UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended September 30, 2015
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from ___________ to ___________
Commission
File Number: 333-141676
ALLDIGITAL
HOLDINGS, INC.
(Exact
name of registrant as specified in its charter)
| Nevada |
|
20-5354797 |
| (State
or other jurisdiction of |
|
(I.R.S.
Employer |
| incorporation
or organization) |
|
Identification
No.) |
| |
|
|
| 6
Hughes Suite 200, Irvine, California |
|
92618 |
| (Address
of principal executive offices) |
|
(zip
code) |
(949)
250-7340
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
| Large
accelerated filer [ ] |
Accelerated
filer [ ] |
| |
|
| Non-accelerated
filer [ ] (Do not check if a smaller reporting company) |
Smaller reporting
company [X] |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No
[X]
As
of November 13, 2015, there were 38,254,959 shares of the registrant’s common stock, $0.001 par value per share, outstanding.
CAUTIONARY
STATEMENT
All
statements included or incorporated by reference in this Quarterly Report on Form 10-Q (this “Report”), other than
statements or characterizations of historical fact, are “forward-looking statements.” Examples of forward-looking
statements include, but are not limited to, statements concerning projected sales, costs, expenses and gross margins; our accounting
estimates, assumptions and judgments; the prospective demand for our products; the projected growth in our industry; the competitive
nature of and anticipated growth in our industry; and our prospective needs for, and the availability of, additional capital.
These forward-looking statements are based on our current expectations, estimates, approximations and projections about our industry
and business, management’s beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking
statements can often be identified by such words as “anticipates,” “expects,” “intends,” “plans,”
“predicts,” “believes,” “seeks,” “estimates,” “may,” “will,”
“should,” “would,” “could,” “potential,” “continue,” “ongoing,”
similar expressions and variations or negatives of these words. These statements are not guarantees of future performance and
are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ
materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which
are set forth in the “Risk Factors” section of this Report, which could cause our financial results, including our
net income or loss or growth in net income or loss to differ materially from prior results, which in turn could, among other things,
cause the price of our common stock to fluctuate substantially. These forward-looking statements speak only as of the date of
this report. We undertake no obligation to revise or update publicly any forward-looking statement for any reason, except as otherwise
required by law.
TABLE
OF CONTENTS
PART
I – FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
ALLDIGITAL
HOLDINGS, INC.
CONSOLIDATED
BALANCE SHEETS
| | |
September
30, 2015 | | |
December
31, 2014 | |
| | |
(Unaudited) | | |
| |
| ASSETS | |
| | | |
| | |
| | |
| | | |
| | |
| Current Assets | |
| | | |
| | |
| Cash and cash equivalents | |
$ | 828,406 | | |
$ | 485,761 | |
| Accounts receivable, net of allowance
of $0- and $0- | |
| 100,539 | | |
| 361,276 | |
| Prepaid expenses
and other current assets | |
| 50,799 | | |
| 50,944 | |
| Total current assets | |
| 979,744 | | |
| 897,981 | |
| Property and equipment, net | |
| 152,039 | | |
| 176,194 | |
| Purchased intangible assets, net | |
| 366,283 | | |
| 386,415 | |
| Other assets | |
| 18,737 | | |
| 18,626 | |
| Total
assets | |
$ | 1,516,803 | | |
$ | 1,479,216 | |
| | |
| | | |
| | |
| LIABILITIES AND STOCKHOLDERS’
(DEFICIT) EQUITY | |
| | | |
| | |
| | |
| | | |
| | |
| Current Liabilities | |
| | | |
| | |
| Accounts payable and accrued expenses | |
$ | 617,829 | | |
$ | 809,018 | |
| Deferred revenue | |
| 52,087 | | |
| 4,465 | |
| Other current
liabilities | |
| 29,875 | | |
| 28,530 | |
| Total current liabilities | |
| 699,791 | | |
| 842,013 | |
| | |
| | | |
| | |
| Long-term liabilities: | |
| | | |
| | |
| Long-term debt | |
| 2,218,461 | | |
| 750,000 | |
| Other
liabilities | |
| 23,724 | | |
| 45,978 | |
| Total long-term
liabilities | |
| 2,242,185 | | |
| 795,978 | |
| | |
| | | |
| | |
| Commitments and Contingencies (Note
9) | |
| | | |
| | |
| | |
| | | |
| | |
| Stockholders’ (Deficit) Equity | |
| | | |
| | |
| | |
| | | |
| | |
| Preferred stock, $0.001 par value, 10,000,000
shares authorized, none and none issued and outstanding, respectively | |
| — | | |
| — | |
| Common stock, $0.001 par value, 90,000,000 shares authorized,
38,254,959 and 37,170,959 issued and outstanding as of September 30, 2015 and December 31, 2014, respectively | |
| 38,255 | | |
| 37,171 | |
| Additional paid-in
capital | |
| 4,979,382 | | |
| 4,636,530 | |
| Accumulated
deficit | |
| (6,442,810 | ) | |
| (4,832,476 | ) |
| Total
stockholders’ (deficit) equity | |
| (1,425,173 | ) | |
| (158,775 | ) |
| | |
| | | |
| | |
| Total
liabilities and stockholders’ (deficit) equity | |
$ | 1,516,803 | | |
$ | 1,479,216 | |
See
accompanying notes to these unaudited consolidated financial statements.
ALLDIGITAL
HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
| | |
Three
Months Ended
September 30, | | |
Nine
Months Ended
September 30, | |
| | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| Net sales | |
| 394,452 | | |
$ | 949,866 | | |
$ | 1,801,429 | | |
$ | 2,762,535 | |
| Cost of sales | |
| 311,451 | | |
| 595,133 | | |
| 1,374,401 | | |
| 2,470,556 | |
| Gross
profit (loss) | |
| 83,001 | | |
| 354,733 | | |
| 427,028 | | |
| 291,979 | |
| Operating expenses | |
| | | |
| | | |
| | | |
| | |
| Selling, marketing,
and advertising | |
| 134,863 | | |
| 146,942 | | |
| 352,571 | | |
| 561,236 | |
| General
and administrative | |
| 571,547 | | |
| 441,736 | | |
| 1,597,059 | | |
| 1,322,441 | |
| Total
operating expenses | |
| 706,410 | | |
| 588,678 | | |
| 1,949,630 | | |
| 1,883,677 | |
| Loss from operations | |
| (623,409 | ) | |
| (233,945 | ) | |
| (1,522,602 | ) | |
| (1,591,698 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Other income (expense) | |
| | | |
| | | |
| | | |
| | |
| Interest income | |
| 178 | | |
| 71 | | |
| 380 | | |
| 652 | |
| Interest expense | |
| (39,053 | ) | |
| (152 | ) | |
| (66,740 | ) | |
| (670 | ) |
| Other
income (expense) | |
| — | | |
| — | | |
| (19,173 | ) | |
| 25,170 | |
| Total
other income (expense) | |
| (38,875 | ) | |
| (81 | ) | |
| (85,533 | ) | |
| 25,152 | |
| Loss from operations before provision
for income taxes | |
| (662,284 | ) | |
| (234,026 | ) | |
| (1,608,135 | ) | |
| (1,566,546 | ) |
| Provision for
income taxes | |
| (98 | ) | |
| (1,600 | ) | |
| (2,198 | ) | |
| (3,200 | ) |
| Net loss | |
$ | (662,382 | ) | |
$ | (235,626 | ) | |
$ | (1,610,333 | ) | |
$ | (1,569,746 | ) |
| Basic and diluted
net loss per share | |
$ | (0.02 | ) | |
$ | (0.01 | ) | |
$ | (0.04 | ) | |
$ | (0.04 | ) |
| Basic and diluted
weighted-average shares outstanding | |
| 38,254,959 | | |
| 36,345,857 | | |
| 38,155,750 | | |
| 35,709,742
| |
See
accompanying notes to these unaudited consolidated financial statements.
ALLDIGITAL
HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
| | |
Nine
Months Ended September 30, | |
| | |
2015
| | |
2014
| |
| Cash Flows From
Operating Activities | |
| | | |
| | |
| Net loss | |
$ | (1,610,333 | ) | |
$ | (1,569,746 | ) |
| Adjustments to reconcile
net loss to net cash provided by (used in) operating activities: | |
| | | |
| | |
| Depreciation and
amortization | |
| 70,228
| | |
| 54,196 | |
| Provision for doubtful
accounts | |
| — | | |
| — | |
| Stock based compensation | |
| 336,936 | | |
| 85,645 | |
| Stock issued for
services | |
| 7,000 | | |
| 87,999 | |
| Loss on disposal
of property and equipment | |
| 19,173 | | |
| 21,595 | |
| Changes in operating
assets and liabilities: | |
| | | |
| | |
| Accounts receivable | |
| 260,737 | | |
| 162,864 | |
| Prepaid expenses
and other current assets | |
| 143 | | |
| (125,822 | ) |
| Other assets | |
| (111 | ) | |
| — | |
| Deferred revenue | |
| 47,622 | | |
| (329,535 | ) |
| Accounts
payable and accrued expenses | |
| (27,227 | ) | |
| 86,286 | |
| Net cash provided
by (used in) operating activities | |
| (895,832 | ) | |
| (1,526,518 | ) |
| | |
| | | |
| | |
| Cash Flows From
Investing Activities | |
| | | |
| | |
| Purchase of property
and equipment | |
| (45,614 | ) | |
| (32,172 | ) |
| Purchase
of intangible assets | |
| — | | |
| (3,763 | ) |
| Net
cash used in investing activities | |
| (45,614 | ) | |
| (35,935 | ) |
| | |
| | | |
| | |
| Cash Flows From
Financing Activities | |
| | | |
| | |
| Proceeds from issuance
of secured notes payable | |
| 1,305,000 | | |
| 412,500 | |
| Payments
on capital lease obligations | |
| (20,909 | ) | |
| (11,673 | ) |
| Net
cash provided by financing activities | |
| 1,284,091 | | |
| 400,827 | |
| Net increase (decrease) in cash and
cash equivalents | |
| 342,645 | | |
| (1,161,626 | ) |
| Cash and cash
equivalents – beginning of period | |
| 485,761 | | |
| 1,300,932 | |
| Cash and cash
equivalents – end of period | |
$ | 828,406 | | |
$ | 139,306 | |
| | |
| | | |
| | |
| Supplemental disclosures
of cash flow information: | |
| | | |
| | |
| Interest
paid | |
$ | 18,581
| | |
$ | 670 | |
| Income
taxes paid | |
$ | 2,198 | | |
$ | 3,200 | |
SUPPLEMENTAL
INFORMATION OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During
the nine months ended September 30, 2015 and 2014, the Company entered into the following noncash investing or financing transactions.
| |
● |
Sold
$163,461 in principal of Notes to two of our vendors in a non-cash transaction, which resulted in the aggregate pay down of
$163,461 in trade payables that were owed as of December 31, 2014. |
| |
|
|
| |
● |
Capital
lease financing for computers and other equipment totaling $89,672. |
See
accompanying notes to these unaudited consolidated financial statements.
ALLDIGITAL
HOLDINGS, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - ORGANIZATION AND BUSINESS
Throughout
this Report, AllDigital Holdings, Inc. and AllDigital, Inc., as a consolidated entity, are referred to as “AllDigital”,
the “Company”, “we”, “our” or “us.” To the extent we need to distinguish AllDigital
Holdings, Inc. from AllDigital, Inc., we refer to AllDigital Holdings, Inc. as “AllDigital Holdings” and to AllDigital,
Inc. as “AllDigital, Inc.”
AllDigital
was incorporated in the state of California on August 3, 2009 and engineers software and hardware based digital broadcasting solutions
to accelerate and optimize the distribution of digital video over the Internet. The Company’s digital broadcasting solutions
are built around proprietary product and service offerings. The Company’s product offerings consist of AllDigital Brevity
and AllDigital Cloud. AllDigital Brevity uses the Company’s patented technology to simultaneously transcode digital video
files to multiple formats and to multiple destinations while transporting them at super-accelerated speeds over the Internet.
AllDigital Cloud is a unified digital broadcasting and cloud services platform dedicated to ingesting, storing, preparing, securing,
managing, monetizing, converting and distributing digital media and other forms of data across devices. AllDigital Integration
Services provides consultation and software development services that enable the Company’s customers to integrate AllDigital
Brevity and AllDigital Cloud into existing digital workflows, with services ranging from transition planning from competitive
offerings to designing, building and hosting complete digital workflows.
The
Company’s ability to successfully generate future revenues is dependent on a number of factors, including: (i) access to
capital, and the Company’s success at growing the Company’s recurring revenues and operating cash flows to continue
developing, operating and maintaining the Company’s proprietary AllDigital Brevity and AllDigital Cloud platforms and services,
including the Company’s completing the development of a highly scalable and multitenant variant of AllDigital Brevity, which
the Company believes will serve as its platform for recurring revenue growth and cash flow profitability in the future, (ii) the
ability to commercialize the Company’s portfolio of digital broadcasting solutions, and (iii) the Company’s ability
to attract and retain key sales, business and product development, and other personnel as the Company’s business and offerings
continue to mature. The Company may encounter setbacks related to these activities.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
Company has prepared the accompanying consolidated unaudited financial statements in accordance with accounting principles generally
accepted in the United States of America, or GAAP, for interim financial statements and with instructions to Form 10-Q pursuant
to the rules and regulations of Securities and Exchange Act of 1934, as amended, or the Exchange Act and Article 8-03 of Regulation
S-X promulgated under the Exchange Act. Accordingly, these financial statements do not include all of the information and footnotes
required by GAAP for complete financial statements. In the opinion of the Company’s management, the Company has included
all adjustments considered necessary (consisting of normal recurring adjustments) for a fair presentation. Operating results for
the nine months ended September 30, 2015 are not indicative of the results that may be expected for the fiscal year ending December
31, 2015. You should read these unaudited condensed consolidated financial statements in conjunction with the audited financial
statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
The
preparation of the Company’s financial statements requires management to make estimates, judgments and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
financial statements. The use of estimates may also affect the reported amounts of revenues and expenses during the reporting
periods. Significant estimates made by management include, among others, estimates of costs used in the calculation of percentage
of completion contracts, realization of capitalized assets, valuation of equity instruments and other instruments indexed to the
Company’s common stock, and deferred income tax valuation allowances. Actual results could differ from those estimates.
Following is a discussion of the Company’s significant accounting policies.
Liquidity
The
accompanying financial statements have been prepared assuming the Company will continue as a going concern. This basis of accounting
contemplates the recovery of the Company’s assets and the satisfaction of its liabilities in the normal course of conducting
its business. Accordingly, the financial statements do not include any adjustments to reflect the possible future effects on the
recoverability or classification of assets and liabilities that may result from the outcome of this uncertainty. The Company has
to date incurred recurring losses and has accumulated losses aggregating approximately $6.4 million as of September 30, 2015.
The Company’s business strategy includes attempting to increase its revenue through investing further in its product development,
sales, and marketing efforts of AllDigital Brevity. The Company intends to finance this portion of its business strategy through
available working capital resources and raising additional funds to provide a long enough horizon for the Company to achieve cash
flow profitability. Without further investment capital, management believes that current cash on-hand and cash flow from operations
will finance the Company through the first quarter of 2016.
These
factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s
ability to continue as a going concern is dependent upon its ability to develop additional sources of capital and to ultimately
achieve sustainable revenues and profitable operations. The Company’s independent auditors, in their report on our financial
statements for the year ending December 31, 2014, expressed substantial doubt about the Company’s ability to continue as
a going concern. The Company’s financial statements do not include any adjustments that might result from the outcome of
these uncertainties.
Principles
of Consolidation
The
consolidated financial statements include the accounts of AllDigital, Inc. that are consolidated in conformity with accounting
principles generally accepted in the United States of America (U.S. GAAP). AllDigital, Inc. is wholly-owned by AllDigital Holdings,
Inc. There are no intercompany transactions as all accounts are in the name of AllDigital, Inc.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be
cash equivalents.
Revenue
Recognition
The
Company recognizes recurring and nonrecurring service revenue in accordance with the authoritative guidance for revenue recognition,
including guidance on revenue arrangements with multiple deliverables. In general, revenue is recognized only when the price is
fixed or determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting
receivable is reasonably assured.
Revenue
from certain design and development contracts, where a solution is designed, developed or modified to a customer’s specifications,
is recognized on a percentage of completion basis in accordance with ASC 605-35 based on the cost-to-cost method, provided such
costs can be reasonably estimated. The Company’s revenue recognition practices related to such contracts include: developing
an approved budget; comparing actual period costs to the budget as a percentage; recognizing revenue for the period based upon
the percentage of actual costs incurred compared to total estimated costs, and; performing monthly budget-actual reviews, updates,
and adjustments as needed. The impact on revenues as a result of these revisions is included in the periods in which the revisions
are made. For contracts for which the Company is unable to reasonably estimate total contract costs, the Company waits until contract
completion to recognize the associated revenue.
Nonrecurring
revenues also include “on-boarding” professional services that involve the development or integration of a customer’s
software application, digital service, system, or Application Programming Interface (“API”) to connect with the AllDigital
Cloud platform. On-boarding professional services projects are typically of a short duration and smaller revenue amounts. The
Company recognizes revenue for on-boarding professional services upon project completion and acceptance.
Monthly recurring revenues
are recognized ratably over the period in which they are delivered and earned. The Company typically charges monthly recurring
platform fees for AllDigital Brevity and AllDigital Cloud, as well as monthly recurring charges for its back-end storage, cloud
processing, origin transit, and maintenance and support services. These fees are generally billed based on a minimum commitment
plus actual usage basis, and the term of such customer contracts vary typically from 12 to 24 months.
Rarely,
a customer contract will include revenue arrangements that consist of multiple product and service deliverables. Such contracts
are accounted for in accordance with ASC 605-25, as amended by ASU 2009-13. For the Company’s multiple-element arrangements,
deliverables are separated into more than one unit of accounting when (i) the delivered element(s) have value to the customer
on a stand-alone basis, and (ii) delivery of the undelivered element(s) is probable and substantially in the control of the Company.
Revenue is then allocated to each unit of accounting based on the estimated selling price determined using a hierarchy of evidence
based first on Vendor-Specific Objective Evidence (“VSOE”) if it exists, based next on Third-Party Evidence (“TPE”)
if VSOE does not exist, and finally, if both VSOE and TPE do not exist, based on the Company’s best estimate of selling
price (“BESP”). If deliverables cannot be separated into more than one unit, then the Company does not recognize revenue
until all deliverables have been delivered and accepted.
Accounts
Receivable
Accounts
receivable are recorded at their face amount less an allowance for doubtful accounts. The allowance for doubtful accounts reflects
management’s best estimate of probable losses in the accounts receivable balance. Management determines the allowance based
on known troubled accounts, historical experience, and other currently available evidence. The allowance for doubtful accounts
was $0 at September 30, 2015, and $0 at December 31, 2014. The Company generally requires a deposit or advance services payments
from its customers for certain contracts involving upfront capital investment, on-boarding, or development to facilitate its working
capital needs.
Earnings
and Loss per Share
The
Company computes net earnings (loss) per share in accordance with ASC 260-10 that establishes standards for computing and presenting
net earnings (loss) per share. Basic earnings (loss) per share are computed by dividing net income (loss) by the weighted average
number of common shares outstanding during the period. Diluted earnings per share is computed similar to basic earnings per share
except that the denominator is increased to include the number of additional common shares that would have been outstanding if
the potential common shares had been issued and if the additional common shares were dilutive.
At
September 30, 2015, the Company had 210,000 warrants and 7,460,761 options that could potentially increase the number of shares
outstanding. At September 30, 2015, the Company had sold $2,218,461 of its 5% Senior Secured Convertible Notes due December 31,
2017 (the “Exchange Notes”) that if converted at the note conversion price of $.15 per share, could potentially increase
the number of shares outstanding by 14,789,740 shares. These instruments were excluded from the computation of the diluted loss
per share as their impact is anti-dilutive.
Fair
Value of Measurements
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Assets and liabilities recorded at fair value in the accompanying consolidated
balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The
fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent
sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on
the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels,
which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and
the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
| |
Level
Input: |
|
Input
Definition: |
| |
|
|
|
| |
Level
1 |
|
Inputs
are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date. |
| |
|
|
|
| |
Level
2 |
|
Inputs,
other than quoted prices included in Level I that are observable for the asset or liability through corroboration with market
data at the measurement date. |
| |
|
|
|
| |
Level
3 |
|
Unobservable
inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability
at the measurement date. |
Assets
subject to this classification at September 30, 2015, and December 31, 2014, were cash and cash equivalents and are considered
Level 1 assets.
For
certain of the Company’s financial instruments, including accounts receivable, prepaid expenses, and accounts payable, the
carrying amounts approximate fair value due to their short maturities. The carrying amount of the Company’s notes payable
approximates fair value based on prevailing interest rates.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC 740-10, Income Taxes. The Company recognizes deferred tax assets
and liabilities to reflect the estimated future tax effects, calculated at the tax rate expected to be in effect at the time of
realization. The Company records a valuation allowance related to a deferred tax asset when it is more likely than not that some
portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the
changes in tax laws and rates at the date of enactment.
ASC
740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements
and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure
and transition issues.
The
Company follows guidance issued by the FASB with regard to its accounting for uncertainty in income taxes recognized in the financial
statements. Such guidance prescribes a recognition threshold of more likely than not and a measurement process for financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. In making this assessment, a company
must determine whether it is more likely than not that a tax position will be sustained upon examination, based solely on the
technical merits of the position and must assume that the tax position will be examined by taxing authorities.
Property
and Equipment
Property
and equipment are recorded at cost, less accumulated depreciation and amortization. Repairs and maintenance of equipment are charged
to expense as incurred. Property and equipment are depreciated using the straight-line method over the estimated useful lives
of the assets as follows:
| |
Furniture
and fixtures |
5 years |
| |
Leasehold improvements |
Shorter of remaining
lease term or up to 3 years |
| |
Fixed assets under
capital lease |
3 years |
| |
Computer equipment
|
3 years |
| |
Software |
3 years |
| |
Signs |
3 years |
Expenditures
for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Gains or losses on
dispositions of property and equipment are included in the results of operations when realized.
Impairment
of Long-Lived and Intangible Assets
The
Company accounts for long-lived assets, that include property and equipment and identifiable intangible assets with infinite useful
lives, in accordance with FASB ASC 350-30, that requires that the Company review long-lived assets for impairment whenever events
or changes in circumstances indicate that the Company may not recover the carrying amount of an asset. The Company measures recoverability
by comparing the carrying amount of an asset to the expected future undiscounted net cash flows generated by the asset. If the
Company determines that the asset may not be recoverable, the Company recognizes an impairment charge to the extent of the difference
between the asset’s fair value and the asset’s carrying amount. The Company had no impairment charges during the nine
months ended September 30, 2015 and 2014. Future amortization expense for the next five years is estimated to be approximately
$9,726 per year.
Stock-Based
Compensation
The
Company accounts for share-based compensation arrangements in accordance with FASB ASC 718, which requires the measurement and
recognition of compensation expense for all share-based payment awards to be based on estimated fair values. The Company uses
the Black-Scholes option valuation model to estimate the fair value of its stock options at the date of grant. The Black-Scholes
option valuation model requires the input of subjective assumptions to calculate the value of stock options. The Company uses
historical data among other information to estimate the expected price volatility and the expected forfeiture rate.
Recent
Accounting Pronouncements
In
August 2014, the FASB issued FASB ASU2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern. FASB ASU 2014-15 changes to the disclosure
of uncertainties about an entity’s ability to continue as a going concern. Under GAAP, continuation of a reporting entity
as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation
becomes imminent. Even if an entity’s liquidation is not imminent, there may be conditions or events that raise substantial
doubt about the entity’s ability to continue as a going concern. Because there is no guidance in GAAP about management’s
responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or
to provide related note disclosures, there is diversity in practice whether, when, and how an entity discloses the relevant conditions
and events in its financial statements. As a result, these changes require an entity’s management to evaluate whether there
are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue
as a going concern within one year after the date that financial statements are issued. Substantial doubt is defined as an indication
that it is probable that an entity will be unable to meet its obligations as they become due within one year after the date that
financial statements are issued. If management has concluded that substantial doubt exists, then the following disclosures should
be made in the financial statements: (i) principal conditions or events that raised the substantial doubt, (ii) management’s
evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations,
(iii) management’s plans that alleviated the initial substantial doubt or, if substantial doubt was not alleviated, management’s
plans that are intended to at least mitigate the conditions or events that raise substantial doubt, and (iv) if the latter in
(iii) is disclosed, an explicit statement that there is substantial doubt about the entity’s ability to continue as a going
concern. These changes become effective for the Company for the 2016 annual period. The Company is currently evaluating the impact
that adopting ASU 2014-15 may have its financial statement presentation and disclosures. Subsequent to adoption, this guidance
will need to be applied by management at the end of each annual period and interim period therein to determine what, if any, impact
there will be on the Consolidated Financial Statements in a given reporting period.
In
May 2014, FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers. The standard will
eliminate the transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle-based
approach for determining revenue recognition. ASU 2014-09 is effective for annual and interim periods beginning after December
15, 2017. Early adoption is not permitted. The revenue recognition standard is required to be applied retrospectively, including
any combination of practical expedients as allowed in the standard. The Company is evaluating the impact, if any, of the adoption
of ASU 2014-09 to its financial statements and related disclosures. The Company has not yet selected a transition method nor has
it determined the effect of the standard on its ongoing financial reporting.
In
July 2013, the FASB issued Accounting Standards Updates 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating
Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (Topic 740). ASU 2013-11 requires that unrecognized
tax benefits be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward,
a similar tax loss, or a tax credit carryforward, except in certain circumstances. When those circumstances exist, the unrecognized
tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets.
The Company adopted this guidance effective January 1, 2014. The Company does not believe the adoption of ASU 2013-11 has significant
impact on its consolidated financial statements.
NOTE
3 - PROPERTY AND EQUIPMENT
Property
and equipment as of September 30, 2015, and December 31, 2014, consisted of the following:
| | |
September
30, 2015 | | |
December
31, 2014 | |
| | |
| | |
| |
| Furniture and fixtures | |
$ | 11,873 | | |
$ | 16,328 | |
| Leasehold improvements | |
| 3,272 | | |
| 3,772 | |
| Fixed assets under capital lease | |
| 69,490 | | |
| 89,672 | |
| Computer equipment | |
| 258,228 | | |
| 213,154 | |
| Software | |
| 45,833 | | |
| 45,833 | |
Sign
| |
| —
| | |
| 2,050
| |
Intangible assets
| |
| 384,365
| | |
| 384,365
| |
| Less accumulated
depreciation and amortization | |
| (254,739 | ) | |
| (192,565 | ) |
| | |
| | | |
| | |
| | |
$ | 518,322 | | |
$ | 562,609 | |
Accumulated
amortization of assets under capital leases amounted to $30,884 and $17,997 at September 30, 2015 and December 31, 2014, respectively.
NOTE
4 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses as of September 30, 2015, and December 31, 2014, consisted of the following:
| | |
September
30, 2015 | | |
December
31, 2014 | |
| | |
| | |
| |
| Accounts payable | |
$ | 199,356 | | |
$ | 413,700 | |
| Accrued personnel costs | |
| 266,834 | | |
| 308,135 | |
| Accrued professional fees | |
| 32,505 | | |
| 76,825 | |
| Other | |
| 119,134 | | |
| 10,358 | |
| | |
| | | |
| | |
| | |
$ | 617,829 | | |
$ | 809,018 | |
NOTE
5 - NOTES PAYABLE
From
October 2014 to July 2015 the Company issued its 5% Senior Secured Convertible Notes due December 31, 2016 (the “5% Notes”),
under its private placement memorandum. The 5% Notes have a maturity date of December 31, 2016 (“Original Maturity Date”).
The 5% Notes will bear interest at the rate of five percent (5%) per annum payable quarterly on the fifth (5th) day after the
last business day of each calendar quarter. After the Original Maturity Date, and until the outstanding principal and accrued
interest on the 5% Notes has been paid, the 5% Notes will bear interest at a rate of 1.0% per month. The outstanding principal
under the 5% Notes is convertible at any time prior to repayment, in whole or in part, into shares of the Company’s common
stock at a conversion price of $0.15 per share, subject to adjustment for stock splits, stock dividends and recapitalizations.
All accrued interest on the 5% Notes shall be paid in cash upon any conversion of the 5% Notes. The 5% Notes are secured under
the terms of the Security Agreement by a first priority lien on all of the Company’s tangible and intangible assets.
In October and November 2014,
the Company entered into Securities Purchase Agreements with three investors, pursuant to which the Company issued and sold its
5% Notes with an aggregate principal of $750,000 for an aggregate purchase price of $750,000. The 5% Notes are convertible into
an aggregate of up to 5,000,000 shares of the Company’s common stock. In connection with the sale of the 5% Notes, the Company
entered into a Security Agreement with these investors and Richard P. Stevens, II. as collateral agent.
In
February 2015, the Company entered into a Securities Purchase Agreement with one of its vendors, pursuant to which the Company
issued and sold its 5% Notes with a principal of $135,000 to its vendor for an aggregate purchase price of $135,000, which resulted
in the pay down of $135,000 in trade payables. The underlying 5% Note is convertible into an aggregate of up to 900,000 shares
of the Company’s common stock. In connection with the sale of the 5% Note, the Company entered into a Security Agreement
with this vendor and Richard P. Stevens, II. as collateral agent.
In
February 2015, the Company entered into a Securities Purchase Agreement with an executive officer and board member, pursuant to
which the Company issued and sold its 5% Notes with a principal of $230,000 for an aggregate purchase price of $230,000. The 5%
Note is convertible into an aggregate of up to 1,533,333 shares of the Company’s common stock. In connection with the sale
of the 5% Note, the Company entered into a Security Agreement with this investor and Richard P. Stevens, II. as collateral agent.
In
April 2015, the Company entered into a Securities Purchase Agreement with one of its vendors, pursuant to which the Company issued
and sold its 5% Notes with a principal of $28,461 to its vendor for an aggregate purchase price of $28,461, which resulted in
the pay down of $28,461 in trade payables. The underlying 5% Note is convertible into an aggregate of up to 189,743 shares of
the Company’s common stock. In connection with the sale of the 5% Note, the Company entered into a Security Agreement with
this vendor and Richard P. Stevens, II. as collateral agent.
In
April 2015, the Company entered into Securities Purchase Agreements with two investors, pursuant to which the Company issued and
sold its 5% Notes with an aggregate total principal of $250,000 for an aggregate purchase price of $250,000. The 5% Notes are
convertible into an aggregate of up to 1,666,666 shares of the Company’s common stock. In connection with the sale of the
5% Notes, the Company entered into a Security Agreement with these investors and Richard P. Stevens, II. as collateral agent.
In
May 2015, the Company entered into Securities Purchase Agreements with three investors, pursuant to which the Company issued and
sold its 5% Notes with an aggregate total principal of $175,000 for an aggregate purchase price of $175,000. The 5% Notes are
convertible into an aggregate of up to 1,166,666 shares of the Company’s common stock. In connection with the sale of the
5% Notes, the Company entered into a Security Agreement with these investors and Richard P. Stevens, II. as collateral agent.
On July 8, 2015, the Company entered into
a Securities Purchase Agreement with an investor, pursuant to which the Company issued and sold its 5% Notes with an aggregate
total principal of $50,000 for an aggregate purchase price of $50,000. The 5% Note is convertible into an aggregate of 333,333
shares of the Company’s common stock. In connection with the sale of the 5% Notes, the Company entered into a Security Agreement
with this investor and Richard P. Stevens, II. as collateral agent.
On July 20, 2015, the Company entered into
a Securities Purchase Agreement with an investor, who also serves as a Vice President and Director of the Company, pursuant to
which the Company issued and sold its 5% Notes with an aggregate total principal of $600,000 for an aggregate purchase price of
$600,000. The 5% Note is convertible into an aggregate of up to 4,000,000 shares of the Company’s common stock. In connection
with the sale of the 5% Notes, the Company entered into a Security Agreement with this investor and Richard P. Stevens, II. as
collateral agent.
On
July 31, 2015, the Company entered into an Amendment and Exchange Agreement (the “Exchange Agreement”) with certain
investors representing a majority in principal amount of the Company’s outstanding 5% Notes. On July 31, 2015 (the “Closing
Date”), under the terms of the Exchange Agreement, the Company issued $2,218,461 in principal amount of its 5% Senior Convertible
Notes due December 31, 2017 (the “Exchange Notes”) in exchange for the 5% Notes (the “Exchange”). The
Exchange Notes have substantially identical terms to the 5% Notes except that the maturity date of the Exchange Notes is December
31, 2017 and all unpaid interest due and payable under the Exchange Notes is due and payable on the new maturity date. The Exchange
Notes are convertible into an aggregate of up to 14,789,740 shares of the Company’s common stock. On the Closing Date, under
the terms of the Exchange Agreement, the 5% Notes were cancelled. The Exchange Notes are secured under the terms of an Amended
and Restated Security Agreement, dated July 31, 2015, by and among the Company, Richard P. Stevens, II, as collateral agent, and
certain of the investors representing a majority in principal amount of the outstanding 5% Notes, by a first priority lien on
all of the Company’s tangible and intangible assets. On July 31, 2015, the Company consummated the Exchange, under which
the Company issued the Exchange Notes in exchange for the 5% Notes.
On
July 31, 2015, the investors holding a majority in principal amount of the Company’s outstanding 5% Notes waived the Company’s
obligation to pay accrued interest due and payable under the 5% Notes that otherwise would have been due and payable on July 6,
2015.
NOTE
6 - COMMITMENTS AND CONTINGENCIES
The
following is a schedule by years of future minimum lease payments under capital lease, together with the present value of the
net minimum lease payments as of September 30, 2015.
| | |
Year
ended
September 30, | |
| 2016 | |
| 32,616 | |
| 2017 | |
| 24,395 | |
| 2018 | |
| - | |
| Total minimum lease payments | |
| 57,011 | |
| Less: Amount
representing interest | |
| (3,412 | ) |
| Present value
of net minimum lease payments | |
| 53,599 | |
The
present value of net minimum lease payments is reflected in the balance sheet as current and noncurrent obligations under capital
leases of $29,875 and $23,724, respectively.
Operating
Leases
In
2014, the Company entered into a Lease Agreement for office space at 6 Hughes, Suite 200, Irvine, California, 92618, which is
used as its corporate office. The initial three-year term expires December 31, 2017, and lease renewal is possible upon mutual
agreement of the parties. Rent expense attributed to all operating leases for the nine months ended September 30, 2015 and 2014
was $138,662 and $186,580, respectively.
The
Company has entered into various non-cancelable operating leases for computer servers. At September 30, 2015, future minimum rental
commitments under these operating leases are:
| Year
ended September 30, | |
| |
| 2016 | |
$ | 131,353 | |
| 2017 | |
| 81,410 | |
| 2018 | |
| - | |
| Total | |
$ | 212,763 | |
Legal
Matters
The
Company is subject to various claims and contingencies in the ordinary course of its business, including those related to litigation,
business transactions, employee-related matters, and others. When the Company is aware of a claim or potential claim, it assesses
the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably
estimated, the Company will record a liability for the loss. If the loss is not probable or the amount of the loss cannot be reasonably
estimated, the Company discloses the claim if the likelihood of a potential loss is reasonably possible and the amount involved
could be material. While there can be no assurances, the Company does not expect that any of its pending legal proceedings will
have a material financial impact on the Company’s operating results.
On
July 23, 2015, Donald Harris, an individual, Amir Ecker, an individual, and Alexander Keszeli, an individual (the “Plaintiffs”)
filed a complaint against AllDigital Holdings, Inc., Stephen Smith, an individual, and Timothy Napoleon, an individual (the “Defendants”),
in the Superior Court of California, County of Orange (Case No.: 30-2015-00800862-CU-SL-CXC). The Plaintiffs allege that they
were collectively misled into purchasing $1,485,000 of the Company’s Convertible Promissory Notes (“Investor Convertible
Notes”). The Investor Convertible Notes were subsequently converted into shares of the Company’s common stock pursuant
to the terms of the Investor Convertible Notes. The Company is in the process of answering the complaint. The ultimate resolution
of this proceeding and these matters are inherently difficult to predict; as such, the Company’s operating results could
be materially affected by the unfavorable resolution of this proceeding for any particular period, depending, in part, upon the
operating results for such period. The Company believes that the allegations made in the complaint are without merit and, as such,
the Company intends to vigorously defend against the allegations made in the complaint.
NOTE
7 - STOCKHOLDERS’ EQUITY
Preferred
Stock
The
Company’s board of directors (the “Board of Directors”) has the authority to issue preferred stock in one or
more series and to, within the limits set forth by Nevada law and without shareholder action:
| |
● |
designate
in whole or in part, the powers, preferences, limitations, and relative rights, of any class of shares before the issuance
of any shares of that class; |
| |
|
|
| |
● |
create
one or more series within a class of shares, fix the number of shares of each such series, and designate, in whole or part,
the powers, preferences, limitations, and relative rights of the series, all before the issuance of any shares of that series; |
| |
|
|
| |
● |
alter
or revoke the powers, preferences, limitations, and relative rights granted to or imposed upon any wholly unissued class of
shares or any wholly unissued series of any class of shares; or |
| |
|
|
| |
● |
increase
or decrease the number of shares constituting any series, the number of shares of which was originally fixed by the Board
of Directors, either before or after the issuance of shares of the series; provided that, the number may not be decreased
below the number of shares of the series then outstanding, or increased above the total number of authorized shares of the
applicable class of shares available for designation as a part of the series. |
The
issuance of preferred stock by the Board of Directors could adversely affect the rights of holders of the Company’s common
stock. The potential issuance of Preferred Stock may:
| |
● |
have
the effect of delaying or preventing a change in control of the Company; |
| |
|
|
| |
● |
discourage
bids for the common stock at a premium over the market price of the common stock; and |
| |
|
|
| |
● |
adversely
affect the market price of, and the voting and other rights of the holders of the Company’s common stock. |
As
of September 30, 2015, there were no shares of preferred stock issued or outstanding.
Common
Stock
In
January 2014, the Company sold 2,250,000 shares of its common stock at a price of $0.15 per share to a newly appointed member
of the Board of Directors and executive officer. In February 2014, 150,000 shares of common stock were issued as compensation
to a service provider. In May 2014, the Company sold 400,000 shares and 100,000 shares of its common stock, respectively, to two
of its officers who are also members of its Board of Directors, at a purchase price of $0.15 per share. In May and June 2014,
respectively, 66,667 shares and 76,923 shares of its common stock were issued to a service provider. In July, August, and September
2014, respectively, 100,000 shares, 111,111 shares, and 165,000 shares were issued to service providers. In October and November
2014, respectively, 222,222 shares and 297,059 shares were issued to service providers. The shares issued to service providers
were measured at their grant date fair value and recognized as an expense in the accompanying consolidated statement of operations.
Restricted
Stock Units
During
2014, the Company issued 2,000,000 restricted stock units to an officer. At vesting each restricted stock unit will be exchanged
for one share of its common stock. The restricted stock units vest in equal annual installments over the two-year period commencing
on the anniversary of the date of grant. In January 2015, the Company issued 1,000,000 shares of its common stock to an executive
officer and board member pursuant to his employment agreement and recognized $151,875 in related stock compensation expense as
of September 30, 2015.
The
following table summarizes the activity of the Company’s restricted stock units:
| | |
Number
of
RSUs | | |
Weighted-
Average
Grant Date
Fair Value | |
| Unvested at December 31, 2014 | |
| 2,000,000 | | |
$ | 0.20 | |
| Granted | |
| — | | |
| — | |
| Vested | |
| (1,000,000 | ) | |
$ | 0.20 | |
| Forfeited | |
| — | | |
| — | |
| Unvested at September 30, 2015 | |
| 1,000,000 | | |
$ | 0.20 | |
The
Company recorded $151,875 of expense relating to restricted stock units during the period ended September 30, 2015 and such expense
is included in stock-based compensation expense in the Company’s Consolidated Statement of Operations.
As
of September 30, 2015, the pre-tax compensation expense for all unvested restricted stock units in the amount of approximately
$50,625 will be recognized in the Company’s results of operations over a weighted average period of 0.33 years.
Stock
Options
In
2011, the Company established the 2011 Stock Option and Incentive Plan (the “Plan”) for directors, employees, consultants
and other persons acting on behalf of the Company, under which 8,500,000 shares of common stock are authorized for issuance. Options
granted under the Plan vest on the date of grant, over a fixed period of time, or upon the occurrence of certain events and have
a contractual term of up to ten years.
A
summary of the status of the options granted is as follows:
| | |
Number
of
Shares
Underlying
Options | | |
Weighted
average
exercise price | | |
Weighted
Average
remaining
contractual term -
years | |
| Outstanding, December 31, 2014 | |
| 7,440,364 | | |
$ | 0.13 | | |
| 9.29 | |
| Granted | |
| 577,500 | | |
$ | 0.08 | | |
| 7.94 | |
| Forfeited/Expired | |
| 557,103 | | |
$ | 0.22 | | |
| - | |
| Outstanding, September 30, 2015 | |
| 7,460,761 | | |
$ | 0.12 | | |
| 8.59 | |
| Exercisable, September 30, 2015 | |
| 2,467,523 | | |
$ | 0.14 | | |
| 7.98 | |
| Expected to vest, September 30, 2015(*)
| |
| 2,980,064 | | |
$ | 0.11 | | |
| 8.89 | |
(*)
In addition to the vested options, the Company expects a portion of the unvested options to vest at some point in the future.
Options expected to vest is calculated by applying an estimated forfeiture rate to the unvested options.
At
September 30, 2015, 7,460,761 shares of common stock were reserved for issuance under outstanding options under the Plan and 1,039,239
shares of common stock were available for grant under the Plan.
As
of September 30, 2015, there was $321,186 of total unrecognized compensation expense related to non-vested share-based compensation
arrangements granted under the Plan. The expense is expected to be recognized over a weighted average period of 2.88 years. The
aggregate intrinsic value of the options outstanding at September 30, 2015 was $0 and the aggregate intrinsic value of the options
exercisable or expected to vest in the future was $0.
Stock-based
compensation expense for the nine months ended September 30, 2015 and 2014 was $185,061 and $85,645 respectively.
The
fair value of the options granted by the Company for the nine months ended September 30, 2015 and 2014 is estimated at $44,532
and $756,561, respectively.
The
fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model. The Black-Scholes
option pricing model was developed for use in estimating the fair value of traded options, which do not have vesting restrictions
and are fully transferable. The determination of the fair value of each stock option is affected by the Company’s stock
price on the date of grant, as well as assumptions regarding a number of highly complex and subjective variables. Because the
Company’s employee stock options have characteristics significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the
existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The assumptions
used to value stock options are as follows:
| | |
Period
Ended | |
| | |
September
30, 2015 | | |
December
31, 2014 | |
| Dividend yield | |
| - | | |
| - | |
| Risk-free interest rate | |
| 1.34 | % | |
| 1.60%
to 1.65 | % |
| Volatility | |
| 193 | % | |
| 193 | % |
| Expected life (in years) | |
| 5.9 | | |
| 7.0 | |
| Weighted average grant date fair value per share of options granted | |
$ | 0.08 | | |
$ | 0.12 | |
The
dividend yield is zero as the Company has not paid and currently does not anticipate paying dividends.
The
risk-free interest rate is based on the U.S. Treasury bond.
Volatility
is estimated based on comparable companies in the industry.
Warrants
A
summary of the status of the warrants granted is as follows:
| | |
Shares
issuable
upon exercising
of outstanding
warrants | | |
Weighted-average
exercise price | |
| | |
| | |
| |
| Outstanding – December 31, 2014 | |
| 210,000 | | |
$ | 0.26 | |
| Granted | |
| — | | |
| — | |
| Forfeited | |
| — | | |
| — | |
| Exercised | |
| — | | |
| — | |
| Outstanding – September 30,
2015 | |
| 210,000 | | |
$ | 0.26 | |
| | |
| | | |
| | |
| Exercisable – September 30,
2015 | |
| 210,000 | | |
$ | 0.26 | |
The
following table summarizes information about warrants outstanding at September 30, 2015:
| Outstanding | | |
Exercisable | |
Range
of
exercise
prices | | |
Number
of
shares
issuable
upon
exercise of
outstanding
warrants | | |
Weighted—average
remaining contractual
life (in years) | | |
Weighted—average
exercise price | | |
Number
of
warrants
exercisable | | |
Weighted—
average
exercise
price | |
| $ | 0.25 | | |
| 150,000 | | |
| 0.92 | | |
$ | 0.25 | | |
| 150,000 | | |
$ | 0.25 | |
| $ | 0.275 | | |
| 60,000 | | |
| 0.83 | | |
$ | 0.275 | | |
| 60,000 | | |
$ | 0.275 | |
| $ | 0.25
- 0.275 | | |
| 210,000 | | |
| 0.89 | | |
$ | 0.257 | | |
| 210,000 | | |
$ | 0.257 | |
NOTE
8 - INCOME TAXES
The
Company establishes a valuation allowance when it is more likely than not that the Company’s recorded net deferred tax asset
will not be realized. In determining whether a valuation allowance is required, the Company must take into account all positive
and negative evidence with regard to the utilization of a deferred tax asset. As of September 30, 2015 and December 31, 2014,
the valuation allowance for deferred tax assets totaled approximately $1.8 million and $1.3 million, respectively. For the nine
months ended September 30, 2015, the increase in the valuation allowance was $0.5 million.
The
Company plans to continue to provide a full valuation allowance on future tax benefits until it can sustain an appropriate level
of profitability and until such time, the Company would not expect to recognize any significant tax benefits in its future results
of operations.
As
of September 30, 2015, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately
$4.4 million and $4.4 million, respectively, which begin to expire in 2023. The utilization of net operating loss carryforwards
may be limited under the provisions of Internal Revenue Code Section 382 and similar state provisions due to a change in ownership.
The
Company has not recognized any liability for unrecognized tax benefits. The Company expects any resolution of unrecognized tax
benefits, if created, would occur while the full valuation allowance of deferred tax assets is maintained; therefore the Company
does not expect to have any unrecognized tax benefits that, if recognized, would affect the effective tax rate.
The
Company’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense.
As of September 30, 2015 and December 31, 2014, the Company had no accrual for the payment of interest or penalties. For Federal
purposes, the years subject to examination are 2012-2014. For California purposes, the years subject to examination are 2011-2014.
NOTE
9 - COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS
Major
Customers
At
September 30, 2015 and December 31, 2014, four and two customers accounted for 76% and 68% of the outstanding accounts receivable,
respectively.
For
the nine months ended September 30, 2015 and 2014, six and three customers accounted for 76% and 64% of total revenue, respectively.
Major
Vendors
At
September 30, 2015 and December 31, 2014, four and three vendors accounted for 82% and 68% of the outstanding accounts payable,
respectively.
For
the nine months ended September 30, 2015 and 2014, four and one vendors accounted for 40% and 14% of total purchases, respectively.
Concentrations
of Credit Risk
Financial
instruments that may subject the Company to credit risk include uninsured cash-in-bank balances. The Company places its cash with
high quality financial institutions located in Southern California. From time to time, such balances exceed amounts insured by
the Federal Deposit Insurance Corporation. The Company has not experienced any losses in such accounts and believes it is not
exposed to any significant credit risk related to its cash balances. As of September 30, 2015, the Company’s uninsured cash
balance was $579,519.
NOTE
10 - SEGMENT INFORMATION
The
Company currently operates in one business segment, digital broadcasting solutions. All fixed assets are located at the Company’s
headquarters and data centers located in the United States. All sales for the nine months ended September 30, 2015 were in the
United States and Canada.
NOTE
11 - SUBSEQUENT EVENTS
On
November 4, 2015, the Company entered into a Securities Purchase Agreement with an investor, pursuant to which the Company issued
and sold its 5% Senior Secured Notes due December 31, 2017 (the “New 5% Notes”) with an aggregate total principal
of $56,800 for an aggregate purchase price of $56,800. The New 5% Note is convertible into an aggregate of up to 378,667 shares
of the Company’s common stock.
In
connection with the sale of the New 5% Notes, the Company entered into a Security Agreement with this investor and Richard P.
Stevens, II. as collateral agent. The New 5% Notes have a maturity date of December 31, 2017. The New 5% Notes will bear interest
at the rate of five percent (5%) per annum payable on the maturity date. After the maturity date, and until the outstanding principal
and accrued interest on the New 5% Notes has been paid, the New 5% Notes will bear interest at a rate of 1.0% per month. The outstanding
principal under the New 5% Notes is convertible at any time prior to repayment, in whole or in part, into shares of the Company’s
common stock at a conversion price of $0.15 per share, subject to adjustment for stock splits, stock dividends and recapitalizations.
All accrued interest on the New 5% Note shall be paid in cash upon any conversion of the New 5% Notes. The New 5% Notes are secured
under the terms of the Security Agreement by a first priority lien on all of the Company’s tangible and intangible assets.
ITEM
2. MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Throughout this Report,
AllDigital Holdings, Inc. and AllDigital, Inc., as a consolidated entity, are referred to as “AllDigital”, the “Company”,
“we”, “our” or “us.” To the extent we need to distinguish AllDigital Holdings, Inc. from AllDigital,
Inc., we refer to AllDigital Holdings, Inc. as “AllDigital Holdings” and to AllDigital, Inc. as “AllDigital,
Inc.” AllDigital is the registered owner of the AllDigital® trademark. Any other trademarks and service marks
used in this Report are the property of their respective holders.
Certain
Technical Terms
In
this Report, we use certain technical terms to describe our business, which terms are important in understanding our business,
including the following:
| |
● |
“apps”
are software applications that operate on a device, and which can act as the front-end of a remotely hosted, cloud-based digital
service. |
| |
|
|
| |
● |
“codec”
is a device or computer program capable of encoding or decoding a digital data stream
or signal.
|
| |
|
|
| |
● |
“devices”
are Internet-connected devices, including without limitation smartphones, tablet computers, desktop and laptop computers,
gaming consoles, digital televisions, home theatre systems, streaming players, “smart” appliances and digital
signage. |
| |
|
|
| |
● |
“digital
broadcasting workflow” is a series of interconnected processes to ingest, store, prepare, secure, manage, monetize,
convert and distribute live media feeds and video-on-demand and pay-per-view assets, as well as real-time data and other information
to and from Apps on devices. |
| |
|
|
| |
● |
“digital
services” are hosted, cloud-based software applications intended for use on, interactivity with, and the delivery of
digital media to or from, one or more devices, through a digital broadcasting workflow. Examples of well-known digital services
include NetFlix’s Movies On-Demand, Hulu, Pandora Radio, YouTube and Facebook. |
| |
|
|
| |
● |
“docker”
is a container technology used to package an application and its dependencies in virtual
containers to create highly distributed systems, allowing multiple applications and processes
to run autonomously on a single physical machine or across multiple virtual machines.
|
| |
|
|
| |
● |
“kuberenetes”
created by Google is an open source orchestration system for Docker containers that provides
a platform for automating deployment, scaling and operations of application containers
across clusters of hosts.
|
| |
|
|
| |
● |
“microservices”
is a software architecture in which a large application is built as a suite of modular services. |
| |
|
|
| |
● |
“machine
virtualization and multitenancy” refer to the act of creating a virtual (rather than actual) version of something, including
(but not limited to) a virtual computer hardware platform, operating system (OS), storage device, or computer resources. Multitenancy
allows these platform resources to be defined and allocated via software. |
| |
|
|
| |
● |
“pairing”
is the process of setting-up, managing and maintaining the ongoing data exchange between a digital service and a device through
the applicable digital broadcasting workflow. Pairing includes not only the initial process of ensuring the compatibility
of the digital service with one or more devices operating on one or more device platforms, but may also include any or all
of the following: |
| |
● |
Managing
various elements of and processes related to the ongoing data exchange between a digital service and a device, including device
compatibility, security, quality of service, data and signal flows, and dynamic updates; |
| |
|
|
| |
● |
Applying
business rules (e.g., subscriber eligibility and authentication) and processing to live media feeds, video-on-demand (e.g.,
converting master video files into formats compatible with the target devices), real-time data and other data assets, and
digital services; and |
| |
|
|
| |
● |
Acting
as the origin for data exchange between the digital services, through the digital broadcasting workflow, to the devices. |
| |
● |
“video
compression” uses modern coding techniques to reduce redundancy in video data. Most video compression algorithms and
codecs combine spatial image compression and temporal motion compensation. Video compression is a practical implementation
of source coding in information theory. In practice, most video codecs also use audio compression techniques in parallel to
compress the separate, but combined data streams as one package. |
General
Overview
We
engineer software and hardware based digital services and solutions that accelerate and optimize the distribution of digital video
over the Internet. Our digital broadcasting solutions are built around proprietary product and service offerings.
AllDigital
Brevity
AllDigital
Brevity, or Brevity, is our file transport and transcoding service that uses our patented technology to simultaneously compress
and transcode digital video files into one or many formats while transporting them to one or many destinations at super-accelerated
speeds over the Internet.
AllDigital
Cloud
AllDigital
Cloud, or AD Cloud, is a unified digital broadcasting and cloud services platform dedicated to ingesting, storing, preparing,
securing, managing, monetizing, converting and distributing digital media and other forms of data across devices.
AllDigital
Integration Services
AllDigital
Integration Services provides consultation and software development services that enable our customers to integrate Brevity and
AD Cloud into existing digital workflows, with services ranging from transition planning and onboarding to designing, building
and hosting complete digital workflows.
General
Outlook
There
are a number of market dynamics that we believe will drive significant demand for digital services over the next 3 to 5 years,
including: (i) increasing popularity of OTT video streaming services, (ii) global improvements in Internet accessibility, (iii)
substantial and growing demand for mobile devices and for viewing digital video on these devices, (iv) rapid technological advancements
increasing the affordability of and access to devices capable of creating and viewing ultra high definition (4K) video, and (v)
business applications for digital video across existing and evolving use cases. We believe that the growth of the digital services
market will not be sustainable without the support from third party service providers that offer the digital services and solutions
required to successfully develop, operate, and support digital media workflows.
Our
ability to successfully generate future revenues is dependent on a number of factors, including: (i) access to capital and our
success at growing our recurring revenues and operating cash flows to continue developing, operating and maintaining our proprietary
Brevity and AD Cloud platforms and services, (ii) the ability to commercialize our portfolio of digital services, and (iii) our
ability to attract and retain key sales, business, engineering, and other personnel as our business and service offerings continue
to mature. We may encounter setbacks related to these activities.
Recent
Developments
We plan to release an entirely new generation
of our file transport and transcoding service, New Brevity, on December 1, 2015.
New Brevity has been completely re-architected
and developed with the cloud in mind, incorporating many of the latest software architectural styles and technologies including
microservices architecture, docker containers, and kuberenetes orchestration technology, and like all generations of Brevity,
New Brevity has our patented technology at its core (United States Patent No. 8,533,166 B1 – Methods and systems for encoding/decoding
files and transmission thereof, issued September 10, 2014; United States Patent No. 8,874,531 B2 – Methods and systems for
encoding/decoding files and transmission thereof, issued October 28, 2014), which enables it to transcode video files as they
are being delivered real time. We believe this to be a key differentiating benefit of our service.
For the past year we have been working closely
with our Brevity customers and prospects, including broadcasters, global technology companies, entertainment companies, and OEM’s.
Their valued feedback helped us to identify and prioritize the development of the new and newly enhanced features that are part
of New Brevity, which include, (i) extensive and fully documented APIs, (ii) cloud agnostic capabilities, (iii) industry leading
security protocols, (iv) multitenancy, (v) scalability, (vi) redundancy, (vii) speed (Brevity Warp™), (viii) broadcast codecs,
and (ix) simplicity – a completely redesigned app that allows for point and click design and deployment of custom digital
workflows, control over system resources, and the system-directed creation of transcoding profiles.
Following our launch of New Brevity, we anticipate
the frequent addition of new features to New Brevity both from our feature roadmap and strategic use cases. We believe that the
ability to frequently and rapidly add new features without impacting the performance of our service is critical to remaining relevant
in our rapidly changing industry. New Brevity and its microservices based architecture will provide us with that capability through
the use of a Continuous Delivery Pipeline.
We believe that New Brevity will serve as
our platform for recurring revenue growth and cash flow profitability in the future.
Results
of Operations – Three months ended September 30, 2015 and 2014
The
following discussions are based on our statements of operations for the three months ended September 30, 2015 and 2014 (unaudited)
and notes thereto.
The
tables presented below, which compare our results of operations from one period to another, present the results for each period
and the change in those results from one period to another in both dollars and percentage change. The columns present the following:
| |
● |
The
second two data columns in each table show the dollar results for each period presented. |
| |
|
|
| |
● |
The
columns entitled “Dollar variance” and “% variance” show the change in results, both in dollars and
percentages. These two columns show favorable changes as positive and unfavorable changes as negative. For example, when net
sales increase from one period to the next, that change is shown as a positive number in both columns. Conversely, when expenses
increase from one period to the next, that change is shown as a negative in both columns. Where percentages would not be meaningful,
an asterisk is shown. |
Three
months ended September 30, 2015 (Unaudited) Compared to
Three
Months Ended September 30, 2014 (Unaudited)
| | |
For
the three months ended
September 30, | | |
Dollar
variance
favorable | | |
%variance
favorable | |
| | |
2015 | | |
2014 | | |
(unfavorable) | | |
(unfavorable) | |
| Net
sales | |
$ | 394,452 | | |
$ | 949,866 | | |
$ | (555,414 | ) | |
| (58.5 | )% |
| Cost of sales | |
| 311,451 | | |
| 595,133 | | |
| 283,682 | | |
| 47.7 | % |
| Gross profit
| |
| 83,001 | | |
| 354,733 | | |
| (271,732 | ) | |
| (76.6 | )% |
| | |
| | | |
| | | |
| | | |
| | |
| Operating expenses
| |
| | | |
| | | |
| | | |
| | |
| Selling, marketing and advertising | |
| 134,863 | | |
| 146,942 | | |
| 12,079 | | |
| 8.2 | % |
| General and administrative | |
| 571,547 | | |
| 441,736 | | |
| (129,811 | ) | |
| (29.4 | )% |
| Total operating
expenses | |
| 706,410 | | |
| 588,678 | | |
| (117,732 | ) | |
| (20.0 | )% |
| | |
| | | |
| | | |
| | | |
| | |
| Loss from operations
| |
| (623,409 | ) | |
| (233,945 | ) | |
| (389,464 | ) | |
| (166.5 | )% |
| | |
| | | |
| | | |
| | | |
| | |
| Other income (expense)
| |
| | | |
| | | |
| | | |
| | |
| Interest income | |
| 178 | | |
| 71 | | |
| 107 | | |
| 150.7 | % |
| Interest expense | |
| (39,053 | ) | |
| (152 | ) | |
| (38,901 | ) | |
| (25592.8 | )% |
| Other income
(expense) | |
| - | | |
| - | | |
| - | | |
| * | % |
| Total other income
(expense) | |
| (38,875 | ) | |
| (81 | ) | |
| (38,794 | ) | |
| (47893.8 | )% |
| | |
| | | |
| | | |
| | | |
| | |
| Loss before provision for income taxes
| |
| (662,284 | ) | |
| (234,026 | ) | |
| (428,258 | ) | |
| (183.0 | )% |
| Provision for
income taxes | |
| (98 | ) | |
| (1,600 | ) | |
| 1,502 | | |
| 93.9 | % |
| Net loss | |
$ | (662,382 | ) | |
$ | (235,626 | ) | |
$ | (426,756 | ) | |
| (181.1 | )% |
Net
Sales. Net sales decreased $555,414, or 58%, in the third quarter of 2015 compared to the third quarter of 2014 due to a $537,501
decrease in nonrecurring, project-based revenue, a net decrease of $42,768 in recurring revenue, and an increase of $24,855 in
subcontract revenue. Nonrecurring revenue decreased due to changes in our project mix and resource strategy as we engaged on a
higher volume of shorter duration projects during the quarter, which led to faster completion rates, higher overall profitability,
and more effective balancing of our development resources between internal and external software development initiatives. The
decrease in recurring revenue includes our loss of $28,923 in recurring revenue attributed to one customer that received outsourced
data center management services from us, a legacy service offering that has low margins and that is not core to the business of
providing digital broadcast solutions, and a net decrease of $13,845 attributed to customer losses and changes in customer usage.
During the quarter, we performed subcontract services for one customer, including project oversight and the procurement and management
of overseas development resources for their large development project, which we concluded this quarter.
Cost
of Sales. Cost of sales decreased by $283,682, or 48%, in the third quarter of 2015 compared to the third quarter of 2014.
The decrease resulted from a net reduction of $249,093 in payroll related expense, reductions in contractor expense and travel
expense of $65,041 and $541, respectively, from changes in our project mix and resource strategy, and an increase of $30,993 in
customer infrastructure operating expenses.
Gross
Profit. We achieved a gross profit of $83,001 in the third quarter of 2015, a decrease of $271,732, or 77%, compared to a
gross profit of $354,733 in the third quarter of 2014. The decrease in gross profit resulted from a $555,414 decrease in sales
offset by a $283,682 reduction to cost of sales.
Selling,
Marketing and Advertising Expenses. Selling, marketing and advertising expenses decreased by $12,079, or 8%, in the third
quarter of 2015 compared to the third quarter of 2014. The net decrease resulted from a net increase in payroll-related expense
of $21,964 and reductions in both third party services and travel and related selling expenses of $31,322 and $2,721, respectively,
as we shifted from a field sales model to one that leverages both inside sales and reseller channels to drive more profitable
growth.
General
and Administrative Expenses. General and Administrative expenses increased by $129,811, or 29%, in the third quarter of 2015
compared to the third quarter of 2014. The increase resulted from net increases in employee payroll and fees to third party developers
of $129,137 and $42,031, respectively, and decreases in fees for professional services and general operating expenses of $13,821
and $27,536, respectively. These changes largely reflect our continued focus upon the internal development of AllDigital Brevity
in general operating expenses.
Other
Income (Expense). Other expense increased by $38,794, or 47,894%, in the third quarter of 2015 compared to $81 in the third
quarter of 2014. The increase resulted from higher net interest expense of $38,901, which includes $37,957 of interest expense
recognized in 2015 from our convertible secured notes, and a decrease of $107 in interest income.
Results
of Operations – Nine Months Ended September 30, 2015 and 2014
The
following discussions are based on the consolidated balance sheets as September 30, 2015 (unaudited) and December 31, 2014 and
statements of operations for the nine months ended September 30, 2015 and 2014 (unaudited) and notes thereto.
The
tables presented below, which compare AllDigital’s results of operations from one period to another, present the results
for each period and the change in those results from one period to another in both dollars and percentage change. The columns
present the following:
| |
● |
The
second two data columns in each table show the dollar results for each period presented. |
| |
|
|
| |
● |
The
columns entitled “Dollar variance” and “% variance” show the change in results, both in dollars and
percentages. These two columns show favorable changes as positive and unfavorable changes as negative. For example, when net
sales increase from one period to the next, that change is shown as a positive number in both columns. Conversely, when expenses
increase from one period to the next, that change is shown as a negative in both columns. Where percentages would not be meaningful,
an asterisk is shown. |
Nine
months ended September 30, 2015 (Unaudited) Compared to
Nine
Months Ended September 30, 2014 (Unaudited)
| | |
For
the nine months ended
September 30, | | |
Dollar
variance
favorable | | |
%variance
favorable | |
| | |
2015 | | |
2014 | | |
(unfavorable) | | |
(unfavorable) | |
| Net sales | |
$ | 1,801,429 | | |
$ | 2,762,535 | | |
$ | (961,106 | ) | |
| (34.8 | )% |
| Cost of sales | |
| 1,374,401 | | |
| 2,470,556 | | |
| 1,096,155 | | |
| 44.4 | % |
| Gross profit
| |
| 427,028 | | |
| 291,979 | | |
| 135,049 | | |
| 46.3 | % |
| | |
| | | |
| | | |
| | | |
| | |
| Operating expenses
| |
| | | |
| | | |
| | | |
| | |
| Selling, marketing and advertising | |
| 352,571 | | |
| 561,236 | | |
| 208,665 | | |
| 37.2 | % |
| General and administrative | |
| 1,597,059 | | |
| 1,322,441 | | |
| (274,618 | ) | |
| (20.8 | )% |
| Total operating
expenses | |
| 1,949,630 | | |
| 1,883,677 | | |
| (65,953 | ) | |
| (3.5 | )% |
| | |
| | | |
| | | |
| | | |
| | |
| Loss from operations
| |
| (1,522,602 | ) | |
| (1,591,698 | ) | |
| 69,096 | | |
| 4.3 | % |
| | |
| | | |
| | | |
| | | |
| | |
| Other income (expense)
| |
| | | |
| | | |
| | | |
| | |
| Interest income | |
| 380 | | |
| 652 | | |
| (272 | ) | |
| (41.7 | )% |
| Interest expense | |
| (66,740 | ) | |
| (670 | ) | |
| (66,070 | ) | |
| (9861.2 | )% |
| Other income
(expense) | |
| (19,173 | ) | |
| 25,170 | | |
| (44,343 | ) | |
| (176.2 | )% |
| Total other income
(expense) | |
| (85,533 | ) | |
| 25,152 | | |
| (110,685 | ) | |
| (440.1 | )% |
| | |
| | | |
| | | |
| | | |
| | |
| Loss before provision for income taxes
| |
| (1,608,135 | ) | |
| (1,566,546 | ) | |
| (41,589 | ) | |
| 2.7 | % |
| Provision for
income taxes | |
| (2,198 | ) | |
| (3,200 | ) | |
| 1,002 | | |
| 31.3 | % |
| Net loss | |
$ | (1,610,333 | ) | |
$ | (1,569,746 | ) | |
$ | (40,587 | ) | |
| (2.6 | )% |
Net
Sales. Net sales decreased $961,106, or 35%, in the first nine months of 2015 compared to the first nine months of 2014 due
to a $1,332,222 decrease in nonrecurring, project-based revenue, a net decrease of $165,672 in recurring revenue, and an increase
of $536,788 in subcontract revenue. Nonrecurring revenue decreased due to changes in our project mix and resource strategy as
we engaged on a higher volume of shorter duration projects during the period, which led to faster completion rates, higher overall
profitability, and more effective balancing of our development resources between internal and external software development initiatives.
The decrease in recurring revenue includes our loss of $89,964 in recurring revenue attributed to one customer that received outsourced
data center management services from us, a legacy service offering that has low margins and that is not core to the business of
providing digital broadcast solutions, and a net decrease of $75,711 attributed to reductions in customer usage or loss. During
the quarter we performed subcontract services for one customer, including project oversight and the procurement and management
of overseas development resources for their large development project, which we concluded this quarter.
Cost
of Sales. Cost of sales decreased by $1,096,155, or 44%, to $1,374,401 in the first nine months of 2015 compared to $2,470,556
in the first nine months of 2014. The decrease resulted from a net reduction of $855,365 in payroll-related expense, reductions
in both outside contractor expense and travel expense of $273,348 and $36,680, respectively, from changes in our project mix and
resource strategy, and an increase of $69,238 in customer infrastructure operating expenses.
Gross
Profit. We produced a gross profit of $427,028 in the first nine months of 2015, an increase of $135,049, compared to a gross
profit of $291,979 in the first nine months of 2014. The increase in gross profit resulted from a $961,106 decrease in sales offset
by a $1,096,155 decrease to cost of sales.
Selling,
Marketing and Advertising Expenses. Selling, marketing and advertising expenses decreased by $208,665, or 37%, in the first
nine months of 2015 compared to the first nine months of 2014. The net decrease resulted from a net reduction in payroll-related
expense of $69,624, and reductions in both third party services and travel and related selling expenses of $102,838 and $36,203,
respectively, as we shifted from a field sales model to one that leverages both inside sales and reseller channels to drive more
profitable growth.
General
and Administrative Expenses. General and Administrative expenses increased by $274,618 or 21%, in the first nine months of
2015 compared to the first nine months of 2014. The increase resulted from net increases in employee payroll and fees to third
party developers of $315,716 and $150,756, respectively, and decreases in fees for professional services and general operating
expenses of $110,670 and $81,184, respectively. These changes largely reflect our continued focus upon the internal development
of AllDigital Brevity in general operating expenses.
Other Income (Expense).
Other expense increased by $110,685 or 440% in the first nine months of 2015 compared to the first nine months of 2014. The increase
resulted from higher net interest expense of $66,070, which includes $67,088 of interest expense recognized in 2015 from our convertible
secured notes, a decrease of $2,422 in losses on disposal of assets, an increase in interest income of $272, and an increase in
other expense of $46,765 for a one-time benefit from a vendor settlement that was recognized in 2014.
Effects
of Inflation
The
impact of inflation was not significant to our financial condition or results of operations for the nine months ended September
30, 2015 and 2014.
Liquidity
and Capital Resources
During
the nine months ended September 30, 2015, we funded our operations primarily from issuing our 5% Senior Secured Convertible Notes
due December 31, 2016, or 5% Notes, which were subsequently exchanged pursuant to the Amendment and Exchange Agreement to our
5% Senior Secured Convertible Notes due December 31, 2017, or Exchange Notes. Working capital as of September 30, 2015 and December
31, 2014 was $279,953 and $55,968, respectively. We had accumulated losses of $6,442,810 and $4,832,476 at September 30, 2015
and December 31, 2014, respectively. Our available capital resources at September 30, 2015 consisted primarily of $828,406 in
cash and cash equivalents.
As
of September 30, 2015, we had current assets of $979,744, including $828,406 in cash and cash equivalents. Cash increased from
$485,761 at December 31, 2014 to $828,406 at September 30, 2015, due primarily to $1,305,000 of cash provided by the issuance
of our 5% Notes. Net cash used in operating activities was $895,832 and $1,526,518 for the nine months ended September 30, 2015
and 2014, respectively.
On
August 10, 2015, we received notice from a longstanding, material customer of their plan to insource and reduce the majority of
their AllDigital services, representing approximately $19,000 of our monthly recurring revenue and 9.6% of our total revenue for
the nine months ended September 30, 2015. This reduction in services became effective on October 9, 2015 and is not reflected
in our financial results.
We
expect that our future available capital resources will consist primarily of cash on hand, cash generated from our business, if
any, and future debt and/or equity financings, if any.
Our future success is dependent upon a number
of factors, including (i) access to capital, and our success at growing our recurring revenues and operating cash flows to continue
developing, operating and maintaining our proprietary AllDigital Brevity and AllDigital Cloud platforms and services, including
our successful launch of and sufficient customer demand for New Brevity, which we believe will serve as our platform for recurring
revenue growth and cash flow profitability in the future, (ii) the ability to commercialize our portfolio of digital broadcasting
solutions, and (iii) our ability to attract and retain key sales, business and product development, and other personnel as our
business and offerings continue to mature. We may encounter setbacks related to these activities.
We
monitor our financial resources on an ongoing basis and may adjust planned business activities and operations as needed to ensure
that we have sufficient operating capital. We evaluate our capital needs, and the availability and cost of capital on an ongoing
basis and expect to seek capital when and on such terms as deemed appropriate based upon an assessment of then-current liquidity,
capital needs, and the availability and cost of 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 or
equity-linked securities (such as warrants, convertible notes or similar securities). We believe that we will be able to obtain
financing when and as needed, but may be required to pay a high price for capital. We do not have any commitments to provide capital.
We
believe that when considering the loss of our material customer, current and future available working capital resources and revenues
generated from operations will be adequate to meet our anticipated working capital and capital expenditure requirements through
the first quarter of 2016. Thus, we require additional financing. Our failure to raise capital could prevent our ability to continue
as a going concern.
No
assurances can be given that we will be successful in obtaining additional financing in the future. Any future financing that
we may obtain may cause significant dilution to existing stockholders. Any debt financing or other financing of securities senior
to our common stock that we are able to obtain will likely include financial and other covenants that will restrict our flexibility.
At a minimum, we expect these covenants to include restrictions on our ability to pay dividends on our common stock. Any failure
to comply with these covenants would have a material adverse effect on our business, prospects, financial condition, results of
operations and cash flows. See “Risk Factors.”
Off-Balance
Sheet Arrangements
None.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
We
conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, our principal accounting officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended, or Exchange Act, means controls and other procedures of a company that
are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange
Act is recorded, processed, summarized and reported, within the time periods specified in the Security and Exchange Commission’s
rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure
that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated
and communicated to the company’s management, including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation,
our Chief Executive Officer and Chief Financial Officer concluded as of September 30, 2015 that our disclosure controls and procedures
were not effective at the reasonable assurance level because of the material weaknesses in internal control over financial reporting
described below.
A
material weakness is a control deficiency (within the meaning of Public Company Accounting Oversight Board (PCAOB) Auditing Standard
No. 5) or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or detected on a timely basis.
As
previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, our management previously determined
that as of December 31, 2014 we had material weaknesses in our internal control over financial reporting and our management identified
the following material weaknesses:
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We
have an insufficient quantity of dedicated resources and experienced personnel involved in reviewing and implementing internal
controls. As a result, a material misstatement of the interim and annual financial statements could occur and not be prevented
or detected on a timely basis. |
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|
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We
have insufficient resources to achieve the optimal level of segregation of duties relative to key financial reporting functions. |
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Previously,
our entire board of directors performed the functions generally performed by an audit committee, and none of the members of
our board of directors qualified as an audit committee financial expert. While not being legally obligated to have an audit
committee or independent audit committee financial expert, it is management’s view that to have an audit committee,
comprised of independent board members, and an independent audit committee financial expert is an important entity-level control
over our financial statements. |
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We
have insufficient resources to achieve an optimal segregation of duties for our executive officers. |
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We
did not have sufficient quantity or qualified personnel to manage a timely period end financial reporting. |
In
light of the material weaknesses described above, additional analyses and other procedures were performed to ensure that our consolidated
financial statements included in this Quarterly Report on Form 10-Q were prepared in accordance with GAAP. These measures included
expanded quarter-end closing procedures, the dedication of significant internal resources and reconciliations and management’s
own internal reviews and efforts to remediate the material weaknesses in internal control over financial reporting described above.
As a result of these measures, management concluded that our consolidated financial statements included in this Quarterly Report
on Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows as of the
dates, and for the periods, presented in conformity with GAAP.
Management’s
Remediation Initiatives and Interim Measures
In
response to the identified material weaknesses, we have dedicated significant resources to improve our control environment. Management
believes that actions taken beginning in December 2014, along with other improvements not yet fully implemented, will address
the material weaknesses in our internal control over financial reporting noted above. Our management plans to continue to review
and make changes to the overall design of our control environment, including the roles and responsibilities within the organization
and reporting structure, as well as policies and procedures to improve the overall internal control over financial reporting.
In particular, we have implemented, or plan to implement, the measures described below to remediate the material weaknesses described
above.
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● |
Assessing
the current duties of existing personnel, assigning additional duties to existing personnel, and, in a cost effective manner,
potentially hiring additional personnel to assist with the preparation of our financial statements to allow for proper segregation
of duties, as well as additional resources for control documentation. |
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Assessing
the duties of our officers, diversifying duties and responsibilities of such executive officers where needed. |
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Reviewing
our internal controls and controls design with outside consultants that are experts in designing internal controls over financial
reporting based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (“COSO”) (as revised). |
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Evaluating
the composition of our board of directors, with particular focus on issues of independence. In April, 2015, our board of directors
created and nominated an audit committee which consists of independent board members. Our board of directors also nominated
an audit committee financial expert. |
We
expect that these improvements and procedures will be substantially implemented by March 31, 2016, and we intend to continue to
monitor the effectiveness of these actions and will make changes that management determines are appropriate.
Inherent
Limitations on the Effectiveness of Controls
Management
does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect
all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent
limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute
assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have
been or will be detected.
These
inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because
of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or
more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions
about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to
risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance
with policies or procedures.
Changes
in Internal Control over Financial Reporting
Except
for the remedial actions described above, there were no changes in our internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Rule 13aa-15 under the Exchange Act that occurred during the three
months ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, or internal control
over financial reporting.
PART
II – OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
On
July 23, 2015, Donald Harris, an individual, Amir Ecker, an individual, and Alexander Keszeli, an individual, collectively the
Plaintiffs, filed a complaint against AllDigital Holdings, Inc., Stephen Smith, an individual, and Timothy Napoleon, an individual,
collectively the Defendants, in the Superior Court of California, County of Orange (Case No.: 30-2015-00800862-CU-SL-CXC). The
Plaintiffs allege that they were collectively misled into purchasing $1,485,000 of our Convertible Promissory Notes, or Investor
Convertible Notes. The Investor Convertible Notes were subsequently converted into shares of our common stock pursuant to the
terms of the Investor Convertible Notes. We are in the process of answering the complaint. The ultimate resolution of this proceeding
and matters are inherently difficult to predict; as such, our operating results could be materially affected by the unfavorable
resolution of this proceeding for any particular period, depending, in part, upon the operating results for such period. We believe
that the allegations made in the complaint are without merit and, as such, the Company intends to vigorously defend against the
allegations made in the complaint.
In
addition, we are subject to legal proceedings, claims and litigation arising in the ordinary course of business. While the amounts
claimed may be substantial, the ultimate liability cannot presently be determined because of considerable uncertainties that exist.
Therefore, it is possible that the outcome of those legal proceedings, claims and litigation could adversely affect our quarterly
or annual operating results or cash flows when resolved in a future period. However, based on facts currently available, management
believes such matters will not adversely affect in any material respect our financial position, results of operations or cash
flows.
ITEM
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, including our new AllDigital Brevity platform, 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 platforms 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 platforms 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 platforms; 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. |
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
have a history of only nominal revenues, have incurred losses, expect continued losses and may never achieve profitability. If
we continue to incur losses, we may have to curtail our operations, which may prevent us from successfully selling our products
and services as well as operating and expanding our business.
We
have a history of only nominal revenues, have not been profitable and expect continued losses. Historically, we have relied upon
cash from financing activities to fund substantially all of the cash requirements of our activities and have incurred significant
losses and experienced negative cash flow. As of September 30, 2015, we had an accumulated deficit of $6,442,810 and incurred
a net loss of $1,610,333 during the nine months ended September 30, 2015. We cannot predict when we will become profitable or
if we ever will become profitable. We may continue to incur losses for an indeterminate period of time and may never achieve or
sustain profitability. Even if we are able to achieve profitability, we may be unable to sustain or increase our profitability
on a quarterly or annual basis. An extended period of losses and negative cash flow may prevent us from successfully selling our
products and services and operating or expanding our business. As a result of our financial condition, our independent auditors
have issued a report questioning our ability to continue as a going concern.
We
are seeking additional financing to meet our liquidity and capital expenditure requirements and may be unable to obtain this financing
on a timely basis, in sufficient amounts, on terms acceptable to us or at all. Any financing we are able to obtain may be available
only on burdensome terms that may cause significant dilution to our stockholders and impose onerous financial restrictions on
our business.
We
are seeking additional financing to meet our liquidity and capital expenditure requirements. Management believes that without
additional financing, our current cash on hand and expected cash flow from operations will be sufficient to fund our liquidity
and capital expenditure requirements only through the first quarter of 2016. Future financing may not be available on a timely
basis, in sufficient amounts, on terms acceptable to us or at all. Any equity financing may cause significant dilution to existing
stockholders. Any debt financing or other financing of securities senior to our common stock will likely include financial and
other covenants that will restrict our flexibility. At a minimum, we would expect these covenants to include restrictions on our
ability to pay dividends on our common stock. Any failure to comply with these covenants could have a material adverse effect
on our business, prospects, financial condition and results of operations because we could lose any then-existing sources of financing
and our ability to secure new financing may be impaired. In addition, any prospective debt or equity financing transaction will
be subject to the negotiation of definitive documents and any closing under those documents will be subject to the satisfaction
of numerous conditions, many of which could be beyond our control. We may be unable to obtain additional financing from one or
more lenders or equity investors, or if funding is available, it may be available only on burdensome terms that may cause significant
dilution to our stockholders and impose onerous financial restrictions on our business.
Our
independent auditors have issued a report expressing substantial doubt about our ability to continue as a going concern. This
report may impair our ability to raise additional financing and adversely affect the price of our common stock.
The
report of our independent auditors contained in our financial statements for the years ended December 31, 2014 and 2013 filed
with our Annual Report on Form 10-K for the year ended December 31, 2014, includes a paragraph that explains that we have incurred
significant losses and negative cash flows from operations. This report raises substantial doubt about our ability to continue
as a going concern. Reports of independent auditors questioning a company’s ability to continue as a going concern are generally
viewed unfavorably by analysts and investors. This report may make it difficult for us to raise additional debt or equity financing
necessary to continue the development of AllDigital Brevity. We urge potential investors to review this report before making a
decision to invest in us.
Our
disclosure controls and procedures and internal control over financial reporting are not effective, which may cause our financial
reporting to be unreliable and lead to misinformation being disseminated to the public.
Our
management evaluated our disclosure controls and procedures as of September 30, 2015 and concluded that as of that date, our disclosure
controls and procedures were not effective. The ineffectiveness of our disclosure controls and procedures was due to (i) insufficient
resources, (ii) inadequate segregation of duties for key financial reporting functions, and (iii) insufficient segregation of
duties for our executive officers.
As
of the date of this quarterly report on Form 10-Q, we believe that these material weaknesses continue to exist and our disclosure
controls and procedures and internal control over financial reporting are not effective. If such material weaknesses and ineffective
controls are not promptly corrected in the future, our ability to report quarterly and annual financial results or other information
required to be disclosed on a timely and accurate basis may be adversely affected. Also such material weaknesses and ineffective
controls could cause our financial reporting to be unreliable and lead to misinformation being disseminated to the public. Investors
relying upon this misinformation may make an uninformed investment decision.
We
are in the early stages of the full production version of our AllDigital Brevity platform and we cannot be certain that AllDigital
Brevity will perform as expected and/or be accepted by our current and potential customers.
We
have only recently deployed the full production version of AllDigital Brevity. Accordingly, our AllDigital Brevity 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.
Even if our AllDigital Brevity platform performs as expected, we may not be successful in marketing and selling the platform to
current or potential customers. Any failure to address early production or market acceptance 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, timekeeping, 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 product offerings, including our AllDigital Brevity and AllDigital
Cloud platforms, 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 developed by and included in third party applications that we use. 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. |
Our
continued growth could be adversely affected by the loss of several key customers.
For
the three months ending September 30, 2015, our four largest billing relationships accounted for approximately 67% of our total
billings. 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 2015. 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 an 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. If we are successful at raising additional capital, we intend
to increase our operating expenses and capital expenditures in order to further the development and distribution of our AllDigital
Brevity platform and other product offerings. If we are to increase our operating expenses and capital expenditures and are not
successful at selling AllDigital Brevity at projected levels, 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 software development, project management, and 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 various platforms,
including AllDigital Brevity and AllDigital Cloud, 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 plan to enter into transactions to acquire companies or a 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. |
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 software developers,
who offer digital media workflow solutions, transcoding, and high-speed file transfer services, 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 products and 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. |
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 or breach 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 beyond any insured levels, which on its own or combined with the potential loss of current customers or future
customers as a result of the reputational harm associated with such a breach could have a material adverse effect on our business,
financial condition and results of operations.
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. |
| |
|
|
| |
● |
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. |
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
acquired two patents in connection with our purchase of the assets of Brevity Ventures, Inc. These patents secure our rights to
specific processes and underlying algorithms that differentiate AllDigital Brevity from other competitive offerings. Our inability
to protect and defend these patents could have a material adverse impact upon our business, including our ability to reach cash
flow profitability.
For
products and services other than AllDigital Brevity, 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:
| |
● |
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. |
| |
|
|
| |
● |
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. |
| |
|
|
| |
● |
Our
existing trademarks or any future trademarks may be canceled or otherwise fail to provide meaningful protection. |
| |
|
|
| |
● |
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. |
| |
|
|
| |
● |
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. |
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:
| |
● |
cease
selling, incorporating or using services, technology, platform or products that rely upon the disputed intellectual property; |
| |
|
|
| |
● |
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; |
| |
|
|
| |
● |
redesign
services, technology, products, platform or portions of services, technology or products, that incorporate disputed intellectual
property; |
| |
|
|
| |
● |
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 |
| |
|
|
| |
● |
pay
monetary damages to the third party adjudged to be the rightful holder of the intellectual property right. |
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:
| |
● |
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; |
| |
|
|
| |
● |
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; |
| |
|
|
| |
● |
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; and |
| |
|
|
| |
● |
new
laws and regulations may negatively affect consumers’ and businesses’ use of the Internet or devices, thereby
reducing demand. |
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.
Risks
Related to Our Capital Stock and Capitalization
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 additional shares of 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 additional shares of 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:
| |
● |
priced
under five dollars; |
| |
|
|
| |
● |
not
traded on a national stock exchange, such as NASDAQ or the NYSE ; |
| |
|
|
| |
● |
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 |
| |
|
|
| |
● |
issued
by a company that has average revenues of less than $6 million for the past three years. |
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:
| |
● |
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. |
| |
|
|
| |
● |
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. |
| |
|
|
| |
● |
In
connection with the execution of any transaction involving a penny stock, certain broker-dealers must deliver to certain purchasers
the following: |
| |
|
|
| |
● |
bid
and offer price quotes and volume information; |
| |
|
|
| |
● |
the
broker-dealer’s compensation for the trade; |
| |
|
|
| |
● |
the
compensation received by certain salespersons for the trade; |
| |
|
|
| |
● |
monthly
account statements; and |
| |
|
|
| |
● |
a
written statement of the customer’s financial situation and investment goals. |
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.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. MINE SAFETY DISCLOSURE
Not
applicable.
ITEM
5. OTHER INFORMATION
None.
ITEM
6. EXHIBITS
Index
to Exhibits
| Exhibit
Number |
|
Description |
| |
|
|
| 31.1 |
|
Certifications
Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
| |
|
|
| 31.2 |
|
Certifications
Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
| |
|
|
| 32.1 |
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. |
| |
|
|
| 101.INS |
|
XBRL
Instance Document (*) |
| |
|
|
| 101.SCH |
|
XBRL
Taxonomy Extension Schema (*) |
| |
|
|
| 101.CAL |
|
XBRL
Taxonomy Extension Calculation Linkbase (*) |
| |
|
|
| 101.DEF |
|
XBRL
Taxonomy Extension Definition Linkbase (*) |
| |
|
|
| 101.LAB |
|
XBRL
Taxonomy Extension Label Linkbase (*) |
| |
|
|
| 101.PRE |
|
XBRL
Taxonomy Extension Presentation Linkbase (*) |
(*)
Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating
to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions
of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly
amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements.
Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are
not subject to liability.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
| |
|
ALLDIGITAL
HOLDINGS, INC. |
| |
|
|
|
| November
16, 2015 |
|
By: |
/s/
Michael Linos |
| Date |
|
|
Michael Linos,
|
| |
|
|
Chief Executive
Officer |
| |
|
|
|
| November
16, 2015 |
|
|
/s/
Brad Eisenstein |
| Date |
|
|
Brad Eisenstein, |
| |
|
|
Chief Financial
Officer and Chief Operating Officer |
EXHIBITS
FILED WITH THIS REPORT
| Exhibit
Number |
|
Description
|
| |
|
|
| 31.1 |
|
Certification
Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
| |
|
|
| 31.2 |
|
Certification
Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
| |
|
|
| 32.1 |
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. |
| |
|
|
| 101.INS |
|
XBRL
Instance Document (*) |
| |
|
|
| 101.SCH |
|
XBRL
Taxonomy Extension Schema (*) |
| |
|
|
| 101.CAL |
|
XBRL
Taxonomy Extension Calculation Linkbase (*) |
| |
|
|
| 101.DEF |
|
XBRL
Taxonomy Extension Definition Linkbase (*) |
| |
|
|
| 101.LAB |
|
XBRL
Taxonomy Extension Label Linkbase (*) |
| |
|
|
| 101.PRE |
|
XBRL
Taxonomy Extension Presentation Linkbase (*) |
(*)
Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating
to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions
of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly
amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements.
Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are
not subject to liability.
Exhibit
31.1
CERTIFICATION
I,
Michael Linos, certify that:
| 1. |
I
have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 of AllDigital Holdings, Inc. |
| |
|
| 2. |
Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report; |
| |
|
| 3. |
Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
| |
|
| 4. |
The
registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| |
(a) |
Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared; |
| |
|
|
| |
(b) |
Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles; |
| |
|
|
| |
(c) |
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based
on such evaluation; and |
| |
|
|
| |
(d) |
Disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and |
| 5. |
The
registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions): |
| |
(a) |
All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and |
| |
|
|
| |
(b) |
Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting. |
| Dated:
November 16, 2015 |
/s/
Michael Linos |
| |
Michael Linos
|
| |
Chief Executive
Officer |
Exhibit
31.2
CERTIFICATION
I,
Brad Eisenstein, certify that:
| 1. |
I
have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 of AllDigital Holdings, Inc.; |
| |
|
| 2. |
Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report; |
| |
|
| 3. |
Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
| |
|
| 4. |
The
registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| |
(a) |
Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared; |
| |
|
|
| |
(b) |
Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles; |
| |
|
|
| |
(c) |
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based
on such evaluation; and |
| |
|
|
| |
(d) |
Disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and |
| 5. |
The
registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions): |
| |
(a) |
All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and |
| |
|
|
| |
(b) |
Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting. |
| Dated:
November 16, 2015 |
/s/
Brad Eisenstein |
| |
Brad Eisenstein |
| |
Chief Financial
Officer and Chief Operating Officer |
Exhibit
32.1
CERTIFICATION
OF
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report on Form 10-Q AllDigital Holdings, Inc. (the “Company”) for the period ended September
30, 2015 (the “Report”), the undersigned hereby certify in their capacities as Chief Executive Officer and Chief Financial
Officer of the Company, respectively, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
| 1. |
the
Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended;
and |
| |
|
| 2. |
the
information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company. |
| Dated:
November 16, 2015 |
/s/
Michael Linos |
| |
Michael Linos |
| |
Chief Executive
Officer |
| |
|
| Dated: November
16, 2015 |
/s/
Brad Eisenstein |
| |
Brad Eisenstein |
| |
Chief Financial
Officer and Chief Operating Officer |
AllDigital (CE) (USOTC:ADGL)
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