IMERGENT INC ITEM 1A RISK FACTORS You should carefully consider the following risks before making an investment in our Company |
In addition, you should keep in mind that the risks described below are not the only risks that we face |
However, additional risks not presently known to us, or risks that we currently believe are not material, may also impair our business operations |
You should also refer to the other information set forth in this Annual Report on Form 10-K, including the discussions set forth in “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as our consolidated financial statements and the related notes |
Our business prospects, financial condition, or results of operations could be adversely affected by any of the following risks |
If we are adversely affected by such risks, then the trading price of our common stock could decline, and you could lose all or part of your investment |
Proposed Federal Trade Commission rules could adversely impact the manner in which we solicit potential customers |
On April 5, 2006, the Federal Trade Commission, or FTC, announced proposed rules that, if adopted, could be construed or applied in a way that would negatively impact the manner in which we solicit potential customers and offer our customers our products |
The FTC is currently requesting comments to the proposed rules |
We cannot predict whether the proposed rules will be adopted, or if adopted, whether they would be deemed to apply to us |
The proposed rules, if adopted, may be interpreted or applied in a manner that may reduce our revenue and profitability |
Changes in international and domestic laws and regulations and the interpretation and enforcement of such laws and regulations could adversely impact our financial results or ability to conduct business |
We are subject to a variety of international, federal and state laws and regulations as well as oversight from a variety of international and domestic governmental agencies |
The laws governing our business may change in ways that harm our business |
Federal, state or foreign governmental agencies administering and enforcing such laws may also choose to interpret and apply them in ways that harm our business |
These interpretations are also subject to change |
Regulatory action could materially impair or force us to change our business model and may adversely affect our revenue, increase our compliance costs and reduce our profitability |
In addition, governmental agencies such as the SEC, IRS or state taxing authorities may find that we have violated federal laws, state laws or their rules and regulations, and we could be subject to fines, penalties or other actions that could materially harm our business |
From time to time we are and have been the subject of governmental inquiries and investigations into our business practices that could require us to change our sales and marketing practices or pay damages or fines, which could negatively impact our financial results or ability to conduct business |
From time to time, we receive inquiries from federal, state, city and local government officials in the various jurisdictions in which we operate |
These inquiries and investigations generally concern compliance with various city, county, state and/or federal regulations involving sales and marketing practices |
We have and do respond to these inquiries and have generally been successful in addressing the concerns of these persons and entities, without a formal complaint or charge being made, although there is often no formal closing of the inquiry or investigation |
There can be no assurance that the ultimate resolution of these or other inquiries and investigations will not have a material adverse effect on our business or operations, or that a formal complaint will not be initiated |
We also receive complaints and inquiries in the ordinary course of our business from both customers and governmental and non-governmental bodies on behalf of customers, and in some cases these customer complaints have risen to the level of litigation |
To date we have been able to resolve these matters on a mutually satisfactory basis |
However, there can be no assurance that the ultimate resolution of these matters will not have a material adverse affect on our business or results of operations |
On February 14, 2005, the state of Texas notified us of its intent to file an action against us, which was in fact filed on February 21, 2005 |
The action was against iMergent, Inc, StoresOnline, Brandon Lewis, and Donald Danks, in the District Court for Bexar County, Case Number 2005 CI 02791 |
The petition alleged that the Company sells a business opportunity and alleged nine instances of fraud over a four-year period |
The Company has filed a denial to all allegations |
The Company contended that it does not sell a business opportunity under Texas law |
The Company further disputed there has been any instances of fraud |
On November 29, 2005, the Company and the 9 ______________________________________________________________________ office of the Texas Attorney General announced a settlement whereby the Company agreed to pay a total of dlra400cmam000 into a refund pool to refund certain Texas customers who may file claims and reimburse dlra60cmam000 in legal fees to the Texas Attorney General’s office |
If the refund pool is not exhausted by the claims of certain Texas customers, the remaining funds in the refund pool may be applied to the dlra60cmam000 in legal fees, and any remaining funds in the refund pool will go into an educational fund for the state of Texas |
The deadline for the filing of claims has now expired, and the agreed reimbursement has been less that dlra340cmam000, accordingly the Company will not be responsible for any further costs of fees |
The Company also agreed to certain actions intended to clarify the business practices of the Company |
There was no limitation on the Company conducting business in the state of Texas, and there was no material negative impact on the operations of the Company |
On March 8, 2005, an action was filed by Elliott Firestone, on behalf of himself and all others similarly situated, against the Company, certain current and former officers, and certain current and former directors, in the US District Court for the District of Utah Civil Nodtta 2:05cv00204 DB Additional complaints were then filed against the Company alleging similar claims |
The court ordered that the cases be consolidated, and on November 23, 2005, allowed a “consolidated amended complaint for violation of federal securities laws” against the Company, certain current and former officers, and certain current and former directors, together with the former independent auditors for the Company, Grant Thornton LLP, as defendants |
The amended consolidated complaint alleges violations of federal securities laws claiming that the defendants either made or were responsible for making material misleading statements and omissions, providing inaccurate financial information, and failing to make proper disclosures which required the Company to restate its financial results |
The suit seeks unspecified damages, including attorneys’ fees and costs |
Although this action was determined by the court to be the “consolidated action”, a complaint was filed in October 2005 by Hillel Hyman on behalf of himself and all others similarly situated against the Company, certain current and former officers, certain current and former directors, and Grant Thornton LLP This group in subsequent filings refers to itself as the “accounting restatement group” and alleges that it should be determined by the court to be the consolidated plaintiff as it properly alleges a class period consistent with timing necessary to raise a claim based upon the restatement of financial results announced by the Company |
The complaint alleges violations of federal securities laws by the Company and Grant Thornton LLP The Company disputes the allegations raised in both actions, but has not filed substantive responsive pleadings to the actions |
On February 28, 2006, at a “Status Conference” the court determined that the complaint filed by the accounting restatement group should be substituted as the new consolidated amended complaint |
On April 3, 2006, the court entered a consent order substituting Mr |
The discovery stay imposed under applicable federal law, which controls the administration of class actions, remains in place |
There has been no amended complaint filed to date |
In addition to the foregoing, there have been stockholder derivative lawsuits filed in the US District Court for the District of Utah as well as the State Court in Utah against the Company, certain officers of the Company, and current and former directors of the Company |
The Company has successfully requested delays in filing responses due to the consolidated class action |
On March 21, 2005, and subsequent dates, we met with a representative of the Ventura County District Attorney’s (DA) office as well as a representative of the office of the California Attorney General |
The Ventura County DA discussed an investigation by that office into whether we were in violation of the California Seminar Sales Act (California Civil Code § 1689dtta20-1693) and the Seller Assisted Marketing Plans Act (California Civil Code § 1812dtta200-1812dtta221) (the “SAMP ACT”) |
On September 1, 2006, the parties agreed to a stipulation which provides that the Company pay a total settlement dlra550cmam000 |
The settlement amount includes payment of dlra200cmam000 to the State of California and to Ventura County for an award of costs, attorney and statutory fees; and dlra350cmam000 to make refunds to certain California customers who may file claims |
To the extent that filed claims exceed the balance in the refund account, refunds will be paid on a pro-rata basis |
The Company also agreed to take certain actions intended to clarify the business practices of the Company |
There is no limitation on the Company conducting business in the state of California, and no obligation for the Company to register under the Seller Assisted Marketing Plans Act |
On August 28, 2006, the Utah Department of Commerce Division of Consumer Protection served an Administrative Citation (the Citation) seeking that we register under §13-15 of the Utah Business Opportunity Disclosure Act (the Disclosure Act) |
The Citation indicated the maximum potential fine was dlra2cmam500 and the issuance of a cease and desist order |
The Company is contesting the Citation and does not intend to register under the Disclosure Act because the Company contends it is not selling a business opportunity |
In addition to contesting the Citation, the Company, on August 28, 2006, filed a declaratory action with the United States District Court 10 ______________________________________________________________________ District of Utah, Central Division seeking a declaratory judgment that (1) the Disclosure Act is unconstitutional, or (2) if constitutional, the Disclosure Act does not apply to the Company |
On June 1, 2005, the Australian Competition and Consumer Commission, or ACCC, filed an action against the Company alleging the Company engages in making misleading and deceptive representations |
The ACCC obtained an order on an ex-parte basis preventing the Company from transferring certain funds outside the jurisdiction of Australian courts, pending further hearings on the case |
At mediation, the parties agreed to a settlement, which has been confirmed by the Court, the settlement resolves all outstanding issues under the order |
The Company does not admit any liability, however, the Company has agreed to allow refunds up to a maximum of approximately dlra468cmam000 to certain Australian customers and pay related administrative costs to the ACCC of approximately dlra28cmam000 |
The refund account is funded entirely by funds presently held as restricted cash under the June 1, 2005 order |
If the amount held as restricted funds is not exhausted by the claims of certain Australian customers, the remainder of the account will be returned to the Company |
There has been no final accounting of accepted claims |
The Company will not pay any other fees, costs or penalties under the settlement agreement |
The Company will continue to conduct StoresOnlineTM workshops in Australia |
All previous injunctions by the ACCC against the Company have expired |
On January 13, 2006, the State of Indiana filed an action against iMergent, Inc |
in the Marion Superior Court, Case Number 490070601PL001792 |
The petition alleges that the Company sells a business opportunity and alleges violations of the Indiana Consumer Protection Act |
The Company contends that it does not sell a business opportunity under Indiana law, and further that it has not violated any other Indiana statute |
The Company has filed a motion for summary judgment, as it believes the claims are not legally sufficient, and contends as a matter of law that it is not subject to the business opportunity statute |
On October 24, 2005, the Company announced it had been notified by the Securities and Exchange Commission (SEC) that it had issued a formal order of investigation related to the Company |
Prior to the order, the Company had announced a change of the independent registered public accounting firm for the Company |
The Company also issued a Form 8-K of Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review |
The Company is fully cooperating with the SEC in this matter |
We also are subject to various claims and legal proceedings covering matters that arise in the ordinary course of business |
We believe that the resolution of these other cases will not have a material adverse effect on our business, financial position, or results of operations |
We may not prevail in these actions and may be required to pay fines or damages, we may be restricted in our ability to conduct our business in a given market, or be subject to other adverse consequences |
In addition, the cooperation in these matters, as well as other litigation or regulatory matters, requires the diversion of our resources, including time and expense, from growing our business |
From time to time we are and have been the subject of customer complaints and lawsuits relating to our business practices that could require us to change our sales and marketing practices or pay damages or fines, which could negatively impact our financial results |
We sometimes receive complaints and inquiries in the ordinary course of business from both customers and governmental and non-governmental bodies on behalf of customers and, in some cases, these customer complaints have resulted in litigation |
The ultimate resolution of these matters may have a material adverse effect on our financial condition or results of operations |
We are the subject of claims alleging violations of federal securities laws, which claims require us to expend significant resources to dispute, and could subject us to significant liability and the requirement to pay damages |
Our current and former directors and officers are the subject of stockholder derivative lawsuits and lawsuits alleging violations of federal securities laws |
For example, on March 8, 2005, an action was filed by Elliott Firestone, on behalf of himself and all others similarly situated, against us, certain current and former officers, and 11 ______________________________________________________________________ certain current and former directors, in the US District Court for the District of Utah |
Additional complaints were then filed against us alleging similar claims |
The court ordered that the cases be consolidated, and on November 23, 2005, allowed a “consolidated amended complaint for violation of federal securities laws” against us, certain current and former officers, and certain current and former directors, together with our former independent auditors, Grant Thornton LLP, as defendants |
The amended consolidated complaint alleges violations of federal securities laws claiming that the defendants either made or were responsible for making material misleading statements and omissions, providing inaccurate financial information, and failing to make proper disclosures which required us to restate our financial results |
The suit seeks unspecified damages, including attorneys’ fees and costs |
We may be required to pay judgments or settlements and incur expenses in amounts that would materially harm our business and financial results |