully complies with representations in the policies regarding the manner in which the information provided by consumers and other visitors to a website is used and disclosed by the company and the failure to do so could give rise to a complaint under state or federal unfair competition or consumer protection laws. We review our privacy policies and operations on a regular basis, and currently, we believe we are in material compliance with applicable U.S. federal and state laws. Our business could be adversely affected if new regulations or decisions regarding the storage, transmission, use and/or disclosure of personal information are implemented in such ways that impose new or additional technology requirements on us, limit our ability to collect, transmit, store and use the information, or if government authorities or private parties challenge our privacy practices that result in restrictions on us, or we experience a significant data or information breach which would require public disclosure under existing notification laws and for which we may be liable for damages or penalties.
The United States Congress enacted the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or CAN-SPAM, regulating "commercial electronic mail messages" (i.e., e-mail), the primary purpose of which is to promote a product or service. The FTC has promulgated various regulations applying CAN-SPAM and has enforcement authority for violations of CAN-SPAM. Any entity that sends commercial e-mail messages, such as Alloy and our various subsidiaries for itself and clients, and those who re-transmit such messages, must adhere to the CAN-SPAM requirements. Violations of its provisions may result in civil money penalties and criminal liability. Although the FTC has publicly announced that it does not at the present time intend to do so, CAN-SPAM further authorizes the FTC to establish a national "Do Not E-Mail" registry akin to the "Do Not Call Registry" relating to telemarketing. The Federal Communications Commission has also promulgated CAN-SPAM regulations prohibiting the sending of unsolicited commercial electronic e-mails to wireless e-mail addresses and has released a "Do Not E-Mail" registry applicable to wireless domain addresses, some of which may be in our databases. Compliance with these provisions may limit our ability to send certain types of e-mails on our own behalf and on behalf of several of our advertising clients, which may adversely affect our business. While we intend to operate our businesses in a manner that complies with the CAN-SPAM provisions, we may not be successful in so operating. If it turns out we have violated the provisions of CAN-SPAM we may face enforcement actions by the FTC or FCC or face civil penalties, either of which could adversely affect our business.
In addition to the federal CAN-SPAM regulations, many states have comparable legislation. There have been a number of cases brought as class actions based on the federal and state statutes. At the state level the courts have tended to decide in favor of the plaintiffs and awarded substantial damages. An award of damages, at either the federal or state level could have a detrimental impact on our financial results.
Social networking websites are under increased scrutiny. Legislation has been introduced on the state and federal level that could regulate social networking websites. Some of the proposed rules call for more stringent age-verification techniques, attempt to mandate data retention or data destruction by Internet providers, and impose civil and/or criminal penalties on owners or operators of social networking websites. For example, the United States Congress may consider once again the Deleting Online Predators Act which, if enacted in the form introduced in 2007, would require certain schools and libraries to protect minors from online predators in the absence of parental supervision when using commercial networking websites and chat rooms. Such law could potentially limit user access to our websites. Similar bills to ban or restrict access to social networking sites are also being introduced and considered on the state level. Dozens of state attorneys general in late 2008 and early 2009 have served subpoenas on certain social networking sites relating to known predators and if any such actions become more widespread, similar actions could potentially have an adverse effect on our reputation or our business.
The FTC has been considering a number of issues relating to online behavioral advertising and has most recently issued a report containing a new set of "guidelines" for industry self-regulation. The FTC's report may result in future regulation of the collection and use of online consumer data, which could potentially place restrictions on our ability to utilize our database and other marketing data on our own behalf and on behalf of our advertising clients, which may adversely affect our business.
Legislation concerning the above described online activities has either been enacted or is in various stages of development and implementation in other countries around the world and could affect our ability to make our websites available in those countries as future legislation is made effective. It is possible that state and foreign governments might also attempt to regulate our transmissions of content on our website or prosecute us for violations of their laws.
Governments of states or foreign countries might attempt to regulate our transmissions or levy sales or other taxes relating to our activities even though we do not have a physical presence and/or operate in those jurisdictions. As our products and advertisements are available over the Internet anywhere in the world, and we conduct marketing programs in numerous states, multiple jurisdictions may claim that we are required to qualify to do business as a foreign corporation in each of those jurisdictions and pay various taxes in those jurisdictions.
Employees
As of January 31, 2016, we have one full-time employee, Caleb Wickman, our President, Treasurer, Secretary and Director. The Company utilizes independent contractors as needed.
ITEM 1A.
ITEM 1A. RISK FACTORS
An investment in our Securities is extremely speculative and illiquid, involves a high degree of risk, including the risk of a loss of your entire investment, and is therefore not suitable for all investors. You should carefully consider the risks and uncertainties described below and the other information contained in this annual report before purchasing any Shares. The risks set forth below are not the only ones facing our company. Additional risks and uncertainties may exist that could also adversely affect our business, operations and prospects. If any of the following risks actually materialize, our business, financial condition, prospects and/or operations could suffer. In such event, our ability to pay the Shares may be impaired, and you could lose all or a substantial portion of the money that you pay for the Securities.
Risk Factors Relating to our Business
General
Investment in Artec Global Media, Inc. is highly speculative, involves a high degree of risk and could result in the loss or part of an investor's capital contribution. Therefore, prospective investors should not subscribe for Shares unless they can bear such a loss. Moreover, there can be no assurance that Artec Global Media, Inc.'s operating and growth objectives will be achieved and financial results may vary materially from one reporting period to the next. Consequently, an investment in Artec Global Media, Inc. is suitable only for sophisticated investors capable of making an informed independent decision as to the risks involved in an investment in Artec Global Media, Inc. Potential risk factors to consider prior to making an investment in Artec Global Media, Inc. include but are not limited to the factors discussed below.
We are an early stage company in an emerging market with an unproven business model and a limited operating history, which makes it difficult to evaluate our current business and future prospects and may increase the risk of your investment.
We have only a limited operating history, and our current business and future prospects are difficult to evaluate. While our management has significant experience and a successful history operating online marketing companies, Artec Global Media, Inc. is a new venture which only recently commenced operations in late 2013. We have developed a strategy for taking advantage of what we believe is a shift of local and multi-office marketing budgets from traditional media formats to digital media formats, but we cannot assure you that our strategy will not fail or prove less successful than other approaches. You must consider our business and prospects in light of the risks and difficulties we encounter as an early stage company in the new and rapidly evolving online marketing industry. These risks and difficulties include:
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Our new and unproven business model;
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Maintaining the effectiveness of our Platform, and adopting our technology and solutions to new market opportunities and challenges;
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Our limited number of product offerings and risks associated with developing and selling new product offerings;
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Continuing to attract new clients, many of whom have not previously advertised online and may not understand the value to their business of our products and services; and
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Effectively managing rapid growth in our sales force, personnel and operations.
Failing to successfully address these challenges or others could significantly harm our business, financial condition, results of operations and liquidity.
Potential for indebtedness.
There is no assurance that the Company will not incur additional debt in the future, that it will have sufficient funds to repay its indebtedness or that the Company will not default on its debt, jeopardizing its business viability. Furthermore, the Company may not be able to borrow or raise additional capital in the future to meet the Company's needs or to otherwise provide the capital necessary to conduct its business.
Segments of our business operate in an immature industry and have a relatively new business model, which makes it difficult to evaluate our business and prospects.
Segments of our business include online marketing and media services, which is an immature industry that has undergone rapid and dramatic changes in its short history. The industry in which we operate is characterized by rapidly-changing Internet media, evolving industry standards, and changing user and client demands. Our business model is also evolving and is distinct from many other companies in our industry, and it may not be successful. As a result of these factors, the future revenue and income potential of our business is uncertain. Although we have experienced significant revenue growth in recent periods, we may not be able to sustain current revenue levels or growth rates. Any evaluation of our business and our prospects must be considered in light of these factors and the risks and uncertainties often encountered by companies in an immature industry with an evolving business model such as ours. Some of these risks and uncertainties relate to our ability to:
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Maintain and expand client relationships;
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Manage our expanding operations and implement and improve our operational, financial and management controls;
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Overcome challenges presented by adverse global economic conditions as they impact spending in our client verticals;
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Raise capital at attractive costs, or at all;
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Acquire and integrate websites and other businesses;
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Successfully expand our footprint in our existing client verticals and enter new client verticals;
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Respond effectively to competition and potential negative effects of competition on profit margins;
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Attract and retain qualified management, employees and independent service providers;
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Successfully introduce new processes and technologies and upgrade our existing technologies and services;
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Protect our proprietary technology and intellectual property rights; and
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Respond to government regulations relating to the Internet, marketing in our client verticals, personal data protection, email, software technologies and other aspects of our business.
If we are unable to address these risks, our business, results of operations and prospects could suffer.
Changes to web browsers and a number of other factors could impair our ability to collect the significant amounts of data we use to optimize display advertisements for our clients.
We collect information about the interaction of users with our advertisers' and publishers' websites (including, for example, information about the placement of advertisements and users' shopping or other interactions with our clients' websites or advertisements) using cookies and similar tracking technologies. Our ability to access and use such data could be restricted by a number of factors, including consumer choice, restrictions imposed by advertisers and publishers, changes in technology, and new developments in laws, regulations and industry standards. Further, certain web browsers, such as Safari, currently block or are planning to block some or all third-party cookies by default. In the event third-party cookies are blocked by default by web browsers, we will need to adapt our solution to enable us to continue to access data and deliver our advertising solutions. A potential adaptation to our solution involves additional technical integration with our advertiser clients so that we are considered a first party for purposes of web browser defaults. To date, we have not integrated this adaptation with any client and do not know if it will be successful. In addition, our advertiser clients may not agree to enable this additional integration. If the adaptation to our solution is not successful or if our clients do not enable us to utilize this adaptation on their websites, we could be blocked from serving advertisements to users that utilize web browsers that block third-party cookies. If we are blocked from serving advertisements to a significant portion of internet users, our business could suffer and our results of operations harmed.
In addition, our ability to collect and use data may be restricted or prevented by a number of other factors, including:
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The failure of our network or software systems, or the network or software systems of our clients;
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Variability in user traffic on advertiser websites;
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Decisions by some of our advertiser clients or publishers to restrict our ability to collect data from them, third parties and users to refuse to implement mechanisms we request to ensure compliance with our legal obligations;
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Decisions by consumers to opt out of tracking or to use technology, such as browser settings that limits our ability to collect data about users and reduce our ability to deliver relevant advertisements;
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Our inability to grow our advertiser and publisher base in new industry verticals in order to obtain the critical mass of data necessary for to perform optimally in such new industry vertical;
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Interruptions, failures or defects in our data collection, mining, analysis and storage systems;
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Changes in regulation impacting the collection and use of data;
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Changes in browser or device functionality and settings, and other new technologies, which make it easier for users to prevent the placement of cookies or other tracking technology and impact our publishers' or our advertisers' ability to collect and use data; and
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Changes in international laws, rules, regulations and industry standards or increased enforcement of international laws, rules, regulations and industry standards.
Any of the above described limitations on our ability to successfully collect, utilize and leverage data could also materially impair the optimal performance of our business and severely limit our ability to target users for our advertisements, which would harm our business and adversely impact our future results of operations.
Regulatory, legislative or self-regulatory developments regarding internet privacy matters could adversely affect our ability to conduct our business.
Self-regulation and privacy regulation
The regulatory environment for the collection and use of consumer data by advertising networks, advertisers, and publishers is very unsettled in Europe, the United States and internationally.
The United States and foreign governments have enacted, considered or are considering legislation or regulations that could significantly restrict industry participants' ability to collect, augment, analyze, use and share anonymous data, such as by regulating the level of consumer notice and consent required before a company can place cookies or other tracking technologies. A number of existing bills are pending in the U.S. Congress that contain provisions that would regulate how companies can use cookies and other tracking technologies to collect and utilize user information.
In addition to compliance with government regulations, we voluntarily participate in several trade associations and industry self-regulatory groups that promulgate best practices or codes of conduct relating to targeted advertising. For example, the Internet Advertising Bureau EU & US, the Network Advertising Initiative and the Digital Advertising Alliance, have developed and implemented guidance for companies to provide notice and choice to users regarding targeted advertising. There is ongoing debate about whether the current guidance and approaches by such associations and industry groups complies with EU law. For example, on December 28, 2011, the Article 29 Working Group published an opinion stating that the self-regulatory code was not adequate to comply with Article 5.3 of the amended E-Privacy Directive addressing placement and reading of cookies for targeted advertising. We could be adversely affected by changes to these guidelines and codes in ways that are inconsistent with our practices or the practices of our publishers and advertisers or in conflict with the laws and regulations of the EU, United States or other international regulatory authorities.
These existing and proposed laws, regulations and industry standards can be costly to comply with and can delay or impede the development of new products, result in negative publicity and reputational harm, increase our operating costs, require significant management time and attention, increase our risk of non-compliance and subject us to claims or other remedies, including fines or demands that we modify or cease existing business practices.
Privacy risks relating to our clients' actions or inactions
On behalf of certain of our clients using some of our services, we collect and store information derived from the activities of website visitors and their devices. This enables us to provide such clients with reports on information from and about the visitors to their websites in the manner specifically directed by each such individual client and to conduct targeted advertising. Federal, state and foreign governments and agencies have adopted or are considering adopting laws regarding the passive collection, use, sharing and storage of data collected from or about users' or their devices. Any perception of our practices or products as an invasion of privacy, whether or not such practices or products are consistent with current or future regulations and industry practices, may subject us to public criticism, private class actions, reputational harm or claims by regulators, which could disrupt our business and expose us to increased liability.
Our compliance with privacy laws and regulations and our reputation among the public body of website visitors depend in part on our clients' adherence to privacy laws and regulations and their use of our services in ways consistent with visitors' expectations. We contractually require our clients to notify visitors to their websites about our services (i.e., that we place cookies and collect and share certain non-identifying data for purposes of targeting advertisements), and further require that they link to pages where visitors can opt-out of the collection or targeting. We rely on representations made to us by clients that they will comply with all applicable laws including all relevant privacy and data protection regulations. We make reasonable efforts to enforce contractual notice requirements but do not fully audit our clients' compliance with our recommended disclosures or their adherence to privacy laws and regulations, nor do we contractually require them to seek explicit consent to the placement of cookies which may be required in certain countries. If our clients fail to adhere to our contracts in this regard, or a court or governmental agency determines that we have not adequately, accurately or completely described our own products, services and data collection, use and sharing practices in our own disclosures to consumers, or if explicit consent was required, then we, and our clients, may be subject to potentially adverse publicity, damages and related possible investigation or other regulatory activity in connection with our privacy practices or those of our clients.
The market in which we participate is intensely competitive, and if we do not compete effectively, our operating results could be harmed.
The market for marketing solutions is intensely competitive and rapidly changing, and with the emergence of new technologies and market entrants, we expect competition to intensify in the future.
Our competitors include:
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Marketing providers. We compete with large marketing providers and integrated marketing platform providers that typically offer their products and services through disparate, online-only, self-service platforms.
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Traditional offline media companies. We compete with traditional direct mail, fulfillment, yellow page, newspaper, television and radio companies that, in many cases, have large, direct sales forces.
Many of our current and potential competitors enjoy substantial competitive advantages, such as greater name recognition, longer operating histories, and substantially greater financial, technical and other resources and, in some cases, the ability to combine their online marketing products with traditional offline media such as newspapers or yellow pages. These companies may use these advantages to offer products similar to ours at a lower price, develop different products to compete with our current solutions and respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or client requirements. In particular, if major Internet search companies such as Google, Yahoo! and Microsoft decide to devote greater resources to develop and market online advertising offerings directly to local businesses, greater numbers of our clients and potential clients may choose to purchase online advertising services directly from these competitors, particularly if and as the ease of their self-service models increases. In addition, many of our current and potential competitors have established marketing relationships with and access to larger client bases and are heavily investing in recruiting sales personnel, which might affect our ability to achieve our hiring targets. As the market for local advertising increases, we expect new competitors, business models and solutions to emerge, some of which may be superior to ours. We also believe that the marketplace for online media is more transparent than other media marketplaces. Our competitors may use information available to them to price their products at a discount to the prices that we currently offer. Even if our online marketing and reporting solutions are more effective than those offered by our competitors, potential clients might adopt competitive products and services in lieu of purchasing our solutions. For all of these reasons, we may not be able to compete successfully against our current and potential competitors.
We are dependent for our success on a key executive officer.
Our success depends to a critical extent on the continued services of our Chief Executive Officer, Caleb Wickman. If we lost this key executive officer, we would be forced to expend significant time and money in the pursuit of a replacement, which would result in both a delay in the implementation of our business plan and the diversion of limited working capital. We can give you no assurance that we could find a satisfactory replacement for this key executive officer at all, or on terms that are not unduly expensive or burdensome. We do not have an employment agreement with Mr. Wickman and his employment is severable by either party at will.
Failure to adequately recruit, train and retain our marketing professionals would impede our growth and could harm our business, operating results and financial condition.
Our ability to maintain or grow revenue and achieve profitability will depend, in large part, on increasing the size of our direct sales force of marketing professionals. As more companies seek to capitalize on the shift to online media, competition for knowledgeable and qualified media sales personnel will increase. Moreover, employees that we hire from our competitors may in the future be subject to claims of breach of noncompetition and non-solicitation obligations owed to their former employers, which could impact our ability to attract and hire high-quality candidates and potentially subject us to litigation. If we are unable to effectively recruit, train and retain marketing personnel, we may not be able to grow our sales force, our revenue may suffer or our costs may increase.
The impact of worldwide economic conditions, including the resulting effect on advertising budgets, may adversely affect our business, operating results and financial condition.
Our performance is subject to worldwide economic conditions and their impact on levels of advertising. Although we believe that marketing budgets that have been traditionally invested in mediums such as print and television and these budgets are now being reallocated to Internet marketing, we believe that continuing economic difficulties have adversely affected our business. We believe the economic conditions in the United States remain challenging.
To the extent that economic difficulties continue, or worldwide economic conditions materially deteriorate, our existing and potential clients may no longer consider investment in our marketing solutions a necessity, or may elect to reduce advertising budgets. Historically, economic downturns have resulted in overall reductions in advertising spending. In particular, online marketing advertising solutions may be viewed by some of our existing and potential clients as a lower priority and may be among the first expenditures reduced as a result of unfavorable economic conditions. These developments could have an adverse effect on our business, operating results and financial condition.
Our future success depends in part on our ability to effectively develop and sell additional products, services and features.
We invest in the development of new products and services with the expectation that we will be able to effectively offer them to our clients. Our future revenue depends in part on our ability to stay competitive with our product and service offerings. Our ability to develop and launch new products on our expected timelines, or at all, is subject to numerous risks and uncertainties, such as the difficulties of designing complex software products, achieving desired functionality and integrating the new products with our existing technology.
The sale of new or additional features, products and services, the value or utility of which may be different from our current products and services or less easily understood by our clients, may require increasingly sophisticated and costly sales efforts and increased operating expenses, as well as additional training of our employees and clients. New product launches require the investment of resources in advance of any revenue generation. If new products fail to achieve market acceptance, we may never realize a return on this investment. If these efforts are not successful, our business may suffer.
Poor perception of our business or industry as a result of the actions of third parties could harm our reputation and adversely affect our business, financial condition and results of operations.
There are companies within our industry that regularly engage in activities that our clients' customers may view as unlawful or inappropriate. These activities, such as deceptive promotions, by third parties may be seen by clients as characteristic of participants in our industry and, therefore, may have an adverse effect on the reputation of all participants in our industry, including us. Any damage to our reputation, including from publicity from legal proceedings against us or companies that work within our industry, governmental proceedings, consumer class action litigation, or the disclosure of information security breaches or private information misuse, could adversely affect our business, financial condition and results of operations.
If we fail to compete effectively against other marketing and media companies and other competitors, we could lose clients and our revenue may decline.
The market for online and offline marketing is intensely competitive. We expect this competition to continue to increase in the future. We perceive only limited barriers to entry to the online marketing industry. We compete both for clients and for limited high quality advertising inventory. We compete for clients on the basis of a number of factors, including return on marketing expenditures, price, and client service.
We compete with Internet and traditional media companies for a share of clients' overall marketing budgets, including:
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Online marketing or media services providers;
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Offline and online advertising agencies;
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Major Internet portals and search engine companies with advertising networks such as Google, Yahoo!, MSN and AOL;
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Other online marketing service providers, including online affiliate advertising networks and industry-specific portals or lead generation companies;
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Website publishers with their own sales forces that sell their online marketing services directly to clients;
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In-house marketing groups at current or potential clients;
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Offline direct marketing agencies; and
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Television, radio and print companies.
Competition for marketing budgets, as well as competition with traditional media companies, could result in significant price pressure, declining margins, reductions in revenue and loss of market share. In addition, as we continue to expand the scope of our services, we may compete with a greater number of websites, clients and traditional media companies across an increasing range of different services, including in vertical markets where competitors may have advantages in expertise, brand recognition and other areas. Large Internet companies with brand recognition, such as Google, Yahoo!, MSN, and AOL, have significant numbers of direct sales personnel and substantial proprietary advertising inventory and web traffic that provide a significant competitive advantage and have significant impact on pricing for Internet advertising and web traffic. These companies may also develop more vertically targeted products that match consumers with products and services, such as Google's mortgage rate and credit card comparison products, and thus compete with us more directly. The trend toward consolidation in the Internet advertising arena may also affect pricing and availability of advertising inventory and web traffic. Many of our current and potential competitors also enjoy other competitive advantages over us, such as longer operating histories, greater brand recognition, larger client bases, greater access to advertising inventory on high-traffic websites, and significantly greater financial, technical and marketing resources. As a result, we may not be able to compete successfully. If we fail to deliver results that are superior to those that other online marketing service providers achieve, we could lose clients and our revenue may decline.
Unauthorized access to or accidental disclosure of consumer personally-identifiable information that we collect may cause us to incur significant expenses and may negatively affect our credibility and business.
There is growing concern over the security of personal information transmitted over the Internet, consumer identity theft and user privacy. Despite our implementation of security measures, our computer systems may be susceptible to electronic or physical computer break-ins, viruses and other disruptions and security breaches. Any perceived or actual unauthorized disclosure of personally-identifiable information regarding website visitors, whether through breach of our network by an unauthorized party, employee theft, misuse or error or otherwise, could harm our reputation, impair our ability to attract website visitors and attract and retain our clients, or subject us to claims or litigation arising from damages suffered by consumers, and thereby harm our business and operating results. In addition, we could incur significant costs in complying with the multitude of state, federal and foreign laws regarding the unauthorized disclosure of personal information.
If we do not adequately protect our intellectual property rights, our competitive position and business may suffer.
Our ability to compete effectively depends upon our proprietary systems and technology. We rely on trade secret, trademark and copyright law, confidentiality agreements and technical measures to protect our proprietary rights. Effective trade secret, copyright, trademark and patent protection may not be available in all countries where we currently operate or in which we may operate in the future. Some of our systems and technologies are not covered by any copyright, patent or patent application. We cannot guarantee that: (i) our intellectual property rights will provide competitive advantages to us; (ii) our ability to assert our intellectual property rights against potential competitors or to settle current or future disputes will not be limited by our agreements with third parties; (iii) our intellectual property rights will be enforced in jurisdictions where competition may be intense or where legal protection may be weak; (iv) any of the patents, trademarks, copyrights, trade secrets or other intellectual property rights that we may employ in our business will not lapse or be invalidated, circumvented, challenged, or abandoned; (v) competitors will not design around our protected systems and technology; or (vi) that we will not lose the ability to assert our intellectual property rights against others.
Confidentiality agreements with employees, consultants and others may not adequately prevent disclosure of trade secrets and other proprietary information.
We have devoted substantial resources to the development of our proprietary systems and technology. In order to protect our proprietary systems and technology, we enter into confidentiality agreements with our employees, consultants, independent contractors and other advisors. These agreements may not effectively prevent unauthorized disclosure of confidential information or unauthorized parties from copying aspects of our services or obtaining and using information that we regard as proprietary. Moreover, these agreements may not provide an adequate remedy in the event of such unauthorized disclosures of confidential information and we cannot assure you that our rights under such agreements will be enforceable. In addition, others may independently discover trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such parties. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could reduce any competitive advantage we have and cause us to lose clients, publishers or otherwise harm our business
Increased taxation of companies engaged in Internet commerce may adversely affect the commercial use of our marketing services and our financial results.
The tax treatment of Internet commerce remains unsettled, and we cannot predict the effect of current attempts to impose sales, income or other taxes on commerce conducted over the Internet. Tax authorities at the international, federal, state and local levels are currently reviewing the taxation of Internet commerce, particularly as many governmental agencies seek to address fiscal concerns and budgetary shortfalls by introducing new taxes or expanding the applicability of existing tax laws. We have experienced certain states taking expansive positions with regard to their taxation of our services. The imposition of new laws requiring the collection of sales or other transactional taxes on the sale of our services via the Internet could create increased administrative burdens or costs, discourage clients from purchasing services from us, decrease our ability to compete or otherwise substantially harm our business and results of operations.
Limitations on our ability to collect and use data derived from key partners and aggregators could significantly diminish the value of our services and cause us to lose clients and revenue.
When a user visits our websites, we use technologies, including "cookies", to collect information such as the user's Internet Protocol, or IP, address, offerings delivered by us that have been previously viewed by the user and responses by the user to those offerings. In order to determine the effectiveness of a marketing campaign and to determine how to modify the campaign, we need to access and analyze this information. The use of cookies has been the subject of regulatory scrutiny and litigation and users are able to block or delete cookies from their browser. Periodically, certain of our clients and publishers seek to prohibit or limit our collection or use of this data. Interruptions, failures or defects in our data collection systems, as well as privacy concerns regarding the collection of user data, could also limit our ability to analyze data from our clients' marketing campaigns. This risk is heightened when we deliver marketing services to clients in the financial and medical services client verticals. If our access to data is limited in the future, we may be unable to provide effective technologies and services to clients and we may lose clients and revenue.
We rely on Internet bandwidth and data center providers and other third parties for key aspects of the process of providing services to our clients, and any failure or interruption in the services and products provided by these third parties could harm our business.
We rely on third-party vendors, including data center and Internet bandwidth providers. Any disruption in the network access or co-location services provided by these third-party providers or any failure of these third-party providers to handle current or higher volumes of use could significantly harm our business. Any financial or other difficulties our providers face may have negative effects on our business, the nature and extent of which we cannot predict. We exercise little control over these third-party vendors, which increases our vulnerability to problems with the services they provide. We license technology and related databases from third parties to facilitate analysis and storage of data and delivery of offerings. We have experienced interruptions and delays in service and availability for data centers, bandwidth and other technologies in the past. Any errors, failures, interruptions or delays experienced in connection with these third-party technologies and services could adversely affect our business and could expose us to liabilities to third parties.
Our systems also heavily depend on the availability of electricity, which also comes from third-party providers. If we or third-party data centers which we utilize were to experience a major power outage, we would have to rely on back-up generators. These back-up generators may not operate properly through a major power outage and their fuel supply could also be inadequate during a major power outage or disruptive event. Information systems such as ours may be disrupted by even brief power outages, or by the fluctuations in power resulting from switches to and from back-up generators. This could give rise to obligations to certain of our clients which could have an adverse effect on our results for the period of time in which any disruption of utility services to us occurs.
We could lose clients if we fail to detect click-through or other fraud on advertisements in a manner that is acceptable to our clients.
We are exposed to the risk of fraudulent clicks or actions on our websites or our third-party publishers' websites. We may in the future have to refund revenue that our clients have paid to us and that was later attributed to, or suspected to be caused by, fraud. Click-through fraud occurs when an individual clicks on an ad displayed on a website or an automated system is used to create such clicks with the intent of generating the revenue share payment to the publisher rather than to view the underlying content. Action fraud occurs when on-line forms are completed with false or fictitious information in an effort to increase the compensable actions in respect of which a web publisher is to be compensated. It is conceivable that this activity could negatively affect our profitability, and this type of fraudulent act could hurt our reputation. If fraudulent clicks or actions are not detected, the affected clients may experience a reduced return on their investment in our marketing programs, which could lead the clients to become dissatisfied with our campaigns, and in turn, lead to loss of clients and the related revenue. Additionally, we have from time to time had to terminate relationships with web publishers who we believed to have engaged in fraud and we may have to do so in the future. Termination of such relationships entails a loss of revenue associated with the legitimate actions or clicks generated by such web publishers.
If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired, which would adversely affect our ability to operate our business.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. We may in the future discover areas of our internal financial and accounting controls and procedures that need improvement. Our internal control over financial reporting will not prevent or detect all error and all 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. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected. If we are unable to maintain proper and effective internal controls, we may not be able to produce accurate financial statements on a timely basis, which could adversely affect our ability to operate our business and could result in regulatory action.
We have not voluntarily implemented various corporate governance measures, in the absence of which, shareholders may have more limited protections against interested director transactions, conflicts of interest and similar matters.
Recent U. S. legislation, including the Sarbanes-Oxley Act of 2002, has resulted in the adoption of various corporate governance measures designed to promote the integrity of the corporate management and the securities markets. Some of these measures have been adopted in response to legal requirements. Others have been adopted by companies in response to the requirements of national securities exchanges, such as the NYSE or The NASDAQ Stock Market, on which their securities are listed. Among the corporate governance measures that are required under the rules of national securities exchanges and NASDAQ are those that address board of directors' independence, audit committee oversight and the adoption of a code of ethics. We have not yet adopted any of these corporate governance measures and, since our securities are not listed on a national securities exchange or NASDAQ, we are not required to do so. It is possible that if we were to adopt some or all of these corporate governance measures, shareholders would benefit from somewhat greater assurances that internal corporate decisions were being made by disinterested directors and that policies had been implemented to define responsible conduct. For example, in the absence of audit, nominating and compensation committees comprised of at least a majority of independent directors, decisions concerning matters such as compensation packages to our senior officers and recommendations for director nominees may be made by a majority of directors who have an interest in the outcome of the matters being decided. Prospective investors should bear in mind our current lack of corporate governance measures in formulating their investment decisions.
Risks Related To Our Capital Structure
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 cannot assure an investor that funds will be legally available to pay dividends or that even if the funds are legally available, that the dividends will be paid.
Issuance of additional stock would dilute your proportionate ownership and voting rights.
We are entitled under our articles of incorporation to issue up to Seven Hundred Fifty Million (750,000,000) shares of common stock, most of which has been issued. We will need to increase our authorized shares to allow for the conversion of debt that the Company has issued. Conversion of this debt could potentially result in the issuance of over 3 billion shares. Also, our board of directors may generally issue stock, or options or warrants to purchase shares, without further approval by our stockholders based upon such factors as our board of directors may deem relevant at that time. It is likely that we will be required to issue a large amount of additional securities to raise capital to further our development. It is also likely that we will be required to issue a large amount of additional securities to directors, officers, employees and consultants as compensatory grants in connection with their services, both in the form of standalone grants or under our stock plans. We cannot give you any assurance that we will not issue additional Common Stock, or options or warrants to purchase those shares, under circumstances we may deem appropriate at the time.
Currently, there is a limited public market for our securities, and we cannot assure you that any liquid public market will ever develop and it is likely to be subject to significant price fluctuations.
Currently, there is a limited public market for our stock and a liquid public market may not materialize. Even if we are successful in developing a public market, there may not be enough liquidity in such market to enable shareholders to sell their stock.
Our common stock is unlikely to be followed by any market analysts, and there may be few or no institutions acting as market makers for the common stock. Either of these factors could adversely affect the liquidity and trading price of our common stock. Until our common stock is fully distributed and an orderly market develops in our common stock, if ever, the price at which it trades is likely to fluctuate significantly. Prices for our common stock will be determined in the marketplace and may be influenced by many factors, including the depth and liquidity of the market for shares of our common stock, developments affecting our business, including the impact of the factors referred to elsewhere in these Risk Factors, investor perception of the Company, and general economic and market conditions. No assurances can be given that an orderly or liquid market will ever develop for the shares of our common stock.
Our Common Stock may be subject to "penny stock" rules which may be detrimental to investors.
The SEC has adopted regulations which generally define "penny stock" to be any equity security that has a market price (as defined) of less than $5.00 per share or an exercise price of less than $5.00 per share. Such securities are subject to rules that impose additional sales practice requirements on broker-dealers who sell them. For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchaser of such securities and have received the purchaser's written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the transaction, of a disclosure schedule prepared by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market. Finally, among other requirements, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. As the Shares immediately following this Offering will likely be subject to such penny stock rules, purchasers in this Offering will in all likelihood find it more difficult to sell their Shares in the secondary market.
IN ADDITION TO THE ABOVE RISKS, BUSINESSES ARE OFTEN SUBJECT TO RISKS NOT FORESEEN OR FULLY APPRECIATED BY MANAGEMENT. IN REVIEWING THIS MEMORANDUM, YOU SHOULD KEEP IN MIND THAT THERE MAY BE OTHER POSSIBLE RISKS THAT COULD BE IMPORTANT.
ITEM 2.
ITEM 2. PROPERTIES
The Company does not own any property or real estate. The Company operates virtually from the residence of its officer.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are not party to nor are we aware of any material pending lawsuit, litigation or proceeding.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock began trading on the Over the Counter Markets Group Inc. QB tier (the "OTCQB") under the symbol "ACTL" on November 18, 2013.
The following table sets forth the high and low bid quotations of the Company's common stock for each quarter during the past fiscal year as reported by the OTCQB. The below quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions:
The market price of our common stock is subject to significant fluctuations in response to variations in our quarterly operating results, general trends in the market, and other factors, over many of which we have little or no control. In addition, broad market fluctuations, as well as general economic, business and political conditions, may adversely affect the market for our common stock, regardless of our actual or projected performance.
Holders
As of May 5, 2016, 699,217,523 shares of common stock are issued and outstanding. There are approximately 24 stockholders of record of our common stock. 671,935,268 shares of our common stock are held in "street name" or by beneficial holders, whose shares are held of record by banks, brokers, and other financial institutions.
Transfer Agent
The transfer agent and registrar for our common stock is Island Stock Transfer. Their address is 15500 Roosevelt Blvd., Suite 301, Clearwater FL 33760 and their telephone number at that location is (727) 289-0010.
Dividend Policy
We have not paid any dividends on our common stock and our Board of Directors (the "Board") presently intends to continue a policy of retaining earnings, if any, for use in our operations. The declaration and payment of dividends in the future, of which there can be no assurance, will be determined by the Board in light of conditions then existing, including earnings, financial condition, capital requirements and other factors. The Nevada Revised Statutes prohibit us from declaring dividends where, if after giving effect to the distribution of the dividend:
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We would not be able to pay our debts as they become due in the usual course of business; or
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Our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of stockholders who have preferential rights superior to those receiving the distribution.
Except as set forth above, there are no restrictions that currently materially limit our ability to pay dividends or which we reasonably believe are likely to limit materially the future payment of dividends on common stock.
Securities Authorized for Issuance Under Equity Compensation Plans
We currently do not maintain any equity compensation plans.
Recent Sales of Unregistered Securities
All funds received from the sale of our securities were used for working capital purposes. All shares bear a legend restricting their disposition. The foregoing securities may not be offered or sold in the United States unless registered under the Act, or pursuant to an exemption from registration.
The securities were issued in reliance upon an exemption from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"). Each investor took his securities for investment purposes without a view to distribution and had access to information concerning us and our business prospects, as required by the Securities Act. In addition, there was no general solicitation or advertising for the purchase of our shares. Our securities were sold only to an accredited investor and a limited number of sophisticated investors, as defined in the Securities Act with whom we had a direct personal preexisting relationship, and after a thorough discussion. Finally, our stock transfer agent has been instructed not to transfer any of such shares, unless such shares are registered for resale or there is an exemption with respect to their transfer.
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Each purchaser was provided with access to our filings with the United States Securities and Exchange Commission (the "SEC"), including the following:
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Our annual report to stockholders for the most recent fiscal year, the definitive proxy statement filed in connection with that annual report, and, if requested by the purchaser in writing, a copy of our most recent Form 10-K under the Exchange Act of 1934, as amended (the "Exchange Act").
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The information contained in an annual report on Form 10-K under the Exchange Act.
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The information contained in any reports or documents required to be filed by Artec Global Media, Inc. under sections 13(a), 14(a), 14(c), and 15(d) of the Exchange Act since the distribution or filing of the reports specified above.
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A brief description of the securities being offered, the use of the proceeds from the offering, and any material changes in our affairs that are not disclosed in the documents furnished.
During the year ended January 31, 2016, we entered into the following securities related transactions:
1.
The Company issued 425,000 shares of restricted common stock in exchange for services valued at $9,075.
2.
The Company issued 10,740,000 shares of restricted common stock for total proceeds of $117,000.
3.
The Company issued 8,130,000 shares of restricted common stock to TCA Global Credit Master Fund LP as part of the TCA financing transactions. (1)
4.
The Company issued 417,010,192 shares of common stock upon the conversion of convertible promissory notes and accrued interest totaling $300,369.
During the year ended January 31, 2015, we entered into the following securities related transactions:
1.
The Company issued 370,255 shares of common stock for $1.00 per share for total proceeds of $370,255.
2.
The Company issued 635,000 shares of restricted common stock in exchange for services valued at $1.00 per share.
3.
In connection with the January 7, 2015 Securities Purchase Agreement with Typenex Co-Investment, LLC we issued a Stock Purchase Warrant to purchase up to $43,750 divided by the Market Price, as such number may be adjusted from time to time pursuant to the terms of the Typenex Note. (2)
(1) See "Note 4 - " TCA Global Credit Master Fund LP Financing Transactions" under ITEM 8, Financial Statements, for additional information.
(2) See "Note 3 - "Convertible Promissory Notes" under ITEM 8, Financial Statements, for additional information.
Additional Information
Copies of our annual reports, quarterly reports, current reports, and any amendments to those reports, are available free of charge on the internet at www.sec.gov. All statements made in any of our filings, including all forward-looking statements, are made as of the date of the document in which the statement is included, and we do not assume or undertake any obligation to update any of those statements or documents unless we are required to do so by law.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis ("MD&A") is intended to help the reader understand the results of operations and financial condition of Artec Global Media, Inc. The MD&A is provided as a supplement to, and should be read in conjunction with financial statements and the accompanying notes to the financial statements included in this Form 10-K.
Our discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Overview
Artec Global Media, Inc. is a twenty-first century marketing firm dedicated to helping its clients improve the return on their marketing dollars by delivering measurable marketing results in an increasingly digital world. We provide online marketing and reporting solutions, including lead generation, performance media, affiliate marketing and other related web services and consultation. We use world-class technology solutions to create advertising campaigns, optimize those campaigns in real time and track tangible results. We focus on serving clients in large, information-intensive industry verticals where relevant, targeted media and offerings help visitors make informed choices, find the products that match their needs, and thus become qualified customer prospects for our clients.
Additionally, we recently entered the student loan debt consultation business whereby we assist debtors in maximizing the benefits afforded by a myriad of government programs targeted to student loan debt holders. Our student loan debt relief consultation services earn a contracted fee upon the completion of our services. Leads for this service are through two company owned websites, www.NSLRelief.com and www.NSLAlliance.com. Through these websites, prospective clients can request information, receive a free consultation and contact a student loan counselor.
Going Concern
The Company's financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet achieved a level of revenues sufficient to cover its operating costs and allow it to continue as a going concern.
As of January 31, 2016, we had negative working capital of $1,078,697 and cash of $19,859. Management recognizes that in order for us to meet our capital requirements, and continue to operate, additional financing will be necessary. We expect to raise additional funds through private or public equity investment in order to expand the range and scope of our business operations. We will seek access to private or public equity but there is no assurance that such additional funds will be available for us to finance our operations on acceptable terms, if at all. If we are unable to raise additional capital or generate positive cash flow, it is unlikely that we will be able to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Results of Operations
We are a start-up company. We did not begin meaningful operations until our first quarter of 2014. As of January 31, 2016, we had total assets of $29,009 and total liabilities of $1,119,360. Since our Inception to January 31, 2016, we have accumulated a deficit of $2,503,181. We anticipate that we will continue to incur losses for the foreseeable future. Our financial statements have been prepared assuming that we will continue as a going concern. We expect we will require additional capital to meet our long term operating requirements. We expect to raise additional capital through, among other things, the sale of equity or debt securities.
Year Ended January 31, 2016 Compared with the year ended January 31, 2015
Revenue
Revenue is generated from advertising and marketing services whereby the Company markets other companies' products through our online portal http://artecglobalmedia.com and other 3rd party portals. The Company also generates revenue through the sale of data used by companies in the targeted marketing of their products and services via direct mail. Additionally, the Company earns contracted fees from student loan borrowers in exchange for providing services designed to assist the borrower in managing their student loans and enroll in qualifying programs that ease the financial burden. During the year ended January 31, 2016, the Company recognized $609,202 of revenue compared to $280,950 during the year ended January 31, 2015. The increase is due to the Company gaining traction with existing and new clients and expanding into new verticals, including student loans, Small Business Lending, Debt consolidation, Credit Repair Services , Dating Services and Data Sales. We have significantly increased our live web calls and forms that we sell to clients, in these verticals. Along with increasing our lead sales we have also decreased our costs to generate the leads using our own internal marketing resources, rather than having to buy as much from other providers.
Operating Expenses
Operating expenses decreased $184,151 to $1,384,828 during the year ended January 31, 2016 compared to $1,568,979 during the year ended January 31, 2015. Included in operating expenses are non cash items related to stock and debt issued for services which totaled $431,975 and $647,500 during the years ended January 31, 2016 and 2015, respectively. Adjusted for these non cash items, operating expenses were $952,853 and $921,479 during the years ended January 31, 2016 and 2015, respectively. So, while revenue increased, operating expenses remained relatively flat on a dollar basis and decreased on a non-cash adjusted basis from 328% of revenue during 2014 to 156% of revenue during 2015. Management expects operating expenses to continue to decrease as a percent of revenue as the Company's continued to develop its strategic plan to become a vertically integrated marketing firm.
Other Income (Expense)
During the year ended January 31, 2016 and 2015, the Company incurred $76,630 and $5,841, respectively, of interest expense related to the stated interest contained in our outstanding convertible promissory notes and $273,403 and $24,759, respectively, for the amortization of the debt discount resulting from the beneficial conversion feature contained on our convertible promissory notes.
Liquidity and Capital Resources
Our principal source of liquidity is cash in the bank. As of January 31, 2016 our current assets were $29,009 and were comprised of $19,859 in cash and $9,150 of accounts receivable. Due to the "start-up" nature of our business, we expect to incur losses as we develop and introduce our products and services. These conditions raise doubt about our ability to continue as a going concern. Management recognizes that in order for us to meet our capital requirements, and continue to operate, additional financing will be necessary. We expect to raise additional funds through private or public equity investment in order to expand the range and scope of business operations. We will try to raise additional funds through private or public equity but there is no assurance that such additional funds will be available for us to finance our operations on acceptable terms, if at all. If we are unable to raise additional capital or generate positive cash flow, it is unlikely that we will be able to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
For the year ended January 31, 2016, net cash flows used in operating activities was $341,231, compared to $612,682 for the year ended January 31, 2015.
For the year ended January 31, 2016, we generated cash flows from financing activities of $304,345 from the issuance of common stock and loans compared to $664,142 for the year ended January 31, 2015. We have financed our operations primarily through the issuance of debt and equity.
Plan of Operation and Funding
Our cash reserves are not sufficient to meet our obligations for the next twelve month period. As a result, we are seeking additional funding from the sale of shares of our common stock. We may also seek to obtain short-term loans from our directors or unrelated parties, although no such arrangements have been made. Our ability to continue operations will be dependent upon the successful completion of additional financing and, ultimately, the achievement of profitable operations. There can be no assurances that we will be successful, which would in turn significantly affect our ability to be successful in our business plan. If not, we will likely be required to reduce operations. We will continue to evaluate our projected expenditures relative to our available cash and to seek additional means of financing in order to satisfy our working capital and other cash requirements.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make judgments, assumptions and estimates that have a significant impact on the results that we report in our financial statements. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Certain of these significant accounting policies require us to make critical accounting estimates, as defined below.
A critical accounting estimate is defined as one that is both material to the presentation of our financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. Specifically, critical accounting estimates have the following attributes:
·
we are required to make assumptions about matters that are highly uncertain at the time of the estimate; and
·
different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations.
Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have historically been minor and have been included in the financial statements as soon as they became known. Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that our financial statements are fairly stated in accordance with accounting principles generally accepted in the United States, and present a meaningful presentation of our financial condition and results of operations.
Our most critical accounting estimates include:
·
the recognition and measurement of current and deferred income taxes, which impact our provision for taxes.
·
Fair value measurements
Below, we discuss this policy further, as well as the estimates and judgments involved.
Income Taxes
Provisions for income taxes are based on taxes payable or refundable for the current period and deferred taxes on temporary differences between the amount of taxable income and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled.
When accounting for Uncertainty in Income Taxes, first, the tax position is evaluated to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed "more-likely-than-not" to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50 percent likelihood of being realized upon ultimate settlement. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company's utilization of U.S. Federal net operating losses will be limited in accordance to Section 381 rules. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
Level 1 - Quoted prices for identical assets and liabilities traded in active exchange markets, such as the national stock exchanges.
Level 2 - Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data. Level 2 also includes derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived principally from or corroborated by observable market data.
Level 3 - Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for nonbinding single dealer quotes not corroborated by observable market data.
The Company has various processes and controls in place to ensure that fair value is reasonably estimated. Where market information is not available to support internal valuations, independent reviews of the valuations are performed and any material exposures are evaluated.
Many of our financial instruments are issued in conjunction with the issuance of debt. At the time of issuance we allocate the proceeds received to the various financial instruments and this involves the determination of fair value. From time to time, the fair value of these financial instruments exceeds the proceeds received. When this occurs, we critically evaluate the validity of the fair value computation.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Artec Global Media, Inc.
Solana Beach, California
We have audited the accompanying balance sheet of Artec Global Media, Inc. ("the Company") as of January 31, 2016, and the related statements of operations, stockholders' deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Artec Global Media, Inc. as of January 31, 2015, were audited by other auditors whose report dated April 30, 2015, expressed an unqualified opinion on those financial statements, and whose report included an emphasis of a matter paragraph expressing substantial doubt about the Company's ability to continue as a going concern. The other auditors have ceased operations.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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 audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Artec Global Media, Inc. as of January 31, 2016, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has not generated positive net income since inception, has an accumulated deficit, and does not have positive cash flows from operating activities. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans regarding these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/S/ PETERSON SULLIVAN LLP
Seattle, Washington
May 17, 2016
Artec Global Media, Inc.
Balance Sheets
(The accompanying notes are an integral part of these financial statements)
Artec Global Media, Inc.
Statements of Operations
For the Years Ended January 31, 2016 and 2015
(The accompanying notes are an integral part of these financial statements)
Artec Global Media, Inc.
Statement of Stockholders' Deficit
For the Years Ended January 31, 2016 and 2015
(The accompanying notes are an integral part of these financial statements)
Artec Global Media, Inc.Statements of Cash Flows For the Years Ended January 31, 2016 and 2015
(The accompanying notes are an integral part of these financial statements)
ARTEC GLOBAL MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2016 AND 2015
NOTE 1 - Organization, Going Concern and Concentrations of Credit Risk
Organization
Artec Global Media, Inc. (the "Company," "we," "us," "our") was incorporated under the laws of the State of Nevada on August 6, 2012 ("Inception") originally intending to commence operations in the business of distributing crystal white glass floor tile. The Company was in the development stage until January 2013 when the Company changed its focus to providing online marketing and reporting solutions to companies and began generating revenue. Thus, beginning in the quarter ending April 30, 2014, the Company left the development stage. On June 30, 2014 the Company changed its name from Artec Consulting Corp. to Artec Global Media, Inc. to more accurately align our corporate name with our current business activities.
Going Concern
The Company has not generated positive net income since inception. The Company has an accumulated deficit of $2,503,181 as of January 31, 2016, and does not have positive cash flows from operating activities. The accompanying financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, which contemplates continuation of the Company as a going concern, which is dependent upon the Company's ability to establish itself as a profitable business.
In its report with respect to the Company's financial statements for the year ended January 31, 2016, the Company's independent auditors expressed substantial doubt about the Company's ability to continue as a going concern. Because the Company has not yet generated net income from its operations, its ability to continue as a going concern is wholly dependent upon its ability to obtain additional financing and increase revenue.
As of January 31, 2016, the Company had cash and cash equivalents of $19,859. Based upon its current and near term anticipated level of operations and expenditures, the Company's cash on hand is insufficient to enable it to continue operations for the next twelve months. As a result, the Company is seeking additional financing but has no commitments to obtain any such financing, and there can be no assurance that financing will be available in amounts or on terms acceptable to the Company, if at all. If adequate funds are not available on reasonable terms, or at all, it would result in a material adverse effect on the Company's business, operating results, financial condition and prospects.
Concentrations of credit risk
At January 31, 2016, two customers accounted for 100% (85% and 15%) of accounts receivable. At January 31, 2015, two customers accounted for 85% (70% and 15%) of accounts receivable.
During the year ended January 31, 2016, two customers accounted for 43% (22% and 21%) of sales. During the year ended January 31, 2015, two customers accounted for 62% (35% and 27%) of sales.
NOTE 2 - Summary of Significant Accounting Policies
Estimates
The preparation of the Company's financial statements requires management to make estimates and use assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. These estimates and assumptions are affected by management's application of accounting policies. On an on-going basis, the Company evaluates its estimates. Actual results and outcomes may differ materially from these estimates and assumptions.
Revenue Recognition
Revenue is generated from advertising and marketing services, the sale of marketing data and from student loan borrower services. Firms engage our advertising solutions whereby the Company markets products through our online portal http://artecglobalmedia.com and other 3rd party portals. Clients pay us for leads that they can convert into customers. Typically, leads are routed through a call center or other offline customer acquisition process. Online leads are usually generated as clicks from websites or email. The two revenue options the Company has promoted are pay-per-lead and pay-per-sale. Revenue from the pay-per-lead option ranges from $4 to $6 per verified lead and the pay-per-sale option revenue range is from $80-$120. Customer payment terms range from net 7 to net 30 days.
The Company generates revenue through the sale of data used by companies in the targeted marketing of their products and services via direct mail. Payment for our data is either upfront or via a revenue sharing arrangement whereby the Company is paid monthly based on the customers acquired through the direct mail process.
The Company also earns contracted fees from student loan borrowers in exchange for providing services designed to assist the borrower in managing their student loans and enroll in qualifying programs that ease their financial burden. The borrower and the Company enter into a contract under which the Company is required to fulfill a specific goal only after which the Company is able to collect its fee. Collection is typically within a few days of the Company meeting its obligation. Through January 31, 2016 the amount of fees collected has been minimal at less than 10% of revenue.
Revenue is recognized only when persuasive evidence of an arrangement exists, the fee is fixed or determinable, the product or service has been delivered, and collectability of the resulting receivable is probable.
Advertising costs
Advertising costs are anticipated to be expensed as incurred. The Company recognized $11,000 and $74,236 in advertising costs during the years ended January 31, 2016 and 2015, respectively.
Cash and Cash Equivalents
Cash and cash equivalents includes highly liquid investments with original maturities of three months or less. The Company has amounts deposited with financial institutions in excess of federally insured limits.
Accounts Receivable
Accounts receivable are reported at the customers' outstanding balances. The Company does not have a history of significant bad debt and has not recorded any allowance for doubtful accounts. Interest is not accrued on overdue accounts receivable. The Company evaluates receivables on a regular basis for potential reserve.
Fair Value Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company utilizes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value because of the short-term nature of these instruments and their liquidity. It is not practical to determine the fair value of our debt instruments due to the complex terms. Management is of the opinion that the Company is not exposed to significant interest or credit risks arising from these financial instruments.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
Stock-Based Compensation
The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with FASB ASC 718-10 and the conclusions reached by FASB ASC 505-50. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by FASB ASC 505-50.
Net Income (Loss) Per Share
The computation of basic earnings per share ("EPS") is based on the weighted average number of shares that were outstanding during the period, including shares of common stock that are issuable at the end of the reporting period. The computation of diluted EPS is based on the number of basic weighted-average shares outstanding plus the number of common shares that would be issued assuming the exercise of all potentially dilutive common shares outstanding using the treasury stock method. The computation of diluted net income per share does not assume conversion, exercise or contingent issuance of securities that would have an antidilutive effect on earnings per share. Therefore, when calculating EPS, if the Company experienced a loss, there is no inclusion of dilutive securities as their inclusion in the EPS calculation is antidilutive. Furthermore, options and warrants will have a dilutive effect under the treasury stock method only when the average market price of the common stock during the period exceeds the exercise price of the options or warrants (they are in the money).
Following is the computation of basic and diluted net loss per share for the years ended January 31, 2016 and 2015:
Recent Accounting Pronouncements
In September 2015, the FASB issued Accounting Standards Update ("ASU") 2015-16, Business Combinations (Topic 805). This ASU eliminates the requirement for retrospective application of measurement period adjustments relating to provisional amounts recorded in a business combination as of the acquisition date. The amendments in this update require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. For public business entities, the amendments will be effective for fiscal years beginning after December 15, 2015. Early adoption is permitted. The Company does not expect this accounting update to have a material effect on its consolidated financial statements in future periods, although that could change.
In April 2015, the FASB issued ASU 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40). This ASU provides guidance about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the software license element of the arrangement should be accounted for consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the arrangement should be accounted for as a service contract. For public business entities, the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. The adoption of this guidance will not have a material impact on our financial statements.
In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This ASU requires retrospective adoption and will be effective for fiscal years beginning after December 15, 2015 and for interim periods within those fiscal years. We expect the adoption of this guidance will not have a material impact on our financial statements.
In February 2015, the FASB issued ASU 2015-02, "Amendments to the Consolidation Analysis", which amends the consolidation requirements in ASC 810 and significantly changes the consolidation analysis required under U.S. GAAP relating to whether or not to consolidate certain legal entities. Early adoption is permitted. The Company's effective date for adoption is February 1, 2016. The Company does not expect this accounting update to have a material effect on its consolidated financial statements in future periods, although that could change.
In January 2015, the FASB issued ASU 2015-01, "Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items", which eliminates the concept from U.S. GAAP the concept of an extraordinary item. Under the ASU, an entity will no longer (1) segregate an extraordinary item from the results of ordinary operations; (2) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; or (3) disclose income taxes and earnings-per-share data applicable to an extraordinary item. Early adoption is permitted. The Company's effective date for adoption is February 1, 2016. The Company does not expect this accounting update to have a material effect on its consolidated financial statements in future periods, although that could change.
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, to clarify the principles used to recognize revenue for all entities. In March 2016, the FASB issued ASU 2016-08 to further clarify the implementation guidance on principal versus agent considerations. The guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted. The Company is currently evaluating the impact, if any, that the adoption of this guidance will have on the Company's consolidated financial statements and related disclosures.
We review new accounting standards as issued. Although some of these accounting standards issued or effective after the end of our previous fiscal year may be applicable to us, we have not identified any standards that we believe merit further discussion. We believe that none of the new standards will have a significant impact on our financial statements.
NOTE 3 - Convertible Promissory Notes
Following is a summary of our outstanding convertible promissory notes as of January 31, 2016:
LG Capital Funding Convertible Notes
On October 30, 2014, Artec and LG Capital Funding, LLC ("LG Capital") entered into a Securities Purchase Agreement (the "LG SPA"). Under the LG SPA, LG Capital will provide $165,375 in three equal payments of $55,125 and evidenced by a convertible promissory note on each of October 31, 2014, January 29, 2015 and a date to be determined. On October 31, 2014, Artec received $50,000 net of $5,125 ($2,500 legal fees and $2,625 OID) and issued a convertible promissory note (the "LG Note 1") in the amount of $55,125. On January 30, 2015, Artec received $50,000 net of $5,125 ($2,500 legal fees and $2,625 OID) and issued a convertible promissory note (the "LG Note 2") in the amount of $55,125. The LG Note 1 and LG Note 2 (collectively the "LG Notes") matured on October 30, 2015 and January 30, 2016, respectively, accrue interest of 8% and are convertible into shares of common stock any time 180 days after the date of each LG Note at a conversion price equal to 65% of the lowest closing bid price as quoted on a national exchange for ten prior trading days including the date on which the Notice of Conversion is received by Artec. In no event shall LG Capital effect a conversion if such conversion results in LG Capital beneficially owning in excess of 9.9% of the outstanding common stock of the Company. Accrued interest shall be paid in shares of common stock at any time at the discretion of LG Capital pursuant to the conversion terms above.
The Company is in default of LG Note 1 and LG Note 2, with a principal balance totaling $83,625 as of January 31, 2016, due to there being an unpaid balance as of the date of maturity. As a result, the interest on LG Note 1 and LG Note 2 increased to 24%.
The debt discounts attributable to the fair value of the beneficial conversion feature amounted to $29,681 and $30,252 for LG Note 1 and LG Note 2, respectively, and were accreted over the term of the LG Notes.
During the year ended January 31, 2016, the Company recognized $9,223 of interest expense and $52,370 of debt discount accretion related to the LG Notes. During the year ended January 31, 2015, the Company recognized $1,124 of interest expense and $7,563 of debt discount accretion related to the LG Notes.
During the year ended January 31, 2016, LG Capital converted $28,569 of principal and interest into 15,737,475 shares of common stock.
Adar Bays Convertible Note
On October 30, 2014, Artec and Adar Bays, LLC ("Adar") entered into a Securities Purchase Agreement (the "Adar SPA"). Under the Adar SPA, Adar will provide $105,000 in two equal payments of $52,500 and evidenced by a convertible promissory note. On October 31, 2014, Artec received $47,500 net of $5,000 ($2,500 legal fees and $2,500 OID) and issued a convertible promissory note (the "Adar Note") in the amount of $52,500. The Adar Note accrues interest of 8%, matured on October 31, 2015 and is convertible into shares of common stock any time 180 days after October 30, 2014, beginning on April 28, 2015 at a conversion price equal to 65% of the lowest closing bid price as quoted on a national exchange for ten prior trading days including the date on which the Notice of Conversion is received by Artec. In no event shall Adar effect a conversion if such conversion results in Adar beneficially owning in excess of 9.9% of the outstanding common stock of the Company. Accrued interest shall be paid in shares of common stock at any time at the discretion of Adar pursuant to the conversion terms above. The Adar Note may not be prepaid.
Additionally, Adar issued to the Company a note for $50,000, bearing interest at the rate of 8% per annum maturing on July 1, 2015 (the "Adar Investor Note"). The Adar Investor Note may be prepaid, without penalty, all or portion of the outstanding balance along with accrued but unpaid interest at any time prior to maturity. No cash changed hands in exchange for the Adar Investor Note. The purpose of the Adar Investor Note is to facilitate the timely sale of common stock in the future should Adar fund the Adar Investor Note. Adar has not funded the Adar Investor Note and the Company does not expect to receive funds pursuant to the Adar Investor Note.
The debt discount attributable to the fair value of the beneficial conversion feature amounted to $28,270 for the Adar Note and was being accreted over the term of the Adar Note. The Company recognized $4,408 of interest expense and $21,067 of debt discount accretion related to the Adar Note during the year ended January 31, 2016. The Company recognized $1,058 of interest expense and $7,203 of debt discount accretion related to the Adar Note during the year ended January, 31, 2015.
During the year ended January 31, 2016, Adar converted $57,108 of principal and interest into 83,481,081 shares of common stock. The balance on the Adar Note was paid off in 2015.
JMJ Financial Convertible Note
On November 12, 2014, Artec and JMJ Financial entered into a $250,000 Convertible Promissory Note (the "JMJ Note"). Under the JMJ Note, JMJ Financial will advance various amounts up to $250,000 in their sole discretion. Each advance matures two years from the date of advance (the "JMJ Maturity Date") and carries the following terms: (i) no interest for the first 90 days with a one-time 12% charge on the 90th day outstanding; (ii) each advance may be repaid within 90 days after which Artec may not make further payments prior to the JMJ Note Maturity Date; (iii) each advance includes a 10% original issue discount. JMJ Financial may convert at their discretion any or all of the outstanding principal and interest at any time from the date of each advance into shares of common stock at a conversion price equal to 60% of the lowest trade price in the 25 trading days previous to the conversion. Unless otherwise agreed in writing by both parties, at no time will JMJ Financial convert any amount of the JMJ Note into common stock that would result in the JMJ Financial owning more than 4.99% of the common stock outstanding. Artec receved $35,000 pursuant to the JMJ Note ("JMJ Note 1") on November 12, 2014 and recorded a debt discount of $25,926 attributable to the fair value of the beneficial conversion feature. Artec received $25,000 pursuant to the JMJ Note ("JMJ Note 2") (collectively the "JMJ Notes") on April 28, 2015 and recorded a debt discount of $18,519 attributable to the fair value of the beneficial conversion feature. The debt discounts are being accreted over the term of the JMJ Notes.
The Company recognized $8,000 of interest expense related to the JMJ Notes and $41,604 of debt discount accretion during the year ended January 31, 2016. The Company recognized no interest expense related to the JMJ Notes and $2,841 of debt discount accretion during the year ended January 31, 2015.
During the year ended January 31, 2016, JMJ converted $63,013 of principal and interest into a total of 52,697,500 shares of common stock leaving a balance of 11,654 as of January 31, 2016.
Vista Capital Investments Convertible Note
On December 4, 2014, Artec and Vista Capital Investments, LLC ("Vista") entered into a Securities Purchase Agreement (the "Vista SPA"), for the sale of a 12% convertible note in the principal amount of $250,000 (which includes a $25,000 original issue discount) (the "Vista Note") of which Vista funded $35,000 upon closing. Additional consideration, up to the principal amount, is payable to Artec at the discretion of Vista. Artec has no obligation to pay Vista any amounts on the unfunded portion of the Vista Note. The Vista Note bears a one-time interest charge of 12% on the date consideration is received. All interest and principal must be repaid two years from the date consideration is received. The Vista Note is convertible into common stock, at Vista's option, at 60% of the lowest trade occurring during the twenty five (25) consecutive trading days immediately preceding the conversion date. In the event the Company elects to prepay all or any portion of the Vista Note within 90 days of the issuance date, the Company is required to pay to Vista an amount in cash equal to 145% multiplied by the sum of all principal, interest and any other amounts owing. Unless otherwise agreed in writing by both parties, at no time will Vista convert any amount of the Vista Note into common stock that would result in the Vista owning more than 4.99% of the common stock outstanding.
The debt discount attributable to the fair value of the beneficial conversion feature amounted to $38,889 for the Vista Note and is being accreted over the term of the Vista Note.
The Company recognized $10,000 of interest expense related to a default penalty pursuant to section 3(b)(iv) of the Vista Note and recorded $19,444 of debt discount accretion during the year ended January 31, 2016. The Company recognized $4,667 of interest expense and recorded $3,090 of debt discount accretion during the year ended January 31, 2015.
During the year ended January 31, 2016, Vista converted $50,260 of principal and interest into 126,600,000 shares of common stock leaving a balance of $3,295 as of January 31, 2016.
Typenex Financing
On January 7, 2015 (the "Effective Date") Artec entered into a Securities Purchase Agreement with Typenex Co-Investment, LLC ("Typenex"), for the sale of a 10% convertible note in the principal amount of $225,000 (which includes Typenex legal expenses in the amount of $5,000 and a $20,000 original issue discount) (the "Typenex Note") of which Typenex funded $75,000 upon closing. We have no obligation to pay Typenex any amounts on the unfunded portion of the Typenex Note. Additionally, Typenex issued to the Company three notes, aggregating $125,000, bearing interest at the rate of 8% per annum with each note maturing seventeen months from January 7, 2015 (the "Typenex Investor Notes"). The Typenex Investor Notes may be prepaid, without penalty, all or portion of the outstanding balance along with accrued but unpaid interest at any time prior to maturity. No cash changed hands in exchange for the Typenex Investor Notes. The purpose of the Typenex Investor Notes is to facilitate the timely sale of common stock in the future should Typenex fund the Typenex Investor Notes.
The Typenex Note bears interest at the rate of 10% per annum. All interest and principal must be repaid on June 7, 2016. The Typenex Note is convertible into common stock, at Typenex's option, at the lesser of (i) $5.00, and (ii) 70% (the "Conversion Factor") of the average of the three (3) lowest Closing Bid Prices in the twenty (20) Trading Days immediately preceding the applicable Conversion, provided that if at any time the average of the three (3) lowest Closing Bid Prices in the twenty (20) Trading Days immediately preceding any date of measurement is below $2.50, then in such event the then-current Conversion Factor shall be reduced to 65% for all future Conversions, subject to other reductions set forth in the Typenex Note. In the event the Company elects to prepay all or any portion of the Typenex Note, the Company is required to pay to Typenex an amount in cash equal to 125% multiplied by the sum of all principal, interest and any other amounts owing. The Typenex Note is secured by all of the assets of the Company and includes customary event of default provisions.
Typenex has agreed to restrict its ability to convert the Typenex Note and receive shares of common stock such that the number of shares of common stock held by them in the aggregate and their affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock. The Typenex Note is a debt obligation arising other than in the ordinary course of business, which constitutes a direct financial obligation of the Company. The Typenex Note also provides for penalties and rescission rights if we do not deliver shares of our common stock upon conversion within the required timeframes.
Additionally, the Company granted Typenex six warrants, corresponding to the delivery of six tranches of cash funds, to purchase shares of the Company's common stock, $0.001 par value (the "Common Stock"). The first warrant will entitle the holder to purchase a number of shares equal to $43,750 divided by the Market Price (defined as 70% of the average 3 lowest closing bid prices in the 20 days immediately preceding conversion), as such number may be adjusted from time to time pursuant to the terms of the Typenex Note, and the remaining warrants will entitle the holder to purchase a number of shares equal to $13,750 divided by the Market Price, as such number may be adjusted from time to time pursuant to the terms of the Typenex Note. Each warrant is not exercisable until each corresponding tranche is funded.
The Company first allocated between the Typenex Note and the warrants based upon their relative fair values. The estimated fair value of the warrants issued with the Typenex Note was $43,750. Next, the intrinsic value of the beneficial conversion feature was computed as the difference between the fair value of the common stock issuable upon conversion of the Typenex Note and the total price to convert based on the effective conversion price. The calculated intrinsic value was $66,667. As this amount resulted in a total debt discount that exceeds the loan proceeds, the amount recorded for the beneficial conversion feature was limited to $43,750. The resulting $87,500 discount to the Typenex Note is being accreted over the seventeen month term of the Typenex Note.
During the year ended January 31, 2016, the Company recognized approximately $38,000 of interest expense, including approximately $30,000 of "add-Backs" to compensate Typenex for the deficit between the amount of the Typenex Note converted and the amount realized from the subsequent sale of the conversion shares, and $61,776 of accretion related to the debt discount. During the year ended January 31, 2015, the Company recognized no interest expense and $4,062 of accretion related to the debt discount.
During the year ended January 31, 2016, Typenex converted $77,720 of principal and interest into a total of 96,917,145 shares of common stock leaving a a principal balance of $48,406 due as of January 31, 2016.
Vis Vires Group, Inc. Convertible Note
On June 8, 2015, Artec and Vis Vires Group ("Vis Vires") entered into a Securities Purchase Agreement (the "Vis Vires SPA"), for the sale of an 8% convertible note in the principal amount of $69,000 of which Artec received $61,100 after payment of legal fees (the "Vis Vires Note"). The Vis Vires Note matured on March 10, 2016 and is currently in default. The Vis Vires Note interest rate increased to twenty-two percent (22%) upon maturity. The Vista Note is convertible into common stock, at Vis Vires's option, at 58% of the average of the lowest three (3) closing bid prices for our common stock during the ten (10) trading day period prior to conversion. In no event shall Vis Vires effect a conversion if such conversion results in Vis Vires beneficially owning in excess of 9.99% of the outstanding common stock of the Company. The Note and accrued interest may be prepaid from the date of issuance with the following penalties: (i) within 30 days - 110%; (ii) within 31 - 60 days - 115%; (iii) within 61 - 90 days - 120%; (iv) within 91 - 120 days - 125%; (v) within 121 - 150 days - 130%; and (vi) within 151 - 180 days - 135%. Upon the occurrence of a default as described in the Vis Vires Note, the Company shall pay an amount equal to the greater of (i) 150% of the then outstanding principal and interest, or (ii) the "parity value" of the Default Sum to be prepaid, where parity value means (a) the highest number of shares of common stock issuable upon conversion of or otherwise pursuant to such Default Sum in accordance with Article 1 of the Vis Vires Note, treating the trading day immediately preceding the Mandatory Prepayment Date as the "Conversion Date" for purposes of determining the lowest applicable conversion price. The debt discount attributable to the fair value of the beneficial conversion feature amounted to $52,378 for the Vis Vires Note and is being accreted over the term of the Vis Vires Note.
During the year ended January 31, 2016, the Company recognized $3,500 of interest expense and $44,976 of debt discount accretion related to the Vis Vires Note.
During the year ended January 31, 2016, Vis Vires converted $23,700 of principal into a total of 41,576,991 shares of common stock leaving a a principal balance of $45,300 due as of January 31, 2016.
NOTE 4 - TCA Global Credit Master Fund LP Financing Transactions
Following is a summary of our outstanding balances with respect to the financing agreements with TCA Global Credit Master Fund LP ("TCA")as of January 31, 2016:
Senior Secured Revolving Credit Facility Agreement
On December 24, 2015, the Company entered into a Senior Secured Revolving Credit Facility Agreement (the "Credit Facility") with TCA for a maximum of $10,000,000. The Credit Facility provides for TCA to make revolving loans to the Company from time to time, until the revolving loan maturity date and in amounts as TCA may determine up to the revolving loan availability. Revolving loans may be repaid and borrowed again up to the revolving loan maturity date unless the revolving loans are terminated or extended. The Company may request that the revolving loan commitment be increased up to $10,000,000 and TCA, in its sole discretion may make available revolving loan commitment increases. As security, the Company issued a continuing and unconditional first priority security interest in all property of the Company.
The Credit Facility provides for the weekly payment of the receipts collection fee, accrued and unpaid interest of all revolving loans and other charges and fees. The receipts collection fee is a surcharge charged to the Company on a monthly basis and, when added together with any monthly interest, shall not exceed 1.417% of the then outstanding principal balance of all loans, per month. The receipts collection fee, interest and other charges are due weekly. Any amount of principal or interest which is not paid when due, whether at stated maturity, by acceleration or otherwise, shall, at TCA's option, bear interest on demand at the default rate of 18%.
The Company is required to direct customers to make payments to a lock box account. Weekly, TCA shall sweep lock box account funds to their account and apply said funds to unpaid fees, accrued interest owed, receipts collection fees and towards building a reserve equal to 20% of the revolving loan commitment which currently stands at $900,000.
Pursuant to the Credit Facility, on December 24, 2015, the Company issued a Senior Secured Revolving Convertible Promissory Note (the "TCA Note") with face amount of $900,000. On December 28, 2015, TCA funded $150,000 of the TCA Note of which the Company received $26,095 net of a $45,000 commitment fee, $6,500 due diligence fee, $50,000 in legal fees, $1,500 asset monitoring fee, $7,500 finder's fee, $2,450 stamp tax, $3,495 escrow fee and $7,460 of miscellaneous filing fees. The TCA Note is due in six months on June 24, 2016 (the "TCA Note Maturity Date"), accrues interest at the rate of 12% per annum and is convertible into shares of common stock in the event of default at 85% of the lowest of the average daily volume weighted average price of the Company's common stock during the five trading days immediately prior to the conversion date. In no event shall TCA effect a conversion if such conversion results in TCA beneficially owning in excess of 4.99% of the outstanding common stock of the Company.
Conversion of the TCA Note and unpaid interest is subject to "make-whole rights" where if upon liquidation by TCA of conversion shares the amount received is less than the conversion amount specified in the relevant conversion notice, the Company shall issue to TCA additional shares of common stock equal to the conversion amount minus the realized amount. If upon sale of the additional shares, the total received by TCA is still less than the conversion amount specified in the relevant conversion notice, the Company shall issue additional shares until the conversion amount has been fully satisfied.
Upon each occurrence of a default or event of default, TCA shall have the right, but not the obligation, to 1) declare its commitments to the Company to be terminated and all obligations to be immediately due and payable; and 2) to cause the Company to pay TCA a penalty in cash in an amount equal to 10% of the amount of the obligations at the time of default. In the event a single default or event of default continues for a period of longer than 30 days, the 10% penalty shall be immediately applied upon expiration of each subsequent 30 day period and shall continue to be applied upon expiration of each subsequent 30 day period until such default is cured to the satisfaction of TCA, in its sole discretion.
In connection with the Credit Facility, the Company issued three convertible promissory notes (the "Fee Notes") each in the amount of $105,000 to TCA as consideration of investment banking and advisory services fully rendered. The Fee Notes mature on June 24, 2016, September 24, 2016 and December 24, 2016, respectively. The Fee Notes 1) bear zero interest unless in default which, then, at the TCAs option shall bear interest at the default rate of 18%; 2) are convertible into shares of common stock in the event of default at 85% of the lowest of the average daily volume weighted average price of the Company's common stock during the five trading days immediately prior to the conversion date. In no event shall TCA effect a conversion if such conversion results in TCA beneficially owning in excess of 4.99% of the outstanding common stock of the Company. As security, the Company issued a continuing and unconditional first priority security interest all property of the Company. Conversion of the Fee Notes and unpaid interest is subject to make-whole rights.
As additional consideration, the Company issued to TCA, 8,130,000 shares in three tranches of 2,710,000 each on December 24, 2015 valued at $9,000.
The debt discounts attributable to the fair value of the beneficial conversion feature contained in the TCA Note and Fee Notes and TCA incurred issuance costs amounted to $8,610 and $123,905, respectively, and are being accreted through the TCA Note Maturity Date and Fee Note maturity dates.
During the year ended January 31, 2016, the Company recognized $4,132 of interest expense and $29,527 of debt discount accretion related to the Debenture.
Debenture and Fee Debentures
On December 24, 2015, the Company entered into a Securities Purchase Agreement with TCA for the sale of a secured, 18% senior, secured, convertible, redeemable debenture in the principal amount of $100,000. On December 28, 2015, the Company received $74,650 net of a $5,000 commitment fee, $15,000 in legal fees, $5,000 finder's fee and $350 stamp tax and issued a senior, secured, convertible, redeemable debenture (the "Debenture") in the amount of $100,000. The Debenture is due in twelve months on December 24, 2016 (the "Debenture Maturity Date"), accrues interest at the rate of 18% per annum and is convertible into shares of common stock in the event of default at 90% of the lowest of the average daily volume weighted average price of the Company's common stock during the five trading days immediately prior to the conversion date. In no event shall TCA effect a conversion if such conversion results in TCA beneficially owning in excess of 4.99% of the outstanding common stock of the Company. As security, the Company issued a continuing and unconditional first priority security interest in all property of the Company.
The Company may prepay the Debenture without penalty. The Company shall make monthly payments of interest which is calculated on the basis of a 360-day year and accrue daily. Late payments of principal, interest or other charges not received by TCA within five business days of the due date shall be subject to a 5% late fee of the unpaid amount. In the event of default as described in the Debenture, the interest rate shall increase to 22%.
Conversion of the Debenture and unpaid interest is subject to "make-whole rights" where if upon liquidation by TCA of conversion shares the amount received is less than the conversion amount specified in the relevant conversion notice, the Company shall issue to TCA additional shares of common stock equal to the conversion amount minus the realized amount. If upon sale of the additional shares, the total received by TCA is still less than the conversion amount specified in the relevant conversion notice, the Company shall issue additional shares until the conversion amount has been fully satisfied.
In connection with the Debenture, the Company issued three Senior Secured, Convertible, Redeemable Debentures (the "Fee Debentures") each in the amount of $33,333 to TCA as consideration of advisory services fully rendered. The Fee Debentures mature on June 24, 2016, September 24, 2016 and December 24, 2016, respectively. The Fee Debentures 1) bear zero interest unless in default which, then, at the TCAs option shall bear interest at the default rate of 22%; 2) are convertible into shares of common stock in the event of default at 90% of the lowest of the average daily volume weighted average price of the Company's common stock during the five trading days immediately prior to the conversion date. In no event shall TCA effect a conversion if such conversion results in TCA beneficially owning in excess of 4.99% of the outstanding common stock of the Company. As security, the Company issued a continuing and unconditional first priority security interest in all property of the Company. Conversion of the Fee Notes and unpaid interest is subject to make-whole rights.
The debt discounts attributable to the fair value of the beneficial conversion feature and TCA incurred issuance costs amounted to $0 and $25,350, respectively, and are being accreted through the Debenture Maturity Date.
During the year ended January 31, 2016, the Company recognized $1,950 of interest expense and $2,639 of debt discount accretion related to the Debenture.
Committed Equity Facility Agreement
On December 24, 2015, the Company entered into a Committed Equity Facility Agreement (the "Equity Facility") with TCA whereby the Company shall issue and sell ("Advance") to TCA, from time to time, up to $5,000,000 of the Company's common stock. By delivering an Advance notice to TCA, the Company may request up to the Maximum Advance Amount defined as no more than 15% of the average daily volume of shares of common stock traded during the immediately preceding five consecutive trading days. In no event shall the number of shares issuable to TCA cause TCA's beneficial ownership to exceed 4.99% of the then outstanding common stock nor shall the number of shares issuable exceed the Exchange Cap. On each Advance notice date, the Company shall deliver to TCA's brokerage account a number of shares equal to the dollar amount of the Advance divided by the Market Price (defined as the lowest VWAP of the common stock on the applicable Advance notice date multiplied by 200%). If the Advance shares initially delivered to TCA are greater than the number of shares sold, then TCA shall deliver to the Company any excess Advance shares unless the parties agree to apply those shares to the next Advance.
Concurrently, with the Equity Facility, the Company entered into a Registration Rights Agreement of the same date for the resale of shares by TCA. The Registration Rights Agreement requires the Company to file with the SEC a registration statement on Form S-1 for a sufficient number of shares equal to at least three times the number of registerable securities under the Equity Facility no later than 45 days from December 24, 2015 with a declaration of effectiveness required no later than 90 days from December 24, 2015. In the event the registration statement is not declared effective by the SEC 120 days from December 24, 2015, the Company shall be obligated to pay TCA $500 per month until the registration is declared effective.
To date, the Company has not filed a registration statement on form S-1. Thus, the Company is currently ineligible to make Advance requests to TCA.
The TCA Note, Debenture, Credit Facility and Equity Facility were issued by the Company under the exemption from registration afforded by Section 4(a)(2) of the Securities Act, as amended and/or Regulation D promulgated thereunder, as the securities were issued to accredited investors, without a view to distribution, and were not issued through any general solicitation or advertisement.
NOTE 5 - Stockholder's Equity
Preferred Stock
On November 10, 2015, the Company amended its articles of incorporation to authorize 10,000,000 shares of preferred stock, par value $0.001. The authorized shares of preferred stock may be issued from time to time in one or more classes or series as determined by the board of directors. No preferred shares were outstanding as of January 31, 2016.
Common Stock
During the year ended January 31, 2016, the Company 1) issued 10,740,000 shares of common stock for total proceeds of $117,000; 2) issued 425,000 shares of restricted common stock in exchange for services valued at $9,075; 3) issued 417,010,192 shares upon conversion of various convertible promissory notes principal and interest totaling $300,369, See "Note 2 - Convertible Promissory Notes" above; and 4) issued 8,130,000 shares of restricted common stock concurrently with the TCA transactions described under Note 4 above.
During the year ended January 31, 2015, the Company 1) issued 370,255 shares of common stock for $1.00 per share for total proceeds of $370,255, and 2) issued 635,000 shares of restricted common stock in exchange for services valued at $1.00 per share.
Liability For Potentially Dilutive Securities in Excess of Authorized Number of Common Shares
In accordance with ASC Topic 815, Derivatives and Hedging, the Company accounts for contracts for the issuance of common stock that are in excess of authorized shares as a liability that is recorded at fair value. This liability is required to be remeasured at each reporting period with any change in value to be included in other income and expense until such time as there is no longer an excess of the number of issued and potentially issuable securities over the number of authorized shares. This condition will change either because of an increase in the authorized number of shares or a reverse stock split as approved by shareholders or a reduction in the number of potentially issuable securities. At that time any existing liability will be eliminated.
On January 31, 2016, the combined total of the Company's issued shares and its potentially issuable shares exceeded the authorized number of shares by 1,343,294,271 potentially issuable shares. This excess arose because of the conversion features of certain convertible debt that were triggered on that date. At this initial measurement date, the fair value of the potentially issuable shares in excess of the authorized number of common shares was $402,988, which amount was recorded as a liability for reclassified equity contracts, with a corresponding charge to shareholders' equity. This liability was recorded based on the valuation of the last contracts to contribute to the excess.
NOTE 6 - Income Taxes
No provision for income taxes was recorded in the periods presented due to tax losses incurred in each period. As of January 31, 2016 and January 31, 2015, the Company had net operating loss carry forwards of approximately $2,200,233 and $1,351,156, respectively, for income tax reporting purposes.
A reconciliation between the amount of income tax benefit determined by applying the applicable U.S. statutory income tax rate to pre-tax loss for the years ended January 31, 2016 and 2015 is as follows:
The valuation allowance for deferred tax assets as of January 31, 2016 and 2015 was $529,094 and $243,493, respectively. The net change in the total valuation allowance for the year ended January 31, 2016 was an increase of $285,601. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Due to the uncertainty of realizing the deferred tax asset, management has recorded a valuation allowance against the entire deferred tax asset.
The Company's U.S. federal net operating loss carry forward ("NOL") will expire in years 2033 through 2035. Utilization of the NOL is subject to annual limitations under Internal Revenue Code Sections 382 and 383, respectively, as a result of significant changes in ownership, private placements and debt conversions. Subsequent significant equity changes, could further limit the utilization of the NOL. The annual limitations have not yet been determined; however, when the annual limitations are determined, the gross deferred tax assets for the NOL will be reduced with a reduction in the valuation allowance of a like amount.
The Company has adopted the accounting guidance related to uncertain tax positions, and has evaluated its tax positions and believes that all of the positions taken by The Company in its federal and state exempt organization tax returns are more likely than not to be sustained upon examination. The Company returns are subject to examination by federal and state taxing authorities generally for three years after they are filed.
As of January 31, 2016 and 2015, there were no unrecognized tax benefits. Accordingly, a tabular reconciliation from beginning to ending periods is not provided. The Company will classify any future interest and penalties as a component of income tax expense if incurred. To date, there have been no interest or penalties charged or accrued in relation to unrecognized tax benefits.
The Company does not anticipate that the total amount of unrecognized tax benefits will change significantly in the next twelve months.
NOTE 7 - Related Party Transactions
A related party is generally defined as (i) any person that holds 10% or more of the Company's securities and their immediate families, (ii) the Company's management, (iii) someone that directly or indirectly controls, is controlled by or is under common control with the Company, or (iv) anyone who can significantly influence the financial and operating decisions of the Company. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties.
Ducks Nest Investments, Inc., wholly owned by Stone Douglass, Chairman, provides consulting services to the Company. During the year ended January 31, 2016 and 2015, the Company paid Ducks Nest Investments, Inc. $25,000 and $0, respectively.
CW Web Designs, wholly owned by Caleb Wickman, President, provides data management and client-marketing program development services to the Company. During the year ended January 31, 2016 and 2015, the Company paid CW Web Designs $0 and $15,500, respectively.
All related party transactions are recorded at the exchange amount established and agreed to between related parties and are in the normal course of business.
NOTE 8 - Subsequent Events
Management has reviewed material events subsequent of the year ended Janauary 31, 2016 and prior to the filing of financial statements in accordance with FASB ASC 855 "Subsequent Events". From February, 2016 through the date of this report, the company issued 253,662,076 shares of its common stock in exchange for debt principal and interest totaling $23,778.
In connection with the appointment of Timothy Honeycutt's appointment to the Board, the Company issued to him a convertible promissory note in the original principal amount of $25,000, maturing 3 years from the date of issuance, accruing interest at a rate of 12.0% per annum and convertible into shares of common stock of the Company at a 40.0% discount to the market price of those shares.
On March 4, 2016, Artec isued to T McNeil Advisors, LLC ("McNeil") a convertible promissory note (the "McNeil Note") in the amount of $37,500 in exchange for advisory services. The McNeil Note accrues interest at 8%, matures on in one year on March 4, 2017 and is convertible into shares of common stock any time at a conversion price equal to 55% of the lowest trading price as quoted on a national exchange for the twenty prior trading days including the date on which the Notice of Conversion is received by Artec. In no event shall McNeil effect a conversion if such conversion results in McNeil beneficially owning in excess of 9.9% of the outstanding common stock of the Company. Accrued interest shall be paid in cash only. The McNeil Note may be prepaid with the following penalties: (i) if the McNeil Note is prepaid within 90 days of the issuance date, then 115% of the face amount plus any accrued interest; (ii) if the McNeil Note is prepaid within 91 -180 days of the issuance date, then 135% of the face amount plus any accrued interest. The Note may not be prepaid after the 180th day. Upon an event of default, the interest rate shall increase to 24%.
On March 31, 2016, Artec and LG Capital entered into a Securities Purchase Agreement (the "LG SPA 2"). Under the LG SPA 2, LG Capital will provide $315,000 in four equal payments of $78,750 and evidenced by a convertible promissory note on each of March 1, 2016 and May 9, 2016 with the remaining amounts funded as agreed by the parties at a later date. On each of March 15, 2016, and May 4, 2016 Artec received $71,250 net of $7,500 ($3,750 legal fees and $3,750 OID) for total proceeds of $142,500 and issued two convertible promissory notes each in the amount of $78,750 (the "2016 LG Notes"). the 2016 LG Notes mature in one year, accrue interest of 8% and are convertible into shares of common stock any time at a conversion price equal to 55% of the lowest trading price as quoted on a national exchange for twenty prior trading days including the date on which the Notice of Conversion is received by Artec. In no event shall LG Capital effect a conversion if such conversion results in LG Capital beneficially owning in excess of 9.9% of the outstanding common stock of the Company. Interest shall be paid in cash. The Note may not be prepaid.
On May 3, 2016, Artec and Cerberus Finance Group, LTD. ("Cerberus") entered into a Securities Purchase Agreement (the "Cerberus SPA"). Under the Cerberus SPA, Cerberus will provide $70,000 in two equal payments of $35,000 with the first funded on May 3, 2016 and the remaining amount to be funded as agreed by the parties at a later date. On May 12, 2016 Artec received $23,000 net of $12,000 ($2,000 legal fees and $10,000 to financial advisor) and issued a convertible promissory note (the "Cerberus Note") in the amount of $35,000. The Cerberus Note matures in one year, accrues interest of 8% and is convertible into shares of common stock any time at a conversion price equal to 55% of the lowest trading price as quoted on a national exchange for twenty prior trading days including the date on which the Notice of Conversion is received by Artec. In no event shall LG Capital effect a conversion if such conversion results in LG Capital beneficially owning in excess of 9.9% of the outstanding common stock of the Company. Interest shall be paid in cash. The Note may not be prepaid.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As of January 31, 2016, under the direction of the Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a - 15(e) under the Securities Exchange Act of 1934, as amended. Based on the evaluation of these controls and procedures required by paragraph (b) of Sec. 240.13a-15 or 240.15d-15 the disclosure controls and procedures have been found to be ineffective.
The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in our reports filed under the securities Exchange Act, is recorded, processed, summarized, and reported within the time periods specified by the SEC's rules and forms. Disclosure controls are also designed with the objective of ensuring that this 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.
(b) Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives. Furthermore, smaller reporting companies face additional limitations. Smaller reporting companies employ fewer individuals and find it difficult to properly segregate duties. Smaller reporting companies tend to utilize general accounting software packages that lack a rigorous set of software controls.
Our management, with the participation of the President and Treasurer, evaluated the effectiveness of the Company's internal control over financial reporting as of January 31, 2016. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on that evaluation, our management concluded that as of the end of the fiscal year covered by this Annual Report on Form 10-K, that our internal control over financial reporting has not been effective due to the following material weaknesses:
(1) Lack of segregation of duties. Management has found it necessary to limit the Company's administrative staffing in order to conserve cash, until the Company's level of business activity increases. As a result, there is limited segregation of duties amongst the employees, and the Company has identified this as a material weakness in the Company's internal controls. The Company intends to remedy this material weakness by hiring additional employees and reallocating duties, including responsibilities for financial reporting, among the employees as soon as there are sufficient resources available. However, until such time, this material weakness will continue to exist. Despite the limited number of employees and limited segregation of duties, management believes that the Company is capable of following its disclosure controls and procedures effectively.
(2) Lack of in-house US GAAP Expertise. Our current accounting personnel perform adequately in the basic accounting and recordkeeping function. However, our operations and business practices include complex technical accounting issues that are outside the routine basic functions. These technical accounting issues are complex and require significant expertise to ensure that the accounting and reporting are accurate and in accordance with generally accepted accounting principles.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which permanently exempts non-accelerated filers (generally issuers with a public float under $75 million) from complying with Section 404(b) of the Sarbanes-Oxley Act of 2002.
(c) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report 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 all of our directors and executive officers as of April 6, 2015.
Timothy Honeycutt 42 Director April 29, 2016
Biographical Information
Set forth below are the names of all of our directors and executive officers, all positions and offices held by each person, the period during which each has served as such, and the principal occupations and employment of such persons during at least the last five years, and other director positions held currently or during the last five years:
Current Directors and Officers
Mr. Caleb Wickman - President, Treasurer and Secretary
President, CEO and CFO. Mr. Wickman brings tremendous experience in network marketing to the Company. Prior to Artec, Mr. Wickman founded and operated CW Web Designs for more than a decade. In addition, Mr. Wickman served as COO of American Satellite, Inc., a top retailer for Dish Network and DirecTV from 2007 to 2010. At that post, Mr. Wickman led the effort to drive more than $20M in annual revenue where he was responsible for management of more than 400 employees. From 2003 through 2007, he served as President of Real World Media, LLC, a web marketing and media firm serving more than 1,000 affiliate customers, generating $12M in annual revenue at the time of his exit. Mr. Wickman attended San Diego State University.
Mr. A. Stone Douglass - Chairman
Chairman. Mr. Douglass has worked in many different industries over the last 45 years. Currently the Chairman of Duck's Nest Investments, Inc., Mr. Douglass was recently CEO of Spy Optics, a Carlsbad California based public manufacturer of action sports eyewear, RedEnvelope, a San Francisco-based on-line gift site, Ryderz Compound, also in Carlsbad, who operated 35 retail stores selling action sports clothing and accessories, Neocork Technologies, a Napa California based manufacturer of synthetic wine corks sold world-wide, and Steakhouse Partners, a San Diego owner and operator of steak restaurants.
Timothy Honeycutt - Director
Timothy Honeycutt is a media driver whose entrepreneurial vision has carried multiple companies through rapid and continuous sales. Tim purchased his first business, a franchise of ORECK Vacuum LLC at age 21, growing the business in to 6 locations over 15 years. Tim took his media expertise to a national level creating TV and Radio spots for multiple companies growing their sales to $20 plus million per year.
We currently do not have an employment agreement with any of our officers or directors.
Family Relationships and Other Matters
There are no family relationships among or between any of our officers and directors.
Legal Proceedings
None of our Directors or officers are involved in any legal proceedings as described in Regulation S-K (§ 229.401(f)).
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Because we do not have a class of equity securities registered pursuant to section 12 of the Exchange Act we are not required to make the disclosures required by Item 405 of Regulation SK.
CODE OF ETHICS
We have adopted a Code of Ethics that applies to all of our officers, directors and employees, including our Chief Executive Officer and Chief Financial Officer. The Code of Ethics is designed to deter wrongdoing, and to promote, among other things, honest and ethical conduct, full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with, or submit to the SEC, compliance with applicable governmental laws, rules and regulations, the prompt internal reporting of violations of the Code of Ethics, and accountability for adherence to the Code of Ethics. Our Code of Ethics is available on our website at http://artecglobalmedia.com.
CORPORATE GOVERNANCE
Director Independence
We are not listed on a major U.S. securities exchange and, therefore, are not subject to the corporate governance requirements of any such exchange, including those related to the independence of directors; however, at this time, after considering all of the relevant facts and circumstances, our Board has determined that Mr. Douglass and Mr. Honeycutt are independent from our management and qualify as "independent directors" as defined under the standards of independence of the FINRA listing standards. Upon our listing on any national securities exchange or any inter-dealer quotation system, we will elect such independent directors as is necessary under the rules of any such securities exchange.
Board Leadership Structure
We currently have one executive officer who is also a Director. Our Board has reviewed the Company's current Board leadership structure. In light of the Company's size, nature of the Company's business, regulatory framework under which the Company operates, stockholder base, the Company's peer group and other relevant factors, the Company has determined that this structure is currently the most appropriate Board leadership structure for our company. Nevertheless, the Board intends to carefully evaluate from time to time whether our current structure should be modified based on what the Board believes is best for the Company and our stockholders.
Board Role in Risk Oversight
Risk is inherent in every business, and how well a business manages risk can ultimately determine its success. We face a number of risks, including strategic risks, enterprise risks, financial risks, and regulatory risks. While our management is responsible for day to day management of various risks we face, the Board, as a whole, is responsible for evaluating our exposure to risk and to satisfy itself that the risk management processes designed and implemented by management are adequate and functioning as designed. The Board reviews and discusses policies with respect to risk assessment and risk management. The Board also has oversight responsibility with respect to the integrity of the Company's financial reporting process and systems of internal control regarding finance and accounting, as well as its financial statements.
Audit Committee
The Board does not currently have a standing Audit Committee. The full Board performs the principal functions of the Audit Committee. The full Board monitors our financial reporting process and internal control system and reviews and appraises the audit efforts of our independent accountants.
Compensation Committee
The Board does not currently have a standing Compensation Committee. The full Board establishes our overall compensation policies and reviews recommendations submitted by our management.
Nominating Committee
The Board does not currently have a standing Nominating Committee. We do not maintain a policy for considering nominees. Our Bylaws provides that the number of Directors shall be fixed from time to time by the Board, but in no event shall be less than the minimum required by law. The Board of Directors shall be large enough to maintain our required expertise but not too large to function efficiently. Director nominees are recommended, reviewed and approved by the entire Board. The Board believes that this process is appropriate due to the relatively small number of directors on the Board and the opportunity to benefit from a variety of opinions and perspectives in determining director nominees by involving the full Board.
While the Board is solely responsible for the selection and nomination of directors, the Board may consider nominees recommended by stockholders as it deems appropriate. The Board evaluates each potential nominee in the same manner regardless of the source of the potential nominee's recommendation. Although we do not have a policy regarding diversity, the Board does take into consideration the value of diversity among Board members in background, experience, education and perspective in considering potential nominees for recommendation to the Board for selection. Stockholders who wish to recommend a nominee should send nominations to our President, Caleb Wickman, 1000 E William St. Suite 204, Carson City, NV 89701, that includes all information relating to such person that is required to be disclosed in solicitations of proxies for the election of directors. The recommendation must be accompanied by a written consent of the individual to stand for election if nominated by the Board and to serve if elected.
Compensation Consultants
We have not historically relied upon the advice of compensation consultants in determining Named Executive Officer compensation. Instead, the full Board reviews compensation levels and makes adjustments based on their personal knowledge of competition in the market place, publicly available information and informal surveys of human resource professionals.
Stockholder Communications
Stockholders who wish to communicate with the Board may do so by addressing their correspondence to the Board at Artec Global Media, Inc., Attention: Caleb Wickman, 1000 E William St. Suite 204, Carson City, NV 89701. The Board shall review and respond to all correspondence received, as appropriate.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information about compensation paid, earned or accrued for services by our Executive Officer during the fiscal year ended January 31, 2016 and 2015:
SUMMARY COMPENSATION TABLE
___________
(1) Mr. Wickman became the Company's Director, President, Treasurer and Secretary on December 20, 2013. There are no current employment agreements between the Company and Mr. Wickman.
Outstanding Equity Awards at Fiscal Year-End
None.
Payments Upon Termination of Change in Control
There are no understandings or agreements known by management at this time which would result in a change in control.
Compensation of Directors
No compensation has been paid to date by the Company to any non-employee directors.
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 May 5, 2016 by (i) all persons who are known by us to beneficially own more than 5% of our outstanding shares of common stock, (ii) each director, director nominee, and Named Executive Officer; and (iii) all executive officers and directors as a group:
______________
*Less than 1%
(1) Beneficial Ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Each of the beneficial owners listed above has direct ownership of and sole voting power and investment power with respect to the shares of Company common stock and except as indicated the address of each beneficial owner is 1000 E William St Suite 204, Carson City, NV 89701.
(2) Calculated pursuant to rule 13d-3(d) of the Exchange Act. Beneficial ownership is calculated based on 699,217,523 shares of Common Stock issued and outstanding on a fully diluted basis as of May 5, 2016. Under Rule 13d-3(d) of the Exchange Act, shares not outstanding which are subject to options, warrants, rights or conversion privileges exercisable within 60 days are deemed outstanding for the purpose of calculating the number and percentage owned by such person, but are not deemed outstanding for the purpose of calculating the percentage owned by each other person listed.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
We do not have a formal written policy for the review and approval of transactions with related parties. However, our Code of Ethics requires actual or potential conflict of interest to be reported to the Board. Our employees are expected to disclose personal interests that may conflict with ours and they may not engage in personal activities that conflict with their responsibilities and obligations to us. Periodically, we inquire as to whether or not any of our Directors have entered into any transactions, arrangements or relationships that constitute related party transactions. If any actual or potential conflict of interest is reported, our entire Board and outside legal counsel review the transaction and relationship disclosed and the Board makes a formal determination regarding each Director's independence. If the transaction is deemed to present a conflict of interest, the Board will determine the appropriate action to be taken.
Transactions with Related Persons
The Board is responsible for review, approval, or ratification of "related-person transactions" involving the Company or its subsidiaries and related persons. Under SEC rules (Section 404 (a) of Regulation S-K), a related person is a director, officer, nominee for director, or 5% stockholder of the company since the beginning of the previous fiscal year, and their immediate family members. the Company is required to report any transaction or series of transactions in which the company or a subsidiary is a participant, the amount involved exceeds $120,000, and a related person has a direct or indirect material interest.
The Board has determined that, barring additional facts or circumstances, a related person does not have a direct or indirect material interest in the following categories of transactions:
·
any transaction with another company for which a related person's only relationship is as an employee (other than an executive officer), director, or beneficial owner of less than 10% of that company's shares, if the amount involved does not exceed the greater of $1 million or 2% of that company's total annual revenue;
·
compensation to executive officers determined by the Board;
·
compensation to directors determined by the Board;
·
transactions in which all security holders receive proportional benefits; and
·
banking-related services involving a bank depository of funds, transfer agent, registrar, trustee under a trust indenture, or similar service.
The Board reviews transactions involving related persons who are not included in one of the above categories and makes a determination whether the related person has a material interest in a transaction and may approve, ratify, rescind, or take other action with respect to the transaction in its discretion. The Board reviews all material facts related to the transaction and takes into account, among other factors it deems appropriate, whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances; the extent of the related person's interest in the transaction; and, if applicable, the availability of other sources of comparable products or services.
No related party transactions greater than $120,000 occurred during the fiscal years ended January 31, 2016 and 2015. For related party transactions that do not exceed $120,000 please see the notes to the financial statements included in this Form 10-K.
Review, Approval or Ratification of Transactions with Related Persons
Our unwritten policy with regard to transactions with related persons is that all material transactions are to be reviewed by the entire Board for any possible conflicts of interest. In the event of a potential conflict of interest, the Board will generally evaluate the transaction in terms of the following standards: (i) the benefits to us; (ii) the impact on a director's independence in the event the related person is a director, an immediate family member of a director or an entity in which a director is a partner, shareholder or executive officer; (iii) the availability of other sources for comparable products or services; (iv) the terms and conditions of the transaction; and (v) the terms available to unrelated parties or the employees generally. The Board will then document its findings and conclusion in written minutes.
Director Independence
Please refer to "Director Independence" under the section titled "CORPORATE GOVERNANCE" in "ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE."
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
INDEPENDENT PUBLIC ACCOUNTANTS
On December 3, 2015, the Company appointed Peterson Sullivan LLP ("PSCPA") to serve as our independent registered public accounting firm to audit our financial statements for the fiscal year ended January 31, 2016. Bedinger & Company served as our independent registered public accounting firm during the years ended January 31, 2015 and 2014 and through our second quarter ended July 31, 2015. To the knowledge of management, PSCPA has no direct or material indirect financial interest in us or any connection with us in any capacity otherwise than as independent accountants.
Our Board, in its discretion, may direct the appointment of different public accountants at any time during the year, if the Board believes that a change would be in the best interests of the stockholders. The Board has considered the audit fees, audit-related fees, tax fees and other fees paid to our auditors, as disclosed below, and has determined that the payment of such fees is compatible with maintaining the independence of the accountants.
We do not currently have an audit committee.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table presents aggregate fees for professional services rendered by our auditors during the years ended January 31, 2016 and 2015:
Audit Fees
Audit fees for the year ended January 31, 2016 totaled $31,755 and consist of the aggregate fees billed by our auditors for the audit of the financial statements included in our Annual Report on Form 10-K and review of interim financial statements included in the quarterly reports on Form 10-Q during the year ended January 31, 2016.
Audit-Related Fees
The Company did not pay any audit-related fees for the year ended January 31, 2016.
Tax Fees
Tax fees for the year ended January 31, 2016 totaled $0 and $0.
All Other Fees
There were no other fees billed by the Company's auditors for the year ended January 31, 2016.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) The following documents are filed as a part of this Form 10-K:
1. Financial Statements
The following financial statements are included in Part II, Item 8 of this Form 10-K:
Report of Independent Registered Public Accounting Firm
Balance Sheets as of January 31, 2016 and 2015
Statements of Operations for the years ended January 31, 2016 and 2015
Statements of Stockholders' Deficit For the years Ended January 31, 2016 and 2015
Statements of Cash Flows for the years ended January 31, 2016 and 2015
Notes to Financial Statements
2. Exhibits
The exhibits listed in the Exhibit Index, which appears immediately following the signature page, are incorporated herein by reference, and are filed as part of this Form 10-K.
3. Financial Statement Schedules
Financial statement schedules are omitted because they are not required or are not applicable, or the required information is provided in the financial statements or notes described in Item 15(a)(1) above.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ARTEC GLOBAL MEDIA, INC.
(Registrant)
May 17, 2016By:/s/ Caleb Wickman
Caleb Wickman
President, Treasurer and Secretary
(Principal Executive Officer and Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in capacities and on the dates indicated.
Signature
Title
Date
/s/ Caleb Wickman
Director President, Treasurer and Secretary
May 17, 2016
Caleb Wickman
(Principal Executive Officer and Principal Financial Officer)
/s/ Stone Douglass
Chairman
May 17, 2016
Stone Douglass
/s/ Timothy Honeycutt
Director
May 17, 2016
Timothy Honeycutt
Exhibit Index
__________________
*Filed herewith