(“NetMovies” or the “Company”) isan enterprised focused on enabling, delivering, and distributing multimedia entertainment to consumers, and providing a platform for the converged control of and optimal distribution of content among consumer’s entertainment choices in a single platform. Started in 2001 by John Fanning, founding Chairman and CEO of Napster, Inc., NetMovies’ has, since its inception, targeted inefficiencies in distribution networks. Just as Napster was designed as a broker of consumer-owned files, providing liquidity in file sharing networks that pioneered the field of multimedia file sharing, paving the way not only for peer-to-peer networks such as Bittorrent, but also proving the fundamental business model that fuels YouTube, and establishing the internet as a venue for music that inspired the resurgence of Apple and forays into the space by leaders such as Microsoft and Dell. With NetMovies, Mr. Fanning has applied his vision to broadband media, identifying inefficiencies in the network. Initially expanding on peer-to-peer technology developed at Napster, this line was spun out to Boston-based PermissionTV, allowing NetMovies to target the one factor most limiting to internet media: the challenges associated with bringing the video from the lean-forward internet to the lean-back television. NetMovies first product will be a device to wirelessly transmit full-HD signals along with broadband internet across short distances and across longer distances within the home using existing cabling infrastructure and without requiring any effort on the part of the consumer beyond connecting existing cables. Simultaneously, the company will be integrating its existing content distribution infrastructure into the device, offering both the ability to distribute content and multi-media advertisements attached to content delivered by the Company or others on the internet.
The NetMovies business model encompasses three key components:
Multimedia hardware – NetMovies has concepts and preliminary designs for a revolutionary device that will deliver wireless HDMI and HDMI over standard home wiring – allowing for longer distances and traversal of signal-blocking structures. Wireless and wired dongles will attach to televisions and A/V equipment minimizing the footprint and eliminating the need for additional components, while control of the system will via AJAX-enabled wireless web accessed via a NetMovies mobile device or any third-party wifi or cellular device with a browser.
Formal and Informal Content – Connecting both traditional and internet entertainment sources, users of NetMovies devices will have access to television, DVD, or cable and additionally, pending agreements where necessary, formal and informal content available on-line, allowing access to not just such mainstream internet content as Google’s YouTube and Amazon’s Unbox, but also fringe content available on sites such as John to fill in or even BitTorrent. Beyond this, the NetMovies CDN offers the capacity to store and deliver such content desired but unavailable elsewhere.
Advertising Revenue Streams – Integral in the NetMovies devices will be the ability to insert pre-roll, mid-roll, or post-roll advertisements delivered via the NetMovies CDN. These ads will be centrally managed, able to be delivered on a global, regional, or individualized basis, and, because the NetMovies are conceived around full-screen entertainment, will be able to be delivered seamlessly with third-party content sources.
Top Tier Strategic Partnerships – NetMovies is pursuing relationships with strategic partners relevant to all aspects of its business—hardware, networking, content, consumer electronics, and distributors. For example, [Blockbuster Inc.] (“Blockbuster”) was a start-up investor in NetMovies and has been instrumental in establishing early relationships between NetMovies and content providers, as well as representing a potential distribution and marketing partnership.
The key to the NetMovies model is to exploit the opportunity created by parallel media consumption. Various sources report an almost doubling of the trend of simultaneous consumption of multiple media sources, typically realized in the form of browsing web sites with the television playing in the background. Using the NetMovies device, this parallel consumption can be integrated. For example, a browser plug-in could shunt a web page to the television, automatically displacing the existing television programming with new multimedia content from the web. Achieving the once science fiction goal of seamless connections, NetMovies is exploring such user interface models as, for example, connecting the top of a screen device with a television, allowing digital content to be pushed off the top of the screen to appear on another connected device. Dating back to the original Napster, this integrated entertainment model has always been Mr. Fanning’s vision, and only now has the technology arrived and become mainstream enough for it to be realized.
A significant opportunity exists to provide multi-screen integrated entertainment beyond the single-screen convergence model currently being explored by such vendors as Apple, Tivo, and Microsoft. NetMovies believes it can capitalize on this opportunity and address the shortcomings of its competitors by utilizing a revolutionary technological framework to integrate a range of services and content:
Advanced Technology
Wireless and waveguided HDMI technology is now, for the first time, making existing home data infrastructure able to satisfy the requirements to achieve this integration;
Moore’s law and miniaturization make possible the deployment of multi-purpose, muti-capability systems able to fit into a package small enough to fit in a dongle;
New chip technology enables datapath convergence and multi-format decompression to be pushed downstream.
Diverse revenues
Hardware sales
Advertising distribution
Partner fees
Premium content
RangeofContent
With few limitations, any and all content distributable in any medium will be able to be pushed to a television screen; Going forward, NetMovies is establishing and building relationships with strategic partners in all segments of its business—hardware, networking, content production, consumer electronics, and distributors. These partnerships would create substantial growth opportunities in the near future, allowing NetMovies to expand into markets outside the home including mobile and professional markets.
Corporate Information
The Company was incorporated under the laws of the State ofDelawarein December 1999. The Company’s principal executive offices are located at 165 Nantasket Avenue, Hull, Massachusetts 02045, and its telephone number is. (781) 925 - 1700
The Company maintains a corporate website at www.NetMovies.com.
Securities Offered
40,000,000 shares of Common Stock. See “Description of Securities.”
Purchase Price
$.50 per share
Minimum Purchase
The minimum purchase by an investor will be 50,000 shares of Common Stock ($25,000). The Company reserves the right to accept smaller individual subscriptions in its discretion.
Net Proceeds
$19,800,000 if all of the shares of Common Stock offered hereby are sold. See “Use of Proceeds.”
Offering Period
The Offering will be open until January 31, 2009, or until all of the shares of Common Stock are subscribed for by purchasers and accepted by the Company, whichever occurs first. The Company may, at its option, extend the subscription period until February 28, 2009, if all of the shares have not been sold on or before January 31, 2009. The Company may hold one or more closings.
Before the Offering
50,950,000 shares of Common Stock.
After the Offering (2)
90,950,000 shares of Common Stock (if the maximum number of shares are sold).
Use of Proceeds.
Development of services and products; sales, marketing and promotion activities; and general corporate purposes and working capital.
Terms of Offering and Subscription
This Offering is being made on a “best efforts” basis with respect to all 40,000,000 shares of Common Stock offered. All funds received from subscribers for the shares of Common Stock will be held in a special non-interest bearing account at Citizens Bank,Riverside,Rhode Island, until a closing is held.
The Offering will be open until January 31, 2009, or until all of the shares of Common Stock are subscribed for by purchasers and accepted by the Company, whichever occurs first. The Company may, at its option, extend the subscription period until February 28, 2009, if all of the shares have not been sold on or before January 31, 2009. The Company may hold one or more closings.
The Offering will erminate on or before January 31, 2009, unless extended by the Company, in its sole discretion, until February 28, 2009,
without notice to prospective subscribers.
If the Offering is erminated or withdrawn prior to an nitial closing, the Company will return o subscribers the subscription amounts, without interest.
Subscription proceeds will be received by the Company and not
held in a formal escrow account. Promptly following the receipt of fully executed subscription documents and clearance of subscription proceeds, and acceptance by the Company thereof, the Company shall execute and deliver the Common Stock certificates to subscribers.
Investor Suitability
Subscription for shares of Common Stock in this Offering is limited to natural persons or entities who are an “accredited investor,” as such term is defined in Regulation D under the Securities Act. In order to subscribe for shares, each prospective investor must meet the criteria set forth in the Investor Suitability Requirements attached as Appendix B.
Subscription Documents
In order to subscribe for shares, each prospective investor will be required to deliver the subscription price, calculated on the basis of $.50 per share, payable inUnited Statesdollars, by wire transfer or by check, payable to “NetMovies, Inc. – 2008 Private Placement.” In addition, each prospective investor must complete, execute and deliver the Subscription Agreement and Investor Questionnaire attached as Appendix C.
Risk Factors
An investment in the Company is highly speculative and subject to significant risks. No assurance can be given that the Company will be profitable, that an investor will realize a return on their investment or that such investor will not lose the investment altogether. See “Risk Factors.”
Additional Information
To the extent necessary, the Company will provide investors with supplements to this Memorandum containing new or changed information about the Company.
Requests for additional information may be directed to Jonathan Lang, the Company’s Chief Operating Officer, at tel: (703) 407-3535.
1. This number includes 38,700,000 shares reserved for issuance upon the conversion of outstanding Series A Convertible Preferred Stock. Does not include 7,035,000 shares reserved for issuance upon the exercise of outstanding stock options and 191,471 shares of Common Stock reserved for issuance upon the exercise of future stock option grants.
2. The Company has obtained approval by written consent of holders of a majority of the outstanding Common Stock and Preferred Stock to amend the Company’s Certificate of Incorporation to increase the authorized Common Stock to 100,000,000 shares, effective on or prior to the initial closing of this Offering.
RISK FACTORS
The shares of Common Stock offered hereby are speculative and involve a high degree of risk. Prospective purchasers should carefully consider, among other things, the following risk factors concerning the business of the Company and this Offering prior to making an investment decision.
The Company has no significant operating history upon which prospective investors can evaluate its performance.
The Company was incorporated and commenced operations in December 1999, and has no significant operating history upon which prospective investors can evaluate its performance. The Company will be unable to commence significant commercial operations if this Offering or a subsequent offering is unsuccessful. As a new business, the Company is subject to all of the risks inherent in the establishment of a new business enterprise. The likelihood of the success of the Company must be considered in light of the problems, unanticipated expenses, difficulties, complications and delays frequently encountered in connection with building a business, scaling-up operations and the rapidly changing and competitive environment in which the Company operates.
The Company needs the proceeds of this Offering, and potentially of subsequent funding, and any such proceeds may not be sufficient to complete the Company’s business plan.
The proceeds of this Offering are needed to finance the continued operation of the Company, the development of its service offerings and its proposed marketing and sales activities, including corporate overhead and salaries. The Company anticipates that the proceeds of this Offering at the maximum level will be sufficient to fund the Company’s operations for at least 24 months. No assurance can be given that the Company will generate funds from operations once it has expended the proceeds of this Offering or that the Company will not require additional financing in the future. There can be no assurance that additional financing from other sources will be available on acceptable terms, or at all. Investors in this Offering may be requested to fund additional amounts to the Company in the future, although they will not be obligated to do so. The Company has no current commitments or arrangements for additional financing after this Offering has been completed. See “Use of Proceeds.”
The Company may not realize significant benefits from its strategic relationship with Blockbuster.
Blockbuster has relationships with other companies that are competitors to NetMovies, such as CinemaNow, and its investment in NetMovies is small relative to Blockbuster’s size. Although, there have been frequent discussions with Blockbuster management regarding joint marketing plans these discussions may not produce the desired results. There can be no assurance that NetMovies will continue to have a positive and fruitful relationship with Blockbuster and Blockbuster is under no legal obligation to help NetMovies.
The Company faces uncertainty as to the commercial viability and market acceptance of its technology among consumers.
The Company’s technology is in the development stage and has not been implemented on a commercial basis in any significant manner. There can be no assurance that the Company will be able to achieve sufficient acceptance of its technology to make it commercially viable. The value of the Company’s offerings will be dependent to a significant degree upon the Company’s ability to attract clients in the face of competition. There can be no assurance that such market acceptance will be sufficient to attract enough revenue for the Company to cover its substantial development and operating costs.
The Company depends on the Internet to conduct its business.
The success of the Company will depend to a significant degree on growth in the usage of the Internet by consumers for online entertainment. The evolving nature of the Internet creates numerous uncertainties concerning matters such as the future speed and information carrying capacity of the Internet and the nature of future access to the Internet by consumers and businesses, as well as the future popularity of various uses of the Internet.
The markets for Internet products and services are characterized by rapidly changing technology, evolving industry standards, frequent new product and service introductions, shifting distribution channels and changing customer demands and expectations, all of which can have the effect of making large investments in hardware and software obsolete in a relatively short period of time. The Company’s success or failure will depend in large part upon its ability to adapt to and compete in this fluid marketplace. Changes in the legal environment governing the Internet relating to such matters as user privacy, libel and slander, new government regulation and access charges could also impact the Company’s business and the growth of the Internet generally.
The Company faces competition from a number of extremely large, established companies.
The Company faces competition from a number of companies, notably other providers of internet-convergence entertainment system components. The Company’s competitors include Apple, Dell, Vudu, NetFlix, CAC Media, and a number of other established companies that offer similar convergence products. If any or all of these competitors acquire additional market share, this could result in NetMovies losing market share, which would have a material adverse effect on the Company’s business. If the Company is unable to respond effectively to its competitors, many of which have greater financial resources, its business and results of operations will be materially adversely affected.
Unauthorized use of credit cards and bank accounts could expose the Company to substantial losses. If the Company were unable to detect and prevent unauthorized use of cards and bank accounts, its business would suffer.
As one component of NetMovies revenue depends on on-line subscription fees for premium content, and another component relies on on-line sales of advertisements, it could be a target for fraud. In configuring the NetMovies service offerings, the Company faces an inherent trade-off between customer convenience and security. Identity thieves and those committing fraud using stolen credit card or bank account numbers, often in bulk and in conjunction with automated mechanisms of online communication, potentially can unlawfully access the NetMovies services. The Company expects that technically knowledgeable criminals will continue to attempt to circumvent its anti-fraud systems, and if successful, the Company’s business and results of operations will be materially adversely affected.
Security and privacy breaches in the Company’s electronic transactions may expose it to additional liability and result in the loss of customers, either of which events could harm the Company’s business.
Any inability on the Company’s part to protect the security and privacy of its electronic transactions could have a material adverse effect on its business and results of operations. A security or privacy breach could:
expose the Company to additional liability,
Increase the Company’s expenses relating to resolution of these breaches, and
deter customers from using NetMovies services.
The Company cannot assure you that its use of applications designed for data security will effectively counter evolving security risks or address the security and privacy concerns of existing and potential customers. Any failures in the Company’s security and privacy measures could have a material adverse effect on its business, financial condition and results of operations.
If the Company were found to be subject to or in violation of any laws or regulations governing money transmitters, it could be subject to liability and forced to change its business practices.
Although there have been no definitive interpretations to date, the Company assumes that its services are subject to the Electronic Fund Transfer Act and Regulation E of the Federal Reserve Board. As a result, among other things, the company must provide advanced disclosure of changes to its products and services, follow specified error resolution procedures, and absorb losses from transactions not authorized by the consumer. In addition, the Company is subject to the financial privacy provisions of the Gramm-Leach-Bliley Act and related regulations. As a result, some customer financial information that the Company receives is subject to limitations on reuse and disclosure under the Gramm-Leach-Bliley Act and related regulations. Additionally, pending legislation at the state and federal levels may restrict further the Company’s information gathering and disclosure practices. Existing and potential future privacy laws may limit the Company’s ability to develop new products and services that make use of data gathered through its products and services. The provisions of these laws and related regulations are complicated, and the Company does not have extensive experience in complying with these laws and related regulations. Even technical violations of these laws can result in penalties of up to $1,000 assessed for each non-compliant transaction.
We may experience breakdowns in our online system that could damage customer relations and expose us to liability.
A system outage or data loss could have a material adverse effect on our business, financial condition and results of operations. To operate our business successfully, we must protect our payment processing and other systems from interruption by events beyond our control. Events that could cause system interruptions include:
fire
earthquake
terrorist attacks
natural disasters
computer viruses
unauthorized entry
telecommunications failure
power loss
We depend on third parties for co-location of our data servers and cannot guarantee the security of our servers. Our primary servers currently reside in facilities in North Carolina. Currently these facilities do not provide the ability to switch instantly to another back-up site in the event of failure of the main server site. This means that an outage at one facility could result in our system being unavailable for at least several hours. This downtime could result in increased costs and lost revenues which would be detrimental to our business.
We cannot assure you that our infrastructure could handle a larger volume of customer transactions. Any failure to accommodate volume could impair customer satisfaction, lead to a loss of customers, impair our ability to add customers or increase our costs, all of which would harm our business.
Because our customers may use our products for critical transactions, any errors, defects or other infrastructure problems could result in damage to our customers' businesses. These customers could seek significant compensation from us for their losses. Even if unsuccessful, this type of claim likely would be time consuming and costly for us to address.
Our product features may infringe claims of third-party patents and copyrights, which could affect our business and financial condition adversely.
We are aware of various patents and copyrights held by third parties in the area of movie download systems. The holders of rights under these patents and copyrights might assert that we are infringing them. We cannot assure you that our product features do not infringe on patents held by others or that they will not in the future. If any party asserts claims against us, litigation may have a material adverse effect on us even if we defend ourselves successfully. In lieu of expensive litigation, we may seek a patent license but we cannot assure you that we could secure a license on reasonable terms.
The Company’s status under banking or financial services laws or other laws in countries outside the United States is unclear. The cost of obtaining any required licenses or regulatory approvals in these countries could affect the Company’s financial condition.
The Company intends to offer its services to customers outside the United States. The status of the Company as a regulated business in these countries is unclear. If the Company is found to be subject to and in violation of any foreign laws or regulations, it could be subject to liability, forced to change its business practices or forced to suspend operations in one or more countries. Alternatively, it could be required to obtain licenses or regulatory approvals that could impose a substantial cost on it.
The Company is subject to U.S. and foreign government regulation of the Internet, the impact of which is difficult to predict. The Company could be exposed to significant liabilities and expenses if it is required to comply with new or additional regulations.
There are currently few laws or regulations that apply specifically to the sale of goods and services on the Internet. The application to the Company of existing laws and regulations relating to issues such as currency exchange, pricing, taxation, quality of services, electronic contracting, consumer protection, privacy, and intellectual property ownership and infringement is unclear. In addition, the Company may become subject to new laws and regulations directly applicable to the Internet or its activities. Any existing or new legislation applicable to the Company could expose it
