You should consider each of the following risk factors and any other information set forth herein and in our reports filed on TMM, Inc.'s website, including the more detailed information in our financial statements and related notes, in evaluating our business and prospects. Additional risks and uncertainties not presently know to us, or that we currently consider immaterial, may also impair our business or operations. If any of the following risks actually occur, our business and financial results or prospects could be harmed.
Risks Related to Our Financial Condition and Business Model
RISKS RELATED TO OUR FINANCIAL CONDITION
Until we generate revenue from the licensing or sale of our technology and become profitable, there will be doubt about our ability to continue as a going concern.
We have not generated any revenue since the inception of the Company and have incurred significant losses over that same period of time. Based upon our current financial condition, our management estimates that we have sufficient cash to operate our business at the current level for the next eighteen months. However, until revenue is generated and profitability is achieved, our financial condition raises doubt that we will be able to operate as an ongoing company. Our financial statements do not include any adjustments that might result from the uncertainty as to whether we will be an ongoing company.
Because our operating history is characterized by net losses, we anticipate further losses and we may never become profitable.
Since we commenced our current business operations with our current board and management during the fiscal quarter ended December 31, 2011, we have incurred significant operating losses. We expect to continue to incur operating losses until such time that we can make our technology commercial and license it to end users. We may not have adequate cash resources to reach the point of profitability, and we may never become profitable. Even if we do achieve profitability, we may be unable to increase our license revenues and sustain or increase our profitability in the future.
Even though we recently completed a private placement for additional operating capital, we may require additional resources to fully implement our business plan and may be forced to curtail or cease operations if we are not able to obtain additional financing in the future.
If we do not generate revenues and become profitable in the near term and are not able to secure additional funding, the implementation of our business plan will be impaired. Additional financing may take the form of further private equity or debt financings depending upon prevailing market conditions. These financings may not be available or, if available, may be on terms that are not favorable to us and could result in undue dilution to our stockholders and reduction of the market value of our common stock. If we obtain debt financing, we may be required to pledge assets as collateral, which would be subject to seizure by our creditors. If we were to default under the debt agreements, we could be required to comply with financial and other covenants that could limit our flexibility in conducting our business and put us at a disadvantage compared to our competitors, and we would be required to use our available cash to pay debt service. Since the terms and availability of any financing depends to a large degree upon general economic conditions and third parties over which we have no control, we can give no assurance that we will obtain the needed financing or that we will obtain such financing on attractive terms. In addition, our ability to obtain financing depends on a number of other factors, many of which are also beyond our control, such as interest rates and national and local business conditions. If the cost of obtaining needed financing is too high or the terms of such financing are otherwise unacceptable in relation to the strategic opportunity we are presented with, we may decide to forego that opportunity. If adequate capital is not available to us, we would likely be required to significantly curtail or possibly even cease our operations.
RISKS RELATED TO OUR BUSINESS MODEL
If our fractal video compression technology does not gain broad commercial acceptance, our business will be materially harmed and we may need to curtail or cease operations.
Many factors may affect the commercial acceptance of our fractal video compression technology, including the following:
• performance, reliability and cost-effectiveness of our fractal technology compared to conventional technology;
• developments relating to other alternative fractal technologies;
• fluctuations in economic and market conditions that affect the cost or viability of our alternative technology;
• overall growth in our fractal video compression market;
• availability and terms of government utilization of our technology;
• fluctuations in capital expenditures by end-users on our technology which could decrease when the economy slows and interest rates increase; and
• the development of new and profitable competing fractal video compression technology.
Product quality expectations may not be met causing slower market acceptance.
In order to achieve our goal of improving the quality and lowering the total costs of video streaming and storage, we plan on integrating changes and improvement in our technology on an ongoing basis.
Despite our continuous quality improvement initiatives, we may not meet customer expectations. Any significant quality issues with our technology could have a material adverse effect on our rate of adoption, results of operations, financial condition and cash flow. Moreover, as we develop new technology for commercial use, our technology may perform below expectations. Any significant performance below expectations could adversely affect our operating results, financial condition and cash flow and affect the marketability of our technology.
If technological changes in the video compression industry render our technology uncompetitive or obsolete, our market share may decline and cause our business to fail.
The video compression market is characterized by continually changing technology requiring improved features, such as higher quality, increased compression ratio and speed. Our failure to further refine our technology and develop and introduce new enhancements could cause our technology to become uncompetitive and obsolete, which could reduce our market share and cause our revenues, if any, to decline. The video compression technology market is evolving and competitive. We will need to invest significant financial resources in research and development to keep pace with technological advances to effectively compete in the future. A variety of competing technologies are under development by other companies that could result in lower costs or higher performance than our technology. While we intend to continually improve our technology, our development efforts may be rendered obsolete by the technological advances of others, and other technologies may prove more advantageous for the commercialization of alternative technologies. Should this occur, it could have a material adverse effect on our business, including our operating results, financial condition and cash flow.
If we fail to respond to changes in customer preferences in a timely manner and adapt our technology to meet the needs of various market sectors, any future license revenues of ours may be adversely affected, and our business may fail.
The video compression industry is highly competitive, and other providers of similar technologies are also attempting to gain competitive advantages as well. Our financial performance depends on our ability to identify, originate and define industry trends, as well as to anticipate, gauge and react to changing customer preferences and adapt our technology accordingly in a timely manner. If we misjudge the demands of the market, it could have a material adverse effect on our business, including our operating results, financial condition and cash flow.
The complexity of our technology may lead to errors, defects, and bugs, which could subject us to significant costs and adversely affect market acceptance of our technology, and our business may fail.
Our technology may contain undetected errors, weaknesses, defects or bugs as is or as new applications are released. If our technology contains production defects, reliability, quality or compatibility problems that are significant to our customers, our reputation may be damaged and customers may be reluctant to license or purchase our technology, which could adversely affect our ability to retain and attract new customers. In addition, these defects or bugs could interrupt or delay new commercial applications, which could have a material adverse effect on our business, including our operating results, financial condition and cash flow.
We may be required to make significant expenditures of capital and other resources to resolve the problems. This could result in significant additional development costs and the diversion of technical and other resources from our other development efforts. We could also incur significant costs to repair or replace defective applications. These costs or damages could have a material adverse effect on our business, including our operating results, financial condition and cash flow.
If we are unable to successfully manage growth, our operations could be adversely affected and our business may fail.
Our progress is expected to require the full utilization of our management, financial and other resources, which to date has occurred with limited working capital. Our ability to manage growth effectively will depend on our ability to improve and expand operations, including our financial and management information systems, and to recruit, train and manage technical and sales personnel. There can be no absolute assurance that management will be able to manage growth effectively.
If we do not properly manage the growth of our business, we may experience significant strains on our management and operations and disruptions in our business. Various risks arise when companies and industries grow quickly. If our business or industry grows too quickly, our ability to meet customer demand in a timely and efficient manner could be challenged. We may also experience development or production delays as we seek to meet increased demand for our technology. Our failure to properly manage the growth that we or our industry might experience could negatively impact our ability to execute on our operating plan and, accordingly, could have an adverse impact on our business, our cash flow and results of operations, and our reputation with our current or potential customers.
RISKS RELATED TO CONTROL PERSONS, KEY EMPLOYEES AND MANAGEMENT
Because our business is dependent upon the performance of key employees and consultants, the loss of those persons would materially impact our business.
Our business is dependent upon the performance of certain key employees, notably our President and director, our CFO and director, and our third director as well as upon various technology consultants / programmers. We are in the process of locating and hiring additional personnel. Competition for these individuals is intense and we may be able to hire such persons, if at all, only as at-will employees who are under no legal obligation to remain with us. Our competitors may choose to extend offers to any of these individuals on terms which we may be unwilling to meet. In addition, any or all of our key employees may decide to leave for a variety of personal or other reasons beyond our control.
Our board of directors may change our operating policies and strategies without prior notice or stockholder approval and such changes could harm our business and results of operations and the value of our stock.
Our board of directors has the authority to modify or waive our current operating policies and strategies without prior notice and without stockholder approval. We cannot predict the effect any changes to our current operating policies and strategies would have on our business, operating results and value of our stock. However, the effects could have a material adverse effect on our business, including our operating results, financial conditions and cash flow.
Certain stockholders control or have the ability to exert significant influence over the voting power of our capital stock.
Control of a substantial amount of our common stock is held by a relatively small group of persons. Because these shareholders collectively hold a significant portion of our common stock, they have the ability to exert significant influence over our policies and management. The interests of these stockholders may differ from the interests of our other stockholders. Accordingly, they will have a significant influence in determining the outcome of all corporate transactions or other matters, including mergers, consolidations and the sale of all or substantially all of our assets, the licensing of our technology and also the power to prevent or cause a change in control. While we have no current plans with regard to any merger, consolidation or sale of substantially all of our assets, the interests of these shareholders may still differ from the interests of the other stockholders.
If we are not able to maintain the security of our technology or are not granted full protection for property rights over our name and trademark safeguarding our name or the public's identification of our brand, such failure could have a material adverse effect on our business or create a potential loss of any competitive advantage we might have.
Our success will depend in part, on our ability to obtain and enforce intellectual property rights over our technology, name and trademark in both the United States and other countries. There can be no assurance that the steps we intend to take to protect our rights will be adequate, that we will be able to secure protections or registrations for our rights or marks in the United States or in foreign countries or that third parties or foreign governments will not infringe upon our territorial rights or misappropriate our technology, designs, copyrights, trademarks, service marks, domain name and similar proprietary rights. In addition, effective intellectual property protection may be unenforceable or limited in certain foreign countries. It is possible that our competitors or others will adopt product or service names similar to ours, thereby impeding our ability to build brand identity which could possibly lead to customer confusion. Our inability to protect our intellectual property adequately could have a material adverse effect on the acceptance of our brand and on our business, financial condition and operating results. In the future, litigation may be necessary to enforce and protect our territorial distribution rights, our trade secrets, copyrights and other intellectual property rights. Litigation would divert management resources and be expensive and may not effectively protect our intellectual property. We may be subject to litigation for claims of infringement of the rights of others or to determine the scope and validity of the territorial and/or intellectual property rights of others. If other parties file applications for marks used or registered by us, we may have to oppose those applications and participate in administrative proceedings to determine priority of rights to the mark, which could result in substantial costs to us due to the diversion of management's attention and the expense of such litigation, even if the eventual outcome is favorable to us. Adverse determinations in such litigation could result in the loss of certain of our proprietary intellectual property.
We may be exposed to patent infringement, misappropriation or other claims by third parties and an adverse determination could result in us paying significant damages.
Our success depends, in part, on our ability to use and develop our technology and know-how and to create technology without infringing the intellectual property or other rights of third parties. We may be subject to litigation involving claims of patent infringement or violation of intellectual property rights of third parties. The validity and scope of claims relating to our technology involve complex scientific, legal and factual questions and analyses and, therefor, may be highly uncertain. The defense and prosecution of intellectual property suits, patent opposition proceedings, trademark disputes and related legal and administrative proceedings can be both costly and time consuming and may significantly divert our resources and the attention of our technical and management personnel. An adverse ruling in any such litigation or proceedings could subject us to significant liability to third parties, require us to seek licenses from third parties, to pay ongoing royalties, or to redesign our technology or subject us to injunctions prohibiting the manufacture and sale of our products or the use of our technologies. Protracted litigation could also result in our customers or potential customers deferring or limiting their purchase or use of our technology until resolution of such litigation.
Because the payment of dividends is at the discretion of the Board of Directors, investors may not realize cash dividends at the frequency or in the amounts they anticipate.
We have never declared or paid any cash dividends on our common stock. Our payment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including but not limited to our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. Distributions to our stockholders are subordinate to the payment of our debts and obligations. If we have insufficient funds to pay our debts and obligations, distributions to stockholders will be suspended pending the payment of such debts and obligations. Accordingly, investors must rely on sales of their own common stock after price appreciations, which may never occur, as the only way to recover their initial investment.
Because we intend to conduct business outside of the United States, we will be subject to risks of doing business in foreign countries which are not found in doing business in the United States which could have a material adverse effect on our business.
We intend to conduct business outside of the United States, including Canada and possibly Australia, Japan, Korea, Central America, South America, and Europe. Doing business in foreign countries carries with it certain risks that are not found in doing business in the United States, which could have a material adverse effect on our business, including our operating results, financial condition and cash flow. The risks of doing business in foreign countries that could result in losses against which we are not insured include:
• Exposure to local economic conditions;
• Potential adverse changes in the diplomatic relations of foreign countries with the United States;
• Hostility from local populations;
• The adverse effect of currency exchange controls;
• Restrictions on the withdrawal of foreign investment and earnings;
• Government policies against businesses owned by foreigners; investment restrictions or requirements;
• Expropriations of property and technology;
• The potential instability of foreign governments;
• The risk of insurrections;
• Risks of renegotiation or modification of existing agreements with governmental authorities;
• Foreign exchange restrictions;
• Withholding and other taxes on remittances and other payments by subsidiaries; and
• Changes in taxation structure.
• Because we intend to conduct business in foreign countries, exchange rates may cause future losses in our international operations.
Because we expect to develop international sales and distributors, we may derive revenues from any such international operations in currencies other than the U.S. dollar. In so doing, we may incur currency translation losses due to changes in the values of foreign currencies and in the value of the U.S. dollar. We cannot predict the effect of exchange rate fluctuations upon future operating results.
Because our articles of incorporation, bylaws and Nevada law limit the liability of our officers, directors, and others, shareholders may have no recourse for acts performed in good faith.
Under our articles of incorporation, bylaws and Nevada law, each of our officers, directors, employees, attorneys, accountants and agents are not liable to us or the shareholders for any acts they perform in good faith, or for any non-action or failure to act, except for acts of fraud, willful misconduct or gross negligence. Our articles and bylaws provide that we will indemnify each of our officers, directors, employees, attorneys, accountants and agents from any claim, loss, cost, damage liability and expense by reason of any act undertaken or omitted to be undertaken by them, unless the act performed or omitted to be performed constitutes fraud, willful misconduct or gross negligence.
If we issue share of preferred stock with superior rights than the common stock offered hereby, it could result in a decrease in the value of our common stock and delay or prevent a change in control of us.
Our board of directors is authorized to issue shares of preferred stock. Our board of directors has the power to establish the dividend rates, liquidation preferences, voting rights, redemption and conversion terms and privileges with respect to any series of preferred stock. The issuance of any shares of preferred stock having rights superior to those of the common stock may result in a decrease in the value or market price of the common stock. Holders of preferred stock may have the right to receive dividends, certain preferences in liquidation and conversion rights. The issuance of preferred stock could, under certain circumstances, have the effect of delaying, deferring or preventing a change in control of us without further vote or action by the stockholders and may adversely affect the voting and other rights of the holders of common stock.
Because we have available a significant number of authorized shares of common stock, we may issue additional shares for a variety of reasons which will have a dilutive effect on our shareholders, resulting in reduced ownership and decreased voting power, or may result in a change of control.
Our board of directors has the authority to issue additional shares of common stock up to the authorized amount as stated in our Articles of Incorporation. If all of the stock options and warrants of our common stock are exercised, then there will be additional dilution of our issued and outstanding shares.
Our board of directors may choose to issue some or all of such shares to acquire one or more businesses or other types of property, or to provide additional financing in the future. The issuance of any such shares may result in a reduction of the book value or market price of the outstanding shares of our common stock. If we do issue any such additional shares, such issuance also will cause a reduction in the proportionate ownership and voting power of all other shareholders. Further, any such issuance may result in a change of control of the company. For instance, if the board of directors decides to issue a large number of shares of our common stock, the issuance could, if large enough in relation to our presently issued and outstanding shares, result in a change of control of our company. The board has the power to decide the amount of shares and price of those shares under Nevada law, and our capital needs may require a large amount of shares to finance our company. So the risk exists that our current capital structure may change resulting in new shareholders wielding a large percentage of shares.
Certain legislation relating to public companies may make it more difficult for us to retain or attract officers and directors.
The enactment of the legislation involving certain compliance practices of public companies has resulted in a series of rules and regulations that increase responsibilities and liabilities of directors and executive officers. The perceived increased personal risk associated with these recent changes may deter qualified individuals from accepting these roles. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. We continue to evaluate and monitor developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
RISKS RELATED TO OUR SECURITIES
If our business is unsuccessful, our shareholders may lose their entire investment.
Although shareholders will not be bound by or be personally liable for our expenses, liabilities or obligations, should we suffer a deficiency in funds with which to meet our obligations, the shareholders as a whole may lose their entire investment in the Company.
If a market for our common stock is limited, shareholders may be unable to sell their shares.
Our common stock is currently quoted on the Pink Sheets under the symbol 'TMMI'. There could develop a limited public market for our common stock. A limited public market for our stock could make it difficult to sell your shares in our stock.
Short selling could increase the volatility of our stock price.
Short selling occurs when a person sells shares of stock which the person does not yet own and promises to buy stock in the future to cover the sale. The general objective of the person selling the shares short is to make a profit y buying the shares later, at a lower price, to cover the sale. Significant amounts of short selling, or the perception that a significant amount of shorts sales could occur, could depress the market price of our common stock. In contrast, purchases to cover a short position may have the effect of preventing or retarding a decline in the market price of our common stock, and together with the imposition of the penalty bid, may stabilize, maintain or otherwise affect the market price of our common stock. As a result, the price of our common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued at any time. These transactions may be effected on any markets or exchanges. Such short selling if it were to occur could impact the value of our stock in an extreme and volatile manner to the detriment of our shareholders.
Because we are subject to the 'Penny Stock' rules as a result of our shares being quoted on the Pink Sheets, the level of trading activity in our stock may be reduced.
Broker-dealer practices in connection with transactions in 'penny stocks' are regulated by penny stock rules adopted by the Securities and Exchange Commission. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on some national securities exchanges or quoted on NASDAQ). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and, 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, and monthly account statements showing the market value of each penny stock held in the customer's account. In addition, broker-dealers who sell these securities to persons other than established customers and 'accredited investors' must make a special written determination that the penny stock is a suitable investment for the purchaser and receiver the purchaser's written agreement to the transaction. Consequently, these requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security subject to the penny stock rules, and investors in our common stock may find it difficult to sell their shares.
Because FINRA sales practice requirements may limit a stockholder's ability to buy and sell our stock, investors may not be able to sell their stock should they desire to do so.
In addition to the 'penny stock' rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may have the effect of reducing the level of trading activity in our common stock. As a result, fewer broker-dealers may be willing to make a market in our common stock, reducing a stockholder's ability to resell shares of our common stock.
Because we do not expect to pay dividends for the foreseeable future, investors seeking cash dividends should not purchase our common stock.
We have never declared or paid any cash dividends on our common stock. We currently intend to retain future earnings, if any, to finance the expansion of our business. As a result, we do not anticipate paying any cash dividends in the immediate future. Our payment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including but not limited to our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. Accordingly investors must rely on sales of their own common stock after price appreciation, which may never occur, as the only way to realize their investment. Investors seeking cash dividends should not purchase our common stock.
TMM, Inc. Risk Factors