Item 1 —
Business
History
Organization
On December 14, 2009, America’s Suppliers,
Inc. was incorporated under the laws of the State of Delaware. America’s Suppliers, Inc. is an internet-based provider of
general merchandise through its wholly owned subsidiaries (collectively, the Company), DollarDays International, Inc. (“DollarDays”)
and WowMyUniverse Inc. (“Wow”). DollarDays is a wholesaler of general merchandise to small independent resellers through
its website www.DollarDays.com. Wow targets general consumers through its website WowMyUniverse.com. Orders are placed by customers
through the Company’s websites where, upon successful payment, the merchandise is shipped directly from the vendors’
warehouse.
Operations
Dollar Days
We, through our wholly-owned subsidiary
DDI Inc., develop software programs that allow us to provide general merchandise from third party manufacturers and suppliers
for resale to businesses through our website at
www.DollarDays.com
. We have been recognized as a leader in the
Internet wholesale market of discounted merchandise by a leading business periodical and numbers trade associations. Our
objective is to provide a one-stop discount shopping destination for general merchandise for smaller distributors, retailers and
non-profits nationwide seeking single and small cased-sized lots at bulk prices. We launched our first website in October
2001. The site offers customers an opportunity to shop for bargains conveniently, while offering our suppliers an alternative
sales channel. We believe our website offers a unique benefit to smaller businesses in that they are able to purchase
goods from wholesalers and importers in single and small case lots, with no minimum purchase requirements at discounted prices. We
believe the prevailing reason our business has been able to obtain bulk pricing for single case lots is our ability to reach smaller
distributors, retailers and non-profits that most general merchandise suppliers cannot economically reach. We provide all the
logistics and customer support to serve this sales channel and grow our customer base.
We continually add new, limited inventory
products to our website in order to create an atmosphere that encourages customers to visit frequently and purchase products before
the inventory sells out. Through our Internet catalog, we offer approximately 150,000 products, including up to 25,000
closeout items at further discounted prices. Closeout merchandise is typically available in inconsistent quantities
and prices.
We accept orders, either online or via
telephone sales staff, collect payment in the form of credit or debit card, PayPal or similar means, and coordinate with manufacturers,
importers and close-out specialists regarding delivery particulars. PayPal refers to the online payment platform located
at
www.paypal.com
and its localized counterparts. Our proprietary software and service procedures allow us to
sell merchandise to a single customer, and bill as a singer order, items purchased and delivered from multiple suppliers. We
do not take possession of inventory, but we are responsible for processing customer claims and returns.
Our website has a registered base of approximately
230,000 small businesses and receives approximately 3 million monthly page views. We receive an average of approximately
5,000 orders per month. Our target audience is smaller businesses.
Our historical success has resulted largely
from the size of our community of active users. We had approximately 35,000 unique customers place an order with us
in 2012 and 2011. We believe our sales and marketing efforts make inefficient markets more efficient because:
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Our website includes more
than 150,000 items on any given day and makes available to our users a wide variety of goods; and
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We bring buyers and sellers together
for lower costs than traditional intermediaries.
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We have had increased success throughout
the years by attracting repeat customers. In 2010, 2011 and 2012, the sales volume of individuals who purchased through
our website four times or more was 40%, 41% and 42%, respectively.
WowMyUniverse.com
During 2010, we established a majority-owned
subsidiary,
WowMyUniverse.com
to develop a retail online business to sell directly to consumers. On October 1, 2010, this
subsidiary became wholly owned as we acquired the non-controlling interest in exchange for our interest in an unconsolidated subsidiary.
During 2010, most of our activities related
to WowMyUniverse.com consisted of website development and marketing activities. While we experienced limited sales through test
marketing in 2010 and early 2011, we began full operations in the second half of 2011. Revenues from WowMyUniverse.com were approximately
$185,000 in 2011 and $166,000 in 2012.
Products and Services
Manufacturer, Supplier and Distribution
Relationships
It is difficult to establish wholesale
and closeout buying relationships with manufacturers and vendors. Trust and experience gained through past interactions
are important. We believe our business model reduces the risk to the manufacturer because its discounted products are
sold alongside its full-priced products. We enter into standardized contracts with each of our suppliers. Our
supplier relationships provide us with both private label and recognized brand-name products. The table below identifies
some of the brand names often found on our website.
Avon
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Fruit of the Loom
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3M
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Black & Decker
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Gillette
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Tommy Hilfiger
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Calvin Klein
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Revlon
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Tonka
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Colgate
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Kellogg’s
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Victoria’s Secret
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Disney
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NFL
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Ziploc
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Our manufacturer and supplier relationships
are based on historical experience with manufacturers, vendors and liquidation wholesalers. We are not obligated or entitled to
receive merchandise on a long–term or short-term basis, nor do our contractual terms guarantee the availability of merchandise. We
control the terms on which products are sold through our website.
Online Products
Our customers can locate products on our
website by utilizing our proprietary search function or by navigating through online departments. The departments section is currently
organized into approximately 32 main categories:
America’s Boutique
Suppliers
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Custom Imprinting
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Medical Products
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Arts & Crafts
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Electronics & Media
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Office & School Supplies
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As Seen on TV
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Food Pantry
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Pallet Assortment
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Automotive
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Gift Baskets
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Party Supplies
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Baby Care
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Hardware
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Pets
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Bath and Body
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Holiday & Seasonal
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Religious
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Books & Calendars
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Dome Décor
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Sports & Outdoors
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Candles & Home Fragrance
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Housewares
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Stationary & Gift Wrap
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Cleaning Supplies
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Jewelry
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Store Fixtures
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Clothing
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Lawn & Garden
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Toys & Games
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Cosmetics & Fragrances
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Licensed Team Products
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Our categories change as our business
evolves and from time to time we need to add or subtract categories to better serve our suppliers and customers. Each of the departments
has multiple categories that more specifically define the products offered within that department. For example, the
“Toys & Games” department currently has the following product categories:
Action Figures
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Games
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Remote Control Toys
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Action Toys
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Glow in the Dark
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Sport Related Toys
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Bingo Accessories
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Licensed Toys
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Stuffed Animals
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Building Toys
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Novelty & fake Money
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Teddy Bears
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Cars, Trucks & Vehicles
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Novelty Toys
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Toy Animals
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Costume Dress Up/Make Believe
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Outdoor Toys
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Toy Musical Instruments
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Dolls & Doll Accessories
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Playing Cards & Accessories
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Water Guns
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Electronic Toys
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Puppets
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Flashing Novelties
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Puzzles
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Categories are typically further divided
into subcategories to facilitate product identification. Individual products can be accessed and viewed from the category
or subcategory pages. These specific product pages include product descriptions, color photographs and pricing information.
The number of total products we offer
has grown from less than 5,000 in 2001, to more than 225,000 products in 2012. The number of products and product categories
change throughout the year, as we periodically reorganize our departments and/or categories to better reflect our current product
offerings.
Sales and Marketing
We use a variety of methods to target
our consumer audience, including online campaigns, direct marketing, and trade-shows. However, our primary marketing
consists of online marketing, including advertising through portals, keywords, search engines, affiliate marketing programs, banners,
and email campaigns. We seek to identify and eliminate campaigns that do not meet our expectations. We generally develop
these campaigns internally.
Marketing
Our marketing initiatives include, but
are not limited to, the following:
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Web Positioning
: In
order to maintain favorable positioning and to increase the likelihood of our website being “found” by customers looking
for wholesale merchandise, we maintain a proactive search engine optimization effort to assure continued high search engine placement. We
currently have over 450,000 web pages indexed in various search engines, including Google, Bing, Yahoo, MSN and AOL. Part
of the continuing search engine optimization program involves evolution of page content and product descriptions for maximum indexing
and rank possibilities. We believe our newer categories and higher priced products in existing categories help to increase
search engine visibility and should, therefore, increase visitor counts. Approximately 75% of our gross sales in 2012,
2011, and 2010 came from “organic” (i.e., unpaid) search engine traffic.
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Website
Design
: We continually evaluate our website and make improvements as deemed necessary. Periodically, we intend
to re-design our website as market factors and technological advances necessitate.
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Banner
Ads
: We place banner ads in many relevant wholesale directories.
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Pay-Per-Click
Advertising
: Pay-per-click companies provide advertising space on various relevant websites and charge us based
on actual user clicks on our ads. We monitor the results of our various pay-per-click programs and evaluate alternative
advertising outlets.
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Promotions
: We
offer both broad based promotions on our website available to all users, and targeted promotions transmitted via email directly
to select customers. Promotions include, but are not limited to, price discounts, free merchandise or premiums,
discount coupons, free shipping, and combinations of different promotions. Free shipping promotions have been our
most popular campaigns.
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E-mail
Campaigns
: We send approximately 3 million emails per month offering a variety of promotions, as previously
discussed.
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Platinum
Program
: Under this subscription service, in return for a $49 joining fee and an additional $15.95 monthly fee
or $175 annual fee, customers can receive a number of discounts and savings on goods, services, freight and other products sold
on our website. Our platinum program participants purchased more products through our website than non-participants
and made purchases more frequently than prior to participating in the program.
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Affiliates
: We
promote an “affiliate” program, where we pay a sales commission to affiliates for customers recommended to our
website by such affiliates. Approximately 700 affiliates have DollarDays’ banners on their websites.
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Distributors
: We
encourage Internet entrepreneurs to “clone” our website under the respective entrepreneurs’ names. These
“clones”, for which such entrepreneurs pay us a $99 annual fee and a $15.99 monthly fee, reflect our website at
www.DollarDays.com
in every aspect except for the difference in name. We have approximately 300 distributors
who promote their websites, while we handle all related sales, promotional efforts, customer service, collection and other
back office matters in the same manner we handle orders pertaining to our own website. We pay distributors a commission
on all sales generated through their independent websites.
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Sales
No single customer accounts for more than
5% of our revenues. We utilize internal staffing and outsourced resources to have sales and support coverage 24 hours
per day, seven days a week. The primary function of the sales staff is to field incoming calls and make outgoing calls
to solicit new customers, obtain additional sales from infrequent purchasers and re-contact lapsed customers.
To facilitate our sales process, as part
of our overall software program we have implemented a vendor management system (“VMS”), which is an interface between
us and our vendors. The VMS is the primary platform for a vendor to place and remove its product on our website, as
well as providing inventory tracking ability for the vendor. Once a product is listed on the website, customers and
sales staff are able to place and fulfill orders.
We have established the DollarDays Institute,
which coordinates with our vendors, via regular telephone seminars, on how to better describe and illustrate their products and
how to best utilize our VMS to their advantage. Management believes the visual and verbal depiction of the products
on our website is crucial to sales and establishing a loyal consumer base. If a product’s picture is inadequate
or its description incomplete or unpersuasive, the product is unlikely to sell. We believe the DollarDays Institute
enables our vendors to better promote their products, and consequently, increase sales.
Our product mix changes daily based on
the availability of the products we buy and sell.
Our primary distribution channel is online
sales to small businesses, non-profits and home-based businesses located in the United States. During 2012 and 2011,
revenues from domestic customers accounted for approximately 93% of our revenues.
Vendor Relations
Our ability to service our customers
quickly and efficiently is contingent upon vendor response time in fulfilling orders for in-stock merchandise and promptly informing
us of out-of-stock products. To facilitate our vendor relationships, we enter into agreements with them whereby they
agree to the following:
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Participation in the VMS
program to automatically convey information about out-of-stock items, price changes, new products, changes in product description
and other important information to be reflected by the vendor on our website;
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Use of one of our pre-approved shippers;
and
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Payment of a 2.5% marketing fee, which
is automatically deducted from their invoice.
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Our merchandising department monitors
vendors for compliance with the terms of their respective agreements. In the event a vendor does not comply with the
terms of the agreement, such vendor’s products may be removed from our website and replaced with products from a more suitable
vendor.
We have over 400 vendors and the total
amount purchased from any single vendor does not exceed 10% of our revenues.
Customer Service and Sales
We are committed to providing superior
customer service. We staff our customer service and sales department with dedicated in-house professionals who respond
to phone and e-mail inquiries on products, ordering, shipping status and returns. Our customer service and sales staff
processes approximately 2,500 calls per week and up to approximately 3,000 calls per week during peak periods.
Technology
We use our internally developed software
to support our operations. We have developed intuitive user interfaces and customer tools to create a user-friendly website and
developed transaction processing, database and network applications that help enable our users to reliably and securely complete
transactions on our sites. Our technology infrastructure simplifies the storage and processing of large amounts of data, eases
our operation, and automates much of the administration. Our Internet hosting provider utilizes a distributed protection
system to catch and mitigate attacks launched against our servers in addition to regular vulnerability testing. The application
sites are hosted using multiple virtual machines spread across multiple physical servers for performance, stability, and protection
from hardware failure. Static files such as imagery are mirrored to a content distribution network for low latency delivery to
visitors.
We also use a third-party application
to provide search, navigation and merchandising techniques to guide customers through our website. We currently employ
two full-time IT engineers to monitor and maintain the functionality of our website with domain specialists available in an on-call
basis.
We have also developed a web-based e-commerce
property specially tailored for vendors listing products on our website. The technology is designed to permit our vendors
to list their own products on our website, subject to our approval, and remove such products once the respective inventory is
depleted. This technology eases the burden on merchandising personnel to maintain accurate product information
and available quantities. The system also provides a means for vendors to provide immediate tracking and short-ship information
to speed collection of funds from customers.
Essential systems are backed up on a regular
basis mirrored to multiple secure off-site locations for disaster recovery.
We are continually improving our technology
to enhance the customer experience and increase efficiency, scalability, and security.
Competition
The online wholesale market is rapidly
evolving, intensely competitive and has relatively low barriers to entry, as new competitors can launch websites at relatively
low costs. We believe competition in the online wholesale market is based predominately on:
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price;
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product quality and selection;
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ease of shopping experience;
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order processing and fulfillment;
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customer service; and
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company brand recognition.
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Our wholesale services compete with other
online retailers and traditional wholesalers, liquidation “brokers”, importers and manufacturers that sell general
merchandise, some of which may specifically adopt our methods and target our customers. We currently or potentially
compete with a variety of companies that can be divided into several broad categories:
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local wholesalers tailored to service and supply
small independent retailers that carry “fast-selling” general brands, provide personal delivery and who often
have interpersonal relations with smaller retailers;
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catalog sellers, including suppliers from whom we purchase product,
such as SMC;
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liquidation e-tailers;
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online general retailers with discount departments such as Amazon.com,
Inc., eBay, Inc. and Buy.com, Inc.;
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online specialty retailers such as BlueNile and BackCountry; and
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traditional small business wholesalers such as Costco Wholesale
Corporation.
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As the market for online wholesale and
liquidation grows, we believe that companies involved in online retail, as well as traditional retailers and liquidation brokers,
will increase their efforts to develop services that compete with our online services. We are unable to anticipate
which other companies are likely to offer products and services in the future that will compete with us.
In addition, many of our current and potential
competitors have greater brand recognition, longer operating histories, larger customer bases and significantly greater financial,
marketing and other resources than we do, and may enter into strategic or commercial relationships with larger, more established
and well-financed companies. Some of our competitors could devote greater resources to marketing and promotional campaigns
and devote substantially more resources to their websites and systems development than we can. New technologies
and the continued enhancement of existing technologies also may increase competitive pressures. We cannot ensure that
we will be able to compete successfully against current and future competitors or address increased competitive pressures.
Intellectual Property
We own the rights associated with the
trademarks “America’s Suppliers”, “DollarDays”, “DollarDay$” and the logo for DollarDays. We
have filed trademark applications with the United States Patent and Trademark Office seeking registration of certain service marks
and trademarks. We regard our domain names and similar intellectual property as critical to our success. We
rely on a combination of laws and contractual restrictions with our employees, customers, suppliers, affiliates and others to
establish and protect our proprietary rights. Despite these precautions, it may be possible for a third party to copy
or otherwise obtain and use our intellectual property without authorization. There can be no assurance that our applications
will be successful or that we will be able to secure significant protection for our service marks or trademarks in the United
States or elsewhere. In addition, we cannot ensure that others will not independently develop similar intellectual
property. Although we have registered and are pursuing the registration of our key trademarks in the United States
and internationally, some of our trade names are not eligible to receive trademark protection. In addition, effective
trademark protection may not be available or may not be sought by us in every country in which our products and services are made
available online, including the United States.
Third parties may in the future recruit
our employees who have had access to our proprietary technologies, processes and operations. These recruiting efforts
expose us to the risk that such employees will misappropriate our intellectual property.
Legal and Regulatory Matters
From time to time, we may receive claims
of and become subject to consumer protection, employment, intellectual property and other commercial litigation related to the
conduct of our business. Also, we may receive related inquiries from state and federal agencies which might relate
to our business practices, or the activity of our customers or suppliers. Such regulatory matters and commercial litigation
could be costly and time consuming and could divert our management and key personnel from our business operations. The
uncertainty of litigation increases these risks. In connection with such litigation or regulatory inquiries, we may
be subject to significant damages or equitable remedies or fines relating to the operation of our business and the sale of products
on our website. Any such litigation may materially harm our business, prospects, results of operations, financial condition
or cash flow. We are not aware of any outstanding litigation or any pending or threatened litigation that would be
expected to have a material adverse effect on our financial condition or results of operations.
These and other types of claims could
result in increased costs of doing business through legal expenses, adverse judgments, settlements or require us to change our
business practices.
Additional litigation may be necessary
in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope
of the proprietary rights of others. Any litigation, regardless of outcome or merit, could result in substantial costs
and diversion of management and technical resources, any of which could materially harm our business.
Government Regulation
Our services are subject to federal
and state consumer protection laws, including laws protecting the privacy of non-public consumer information and regulations prohibiting
unfair and deceptive trade practices. In particular, under federal and state financial privacy laws and regulations,
we must provide notice to consumers of our policies on sharing non-public information with third parties, provide advance notice
of any changes to our policies and, with limited exceptions, give consumers the right to prevent sharing of their non-public personal
information with unaffiliated third parties. Furthermore, the growth and demand for online commerce could result in
more stringent consumer protection laws that impose additional compliance burdens on online companies. These consumer
protection laws could result in substantial compliance costs and could interfere with the conduct of our business.
In many states, there is currently great
uncertainty whether or how existing laws governing issues such as property ownership, sales and other taxes, libel and personal
privacy apply to the Internet and commercial online services and whether additional laws and regulations will be enacted. In
addition, new state tax regulations may subject us to additional state sales and income taxes. New legislation or regulation,
the application of laws and regulations from jurisdictions whose laws do not currently apply to our business, or the application
of existing laws and regulations to the Internet and commercial online services could result in significant additional taxes on
our business. These taxes could have an adverse effect on our cash flows and results of operations. Furthermore,
there is a possibility we may be subject to significant fines or other payments for any past failures to comply with these requirements.
The Consumer Product Safety Improvement
Act (the “Act”) became effective February 10, 2009. This law prohibits resellers from selling children’s’
products that exceed specified levels of lead and certain other chemicals. Resellers are not required to test the products
themselves. However, if they do sell such products, they could be subject to civil and/or criminal penalties. Since
the merchandise sold through our website it is shipped directly from the manufacturer/importer to the retailer, we never take
physical possession of any merchandise and could not test the products. Accordingly, to minimize our risk, we have
undertaken the following steps:
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We have discontinued all
items which, in our judgment, have any significant likelihood of being out of compliance with the Act. The limited
exception to this is that certain closeouts may date back to a period before testing was commonplace. We have discontinued
all items we believe constitute a significant risk of containing inappropriate chemicals; and
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We have requested that all our vendors
certify that the products they sell are in compliance with the Act. They have all complied except for
certain vendors of close-outs who cannot know whether the products they are buying may have been produced before these maximum
levels of permissible lead and other chemicals were established.
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Employees
As of December 31, 2012, we had a total
of 39 full-time employees. We have never had a work stoppage, and none of our employees are represented by a labor
union. We consider our employee relationships to be positive.
Reports to Security Holders
We file reports with the Securities and
Exchange Commission, or SEC, including annual reports, quarterly reports and other information we are required to file pursuant
to US federal securities laws. You may read and copy materials we file with the SEC at the SEC’s Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information from the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC, which is
http://www.sec.gov
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Item 1A –
Risk Factors
Although we have recently achieved
profitability, we have a history of significant losses. If we do not maintain profitability, our financial condition and our stock
price could suffer.
We have a history of losses and accumulated
deficit. We have recently achieved profitability; however, we may not be able to sustain or increase profitability on a quarterly
or annual basis in the future. If our revenues grow more slowly than we anticipate, or if our operating expenses exceed our expectations,
our financial results would be harmed.
We will continue to incur significant
operating expenses and capital expenditures to continue to improve our software and technologies, and:
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enhance our distribution and order fulfillment
capabilities;
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further improve our order processing systems and capabilities;
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expand our customer service capabilities to better serve our customers’
needs;
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expand or modify our product offerings;
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rent office space;
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increase our general and administrative functions to support our
operations; and
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maintain or increase our sales, branding and marketing activities,
including maintaining existing, or entering into new online marketing or marketing analytics arrangements, and continuing
or increasing our direct mail campaigns.
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Because we may incur many of these expenses
before we receive any revenues from our efforts, our losses may be greater than the losses we would incur if we developed our
business more slowly. Further, we base our expenses in large part on our operating plans and future revenue projections. Many
of our expenses are fixed in the short term, and we may not be able to quickly reduce spending if our revenues are lower than
we project. Therefore, any significant shortfall in revenues would likely harm our business, prospects, operating results and
financial condition. In addition, we may find that these efforts are more expensive than we currently anticipate, which would
further increase our losses. Also, the timing of these expenses may contribute to fluctuations in our quarterly operating results.
A downturn in general economic conditions
may adversely affect our results of operations.
The success of our operations depends
to a significant extent upon a number of factors relating to discretionary consumer spending, including economic conditions affecting
disposable consumer income such as employment, business conditions, interest rates and taxation. There can be no assurance that
consumer spending will not be adversely affected by economic conditions, thereby impacting our growth, financial condition and
results of operations.
We may experience significant fluctuations
in our operating results and growth rate.
We may not be able to accurately forecast
our growth rate. We base our expense levels and investment plans on sales estimates. A significant portion of our expenses and
investments is fixed, and we may not be able to adjust our spending quickly enough if our sales are less than expected.
Our revenue growth may not be sustainable,
and our percentage growth rates may decrease. Our revenue and operating profit depends on the continued growth of demand for our
products and services, and our business is affected by general economic and business conditions worldwide. A softening of demand,
whether caused by changes in customer preferences or a weakening of the U.S. or global economies, may result in decreased revenue
or growth.
Our revenues and operating results will
also fluctuate for many other reasons, including due to risks described elsewhere in this section and the following:
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our ability to retain and
increase sales to existing customers, attract new customers and satisfy our customers’ demands;
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our ability to expand our network of
vendors;
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our ability to access vendor merchandise
and fulfill orders;
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the introduction of competitive websites,
products and services;
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changes in usage of the Internet and
e-commerce, both domestically and internationally;
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timing, effectiveness and costs of
expansion and upgrades to our systems and infrastructure;
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the success of our geographic, service
and product line expansions;
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the outcomes of legal proceedings and
claims;
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variations in the mix of products and
services we sell;
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variations in our level of merchandise
and vendor returns;
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the extent to which we offer free shipping,
continue to reduce product prices worldwide, and provide additional benefits to our customers;
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increases in the prices of fuel and
gasoline, as well as increases in the prices of other energy products and commodities like paper and packing supplies;
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the extent to which operators of networks
between our customers and our website charge fees to grant our customers unimpaired and unconstrained access to our online
services;
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our ability to collect amounts that
may become owed to us;
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the extent to which use of our services
is affected by spyware, viruses, “phishing” and other spam emails, “denial of service” attacks, data
theft, computer intrusions and similar events; and
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terrorist attacks and armed hostilities.
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We are dependent on a limited number
of shipping companies.
We rely on a limited number of shipping
companies to deliver inventory to us and completed orders to our customers. If we are not able to negotiate acceptable
terms with these companies or they experience performance problems or other difficulties, it could negatively impact our operating
results and customer experience. In addition, our ability to ship completed orders to customers may be negatively affected
by inclement weather, fire, flood, power loss, earthquakes, labor disputes, acts of war or terrorism, acts of God and similar
factors. Third parties either drop-ship or otherwise fulfill our customers’ orders, and we are increasingly reliant
on the reliability, quality and future procurement of their services. The inability of these other companies to accurately forecast
product demand would result in unexpected costs and other harm to our business and reputation.
Our business could suffer if we are
unsuccessful in making, integrating and maintaining acquisitions and investments.
We may acquire, or invest in or enter
into joint ventures with additional companies. These transactions create risks such as:
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disruption of our ongoing
business, including loss of management focus on existing businesses;
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problems retaining key personnel;
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additional operating losses and expenses
of the businesses we acquired or in which we invested;
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the potential impairment
of amounts capitalized as intangible assets as part of the acquisition;
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the potential impairment of customer
and other relationships of the company we acquired or in which we invested or our own customers as a result of any integration
of operations;
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the difficulty of incorporating acquired
technology into our offerings and unanticipated expenses related to such integration;
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the difficulty of integrating a new
company’s accounting, financial reporting, management, information, human resource and other administrative systems
to permit effective management, and the lack of control if such integration is delayed or not implemented;
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the difficulty of implementing the
controls, procedures and policies appropriate for a larger public company;
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potential unknown liabilities associated
with a company we acquire or in which we invest; and
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for foreign transactions, additional
risks related to the integration of operations across different cultures and languages, and the economic, political, and regulatory
risks associated with specific countries.
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Finally, as a result of future acquisitions
or mergers, we may need to issue additional equity securities, spend our cash, or incur debt, contingent liabilities, or amortization
expenses related to intangible assets, any of which could reduce our profitability and harm our business.
We may not be able to adequately develop
WowMyUniverse.com.
During 2010, we made investments in a
retail website, WowMyUniverse.com. WowMyUniverse.com has experienced negative cash flows each year since 2010 and may continue
to do so in the future as we continue to develop this business. Our experience in developing online businesses is limited to the
wholesale marketplace, and our relative lack of experience in retail commerce may be detrimental to the success of WowMyUniverse.com.
We may face exposure to business conditions and risks that are unforeseen as a result of this lack of experience.
The loss of key senior management personnel
could negatively affect our business.
We depend on our senior management and
other key personnel, including our Chairman and Chief Executive Officer. The loss of these individuals or any of our
other current or future executive officers or key employees could harm our business, future operating prospects and results of
operations.
Additionally, we do not currently maintain
“key person” life insurance policies on the lives of any of our executive officers. This lack of insurance
means that we may not have adequate compensation for the loss of the services of these individuals.
Our vendor relationships subject us
to a number of risks.
We have significant vendors that are important
to our sourcing, manufacturing and related ongoing servicing of merchandise and content. We do not have long-term arrangements
with most of our vendors to guarantee availability of merchandise, content, components, or services. If our current
vendors were to stop selling merchandise, components or services to us on acceptable terms, we may be unable to procure adequate
replacements from other vendors in a timely and efficient manner or on acceptable terms, or at all.
We depend on our relationships with
third party vendors for the products that we sell on our website. If we fail to maintain these relationships, our business will
suffer.
At December 31, 2012, we had fulfillment
partner relationships with approximately 400 vendors whose products we offer for sale on our website. We depend on our fulfillment
partners to provide the product selection we offer. We plan to continue to expand the number of fulfillment partner relationships
and the number of products offered for sale by our fulfillment partners on our website. In general, we agree to offer
the third parties’ products on our website and these third parties agree to provide us with information about their products,
honor our customer service policies and ship the products directly to the customer. If we do not maintain our existing relationships
or build new relationships with third parties on acceptable commercial terms, we may not be able to offer a broad selection of
merchandise, and customers may refuse to shop at our website. In addition, manufacturers may decide not to offer particular products
for sale on the Internet. If we are unable to maintain our existing fulfillment partner relationships, or build new ones, or if
other product manufacturers refuse to allow their products to be sold via the Internet, our business and prospects would suffer
severely.
We depend upon third-party delivery services to deliver
our products to our customers on a timely and consistent basis. Deterioration in our relationship with any one of these third
parties could decrease our ability to track shipments, cause shipment delays and increase shipping costs.
We rely upon multiple third parties for
the shipment of our products. We cannot be sure these relationships will continue on terms favorable to us, if at all. Unexpected
increases in shipping costs or delivery times could harm our business, prospects, financial condition and results of operations.
If our relationships with these third parties are terminated or impaired or if these third parties are unable to deliver products
for us, whether through labor shortage, slow down or stoppage, deteriorating financial or business condition, responses to terrorist
attacks or for any other reason, we would be required to use alternative carriers for the shipment of products to our customers.
In addition, conditions such as adverse weather can prevent carriers from performing their delivery services, which can have an
adverse effect on our customers’ satisfaction with us. In any of these circumstances, we may be unable to engage alternative
carriers on a timely basis, upon favorable terms, or at all. Changing carriers would likely have a negative effect on our business,
operating results and financial condition. Potential adverse consequences include:
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reduced visibility of order status and package
tracking;
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delays in order processing and product delivery;
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increased cost of delivery, resulting in reduced gross margins;
and
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reduced shipment quality, which may result in damaged products
and customer dissatisfaction.
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A significant number of merchandise
returns could harm our business, financial condition and results of operations.
We allow our customers to return products.
If merchandise returns are significant, our business, prospects, financial condition and results of operations could be harmed.
We modify our policies relating to returns from time to time and any policies intended to reduce the number of product returns
may result in customer dissatisfaction and fewer repeat customers.
If the products that we offer on our website do not
reflect our customers’ tastes
and preferences, our revenues and profit margins may decrease.
Our success depends in part on our ability
to offer products that reflect consumers’ tastes and preferences. Consumers’ tastes are subject to frequent, significant
and sometimes unpredictable changes. Because some of the products we sell consist of manufacturers’ and retailers’
excess inventory, we have limited control over some of the specific products we are able to offer for sale. If our merchandise
fails to satisfy customers’ tastes or respond to changes in customer preferences, our revenues could suffer. In addition,
any failure to offer products in line with customers’ preferences could allow our competitors to gain market share. This
could have an adverse effect on our business, prospects, results of operations and financial condition.
We will have to attract and retain customers.
Our success depends on our ability to
attract and retain customers. We have relationships with online services, search engines, directories and other website and e-commerce
businesses to provide content, advertising banners and other links that direct customers to our website. We rely on these relationships
as significant sources of traffic to our website and to generate new customers. If we are unable to develop or maintain these
relationships on acceptable terms, or to develop suitable alternatives, our ability to attract new customers may be impaired and
our financial condition could be harmed. We cannot assure you we will be able to increase our revenues, if at all, in a cost-effective
manner.
Further, many online advertisers on whom
we may wish to, or presently do, rely on for services, may be reluctant to enter into or maintain relationships with us because
our competitors may be more attractive advertising clients. Additionally, failure to achieve sufficient traffic or generate sufficient
revenue from purchases originating from online advertisers may cause online advertisers to terminate their relationship with us.
Without these relationships, our revenues, business, prospects, financial condition and results of operations could suffer.
We may not be able to compete
successfully against existing or future competitors.
The online liquidation services market
is rapidly evolving and intensely competitive. Barriers to entry are minimal, and current and new competitors can launch new websites
at a relatively low cost.
We expect the online liquidation services
market to become even more competitive as traditional liquidators and online retailers develop services that compete with ours.
In addition, manufacturers and retailers may decide to create their own websites to sell their own excess inventory and the excess
inventory of third parties. Competitive pressures created by any one of our competitors, or by our competitors collectively, could
harm our business, prospects, financial condition and results of operations.
Further, as a strategic response to changes
in the competitive environment, we may from time to time make certain pricing, service or marketing decisions or acquisitions
that could harm our business, prospects, financial condition and results of operations. To the extent we enter new lines of businesses,
we expect that we would be competing with many established businesses.
Many of our current and potential competitors
have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing
and other resources than we do. In addition, online retailers and liquidation e-tailers may be acquired by, receive investments
from or enter into other commercial relationships with larger, well-established and well-financed companies. Some of our competitors
may be able to secure merchandise from manufacturers on more favorable terms, devote greater resources to marketing and promotional
campaigns, adopt more aggressive pricing or inventory availability policies and devote substantially more resources to website
and systems development than we do. Increased competition may result in reduced operating margins, loss of market share and a
diminished brand. We cannot assure you we will be able to compete successfully against current and future competitors.
Our operating results depend on our
website, network infrastructure and transaction-processing systems. Capacity constraints or system failures would harm our business
and reputation.
Any system interruptions that result in
the unavailability of our website or reduced performance of our transaction systems would reduce our transaction volume and the
attractiveness of our services to both our customers and vendors and can be expected to harm our business, prospects, operating
results and financial condition.
We use internally developed software and
systems for our website and certain aspects of our transaction processing systems. We have experienced periodic systems interruptions
due to server failure, which we believe will continue to occur from time to time. If the volume of traffic on our website or the
number of purchases made by customers substantially increases, we will need to further expand and upgrade our technology, transaction
processing systems and network infrastructure.
Our transaction processing systems and
network infrastructure may be unable to accommodate increases in traffic in the future. We may be unable to project accurately
the rate or timing of traffic increases or successfully upgrade our systems and infrastructure to accommodate future traffic levels.
In addition, we may be unable to upgrade and expand our transaction processing systems in an effective and timely manner or to
integrate any newly developed or purchased functionality with our existing systems. Any such difficulties with our transaction
processing systems or other difficulties upgrading, expanding or integrating various aspects of our systems may cause unanticipated
system disruptions, slower response times, and degradation in levels of customer service, additional expense, impaired quality
and speed of order fulfillment or delays in reporting accurate information.
If the facility where substantially
all of our computer and communications hardware is located fails, our business, results of operations and financial condition
will be harmed.
Our success, and in particular, our ability
to successfully receive and fulfill orders and provide high-quality customer service, largely depends on the efficient and uninterrupted
operation of our computer and communications systems. We have computers and communications hardware located in the Arizona that
are backed up regularly. Although we have designed our back-up system in an effort to be able to provide limited back-up website
functionality in the event of a failure of our main facility, our systems and operations are vulnerable to damage or interruption
from fire, flood, power loss, telecommunications failure, terrorist attacks, acts of war, break-ins, earthquake and similar events,
and our back-up systems are not designed to handle the volume of transactions normally handled by our primary systems. Our disaster
recovery plan may be inadequate, and our business interruption insurance may be insufficient to compensate us for losses that
may occur. Despite the implementation of network security measures, our servers are vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions, which could lead to interruptions, delays, loss or public disclosure of critical
data or the inability to accept and fulfill customer orders. The occurrence of any of the foregoing risks could harm our reputation,
business, prospects, financial condition and results of operations.
We may be unable to protect our proprietary
technology or keep up with that of our competitors.
Our success depends to a significant degree
upon the protection of our software and other proprietary intellectual property rights. We may be unable to deter misappropriation
of our proprietary information, detect unauthorized use or take appropriate steps to enforce our intellectual property rights.
In addition, our competitors could, without violating our proprietary rights, develop technologies that are as good as or better
than our technology.
Our failure to protect our software and
other proprietary intellectual property rights or to develop technologies that are as good as our competitors’ could put
us at a disadvantage to our competitors. These failures could harm our business, results of operations and financial condition.
We may be accused of infringing intellectual
property rights of third parties.
Third parties may claim we infringe their
intellectual property rights. The ready availability of damages, royalties and potential for injunctive relief has increased the
defense litigation costs of patent infringement claims. Such claims, whether or not meritorious, may result in significant expenditure
of financial and managerial resources, and the payment of damages or settlement amounts. Additionally, we may become subject to
injunctions prohibiting us from using software or business processes we currently use or may need to use in the future, or requiring
us to obtain licenses from third parties when such licenses may not be available on terms acceptable to us or at all. In addition,
we may not be able to obtain on favorable terms, or at all, licenses or other rights with respect to intellectual property we
do not own in providing e-commerce services.
If we do not respond to rapid technological
changes, our services could become obsolete and we could lose customers.
To remain competitive, we must continue
to enhance and improve the functionality and features of our business. We may face material delays in introducing new services,
products and enhancements. If this happens, our customers may forgo the use of our website and use those of our competitors. The
Internet and the online commerce industry are rapidly changing. If competitors introduce new products and services using new technologies
or if new industry standards and practices emerge, our existing website and our proprietary technology and systems may become
obsolete. Our failure to respond to technological change or to adequately maintain, upgrade and develop our computer network and
the systems used to process customers’ orders and payments could harm our business, prospects, financial condition and results
of operations.
We may not be able to obtain trademark
protection for our service marks or trademarks, which could impede our efforts to build brand identity.
We have filed trademark applications with
the Patent and Trademark Office seeking registration of certain service marks and trademarks. There can be no assurance that our
applications will be successful or that we will be able to secure significant protection for our service marks or trademarks in
the United States or elsewhere. Our competitors or others could adopt product or service marks similar to our marks, or try to
prevent us from using our marks, thereby impeding our ability to build brand identity and possibly leading to customer confusion.
Any claim by another party against us or customer confusion related to our trademarks, or our failure to obtain trademark registration,
could negatively affect our future business prospects. We may need to apply for future trademark protection and there
can be no assurance that our future applications will be successful or that we will be able to secure significant protection for
our service marks or trademarks in the United States or elsewhere.
Our business and reputation may be
harmed by the listing or sale of pirated, counterfeit or illegal items by third parties.
We have received in the past, and we anticipate
we will receive in the future, communications alleging that certain items listed or sold through our website infringe third-party
copyrights, trademarks and trade names or other intellectual property rights or that we have otherwise infringed third parties’
past, current or future intellectual property rights.
We may be unable to prevent third parties
from listing unlawful goods, and we may be subject to allegations of civil or criminal liability for unlawful activities carried
out by third parties through our website. Any costs incurred as a result of liability or asserted liability relating to the sale
of unlawful goods could harm our revenues, business, prospects, financial condition and results of operations.
Resolving litigation or claims regarding
patents or other intellectual property, whether meritorious or not, could be costly, time-consuming, cause service delays, divert
our management and key personnel from our business operations, require expensive or unwanted changes in our methods of doing business
or require us to enter into costly royalty or licensing agreements, if available. As a result, these claims could harm our business.
Negative publicity generated as a result of the foregoing could damage our reputation, harm our business and diminish the value
of our brand name.
We may be liable if third parties misappropriate
our customers’ personal information.
If third parties are able to penetrate
our network security or otherwise misappropriate our customers’ personal information or credit card information, or if we
give third parties improper access to our customers’ personal information or credit card information, we could be subject
to liability. This liability could include claims for unauthorized purchases with credit card information, impersonation or other
similar fraud claims or damages for alleged violations of state or federal laws governing security protocols for the safekeeping
of customers’ personal information. This liability could also include claims for other misuses of personal information,
including unauthorized marketing purposes. Liability for misappropriation of this information could adversely affect our business.
In addition, we could incur additional expenses if new regulations regarding the use of personal information are introduced or
if government agencies investigate our privacy practices.
We rely on encryption and authentication
technology licensed from third parties to provide the security necessary to effect secure transmission of confidential information
such as customer credit card numbers. We cannot assure you that advances in computer capabilities, new discoveries in the field
of cryptography or other events or developments will not result in a compromise or breach of the algorithms we use to protect
customer transaction data. If any such compromise of our security were to occur, it could harm our reputation, business, prospects,
financial condition and results of operations. A party who is able to circumvent our security measures could misappropriate proprietary
information or cause interruptions in our operations. We may be required to expend significant capital and other resources to
protect against such security breaches or to alleviate problems caused by such breaches. We cannot assure you that our security
measures will prevent security breaches or that failure to prevent such security breaches will not harm our business, prospects,
financial condition and results of operations.
Our success is tied to the continued
use of the Internet and the adequacy of the Internet infrastructure.
Our future revenues and profits, if any,
substantially depend upon the continued widespread use of the Internet as an effective medium of commercial business. Factors
which could reduce the widespread use of the Internet include:
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actual or perceived lack of security of information
or privacy protection;
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possible disruptions, computer viruses or other damage to Internet
servers or to users’ computers;
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significant increases in the costs of transportation of goods;
and
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governmental regulation.
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Credit card fraud could adversely affect
our business.
We do not carry insurance against the
risk of credit card fraud, so the failure to adequately control fraudulent credit card transactions could reduce our revenues
and our gross margin. We have implemented technology to help us detect the fraudulent use of credit card information. However,
we may in the future suffer losses as a result of orders placed with fraudulent credit card data even though the associated financial
institution approved payment of the orders. Under current credit card practices, we may be liable for fraudulent credit card transactions
because we do not obtain a cardholder’s signature. If we are unable to detect or control credit card fraud, our liability
for these transactions could harm our business, results of operation or financial condition.
If one or more states successfully
assert that we should collect sales or other taxes on the sale of our merchandise or the merchandise of third parties that we
offer for sale, our business could be harmed.
We do not currently collect sales or other
similar taxes for physical shipments of goods into states, other than Arizona. One or more local, state or foreign jurisdictions
may seek to impose sales tax collection obligations on us even though we are engaged in online commerce, and have no physical
presence in those jurisdictions. The location of our fulfillment centers and customer service center networks, or any other operations
of the Company, establishing a physical presence in states where we are not now present, may result in additional sales and other
tax obligations. Our business could be adversely affected if one or more states or any foreign country successfully asserts that
we should collect sales or other taxes on the sale of our merchandise.
Existing or future government regulation
could harm our business.
Today there are relatively few laws specifically
directed towards conducting business on the Internet. However, due to the increasing popularity and use of the Internet, many
laws and regulations relating to the Internet are being debated at the state and federal levels. These laws and regulations could
cover issues such as user privacy, freedom of expression, pricing, fraud, quality of products and services, taxation, advertising,
intellectual property rights and information security. Applicability to the Internet of existing laws governing issues such as
property ownership, copyrights and other intellectual property issues, taxation, libel, obscenity and personal privacy could also
harm our business. For example, United States and foreign laws regulate our ability to use customer information and to develop,
buy and sell mailing lists. The vast majority of these laws was adopted prior to the advent of the Internet and do not contemplate
or address the unique issues raised thereby. Those laws that do reference the Internet are only beginning to be interpreted by
the courts and their applicability and reach are therefore uncertain. These current and future laws and regulations could harm
our business, results of operation and financial condition.
The Consumer Product Safety Improvement
Act became effective February 10, 2009 and prohibits resellers from selling children’s products that exceed specified levels
of lead and certain other chemicals. Resellers are not required to test the products themselves, however, if they do
sell such products, they could be subject to civil and/or criminal penalties. Since the merchandise sold through our
website it is shipped directly from the manufacturer/importer to the retailer, we never take physical possession of any merchandise
and could not test the products. Accordingly, to minimize our risk, we have undertaken the following steps:
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We have discontinued all
items which, in our judgment, have any significant likelihood of being out of compliance with the Act. The limited
exception to this is that certain closeouts may date back to a period before testing was commonplace. We have discontinued
all items we believe constitutes a significant risk of containing inappropriate chemicals. However, some products
or a garment with an inappropriate thread or button may slip through; and
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We have insisted that all
our vendors certify that the products they sell are in compliance with the Act. They have all complied
except for certain vendors of close-outs who cannot know whether the products they are buying may have been produced before
these maximum levels of permissible lead and other chemicals were established.
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Despite our efforts, it is possible we
may become subject to litigation under the Consumer Product Safety Improvement Act. Any such litigation could be expected
to harm our reputation and may impact our future business prospects and results of operations.
Laws or regulations relating to privacy
and data protection may adversely affect the growth of our Internet business or our marketing efforts.
We are subject to increasing regulation
at the federal, state and international levels relating to privacy and the use of personal user information. For example, we are
subject to various telemarketing laws that regulate the manner in which we may solicit future suppliers and customers. Such regulations,
along with increased governmental or private enforcement, may increase the cost of growing our business. In addition, many jurisdictions
have laws that limit the uses of personal user information gathered online or offline or require companies to establish privacy
policies. The Federal Trade Commission has adopted regulations regarding the collection and use of personal identifying information
obtained from children under 13. Proposed legislation in this country and existing laws in foreign countries require companies
to establish procedures to notify users of privacy and security policies, obtain consent from users for collection and use of
personal information, and/or provide users with the ability to access, correct and delete personal information stored by us. Additional
legislation regarding data security and privacy has been proposed in Congress. These data protection regulations may restrict
our ability to collect demographic and personal information from users, which could be costly or harm our marketing efforts, and
could require us to implement new and potentially costly processes, procedures and/or protective measures.
We may be subject to product liability
claims if people or property are harmed by the products we sell or if the products do not comply with government regulations.
Although we do not take legal title to
any of the merchandise sold on our website, some of the products we sell may expose us to product liability claims relating to
personal injury, death or property damage, and may require product recalls or other actions. If the products we sell do not comply
with government regulations, we may also be exposed to product liability claims. Although we maintain liability insurance,
we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be
available to us on economically reasonable terms, or at all. In addition, some of our agreements with vendors and sellers do not
indemnify us from product liability.
We are subject to payment related risks.
We accept payments using a variety of
methods, including credit card, debit card, credit accounts (including promotional financing), gift certificates, direct debit
from a customer’s bank account, physical bank check and payment upon delivery. For certain payment methods, including credit
and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower our profit
margins. We rely on third parties to provide payment processing services, including the processing of credit cards, debit cards,
electronic checks, and promotional financing, and it could disrupt our business if these companies become unwilling or unable
to provide these services to us. We are also subject to payment card association operating rules, certification requirements and
rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to
comply. If we fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose
our ability to accept credit and debit card payments from our customers, process electronic funds transfers, or facilitate other
types of online payments, and our business and operating results could be adversely affected.
The market for our common stock may
be illiquid, and the price of our common stock might be volatile.
Shares of our common stock are currently
traded on the Pink Sheets, and it is not expected that our Common Stock will be traded on a national securities exchange like
the New York Stock Exchange or NASDAQ in the near future. Historically, the market for securities traded on the Pink
Sheets has been less liquid than the markets for securities traded on national securities exchanges. Because of such illiquidity
and the fact that our Common Stock would be valued by market-makers (if a material market develops) based on market forces which
consider various factors beyond our control, there can be no assurance that the market value of the shares at any given time would
be the same or higher than the public purchase price of our shares. In addition, the market price, if a material market
develops, could decline if the yields from other competitive investments exceed the actual dividends paid by us on our shares.
The market price of our Common Stock may be volatile in the future based on a variety of factors, including changes in general
economic conditions, developments in securities and other financial markets, our operating results, and other factors discussed
in this report and/or currently unknown to the Company.
Our common stock may be subject to the “penny stock”
rules as promulgated under the Exchange Act.
In the event that no exclusion from the
definition of “penny stock” under the Exchange Act is available, then any broker engaging in a transaction in our
Common Stock will be required to provide its customers with a risk disclosure document, disclosure of market quotations, if any,
disclosure of the compensation of the broker-dealer and its sales person in the transaction, and monthly account statements showing
the market values of our securities held in the customer’s accounts. The bid and offer quotation and compensation
information must be provided prior to effecting the transaction and must be contained on the customer’s confirmation of
sale. Certain brokers are less willing to engage in transactions involving “penny stocks” as a result of
the additional disclosure requirements described above, which may make it more difficult for holders of our Common Stock to dispose
of their shares.