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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013

 

[  ]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 incorporation)   (IRS Employer Identification No.)

 

220 Technology Drive, Suite 100 Irvine, California 92618
(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code : (949) 250-7340

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES [  ] NO [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES [  ] NO [X]

 

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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Report or any amendment to this Report. [X]

 

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 definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

[  ] Large Accelerated Filer [  ] Accelerated Filer
   
[  ] Non-accelerated Filer [X] Smaller reporting Company
   
(Do not check if a smaller reporting company)  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): YES [  ] NO [X]

 

The aggregate market value of the voting common equity held by non-affiliates of the registrant computed by reference to the closing sale price of such stock, was approximately $740,946 as of June 28, 2013, the last business day of the registrant’s most recently completed second fiscal quarter. The registrant has no non-voting common equity.

 

As of March 26, 2014, the registrant had 35,631,977 shares of common stock, $0.001 par value, outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE: None.

 

 

 

 
 

 

CAUTIONARY STATEMENT

 

All statements included or incorporated by reference in this Annual Report on Form 10-K (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 and expenses; our accounting estimates, assumptions and judgments; the demand for our products; the competitive nature of and anticipated growth in our industry; and our prospective needs for 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 expected results, which in turn could, among other things, cause the price of our common stock to decrease. 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.

 

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TABLE OF CONTENTS

 

PART 1
     
Item 1. Business 4
Item 1A. Risk Factors 16
Item 1B. Unresolved Staff Comments 29
Item 2. Properties 29
Item 3. Legal Proceedings 29
Item 4. Mine Safety Disclosures 29
     
PART II
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities 30
Item 6. Selected Financial Data 31
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 31
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 38
Item 8. Financial Statements and Supplementary Data 38
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 39
Item 9A. Controls and Procedures 39
Item 9B. Other Information 40
     
PART III
     
Item 10. Directors, Executive Officers and Corporate Governance 41
Item 11. Executive Compensation 44
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 47
Item 13. Certain Relationships and Related Transactions, and Director Independence 48
Item 14. Principal Accounting Fees and Services 51
     
PART IV
     
Item 15. Exhibits, Financial Statements Schedules 52
  Signatures 57
     
Index to Consolidated Financial Statements and Supplemental Information Exhibits Filed with this Report 56

 

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PART I

 

Item 1. Business

 

Throughout this Report, AllDigital Holdings, Inc. and AllDigital, Inc., as a consolidated entity, are referred to as “AllDigital”, the “Company”, “we” 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.” We have registered or are in the process of registering the following trademarks: AllDigital® and Cablebox™. 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 to an understanding of 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.
     
  “Content Management System” (“CMS”) is a Software as a Service (“SaaS”) platform that allows for the management of digital media assets, data exchange with digital services and data management.
     
  “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, Instagram, Twitter, MLB.com, Match.com, Pinterest and Facebook.
     
  “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.

 

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General Overview

 

We provide digital broadcasting solutions. Our digital broadcasting solutions consist of the technology and related services required to develop, operate and support a variety of App and digital service implementations, through a digital broadcasting workflow, across a large and diverse market of devices. Our business model targets a variety of organizations and existing providers of digital services, such as media and entertainment companies, enterprises, government agencies, and nonprofits.

 

There are a number of technical, financial, personnel, and management challenges for media and entertainment companies, enterprises, and organizations wanting to successfully develop, operate and support a digital service through a digital broadcasting workflow to target devices. As demand continues to increase from both end-users and their devices requiring growing amounts of cloud-based digital media, data processing, services, and quality of service levels, we believe that these challenges will similarly increase.

 

Our CMS platform currently branded as “AllDigital Cloud” addresses a significant number of these challenges. AllDigital Cloud is a unified digital broadcasting and cloud services platform. It is dedicated to ingesting, storing, preparing, securing, managing, monetizing, converting and distributing digital media and other forms of data across devices. AllDigital Cloud enables and supports a variety of complex digital broadcasting workflow and digital service implementations. It also maximizes the performance of, and offers significant scale and pricing advantages related to, the cloud-based storage, cloud processing and origin transit of digital media to and from devices.

 

General Outlook

 

We expect that the need for digital broadcasting solutions will accelerate significantly over the next 2-3 years, which acceleration we anticipate will be driven by the convergence of the following two key market dynamics: (i) the market for devices is substantial and rapidly growing and (ii) digital services are increasingly critical to enterprise core business applications, are implemented to achieve a wide variety of objectives, and are rapidly proliferating. We believe that the growth of the digital services market will not be sustainable, however, without the creation of third party service providers that offer the digital broadcasting solutions required to successfully develop, operate and support digital services to a large and diverse market of devices.

 

Our ability to successfully generate future revenues is dependent on a number of factors, including: (i) the availability of capital to continue to develop, operate and maintain our proprietary AllDigital Cloud platform and services, (ii) the ability to commercialize our portfolio of digital broadcasting solutions to media and entertainment companies, enterprises, government agencies, and non-profits, 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.

 

Termination of Broadcast Merger

 

On January 6, 2013, we entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Broadcast International, Inc., a Utah corporation (“Broadcast”) and Alta Acquisition Corporation, a Nevada corporation and wholly-owned subsidiary of Broadcast International (“Merger Sub”). On November 4, 2013, the Merger Agreement was terminated. Broadcast sent notice of termination without cause following the occurrence of the October 31, 2013 “end date” without a closing having occurred. We rejected the purported termination under this provision, which cannot be used by a party whose breaches and failures cause the merger contemplated by the Merger Agreement not to close by end date. We then sent a notice terminating the Merger Agreement for cause due to Broadcast’s breach of the non-solicitation covenants in the Merger Agreement, which we believe triggers a termination fee of $100,000 and 4% of the equity of Broadcast on a non-diluted basis, and due to various other misrepresentations and breaches. We have reserved the right to pursue damages for breach, in addition to any applicable termination fee, from Broadcast.

 

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Market Opportunity

 

Industry analysts have predicted that, over the next few years, potentially several hundred thousand different Apps will be developed that enable new and innovative functionality to a growing universe of devices. The creators and providers of these Apps, many of which will act as the front-end of a digital service, will come from a number of different market segments. These market segments, representing our existing and target customers, include:

 

  Media and entertainment companies;
     
  Enterprises (i.e., small, medium and Fortune 500 corporations);
     
  Educational institutions;
     
  Interactive gaming companies;
     
  Government / non-profit organizations;
     
  Faith-based organizations; and
     
  Hardware manufacturers and software providers.

 

High-definition video, broadband wireless access, the proliferation of devices, consumer convenience and other factors are driving demand and creating new markets for digital services. Examples of digital services include:

 

  Watching live television (e.g. Hulu, MLB.com) on a tablet or desktop computer;
     
  Social networking through your smartphone;
     
  Selecting and watching an on-demand movie on your connected television;
     
  Ordering a pizza or lunch using your smartphone during an office meeting;
     
  Participating in corporate training from a home office desktop computer;
     
  Receiving an electronic coupon from an interactive digital signage display and system while shopping at a retail store where you are a registered customer; and
     
  Connecting a group of 50 individuals, each at a separate physical location with their own gaming console, to execute a military campaign online.

 

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We believe digital services are: rapidly proliferating; implemented to achieve a wide variety of objectives; driving new business models and strategies; increasingly critical to enterprise core business applications; and changing the way organizations store, originate, and distribute digital media and software applications.

 

Developing, operating and supporting a successful digital service through a digital broadcasting workflow presents a series of challenges for any organization. The financial, personnel, management and technical challenges generally involve investing in, project managing and integrating a combination of complex, proprietary, incompatible, and costly software and equipment, across multiple vendor solutions. Successfully developing, operating and supporting a digital service across a set of target devices will generally require: hiring a team of specialized software engineers and other personnel; procuring the broadcasting, data management, and networking software and equipment required; and a combination or all of the following technical challenges:

 

  Managing various elements of and processes related to the high-speed and ongoing data exchange between a digital service and a device, including device compatibility, security requirements, high levels of quality of service, data and signal flows, and dynamic updates;
     
  Applying real-time 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;
     
  Acting as the origin for data exchange between the digital service and target devices in a rapid and cost-effective manner across multiple transport partners;
     
  Procuring and managing a series of integrated, cost-effective and scalable cloud-based services, through a cloud services platform that enables and supports the storage, processing (e.g., encoding, transcoding), and transit of digital services to a diverse market of devices;
     
  Developing and managing a cloud-based services platform that supports a range of Digital Media delivery formats and protocols, including: H.264/AAC, HTTP Dynamic Streaming (HDS), HTTP Live Streaming (HLS), Real-Time Messaging Protocol (RTMP), and Progressive;
     
  Developing and managing a digital broadcasting platform that provides data processing, content and channel management, business logic, and publishing capabilities between broadcasting endpoints (i.e., devices), as well as the cloud services and back-end business systems (e.g., account and user management) supporting the digital service, which platform should include the following services: channel ingest, mapping and metadata; user, account, and eligibility entitlements; digital media and data management and transformation; pairing and publishing digital media to eligible and authenticated subscribers/users; and application processing interface (“API”) management;
     
  Rapidly resolving any of a series of service incidents that could “break” one or more of the App(s) and/or materially adversely affect the functioning of the digital service, such as: operating system updates, software bugs and patches, problems with upstream vendor systems and/or source feeds, or other incidents anywhere within the digital broadcasting workflow; and
     
  Managing complex user and device entitlements (e.g., conditional access, tokenization, policy management modules, types of encryption, digital rights management) to restrict access to content to authenticated subscribers/users of a digital service, across targeted device types and operating system platforms, in accordance with customer or media and entertainment studio requirements.

 

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Designing and developing the App that supports the digital service on the target device types and platforms is another significant challenge. Device manufacturers currently operate in a highly competitive marketplace where devices based on many different operating systems (e.g., Apple OS / iOS, Windows / RT, Google Android, Blackberry and others) compete for market share. Many of the operating systems powering these devices have different or incompatible features such as user interface standards, security protocols, audio / video decoders, embedded services and screen resolutions. In addition, the complexity of operating system differences is compounded as they occur over four fundamentally different device platforms (i.e., mobile, desktop, gaming and digital television), causing the barriers to successfully develop, operate and support a cross-platform digital service to increase significantly. New connected device platforms are also emerging as viable platforms for Apps including wearables (such as Google Glass and “smart” watches), automobiles, robotics, toys, and interactive public advertising).

 

As a result of these challenges and others, the overall investment required to develop, operate and support a digital service, through a digital broadcasting workflow, to a series of target devices can be prohibitive and/or intimidating for many of our customers. Many lack the technical expertise, time and/or resources to cost-effectively distribute their digital services beyond a traditional desktop computer Web-page experience. digital service and App pioneers (such as Facebook, Netflix, Pandora and MLB.com) have made, and must continue to make, significant, ongoing investments in order to maintain the pairing of their services to hundreds of different types of devices. Smaller and emerging companies typically lack the scale and expertise to compete.

 

We were founded to enable our customers to outsource the complex processes of developing, operating and supporting digital services on a large and diverse market of devices, through digital broadcasting workflows, to a trusted, third party service provider.

 

Industry Overview

 

The Internet plays a crucial role in the way organizations and individuals conduct business and communicate internally and externally. The development of various Internet-based technologies has enabled fundamental and structural changes in the way digital media, digital services and/or Apps are published, combined, operated, implemented, broadcast and retrieved. Over the past few years, this includes the ability to develop, deliver and remotely manage a wide variety of digital services, through various digital broadcasting workflows, from and to various device broadcasting endpoints.

 

We expect that the need for digital broadcasting solutions will continue to accelerate significantly over the next 2-3 years, which we anticipate will be driven by the convergence of the following key market dynamics:

 

The market for devices is substantial and rapidly growing

 

  According to EE Times, by the end of 2014, more than 6 billion devices will be connected to the Internet.
     
  According to Forbes, analysts are predicting that connected devices worldwide could top 50 billion in the next ten years.
     
  According to Digital TV Research, the estimated number of TVs connected to the Internet exceeded 300 million and is expected to exceed 750 million by 2018.
     
  According to Google, there have been over 900 million Android device activations.
     
  According to Apple, Inc.: more than 700 million iOS devices (iPhones, iPod Touches, and iPads) have been sold through 2013
     
  Juniper Research predicts that Mobile Smart Wearable Devices will be a $19 Billion industry by 2018.

 

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Digital services are increasingly critical to enterprise core business applications, are implemented to achieve a wide variety of objectives, and are rapidly proliferating.

 

  According to Cisco, mobile video traffic exceeded 50 percent of traffic for the first time in 2012. Mobile video traffic was 53 percent of traffic by the end of 2013.
     
  In addition, Cisco has reported that Global mobile data traffic grew 81 percent in 2013, reaching 1.5 exabytes per month at the end of 2013, up from 820 petabytes per month at the end of 2012.
     
  According to a recent study conducted by The Diffusion Group – a collection of research analysts and industry advisors who study the way consumers interact with entertainment services and technologies. This year, a little greater than 60% of U.S. households with broadband service have at least one television connected to the Internet. Last year, that number was 53 percent.
     
  According to Facebook, they now have over 1.19 billion monthly average users.
     
  A number of emerging digital services, such as SnapChat, are also experiencing rapid growth. According to Business Insider, Snapchat has about 60 million total installs, making it larger than Instagram when it sold to Facebook for $1 billion. Of those 60 million installs, Snapchat has about 30 million monthly active users. SnapChat was founded in 2011.

 

We expect that digital services will continue to proliferate as media and entertainment companies, individual media brands, commercial enterprises, government agencies, nonprofits, and entrepreneurs continue to create new applications for, and subsequently develop and launch a wide variety of digital services.

 

Over the past few years, certain of our target customers have attempted to address digital service and digital broadcasting workflow initiatives through: custom software development projects with companies like AllDigital; establishing new internal departments (i.e., cost centers); reorganizing or temporarily assigning internal personnel on a project basis; or a hybrid approach of the foregoing. We believe that these approaches generally do not harness the cost efficiencies, economies of scale, development and integration time, and performance benefits, related to working with a vendor dedicated to providing digital broadcasting solutions for numerous clients, however. As the total investment required, technical complexity and other challenges of successfully developing, operating and maintaining a digital service continue to grow, we believe these considerations must be increasingly addressed. We also believe the growth of the digital services market will not be sustainable without the creation of trusted third party providers of digital broadcasting solutions.

 

Target Market Segments

 

We have targeted several industry segments that we believe to be responsive to a comprehensive offering of digital broadcasting solutions. Our business strategy is to provide the technology and services that enable our target customers to cost-effectively and securely distribute, with a high quality of service, a wide range of digital services to a wide variety of devices without requiring significant in-house technical resources.

 

Adoption of digital service business models has seen significant growth in recent years among our target customers, in part because media and entertainment companies, individual media brands, social networking sites and communication companies are typically the earliest adopters of such new technologies. We are not only targeting new market opportunities, but also are attempting to capture the outsourcing of digital service and digital broadcasting workflow implementations by early adopters. We believe that our technology and services offerings can provide significant performance improvements, cost efficiencies, time to market, new features and capabilities, and the ability to pair digital services with greater numbers and types of devices than earlier digital media distribution models.

 

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Examples of our targeted industry segments include:

 

Media Content and Services. There are a number of companies of various sizes and specializations, with media content, online services and/or other business and software application needs that can be distributed to devices via digital services. Examples include:

 

Media and Entertainment: This sub-segment includes movie studios, filmmakers, news broadcasters, talk-show hosts, sports broadcasters and communications services providers. Targeted media brands in this sub-segment generally require a broad range of platform capabilities and services for originating, transporting and selling or otherwise monetizing their media content on devices via digital service offerings. They generally also require assistance with generating revenues from media distribution, increasing audience size, gathering market data, payment processing, providing dynamic updates, and managing entitlements, including conditional access.

 

Social Networking: Some of the most widely used digital service applications are through popular established brands such as Facebook, Instagram, Pinterest, LinkedIn, Match.com and Twitter. Each of these established brands is continuously evolving their digital services applications to include: the integration and “on-boarding” of partner digital services; the expansion of their digital service business models for both recurring and event-based purposes, and; expanding their reach and footprint to additional devices and device platforms. New social networking sites are also emerging, developing and launching digital services dedicated to the creation of on-demand content, originated from devices, delivered to and stored in a centralized repository, and available for viewing, sharing, fundraising, and other purposes. There are also many smaller and more vertical social networking websites that could be converted to either a mobile and/or digital television experience via a digital service. Each of the examples above could be supported by the digital broadcasting solutions we offer.

 

Music and Radio: Radio stations, musicians and digital service Providers benefit from increasing the distribution of their content. Through Internet-based broadcasting of their programming content, they can increase the size of their potential listening audience to a variety of devices and into areas not reachable by their conventional broadcast signal, effectively allowing their content to be available to a much larger and more diverse audience. There are a growing number of online radio stations and services utilizing digital services to reach various devices, such as Pandora Radio, FreeStreams, and similar websites.

 

Education: Community colleges, universities and other educational organizations can expand upon current course offerings with live or recorded audio and video webcasting. Many of these institutions are already equipped with wireless broadband access and have an Internet savvy student population. Internet-based digital broadcasting allows educational institutions to give students and teachers access to classes whenever and wherever they want. We believe that dedicated online services that enable teaching to those who are remotely located or physically disabled (such as an Amazon “Kindle” for education) could benefit greatly from our products and services. For example, using our publishing features and capabilities, educators could use our platform to bring needed revenue to their learning institutions.

 

Interactive Gaming: Interactive gaming has become increasingly popular, with many new computer games offering online functionality that enables players to interact with other players, play against other players over the Internet, or stream or download new scenes or worlds for their games. Each of these applications is a digital service. This includes the availability of games on a growing number of device platforms.

 

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Enterprise/Government/Nonprofit. While consumer adoption of digital service applications and business models has already seen significant growth, many corporations, government agencies and nonprofits appear to be at the early stages of a similar paradigm shift. For example, companies are seeking new and creative ways to cut travel costs by offering live, high-quality, reliable, and secure corporate training on devices. Corporate communications such as presentations, public relations campaigns, quarterly earnings reports or company news, are also frequently being delivered broadly to and managed through multiple devices. Secure voting and polling among international employees is another example of a digital service application. As companies develop and launch unique and successful digital services, we believe that this target market will provide significant growth opportunities. Government agencies for example may want to develop and implement digital service applications for streaming military training and time sensitive news videos to military bases and troop deployments globally, which could also result in significant cost savings.

 

Faith-Based Organizations. Digital broadcasting to devices or digital service applications have also seen penetration and growth within a variety of faith-based organizations such as churches and ministries, as well as affiliate organizations and service providers dedicated to supporting their missions. Live broadcasts and on-demand re-broadcasts of various forms of video and audio content, including online libraries of worship services, specialized teachings, instructional courses, daily devotions and other key messages, can be facilitated through an array of digital service models and implementations.

 

Hardware Manufacturers. Hardware manufacturers produce a broad spectrum of products that target both business and consumer markets. Examples of products by category include: digital signage at financial institutions, retail stores, and restaurants; medical devices; robotics and artificial intelligence; business and home security devices; “smart” appliances; business / home automation and resource conservation; toys; and consumer electronics. As smartphones and tablet products such as the iPhone and iPad continue to demonstrate new and unique capabilities through a wide array of innovative Apps being developed and made available for download from Apple’s App Store, we believe that a similar evolution and economic ecosystem will occur with devices outside of traditional consumer electronics.

 

Products and Services

 

We provide digital broadcasting solutions. Our digital broadcasting solutions consist of the technology and services required to develop, operate and support a variety of digital service implementations, through a digital broadcasting workflow, across a large and diverse market of devices. Our business model targets a variety of organizations and existing providers of digital services, such as media and entertainment companies, enterprises, government agencies, and nonprofits.

 

The core of our solutions is our CMS currently branded as AllDigital Cloud. AllDigital Cloud is a unified digital broadcasting and cloud services platform dedicated to ingesting, storing, preparing, securing, managing, monetizing, converting and distributing digital media across devices. It enables and supports a variety of complex digital broadcasting workflow and digital service implementations. AllDigital Cloud also maximizes the performance of, and offers significant scale and pricing advantages related to, the cloud-based storage, cloud processing and origin transit of digital media to and from devices.

 

Our customers have the option to contract the following digital broadcasting solutions, or purchase a combination of technology and service elements: (i) AllDigital CMS (i.e., AllDigital Cloud Platform, AllDigital Cloud Storage, AllDigital Cloud Processing, AllDigital Origin Transit); (ii) Integration Services (i.e., including App Frameworks); and (iii) Technical Support and App Maintenance.

 

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We typically charge monthly recurring platform (AllDigital Broadcast or AllDigital Cloud) fees, as well as monthly recurring fees for our storage, processing, and origin transit cloud-based services. We also typically charge monthly recurring fees for the technical support and maintenance of Apps that we develop (i.e., Technical Support and App Maintenance), and that act as the front-end of a digital service. Non-recurring revenues typically come from platform customization and integration services, sometimes referred to as “platform on-boarding”, as well as professional services related to custom App development for targeted devices and device platforms (i.e., Integration Services), leveraging our App Frameworks. The term of our customer contracts currently range from a two-month (paid) trial to two years.

 

Since our inception, because of the complex and evolving nature of Apps, digital services, digital broadcasting workflows, and devices, our customers’ requirements have varied widely. Many of our customers have specific functional requirements or a specific concept to develop and manage a digital service to one or more target device types and platforms. Other customers, including large enterprises, begin with only a general concept to distribute their digital media assets through a software application as a service to achieve certain objective(s). These customers typically require some level of professional services support to initially define and discover functional requirements prior to the development and launch of their digital services.

 

AllDigital Cloud

 

Platform: Our AllDigital Cloud platform contains a multi-layered integrated service model. Modular service layers directly support the following: digital asset management; content management; data management; workflow services (e.g., publishing, content subscription, service automation); Application Programming Interface (“API”) management (e.g., customized data ingest/retrieval, authentication); content ingest services; cloud processing services; storage services; and media delivery services. The platform also contains service layer capabilities related to channel and account management, entitlements (e.g., eligibility) and conditional access (e.g., digital rights management). Service layer capabilities require platform customization and integration with customer and/or customer third party vendor feeds and systems. A role-based management portal serves as a control panel for customers and us to: manage their accounts; view reporting, logging, analytics, and billing statistics; and view other capabilities and information.

 

A series of other AllDigital Cloud platform features and capabilities also enable: (i) “plug and play” with multiple 3rd party systems and service providers; (ii) virtualized or hardware-based deployments with minimal customization, resulting in the ability to support the steady or rapid growth and scale of a digital service without significant manual or other system re-configuration requirements; (iii) operating efficiencies and robust service-level / system performance; and (iv) customer-driven configurations to match the needs and requirements of their specific offering.

 

We intend to continue to develop and mature our AllDigital Cloud platform and roadmap to add additional features and capabilities in response to customer requirements, industry trends, and overall market demand.

 

Storage: We provide centralized, fault-tolerant, replicated, asset storage. Our storage platform and capabilities are based on the “cloud storage” methodology where data is stored on multiple servers located in one or more data centers typically shared by more than one customer.

 

The asset storage capability in our AllDigital Cloud Storage service layer is specifically tailored to deliver robust performance and availability for large media libraries, among other attributes. For example, the storage repository can independently scale beyond traditional storage systems in both capacity and performance. The platform also contains a parallel computing approach that overcomes common input/output bottlenecks present in other cloud storage offerings. We also offer customers standards-based access using dedicated or managed computing resources, providing our customers the unique ability to integrate custom features and applications into their digital broadcasting workflows. Our storage platform may be accessed through an API or a Web-based user interface.

 

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Processing: Cloud processing (e.g., encoding and transcoding) is a form of Internet-based computing, whereby shared resources, software and data are provided to computers, servers and other devices on demand. In order to provide services such as the encoding and transcoding of digital media (e.g., convert a master file into a format compatible for a specific device), we provide cloud-computing assets on the same network as our cloud-storage platform. The advantage of this model is to provide our customers with a low latency and cost-effective platform to execute business rules, as well as to operate and support their digital service.

 

AllDigital Cloud includes a range of content processing tools to prepare and convert digital media for multiplatform delivery. The system’s transcoding technology applies industry-standard audio and video codecs to ensure that assets will be delivered in the required output formats for all target device platforms.

 

AllDigital Origin Transit

 

Origin transit is the service of allowing network traffic to cross or “transit” a computer network. Our transit model focuses on optimizing the two-way delivery of data to and from a device. Customers, or devices, can send a single transit of data (e.g., a large file) to our storage platform. We refer to that transit as the “ingress” of data. Once the data is stored or prepared for targeted or widespread delivery over the Internet to one or more content delivery networks (“CDNs”), Internet Service Providers (“ISPs”), or other transport models, we “egress” (or send) the data to these upstream partners.

 

As end-user demand increases for data intensive digital services (e.g., hi-definition video distribution), certain ISPs are demanding extra fees from digital service providers for access to their network to offset the cost of providing massive spikes of data to their subscribers. Our Origin Transit models allows our customers to send data intensive files once to the ISP as opposed to millions of ISP subscribers potentially downloading the same file directly from the digital service provider. The ISP can then distribute the file multiple times to their subscribers at a far lower cost of delivery and distribution since they generally own their own network.

 

Integration Services

 

Integration Services refers to the varying levels of professional services required to customize and integrate the AllDigital Cloud platform to support a digital service with a customer’s proprietary systems and/or other specific requirements. This is sometimes referred to as “platform on-boarding.” Integration Services also refers to custom App development for targeted devices. With each App serving as the front-end of a digital service, professional services associated with custom App development also involves integrating and pairing each App with the AllDigital Cloud platform, or applicable platform components.

 

App Frameworks

 

We have developed a series of proven mobile, desktop, and connected television advanced App frameworks. We continue to develop and improve these App frameworks through a variety of customer experiences, and as a byproduct of our learning related to the complex and evolving nature of Apps, digital services, digital broadcasting workflows, and devices. Our library of App frameworks enables the highly cost-effective and timely development of high quality, secure, and reliable Apps and digital services across a large and fragmented market of device types and platforms.

 

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Technical Support and App Maintenance

 

Technical Support and App Maintenance generally refers to support services, as well as AllDigital Cloud Platform support. Our Technical Support services generally include: level three support; quality of service monitoring and alerting; application and system maintenance; and service incident reporting and project management. Our App Maintenance services include performing ongoing software maintenance releases containing bug fixes and/or enhancements, as well as rapidly modifying and upgrading the Apps to support device OS updates shortly after the final release of such device OS. Technical Support also refers to supporting agreed upon platform quality of service levels throughout the term of the customer contract. AllDigital has the experience and capabilities to support a broad range of digital broadcasting solutions at the highest quality of service levels, leveraging from our robust AllDigital Cloud platform, highly scalable cloud services, and digital broadcasting infrastructure.

 

Sales and Marketing

 

We have provided and/or we are actively providing services to a variety of media and entertainment, enterprise, and organization (government/non-profit) customers since we began our current operations in August 2009. To date, we have obtained our customers as a result of direct sales, word of mouth and/or partner referrals.

 

To attract customers in the future, we have formulated, but have only partially implemented, a marketing strategy that employs multiple channels to introduce our digital broadcasting solutions to likely users. These channels include highly scalable online marketing, direct business development among the target market segments, advertising through highly targeted print and electronic media, recruitment of resellers, adoption into OEM software such as content management system offerings and authoring tools, bundling and referral arrangements with industry partners that offer complementary products and services, and participation in trade shows, seminars and other educational forums directed to our target market segments.

 

The future success of our business will primarily depend on aggressive business development efforts. This will require a persistent and sustained effort to maintain relationships and communication lines with the key decision makers at our target customers.

 

Competition

 

The Digital Media Stack

 

The process of transferring data to and from a device generally involves the origin, conversion, management, transport and delivery of that data through a distribution process. The major components of the data distribution process are collectively referred to as the digital media “stack.” Data may originate from a digital service or a device, and that data must be routed over the Internet. Our customers require a place to store, run and manage their digital service. They require a method to transport data to and from the target devices and device platforms that they support. Our customers also frequently require technical support services, including software application maintenance and support, and data management services, to manage the ongoing pairing of their digital service to one or more devices.

 

Examples of companies that provide services related to, or operating within, the digital media stack include ISPs, CDNs, content management systems (“CMS”), utility computing providers, systems integrators and vertical solutions providers.

 

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An ISP is a company that offers access to the Internet. The ISP connects to its customers using a data transmission technology appropriate for delivering Internet Protocol data over dial-up, DSL, cable modem, wireless or dedicated high-speed connections. Examples include: AT&T, CenturyLink and Verizon.

 

A CDN is a system of computers containing copies of data, placed at various points in a network so as to maximize bandwidth for access to the data from clients throughout the network. A client accesses a copy of the data nearest to the client, as opposed to all clients accessing the same central server, to avoid bottlenecks near that server. Content types include web objects, downloadable objects (media files, software, documents), applications, real time media streams and other components of Internet delivery (DNS, routes, and database queries). Examples include: Akamai, Level 3 Communications and Limelight Networks.

 

CMS companies typically provide website authoring and administration tools designed to allow users to manage their media assets (such as hi-definition video files) prior to distribution over the Internet or other content delivery mechanisms. Examples include: Brightcove, Kaltura and Ooyala.

 

Utility computing companies provide cloud-based services such as data storage and processing. Examples include 3Par, Amazon and IBM. These companies typically focus on providing “raw” storage and processing capacity.

 

A systems integrator is a person or company that specializes in bringing together component subsystems into a whole and ensuring that those subsystems function together efficiently to achieve their intended objectives. Systems integrators work within and across a wide variety of industries, applications, and subsystems, and typically target as their customers Fortune 500 companies, major media brands, as well as hardware and device manufacturers. Examples of large systems integrators include: IBM, PWC, EDS and Accenture.

 

Vertical solution providers are typically smaller companies that provide individual or multiple technical solutions targeted towards customer support, field services or mobile environments.

 

Our Competitors

 

Our core business is digital broadcasting solutions, which is an evolving business offering. Various components of our product and service offerings, however, are provided by several companies which operate in the digital media “stack.” For example, a CMS platform may provide tools for managing the distribution of video files, which overlaps with a subcomponent of our AllDigital Cloud Platform capabilities. CMS providers now also offer certain professional services and digital media to device solutions that directly compete with certain subcomponents of our offerings and capabilities. A CDN may be our partner, hosting video files or other data in various data centers for a mutual client, but that CDN may also provide professional services that include ensuring the compatibility of a digital service with a device, which overlaps with a subcomponent of our offerings and capabilities. We also compete with certain vertical solution providers and system integrators that provide individual implementations of a digital service to a device.

 

Dependence on Certain Customers

 

We have served and/or we are actively serving a variety of media and entertainment, enterprise, and government/non-profit customers since we began our current operations in August 2009. As of December 31, 2013, we had 10 direct customers. We also act as a subcontractor for certain of these customers, servicing and supporting a total of 19 accounts. Through the year ending December 31, 2013, our four largest billing relationships accounted for approximately 82% of our total billings. Rogers Communications accounted for 25%, the Cox Media Group accounted for 24%, Chideo accounted for 17%, and C2 Hosting accounted for 16%.

 

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Intellectual Property

 

We depend on our ability to develop and maintain the proprietary aspects of our technology. We also seek to protect our copyrights, trade secrets and other proprietary information through a combination of contractual provisions, confidentiality procedures and common law copyright and trademark principles.

 

We have not sought or obtained registered copyright or patent protection for any of our intellectual property. We have applied for federal registration of certain trademarks in order to develop a trademark portfolio and protect our brand. Two applications related to the registration of the word mark for ALLDIGITAL were filed on October 16, 2009. As of April 2012, both of our applications were approved as registered marks. We plan to explore applying for additional trademarks in 2014.

 

We believe that elements of our existing AllDigital Cloud platform, certain components of our advanced App frameworks, and certain new technologies under development may have patent potential. As we raise additional capital, we expect to investigate such potential, and if appropriate, commence a provisional patent application filing process.

 

Employees

 

We have twenty-eight full time employees. None of our employees are represented under a collective bargaining agreement.

 

Corporate History

 

Aftermarket Enterprises, Inc. was incorporated in August 2006 in the State of Nevada. On July 29, 2011, AllDigital, Inc., which was incorporated in August 2009 in California, merged with and into a subsidiary of Aftermarket Enterprises, Inc. and became a wholly owned subsidiary of Aftermarket Enterprises, Inc. Shares issued in the transaction constituted approximately 74% of the outstanding shares of common stock post-closing, and the officers and directors of AllDigital, Inc. became the officers and directors of Aftermarket Enterprises, Inc. In August 2011, we changed the name of Aftermarket Enterprises, Inc. to AllDigital Holdings, Inc.

 

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.

 

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We have a limited operating history and cannot ensure the long-term successful operation of our business or the execution of our business plan.

 

We have a limited operating history, and our digital broadcasting solutions are an evolving business offering. As a result, investors have no meaningful track record by which to evaluate our future performance. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by growing companies in new and rapidly evolving markets. We may be unable to accomplish any of the following, which would materially impact our ability to implement our business plan:

 

  establishing and maintaining broad market acceptance of our products, technology, services, and platform, and converting that acceptance into direct and indirect sources of revenue;
     
  establishing and maintaining adoption of our products, technology, services, and platform on a wide variety of devices and device platforms;
     
  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;
     
  developing products, technology, services, and platform that result in a high degree of customer satisfaction and a high level of end-customer usage;
     
  successfully responding to competition, including competition from emerging technologies and solutions;
     
  developing and maintaining strategic relationships to enhance the distribution, features, content and utility of our products, technology, services, and platform; and
     
  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 will likely need to raise additional capital in order to continue and grow our operations, and we may be unable to obtain additional capital on reasonable terms, or at all.

 

We generated negative cash flows from operations during the year ended December 31, 2013, and have limited cash. If we continue to use cash in our operations, we will need to raise additional capital. Given our early stage of operations, we do not expect that bank or other institutional debt financing will be available. We expect that any capital we raise will be through the issuance of equity and equity-linked securities, including common stock, preferred stock, warrants or and convertible debt. We have no commitments from any parties to provide capital and may not be able to raise capital on reasonable terms, or at all. Factors affecting the availability and price of capital may include the following:

 

  the availability and cost of capital generally;
     
  our financial results;
     
  the experience and reputation of our management team;
     
  market interest, or lack of interest, in our industry and business plan;
     
  condition of the global markets and specifically the U.S. economy;
     
  the trading volume of, and volatility in, the market for our common stock;
     
  our ongoing success, or failure, in executing our business plan;
     
  the amount of our capital needs; and
     
  the amount of debt, options, warrants, and convertible securities we have outstanding.

 

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We may be unable to meet our current or future obligations or to adequately exploit existing or future opportunities if we cannot raise sufficient capital. If we are unable to obtain capital for an extended period of time, we may be forced to discontinue operations.

 

We are in the early stages of the full production version of our AllDigital Cloud platform in commercial operation.

 

We have only recently deployed the full production version of our AllDigital Cloud platform. Accordingly, our AllDigital Cloud platform may not perform as expected and we may not be able to address some or all of the early stage production challenges that may occur. Any failure to address early production challenges would significantly harm our results of operations and financial condition.

 

Because of our early stage of operations and limited resources, we may not have in place various processes and protections common to more mature companies and may be more susceptible to adverse events.

 

We are in an early stage of operations and have limited resources. As a result, we may not have in place systems, processes and protections that many of our competitors have or that may be essential to protect against various risks. For example, we have in place only limited resources and processes addressing human resources, 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 AllDigital Cloud platform, broadcasting network services, and cloud services software tools and back-end services is complex and includes software and code used to generate customer invoices. This software and code is either developed internally or licensed from third parties. Any of the system architecture, system administration, software or code may contain errors, or may be implemented or interpreted incorrectly, particularly when they are first introduced or when new versions or enhancements to our tools and services are released. In addition, with respect to certain usage-based billing, the data used to bill the customer for usage is an estimate, based upon complex formulas or algorithms. We or the customer may subsequently believe that such formulas or algorithms overstate or understate actual usage. In any such case, a design or application error could cause overbilling or under-billing of our customers, which may:

 

  adversely impact our relationship with those customers and others, possibly leading to a loss of affected and unaffected customers;
     
  lead to billing disputes and related legal fees, and diversion of management resources;
     
  increase our costs related to product development; and/or
     
  adversely affect our revenues and expenses, either prospectively or retrospectively, potentially requiring restatement of financial statements.

 

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Our continued growth could be adversely affected by the loss of several key customers.

 

Through the year ending December 31, 2013, our four largest billing relationships accounted for approximately 82% 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 2014. Decisions by one or more of these key customers and/or partners to not renew, terminate or substantially reduce their use of our products, technology, services, and platform could substantially slow our revenue growth and lead to a decline in revenue. Our business plan assumes continued growth in revenue, and it is unlikely that we will become profitable without a continued increase in revenue.

 

We are dependent upon key personnel who may leave at any time and may be unable to attract qualified personnel in the future.

 

We are highly dependent upon on a small number of senior executives and other members of management to work effectively as a team, to execute our business strategy and business plan, and to manage our employees, independent contractors, consultants and vendors. Certain of our senior executives have limited public company experience. Any of our senior executives, managers and employees can terminate his or her employment relationship at any time, and the loss of the services of such individuals could have a material adverse effect on our ability to execute our business plan and otherwise have a material adverse effect on our business, financial condition and results of operations.

 

We may incur substantial operating and net losses due to substantial expenditures.

 

Since the commencement of our current operations, we have invested significant time and expense towards developing our products, technology and services in order to capitalize on current market opportunities. We intend to increase our operating expenses and capital expenditures in order to expand our market presence, and as a result, we may incur substantial operating and net losses in the foreseeable future. There can be no assurance that we will achieve or sustain profitability or positive cash flow from our operations.

 

Our resources may not be sufficient to manage our expected growth; failure to properly manage our potential growth would be detrimental to our business.

 

We may fail to adequately manage our anticipated future growth. Any growth in our operations will place a significant strain on our administrative, financial and operational resources. It will also increase demands on our management and on our operational and administrative systems, controls and other resources. Our existing personnel, systems, procedures and controls may be inadequate to support our operations in the future, such that we will be unable to successfully implement appropriate measures consistent with our growth strategy. As part of any growth, we may have to implement new operational and financial systems, procedures and controls to expand, train and manage our employee base and maintain close coordination among our technical, accounting, finance, marketing and sales staff. We may be unable to do this. To the extent we acquire or merge with other businesses, we will also need to integrate and assimilate new operations, technologies and personnel. We may not have the experience or resources to do this. If we are unable to adequately manage future growth, our operating results may suffer.

 

Because our technology, products, platform, and services are complex and are deployed in and across complex environments, they may have errors or defects that could seriously harm our business.

 

Our technology, products, platform, and services are highly complex and are designed to operate in and across data centers, numerous large and complex networks, and other elements of the digital broadcasting workflow that we do not own or control. From time to time, we have needed to correct errors and defects in our software. In the future, there may be additional errors and defects in our software that may adversely affect our services. We may not have in place adequate quality assurance procedures to ensure that we detect errors in our software in a timely manner. If we are unable to efficiently and cost-effectively fix errors or other problems that may be identified, or if there are unidentified errors that allow persons to improperly access our services, we could experience loss of revenues and market share, damage to our reputation, increased expenses and legal actions by our customers.

 

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We may have insufficient transmission and server capacity, which could result in interruptions in our services and loss of revenues.

 

Our operations are dependent in part upon transmission capacity provided by third-party telecommunications network providers. In addition, our distributed network must be sufficiently robust to handle all of our customers’ web-traffic, particularly in the event of unexpected surges in high-definition video traffic. We may not be adequately prepared for unexpected increases in bandwidth demands by our customers. In addition, the bandwidth we have contracted to purchase may become unavailable for a variety of reasons, including payment disputes or network providers going out of business. Any failure of these network providers to provide the capacity we require, due to financial or other reasons, may result in a reduction in, or interruption of, service to our customers, leading to an immediate decline in revenue and possible additional decline in revenue as a result of subsequent customer losses.

 

We may have insufficient human resources in platform development, project management, quality control to manage large customer projects.

 

Our operations are dependent in part upon the availability of adequate human resources to manage and develop our Cloud Platform and specific customer development projects. We may not be adequately prepared for unexpected increases in integration service development efforts required by prospective or existing customers. Software development is a human resource intensive process in an increasingly competitive environment for talented people, a lack (or loss) of which could result in an immediate decline in revenue and possible additional decline in revenue as a result of subsequent customer losses. The loss of developers and related staff can also create delays in providing development services to our customers also potentially resulting in a loss of revenue.

 

We do not have sufficient capital to engage in material research and development, which may harm our long term growth.

 

In light of our limited capital, we have made no material investments in research and development over the past several years. This may conserve capital in the short term. In the long term, as a result of our failure to invest in research and development, our technology and product offerings may not keep pace with the market and we may lose any existing competitive advantage. Over the long term, this may harm our revenue growth and our ability to become profitable.

 

We may acquire businesses or assets, or enter into other business combination transactions, that may be difficult to integrate.

 

As part of our growth strategy we expect to enter into transactions to acquire companies or a substantial portion of their assets, or to combine our business with theirs. These acquisitions or business combinations involve numerous risks, including each of the following:

 

  that the combined entity will not perform as well as the separate businesses performed prior to the transaction;
     
  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;
     
  that the stock and/or other consideration paid in the transaction will exceed the value of the assets or business acquired;
     
  that the use of cash as consideration for the transaction will reduce cash that may be needed for operations below necessary levels;
     
  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;
     
  that we may be assuming potential unknown liabilities of the acquired business; and
     
  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 operators within the digital media stack, who offer subcomponents of our digital broadcasting solutions (e.g., CDN providers, CMS companies, hosting, utility computing companies), or integrators and vertical solution providers who develop single implementations of content or digital media distribution, and related digital services, to a target device platform. These competitors, including future new competitors that may emerge, may be able to develop a comparable or superior platform, and/or technology stack, and/or series of services that provide a similar or more robust set of features and functionality than the technology, products and services we offer. If this occurs, we may be unable to grow as necessary to make our business profitable.

 

Regardless of whether we have superior products, many of these current and potential future competitors have a longer operating history in their current respective business areas and greater market presence, brand recognition, engineering and marketing capabilities, and financial, technological and personnel resources than we do. Existing and potential competitors with an extended operating history, even if not directly related to our business, have an inherent marketing advantage because of the reluctance of many potential customers to entrust key operations to a company that may be perceived as unproven. In addition, our existing and potential future competitors may be able to use their extensive resources:

 

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;
   
to reduce costs, particularly transport, storage and processing costs, because of discounts associated with large volume purchases;
   
to offer less expensive products, technology, platform, and services as a result of a lower cost structure, greater capital reserves or otherwise;
   
to adapt more swiftly and completely to new or emerging technologies and changes in customer requirements;
   
to offer bundles of related services that we are unable to offer;
   
to attract and retain qualified staff more effectively than we can;
   
to take advantage of acquisition and other opportunities more readily; and
   
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 of such data.

 

As part of our product offering, we facilitate the billing by our customers of their end customers, including end customers that may purchase products using credit cards or otherwise provide personal financial and other information over our network. Unauthorized access to our platform and underlying infrastructure, including certain servers for example, may jeopardize the security of the personal information stored in our computer systems and our customers’ computer systems. If this occurs, we may be liable to our customers, and we may lose customers or future customers, as a result of the reputational harm associated with such a breach.

 

Our business operations are susceptible to interruptions caused by events beyond our control.

 

Our business operations are susceptible to interruptions caused by events beyond our control. We are vulnerable to the following potential problems, among others:

 

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.
   
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.
   
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.

 

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The occurrence of any of the foregoing could result in claims for consequential and other damages, significant repair and recovery expenses and extensive customer losses and otherwise have a material adverse effect on our business, financial condition and results of operations.

 

Risks Related to Our Intellectual Property

 

If the protection of our intellectual property is inadequate, our competitors may gain access to our technology, and our business may suffer.

 

We depend on our ability to develop and maintain certain proprietary aspects of our products and services. To protect these proprietary products and services, we rely primarily on a combination of contractual provisions, confidentiality procedures, trade secrets and common law copyright and trademark principles. Adequate protection of our intellectual property is subject to the following risks:

 

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:

 

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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.

 

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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.
   
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.

 

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Risks Related to Our Capital Stock and Capitalization

 

Our officers and directors have significant voting power and may take actions that may not be in the best interests of other stockholders.

 

Our executive officers and directors beneficially own approximately 60% of our outstanding common stock. These executive officers and directors effectively control all matters requiring approval by the stockholders, including any determination with respect to the acquisition or disposition of assets, future issuances of securities, and the election of directors. This concentration of ownership may also delay, defer or prevent a change in control and otherwise prevent stockholders other than our affiliates from influencing our direction and future.

 

We cannot predict the extent to which an active public trading market for our common stock will develop or be sustained. If a public trading market does not develop or cannot be sustained, you may be unable to liquidate your investment in AllDigital.

 

We cannot predict the extent to which an active public market for our common stock will develop or be sustained due to a number of factors, including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors, and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares of common stock until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a public trading market for our common stock will be sustained. If such a market cannot be sustained, you may be unable to liquidate your investment in AllDigital.

 

In addition, the market price for our common stock may be particularly volatile given our status as a relatively small company with a small and thinly-traded “public float” that could lead to wide fluctuations in our share price. You may be unable to sell your common stock at or above your purchase price if at all, which may result in substantial losses to you.

 

Our common stock may be subject to significant price volatility which may have an adverse effect on your ability to liquidate your investment in our common stock.

 

The market for our common stock may be characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will be more volatile than a seasoned issuer for the indefinite future. The potential volatility in our share price is attributable to a number of factors. First, our common shares may be sporadically and/or thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer that could better absorb those sales without adverse impact on its share price. Secondly, an investment in us is a speculative or “risky” investment due to our lack of meaningful revenues or any profits to date and uncertainty of future market acceptance for current and potential products. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer.

 

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We are subject to various regulatory requirements, and may be adversely affected by inquiries, investigations and allegations that we have not complied with governing rules and laws.

 

In light of our status as a public company and the early stage of our business, we are subject to a variety of laws and regulatory requirements in addition to those applicable to all businesses generally. For example, we are subject to the reporting requirements applicable to United States reporting issuers, such as the Sarbanes-Oxley Act of 2002, and certain state and provincial securities laws. In addition, because we are in an early stage of development and intend on issuing securities to raise capital and use acquisitions for growth, our actions will be governed by state and federal securities laws and laws governing the issuance of securities, which are complex. In connection with such laws, we may be subject to periodic audits, inquiries and investigations. Any such audits, inquiries and investigations may divert considerable financial and human resources and adversely affect the execution of our business plan.

 

Through such audits, inquiries and investigations, a regulator or we may determine that we are out of compliance with one or more governing rules or laws. Remedying such non-compliance diverts additional financial and human resources. In addition, in the future, we may be subject to a formal charge or determination that we have materially violated a governing law, rule or regulation. We may also be subject to lawsuits as a result of alleged violation of the securities laws or governing corporate laws. Any charge or allegation, and particularly any determination, that we had materially violated a governing law would harm our ability to enter into business relationships, recruit qualified officers and employees and raise capital.

 

The market price of our common stock may be harmed by our need to raise capital.

 

We need to raise additional capital in the near future and expect to raise such capital through the issuance of equity and equity linked securities including common stock, preferred stock, warrants and convertible debt. Because securities in private placements and other transactions by a company are often sold at a discount to market prices, this need to raise additional capital may harm the market price of our common stock, to the extent that a market develops. In addition, the re-sale of securities issued in such capital-raising transactions, whether under Rule 144 or otherwise, may harm the market price of our common stock.

 

Our ability to issue preferred stock and common stock may significantly dilute ownership and voting power, negatively affect the price of our common stock and inhibit hostile takeovers.

 

Under our Articles of Incorporation, we are authorized to issue up to 10,000,000 shares of preferred stock and 90,000,000 shares of common stock without seeking stockholder approval. Any issuance of preferred stock or common stock would dilute the ownership and voting power of existing holders of our common stock and may have a negative effect on the price of our common stock. The issuance of preferred stock without stockholder approval may also be used by management to stop or delay a change of control, or might discourage third parties from seeking a change of control of our company, even though some stockholders or potential investors may view possible takeover attempts as potentially beneficial to our stockholders.

 

Our common stock is a “low-priced stock” and subject to regulations that limits or restricts the potential market for our stock.

 

Shares of our common stock are “low-priced” or “penny stock,” resulting in increased risks to our investors and certain requirements being imposed on some brokers who execute transactions in our common stock. In general, a low-priced stock is an equity security that is:

 

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.

 

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We believe that our common stock is presently a “penny stock.” At any time the common stock qualifies as a penny stock, the following requirements, among others, will generally apply:

 

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.

 

We do not have significant tangible assets that could be sold upon liquidation.

 

We have nominal tangible assets. As a result, if we become insolvent or otherwise must dissolve, there will be no tangible assets to liquidate and no corresponding proceeds to disburse to our stockholders. If we become insolvent or otherwise must dissolve, stockholders will likely not receive any cash proceeds on account of their shares.

 

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Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

 

Our corporate headquarters are located in Irvine, California in a leased facility of approximately 7,269 square feet. This facility contains all of our operations, including sales and marketing, finance, administration, and project development. The facility is leased under a non-cancelable operating lease agreement expiring December 31, 2014, with possible renewal upon the agreement of both parties at the current market rate. Monthly rent will be $10,717 for the remaining lease term.

 

We believe this facility is adequate for our anticipated business purposes for the foreseeable future. We have leased servers in colocation facilities in Denver, Colorado and Irvine, California.

 

Item 3. Legal Proceedings

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities

 

Market Information

 

Our common stock is quoted on the OTC Bulletin Board under the symbol “ADGL.” The table below sets forth the high and low bid quotations for our common stock as reported on the OTC Bulletin Board for the periods indicated.

 

    Price Range 
    High   Low 
Fiscal Year Ended December 31, 2013           
Quarter ended March 31, 2013   $1.01   $0.18 
Quarter ended June 30, 2013   $0.20   $0.11 
Quarter ended September 30, 2013    $0.17   $0.10 
Quarter ended December 31, 2013   $0.48   $0.10 
            
Fiscal Year Ended December 31, 2012           
Quarter ended March 31, 2012   $1.01   $1.01 
Quarter ended June 30, 2012   $1.01   $0.51 
Quarter ended September 30, 2012   $1.01   $1.01 
Quarter ended December 31, 2012   $1.01   $0.85 

 

The quotations set forth above reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.

 

Security Holders

 

As of March 26, 2014, we had 35,631,977 shares of common stock outstanding held of record by approximately 131 stockholders.

 

Dividends

 

We have not paid dividends on our common stock to date. We currently intend to retain future earnings, if any, to fund our operations and the development and growth of our business and, therefore, do not anticipate paying cash dividends on our common stock within the foreseeable future. Any future payment of dividends on our common stock will be determined by our board of directors and will depend on our financial condition, results of operations, contractual obligations and other factors deemed relevant by our board of directors.

 

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Equity Compensation Plan Information

 

The following table provides information about our common stock that may be issued upon the exercise of options, warrants and rights under all of our only existing equity compensation plan as of December 31, 2013.

 

Plan Category  Number of securities to be issued upon exercise of outstanding options, warrants and rights
(a)
   Weighted-average exercise price of outstanding options, warrants and rights   Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) 
             
Equity compensation plans approved by security holders:               
2011 Stock Incentive Plan (1)   6,649,500   $0.24    1,796,500 
Total   6,649,500   $0.24    1,796,500 

 


(1)The AllDigital Holdings, Inc. Amended and Restated 2011 Stock Incentive Plan, or 2011 Plan, is administered by our Board of Directors and provides for the granting of securities to employees, officers, directors and our other service providers. Our stockholders have approved the 2011 Plan.

 

Recent Sales of Unregistered Securities

 

Not Applicable.

 

Item 6. Selected Financial Data

 

Not applicable.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This discussion contains statements that constitute forward-looking statements. Such statements can be identified by the use of the forward-looking words “anticipate,” “estimate,” “project,” “likely,” “believe,” “intend”, “expect” “will” or similar words. When considering such forward-looking statements, you should keep in mind the risk factors noted in the section of this Report entitled “Risk Factors” and other cautionary statements throughout this Report. You should also keep in mind that all forward-looking statements are based on management’s existing beliefs about present and future events outside of management’s control and on assumptions that may prove to be incorrect. The forward-looking statements and associated risks may include, relate to or be qualified by other important factors, including, without limitation: our business strategy for expanding, maintaining or contracting our presence in these markets and anticipated trends in our financial condition and results of operations We do not undertake to update, revise or correct any forward-looking statements. Any of the factors described above, elsewhere in this Report or in the “Risk Factors” section of this Report 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.

 

Overview of our Business

 

We provide digital broadcasting solutions. Our digital broadcasting solutions consist of the technology and related services required to develop, operate and support a variety of App and digital service implementations, through a digital broadcasting workflow, across a large and diverse market of devices. Our business model targets a variety of organizations and existing providers of digital services, such as media and entertainment companies, enterprises, government agencies, and nonprofits.

 

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There are a number of technical, financial, personnel, and management challenges for media and entertainment companies, enterprises, and organizations wanting to successfully develop, operate and support a digital service through a digital broadcasting workflow to target devices. As demand continues to increase from both end-users and their devices requesting growing amounts of cloud-based digital media, data processing, services, and quality of service levels, these challenges will similarly increase.

 

Our CMS platform currently branded as “AllDigital Cloud” addresses a significant number of these challenges. AllDigital Cloud is a unified digital broadcasting and cloud services platform. It is dedicated to ingesting, storing, preparing, securing, managing, monetizing, converting and distributing digital media and other forms of data across devices. AllDigital Cloud enables and supports a variety of complex digital broadcasting workflow and digital service implementations. It also maximizes the performance of, and offers significant scale and pricing advantages related to, the cloud-based storage, cloud processing and origin transit of digital media to and from devices.

 

Results of Operations

 

The following selected financial information should be read in conjunction with our consolidated financial statements and notes to our consolidated financial statements included elsewhere in this Report, and the other sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this Report.

 

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 first 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.

 

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

 

   For the years ended December 31,   Dollar variance favorable (unfavorable)   % variance favorable (unfavorable) 
   2013   2012         
Net sales  $4,327,227   $3,307,167   $1,020,060    30.8%
Cost of sales   2,505,925    2,486,388    (19,537)   (0.8)%
Gross profit   1,821,302    820,779    1,000,523    121.9%
Operating expenses:                    
Selling, marketing and advertising   537,496    600,789    63,293    10.5%
General and administrative   1,898,493    1,587,445    (311,048)   (19.6)%
Total operating expenses   2,435,989    2,188,234    (247,755)   (11.3)%
Loss from continuing operations   (614,687)   (1,367,455)   752,768    55.0%
Other income (expense):                    
Interest income   728    1,237    (509)   (41.1)%
Interest expense   (636)   (112)   (524)   (467.9)%
Other income   63,884    195,521    (131,637)   (67.3)%
                     
Other income (expense)   63,976    196,646    (132,670)   (124.1)%
                     
Loss before provision for income taxes   (550,711)   (1,170,809)   620,098    53.0%
Provision for income taxes   1,600    2,400    800    33.3%
Net Loss  $(552,311)  $(1,173,209)  $620,098    52.9%

 

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Net Sales. Net sales increased by $1,020,060, or 31%, for 2013 compared to 2012, due primarily to a $261,740 increase in recurring monthly maintenance and support contracts with new and existing customers, and a $758,320 increase in recognition of percentage of completion revenue related to our contracts with existing and new customers.

 

Gross Profit. Our gross profit increased by $1,000,523, or 122%, for 2013 compared to 2012. The increase in gross profit was primarily due to the increase in net sales and a proportionately lower increase in cost of sales. While net sales increased by 31% for 2013 as compared to 2012, cost of sales increased by less than 1%, or $19,537, in the same period; reflective of our concerted effort to maximize efficient use of resources.

 

Selling, Marketing and Advertising Expenses. Selling, marketing and advertising expenses decreased by $63,293, or 11%, for the year 2013 compared to the year 2012. The decrease that resulted from a decrease of $75,861 in salaries and related payroll expenses for sales and marketing employees, and a decrease of $8,333 in travel and entertainment expenses, offset by an increase in advertising expenses of $10,482 and an increase in other sales and marketing expenses of $10,418 was a result of our strategic efforts in 2012 to redirect funds to their most effective uses.

 

General and Administrative Expenses. General and Administrative expenses increased by $311,048, or 20%, for 2013 compared to 2012. The table below shows each type of General and Administrative expense total in 2013 compared to that incurred in the prior year, with the amount of increase or (decrease) and the percentage increase (decrease).

 

   2013   2012   $ Difference   % Change 
Salary & Expense  $983,169   $873,464   $109,705    13%
Legal Fees   185,933    155,832    30,101    19%
Rent   129,374    128,997    376.42    0%
Accounting Fees   105,823    59,760    46,063    77%
Consulting/Outside Services   91,431    38,434    52,997    138%
Office Expenses/Supplies   68,582    37,839    30,744    81%
Depreciation and Amortization Expense   55,370    40,812    14,558    36%
Business Insurance   48,458    14,420    34,038    236%
Recruiting   45,693    7,558    38,134    505%
Travel & Entertainment   35,624    31,119    4,505    14%
Public Reporting   24,258    12,858    11,400    89%
Utilities   22,091    15,721    6,370    41%
Phone   21,500    19,443    2,057    11%
Other G&A Expenses   81,187    151,188    -70,002    -46%
Total General & Administrative  $1,898,492   $1,587,445   $311,047    20%

 

Other Income. Other income decreases by $131,637 in 2013 as compared to 2012. In 2013, $63,884 of other income resulted from a settlement with a former client, while other income in 2012 included a different settlement of $195,000 with a different client.

 

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Liquidity and Capital Resources

 

During 2013, we funded our operations primarily from cash provided by operations and $1,485,000 in cash provided by the issuance of our Convertible Promissory Notes (“Notes”). Working capital as of December 31, 2013 was $918,330, an increase of $1,148,224 over the working capital deficiency of $229,894 as of December 31, 2012. We had accumulated losses of $2,973,553 and $2,421,412 at December 31, 2013 and 2012, respectively. Our available capital resources at December 31, 2013, consisted primarily of $1.3 million in cash and cash equivalents. 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.

 

As of December 31, 2013, we had current assets of $1,837,989, including $1,300,932 in cash and cash equivalents. Cash increased from $462,761 at December 31, 2012 to $1,300,932 at December 31, 2013, due primarily to $1,485,000 of cash provided by the issuance of our Convertible Promissory Notes. Net cash used in operating activities was $583,872 and $507,436 for the years ended December 31, 2013 and 2012, respectively.

 

Cash used in investing activities increased by $22,801 for the year ended December 31, 2013 as compared to the year ended December 31, 2012, primarily a result of purchasing of $58,814 in computer equipment during the year ended December 31, 2013, compared to purchases of $24,439 in computer equipment during year ended December 31, 2012.

 

In August and September of 2013, we raised an aggregate of $1,485,000 through the issuance of our Notes to __ accredited investors. In accordance with their terms, the Notes were converted into approximately 7,787,249 shares of our common stock in November 2013 as a result of the termination of the Merger Agreement with Broadcast.

 

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 to us. We expect that any capital we raise will be through the issuance of our equity and/or equity-linked securities. As of December 31, 2013, we did not have any commitments to provide financing. 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 believe that current and future available capital resources and revenues generated from operations will be adequate to meet our anticipated working capital and capital expenditure requirements for at least the next twelve months. If, however, our capital requirements or cash flow vary materially from our current projections, if unforeseen circumstances occur, or if we require a significant amount of cash to fund future acquisitions, we may require additional financing. Our failure to raise capital, if needed, could restrict its growth, or hinder our ability to compete.

 

We are seeking to accelerate our revenue growth in 2014 and may participate in strategic joint ventures or acquisitions in the next twelve months. As a result we may need additional liquidity and capital resources in 2014. 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.

 

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Critical Accounting Policies and Estimates

 

Basis of Presentation

 

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require 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 our common stock, and deferred income tax valuation allowances. Actual results could differ from those estimates. Following are discussion of our significant accounting policies.

 

Cash and Cash Equivalents

 

We consider all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents.

 

Revenue Recognition

 

We recognize 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. Our 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 we are unable to reasonably estimate total contract costs, we wait 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 platform. On-boarding professional services projects are typically of a short duration and smaller revenue amounts. We recognize revenue for on-boarding professional services upon project completion and acceptance.

 

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Monthly recurring revenues are recognized ratably over the period in which they are delivered and earned. We typically charge monthly recurring platform fees, as well as monthly recurring charges for our 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 our 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 our control. 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 our best estimate of selling price (“BESP”). If deliverables cannot be separated into more than one unit, then we do 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 $10,000 at December 31, 2013 and $0 at December 31, 2012. We generally requires a deposit or advance services payments from its customers for certain contracts involving upfront capital investment, on-boarding, or development contracts to facilitate its working capital needs.

 

Earnings and Loss per Share

 

We compute 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 December 31, 2013, options to purchase 3,065,917 shares of our common stock and warrants to purchase 3,892,274 shares of our common stock were outstanding. At December 31, 2012, we had 2,070,597 options and warrants to purchase 3,892,274 shares of our common stock were outstanding.

 

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 1, 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.

 

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Assets subject to this classification at December 31, 2013 and December 31, 2012 were cash and cash equivalents that are considered Level 1 assets.

 

For certain of our 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 our notes payable approximates fair value based on prevailing interest rates.

 

Income Taxes

 

We account for income taxes in accordance with ASC 740-10, Income Taxes. We recognize 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. We record 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 of 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. We classify interest and penalties as a component of interest and other expenses. To date, we have not been assessed, nor have we paid, any interest or penalties.

 

We 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
Computer equipment 3 years
Software 3 years
Signs 3 years

 

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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

 

We account 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 us to review long-lived assets for impairment whenever events or changes in circumstances indicate that we may not recover the carrying amount of an asset. We measure recoverability by comparing the carrying amount of an asset to the expected future undiscounted net cash flows generated by the asset. If we determine that the asset may not be recoverable, then we recognize an impairment charge to the extent of the difference between the asset’s fair value and the asset’s carrying amount. We had no impairment charges during the twelve months ended December 31, 2013 or 2012.

 

Stock-Based Compensation

 

We account 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. We use the Black-Scholes option valuation model to estimate the fair value of our 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. We use historical data among other information to estimate the expected price volatility and the expected forfeiture rate.

 

Recent Accounting Pronouncements

 

In July 2013, the FASB issued ASU 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. We adopted this guidance effective January 1, 2014. We do not expect the adoption of ASU 2013-11 to significantly impact our consolidated financial statements.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Item 8. Financial Statements and Supplementary Data

 

Reference is made to the consolidated financial statements and accompanying notes included in this report, which begin on page F-1.

 

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

Not applicable.

 

Item 9A. Controls and Procedures

 

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, 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 and Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities 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 our 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 December 31, 2013 that our disclosure controls and procedures were effective at a reasonable assurance level.

 

Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act. Our internal control over financial reporting is designed 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. Our internal control over financial reporting includes those policies and procedures that:

 

i.pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
   
ii.provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
   
iii.provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

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A material weakness is defined by the Public Company Accounting Oversight Board’s Audit Standard No. 5 as being a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis by our internal controls.

 

Management assessed and evaluated the effectiveness of our internal control over financial reporting as of December 31, 2013. Based on the results of management’s assessment and evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2013, our internal control over financial reporting was effective.

 

In making its assessment of our internal control over financial reporting, management used criteria for effective internal control over financial reporting described in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

Management’s report was not subject to attestation by our certified registered public accounting firm pursuant to rules established by the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report on Form 10-K.

 

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

 

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information

 

None.

 

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PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

Directors and Executive Officers

 

The following table sets forth the name, age and position of each of our executive officers and directors as of March 26, 2014:

 

Name   Age   Position
         
Paul Summers   48   Chairman of the Board of Directors and  Chief Executive Officer
         
Steve Smith      46   Vice President of Network Services and  Director
         
Timothy Napoleon   39   Chief Strategist
         
Barbara Crofts   60   Chief Financial Officer
         
Brad Eisenstein   43   Chief Operating Officer
         
Michael Linos   55   Executive Vice President Sales and a Director
         
David Williams   50   Director
         
Mark Walsh   53   Director

 

Board of Directors

 

The following paragraphs set forth certain biographical information about our Board of Directors, including their specific qualifications to serve on our board of directors in light of our business and structure.

 

Paul Summers has served as our Chairman and Chief Executive Officer since July 2011. Mr. Summers is a co-founder of AllDigital, Inc. and has served as Chief Executive Officer and Chairman of the Board of AllDigital, Inc. since its inception in August 2009. Prior to AllDigital, Mr. Summers was a co-founder of VitalStream Holdings, Inc. where he served as President and CEO from 2000 to 2004. Previously, Mr. Summers founded AnaServe, Inc., a Web hosting company in 1995, and worked at Anaserve until its sale to Concentric Network Corporation in 1998. He has over 20 years of executive management and digital media services experience. He is an alumnus of the University of Southern California where he earned a Bachelor of Science degree. Mr. Summers was appointed as a director in light of his executive management experience with small public companies, his experience in the industry and his knowledge of our company and its markets and products.

  

Steve Smith has served as our Vice President of Network Services and a director since July 2011. Mr. Smith is a co-founder of AllDigital, Inc. and has served as the Vice President of Network Services and a Director of AllDigital, Inc. since September 2009. Mr. Smith has over 25 years of highly specialized experience in a wide variety of storage technologies, hosting applications and digital broadcasting solutions delivery technologies. From October 2006 to September 2009, Mr. Smith was the Founder and President of HCI, which provided specialized technical and security-intensive management services for a variety of Internet-based companies. Prior to HCI, Mr. Smith served as the CTO of VitalStream Holdings, Inc.’s integrated content services business unit, where he worked from 2000 through October 2006. Mr. Smith was appointed as a director in light of his experience in the industry and his knowledge of our business and our markets and products.

 

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David Williams has been a director since September 2011. Mr. Williams is presently the president and owner of Advanced Dental Designs, a specialty manufacturer of precision dental equipment, where he has worked since 2009. Prior to this, from 2006 to 2009, he was the Manager of Affiliate Operations for Google, where he oversaw a national team managing 1,600 radio stations as part of Google’s ad network. From 2005 to 2006, Mr. Williams was the Manager of Affiliate Operations at dMarc Broadcasting (which was acquired by Google in 2006). From 2001 to 2005, he was the VP of Operations at VitalStream, where he managed several teams responsible for solutions deployment, customer service and network operations. Before VitalStream, Mr. Williams had co-founded SiteStream along with Steve Smith, SiteStream was later acquired by VitalStream. Mr. Williams received his MBA in Finance from Wharton Business School and received his BS in Business Administration with an accounting major from the University of Southern California. Mr. Williams was appointed as a director in light of his experience in the industry.

 

Michael Linos was appointed as a Director and Executive Vice President of Sales on Jan 27, 2014. Mr. Linos has worked with several technology companies helping them to drive revenue and add significant scale through strategic partnerships and acquisitions. With a broad range of experience in content delivery, enterprise hosting, IP transit and colocation, he has held senior sales and business development positions including Vice President of Business Development at Internap, Executive Vice President of Sales at VitalStream and Vice President of Sales at Verio. Mr. Linos has an MBA from Northwestern University-Kellogg School of Management and a bachelor’s of science degree from the University of Dayton.

 

Mark Walsh was appointed as a Director on February 12, 2014. He previously held the position of Executive Vice President of Sales and Chief Customer Officer for Hostess Brands, LLC from March 2009 to December 2013. Prior to Hostess Brands, Mr. Walsh worked in numerous international divisions of Pepsico for approximately 20-years in senior executive positions gaining significant experience in global brand building, operations, and sales management. Walsh has a BS from the Oregon State University in industrial engineering.

 

Executive Officers

 

The following paragraphs set forth certain biographical information about our executive officers (other than Paul Summers, Steve Smith, Michael Linos and Mark Walsh, whose information is provided above):

 

Barbara Crofts has served as our Chief Financial Officer since December 2, 2013. Prior to her appointment, beginning October 14, 2013, Ms. Crofts was providing accounting and reporting services to us as a consultant. Ms. Crofts previously served as CFO of Main Electric Supply, LLC from August 2011 to June 2013. From July 2009 to August 2011, acting as an independent contractor, Ms. Crofts provided accounting and financial advisory services to Physicians Hospital of Murrieta, LLC. From March 2006 to April 2009, Ms. Crofts was employed by DLC, Inc., during which period she provided accounting and financial advisory services to a number of different middle market companies, including four public companies. Ms. Crofts started her career as an auditor with Arthur Andersen, LLP where she worked from 1978 to 1983. Ms. Crofts is both a Certified Public Accountant and Certified Global Management Accountant. She earned her B.A. degree in International Relations from University of Southern California and her M.B.A degrees from both the Thunderbird School of Global Management and the Marshall School of Business of USC.

 

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Brad Eisenstein was appointed as our Chief Operating Officer on January 7, 2014. Prior to his appointment, beginning November 5, 2013, Mr. Eisenstein provided operations and administrative services to us as a consultant. Mr. Eisenstein previously served as Chief Financial Officer of EZE Trucking Holdings, Inc., a private equity backed multi-state specialty hauling and logistics operator with 16 terminals and over 200 employees, from January 2013 to August 2013. From September 2008 to December 2012, he was Chief Financial Officer of TwinMed LLC, a private equity backed nationwide distributor of medical supplies with 9 distribution centers and over 300 employees. From May 2006 to September 2008, he was Chief Financial Officer of Hirsch Pipe & Supply Company, Inc., a distributor of plumbing materials to trade professionals with 17 locations and over 200 employees. From October 2004 to May 2006, he was Corporate Controller of HD Supply White Cap, a nationwide distributor of building materials to professional contractors with more than 165 locations and over 3,000 employees. Prior to joining HD Supply White Cap, he held several senior management positions, including Director of Sales Operations – Enterprise Hosting of XO Communications from January 2000 to October 2004, Director of Sales Operations of Concentric Network Corporation from August 1998 to January 2000, and Site Controller of AnaServe, Inc. from May 1997 to August 1998. Mr. Eisenstein started his career as an auditor with Arthur Andersen LLP, where he worked from 1994 to 1997. He earned his B.S. degree in Accounting from University of Southern California and his M.B.A degree from the Paul Merage School of Business at University of California, Irvine.

 

Timothy Napoleon has served as our Chief Strategist since February 2012. Mr. Napoleon is a co-founder of AllDigital, and also served on our board of directors from our inception in August 2009 until January 2014. Prior to AllDigital, Mr. Napoleon was the Chief Strategist, Media and Entertainment, for Akamai Technologies, Inc. (NYSE: AKAM), where he worked from 2005 until August 2009. Prior to Akamai, Mr. Napoleon was the Vice President of Business Development at VitalStream Holdings, Inc., where he worked from 2000 to 2005. Mr. Napoleon’s career background thus far has been as a digital media product architect, as well as a marketing and business development executive in the online media and entertainment industries for the past 10 years. Mr. Napoleon received his MBA from the University of Southern California’s Marshall School of Business after earning a BA in Communications from the California State University at Fullerton.

 

Corporate Governance

 

Our board of directors has responsibility for our overall corporate governance and meets regularly throughout the year. Our directors are kept informed of our business through discussions with our executive officers, by reviewing materials provided to them and by participating in meetings of our board of directors and its committees. Our executive officers are appointed by, and serve at the discretion of, our board of directors. There are no family relationships among our executive officers and directors.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Our common stock is not registered under Section 12 of the Securities Exchange Act of 1934; as a result, our affiliates are not subject to the requirements of Section 16(a) of the Securities Exchange Act of 1934.

 

Code of Ethics

 

Our board of directors adopted a Code of Ethics and Conduct in March 2012 that applies to our principal executive officer, principal financial officer and principal accounting officer. The Codes of Ethics, as applied to our principal executive officer, principal financial officer and principal accounting officer constitutes our “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002. A copy of our Code of Ethics and Conduct is attached to this report as Exhibit 14

 

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Committees

 

We do not presently have a standing audit committee, nominating committee or compensation committee, and we do not have a charter for any such committees. Our entire Board of Directors performs the functions generally performed by such committees.

 

Audit Committee

 

Our entire Board of Directors presently performs the functions generally performed by an audit committee. Our board of directors has determined that David Williams is the only member of our audit committee that is “independent” under the NASDAQ Marketplace Rules and that satisfies the other requirements under SEC rules regarding audit committee membership. None of the members of our Audit Committee qualify as an “audit committee financial expert” under applicable SEC rules and regulations governing the composition of the Audit Committee, or satisfies the “financial sophistication” requirements of the NASDAQ Marketplace Rules.

 

Stockholder Communications with our Board of Directors

 

Security holders and other interested parties may contact any member or all members of the board of directors by mail. To communicate with the board of directors, any individual director or any group or committee of directors, correspondence should be addressed to the board of directors or any such individual director or group or committee of directors by either name or title. All such correspondence should be sent “c/o Secretary” at 220 Technology Drive Suite 100, Irvine, California 92618.

 

All communications received as set forth in the preceding paragraph will be opened by the Secretary for the sole purpose of determining whether the contents represent a message to one or more directors. Any contents that are related to us will be forwarded to the addressees other than content that is (a) unrelated to us, (b) similar to something received from the same sender during the preceding 90 days, (c) in the nature of advertising, promotions of a product or service, or (d) patently offensive material.

 

Item 11. Executive Compensation

 

Compensation Processes and Procedures

 

Because of our early stage of operations and limited resources, our process for determining compensation is informal. We do not have a compensation committee or a compensation committee charter. We have not, and in the near future do not expect to, engage a compensation consultant with respect to compensation. Compensation decisions are made by the entire Board of Directors, including Paul Summers, our Chief Executive Officer, based upon the Board of Directors’ subjective determination of what salaries we can afford with our limited resources and what level of equity-based compensation is necessary to attract and retain key personnel. Based upon the subjective knowledge of the industry and other public companies, we believe that our salaries currently in place or proposed for our executive officers are below market. In the future, particularly as we hire outside personnel without significant equity stakes, we expect that the cash portion of the compensation for new, and possibly existing, executives will increase.

 

Summary Compensation Table

 

The following table provides information concerning the compensation for the individual who served as our principal executive officer during the year ended December 31, 2013, our two highest paid executive officers who were serving as an executive officer on December 31, 2013 and an additional individual for whom disclosure would have been provided but for the fact that the individual was not serving as an executive officer at December 31, 2013. These four individuals are collectively referred to in this Report as the “named executive officers.”

 

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Name and Principal
Position
  Year   Salary
($)
(1)
   Option Awards
($)
(2)
   Non-Equity
Incentive Plan
Compensation   ($)
   All
Other
Compensation ($)
(3)(2)
   Total
($)
 
Paul Summers,   2013   $144,000   $   $54,000   $27,117   $225,117 
Chief Executive Officer (5)   2012   $144,000   $   $18,000   $26,468   $188,468 
                               
Tim Napoleon,   2013   $144,000   $   $54,000   $28,707   $226,707 
Chief Strategist   2012   $144,000   $   $18,000   $27,942   $199,942 
                               
Steve Smith,   2013   $144,000   $   $54,000   $8,085   $206,085 
Vice President of Network Services   2012   $144,000   $   $18,000   $7,875   $169,875 
                               
John Walpuck,   2013   $133,015   $66,000   $36,000   $   $235,015 
CFO and COO (4)   2012   $144,000   $84,079   $18,000   $   $264,079 

 


(1) The amounts shown are the aggregate grant date fair values of grants of stock options to the named executive officers pursuant to the provisions of Accounting Standards Codification (“ASC”) 718. For a discussion of valuation assumptions used in ASC 718 calculations, see “Note 7—Stockholders Equity—Stock Options” of the Notes to Financial Statements included in Part IV, Item 15 of our Annual Report on Form 10-K for the year ended December 31, 2013. The options were issued under our 2011 Plan. Information regarding the vesting schedules of options held by our named executive officers is included in the footnotes to the “Outstanding Equity Awards at Fiscal Year-End−2013” table below.

(2) Represents bonuses earned under the executives employment agreement upon achievement of certain performance measures on a quarterly basis.

(3) Represents a reimbursement of health insurance costs.

(4) Resigned as Chief Financial Officer on October 31, 2013.

(5) We owe Mr. Summers $27,500 in unpaid salary and bonus earned during 2009, 2010 and 2011.

 

Executive Employment Agreements, Termination of Employment and Change of Control Arrangements

 

We have entered into employment agreements with each of Paul Summers, Tim Napoleon and Steve Smith as of June 28, 2013, which employment agreements have the terms described below. Except as described below, each of the employment agreements is in the same form. Until his resignation as Chief Financial Officer on October 31, 2013, we had an employment agreement in the same form with John Walpuck, which we had entered into on June 28, 2013.

 

The employment agreements provide for a minimum salary of $144,000 per annum for each of the executive officers. Each executive officer’s base salary will be increased by our Board by an amount not less than the amount obtained by multiplying the executive’s then current base salary by fifteen percent (15%) within sixty (60) days of the date that we first achieve a minimum of cash and accounts receivable of at least $3.5 million.

 

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Pursuant to each employment agreement, each executive officer is also entitled to an annual bonus target opportunity equal to 50% of his base salary upon achievement of certain performance measures on a quarterly basis. In addition, the executive officer is entitled to standard health and other benefits. The executive officer’s employment relationship is “at-will.” The employment agreements include a provision relating to the protection of confidential information, a covenant by the executive officer to work and reside in Orange County, California, a non-competition covenant during the term of his employment and a 12-month non-solicitation covenant. Under the employment agreement, if the executive officer’s employment is terminated by him for good reason, which includes, (a) a material change in the terms and conditions of his employment, (b) a change in the principal place of employment materially increasing his commute time, or (c) any other event that is a functional equivalent of an involuntary termination and which falls within the safe-harbor provisions related to termination for good reason set forth in the regulations implementing Section 409A of the Internal Revenue Code, he is entitled to a severance benefit equal to his base salary and health benefits for one year. “Cause” is defined in the employment agreements to include (a) the employee’s conviction of, or plea of guilty, nolo contendere or the equivalent, in any criminal action involving a felony, (b) the employee’s misappropriation of any of our material funds or property, (c) the employee’s willful misconduct in the performance of his duties for the company, and (c) the employee’s breach of certain covenants set forth in the employment agreement. If the executive officer is terminated by us without cause, he is entitled to a severance benefit equal to his base salary and health benefits for one year. None of the executive officers are entitled to any severance if his employment is terminated at any time by us with cause or by the executive officer without good reason.

 

Non-Equity Incentive Plans

 

Under their employment agreements, each of our named executive officers are entitled to an annual bonus target opportunity equal to 50% of their base salary upon achievement of certain corporate-level performance criteria. The criteria are set in advance of each calendar quarter, and an independent director of the Board of Directors determines following each quarter whether the criteria have been met and bonuses should be paid. Amounts earned in 2013 and 2012 are shown above under the column, “Non-Equity Incentive Plan Compensation”, in the Summary Compensation Table above.

 

Our Board of Directors determined that 2013 quarterly bonuses would be given at the broad discretion of the independent director on our Board of Directors, upon review of our Management Bonus Opportunity, or MBO, programs established with targets related to achievement of current ratio, cash and equivalents, and other performance measures.

 

The Board of Directors approved MBO programs for the first, second, and third quarters of 2012 for our four named executive officers. The MBO targets for the first quarter of 2012 were based upon current assets and current ratio targets to be realized at the end of the quarter. The MBO targets for the second and third quarters of 2012 were based upon cash equivalents and current ratio targets to be realized at the end of each quarter. The MBO targets were met for the first quarter of 2012, but were not met for the second and third quarters of 2012. MBO targets were not set for the fourth quarter of 2012.

 

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Outstanding Equity Awards at Fiscal Year-End

 

The following table sets forth information about outstanding equity awards held by our named executive officers as of December 31, 2013.

 

   Option Awards
Name  Number of Securities Underlying Unexercised Options (#) Exercisable   Number of Securities Underlying Unexercised Options (#) Unexercisable   Option Exercise Price ($)   Option Expiration Date(1)
                
John Walpuck   1,250,000    250,000(2)  $0.25   07/28/2021
    222,083    187,917(3)  $0.25   11/02/2021
    600,000       $0.11   6/28/2023

 


(1)All options held by Mr. Walpuck expired on February 14, 2014 prior to exercise.
(2)Unvested shares were subjected to vesting at a rate 31,250 shares of common stock per month until fully vested.
(3)Unvested shares were subjected to vesting at a rate 8,542 shares of common stock per month until fully vested.

 

Compensation of Directors

 

None of our directors received compensation for their services on our board during 2012 or 2013.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The following table sets forth information with respect to the beneficial ownership of our voting securities as of March 26, 2014, the date of the table, by:

 

each person known by us to beneficially own more than 5% of the outstanding shares of our common stock;
each of our directors;
each of our named executive officers; and
all of our directors and executive officers as a group.

 

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, and includes voting or investment power with respect to the securities. To our knowledge, except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table below have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. Shares of common stock underlying derivative securities, if any, that currently are exercisable or convertible or are scheduled to become exercisable or convertible for or into shares of common stock within 60 days after the date of the table are deemed to be outstanding in calculating the percentage ownership of each listed person or group but are not deemed to be outstanding as to any other person or group. Except as indicated by footnote, percentage of beneficial ownership is based on 35,631,977 shares of common stock outstanding as of the date of the table.

 

47
 

 

Name and Address of Beneficial Owner(1)

  Title of Class  Amount and Nature
of Beneficial Ownership
   Percent
of Class
 
Paul Summers  Common Stock   6,946,358(2)   19.44%
Steve Smith  Common Stock   5,820,877(3)   16.29%
Michael Linos  Common Stock   3,750,000    10.52%
David Williams  Common Stock   150,000(4)   * 
Mark Walsh  Common Stock        
Timothy Napoleon  Common Stock   5,000,000    14.03%
Donald Harris(5)   Common Stock   3,932,954    11.04%
ACT Capital Management, LLLP and Amir L. Ecker and Carol G. Frankenfield (6)   Common Stock   2,621,969    5.01%
All executive officers and directors as a group (8 persons)  Common Stock   21,702,235(7)   60.23%
   Common Stock          

 


*Less than 1.00%
(1)Messrs. Summers, Smith, Linos, Williams and Walsh are directors of AllDigital. Mr. Napoleon is an executive officer of All Digital. The address of each of these persons is c/o AllDigital Holdings, Inc., 220 Technology Drive, Suite 100, Irvine, California 92618.
(2)All securities are held of record by the Paul and Kristen Summers Family Trust, Dated April 22, 2002. Mr. and Mrs. Summers have authority to vote and dispose of such shares. Includes 107,014 shares of common stock underlying warrants.
(3)All securities are held of record by the Steve James Smith Trust Dated October 24, 2002. Mr. Smith has the authority to vote and dispose of such shares. Includes 106,959 shares of common stock underlying warrants.
(4)Represents 35,000 shares of common stock underlying options.
(5)The address for the security holder is 101 South Fort Lauderdale Beach Blvd., # 2703, Ft. Lauderdale, Florida 33316
(6)The address for the security holders is 2 Radnor Corporate Center, Suite 111, Radnor, Pennsylvania 19087.
(7)Includes 213,973 shares of common stock underlying warrants and 185,000 shares of common stock underlying options.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

 

Director Independence

 

On an annual basis, each of our directors and executive officers is obligated to complete a Director and Officer Questionnaire that requires disclosure of any transactions with AllDigital in which a director or executive officer, or any member of his or her immediate family, have a direct or indirect material interest. Following completion of these questionnaires, our board of directors makes an annual determination as to the independence of each director using the current standards for “independence” established by the Securities and Exchange Commission and NASDAQ and consideration of any other material relationship a director may have with AllDigital. Our board has determined that only David Williams is independent under these standards. All of our directors, except for Mr. Williams, also serve as executive officers.

 

Related Party Transactions

 

Other than as described below or elsewhere in this report, since January 1, 2012, there has not been a transaction or series of related transactions to which we were or are a party and in which any director, executive officer, holder of more than 5% of any class of our voting securities, or any member of the immediate family of any of the foregoing persons, had or will have a direct or indirect material interest. No such transactions are currently proposed. All of the below transactions were separately approved by our Board.

 

48
 

 

Michael Linos

 

On January 27, 2014, we entered into an Employment Agreement (the “Employment Agreement”) with Michael Linos, in connection with his appointment as Executive Vice President Sales. Under the terms of this agreement, Mr. Linos will receive a base salary of $144,000 per annum, an opportunity to earn an annual bonus equal to 50% of his base salary upon achievement of certain performance measures on a quarterly basis. He will also be entitled to participate in our benefit plans on terms consistent with those generally applicable to our other executives. Mr. Linos also signed our standard confidentiality, proprietary information and invention assignment agreement.

 

Mr. Linos’ employment relationship is “at-will.” The Employment Agreement includes a provision relating to the protection of confidential information, a covenant by the executive officer to work and reside in Orange County, California, a non-competition covenant during the term of his employment and a 12-month non-solicitation covenant. Under the terms of the Employment Agreement, if Linos’ employment is terminated by him for good reason, which includes, (i) a material change in the terms and conditions of his employment, (ii) a change in the principal place of employment materially increasing his commute time, or (iii) any other event that is a functional equivalent of an involuntary termination and which falls within the safe-harbor provisions related to termination for good reason set forth in the regulations implementing Section 409A of the Internal Revenue Code, he is entitled to a severance benefit equal to his base salary and health benefits for one year. If the executive officer is terminated by us without cause, he is entitled to a severance benefit equal to one year of his base salary and health benefits for one year. Linos will not be entitled to any severance if his employment is terminated at any time by us with cause or by Linos without good reason. Upon Linos’ termination by us for certain enumerated reasons, we will have the right to repurchase any shares of our common stock beneficially owned by Linos on the effective date of his termination at a per share purchase price of $0.15.

 

On January 27, 2014, we issued and sold 2,250,000 shares of its common stock to Michael Linos at a purchase price of $0.15 per share.

 

Director Compensation Plan

 

On February 12, 2014, our Board of Directors (our “Board”) adopted a Director Compensation Plan (the “Director Plan”) pursuant to which the independent directors of our Board will receive the following upon initial appointment or election to our Board:

 

An option to purchase 150,000 shares of our common stock, at an exercise price equal to the closing bid price on the date immediately prior to the appointment date; and subject to accelerated vesting upon a change of control of our company.
   
A cash payment of $5,000.

 

In addition, under the Director Plan, each independent director serving on our Board of will receive the following upon each annual anniversary of the date he or she was initially appointed or elected date to our Board:

 

An option to purchase 75,000 shares of our common stock, at an exercise price equal to the closing bid price on the date immediately prior to the anniversary date; and subject to accelerated vesting upon a change of control of our company.
   
A cash payment of $5,000.

 

49
 

  

Mark Walsh

 

As provided by the Director Plan, at the date of his appointment to the Board of Directors on February 12, 2014, Mark Walsh received a cash payment and was issued an option to purchase 150,000 shares of our common stock under our 2011 Stock Incentive Plan (the “Walsh Option”). The Walsh Option will vest over a period of 4 years, subject to Walsh’s continued employment. Twenty-five percent (25%) of shares underlying the Walsh Option will vest on February 12, 2015, and then 1/36 of the shares underlying the Walsh Option will vest each month thereafter until fully vested. Upon a change of control, any unvested portion of the Walsh Option will immediately vest in full.

 

Executive Officers

 

On December 2, 2013, our Board appointed Barbara Crofts as our Chief Financial Officer. Ms. Crofts does not currently have a written employment agreement but has been offered a salary at the rate of $144,000 per year and issued options to purchase 250,000 shares of our common stock under the 2011 Plan vesting over four years. Upon a change of control, any unvested portion of the option will immediately vest in full.

 

On January 7, 2014, our Board of Directors appointed Brad Eisenstein as our Chief Operating Officer. Prior to his appointment, beginning November 5, 2013, Eisenstein was providing operations and administrative services to us as a consultant during which time he received an aggregate cash compensation of $33,000 and warrants to purchase 35,000 shares of our common stock at an exercise price of $0.30 per share. Mr. Eisenstein receives a base salary of $184,000. Mr. Eisenstein was granted an option to purchase 750,000 shares of common stock under our 2011 Plan. Subject to the terms of a Stock Option Agreement, the option is exercisable over a term of 10 years at an exercise price of $0.12 per share, which is equal to the grant-date closing price of our common stock. The option will vest over a period of 4 years, subject to Mr. Eisenstein’s continued employment. Twenty-five percent (25%) of shares underlying the option will vest on the first anniversary of the grant date, and then 1/36 of the shares underlying the option will vest each month thereafter until fully vested. Upon a change of control, any unvested portion of the option will immediately vest in full.

 

Employment Agreement with Konstantin Wilms

 

On June 28, 2013, we entered into an employment agreement with Konstantin Wilms, who served as our Chief Architect until his resignation in December of 2013. The employment agreement provided for a minimum salary of $160,200 per annum, which amount was required to be increased by a minimum of 5% within 60 days of the date we achieved a cash and modified accounts receivable level of $3.5 million. Mr. Wilms was entitled to an annual bonus target opportunity equal to $10,000 upon achievement of certain performance measures on a quarterly basis, and standard health and other benefits. The employment agreement included a provision relating to the protection of confidential information, a covenant by the officer to work and reside in Orange County, California, a non-competition covenant during the term of his employment and a 12-month non-solicitation covenant. Under the employment agreement, if Mr. Wilms’ employment is terminated by him for good reason, which includes, (a) a material change in the terms and conditions of his employment, (b) a change in the principal place of employment materially increasing his commute time, or (c) any other event that is a functional equivalent of an involuntary termination and which falls within the safe-harbor provisions related to termination for good reason set forth in the regulations implementing Section 409A of the Internal Revenue Code, he was entitled to a severance benefit equal to his base salary and health benefits for one year. Under the terms of his employment agreement, if Mr. Wilms was terminated by us without cause, he was entitled to a severance benefit equal to his base salary and health benefits for one year. He was not entitled to any severance if his employment is terminated at any time by us with cause or by him without good reason. The employment agreement also includes a provision under which Mr. Wilms’ stock options granted after May 31, 2013 automatically accelerate upon a change of control, other than the then proposed merger with Broadcast. Mr. Wilms was resigned without good cause on December 3, 2013.

 

50
 

 

Escrow and Repurchase Agreement

 

On June 28, 2013, we granted incentive stock options to purchase 600,000 shares of our common stock to each of John Walpuck and Konstantin Wilms . The options were to vest over 30 months, with one-third becoming exercisable every ten months. Both Mr. Walpuck and Mr. Wilms served as our executive officers until their resignation in December 2013 prior to the vesting of any of the options. Also on June 28, 2013, we entered into an Escrow and Repurchase Agreement with Steve Smith and Tim Napoleon under which Messrs. Smith and Napoleon agreed to contribute 600,000 shares of our stock to AllDigital, subject to the vesting of the incentive stock option grants to Mr. Walpuck and Mr. Wilms. As a result of the forfeiture of the options of Mr. Walpuck and Mr. Wilms in connection with their resignations, Mr. Smith and Mr. Napoleon were not required to contribute any shares under the terms of the Escrow and Repurchase Agreement.

 

Item 14. Principal Accounting Fees and Services

 

The following table presents the aggregate fees paid by us for professional audit services rendered by Rose, Snyder & Jacobs LLP for the years ended December 31, 2013 and 2012, and professional tax services rendered by Squar, Milner, Peterson, Miranda & Williamson, LLP for the year ended December 31, 2013 and John Balisy and Company for the year ended December 31, 2012.

 

   2013   2012 
Audit Fees  $63,850   $50,000 
Audit-Related Fees   -    1,750 
Tax Fees   13,780    8,010 
           
Total  $77,630   $59,760 

 

Audit Fees. Audit Fees consist of amounts billed for professional services rendered for the audit of our annual consolidated financial statements included in our Annual Report on Forms 10-K, and reviews of our interim consolidated financial statements included in our Quarterly Reports on Forms 10-Q and related matters.

 

Audit-Related Fees. Audit-Related Fees consist of fees billed for professional services that are reasonably related to the performance of the audit or review of our consolidated financial statements but are not reported under “Audit Fees.”

 

Tax Fees. Tax Fees consist of fees billed for professional services for tax compliance activities, including the preparation of federal and state tax returns and related compliance matters.

 

Our Board of Directors has determined that all non-audit services provided by Rose, Snyder & Jacobs LLP were compatible with maintaining that firm’s audit independence.

 

The Board of Directors, functioning as the audit committee, has established pre-approval policies and procedures requiring that the Board of Directors, functioning as the audit committee, approve in advance any engagement of the independent auditors to render audit or non-audit services. As a result, all engagements during 2013 and 2012 of the independent auditors to render audit or non-audit services were approved by the Board of Directors, functioning as the audit committee.

 

51
 

 

PART IV

 

Item 15. Exhibits, Financial Statements Schedules

 

(a) Documents Filed

 

1. Financial Statements. The following Consolidated Financial Statements of the company and Auditors’ report are filed as part of this Annual Report on Form 10-K:

 

Report of Independent Registered Public Accounting Firm
   
Consolidated Balance Sheets for the periods ended December 31, 2013 and 2012
   
Consolidated Statements of Operations for the periods ended December 31, 2013 and 2012
   
Consolidated Statements of Cash Flows for the periods ended December 31, 2013 and 2012
   
Consolidated Statement of Stockholders Equity as of December 31, 2013
   
Notes to the Consolidated Financial Statements

 

2. Financial Statements Schedule. Not applicable.

 

3. Exhibits. The information required by this item is set forth on the exhibit index that follows.

 

52
 

 

Index to Exhibits

 

        Where Located
Exhibit
Number
  Description#   Form   File
Number
  Exhibit
Number
  Filing
Date
  Filed
Herewith
                         
2.1   Agreement and Plan of Merger dated July 29, 2011 among AllDigital, Inc., AllDigital Acquisition Corp. and the Registrant   8-K   333-141676   2.1   8/5/2011    
                         
3.1   Articles of Incorporation, as amended   8-K   333-141676   3.1   8/25/2011    
                         
3.2   Amended and Restated By-laws   8-K   333-141676   3.1   7/2/2013    
                         
4.1   Form of Common Stock Certificate   SB-2   333-141676   4.1   3/30/2007    
                         
10.1   Form of Series 2011A Warrant   8-K   333-141676   4.1   8/5/2011    
                         
10.2   Form of Series 2011B Warrant   10-Q   333-141676   4.3   11/14/2011    
                         
10.3   Form of Series 2011C Warrant   10-Q   333-141676   4.4   11/14/2011    
                         
10.4   Amended and Restated 2011 Stock Option Plan*   S-8   333-179385     2/6/2011    
                         
10.5   Form of Stock Option Agreement*   8-K   333-141676   4.3   8/5/2011    
                         
10.6   Form of Employment Agreement dated June 28, 2013 between the Registrant and each of Summers, Smith and Napoleon*   8-K   333-141676   10.5   7/2/2013    
                         
10.7   Employment Agreement, dated June 28, 2013, between the Registrant and John Walpuck*   8-K   333-141676   10.4   7/2/2013    
                         
10.8   Master Lease Agreement between the Registrant and Technology Finance Corporation   8-K/A   333-141676   10.3   8/29/2011    
                         
10.9   Lease Schedule to Master Lease Agreement with Technology Finance Corporation dated March 29, 2011   8-K/A   333-141676   10.3.1   8/29/2011    
                         
10.10  

Lease Schedule to Master Lease Agreement with Technology Finance Corporation dated April 8, 2011

 

  8-K/A   333-141676   10.3.2   8/29/2011    

 

53
 

 

        Where Located
Exhibit
Number
  Description#   Form   File
Number
  Exhibit
Number
  Filing
Date
  Filed
Herewith
                         
10.11  

Standard Industrial/Commercial Multi-Tenant Lease — Net American Industrial Real Estate Association dated August 25, 2009 between the Registrant Olen Commercial Realty Corp.

  8-K/A   333-141676   10.4   8/29/2011    
                         
10.12   Executive Search Agreement between the Registrant and John C. Wallin dated May 19, 2011   8-K/A   333-141676   10.5   8/29/2011    
                         
10.13   Agreement and Plan of Merger and Reorganization, dated as of January 6, 2012, between the Registrant and Broadcast International, Inc. and Alta Acquisition Corporation   8-K   333-141676   2.1   1/7/2013    
                         
10.14   Form of Voting Agreement, dated January 6, 2013, between the Registrant and certain stockholders of Broadcast International, Inc.   8-K   333-141676   10.1   1/7/2013    
                         
10.15   Professional Services Agreement dated January 6, 2013 with Broadcast International, Inc.   8-K   333-141676   10.3   1/7/2013    
                         
10.16   First Amendment to Agreement and Plan of Merger, dated as of April 9, 2013, between the Registrant and Broadcast International, Inc. and Alta Acquisition Corporation   10-Q   333-141676   10.1   8/13/2013    
                         
10.17   Second Amendment to Agreement and Plan of Merger, dated as of June 30, 2013, between the Registrant and Broadcast International, Inc. and Alta Acquisition Corporation   8-K   333-141676   10.1   7/2/2013    

 

54
 

 

        Where Located
Exhibit
Number
  Description#   Form   File
Number
  Exhibit
Number
  Filing
Date
  Filed
Herewith
                         
10.18   Third Amendment to Agreement and Plan of Merger, dated as of August 26, 2013, between the Registrant and Broadcast International, Inc. and Alta Acquisition Corporation   8-K   333-141676   10.1   8/28/2013    
                         
10.19   Employment Agreement, dated June 28, 2013, between the Registrant and Konstantin Wilms*   8-K   333-141676   10.2   7/2/2013    
                         
10.20   Escrow and Contribution Agreement, dated June 28, 2013among the Registrant, the Stephen James Smith Trust dated 10/24/02, Tim Napoleon and Parr Brown Gee & Loveless, PC   8-K   333-141676   10.3   7/2/2013    
                         
10.21   Director Compensation Plan*                   X
                         
10.22   Offer Letter between the Registrant and Brad Eisenstein*   8-K   333-141676   10.1   1/9/2014    
                         
10.23   Offer Letter between the Registrant and Barbara Crofts                   X
                         
10.19   Employment Agreement between the Registrant and Michael Linos*   8-K   333-141676   10.1   1/31/2014    
                         
10.20   Form of Convertible Promissory Notes issued in August and September 2013   8-K   333-141676   10.2   8/28/2013    
                         
14   Code of Ethics and Conduct                   X
                         
21   Subsidiaries of the Registrant                   X
                         
23   Consent of Independent Registered Public Accounting Firm                   X
                         
31.1   Section 302 Certification of Chief Executive Officer                   X
                         
31.2   Section 302 Certification of Chief Financial Officer                   X
                         
32.1   Section 906 Certification of Chief Executive Officer                   X
                         
32.2   Section 906 Certification of Chief Financial Officer                   X
                         
101.INS   XBRL Instance Document**                    
101.SCH   XBRL Taxonomy Extension Schema**                   X
101.CAL   XBRL Taxonomy Extension Calculation Linkbase**                   X
101.DEF   XBRL Taxonomy Extension Definition Linkbase **                   X
101.LAB   XBRL Taxonomy Extension Label Linkbase**                   X
101.PRE   XBRL Taxonomy Extension Presentation Linkbase**                   X

 


* A contract, compensatory plan or arrangement to which a director or executive officer is a party or in which one or more directors or executive officers are eligible to participate.

** 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.

# Certain of the agreements filed as exhibits contain representations and warranties made by the parties thereto. The assertions embodied in such representations and warranties are not necessarily assertions of fact, but a mechanism for the parties to allocate risk. Accordingly, investors should not rely on the representations and warranties as characterizations of the actual state of facts or for any other purpose at the time they were made or otherwise.

 

55
 

 

ALLDIGITAL HOLDINGS, INC. AND SUBSIDIARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

    Page
     
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   F-1
     
CONSOLIDATED FINANCIAL STATEMENTS    
     
Consolidated Balance Sheets as of December 31, 2013 and 2012   F-2
     
Consolidated Statements of Operations for the Years Ended December 31, 2013 and 2012   F-3
     
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013 and 2012   F-4
     
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2013 and 2012   F-6
     
Notes to Consolidated Financial Statements   F-7

 

56
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

AllDigital Holdings, Inc.

 

We have audited the accompanying consolidated balance sheets of AllDigital Holdings, Inc. (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of AllDigital Holdings, Inc. as of December 31, 2013 and 2012, and the consolidated results of its operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Rose, Snyder & Jacobs LLP

 

Encino, California

 

March 28, 2014

 

F-1
 

 

ALLDIGITAL HOLDINGS, INC

CONSOLIDATED BALANCE SHEETS

 

   December 31, 
   2013   2012 
ASSETS          
           
Current Assets          
Cash and cash equivalents  $1,300,932   $462,761 
Accounts receivable, net of allowance of $10,000 and $0   454,733    122,064 
Prepaid expenses and other current assets   82,324    53,362 
Total current assets   1,837,989    638,187 
Property and Equipment, net   86,648    80,311 
Other Assets          
Deposits   11,164    11,164 
Intangibles – domain name   22,000    19,750 
Total assets  $1,957,801   $749,412 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)          
Current Liabilities          
Accounts payable and accrued expenses  $563,889   $520,308 
Deferred revenue   355,770    347,773 
Total current liabilities   919,659    868,081 
           
Commitments and Contingencies (Note 6)          
           
Stockholders’ Equity (Deficit)          
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, 33,231,977 and 25,440,728 issued and outstanding, respectively   33,233    25,441 
Additional paid-in capital   3,978,462    2,277,132 
Accumulated deficit   (2,973,553)   (2,421,242)
Total stockholders’ equity (deficit)   1,038,142    (118,669)
           
Total liabilities and stockholders’ equity (deficit)  $1,957,801   $749,412 

 

See accompanying notes to these consolidated financial statements.

 

F-2
 

 

ALLDIGITAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   Year Ended December 31,
   2013   2012 
Net sales  $4,327,227   $3,307,167 
Cost of sales   2,505,925    2,486,388 
Gross profit   1,821,302    820,779 
Operating expenses          
Selling, marketing, and advertising   537,496    600,789 
General and administrative   1,898,493    1,587,445 
           
Total operating expenses   2,435,989    2,188,234 
           
Operating loss   (614,687)   (1,367,455)
           
Other income (expense)          
Interest income   728    1,237 
Interest expense   (636)   (112)
Other income   63,884    195,521 
           
Total other income (expense)   63,976    196,646 
Loss before provision for income taxes   (550,711)   (1,170,809)
Provision for income taxes   1,600    2,400 
Net loss  $(552,311)  $(1,173,209)
Basic and diluted net loss per share  $(0.02)  $(0.05)
Basic and diluted weighted-average shares outstanding   26,642,459    25,405,892 

 

See accompanying notes to these consolidated financial statements.

 

F-3
 

 

ALLDIGITAL HOLDINGS, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Years Ended December 31,
   2013   2012 
Cash Flows From Operating Activities          
Net loss  $(552,311)  $(1,173,209)
Adjustments to reconcile net profit (loss) to net cash provided by (used in) operating activities:          
Depreciation and amortization   55,370    40,812 
Stock based compensation   223,122    271,604 
Warrants issued for services   -    2,550 
Provision for doubtful accounts   10,000    34,072 
Changes in operating assets and liabilities:          
Accounts receivable   (342,669)   (46,580)
Deferred costs        11,680 
Prepaid expenses and other current assets   (28,962)   (14,363)
Deferred revenue   7,997    134,992 
 Accounts payable and accrued expenses   43,581    231,006 
Net cash provided by (used in) operating activities   (583,872)   (507,436)
           
Cash Flows From Investing Activities          
Purchase of property and equipment   (61,707)   (32,656)
Payment for intangible – domain name   (2,250)   (8,500)
Net cash used in investing activities   (63,957)   (41,156)
           
Cash Flows From Financing Activities          
Proceeds from issuance of notes payable – bridge   1,485,000    - 
Issuance of common stock   -    - 
Proceeds from exercise of stock options   1,000    12,500 
Net cash provided by financing activities   1,486,000    12,500 
Net Increase (Decrease) in Cash and Cash Equivalents   838,171    (536,092)
Cash and Cash Equivalents – beginning of year   462,761    998,853 
Cash and Cash Equivalents – end of year  $1,300,932   $462,761 
           
Supplemental disclosures of cash flow information:          
Interest paid  $636   $112 
Income taxes paid  $1,600   $2,400 

 

See accompanying notes to these consolidated financial statements.

 

F-4
 

 

SUPPLEMENTAL INFORMATION OF NONCASH INVESTING AND FINANCING ACTIVITIES:

 

During the twelve months ended December 31, 2013, the Company entered into the following noncash transactions:

 

Issued 7,787,249 shares of common stock due to the conversion of $1,485,000 of Convertible Promissory Notes.

 

During the twelve months ended December 31, 2012, the Company entered into the following noncash transactions:

 

Issued warrants to purchase 15,000 shares of common stock for services valued at $2,550.

 

See accompanying notes to these consolidated financial statements.

 

F-5
 

 

ALLDIGITAL HOLDINGS, INC

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

 

   Preferred Stock   Common Stock   Additional   Accumulated     
   Shares   Amount   Shares   Amount   Paid-in Capital   Deficit   Total 
                             
BALANCE – December 31, 2011   -   $-    25,390,728   $25,391   $1,990,528   $(1,248,033)  $767,886 
                                    
Warrants issued for services   -    -    -    -    2,550    -    2,550 
Shares issued for exercise of options             50,000    50    12,450    -    12,500 
Stock based compensation   -    -    -    -    271,604    -    271,604 
Net loss   -    -    -    -    -    (1,173,209)   (1,173,209)
BALANCE – December 31, 2012   -   $-    25,440,728   $25,441   $2,277,132   $(2,421,242)  $(118,669)
                                    
Shares issued for exercise of options   -    -    4,000    4    996    -    1,000 
Conversion of Convertible Notes Payable   -    -    7,787,249    7,788    1,477,212    -    1,485,000 
Stock based compensation   -    -    -    -    223,122    -    223,122 
Net loss   -    -    -    -    -    (552,311)   (552,311)
BALANCE – December 31, 2013   -   $-    33,231,977   $33,233   $3,978,462   $(2,973,553)  $1,038,142 

 

See accompanying notes to these consolidated financial statements.

 

F-6
 

 

ALLDIGITAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - ORGANIZATION AND BUSINESS

 

AllDigital, Inc. (“AllDigital”) was incorporated in the State of California on August 3, 2009, with the primary purpose of providing digital broadcasting solutions dedicated to managing the complex pairing of cloud-based digital media and digital services with Internet-connected devices.

 

Our digital broadcasting solutions consist of the technology and services required to develop, operate and support a variety of complex digital service and digital broadcasting workflow implementations across a diverse market of devices. We accomplish this by enabling, and maximizing the performance of, the cloud-based storage, processing, and transit of digital media and digital services to multiple devices simultaneously. Our business model targets a variety of entities and existing providers of digital services that need to develop, operate and support a cost-effective, high quality and secure digital service, through a digital broadcasting workflow, across a large and diverse market of devices.

 

Our ability to successfully generate future revenues is dependent on a number of factors, including: (i) the availability of capital to continue to develop, operate and maintain our proprietary AllDigital Cloud platform and services, (ii) the ability to commercialize our portfolio of digital broadcasting solutions to media and entertainment companies, enterprises, government agencies, and nonprofits, 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.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require 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 $3.0 million as of December 31, 2013. The Company’s business strategy includes attempting to increase its revenue through investing further in its product development and sales and marketing efforts, and expanding into international markets. The Company intends to finance this portion of its business strategy by using its current working capital resources and cash flows from operations. Management believes its cash flows from operations, together with its liquid assets will be sufficient to fund ongoing operations through at least December 31, 2014. The Company’s business strategy also includes the possibility of engaging in strategic acquisitions or otherwise taking steps to more rapidly increase its growth rates.

 

F-7
 

 

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, as well as monthly recurring charges for our 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.

 

F-8
 

 

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 $10,000 at December 31, 2013, and $0 at December 31, 2012. 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 December 31, 2013, the Company had 3,892,274 warrants and 3,065,917 options that could potentially increase the number of shares outstanding. At December 31, 2012, the Company had 3,892,274 warrants and 2,070,597 options that could potentially increase the number of shares outstanding. 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.

 

F-9
 

 

Assets subject to this classification at December 31, 2013, and December 31, 2012, 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

 

We account for income taxes in accordance with ASC 740-10, Income Taxes. We recognize 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. We record 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. We classify interest and penalties as a component of interest and other expenses. To date, we have not been assessed, nor have we paid, any interest or penalties.

 

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
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 twelve months ended December 31, 2013 and 2012.

 

F-10
 

 

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. We use the Black-Scholes option valuation model to estimate the fair value of our 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. We use historical data among other information to estimate the expected price volatility and the expected forfeiture rate.

 

Recent Accounting Pronouncements

 

In July 2013, the FASB issued ASU 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 will adopt this guidance effective January 1, 2014. The Company does not expect the adoption of ASU 2013-11 to significantly impact its consolidated financial statements.

 

NOTE 3 - PROPERTY AND EQUIPMENT

 

Property and equipment as of December 31, 2013, and December 31, 2012, consisted of the following:

 

   December 31, 2013   December 31, 2012 
         
Furniture and fixtures  $13,568   $11,618 
Computer equipment   139,584    80,771 
Signs   2,050    2,050 
Software   45,833    45,833 
Less accumulated depreciation and amortization   (114,387)   (59,961)
           
   $86,648   $80,311 

 

F-11
 

 

NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses as of December 31, 2013, and December 31, 2012, consisted of the following:

 

   December 31, 2013   December 31, 2012 
         
Accounts payable  $316,096   $252,793 
Accrued personnel costs   188,866    155,243 
Accrued professional fees   6,800    45,847 
Other   52,127    66,425 
           
   $563,889   $520,308 

 

NOTE 5 - NOTES PAYABLE

 

The Company offered and sold an aggregate of $1,485,000 in Convertible Promissory Notes (the “Notes”) in August and September, 2013. The Notes provided that, if the Merger Agreement (discussed further in Note 9 below) was terminated prior to closing, the Notes would automatically convert into shares of common stock of the Company. Upon the November 4, 2013 occurrence of termination of the Merger Agreement, the Notes were converted into 7,787,249 shares of common stock of the Company.

 

The Company evaluated the embedded conversion feature of the Notes pursuant to ASC 470, “Debt”, ASC 480, “Distinguishing Liabilities from Equity”, and ASC 815, “Derivatives and Hedging”. In performing this evaluation, the Company determined that the embedded conversion feature did not meet the criteria of a derivative liability pursuant to ASC 815, as such the conversion feature was not bifurcated. In addition, the conversion feature was not assessed to be beneficial, as such there was no note discount recorded on the accompanying financial statements.

 

NOTE 6 - COMMITMENTS AND CONTINGENCIES

 

Lease Commitments

 

In 2011, the Company entered into a Lease Agreement for office space at 220 Technology Drive, Suite 100, Irvine, California, 92618, which is used as its corporate office. The initial three-year term expires December 31, 2014, and lease renewal is possible upon mutual agreement of the parties. Rent for the remaining lease term is $10,717 per month. Rent expense for the twelve months ended December 31, 2013 and 2012 was $129,374 and $128,997, respectively.

 

The Company has entered into various non-cancelable operating leases for computer servers and phone equipment. At December 31, 2013, future minimum rental commitments under these operating leases are:

 

Year ended     
December 31,     
      
2014   $237,920 
2015    67,985 
2016    54,465 
Total   $360,370 

 

F-12
 

 

Legal Matters

 

The Company is involved from time to time in various legal proceedings in the normal conduct of its business. In the opinion of management, the disposition of all such proceedings is not expected to have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

 

NOTE 7 - STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

Our 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 stockholder 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 our Board of Directors could adversely affect the rights of holders of our 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 our common stock.

 

Common Stock

 

The exercise of stock options resulted in issuance of 4,000 and 50,000 shares of common stock in January 2013 and September 2012, respectively.

 

As referred to in Note 5 above, 7,787,249 shares of common stock of the Company were issued upon conversion of convertible promissory notes (the “Notes” as earlier defined).

 

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.

 

F-13
 

 

During the twelve months ended December 31, 2013, the Company issued options to purchase 2,474,500 shares of common stock under the Plan to certain employees, 4,000 shares of common stock were issued upon exercise of options, and options to purchase 431,000 shares of common stock were forfeited by employees who resigned from the Company. At December 31, 2013, there were options to purchase 6,649,500 shares of common stock outstanding under the Plan.

 

As of December 31, 2013, there were 1,796,500 shares of common stock available for grant under the Plan.

 

A summary of the status of the options granted is as follows:

 

   Shares   Weighted-average
exercise price
   Average
remaining contractual
term- years
   Aggregate
Intrinsic value
 
                 
Outstanding, December 31, 2011   4,350,000   $0.25    9.63    - 
Granted   1,101,000   $0.43    9.32    - 
Exercised   (50,000)  $0.25    9.63      
Forfeited   (791,000)               
Outstanding, December 31, 2012   4,610,000   $0.26    8.70    - 
Granted   2,474,500   $0.15    9.57    - 
Exercised   (4,000)  $0.25    8.26      
Forfeited   (431,000)  $           
Outstanding, December 31, 2013   6,649,500   $0.24    8.39    - 
Exercisable: December 31, 2013   3,065,917   $0.25    7.67    - 
Expected to vest: December 31, 2013   1,723,444   $0.21    9.19    - 

 

As of December 31, 2013, there was $331,816 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over the remaining weighted-average vesting period of 3.16 years. The total fair value of options vested during the twelve months ended December 31, 2013 was $212,614. The aggregate intrinsic value of the options expected to vest in the future was $0.

 

Stock-based compensation expense for the years ended December 31, 2013 and 2012 was $223,122 and $271,604, respectively.

 

The fair value of the options granted by AllDigital Holdings, Inc., for the years ended December 31, 2013 and 2012 is estimated at $365,495 and $446,550, respectively.

 

F-14
 

 

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 our 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:

 

Year Ended December 31,
   2013   2012 
Dividend yield        
Risk-free interest rate   1.66% to 3.04%    1.49% to 2.00% 
Volatility   196%   196%
Expected life (in years)   6.5    6 – 6.5 
Weighted average grant date fair value per share of options granted  $0.15   $0.41 

 

The dividend yield is zero as the Company currently does not pay a dividend.

 

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 outstanding is as follows:

 

   Shares   Weighted-average
exercise price
 
         
Outstanding – December 31, 2011   3,892,274   $0.49 
Granted   -    - 
Forfeited   -    - 
Exercised   -    - 
Outstanding – December 31, 2012   3,892,274   $0.49 
Forfeited   -    - 
Exercised   -    - 
Outstanding – December 31, 2013   3,892,274   $0.49 
           
Exercisable – December 31, 2013   3,892,274   $0.49 

 

The following table summarizes information about warrants outstanding at December 31, 2013:

 

Outstanding   Exercisable
Range of
exercise
prices
   Number of
warrants
outstanding
   Weighted-average
remaining
contractual life
(in years)
   Weighted-average
exercise price
   Number of
warrants
exercisable
   Weighted-average
exercise price
 
$0.25    150,000    3.66   $0.25    150,000   $0.25 
$0.275    60,000    3.58   $0.275    60,000   $0.275 
$0.50    3,682,274    1.68   $0.50    3,682,274   $0.50 
 $0.25 - $0.50    3,892,274    1.78   $0.49    3,892,274   $0.49 

 

F-15
 

 

NOTE 8 - INCOME TAXES

 

The components of the income tax provision for the years ended December 31, 2013 and 2012 were as follows:

 

   December 31,
   2013   2012 
Current  $1,600   $2,400 
Deferred   -    - 
Total  $1,600   $2,400 

 

Income tax expense (benefit) for the years ended December 31, 2013 and 2012 differed from the amounts computed applying the federal statutory rate of 34% to pre-tax income as a result of:

 

   December 31,
   2013   2012 
         
Computed “expected” tax provision (benefit)  $(187,200)  $(398,000)
Income taxes resulting from expenses not deductible for tax purposes   5,600    4,700 
Stock compensation   75,900    92,300 
Change in the valuation allowance for deferred tax assets net of return to provision adjustment   106,300    301,600 
State and local income taxes, net of tax benefit   1,000    1,800 
Total  $1,600   $2,400 

 

Significant components of the Company’s deferred tax assets and liabilities for federal income taxes at December 31, 2013 and 2012 consisted of the following:

 

   December 31,
   2013   2012 
Current deferred tax assets          
Accrued expenses  $44,400   $30,400 
Deferred compensation   11,000    18,100 
Other   3,200    700 
Valuation allowance   (58,600)   (49,200)
Net current deferred tax assets  $-   $- 
           
Long-term deferred tax assets          
Net operating loss carryforward  $644,700   $542,000 
Depreciation and amortization   13,700    300 
Valuation allowance   (658,400)   (542,300)
Net deferred tax assets  $-   $- 

 

F-16
 

 

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 December 31, 2013 and December 31, 2012, the valuation allowance for deferred tax assets totaled approximately $717,000 and $591,000, respectively. For the year ended December 31, 2013, the increase in the valuation allowance was $125,000.

 

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 December 31, 2013, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $1.6 million and $1.5 million, respectively, which expire through 2033. 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 December 31, 2013 and December 31, 2012, the Company had no accrual for the payment of interest or penalties. For Federal purposes, the years subject to examination are 2010-2013. For California purposes, the years subject to examination are 2009-2013.

 

NOTE 9 - SIGNIFICANT AGREEMENTS AND CONCENTRATIONS

 

Terminated Merger Agreement

 

On January 6, 2013, the Company entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Broadcast International, Inc., a Utah corporation (“Broadcast”) and Alta Acquisition Corporation, a Nevada corporation and wholly-owned subsidiary of Broadcast International (“Merger Sub”).

 

On November 4, 2013, the Merger Agreement was terminated. Broadcast sent notice of termination without cause following the occurrence of the October 31, 2013 “end date” without closing having occurred. The Company rejected the purported termination under this provision. The Company then sent a notice terminating the Merger Agreement for cause due to Broadcast’s breach of the non-solicitation covenants in the Merger Agreement, which the Company believes triggers a termination fee of $100,000 and 4% of the equity of Broadcast on a non-diluted basis, and due to various other misrepresentations and breaches. The Company has reserved the right to pursue damages for breach, in addition to any applicable termination fee, from Broadcast.

 

As referred to in Note 5 above, during August and September, 2013, the Company sold an aggregate of $1,485,000 in convertible promissory notes to individual and institutional investors. The Notes provided that upon the earlier to occur of (a) November 30, 2013, if the Merger has not closed, or (b) the termination of the Merger Agreement, amounts owed under the Notes automatically converted into shares of common stock of the Company at a conversion price equal to the quotient of $6,750,000, divided by number of shares of common stock of the Company issued and outstanding.

 

F-17
 

 

As a result of a termination of the Merger Agreement prior to closing, on November 4, 2013, 7,787,249 shares of common stock were issued, and the Notes aggregating $1,485,000 were canceled.

 

Major Customers

 

At December 31, 2013 and December 31, 2012, two and three customers accounted for 71% and 82% of the outstanding accounts receivable, respectively.

 

For the twelve months ended December 31, 2013 and 2012, four and three customers accounted for 82% and 67% of total revenue, respectively.

 

Major Vendors

 

At December 31, 2013 and December 31, 2012, three and four vendors accounted for 62% and 85% of the outstanding accounts payable, respectively.

 

For the twelve months ended December 31, 2013 and 2012, four and four vendors accounted for 17% and 75% 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 (“FDIC”). 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 December 31, 2013, the Company’s uninsured cash was $857,757.

 

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 twelve months ended December 31, 2013, were in the United States and Canada.

 

NOTE 11 - SUBSEQUENT EVENTS

 

In January through March, 2014, the Company issued options to purchase up to an aggregate of 2,802,500 shares of common stock to employees and the Company’s independent director.

 

On January 27, 2014, the Company issued and sold 2,250,000 shares of its common stock to an Executive Officer and Director at a purchase price of $0.15 per share. The Shares were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act and Rule 506 promulgated by the Securities and Exchange Commission thereunder.

 

F-18
 

 

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.
       
March 31, 2014   By: /s/ Paul Summers
Date     Paul Summers,
      Chief Executive Officer, Director
       
March 31, 2014   By: /s/ Barbara Crofts
Date     Barbara Crofts
      Chief Financial Officer

 

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POWER OF ATTORNEY AND ADDITIONAL SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Each person, whose signature to this Form 10-K appears below, hereby constitutes and appoints Paul Summers and Barbara Crofts and each of them, as his true and lawful attorney-in-fact and agent, with full power of substitution, to sign on his behalf individually and in the capacity stated below and to perform any acts necessary to be done in order to file all amendments and post-effective amendments to this Form 10-K, and any and all instruments or documents filed as part of or in connection with this Form 10-K or the amendments thereto and each of the undersigned does hereby ratify and confirm all that said attorney-in-fact and agent, or his substitutes, shall do or cause to be done by virtue hereof.

 

Signature   Title   Date
         
/s/ Paul Summers   Chief Executive Officer, President and Chairman   March 31, 2014
Paul Summers   (Principal Executive Officer)    
         
/s/ Barbara Crofts   Chief Financial Officer   March 31, 2014
Barbara Crofts   (Principal Financial and Accounting Officer)    
         
/s/ Timothy Napoleon   Chief Strategist   March 31, 2014
Timothy Napoleon        
         
/s/ Stephen Smith   Director and Vice President   March 31, 2014
Stephen Smith        
         
/s/ Brad Eisenstein   Chief Operating Officer   March 31, 2014
Brad Eisenstein        
         
/s/ Michael Linos   Executive Vice President Sales and a Director   March 31, 2014
Michael Linos        
         
/s/ Mark Walsh   Director   March 31, 2014
Mark Walsh        
         
/s/ David Williams   Director   March 31, 2014
David Williams        

 

Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act.

 

No annual reports or proxy materials have been sent to security holders of AllDigital Holdings, Inc. To the extent such materials are furnished to security holders subsequent to the filing of this Annual Report on Form 10-K, AllDigital Holdings, Inc. shall furnish copies of such material to the Commission when it is sent to security holders.

 

58
 

 

EXHIBITS FILED WITH THIS REPORT

 

Exhibit
Number
  Description
10.21   Director Compensation Plan
10.23   Offer Letter between the Registrant and Barbara Crofts
14   Code of Ethics and Conduct
21   Subsidiaries of the Registrant
23   Consent of Independent Registered Public Accounting Firm
31.1   Section 302 Certification of Chief Executive Officer
31.2   Section 302 Certification of Chief Financial Officer
32.1   Section 906 Certification of Chief Executive Officer
32.2   Section 906 Certification of Chief Financial Officer
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.

 

59