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1A. RISK FACTORS
Investing
in our common stock involves a high degree of risk. You should carefully consider the risks described below, and all of the other
information set forth in this Report before deciding to invest in shares of our common stock. In addition to historical information,
the information in this Report contains forward-looking statements about our future business and performance. Our actual operating
results and financial performance may be different from what we expect as of the date of this Report. The risks described in this
Report represent the risks that management has identified and determined to be material to our company. Additional risks and uncertainties
not currently known to us, or that we currently deem to be immaterial, may also materially harm our business operations and financial
condition.
We
have a limited operating history and cannot ensure the long-term successful operation of our business or the execution of our
business plan.
We
have a limited operating history, and our digital broadcasting solutions are an evolving business offering. As a result, investors
have no meaningful track record by which to evaluate our future performance. Our prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by growing companies in new and rapidly evolving markets. We may be unable
to accomplish any of the following, which would materially impact our ability to implement our business plan:
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establishing
and maintaining broad market acceptance of our products, technology, services, and platform,
and converting that acceptance into direct and indirect sources of revenue;
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establishing
and maintaining adoption of our products, technology, services, and platform on a wide
variety of devices and device platforms;
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timely
and successfully developing new products, technology, services, service and platform
features, and increasing the functionality and features of our existing products, services,
platform and technology;
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developing
products, technology, services, and platform that result in a high degree of customer
satisfaction and a high level of end-customer usage;
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successfully
responding to competition, including competition from emerging technologies and solutions;
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developing
and maintaining strategic relationships to enhance the distribution, features, content
and utility of our products, technology, services, and platform; and
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identifying,
attracting and retaining talented technical services, engineering, and creative services
staff at reasonable market compensation rates in the markets in which we employ.
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Our
business strategy may be unsuccessful and we may be unable to address the risks we face in a cost-effective manner, if at all.
If we are unable to successfully accomplish these tasks, our business will be harmed.
We
will likely need to raise additional capital in order to continue and grow our operations, and we may be unable to obtain additional
capital on reasonable terms, or at all.
We
generated negative cash flows from operations during the year ended December 31, 2013 and the six months ended June 30, 2014,
and have limited cash. If we continue to use cash in our operations, we will need to raise additional capital. Given our early
stage of operations, we do not expect that bank or other institutional debt financing will be available. We expect that any capital
we raise will be through the issuance of equity and equity-linked securities, including common stock, preferred stock, warrants
or and convertible debt. We have no commitments from any parties to provide capital and may not be able to raise capital on reasonable
terms, or at all. Factors affecting the availability and price of capital may include the following:
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the
availability and cost of capital generally;
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our
financial results;
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the
experience and reputation of our management team;
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market
interest, or lack of interest, in our industry and business plan;
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condition
of the global markets and specifically the U.S. economy;
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the
trading volume of, and volatility in, the market for our common stock;
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our
ongoing success, or failure, in executing our business plan;
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the
amount of our capital needs; and
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the
amount of debt, options, warrants, and convertible securities we have outstanding.
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We
may be unable to meet our current or future obligations or to adequately exploit existing or future opportunities if we cannot
raise sufficient capital. If we are unable to obtain capital for an extended period of time, we may be forced to discontinue operations.
We
are in the early stages of the full production version of our AllDigital Cloud platform in commercial operation.
We
have only recently deployed the full production version of our AllDigital Cloud platform. Accordingly, our AllDigital Cloud platform
may not perform as expected and we may not be able to address some or all of the early stage production challenges that may occur.
Any failure to address early production challenges would significantly harm our results of operations and financial condition.
Because
of our early stage of operations and limited resources, we may not have in place various processes and protections common to more
mature companies and may be more susceptible to adverse events.
We
are in an early stage of operations and have limited resources. As a result, we may not have in place systems, processes and protections
that many of our competitors have or that may be essential to protect against various risks. For example, we have in place only
limited resources and processes addressing human resources, time keeping, data protection, business continuity, personnel redundancy,
and knowledge institutionalization concerns. As a result, we are at risk that one or more adverse events in these and other areas
may materially harm our business, balance sheet, revenues, expenses or prospects.
The
platform architecture and data tracking technology underlying our services is complex and may contain unknown errors in design
or implementation that could result in incorrect billings to our customers.
The
platform architecture and data tracking technology underlying our AllDigital Cloud platform, broadcasting network services, and
cloud services software tools and back-end services is complex and includes software and code used to generate customer invoices.
This software and code is either developed internally or licensed from third parties. Any of the system architecture, system administration,
software or code may contain errors, or may be implemented or interpreted incorrectly, particularly when they are first introduced
or when new versions or enhancements to our tools and services are released. In addition, with respect to certain usage-based
billing, the data used to bill the customer for usage is an estimate, based upon complex formulas or algorithms. We or the customer
may subsequently believe that such formulas or algorithms overstate or understate actual usage. In any such case, a design or
application error could cause overbilling or under-billing of our customers, which may:
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adversely
impact our relationship with those customers and others, possibly leading to a loss of
affected and unaffected customers;
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lead
to billing disputes and related legal fees, and diversion of management resources;
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increase
our costs related to product development; and/or
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adversely
affect our revenues and expenses, either prospectively or retrospectively, potentially
requiring restatement of financial statements.
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Our
continued growth could be adversely affected by the loss of several key customers.
During
the year ending December 31, 2013, our four largest customer relationships accounted for approximately 82% of our total revenue.
During the three months ended June 30, 2014, our three largest customer relationships accounted for approximately 50% of our total
revenue. Our agreements with many of these key customers and/or partners expire in any given year unless renewed by the customer
and/or partner, are terminable at any time upon short-term notice, or are otherwise generally terminable during 2014. Decisions
by one or more of these key customers and/or partners to not renew, terminate or substantially reduce their use of our products,
technology, services, and platform could substantially slow our revenue growth and lead to a decline in revenue. Our business
plan assumes continued growth in revenue, and it is unlikely that we will become profitable without a continued increase in revenue.
We
are dependent upon key personnel who may leave at any time and may be unable to attract qualified personnel in the future.
We
are highly dependent upon on a small number of senior executives and other members of management to work effectively as a team,
to execute our business strategy and business plan, and to manage our employees, independent contractors, consultants and vendors.
Certain of our senior executives have limited public company experience. Any of our senior executives, managers and employees
can terminate his or her employment relationship at any time, and the loss of the services of such individuals could have a material
adverse effect on our ability to execute our business plan and otherwise have a material adverse effect on our business, financial
condition and results of operations.
We
may incur substantial operating and net losses due to substantial expenditures.
Since
the commencement of our current operations, we have invested significant time and expense towards developing our products, technology
and services in order to capitalize on current market opportunities. We intend to increase our operating expenses and capital
expenditures in order to expand our market presence, and as a result, we may incur substantial operating and net losses in the
foreseeable future. There can be no assurance that we will achieve or sustain profitability or positive cash flow from our operations.
Our
resources may not be sufficient to manage our expected growth; failure to properly manage our potential growth would be detrimental
to our business.
We
may fail to adequately manage our anticipated future growth. Any growth in our operations will place a significant strain on our
administrative, financial and operational resources. It will also increase demands on our management and on our operational and
administrative systems, controls and other resources. Our existing personnel, systems, procedures and controls may be inadequate
to support our operations in the future, such that we will be unable to successfully implement appropriate measures consistent
with our growth strategy. As part of any growth, we may have to implement new operational and financial systems, procedures and
controls to expand, train and manage our employee base and maintain close coordination among our technical, accounting, finance,
marketing and sales staff. We may be unable to do this. To the extent we acquire or merge with other businesses, we will also
need to integrate and assimilate new operations, technologies and personnel. We may not have the experience or resources to do
this. If we are unable to adequately manage future growth, our operating results may suffer.
Because
our technology, products, platform, and services are complex and are deployed in and across complex environments, they may have
errors or defects that could seriously harm our business.
Our
technology, products, platform, and services are highly complex and are designed to operate in and across data centers, numerous
large and complex networks, and other elements of the digital broadcasting workflow that we do not own or control. From time to
time, we have needed to correct errors and defects in our software. In the future, there may be additional errors and defects
in our software that may adversely affect our services. We may not have in place adequate quality assurance procedures to ensure
that we detect errors in our software in a timely manner. If we are unable to efficiently and cost-effectively fix errors or other
problems that may be identified, or if there are unidentified errors that allow persons to improperly access our services, we
could experience loss of revenues and market share, damage to our reputation, increased expenses and legal actions by our customers.
We
may have insufficient transmission and server capacity, which could result in interruptions in our services and loss of revenues.
Our
operations are dependent in part upon transmission capacity provided by third-party telecommunications network providers. In addition,
our distributed network must be sufficiently robust to handle all of our customers’ web-traffic, particularly in the event
of unexpected surges in high-definition video traffic. We may not be adequately prepared for unexpected increases in bandwidth
demands by our customers. In addition, the bandwidth we have contracted to purchase may become unavailable for a variety of reasons,
including payment disputes or network providers going out of business. Any failure of these network providers to provide the capacity
we require, due to financial or other reasons, may result in a reduction in, or interruption of, service to our customers, leading
to an immediate decline in revenue and possible additional decline in revenue as a result of subsequent customer losses.
We
may have insufficient human resources in platform development, project management, quality control to manage large customer projects.
Our
operations are dependent in part upon the availability of adequate human resources to manage and develop our Cloud Platform and
specific customer development projects. We may not be adequately prepared for unexpected increases in integration service development
efforts required by prospective or existing customers. Software development is a human resource intensive process in an increasingly
competitive environment for talented people, a lack (or loss) of which could result in an immediate decline in revenue and possible
additional decline in revenue as a result of subsequent customer losses. The loss of developers and related staff can also create
delays in providing development services to our customers also potentially resulting in a loss of revenue.
We
do not have sufficient capital to engage in material research and development, which may harm our long term growth.
In
light of our limited capital, we have made no material investments in research and development over the past several years. This
may conserve capital in the short term. In the long term, as a result of our failure to invest in research and development, our
technology and product offerings may not keep pace with the market and we may lose any existing competitive advantage. Over the
long term, this may harm our revenue growth and our ability to become profitable.
We
may acquire businesses or assets, or enter into other business combination transactions, that may be difficult to integrate.
As
part of our growth strategy we expect to enter into transactions to acquire companies or a substantial portion of their assets,
or to combine our business with theirs. These acquisitions or business combinations involve numerous risks, including each of
the following:
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that
the combined entity will not perform as well as the separate businesses performed prior
to the transaction;
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that
anticipated cost savings, cross-marketing to new customers or other anticipated synergies
will not be achieved;
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that
management resources will be diverted towards negotiating and effecting the acquisition
and then integrating the operations and personnel of the acquired business, instead of
focusing on our existing business plan and operations;
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that
the stock and/or other consideration paid in the transaction will exceed the value of
the assets or business acquired;
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that
the use of cash as consideration for the transaction will reduce cash that may be needed
for operations below necessary levels;
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that
if we enter into a transaction, such transaction may delay our ability to raise needed
capital on a stand-alone basis while the transaction is underway and not yet consummated,
and/or impair the combined company’s ability to raise capital in the event the
transaction is consummated, and/or accelerate our need for capital as a combined company
in the event the transaction is consummated, and the terms of any such capital raise
may be onerous, if we are even successful at being able to raise needed capital;
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that
we may be assuming potential unknown liabilities of the acquired business; and
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that
if we do not consummate such a transaction, we will have expended substantial costs and
resources without achieving the anticipated benefit.
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Acquisitions
or business combinations (or attempted transactions) could have an adverse, rather than a positive, effect on our business, operations
and financial results for the reasons set forth above or otherwise.
The
markets in which we operate are rapidly emerging, and we may be unable to compete successfully against existing or future competitors
to our business.
The
markets in which we operate are becoming increasingly competitive. Our current competitors generally include operators within
the digital media stack, who offer subcomponents of our digital broadcasting solutions (e.g., CDN providers, CMS companies, hosting,
utility computing companies), or integrators and vertical solution providers who develop single implementations of content or
digital media distribution, and related digital services, to a target device platform. These competitors, including future new
competitors that may emerge, may be able to develop a comparable or superior platform, and/or technology stack, and/or series
of services that provide a similar or more robust set of features and functionality than the technology, products and services
we offer. If this occurs, we may be unable to grow as necessary to make our business profitable.
Regardless
of whether we have superior products, many of these current and potential future competitors have a longer operating history in
their current respective business areas and greater market presence, brand recognition, engineering and marketing capabilities,
and financial, technological and personnel resources than we do. Existing and potential competitors with an extended operating
history, even if not directly related to our business, have an inherent marketing advantage because of the reluctance of many
potential customers to entrust key operations to a company that may be perceived as unproven. In addition, our existing and potential
future competitors may be able to use their extensive resources:
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to
develop and deploy new products and services more quickly and effectively than we can;
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to
develop, improve and expand their platforms and related infrastructures more quickly
than we can;
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to
reduce costs, particularly transport, storage and processing costs, because of discounts
associated with large volume purchases;
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to
offer less expensive products, technology, platform, and services as a result of a lower
cost structure, greater capital reserves or otherwise;
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to
adapt more swiftly and completely to new or emerging technologies and changes in customer
requirements;
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to
offer bundles of related services that we are unable to offer;
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to
attract and retain qualified staff more effectively than we can;
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to
take advantage of acquisition and other opportunities more readily; and
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to
devote greater resources to the marketing and sales of their products, technology, platform,
and services.
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If
we are unable to compete effectively in our various markets, or if competitive pressures place downward pressure on the prices
at which we offer our products and services, our business, financial condition and results of operations may suffer.
Our
networks handle personal data, and we may be subject to liability for any loss of such data.
As
part of our product offering, we facilitate the billing by our customers of their end customers, including end customers that
may purchase products using credit cards or otherwise provide personal financial and other information over our network. Unauthorized
access to our platform and underlying infrastructure, including certain servers for example, may jeopardize the security of the
personal information stored in our computer systems and our customers’ computer systems. If this occurs, we may be liable
to our customers, and we may lose customers or future customers, as a result of the reputational harm associated with such a breach.
Our
business operations are susceptible to interruptions caused by events beyond our control.
Our
business operations are susceptible to interruptions caused by events beyond our control. We are vulnerable to the following potential
problems, among others:
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Our
platform, technology, products, and services and underlying infrastructure, or that of
our key suppliers, may be damaged or destroyed by events beyond our control, such as
fires, earthquakes, floods, power outages or telecommunications failures. Our operations
are particularly susceptible to interruption from any of the foregoing because many of
our servers and much of our infrastructure is located in Southern California, which is
prone to the occurrence of the foregoing events.
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We
and our customers and/or partners may experience interruptions in service as a result
of the accidental or malicious actions of Internet users, hackers or current or former
employees.
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We
may face liability for transmitting viruses to third parties that damage or impair their
access to computer networks, programs, data or information. Eliminating computer viruses
and alleviating other security problems may require interruptions, delays or cessation
of service to our customers.
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Failure
of our systems or those of our suppliers may disrupt service to our customers (and from
our customers to their customers), which could materially impact our operations (and
the operations of our customers), adversely affect our relationships with our customers
and lead to lawsuits and contingent liability.
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The
occurrence of any of the foregoing could result in claims for consequential and other damages, significant repair and recovery
expenses and extensive customer losses and otherwise have a material adverse effect on our business, financial condition and results
of operations.
Risks
Related to Our Intellectual Property
If
the protection of our intellectual property is inadequate, our competitors may gain access to our technology, and our business
may suffer.
We
depend on our ability to develop and maintain certain proprietary aspects of our products and services. To protect these proprietary
products and services, we rely primarily on a combination of contractual provisions, confidentiality procedures, trade secrets
and common law copyright and trademark principles. Adequate protection of our intellectual property is subject to the following
risks:
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We
have not applied for a copyright registration or patents with respect to our proprietary
rights, and, as a result, we may have limited legal recourse against others who use our
technology or similar technology.
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Our
claims of proprietary ownership (and related common law copyright assertions) may be
challenged or otherwise fail to provide us with the ability to prevent others from copying
our technology.
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Our
existing trademarks or any future trademarks may be canceled or otherwise fail to provide
meaningful protection.
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Counterparties
to nondisclosure agreements disclose or use our intellectual property in breach of governing
agreements, and our ability to prevent or obtain damages for such breach may be limited
by our financial situation, legal restrictions or other issues.
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If
we use open source technology, with or without our knowledge, we may become subject to
“copyleft” agreements requiring us to license proprietary technology to third
parties.
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Despite
our efforts to protect our proprietary products, technology, platform, and services, unauthorized parties may attempt to copy,
obtain or use certain aspects of it for their own benefit or for purposes of damaging our business or reputation. Policing unauthorized
use of our products, technology, platform, and services is difficult, and although we are unable to determine the extent to which
piracy of our products, technology, platform, and services exists, we expect software piracy to be an ongoing problem.
Third
party claims that we infringe upon their intellectual property rights could be costly to defend and/or settle.
Litigation
regarding intellectual property rights is common in the Internet and software industries. We expect that Internet technologies
and software products and services may be increasingly subject to third-party infringement claims as the number of competitors
in our industry grows and the functionality of products, technology, platform, and services in different industry segments overlaps.
We may from time to time encounter disputes over rights and obligations concerning intellectual property that we developed ourselves,
use or license from third parties, including open source software. Third parties may bring claims of infringement against us,
which may be with or without merit. We could be required, as a result of an intellectual property dispute, to do one or more of
the following:
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cease
selling, incorporating or using services, technology, platform or products that rely
upon the disputed intellectual property;
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obtain
from the holder of the intellectual property a license to sell or use the disputed intellectual
property, which license may not be available on terms acceptable to us or at all;
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redesign
services, technology, products, platform or portions of services, technology or products,
that incorporate disputed intellectual property;
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pay
increased license fees for certain implementations of open source or other third party
software licenses which were not anticipated under an existing license or agreement;
and
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pay
monetary damages to the third party adjudged to be the rightful holder of the intellectual
property right.
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The
occurrence of any of these events could result in substantial costs and diversion of resources or could severely limit the products
and/or services we offer, which may seriously harm our business, operating results and financial condition.
In
addition, we have agreed, and may agree in the future, to indemnify certain of our customers against claims that our products,
technology or services infringe upon the intellectual property rights of others. We could incur substantial costs in defending
our customers against infringement claims and ultimately be required to pay substantial monetary damages attributable to the indemnification
of our customers in the event of a successful claim of infringement against us or them.
We
may be subject to legal liability for providing third-party content.
We
have certain arrangements to offer third-party content via certain of our customers’ websites. We may be subject to claims
concerning this content by virtue of our involvement in marketing, branding, broadcasting or providing access to it, even if we
do not ourselves directly host, operate or provide access to these products, services, content or advertising. While our agreements
with these parties most often provide that we will be indemnified against such liabilities, such indemnification may not be adequate
or available. Investigating and defending any of these types of claims can be expensive, even if the claims do not result in liability.
While to date we have not been subject to material claims, if any potential claims do result in liability, we could be required
to pay damages or other penalties, or result in other adverse impacts to our business, which could harm our operating results
and financial condition.
Risks
Related to Our Industry
Certain
of our service delivery and content handling services are subject to industry regulations, standards, certifications and/or approvals.
The
commercialization of certain of the service delivery and content handling services we provide at times require or are made more
costly due to industry acceptance and regulatory processes, such as ISO certification and strict content security handling standards,
including rights management and other requirements mandated by media and entertainment studios. If we are unable to obtain or
retain these or other formal and informal studio approvals for particular digital service implementations, certifications and
standards compliance in a timely manner, or at all, our operating results could be adversely affected.
General
global market and economic conditions may have an adverse impact on our operating performance and results of operations.
Our
business has been and could continue to be affected by general global economic and market conditions. Weakness in the United States
and worldwide economy has had and could continue to have a negative effect on our operating results, including a decrease in revenue
and operating cash flow. To the extent our customers are unable to profitably monetize the digital services and content we deliver
on their behalf, they may reduce or eliminate their purchase of our products and services. Such reductions in traffic would lead
to a reduction in our revenues. Additionally, in a down-cycle economic environment, we may experience the negative effects of
increased competitive pricing pressure, customer loss, slowdown in commerce over the Internet and corresponding decrease in traffic
delivered over our network and failures by our customers to pay amounts owed to us on a timely basis or at all. Suppliers on which
we rely for servers, bandwidth, co-location and other services could also be negatively impacted by economic conditions that,
in turn, could have a negative impact on our operations or revenues. Flat or worsening economic conditions may harm our operating
results and financial condition.
The
market for digital broadcasting solutions may not grow at a pace that we anticipated or at levels that allow us to continue to
grow.
The
market for digital broadcasting solutions is relatively new and evolving. As a result, we cannot be certain that a viable market
for our products and services will be sustainable. Factors that may inhibit the growth of this market include:
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Our
customers may limit their distribution of digital media and related digital services
to devices because of issues related to protection of copyrights, media and entertainment
company studio approvals related to content protection, royalty payments to artists and
publishers, illegal copying and distribution of data and other intellectual property
rights issues.
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Congestion
of data networks, or consumer reluctance to purchase high-speed Internet connectivity
for their device, may limit the growth of the distribution of content and related digital
services to devices.
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Consumers
may determine not to view or access digital services on their devices because of, among
other factors, poor reception of the broadcast or other delivery of the services, or
the creation or expansion of competing technologies, that provide a similar service at
lower cost or with better features.
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New
laws and regulations may negatively affect consumers’ and businesses’ use
of the Internet or devices, thereby reducing demand.
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If
the market for digital broadcasting solutions does not continue to grow, or grows more
slowly than expected, our business, results of operations and financial condition will
be significantly harmed.
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Risks
Related to Our Capital Stock and Capitalization
Our
officers and directors have significant voting power and may take actions that may not be in the best interests of other stockholders.
Our
executive officers and directors beneficially own approximately 60% of our outstanding common stock. These executive officers
and directors effectively control all matters requiring approval by the stockholders, including any determination with respect
to the acquisition or disposition of assets, future issuances of securities, and the election of directors. This concentration
of ownership may also delay, defer or prevent a change in control and otherwise prevent stockholders other than our affiliates
from influencing our direction and future.
We
cannot predict the extent to which an active public trading market for our common stock will develop or be sustained. If a public
trading market does not develop or cannot be sustained, you may be unable to liquidate your investment in AllDigital.
We
cannot predict the extent to which an active public market for our common stock will develop or be sustained due to a number of
factors, including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional
investors, and others in the investment community that generate or influence sales volume, and that even if we came to the attention
of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or
recommend the purchase of our shares of common stock until such time as we became more seasoned and viable. As a consequence,
there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a
seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an
adverse effect on share price. We cannot give you any assurance that a public trading market for our common stock will be sustained.
If such a market cannot be sustained, you may be unable to liquidate your investment in AllDigital.
In
addition, the market price for our common stock may be particularly volatile given our status as a relatively small company with
a small and thinly-traded “public float” that could lead to wide fluctuations in our share price. You may be unable
to sell your common stock at or above your purchase price if at all, which may result in substantial losses to you.
Our
common stock may be subject to significant price volatility which may have an adverse effect on your ability to liquidate your
investment in our common stock.
The
market for our common stock may be characterized by significant price volatility when compared to seasoned issuers, and we expect
that our share price will be more volatile than a seasoned issuer for the indefinite future. The potential volatility in our share
price is attributable to a number of factors. First, our common shares may be sporadically and/or thinly traded. As a consequence
of this lack of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence
the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event
that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer
that could better absorb those sales without adverse impact on its share price. Secondly, an investment in us is a speculative
or “risky” investment due to our lack of meaningful revenues or any profits to date and uncertainty of future market
acceptance for current and potential products. As a consequence of this enhanced risk, more risk-adverse investors may, under
the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell
their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer.
We
are subject to various regulatory requirements, and may be adversely affected by inquiries, investigations and allegations that
we have not complied with governing rules and laws.
In
light of our status as a public company and the early stage of our business, we are subject to a variety of laws and regulatory
requirements in addition to those applicable to all businesses generally. For example, we are subject to the reporting requirements
applicable to United States reporting issuers, such as the Sarbanes-Oxley Act of 2002, and certain state and provincial securities
laws. In addition, because we are in an early stage of development and intend on issuing securities to raise capital and use acquisitions
for growth, our actions will be governed by state and federal securities laws and laws governing the issuance of securities, which
are complex. In connection with such laws, we may be subject to periodic audits, inquiries and investigations. Any such audits,
inquiries and investigations may divert considerable financial and human resources and adversely affect the execution of our business
plan.
Through
such audits, inquiries and investigations, a regulator or we may determine that we are out of compliance with one or more governing
rules or laws. Remedying such non-compliance diverts additional financial and human resources. In addition, in the future, we
may be subject to a formal charge or determination that we have materially violated a governing law, rule or regulation. We may
also be subject to lawsuits as a result of alleged violation of the securities laws or governing corporate laws. Any charge or
allegation, and particularly any determination, that we had materially violated a governing law would harm our ability to enter
into business relationships, recruit qualified officers and employees and raise capital.
The
market price of our common stock may be harmed by our need to raise capital.
We
need to raise additional capital in the near future and expect to raise such capital through the issuance of equity and equity
linked securities including common stock, preferred stock, warrants and convertible debt. Because securities in private placements
and other transactions by a company are often sold at a discount to market prices, this need to raise additional capital may harm
the market price of our common stock, to the extent that a market develops. In addition, the re-sale of securities issued in such
capital-raising transactions, whether under Rule 144 or otherwise, may harm the market price of our common stock.
Our
ability to issue preferred stock and common stock may significantly dilute ownership and voting power, negatively affect the price
of our common stock and inhibit hostile takeovers.
Under
our Articles of Incorporation, we are authorized to issue up to 10,000,000 shares of preferred stock and 90,000,000 shares of
common stock without seeking stockholder approval. Any issuance of preferred stock or common stock would dilute the ownership
and voting power of existing holders of our common stock and may have a negative effect on the price of our common stock. The
issuance of preferred stock without stockholder approval may also be used by management to stop or delay a change of control,
or might discourage third parties from seeking a change of control of our company, even though some stockholders or potential
investors may view possible takeover attempts as potentially beneficial to our stockholders.
Our
common stock is a “low-priced stock” and subject to regulations that limits or restricts the potential market for
our stock.
Shares
of our common stock are “low-priced” or “penny stock,” resulting in increased risks to our investors and
certain requirements being imposed on some brokers who execute transactions in our common stock. In general, a low-priced stock
is an equity security that is:
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priced
under five dollars;
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not
traded on a national stock exchange, such as NASDAQ or the NYSE;
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issued
by a company that has less than $5 million in net tangible assets (if it has been in
business less than three years) or has less than $2 million in net tangible assets (if
it has been in business for at least three years); and
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issued
by a company that has average revenues of less than $6 million for the past three years.
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We
believe that our common stock is presently a “penny stock.” At any time the common stock qualifies as a penny stock,
the following requirements, among others, will generally apply:
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Certain
broker-dealers who recommend penny stock to persons other than established customers
and accredited investors must make a special written suitability determination for the
purchaser and receive the purchaser’s written agreement to a transaction prior
to sale.
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Prior
to executing any transaction involving a penny stock, certain broker-dealers must deliver
to certain purchasers a disclosure schedule explaining the risks involved in owning penny
stock, the broker-dealer’s duties to the customer, a toll-free telephone number
for inquiries about the broker-dealer’s disciplinary history and the customer’s
rights and remedies in case of fraud or abuse in the sale.
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In
connection with the execution of any transaction involving a penny stock, certain broker-dealers
must deliver to certain purchasers the following:
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bid
and offer price quotes and volume information;
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the
broker-dealer’s compensation for the trade;
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the
compensation received by certain salespersons for the trade;
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monthly
account statements; and
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a
written statement of the customer’s financial situation and investment goals.
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We
have never paid, and do not intend to pay in the future, dividends on our common stock.
We
have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings and do
not expect to pay any dividends in the foreseeable future. It is unlikely that investors will derive any current income from ownership
of our stock. This means that the potential for economic gain from ownership of our stock depends on appreciation of our stock
price and will only be realized by a sale of the stock at a price higher than the purchase price.
We
do not have significant tangible assets that could be sold upon liquidation.
We
have nominal tangible assets. As a result, if we become insolvent or otherwise must dissolve, there will be no tangible assets
to liquidate and no corresponding proceeds to disburse to our stockholders. If we become insolvent or otherwise must dissolve,
stockholders will likely not receive any cash proceeds on account of their shares.