ITEM 1A. RISK FACTORS
RISK FACTORS
Certain factors may have a material adverse effect on our business, financial condition, and results of operations. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this Annual Report, including our consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks actually occurs, our business, financial condition, results of operations, and future prospects could be materially and adversely affected. In that event, the trading price of our common stock could decline, and you could lose part or all of your investment.
Summary Risk Factors
The following summarizes the risks and uncertainties that could materially adversely affect our business, financial condition, results of operation and stock price. You should read this summary together with the more detailed description of each risk factor contained below.
Risks Related to Our Company
We are transitioning from being focused on end-to-end consumer product innovation, development, and commercialization to being focused on digital media and content technologies innovation, development, and commercialization, and we may not be able to successfully implement our business plans.
We have a history of losses, anticipate increases in our operating expenses in the future, and may not achieve or sustain profitability.
The loss of key personnel including our Chief Executive Officer and President, Lisa King, our Chief Operating Officer, Stephen Garrow, and our Chief Financial Officer, Philip Jones, and one of the managers of ZVV, Theodore Farnsworth, could adversely affect our business.
Our growth strategy includes pursuing opportunistic acquisitions of promising companies, technologies and other assets, and we may not find suitable acquisition candidates or successfully operate or integrate any business that we may acquire.
We may not realize the anticipated benefits of acquisitions or investments including our investment in ZVV and Lomotif and our acquisition of AdRizer including integrating AdRizer’s technologies to monetize the content creation and distribution capabilities of Lomotif social media platform.
Our shareholders may not benefit from our planned spin-off of Cryptyde.
We may require additional financing to sustain or grow our operations and implement our business plans and such additional capital may not be available to us, or only available to us on unfavorable terms.
We have debt financing arrangements, which could have a material adverse effect on our financial health and our ability to obtain financing in the future.
Our disclosure controls and procedures have not been effective and if we fail to comply with the rules and regulations under the Sarbanes-Oxley Act, our ability to operate our business and investors’ views of us may be harmed.
Our business is subject to complex and evolving laws and regulations including those relating to privacy, data use and data protection, content, competition, safety and consumer protection, e-commerce, digital assets and other matters, many of which are subject to change and uncertain interpretation
We are increasingly dependent on information technology, and potential cyberattacks, security problems, or other disruption and expanding social media vehicles present new risks.
If we do not adequately protect our intellectual property rights, our business may be harmed.
Our consumer products business is dependent on a small number of key suppliers and customers.
The effects of health pandemics, such as the ongoing global COVID-19 pandemic, have had, and could in the future have, an adverse impact on our business and financial condition.
Risks Related to Lomotif
As of December 31, 2021, Lomotif had not generated any significant revenues and is likely to continue to experience significant net losses for the foreseeable future.
We have funded and expect to continue to fund ZVV and Lomotif with the proceeds of our financing transactions which have been and may in the future be dilutive to our stockholders.
Lomotif’s business is highly competitive, and in order to compete Lomotif may need to rapidly evolve its business model, continuously innovate its technologies or to design features that meet the expectations of its users to retain and grow its user base and business partners on the platform.
Lomotif faces risks related to third parties providing infrastructure, services, content and collaboration opportunities to Lomotif, on which it relies and with whom it does business.
Lomotif’s focus on user experience and acting for the long-term may conflict with the short-term operating results of its business.
Risks Related to AdRizer
We may not be able to successfully integrate AdRizer with our other businesses or investments such as Lomotif and Honey Badger.
The digital advertising industry is intensely competitive, and AdRizer may not be able to effectively compete against its competitors.
High customer concentration, long sales cycles and payment-related risks may subject AdRizer to significant fluctuations or declines in revenues.
To the extent the use of “third-party cookies” or other technology to uniquely identify devices is rejected by Internet users, restricted by government regulations, blocked or limited by technical changes on end users’ devices and web browsers, AdRizer’s performance may decline and AdRizer may lose advertisers.
Risks Associated with an Investment in our Common Stock
The market price of our shares has and may continue to fluctuate significantly.
A substantial number of shares of our common stock may be issued upon conversion of our outstanding convertible notes or exercise of our outstanding warrants, and such issuances and any other equity financing we may conduct may significantly dilute our stockholders and cause the price of our common stock to decline.
We may be or may become the target of securities litigation, which is costly and time-consuming to defend.
Risks Related to Our Company
We are transitioning from being focused on end-to-end consumer product innovation, development, and commercialization to being focused on digital media and content technologies innovation, development, and commercialization, and we may not be able to successfully implement our business plans or effectively manage our growth.
We were incorporated on July 18, 2017, and therefore, have a relatively limited operating history. Our traditional business was focused on end-to-end consumer product innovation, development, and commercialization. In recent years, we have transitioned to be focused on digital media and content technologies innovation, development, and commercialization. In this effort, we have acquired Honey Badger and AdRizer, invested in Lomotif through ZVV, our joint venture with ZASH, and intend to spin-off our packaging and blockchain related businesses which are not directly related to our current core business. We are still in the process of integrating our acquired or invested businesses and technologies and have a very limited history in operating our current business focused on digital media and content technologies upon which an evaluation of our business plans or performance can be made. Our business and prospects must be considered in the light of the potential problems, delays, uncertainties, and complications encountered in connection with developing new business and revenue generation models. The risks include, but are not limited to, the possibility that we will not be able to develop functional and scalable products and services, or that although functional and scalable, our products and services will not be economical to market; that our competitors market and provide or more products and services; that we are not to upgrade and our technologies to accommodate new needs and expand our offerings; or the to comply with the applicable laws and regulations for our products and services as we conduct our business and expand into new markets. Please also refer to our discussion under “Risks Related to Lomotif-” and “Risks Related to AdRizer” for additional risks specifically related to those businesses. There are no assurances that we can address these and if , we and our business, financial condition, and operating results could be materially and affected.
We operate in highly competitive markets.
We are already operating in highly competitive markets and faced with significant cost and liability challenges as well as known and unknown uncertainties, and our future growth strategy will impose significant added responsibilities on management, including the need to identify, recruit, train, and integrate additional employees and the need to manage additional relationships with various business partners including but not limited to influencers, content contributors, suppliers, publishers, advertisers, and other third parties. In addition, pursuing rapid and significant growth may strain our administrative and operational infrastructure and require us to expand our financial, development, regulatory, IT, marketing, and sales capabilities or contract with third parties to provide these capabilities for us. Our ability to manage our business and growth, as well as function as a public company, will require us to continue to improve our operational, financial and management controls, and reporting systems and procedures. The time and resources required to optimize these systems is uncertain, and failure to complete optimization in a timely and efficient manner could adversely affect our operations.
Our growth strategy involves a diverse set of initiatives .
As we execute our growth strategy, we will need to allocate our resources among different initiatives. We cannot assure you that our allocation will ultimately reflect the most profitable application of our resources. For example, we may make product and investment decisions that may not prioritize short-term financial results if we believe that the decisions will improve our financial performance over the long term. These decisions may adversely affect our business and results of operations and may not produce the long-term benefits that we expect. If we are unable to execute our growth strategy successfully, including continuing to grow the user base of the Lomotif platform and developing means to monetize the platform or, if we are otherwise unable to manage our ongoing and future growth effectively, our business, financial condition, and results of operation could be materially adversely affected.
We have a history of losses and we may never achieve profitability.
For the year ended December 31, 2021, our operations lost $80,209,777 of which approximately $43,380,758 was non-cash stock-based compensation.
At December 31, 2021, we had total current assets of $219,741,467 and current liabilities of $70,089,546 resulting in working capital of $149,651,921. At December 31, 2021 we had restricted cash in the amount of $100,000,000, which may only be released upon conversion by the holder of its convertible notes. At December 31, 2021, we had total assets of $405,142,729 and total liabilities of $271,455,687 resulting in stockholders’ equity of $133,687,042. At December 31, 2021, we had a cash and cash equivalents, including restricted cash, of $187,612,176.
The Company received proceeds of $101,029,493 from the sale of our securities through warrant exercises subsequent to December 31, 2021. Almost all of our cash has come from notes and warrants sold to a single investor and if this investor ceases to be a source of funding, there is no assurance we can obtain an equivalent source of funding.
For the year ended December 31, 2020, our operations lost $7,563,625 of which $4,623,130 was non-cash and $1,131,975 related to restructuring, severance, transaction costs and non-recurring items. At December 31, 2020, we had total current assets of $5,342,183 and current liabilities of $11,285,663 resulting in negative working capital of $5,943,480. At December 31, 2020, we had total assets of $28,028,207 and total liabilities of $14,505,506 resulting in stockholders’ equity of $13,522,701.
We expect that we will have sufficient cash to meet our working capital needs and capital requirements for the next 12 months from the date of this filing. However, given the significant costs and all the risks, challenges, and uncertainties relating to the implementation of our business plans, there is no guarantee that our efforts to integrate our recently acquired or invested businesses and technologies and expand tools, technologies, offerings, markets, and partnerships in connection with our efforts to pursue our growth strategies will generate sufficient revenues to offset our initial and ongoing costs of such initiatives, or that we will be able to achieve operational profitability.
The loss of key personnel or the inability of replacements to quickly and successfully perform in their new roles could adversely affect our business.
We depend on the leadership and experience of our relatively small number of key executive management personnel, particularly our Chief Executive Officer and President, Lisa King, our Chief Operating Officer, Stephen Garrow, and our Chief Financial Officer, Philip Jones. ZVV, our joint venture with ZASH, has depended to a great extent on the leadership of one of its managers, Theodore Farnsworth, in the acquisition and development of our Lomotif and AdRizer business units. The loss of the services of any of these key executives or any of our significant personnel could have a material adverse effect on our business and prospects, as we may not be able to find suitable individuals to replace such personnel on a timely basis or without incurring increased costs, or at all. Furthermore, if we lose or terminate the services of one or more of our key employees and advisers, or if one or more of our current or former executives or key employees joins a competitor or otherwise competes with us, it could impair our business and our ability to implement our business plan. Additionally, if we are to hire qualified replacements for our executive and other key positions in a timely fashion, our ability to execute our business plan would be . Even if we can quickly hire qualified replacements, we would expect to experience operational and during any transition. We believe that our future will depend on our continued ability to attract and retain highly skilled and qualified personnel. There is a high level of competition for experienced, personnel in our industry. Our to meet our executive staffing requirements in the future could our growth and our business.
The loss of key consultants or the inability of replacements to quickly and successfully perform in their new roles could adversely affect our business.
We depend on a variety of consultants to provide consulting services consisting of implementation of the Company’s business plan, investor relation services, introduction of potential investors, news distribution, marketing and sales. The loss of the services of any of these consultants could have a material adverse effect on our business and prospects, as we may not be able to find suitable individuals to replace such personnel on a timely basis or without incurring increased costs, or at all. Furthermore, if we lose or terminate the services of one or more of our consultants or if one or more of our consultants joins a competitor or otherwise competes with us, it could impair our business and our ability to successfully implement our business plan. Additionally, if we are unable to hire qualified replacements for our consultants in a timely fashion, our ability to execute our business plan would be harmed. Even if we can quickly hire qualified replacements, we would expect to experience operational disruptions and during any transition. We believe that our future will depend on our continued ability to attract and retain highly skilled and qualified personnel. There is a high level of competition for experienced, personnel in our industry. Our to meet our staffing requirements in the future could our growth and our business.
Our financial statements may be materially affected if our estimates prove to be inaccurate as a result of our limited experience in making critical accounting estimates.
Financial statements prepared in accordance with GAAP require the use of estimates, judgments, and assumptions that affect the reported amounts. Actual results may differ materially from these estimates under different assumptions or conditions. These estimates, judgments, and assumptions are inherently uncertain, and, if they prove to be wrong, then we face the risk that charges to income will be required. In addition, because we have a limited operating history and limited experience in making these estimates, judgments, and assumptions, the risk of future charges to income may be greater than if we had more experience in these areas. Any such charges could significantly harm our business, financial condition, results of operations, and the price of our securities. See “ Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical accounting policies — Use of estimates ” for a discussion of the accounting estimates, judgments, and assumptions that we believe are the most critical to an understanding of our business, financial condition, and results of operations.
If we fail to comply with the rules and regulations under the Sarbanes-Oxley Act, our operating results, our ability to operate our business and investors’ views of us may be harmed.
We are subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act. The Exchange Act requires that we file annual, quarterly and current reports, proxy statements, and other information. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting. Our principal executive officer and principal financial officer are required to certify that our disclosure controls and procedures are effective in ensuring that material information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. As of December 31, 2021, our Principal Executive Officer and Principal Financial and Accounting Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were not effective to provide reasonable assurance that information that it is required to disclose in reports that we file with the SEC is recorded, processed, summarized, and reported within the time periods specified by the Exchange Act rules and regulations. Our failure to maintain the effectiveness of our internal controls in accordance with the requirements of the Sarbanes-Oxley Act could have a material effect on our business. We could investor confidence in the accuracy and completeness of our financial reports, which could have an effect on the price of our common stock. In addition, our efforts to comply with the rules and regulations under the Sarbanes-Oxley or new or changed laws, regulations, and standards may differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice. Regulatory authorities may transactions in our “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ,” and if legal proceedings are initiated us, it may our business.
If we fail to manage our growth, our business and operating results could be harmed.
As we seek to advance our business plans including continuing to grow the user base of the Lomotif platform and developing means to monetize the platform, acquire and build Cryptyde’s brands that use decentralized blockchain technologies in a variety of consumer-facing industries; deploy AdRizer’s technology platform, and grow Honey Badger’s advertiser-based revenue , we will need to expand our financial, development, regulatory, IT, marketing, and sales capabilities or contract with third parties to provide these capabilities for us. We anticipate that a period of significant expansion may be required to integrate our recently acquired or invested businesses and technologies and to penetrate and service the markets for our existing and anticipated future products and services. This expansion will place a significant strain on our management, operational, and financial resources. To manage the expected growth of our operations and personnel, we must establish appropriate and scalable operational and financial systems, procedures, and controls and establish a qualified finance, administrative, and operations staff. As a public company, we will need to maintain internal controls to comply with government-mandated regulations. Our management may be unable to hire, train, retain, motivate, and manage the necessary personnel or to identify, manage, and exploit potential strategic relationships and market opportunities. Our to manage growth effectively could have a material and effect on our business, results of operations, and financial condition.
Our growth strategy includes pursuing opportunistic acquisitions of additional brands, technologies and other assets, and we may not find suitable acquisition candidates or successfully operate or integrate any business that we may acquire.
As part of our strategy, we intend to opportunistically acquire or invest in businesses and technologies that we expect to complement our existing resources and capabilities and advance our growth strategy. Although we believe that opportunities for other, future acquisitions may be available from time to time, competition for acquisition candidates may exist or increase in the future. Consequently, there may be fewer acquisition opportunities available to us as well as higher acquisition prices. There can be no assurance that we will be able to identify, acquire, manage, or successfully integrate additional companies, brands, technologies or other assets without substantial costs, delays, or operational or financial problems. In the event we are able to acquire additional companies, brands, technologies or other assets, the integration and operation of such acquisitions in addition to the on-going integration and operation of the Company may place significant demands on our management, which could adversely affect our ability to manage our business. We may be required to obtain additional financing to fund future acquisitions. There can be no assurance that we will be to obtain additional financing on acceptable terms or at all.
We may not realize the anticipated benefits of acquisitions or investments in joint ventures, or those benefits may be delayed or reduced in their realization.
Acquisitions and investments have been a component of our growth and the development of our business, and that is likely to continue in the future. We believe acquisitions can accelerate our development of revenue generation models and products and services desired by the market and allow us to build additional capabilities and competencies around our existing businesses. In reviewing potential acquisitions or investments, we target brands, technologies, assets or companies that we believe offer attractive products or offerings, the ability for us to leverage our offerings, opportunities to drive our technologies, brands, competencies, or other synergies.
The combination of two independent businesses is a complex, costly, and time-consuming process that will require significant management attention and resources. The integration process may disrupt the businesses and, if implemented ineffectively, would limit the expected benefits of the acquisition. The failure to meet the challenges involved in integrating businesses and realizing the anticipated benefits could cause an interruption of, or a loss of momentum in, our activities and could adversely affect our results of operations. The overall integration of the businesses may result in material unanticipated problems, expenses, liabilities, competitive responses, loss of customer and other business relationships, and diversion of management’s attention. The difficulties of combining the operations of the companies include, among others:
the diversion of management’s attention to integration matters;
difficulties in achieving anticipated cost savings, synergies, business opportunities, and growth prospects from the combination;
difficulties in the integration of operations and systems; and
conforming standards, controls, procedures, accounting and other policies, business cultures, and compensation structures between the two companies.
We cannot be certain that the products, technologies and offerings of companies we may acquire, or acquire an interest in, will achieve or maintain popularity with customers in the future or that any such acquired companies or investments will allow us to more effectively market our products and services, develop our competencies, or to grow our business. In some cases, we expect that the integration of the companies that we may acquire into our operations will create production, marketing and other operating, revenue or cost synergies which will produce greater revenue growth and profitability and, where applicable, cost savings, operating efficiencies and other advantages. However, we cannot be certain that these synergies, efficiencies and cost savings will be realized. Even if achieved, these benefits may be delayed or reduced in their realization. In other cases, we may acquire or invest in companies that we believe have strong and creative management, in which case we may plan to operate them more autonomously rather than fully integrating them into our operations. We cannot be certain that the key talented individuals at these companies would continue to work for us after the acquisition or that they would develop and products, technologies or services in the future. We cannot guarantee that any acquisition or investment we may make will be or , and acquisitions can consume significant amounts of management attention and other resources, which may impact other aspects of our business.
We may not achieve some or all of the expected benefits of the spin-off of Cryptyde, and the spin-off of Cryptyde may adversely affect our business.
We may not be able to achieve some or all of the strategic, financial, operational, marketing or other benefits expected to result from the spin-off of Cryptyde, or such benefits may be delayed or not occur at all. The spin-off of Cryptyde is expected to provide the following benefits, among others:
provide investors with the potential for greater value than a single company by unlocking a premium value for Cryptyde separately;
provide the market with two separate companies that have clear product and service offering demarcation, allowing for targeted branding and marketing;
allow each company flexibility in allocating resources and deploying capital in a manner consistent with the separate business strategies;
broaden the appeal of the potential investor base for both companies; and
facilitate the ability of Cryptyde to separately finance the Bitcoin mining services, and Web3 (decentralized internet) products businesses based on the unique characteristics of each such business.
We may not achieve these and other anticipated benefits for a variety of reasons, including, among others:
potential disruption to the businesses of Vinco Ventures;
management distraction due to the significant amount of time and effort required;
the significant one-time costs of separating the two companies;
incremental costs on the resulting companies, including, among others, the costs of being a stand-alone company and potential tax inefficiencies;
greater susceptibility to market fluctuations and other adverse events as a stand-alone company, including as a result of reduced business diversification; and
risk that the spin-off does not achieve its intended benefits.
We cannot predict with certainty when the benefits expected from the spin-off of Cryptyde will occur or the extent to which they will be achieved. If we fail to achieve some or all of the benefits expected to result from the spin-off, or if such benefits are delayed, our business, financial condition and results of operations could be adversely affected.
Shares eligible for future sale may have adverse effects on our share price.
Sales of substantial amounts of shares or the perception that such sales could occur may adversely affect the prevailing market price for our shares. We may issue additional shares in subsequent public offerings or private placements to make new investments or for other purposes. We are not required to offer any such shares to existing shareholders on a preemptive basis. Therefore, it may not be possible for existing shareholders to participate in such future share issuances, which may dilute the existing shareholders’ interests in us.
Future sales of additional shares of our common stock or securities convertible into shares of our common stock may dilute our shareholders’ ownership in us and may adversely affect us or the trading price of our common stock.
We are generally not restricted from issuing additional shares of our common stock up to the authorized number of shares set forth in our charter. We may issue additional shares of our common stock or securities convertible into our common stock in the future pursuant to current or future employee stock incentive plans, employee stock grants, or in connection with future acquisitions or financings. We cannot predict the size of any such future issuances or the effect, if any, that any such future issuances will have on the trading price of our common stock. Any such future issuances of shares of our common stock or securities convertible into common stock may have a dilutive effect on the holders of our common stock and could have a material negative effect on the trading price of our common stock.
We may not be able to attain stockholder approval on the proposals set forth in our proxy statement to be filed with the SEC, which could have a negative impact on our ability to secure future financing.
The proposals set forth in our proxy statement are subject to shareholder approval. If we do not obtain shareholder approval for the increase of our authorized shares of common stock to allow us to issue additional equity securities for financing purposes and equity incentives for employee retention, we will have limited financing alternatives available to us and may not have adequate shares available to incentivize our employees, and this will therefore increase the cost of capital and could adversely affect our ability to attract and retain talent, which could reduce shareholder returns.
We may require additional financing to sustain or grow our operations and such additional capital may not be available to us, or only available to us on unfavorable terms.
Our growth will be dependent on our ability to access additional equity and debt capital. Historically, we have primarily relied upon convertible debt financings and equity financings to fund our operations. To the extent that revenues generated by our ongoing operations are insufficient to fund future requirements, we may need to raise additional funds through debt or equity financings or curtail our growth. Almost all of our cash has come from notes and warrants sold to a single investor and if this investor ceases to be a source of funding, there is no assurance we can obtain an equivalent source of funding. We cannot be sure that we will be able to raise equity or debt financing on terms favorable to us and our stockholders in the amounts that we require, or at all. Our inability in the future to obtain additional equity or debt capital on acceptable terms, or at all, could adversely impact our ability to execute our business strategy, which could adversely affect our growth prospects and future stockholder returns.
In addition, the terms of a capital raising transaction could require us to agree to stringent financial and operating covenants and to grant security interests on our assets to lenders or holders of our debt securities that could limit our flexibility in operating our business or our ability to pay dividends on our common stock and could make it more difficult for us to obtain capital in the future. Issuance of additional shares of our common stock in future financings directly or upon conversion, exchange or exercise of equity or debt securities will also result in dilution of our stockholders.
We have debt financing arrangements, which could have a material adverse effect on our financial health and our ability to obtain financing in the future and may impair our ability to react quickly to changes in our business.
Our exposure to debt financing could limit our ability to satisfy our obligations, limit our ability to operate our business, and impair our competitive position. For example, it could:
increase our vulnerability to adverse economic and industry conditions;
require us maintain a minimum cash balance of not less than $80,000,000 in a designated account subject to a deposit account control agreement, thereby reducing the availability of cash to fund working capital, capital expenditures or other general corporate purposes; and
limit our ability to obtain additional debt or equity financing due to applicable financial and restrictive covenants contained in our debt agreements.
We may also incur additional indebtedness in the future, which could materially increase the impact of these risks on our financial condition and results of operations. Payments on our debt will depend on our ability to generate cash or secure additional financing in the future. This ability, to an extent, is subject to general economic, financial, competitive, legislative, regulatory, and other factors beyond our control. If our business does not generate sufficient cash flow from operations and sufficient future financing is not available to us, we may not be able to repay our debt, operate our business or fund our other liquidity needs. If we cannot meet or refinance our obligations when they become due, we may be required to attempt to raise capital, reduce expenditures, or take other actions which we may be unable to successfully complete or, even if successful, could have a material adverse effect on us. If such sources of capital are not available or not available on sufficiently favorable terms, we may seek other avenues to fund the business, including seeking to sell assets of all or a portion of our operations. If we decide to raise capital in the equity markets or take other actions, our stockholders could incur significant dilution or valuations, or if we are to raise capital, our ability to effectively operate our business could be . In addition, if we are in raising capital in the equity markets to repay our indebtedness or for any other purpose in the future, our stockholders could incur significant dilution.
Our obligations to the holders of our senior secured convertible notes are secured by a security interest in substantially all of our assets and a designated cash account, so if we default on those obligations, the note holders could foreclose on our assets.
Our obligations under the senior secured convertible notes that we issued in July 2021 and the transaction documents relating to those notes are secured by a security interest in substantially all of our and our subsidiaries’ assets. In addition, we are required to maintain a minimum cash balance of not less than $80,000,000 in a designated account subject to a deposit account control agreement in favor of the collateral agent. We may not use the cash in this account for operational purposes. As of April 14, 2022, these notes had a total principal of $113,000,000 outstanding, of which $33,000,000 will be due in July 2022, and the remaining $80,000,000 will be due in July 2023. As a result, if we default under our obligations under the notes or the transaction documents, the holders of the notes, acting through their appointed agent, could foreclose on their security interests and liquidate some or all of these assets, which would harm our business, financial condition and results of operations and could require us to curtail or cease operations.
The holders of our senior secured convertible notes have certain additional rights upon an event of default under the notes which could harm our business, financial condition and results of operations and could require us to curtail or cease our operations.
Under our senior secured convertible notes, the holders have certain rights upon an event of default. Such rights include (i) an increase in the interest rate to 18% per year thereafter; and (ii) the holders having the right to demand redemption of all or a portion of the notes. At any time after certain notice requirements for an event of default are triggered, a holder of the notes may require us to redeem all or any portion of the note by delivering written notice. Each portion of the note subject to redemption would be redeemed by us in cash by wire transfer of immediately available funds at a price equal to the greater of (i) the product of (A) the conversion amount to be redeemed multiplied by (B) the redemption premium (equal to 120%) and (ii) the product of (X) the conversion rate with respect to the conversion amount in effect at such time as the holder delivers an event of default redemption notice multiplied by (Y) the product of (1) the redemption premium (equal to 120%) multiplied by (2) the greatest closing sale price of the common stock on any trading day during the period commencing on the date immediately preceding the event of default and ending on the date we make the entire payment required to be made under the notes. We may not have sufficient funds to settle the redemption price and, as described above, this could trigger rights under the security interest granted to the holders and result in the of their security interests and of some or all of our assets.
Our warrants contain provisions that require us to pay the warrant holder cash if we fail to receive stockholder approval for certain terms in the warrants required by the warrant holder.
The warrants we issued in November and December 2021 contain certain provisions which provide that we shall seek to obtain a stockholder approval to increase our authorized shares of common stock to at least 400,000,000 and to approve certain anti-dilution protection terms applicable to the warrants by June 4, 2022, or July 4, 2022 in the event that we receive comments from the SEC with respect to the preliminary proxy statement (the “Stockholder Vote Deadline”), and if we fail to receive such stockholder approval by the Stockholder Vote Deadline, we may be required to pay cash to the warrant holder pursuant to the alternate exercise mechanism under those warrants. If the alternate exercise mechanism is triggered, the warrant holder may deliver alternate exercise notices for us to pay cash amount equal to such number of warrant shares in such notice multiplied by $0.65 for the November warrants and $0.361 for the December warrants, subject to customary adjustments for stock dividends, stock splits, reclassifications and similar events related to the common stock.
We are increasingly dependent on information technology, and potential cyberattacks, security problems, or other disruption and expanding social media vehicles present new risks.
We rely on information technology networks and systems, including the internet, to process, transmit, and store electronic information, and to manage or support a variety of business processes, including financial transactions and records, billing, and operating data. We may purchase some of our information technology from vendors, on whom our systems will depend, and we rely on commercially available systems, software, tools, and monitoring to provide security for processing, transmission, and storage of confidential operator and other customer information. We depend upon the secure transmission of this information over public networks. Our networks and storage applications could be subject to unauthorized access by hackers or others through cyberattacks, which are rapidly evolving and becoming increasingly sophisticated, or by other means, or may be breached due to operator error, malfeasance or other system disruptions. In some cases, it will be difficult to anticipate or immediately detect such incidents and the damage they cause. Any significant breakdown, invasion, , , or leakage of information from our systems could our reputation and business.
In addition, the use of social media could cause us to suffer brand damage or information leakage. Negative posts or comments about us on any social networking website could damage our or our brands’ reputations. Employees or others might disclose non-public sensitive information relating to our business through external media channels, including through the use of social media. The continuing evolution of social media will present us with new challenges and risks.
Our business is subject to complex and evolving U.S. and foreign laws and regulations including those relating to privacy, data use and data protection, content, competition, safety and consumer protection, e-commerce, digital assets and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our products and business practices, monetary penalties, increased cost of operations, or declines in customer engagement, or otherwise harm our business.
We are subject to a variety of laws and regulations in the United States and abroad that involve matters important to our business, many of which are still evolving and being tested in courts, and could be interpreted in ways that could harm our business. These laws and regulations involve matters including privacy, data use, data protection and personal information, encryption, rights of publicity, content, intellectual property, advertising, marketing, distribution, data security, data retention and deletion, data localization and storage, data disclosure, digital, electronic contracts and other communications, competition, protection of minors, consumer protection, civil rights, telecommunications, product liability, e-commerce, taxation, economic or other trade controls including sanctions, anti-corruption and political law compliance, securities law compliance, and online payment services. In particular, we are subject to federal, state, and foreign laws regarding privacy and protection of people’s data. Foreign data protection, privacy, content, competition, consumer protection, and other laws and regulations can impose different obligations, or penalties or fines for non-compliance, or be more restrictive than those in the United States. Any change in these laws or regulations, changes in their interpretation, or newly enacted laws or regulations and any failure by us to comply with these laws or regulations, could require changes to certain of our business practices, impact our operations, cash flow or financial condition, impose additional costs on us, or otherwise affect our business.
For a further discussion of the regulatory risks faced by our various businesses, see “- Risks Related to Our Company - Our NFT platform may not be successful and may expose us to legal, regulatory, and other risks. Given the nascent and evolving nature of cryptocurrencies, NFTs, and our NFT platform, we may be unable to accurately anticipate or adequately address such risks or the potential impact of such risks. The occurrence of any such risks could materially and adversely affect our business, financial condition, results of operations, reputation, and prospects”; “ – Risks Related to Lomotif- Lomotif’s business is subject to a variety of laws, regulations, rules, policies and other obligations, which most notably include those related to data privacy and protection. Any violation of the law or regulations governing Lomotif’s operations, including those related to losses or unauthorized access to or releases of confidential information or personal data could subject Lomotif to significant reputational, financial, legal and operational consequences”; “– Risks Related to Lomotif - Lomotif faces risks and uncertainties arising from laws, regulations, rules and the political and economic climate in the jurisdictions across the globe within which it does business, including, without , the United States, Brazil, India, Russia and Singapore”; “- Risks Related to AdRizer - AdRizer’s business practices with respect to data and consumer protection could give rise to liabilities or reputational as a result of governmental regulation, legal requirements or industry standards relating to consumer privacy, data protection and consumer protection”; “ – Risks Related to AdRizer - Government regulation of the Internet, e-commerce and m-commerce is evolving, and changes or by AdRizer to comply with these laws and regulations could substantially its business and results of operations.” Additionally, regarding the regulatory risks faced by the Cryptype businesses expected to be spun off, see relevant discussion under “Risk Factors” in the preliminary information statement filed as Exhibit 99.1 with the Amendment No. 2 to Form 10 filed with the SEC on March 18, 2022.
Our NFT platform may not be successful and may expose us to legal, regulatory, and other risks. Given the nascent and evolving nature of cryptocurrencies, NFTs, and our NFT platform, we may be unable to accurately anticipate or adequately address such risks or the potential impact of such risks. The occurrence of any such risks could materially and adversely affect our business, financial condition, results of operations, reputation, and prospects.
Our wholly-owned subsidiary EVNT, offers a platform for artists and content owners to distribute their intellectual property. Given the increased scrutiny of digital assets as well as cryptocurrencies for regulatory and anti-money laundering purposes, it is possible that the United States and other jurisdictions will engage in increased scrutiny and regulation of NFTs and our business. While NFTs and cryptocurrencies are similar in that both are based on blockchain technology, unlike cryptocurrency units, which are fungible, NFTs have unique identification codes and represent content on the blockchain. The record of ownership of the NFT, which establishes authenticity and may also carry other rights, cannot be duplicated. As NFTs are a relatively new and emerging type of digital asset, the regulatory, commercial, and legal framework governing NFTs (as well as cryptocurrencies) is likely to evolve both in the United States and internationally and implicates issues regarding a range of matters, including, but not limited to, intellectual property rights, privacy and cybersecurity, fraud, anti-money laundering, sanctions, and currency, commodity, and securities law implications.
For example, the public sale of securities may only be effected on securities exchanges that are registered with the SEC and pursuant to offerings registered with the SEC. There is regulatory uncertainty with respect to whether certain NFTs could be considered securities. If NFTs sold on our NFT marketplace were deemed to be securities, we would be in violation of securities laws for engaging in transactions regarding unregistered securities. Such a determination could lead to an enforcement action by the SEC and result in fines and other penalties and have a negative impact on our business.
As another example, NFTs raise various intellectual property law considerations, including adequacy and scope of assignment, licensing, transfer, copyright, and other right of use issues. The creator of an NFT will often have all rights to the content of the NFT and can determine what rights to assign to a buyer, such as the right to display, modify, or copy the content. To the extent we are directly or indirectly involved in a dispute between creators and buyers on our NFT platform, it could materially and adversely affect the success of our NFT platform and harm our business and reputation. NFTs, and our NFT platform, may also be an attractive target for cybersecurity attacks. For example, a perpetrator could seek to obtain the private key associated with a digital wallet holding an NFT to access and sell the NFT without valid authorization, and the owner of the NFT may have limited recourse due to the nature of blockchain transactions and of cybercrimes generally. NFT marketplaces, including our NFT platform, may also be vulnerable to attacks where an unauthorized party acquires the necessary credentials to access user accounts. The safeguards we have implemented or may implement in the future to protect cybersecurity may be . If our NFT platform were to experience any , it could impact our reputation and market acceptance of our platform.
NFTs, and our NFT platform, may also be subject to regulations of the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of Treasury and the Bank Secrecy Act. Further, the Office of Foreign Assets Controls (“OFAC”) has signaled sanctions could apply to digital transactions and has pursued enforcement actions involving cryptocurrencies and digital asset accounts. The nature of many NFT transactions also involve circumstances which present higher risks for potential violations, such as anonymity, subjective valuation, use of intermediaries, lack of transparency, and decentralization associated with blockchain technology. In addition, the Commodity Futures Trading Commission has stated that cryptocurrencies, with which NFTs have some similarities, fall within the definition of “commodities.” If NFTs were deemed to be a commodity, NFT transactions could be subject to prohibitions on deceptive and manipulative trading or restrictions on manner of trading (e.g., on a registered derivatives exchange), depending on how the transaction is conducted. Moreover, if NFTs were deemed to be a “security,” it could raise federal and state securities law implications, including exemption or registration requirements for marketplaces for NFT transactions, sellers of NFTs, and the NFT transactions themselves, as well as liability issues, such as insider trading or material or , among others. NFT transactions may also be subject to laws governing virtual currency or money transmission. For example, New York has legislation regarding the operation of virtual currency businesses. NFT transactions also raise issues regarding compliance with laws of foreign jurisdictions, many of which present complex compliance issues and may with one another. Our launch and operation of our NFT platform us to the foregoing risks, among others, any of which could materially and affect the of our NFT platform and our business, financial condition, results of operations, reputation, and prospects.
Certain U.S. jurisdictions including Washington and Puerto Rico are drafting regulations that would apply their sales tax on digital products to include NFTs and other states may act to adopt similar regulations.
As the market for NFTs is relatively nascent, it is difficult to predict how the legal and regulatory framework around NFTs will develop and how such developments will impact our business and our NFT platform. Further, market acceptance of NFTs is uncertain as buyers may be unfamiliar or uncomfortable with digital assets generally, how to transact in digital assets, or how to assess the value of NFTs. The launch of our NFT platform also subjects us to risks similar to those associated with any new platform offering, including, but not limited to, our ability to accurately anticipate market demand and acceptance, our ability to successfully launch our new NFT platform offerings, creator and buyer acceptance, technical issues with the operation of our new NFT platform, and legal and regulatory risks as discussed above. We believe these risks may be heightened with respect to our NFT platform, as NFTs are still considered a relatively novel concept. If we fail to accurately anticipate or manage the risks associated with our NFT platform or with our facilitation of cryptocurrency transactions, or if we directly or indirectly become subject to disputes, liability, or other legal or regulatory issues in connection with our NFT platform or cryptocurrency transactions, our NFT platform may not be successful and our business, financial condition, results of operations, reputation, and prospects could be materially .
If we fail to protect our intellectual property rights, competitors may be able to use our technology, which could weaken our competitive position, reduce our net revenue, and increase our costs.
Our long-term success will depend to some degree on our ability to protect the proprietary technology that we have developed or may develop or acquire in the future. Patent applications can take many years to issue, and we can provide no assurance that any such patents would be issued. If we are denied any or all of these patents, we may not be able to successfully prevent our competitors from imitating our products or using some or all of the processes that are the subject of such patent applications. Such imitation may lead to increased competition within the finite market for products such as ours. Even if our pending patents were to be issued, our intellectual property rights may not be sufficiently comprehensive to prevent our competitors from developing similar competitive products. Although we may aggressively pursue anyone whom we reasonably believe is infringing upon our intellectual property rights, initiating and maintaining suits against third parties that may infringe upon our intellectual property rights will require substantial financial resources, especially given our lack of patent registrations and applications. We may not have the financial resources to bring such suits, and if we do bring such suits, we may not prevail. Regardless of our in any such actions, we could incur significant expenses in connection with such suits.
Article XIII of our Articles of Incorporation, as amended and restated as of the date of this Annual Report (the “Articles of Incorporation”) designates the courts of the State of Nevada as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, and therefore may limit our stockholders’ ability to choose a forum for disputes with us or our directors, officers, employees, or agents.
Article XIII of our Articles of Incorporation provides that, to the fullest extent permitted by law, and unless we consent to the selection of an alternative forum, the courts of the State of Nevada shall be the sole and exclusive forum for (a) any derivative action or proceeding brought on behalf of the Company, (b) any action or proceeding asserting a claim of breach of a fiduciary duty owed by any director or officer of the Company to the Company or the Company’s stockholders, (c) any action or proceeding asserting a claim against the Company arising pursuant to claims under Title 7 of the Nevada Revised Statutes or our Articles of Incorporation or Bylaws, as amended or amended and restated as of the date of the Annual Report (the “Bylaws”), or (d) any action or proceeding asserting a claim against the Company governed by the internal affairs doctrine.
We believe the choice-of-forum provision in our Articles of Incorporation provide will help provide for the orderly, efficient, and cost-effective resolution of Nevada-law issues affecting us by designating courts located in the State of Nevada (our state of incorporation) as the exclusive forum for cases involving such issues. However, this provision may limit a stockholder’s ability to bring a claim in a judicial forum that it believes to be favorable for disputes with us or our directors, officers, employees, or agents, which may discourage such actions against us and our directors, officers, employees, and agents. If a court were to find the choice-of-forum provision in our Articles of Incorporation was broader than permitted under Nevada law and thus inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition, or results of operations.
Third-party claims of infringement against us could adversely affect our ability to market our products and require us to redesign our products or seek licenses from third parties.
Given that we produce consumer products for licensed properties, we are susceptible to intellectual property lawsuits that could cause us to incur substantial costs, pay substantial damages, or prohibit us from distributing our products. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. In addition, because patent applications can take many years to issue, there may be applications now pending of which we are unaware, which later may result in issued patents that our products may infringe. If any of our products infringe a valid patent, we could be prevented from distributing that product unless and until we can obtain a license or redesign it to avoid infringement. A license may not be available or may require us to pay substantial royalties. We also may not be successful in any attempt to redesign the product to avoid any infringement. Infringement and other intellectual property , with or without merit, can be expensive and time-consuming to , and we may not have the financial and human resources to ourselves any suits that may be brought us.
Our brands are important assets of our businesses and violation of our trademark rights by imitators, or the failure of our licensees or vendors to comply with our product quality, manufacturing requirements, marketing standards, and other requirements could negatively impact revenues and brand reputation.
Our trademarks have a reputation for quality and value and are important to our success and competitive position. Unauthorized use of our trademark rights may not only erode sales of our products, but may also cause significant damage to our brand name and reputation, interfere with our ability to effectively represent ourselves to our customers, contractors, suppliers, and/or licensees, and increase litigation costs. Similarly, failure by licensees or vendors to adhere to our standards of quality and other contractual requirements could result in loss of revenue, increased litigation, and/or damage to our reputation and business. There can be no assurance that our ongoing efforts to protect our brand and trademark rights and ensure compliance with our licensing and vendor agreements will prevent all violations.
We face substantial competition in the consumer products business, which could reduce our market share and negatively impact our net revenue.
There are a number of companies that manufacture and distribute consumer products similar to ours. Many of our anticipated competitors are significantly larger than we are and have considerably greater financial, technical, marketing, and other resources than we do. Some competitors may have a lower cost of funds and access to funding sources that are not available to us. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition, and results of operations.
We are dependent on a small number of key suppliers and customers for our consumer products business. Changes in our relationships with these parties or changes in the economic environments in which they operate could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
Our product sales revenues are concentrated with a small number of customers. We do not have long-term agreements with our customers, and instead develop our products on an item-by-item basis subject to purchase orders from customers. No assurances can be given that our customers will continue to submit purchase orders for new products.
To manufacture our products, we purchase components from independent suppliers or manufacturers, many of whom are located in Asia. An extended interruption in the supply of these products or suitable substitute inventory would disrupt our operations, which could have a material adverse effect on our business, financial condition, and results of operations.
The COVID-19 outbreak caused disruptions in our suppliers and manufacturers’ operations, which resulted in delays in the shipment of products to certain of our customers. See “- The effects of health pandemics, such as the ongoing global COVID-19 pandemic, have had, and could in the future have, an adverse impact on our business, financial condition and results of operations.”
Our operating results may fluctuate significantly as a result of a variety of factors, many of which are outside of our control, which could cause fluctuations in the price of our securities.
We are subject to the following factors that may negatively affect our operating results:
the announcement or introduction of new products by our competitors;
our ability to upgrade and develop our systems and infrastructure to accommodate growth;
our ability to attract and retain key personnel and consultants in a timely and cost-effective manner;
technical difficulties;
the amount and timing of operating costs and capital expenditures relating to the expansion of our business, operations, and infrastructure;
out ability to identify and enter into relationships with appropriate and qualified third-party providers for necessary development and manufacturing services;
regulation by federal, state or local governments of the United States or other applicable jurisdictions;
general economic conditions, as well as economic conditions specific to the entertainment, party items, arts and crafts, and packaging industries;
the announcement of our entrance into a business combination or acquisition of a second company that has a material effect on us; and
various risks related to health epidemics, pandemics and similar outbreaks, such as the COVID-19 pandemic, which may have material adverse effects on our business, financial position, results of operations and/or cash flows.
As a result of our lack of any operating history and the nature of the markets in which we compete, it is difficult for us to forecast our revenues or earnings accurately. As a strategic response to changes in the competitive environment, we may from time to time make certain decisions concerning expenditures, pricing, service, or marketing that could have a material and adverse effect on our business, results of operations, and financial condition. Due to the foregoing factors, our quarterly revenues and operating results are difficult to forecast.
The Company’s results of operations could be negatively impacted by inflationary or deflationary economic conditions, which could affect the ability to obtain raw materials, component parts, freight, energy, labor, and sourced finished goods in a timely and cost-effective manner.
The Company’s products are manufactured using both ferrous and non-ferrous metals including, but not limited to, steel, zinc, copper, brass, aluminum, and nickel. Additionally, the Company uses other commodity-based materials for components and packaging including, but not limited to, plastics, resins, wood, and corrugated products. The Company’s cost base also reflects significant elements for freight, energy, and labor. The Company also sources certain finished goods directly from vendors. If the Company is unable to mitigate any inflationary increases through various customer pricing actions and cost reduction initiatives, its profitability may be adversely affected.
Conversely, in the event there is deflation, the Company may experience pressure from its customers to reduce prices, and there can be no assurance that the Company would be able to reduce its cost base (through negotiations with suppliers or other measures) to offset any such price concessions which could adversely impact results of operations and cash flows.
Further, as a result of inflationary or deflationary economic conditions, the Company believes it is possible that a limited number of suppliers may either cease operations or require additional financial assistance from the Company in order to fulfill their obligations. In a limited number of circumstances, the magnitude of the Company’s purchases of certain items is of such significance that a change in established supply relationships with suppliers or increase in the costs of purchased raw materials, component parts, or finished goods could result in manufacturing interruptions, delays, inefficiencies, or an inability to market products. Changes in value-added tax rebates, currently available to the Company or to its suppliers, could also increase the costs of the Company’s manufactured products, as well as purchased products and components, and could adversely affect the Company’s results.
In addition, many of the Company’s products incorporate battery technology. As other industries begin to adopt similar battery technology for use in their products, the increased demand could place capacity constraints on the Company’s supply chain. In addition, increased demand for battery technology may also increase the costs to the Company for both the battery cells as well as the underlying raw materials. If the Company is unable to mitigate any possible supply constraints or related increased costs, its profitably and financial results could be negatively impacted.
Low demand for new products and the inability to develop and introduce new products at favorable margins could adversely impact the Company’s performance and prospects for future growth.
The Company’s competitive advantage in its consumer products business is due in part to its ability to develop and introduce new products in a timely manner at favorable margins. The uncertainties associated with developing and introducing new products, such as market demand and costs of development and production, may impede the successful development and introduction of new products on a consistent basis. Introduction of new technology may result in higher costs to the Company than that of the technology replaced. That increase in costs, which may continue indefinitely or until increased demand and greater availability in the sources of the new technology drive down its cost, could adversely affect the Company’s results of operations. Market acceptance of the new products introduced in recent years and scheduled for introduction in future years may not meet sales expectations due to various factors, such as the failure to accurately predict market demand, end-user preferences, evolving industry standards, or the emergence of new or disruptive technologies. Moreover, the ultimate success and of the new products may depend on the Company’s ability to technical and technological in a timely and cost- manner, and to manufacturing . The Company’s investments in productive capacity and commitments to fund advertising and product promotions in connection with these new products could profits if those expectations are not met.
Defects in our products could reduce our revenue, increase our costs, burden our engineering, and marketing resources, involve us in litigation and adversely affect us.
Our success in our consumer products business will depend on our ability to avoid, detect, and correct defects in our products. We may not be able to maintain products that are free from defects. Although we have taken steps to prevent defects, our products could suffer such defects. The occurrence of such defects or malfunctions could result in physical harm to the patrons of our customers and the subsequent termination of agreements, cancellation of orders, product returns, and diversion of our resources. Even if our customers do not suffer financial losses, customers may replace our products if they do not perform according to expectations. Any of these occurrences could also result in the of or in market acceptance of our products and/or of sales. In addition, the occurrence of in our products may give rise to for revenues and related by our customers and may subject us to or other action by regulatory authorities that could include or of our ability to do business in certain jurisdictions.
Our products could be recalled.
The Consumer Product Safety Commission or other applicable regulatory bodies may require the recall, repair or replacement of our products if those products are found not to be in compliance with applicable standards or regulations. A recall could increase costs and adversely impact our reputation.
The effects of health pandemics, such as the ongoing global COVID-19 pandemic, have had, and could in the future have, an adverse impact on our business, financial condition and results of operations.
Our business and operations have been and could in the future be adversely affected by health pandemics, such as the global COVID-19 pandemic. The COVID-19 pandemic and efforts to control its spread have curtailed the movement of people, goods and services worldwide, including in the regions in which we and our customers, suppliers and manufacturers operate, and are significantly impacting economic activity and financial markets.
Our operations are subject to a range of external factors related to the COVID-19 pandemic that are not within our control. We have taken precautionary measures intended to minimize the risk of the spread of the virus to our employees, and the communities in which we operate. A wide range of governmental restrictions were previously, and may again be, imposed on our employees, customers, suppliers and manufacturers’ physical movement to limit the spread of COVID-19. There can be no assurance that precautionary measures, whether adopted by us or imposed by others, will be effective, and such measures could negatively affect our sales, marketing and customer service efforts, delay and lengthen our sales cycles, decrease our employees’, suppliers’ and manufacturers’ productivity, reduce our customers’ spending on our products, or create operational or other challenges, any of which could harm our business, results of operations and financial condition. For example, the COVID-19 outbreak caused disruptions in our manufacturers’ operations in Asia, which resulted in delays in the shipment of products to certain of our customers.
The economic uncertainty caused by the COVID-19 pandemic has made and may continue to make it difficult for us to forecast revenue and operating results and to make decisions regarding operational cost structures and investments. We have committed, and we plan to continue to commit, resources to grow our business, including to expand our employee base and technology development and secure alternative suppliers and manufacturers, and such investments may not yield anticipated returns, particularly if worldwide business activity continues to be impacted by the COVID-19 pandemic. The duration and extent of the impact from the COVID-19 pandemic depend on future developments that cannot be accurately predicted at this time, and if we are not able to respond to and manage the impact of such events effectively, our business may be harmed.
Risks Related to Lomotif
There is no guarantee that we may realize the expected benefits from our investments in ZVV, our joint venture with ZASH which owns an 80% interest in Lomotif, and may successfully integrate Lomotif with our other businesses including those we have acquired or intend to acquire to complement Lomotif’s business such as AdRizer and to further our plan to disrupt the media and entertainment industry.
Acquisitions have been and may continue to be an important component of our growth strategy as we transition to be focused on the development of digital media and content technologies; however, we will need to integrate these acquired businesses and assets successfully in order for our growth strategy to succeed and for us to become profitable. In July 2021, ZVV, a joint venture of Vinco Ventures and ZASH, completed the acquisition of 80% of the outstanding equity interest in Lomotif, which we believe was a key step taken to achieve our plan to build a media and entertainment company worldwide with users around the world that allows us to leverage our content globally. In addition, in February 2022, we completed an acquisition of AdRizer, a full-service tracking platform for advertisers seeking ROI optimization and digital analytics, which we believe can complement Lomotif’s business and help to monetize Lomotif’s platform. In reviewing potential acquisitions or investments, we target brands, assets or companies that we believe offer attractive products, technologies or offerings, the ability for us to leverage our offerings, opportunities to drive our brands, competencies, or other synergies. However, there is no guarantee that our acquisitions and investments, including our investments in ZVV and Lomotif, will be or as we expected, and such acquisitions and investments can consume significant amounts of management attention and other resources. in our investments or to integrate our acquired businesses in a cost- and manner may impact our business, financial condition, operating results, and stock price.
To integrate Lomotif and other businesses we acquire or invest in in the media and digital entertainment industry (collectively, the “acquired businesses”), we will need to implement, and the management teams of the acquired businesses will need to adopt, our policies, procedures and best practices, and cooperate with each other in aspects of their operations. We may face difficulty with the integration of the acquired businesses, such as coordinating geographically dispersed organizations, integrating personnel with disparate business backgrounds and combining different corporate cultures. Our acquired businesses may not be profitable and not have sophisticated financial reporting systems in place, and we are relying on their adoption of our best practices to operate their businesses more efficiently to achieve and maintain profitability. However, we may fail in implementing our policies and procedures, or the policies and procedures may not be effective or provide the results we anticipate for a particular business. Further, we will be relying on these policies and procedures in preparing our financial and other reports as a public company, so any of acquired businesses to properly adopt these policies and procedures could our public reporting. Management of the acquired businesses may not have the operational or business expertise that we require to implement our policies, procedures and practices.
In addition, our growth strategy also includes the development of digital properties that we intend to integrate with Lomotif. This will require, among other things, the integration of the individual websites, platforms and databases of Lomotif with each other business that we develop or acquire. This will be a complex undertaking that may prove more difficult, expensive and time consuming than we expect. Even if we are able to achieve this integration, it may not achieve the benefits we anticipate. If we fail to do this properly and in a timely manner, it could harm our revenue and relationship with our users.
If we fail to successfully integrate Lomotif into our internal control over financial reporting, the integrity of our financial reporting could be compromised which could result in a material adverse effect on our reported financial results.
As a private company, Lomotif was not subject to the requirements of the Exchange Act, with respect to internal control over financial reporting. As of December 31, 2021, our Principal Executive Officer and Principal Financial and Accounting Officer have concluded that our disclosure controls and procedures were not effective to provide reasonable assurance that information that it is required to disclose in reports that we file with the SEC is recorded, processed, summarized, and reported within the time periods specified by the Exchange Act rules and regulations. See “—Risks Related to Our Company—If we fail to comply with the rules and regulations under the Sarbanes-Oxley Act, our operating results, our ability to operate our business and investors’ views of us may be harmed.” The integration of Lomotif into our internal control over financial reporting may require significant time and resources from our management and other personnel and may increase our compliance costs. If we fail to successfully integrate these operations, our internal control over financial reporting may not be effective. Failure to achieve and maintain an internal control environment could have a material effect on our ability to accurately report our financial results and the market’s perception of our business and stock price.
As of December 31, 2021, Lomotif had not generated any significant revenues and is likely to continue to experience significant net losses for the foreseeable future. Lomotif has a limited operating history upon which investors can evaluate its future prospects, and our strategies and efforts to monetize the Lomotif platform and grow revenue may not succeed
As of December 31, 2021, Lomotif had not generated any significant revenues and had experienced significant net losses since inception and, given the significant operating and capital expenditures associated with its business plans, we anticipate it will continue to incur net losses and significant negative cash flows for the foreseeable future. If Lomotif ever does achieve profitability, of which no assurances can be given, Lomotif may be unable to sustain or increase such profitability. To achieve and sustain profitability, Lomotif will need to accomplish numerous objectives, including attracting and substantially increasing the number of users, content creators, influencers, and paying advertisers on its platform, securing tipping point scale of user adoption, developing sources of revenue and economies of scale. There is a significant risk that Lomotif will be unable to achieve these objectives, which would its business and could lead to the of our investment in Lomotif.
Lomotif does not have a history of significant revenue generation upon which an evaluation of its business plan or performance and prospects can be made. The business and prospects of Lomotif must be considered in the light of the potential problems, delays, uncertainties and complications encountered in connection with a new business in a market in which there are larger and more established competitors. The risks include, but are not limited to, our ability to: develop new sources of revenue using the Lomotif platform and content; monetize the Lomotif platform; attract new users and retain users; encourage purchases by advertisers; continue developing innovative products, services and technologies in response to user demand; increase brand awareness through marketing and promotional activities; react to changes in user access to and use of the internet; expand into new market segments; integrate new devices, platforms and operating systems; take advantage of any growth in the relevant markets; compete successfully for users, influencers, advertisers, publishers, and business partners with other video-sharing and streaming platforms; and protect Lomotif’s intellectual property and ensure compliance with applicable laws and regulations including those relating to data privacy. There are no assurances that Lomotif can address these and its growth goals in a cost- manner.
It is difficult to accurately forecast future revenues of Lomotif as it is still developing its mobile user marketing, revenue generating services and business models. The current and future expense levels are based largely on estimates of planned operations and future revenues rather than experience. If Lomotif’s forecasts prove incorrect, our business, operating results, financial condition, and stock price may be materially and adversely affected. Any significant reduction in planned or actual revenues may immediately and adversely affect our business, financial condition, operating results, and stock price.
To continue to support the business objectives of Lomotif, Lomotif has an ongoing need for additional funding. As of December 31, 2021, we have provided ZVV with $125,000,000 in funding in the form of capital contributions and have advanced approximately $29,826,000 to ZVV for the purpose of funding Lomotif, including its promotional and marketing expenses. Of this aggregate amount, ZVV used$109,765,000 for the purchase of an 80% equity interest in Lomotif, and to fund loans of $18,950,000 to ZASH and PZAJ Holdings, LLC (“PZAJ”) primarily related to development and production costs of entertainment content that the Company plans to distribute through the Lomotif platform among other distribution channel. The source of such funding has been the sale of our convertible notes and warrants in numerous financing transactions and the release of funds to us from a control account upon the conversion of a portion of our warrants. We expect to continue funding ZVV, Lomotif and PZAJ with the proceeds of the financing transactions that we have already completed, and may in the future need to complete additional financing transactions for the purpose of funding ZVV, Lomotif and PZAJ. Such financing transactions have been and may in the future be dilutive to our stockholders.
Lomotif has incurred losses since its inception and has a present need for additional funding from us or ZVV. For the foreseeable future, we expect to fund ZVV for the purpose of funding Lomotif. A great portion of our prior funding to Lomotif and ZASH (through ZVV) has been spent for developing and acquiring a variety of content for Lomotif, LoMoTV and LoMo Records, and we expect there is an ongoing need for funding to support this operational objective to retain and increase Lomotif’s user base. The financing transactions that we have completed to date, involving the sale of our convertible notes and warrants, have been dilutive to our stockholders, and any future equity financing transactions that we may need to complete in order to raise additional funding to fund our growth objectives with respect to Lomotif and PZAJ, will be dilutive to our stockholders. In addition, to support Lomotif’s effort to monetize its platform, we acquired AdRizer and may decide to acquire or invest in other businesses, technologies, and assets, which we believe can complement Lomotif’s current business activities, both financially and strategically. We may need additional equity financing for future acquisitions or investments, or we may issue our securities as consideration for such acquisitions, each of which would further dilute our stockholders and may adversely affect our stock price. There are no assurances that we will be able to raise any additional needed capital on terms acceptable to us. If we are to obtain sufficient amounts of additional capital to fund our growth objectives with respect to Lomotif and PZAJ and any future acquisitions, we may be required to reduce the scope of our planned growth or otherwise alter our business objectives and operations, which could our business, financial condition, operating results, and stock price.
Lomotif’s business is highly competitive, and the industry is characterized by constant change. In order to compete Lomotif may need to rapidly evolve its business model and continuously innovate its technologies or to design features that meet the expectations of its users to retain and grow the number of users, advertisers and business partners on the platform.
Social platforms are characterized by constant change, including rapid technological evolution, continual shifts in customer demands and preferences, frequent introductions of new products and services and the constant emergence of new industry standards and practices. In addition, short videos and streaming, each as a content format, may be replaced by new content formats. Lomotif’s success will depend, in part, on its ability to respond to these changes in a cost-effective and timely manner; failure to do so may cause Lomotif’s user base to shrink and user engagement to decline, thereby materially and adversely affecting its results of operations. Lomotif began operations in 2015 and has continuously changed and upgraded the technology and features on which its platform relies. Lomotif recently launched LoMoTV and LoMo Records with ZASH to introduce new content and services to its platform, engage new segments of users, and develop potential new revenue sources.
Lomotif faces significant competition in the market of social platforms including companies operating worldwide established video-sharing social platforms such as TikTok, Kuaishou, Snapchat and Instagram. Some of its current and potential competitors have significantly greater resources and better competitive positions in certain markets than it does. These factors may allow its competitors to respond more effectively than Lomotif to new or emerging technologies and changes in market requirements. Lomotif’s competitors may develop products, features, or services that are similar to its or that can achieve greater market acceptance, may undertake more far-reaching and successful product development efforts or marketing campaigns, or may adopt more aggressive pricing policies. In launching and increasing various streaming services, such as LoMoTV and LoMo Records, Lomotif also faces competition from traditional providers of entertainment video, including broadcasters and cable network operators, as well as internet-based e-commerce or entertainment video providers which are increasing their streaming video offerings. Several of these competitors have long operating histories, large customer bases, strong brand recognition, exclusive rights to certain content and significant financial, marketing and other resources. They may secure terms from licensors and influencers, adopt more aggressive pricing and devote more resources to product development, technology, infrastructure, content acquisitions and marketing. As a result, Lomotif’s competitors may acquire and engage users at the expense of the growth or engagement of Lomotif’s user base, which may affect its business and financial results.
We believe that Lomotif’s ability to compete effectively depends upon many factors both within and beyond our control, including:
the usefulness, ease of use, performance, and reliability of Lomotif’s products and services compared to its competitors;
the size and composition of Lomotif’s user base;
the ability to establish and maintain influencers, publishers and other content creators’ interest in contributing to the content of the Lomotif platform;
the engagement of Lomotif’s users with its products and services;
the timing and market acceptance of Lomotif’s products and services, including developments and enhancements to its or its competitors’ products and services;
the ability to monetize Lomotif’s products and services, including to successfully monetize mobile usage;
the frequency, size, and relative prominence of the ads and other commercial content displayed by Lomotif or its competitors;
customer service and support efforts;
marketing and selling efforts;
changes mandated by legislation, regulatory authorities, or litigation, including settlements and consent decrees, some of which may have a disproportionate effect on Lomotif;
acquisitions or consolidation within Lomotif’s industry, which may result in more formidable competitors;
the ability to attract, retain, and motivate talented employees, particularly software engineers;
the ability to cost-effectively manage and grow Lomotif’s operations; and
Lomotif’s reputation and brand strength relative to its competitors.
If Lomotif is not able to effectively compete, its user base and level of user engagement may decrease, which could make it less attractive to influencers, publishers, advertisers, and business partners, and materially and adversely affect its business, revenue prospects and results of operations.
If Lomotif fails to retain its existing users, keep them engaged or acquire new users in a cost-efficient manner, its business, financial condition, results of operations and prospects may be materially and adversely affected. A majority of Lomotif’s current user base is not in the United States and it may not be able to gain a significant number of users in the United States as quickly or as cost effectively as it experienced with other jurisdictions, and will likely need to change or enhance its technology platform to accommodate a user base in the United States at scale.
The size of user base and the level of user engagement are critical to Lomotif’s success. Its expected monetization methods, including advertising, paid features, non-fungible tokens or functions, live streaming, e-commerce and online games, depend on its ability to significantly increase the size of its user base and user engagement. A majority of Lomotif’s current user base is not in the United States. While Lomotif is prioritizing the United States as a region to grow its user base, it may not be able to gain a significant number of users in the United States as quickly or cost effectively as it experienced with other jurisdictions and will likely need to change or enhance its technology platform to accommodate a user base in the United States at scale. If Lomotif fails to grow its user base in the United States or generally, either due to its failure to retain existing users or attract new users, or its users becoming less active, there may be less frequent access of users to its platform, less user engagement with any ads displayed on the platform, and less user spend with paid products or services offered by the platform. This could drive influencers and other content creators away from the Lomotif platform, advertisers from purchasing advertisements on the platform, dissuade merchants from promoting products on the platform, and dissuade publishers and game developers from distributing their tv shows, music records, and games through the platform. As a result, Lomotif may not be to generate the level of revenues expected, or from in revenues. Lomotif may need to conduct more marketing and branding activities and incur additional selling and marketing expenses to retain existing users and attract new users, influencers, advertisers, merchants, game developers and publishers, which may reduce its .
Growing Lomotif’s user base and maintaining a high level of user engagement require it to adequately and timely respond to changes in user preferences, attract and retain popular influencers and offer new features and contents. A number of factors could negatively affect user retention, growth and engagement, including if:
Lomotif fails to maintain its user base, the breadth and diversity of its contents and develop and introduce features, functions and applications that keep its users interested and engaged on its platform;
Lomotif fails to successfully balance its efforts to provide a compelling user experience with the decisions with respect to the frequency, prominence, and size of ads and other commercial content that it displays;
technical or other problems prevent Lomotif from delivering its services in a timely and reliable manner or otherwise adversely affect user experience;
Lomotif fails to address changes in user sentiment about the quality or usefulness of the features, functions and applications offered on its platform and user concerns related to data privacy and safety, cyber security and other factors;
Lomotif is unable to combat spam or inappropriate or abusive use of its platform, which may lead to negative publicity;
Lomotif suffers from negative publicity, fails to maintain its brand image, or its reputation is damaged;
there are adverse changes in Lomotif’s offerings that are mandated by legislation, regulatory authorities, or litigation, including settlements or consent decrees;
users increasingly engage with competing platforms.
If Lomotif’s users, influencers, publishers and other content creators and licensors do not continue to contribute content or their contributions are not perceived as valuable to other users, Lomotif may experience a decline in user growth, retention, and engagement, which could result in the loss of advertisers and revenue.
Lomotif’s success depends on its ability to provide Lomotif users with engaging content, whether through its platform or the associated LoMoTV and LoMo Records, which in part depends on the content contributed by its users, influencers, publishers and other content creators and licensors. If its existing and target content contributors, including influencers, celebrities, artists, athletes, journalists, sports teams, media outlets and brands, publishers, and other users, are not interested in contributing, or do not continue to contribute engaging content to Lomotif, user growth, retention, and engagement may decline. That, in turn, may impair Lomotif’s ability to maintain good relationships with its advertisers and business partners or attract new advertisers and business partners, which may seriously harm its business.
Lomotif faces risks related to third parties on which it relies and with whom it does business. Changes to third-party operating systems, networks, mobile devices, third-party standards, mobile application distribution channels, targeting and measurement tools or third-party terms of service may negatively affect Lomotif’s business. In addition, Lomotif may fail to partner with third-party platforms that integrate with its platform or other products which could harm its business.
Lomotif’s current and expected operations are dependent on:
Electronics manufacturers and their technical standards requirements for their devices,
Whether electronics manufacturers make Lomotif available on their platforms,
Whether speech-based searches and functions will find or work with the Lomotif platform,
Whether manufacturers, search engine algorithms and app stores may show users Lomotif’s platform,
Compatibility with third-party operating systems to support Lomotif’s platform and all its features,
The availability of complex networks and the dependability of mobile devices to connect to networks,
Targeting and measuring tools to collect user data so that Lomotif can drive advertisement revenues,
Third-party terms of service being reasonable or else terms with which Lomotif is able to comply,
Third-parties maintaining their standards of service and complying with rules and regulations,
Influencers and other content contributors,
Advertising agencies and advertisers,
Third-party platforms and websites integrating certain tools and functions,
Third-parties partnering with Lomotif to drive users to its platform or otherwise working with Lomotif to create an integrated user experience between platforms, and
Third-party online payment providers and processors.
Lomotif relies on third parties to supply these services and provide revenue sources. It is important that Lomotif’s platform and related products and services work well across a range of mobile operating systems, complex networks and mobile devices that Lomotif does not control. The networks maintained and services provided by such third parties are vulnerable to damage or interruption, which could impact Lomotif’s results of operations. Any disruption or cancelation of service or partnership by Lomotif or by a third-party with Lomotif could affect user experience, drive users away and discourage advertisers and partners from working with Lomotif.
Furthermore, Lomotif expects to continue to devote significant resources to creating and supporting products and services across multiple platforms and devices. Lomotif may not be successful in maintaining and developing relationships with key participants in the mobile industry or in developing services that operate effectively with these operating systems, networks, devices and standards. Failing to attract and retain a substantial number of new device manufacturers, suppliers, distributors, developers and users, or failing to develop products and technologies that work well on new devices and platforms, could harm Lomotif’s business, financial condition, and operating results and ability to capture future business opportunities.
In addition, the conduct of third parties which provide infrastructure, services, content and collaboration opportunities to Lomotif may affect Lomotif’s business. We cannot be certain whether any such third party has or will infringe any other person’s legal rights or violate any regulatory requirements. While Lomotif is on watch for irregularities or non-compliance in the business practices of any parties with whom Lomotif pursues existing or future cooperation, we cannot assure you that any of these irregularities will be corrected in a prompt and proper manner or that they will not expose us or Lomotif to liability or reputational harm.
The long-term and largely fixed cost nature of certain contractual relationships and commitments Lomotif has or may need to enter into may limit Lomotif’s operating flexibility and could adversely affect its liquidity or results of operations.
In connection with licensing streaming content, Lomotif has and may need to enter into multi-year commitments with content providers. In addition, Lomotif has and may need to multi-year commitments for content that it produces, either directly or through third parties, including elements associated with these productions such as non-cancelable commitments under talent agreements. The payment terms of these agreements are typically not tied to member usage or the size of Lomotif’s user base (“fixed cost”) but may be determined by costs of production or tied to such factors as titles licensed or theatrical exhibition receipts.
Given the multiple-year duration and largely fixed cost nature of certain content commitments, if user acquisition and retention do not meet expectations, margins may be adversely impacted. Payment terms for certain content commitments, such as content LoMoTV or LoMo Records directly produces or will produce, may typically require more up-front cash payments than other content licenses or arrangements whereby Lomotif does not cashflow the production of such content. To the extent revenue growth does not meet expectations, Lomotif’s liquidity and results of operations could be adversely affected as a result of content commitments and accelerated payment requirements of certain agreements. In addition, the long-term and fixed cost nature of certain content commitments may limit flexibility in planning for, or reacting to changes in Lomotif’s business and the market segments in which Lomotif operates. If LoMoTV or LoMo Records licenses or produces content that is not favorably received by consumers in a territory, or is unable to be shown in a territory, the acquisition and retention of users may be adversely impacted and, given the long-term and fixed cost nature of certain of Lomotif’s content commitments, it may not be able to adjust its content offering quickly and its results of operation may be impacted.
Lomotif relies on a combination of patent, trademark, trade secret, copyright, domain names, proprietary technologies and other intellectual property rights to protect its intellectual property. Lomotif’s patents may expire and may not be extended, Lomotif’s patent applications or patent rights may be contested, circumvented, invalidated, limited in scope or Lomotif may be subject to other forms of intellectual property infringement cases that result in liability and prevent Lomotif from continuing to use the intellectual property on which it currently relies. In particular, Lomotif may not be able to prevent others from developing and deploying competing technologies, which could have a material and adverse effect on its business, financial condition, results of operations and prospects.
Lomotif relies on patented technology for mixing and editing videos. Lomotif may not be able to prevent others from developing or exploiting competing technologies, which could have a material and adverse effect on its business operations, financial condition and results of operations. Lomotif’s patents registered in the United States are generally subject to finite and non-extendable terms. Currently, Lomotif also has patent applications pending in the United States and has filed a PCT application, but we cannot assure you that Lomotif will be granted patents pursuant to pending applications. Even if Lomotif’s patent applications succeed and Lomotif is issued patents in accordance with them, it is still uncertain whether these patents will be contested, circumvented or invalidated in the future.
The rights granted under any issued patents may not provide Lomotif with proprietary protection or competitive advantages. Further, the claims under any patents that issue from patent applications may not be broad enough to prevent others from developing technologies that are similar or that achieve results similar to Lomotif’s technology. It is also possible that the intellectual property rights of others will bar Lomotif from licensing or from exploiting any patents that issue from Lomotif’s pending applications. Numerous U.S. and patents issued in other regions and pending patent applications owned by others exist in the fields in which Lomotif has developed and is developing technology. These patents and patent applications might have priority over Lomotif’s patent applications and could subject its patent applications to invalidation or subject it to patent infringement lawsuits in its current and in any future jurisdictions into which Lomotif expands.
Finally, litigation may be necessary in the future to enforce Lomotif’s intellectual property rights and to protect its trade secrets or defend against claims of infringement by Lomotif. Such litigation could be costly, time-consuming, and distracting to management, and could result in the impairment or loss of portions of Lomotif’s available intellectual property or result in payment of substantial damages, penalties and fines or to the removal of relevant content from Lomotif’s website. It may also result in Lomotif’s need to seek license arrangements which may not be available on commercially reasonable terms. Further, efforts to enforce intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of Lomotif’s intellectual property rights, and if such defenses, or countersuits are , Lomotif could intellectual property rights. Lomotif’s to protect proprietary technology copying or use, as well as any or of management’s attention and resources, could further sales or the implementation of the Lomotif platform, the functionality of the platform, introductions of platform’s features, result in Lomotif substituting or more technologies into platforms or Lomotif’s reputation.
Lomotif relies on a combination of patent, trademark, trade secret, copyright and other intellectual property rights and measures to protect its intellectual property and ensure strong branding with users, but trademarks registered, internet search engine keywords purchased and domain names which are already registered by third parties that are similar to Lomotif’s trademarks, brands or websites or third-party misappropriation of Lomotif’s data and copying of Lomotif’s platform could cause confusion for users, divert users from Lomotif’s products and services or harm Lomotif’s reputation and brand image.
Competitors and other third parties may register trademarks or purchase internet search engine keywords or domain names that are similar to Lomotif’s in order to divert potential users from its platform to theirs. Preventing such unauthorized use is inherently difficult. If Lomotif is unable to prevent such unauthorized use, competitors and other third parties may continue to drive potential online customers away from Lomotif’s platform to competing, irrelevant or potentially offensive platforms, which could harm Lomotif’s reputation and cause Lomotif to lose revenues.
Third parties may misappropriate Lomotif’s data through scraping its platform or by other means and may aggregate the data on their own platforms. In addition, “copycat” or piracy-based platforms or apps may misappropriate data on Lomotif’s platform and attempt to imitate Lomotif’s brand or the functionality of Lomotif’s platform. Copied and pirated content may prove to be competitive with Lomotif’s content. If Lomotif becomes aware of such platforms, it may employ technological and legal measures in an attempt to halt their operations if these efforts are commercially reasonable.
Lomotif may not be able to detect all such actions in a timely manner and, even if Lomotif could, technological and legal measures when employed may be insufficient to stop their operations. In those cases, Lomotif’s available remedies may not be adequate to protect against such platforms. Regardless of whether Lomotif can successfully enforce Lomotif’s rights against these platforms, any measures that Lomotif may take could require significant financial or other resources from Lomotif or from us. Those platforms may also lure away some of Lomotif’s users or advertisers or reduce its market share, causing material and adverse effects to Lomotif’s business, financial condition, results of operations and prospects.
Any material disruption or breach of Lomotif’s information technology systems or those of third-party partners could materially damage user and business partner relationships, and could subject Lomotif to significant reputational, financial, legal and operational consequences.
Computer hackers, governments or cyber terrorists may attempt to penetrate Lomotif’s network security and Lomotif’s website. Unauthorized access to Lomotif’s proprietary business information or user data may be obtained through break-ins, sabotage, breach of Lomotif’s secure network by an unauthorized party, computer viruses, computer denial-of-service attacks, employee theft or misuse, breach of the security of the networks of Lomotif’s third-party providers or other misconduct. Despite the implementation of security measures, the servers of Lomotif’s computing providers and other systems, and other third parties on which Lomotif relies, are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical . In addition, the techniques used by computer programmers who may attempt to penetrate and Lomotif’s network security or website change frequently and may not be recognized until launched a target, Lomotif may be to anticipate these techniques.
Any material disruption or slowdown of Lomotif’s systems or those of third parties on which Lomotif depends on, including a disruption or slowdown caused by Lomotif’s failure to successfully manage significant increases in user volume or successfully upgrade applicable systems, system failures, viruses, security breaches, or other causes, could harm Lomotif’s brand and reputation, and adversely affect its revenue prospectus or cause revenues to decline. To the extent that any disruption or security breach was to result in a loss of or damage to data or applications, or disclosure of confidential or proprietary information, Lomotif could incur liability or reputational and the further development of products and services could be . In addition, if changes in technology cause Lomotif’s information systems, or those of third parties on which Lomotif depends, to become , or if such information systems are to handle Lomotif’s growth, Lomotif could users and its business and operating results could be affected.
Lomotif’s products and internal systems rely on software and hardware that is highly technical, and any errors, bugs, or vulnerabilities in these systems, or failures to address or mitigate technical limitations in Lomotif’s systems, could adversely affect its business.
Lomotif’s products, services and internal systems rely on software and hardware, including software and hardware developed or maintained internally or by third parties, that is highly technical and complex. In addition, Lomotif’s products and internal systems depend on the ability of such software and hardware to store, retrieve, process and manage large amounts of data. The software and hardware on which Lomotif relies has contained, and may in the future contain, errors, bugs or vulnerabilities, and Lomotif’s systems are subject to certain technical limitations that may compromise Lomotif’s ability to meet its objectives. Some errors, bugs, or vulnerabilities inherently may be difficult to detect and may only be discovered after the code has been released for external or internal use.
Errors, bugs, vulnerabilities, design defects, or technical limitations within the software and hardware on which Lomotif relies have in the past led to, and may in the future lead to, outcomes including a negative experience for users and advertisers who use Lomotif’s products and services, compromised ability of its products and services to perform in a manner consistent with Lomotif’s terms, contracts or policies, delayed product or service introductions or enhancements, targeting, measurement or billing errors, compromised ability to protect the data of Lomotif’s users or its intellectual property or other data, or reductions in its ability to provide some or all of its services. For example, Lomotif makes commitments to its users as to how their data will be used within and across Lomotif’s products, and its systems are subject to errors, bugs and technical limitations that may prevent it from fulfilling these commitments reliably. In addition, any errors, bugs, or in Lomotif’s systems or the software and hardware on which Lomotif relies, to properly address or mitigate the technical in Lomotif’s systems, or associated or of service or to fulfill its commitments to its users, have in the past led to, and may in the future lead to, outcomes including to Lomotif’s reputation, of users, of advertisers, of revenue, regulatory inquiries, , or liability for , , or other remedies, any of which could affect its business and financial results.
Lomotif’s focus on user experience and acting for the long-term may conflict with the short-term operating results of its business, and also negatively impact Lomotif’s relationships with advertisers or other third parties.
Lomotif strives to focus on user experience and satisfaction, which Lomotif believes is essential to its success and serves the best, long-term interests of the business. Therefore, Lomotif has made, and may make in the future, significant investments or changes in strategy that it thinks will benefit its users, even if the decision negatively impacts its operating results in the short term. In addition, this focus on the user experience may also negatively impact relationships with advertisers or other third parties and may not result in the long-term benefits that Lomotif expects, in which case the success of its business and operating results could be harmed.
Spammers and malicious applications may affect user experience, which could reduce Lomotif’s ability to attract users and advertisers and materially and adversely affect its business, financial condition and results of operations.
Spammers may use Lomotif’s platforms to send targeted and untargeted spam messages to users, which may affect user experience. As a result, Lomotif’s users may use Lomotif’s products and services less or stop using them altogether. In spamming activities, spammers typically create multiple user accounts for the purpose of sending spam messages. Although Lomotif attempts to identify and delete accounts created for spamming purposes, it may not be able to effectively eliminate all spam messages from Lomotif’s platforms in a timely fashion. Any spamming activities could have a material and adverse effect on its business, financial condition and results of operations.
User misconduct and inappropriate content may adversely impact Lomotif’s brand image, business and results of operations, and Lomotif may be held liable for information or content displayed on, retrieved from or linked to its platform or website or distributed to its users. Social media platforms have received increased scrutiny from stakeholders in recent years. Lomotif may experience negative publicity involving Lomotif, its users, its content, its platform, its management, its business model or its industry in general.
Lomotif’s short video and streaming platform enables users to present and exchange information, interact with others and engage in various other online activities, many of which are conducted in real time. As it is difficult to control user behavior in real time, Lomotif’s platform may be misused by individuals or groups of individuals who engaged in, among other things, immoral, inappropriate, disrespectful, fraudulent or illegal activities. While Lomotif has developed its own technologies and is using technologies licensed from others as well as other measures to detect inappropriate content and activities, Lomotif cannot guarantee that it will be able to fully prevent inappropriate content from being posted on its platform or inappropriate activities from being carried out on Lomotif’s platform.
Moreover, as Lomotif has no control over the offline behavior of Lomotif’s users, to the extent that such behavior is associated with Lomotif’s platform, its ability to protect its brand image and reputation may be limited. Lomotif’s business and the public perception of its brand may be materially and adversely affected by misconduct conducted on or linked to Lomotif’s platform. It is possible that Lomotif’s users may engage in conversations or activities on its platform that may be deemed illegal under the laws and regulations of certain countries within which Lomotif operates.
If any of Lomotif’s users suffers or alleges to have suffered physical, financial or emotional harm arising from any contact initiated on Lomotif’s platform, Lomotif may face civil lawsuits or other proceedings initiated by the affected user, or governmental or regulatory actions. Defending such actions could be costly and involve significant time and attention of Lomotif’s management and other resources, which could materially and adversely affect its business, financial condition, results of operations and prospects. There can be no assurance that Lomotif can detect all illegal or inappropriate content displayed on, retrieved from or linked to its platform or website. If Lomotif is held liable for any of the aforementioned incidents in the future, its business, financial condition and results of operations may be materially and adversely affected.
Negative publicity involving Lomotif, its users, content, platform, management, business model or industry in general may materially and adversely harm Lomotif’s brand and, as a result, its business. We cannot assure you that Lomotif will be able to effectively manage negative publicity. We cannot guarantee that there will not be negative news in relation to Lomotif as well as its users and content on its platform. The dissemination of such news to the public may have an adverse effect on Lomotif’s reputation or brand image. Lomotif may have to incur significant expenses in order to remedy the effects of these negative reports, which may materially and adversely affect its results of operations.
If Lomotif is unable to attract, train and retain qualified personnel or if the efforts of Lomotif’s management and other key personnel do not continue as expected, its business may be materially and adversely affected.
Lomotif’s success depends largely upon the continued services of its key executives including its founder and Chief Executive Officer, Paul Yang. Lomotif’s future success also depends, to a significant extent, on its ability to attract, train and retain qualified personnel, particularly management, technical and marketing personnel with expertise in the internet industry; inability to do so may materially and adversely affect its business. Since the internet industry is characterized by high demand and intense competition for talent, we cannot assure you that Lomotif will be able to attract or retain qualified staff or other highly skilled employees. As Lomotif is relatively young, its ability to train and integrate new employees into its operations may not meet the growing demands of its business which may materially and adversely affect Lomotif’s ability to grow its business, which may affect its results of operations.
If Lomotif’s goodwill or intangible assets become impaired, we may be required to record a significant charge to earnings.
Goodwill is a significant asset on Lomotif’s balance sheet. Under U.S. generally accepted accounting principles, or GAAP, we review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. As of December 31, 2021, we had recorded a total of [$120,320,054] of goodwill and intangible assets, net related to our acquisition of Lomotif. An adverse change in market conditions, particularly if such change has the effect of changing one of our critical assumptions or estimates, could result in a change to the estimation of fair value that could result in an impairment charge to our goodwill or intangible assets.
Lomotif’s business is subject to a variety of laws, regulations, rules, policies and other obligations, which most notably include those related to data privacy and protection. Any violation of the law or regulations governing Lomotif’s operations, including those related to losses or unauthorized access to or releases of confidential information or personal data could subject Lomotif to significant reputational, financial, legal and operational consequences.
Lomotif’s business requires it to collect, use, store and otherwise process confidential information, including, among other things, personally identifiable information, or PII, with respect to users and employees. Lomotif is subject to laws, and regulations, and additional laws and regulations as Lomotif’s global expansion evolves, relating to the collection, use, retention, security, transfer or otherwise processing of PII. In many cases, these laws and regulations not only apply to third-party transactions, but also may restrict transfers of PII from Lomotif to us or from us or Lomotif to our subsidiaries. Several jurisdictions have passed laws in this area, and other jurisdictions are considering imposing additional and possibly more stringent restrictions. These laws continue to develop and may vary from jurisdiction to jurisdiction.
Complying with emerging and changing international requirements may cause Lomotif to incur substantial costs or require Lomotif to change its business practices. Non-compliance could result in significant penalties or legal liability as well as reputational harm. Data protection, privacy, and other laws and regulations, including those in Europe and the United States, may impose varying obligations. Regulatory authorities around the world are considering a number of legislative and regulatory proposals concerning data protection. In addition, the interpretation and application of consumer and data protection laws are often uncertain. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with Lomotif’s data practices. These legislative and regulatory proposals, if adopted, and such interpretations could, in addition to the possibility of fines and reputational harm, result in an order requiring Lomotif to change it data practices, which could have an adverse effect on its business and results of operations. Complying with these various laws could cause Lomotif to incur substantial costs or require Lomotif to change its business practices in a manner adverse to the business.
Although Lomotif’s operations in Europe are currently limited, recent legal developments have created compliance uncertainty regarding the processing of personal data that might nonetheless affect it. The General Data Protection Regulation, or GDPR, which came into application in the European Union, or EU, on May 25, 2018, applies to all of Lomotif’s activities conducted from an establishment in the EU or related to any products and services that Lomotif offers to EU users. The GDPR creates significant new requirements regarding the protection of personal data and significantly increases the financial penalties for noncompliance. Lomotif may be considered in violation of the GDPR and thus be required to adopt additional measures in the future. If Lomotif fails to comply with the requirements stipulated by the GDPR in a timely manner, or at all, Lomotif may be subject to significant penalties and fines, which may in turn adversely affect its business, reputation, financial condition and operating results. In addition to the new requirements imposed by the GDPR, the privacy requirements and expectations created in the EU by the GDPR are stricter than certain other regions. These requirements include rules restricting the flow of data across borders. These restrictions may cause companies to localize data and may otherwise impact the use of Lomotif’s services.
Additionally, California recently enacted legislation that has been dubbed the first “GDPR-like” law in the United States. Known as the California Consumer Privacy Act, or CCPA, it creates new individual privacy rights for consumers (as that word is broadly defined in the law) and places increased privacy and security obligations on entities handling personal data of consumers or households. The CCPA, which went into effect on January 1, 2020, requires covered companies to provide new disclosures to California consumers, and provides such consumers new ways to opt-out of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA may increase Lomotif’s compliance costs and potential liability. Some observers have noted that the CCPA could mark the beginning of a trend toward more stringent privacy legislation in the United States, which could increase Lomotif’s potential liability and adversely affect its business.
Lomotif faces risks and uncertainties arising from laws, regulations, rules and the political and economic climate in the jurisdictions across the globe within which it does business, including, without limitation, the United States, Brazil, India, Russia and Singapore .
Failure to comply with such applicable laws, regulations and rules may subject Lomotif’s global operations to strict scrutiny by local authorities, which in turn may materially and adversely affect Lomotif’s globalized operations. As Lomotif expands operations in additional emerging markets and regions, Lomotif may have to adapt its business models or operations to the local markets due to various legal requirements and market conditions. Lomotif’s international operations and expansion efforts may result in increased costs and are subject to various risks, including difficulties in obtaining licenses, permits or other applicable governmental authorizations, content control from local authorities, uncertain enforcement of intellectual property rights, potential claims of intellectual property infringement, the complexity of compliance with laws and regulations and cultural differences.
Compliance with applicable laws, regulations and rules related to matters that are central to Lomotif’s business, including those related to streaming services, content restrictions, data privacy, virtual items, anti-corruption laws, anti-money laundering and the protection of minors, increase the costs and risk exposure of doing business in multiple jurisdictions across the globe. In some cases, compliance with the laws and regulations of one country could violate the laws and regulations of another country. As Lomotif’s globalized operations evolve, we cannot assure you that Lomotif will be able to fully comply with the legal requirements of each jurisdiction and successfully adapt its business models to local market conditions. Due to the complexity involved in Lomotif’s global business expansion, we cannot assure you that Lomotif is in compliance with all local laws or regulations, including license requirements, or that Lomotif’s licenses will be successfully renewed or expanded to cover all of its areas of operations.
Risk Related to AdRizer
There is no guarantee that we will realize the expected benefits from our acquisition of AdRizer or successfully integrate AdRizer with our other businesses or investments such as Lomotif and Honey Badger.
In February 2022, we completed the acquisition of AdRizer, a provider of technology solutions that automate the use of artificial intelligence for digital advertising analytics and programmatic media buying. We plan to integrate the AdRizer platform and Honey Badger with the Lomotif short form video app in an effort to monetize Lomotif’s content creation and streaming capabilities . There is no guarantee that our efforts to integrate these platforms will be successful or beneficial as we expect, and such integration efforts may consume significant amounts of management attention and other resources, which may negatively impact other aspects of our business. See “—Risks Related to Our Company—Our growth strategy includes pursuing opportunistic acquisitions of additional brands, and we may not find suitable acquisition candidates or successfully operate or integrate any business that we may acquire,” “—Risks Related to Our Company—We may not realize the anticipated benefits of acquisitions or investments in joint ventures, or those benefits may be delayed or reduced in their realization,” and “—Risks Related to Lomotif—There is no guarantee that we will realize the expected benefits from our investments in ZVV, our joint venture with ZASH which owns an 80% interest in Lomotif Private Ltd., or integrate the Lomotif app with our other businesses such as AdRizer and Honey Badger or any businesses we may acquire in the future.”
If we fail to successfully integrate AdRizer into our internal control over financial reporting, the integrity of our financial reporting could be further compromised, which could have a material adverse effect on our reported financial results.
As a private company, AdRizer was not subject to the requirements of the Exchange Act, including those pertaining to internal control over financial reporting. The integration of AdRizer into our internal control over financial reporting may require significant time and resources from our management and other personnel and may increase our compliance costs. As of December 31, 2021, our Principal Executive Officer and Principal Financial and Accounting Officer have concluded that our disclosure controls and procedures were not effective to provide reasonable assurance that information that it is required to disclose in reports that we file with the SEC is recorded, processed, summarized, and reported within the time periods specified by the Exchange Act rules and regulations. See “—Risks Related to Our Company—If we fail to comply with the rules and regulations under the Sarbanes-Oxley Act, our operating results, our ability to operate our business and investors’ views of us may be harmed.” If we fail to successfully integrate AdRizer into our internal control over financial reporting, the integrity of our financing reporting could be further compromised. Failure to and maintain an internal control environment could have a material effect on our ability to accurately and timely report our financial results, the market’s perception of our business, our stock price and our ability to raise additional capital on acceptable terms or at all.
The digital advertising industry is intensely competitive, and if AdRizer does not effectively compete against current and future competitors, AdRizer’s and our business, results of operations, and financial condition could be harmed.
AdRizer operates in a highly competitive and rapidly changing industry that is subject to changing technology and customer demands and that includes many companies providing competing solutions. With the introduction of new technologies and the influx of new entrants into the market, we expect competition to persist and intensify in the future, which could harm AdRizer’s and our ability to increase revenue and profitability. New technologies and methods of buying advertising present a dynamic competitive challenge, as market participants offer multiple new products and services aimed at capturing advertising spend.
AdRizer competes with privately-held companies and with public companies such as AdMob, The Trade Desk, Inc., Perion Network Ltd., and Cardlytics, Inc., AdRizer’s current and potential competitors may have significantly more financial, technical, marketing and other resources than we have, allowing them to devote greater resources to the development, promotion, sale and support of their products and services. They may also have more extensive customer bases and broader supplier relationships than we have. As a result, these competitors may be better able to respond quickly to new technologies, develop deeper marketer relationships or offer services at lower prices. Increased competition may result in reduced pricing for AdRizer’s products and services, increased sales and marketing expense, longer sales cycles or a decrease of AdRizer’s market share, any of which could negatively affect AdRizer’s and our revenue, profitability and future operating results and ability to grow our business. These companies may also have greater brand recognition than we have, actively seek to serve AdRizer’s market, and have the power to significantly change the nature of the marketplace to their advantage. Some of AdRizer’s larger competitors may have substantially broader product and service offerings and may leverage their relationships based on other products and services or incorporate additional functionality into existing products and services to business in a manner that may customers from using AdRizer’s products and services, including through selling at zero or margins or product bundling with other products and services which they provide at reduced prices. Customers may prefer to purchase advertising on their own or through another platform without using AdRizer’s buy-side products and services. Potential customers may also prefer to leverage larger sell-side platforms rather than a new platform regardless of product performance or features. These larger competitors often have broader product lines and market focus and may therefore not be as to in a particular market. AdRizer may also experience market perception as a result of being a smaller company than its larger competitors.
AdRizer may also face competition from companies that we do not yet know about or do not yet exist. If existing or new companies develop, market or resell competitive high-value marketing products or services, acquire one of AdRizer’s existing competitors or form a strategic alliance with one of AdRizer’s competitors, AdRizer’s ability to compete effectively could be significantly compromised and our results of operations could be harmed.
High customer concentration exposes AdRizer to various risks faced by its major customers and may subject AdRizer to significant fluctuations or declines in revenues.
A limited number of AdRizer’s major customers have contributed a significant portion to its revenues in the past. AdRizer’s revenue from the top 5 largest customers accounted for approximately 90% and 91% of its total revenues in the fiscal years ended December 31, 2021 and 2020, respectively. Its revenue from its top ten largest customers accounted for approximately 96% and 96% of its total revenues in the fiscal years ended December 31, 2021 and 2020, respectively. Although AdRizer continually seeks to diversify its customer base, and we intend to integrate AdRizer with our other businesses including the Lomotif app to increase our total consolidated revenues, we cannot assure you that the proportion of our revenues contributed by these customers to AdRizer’s or our total revenues will decrease in the near future. Dependence on a limited number of customers exposes us to the risk of substantial losses resulting from the loss or financial impairment of any of those customers. Specifically, any one of the following events, among others, may cause material fluctuations or declines in AdRizer’s revenues and have a material and adverse effect on our business, financial condition, results of operations and prospects:
an overall decline in the business of one or more of AdRizer’s significant customers;
the decision by one or more of AdRizer’s significant customers to switch to its competitors;
AdRizer’s agreement to reduce the prices of its products and services purchased by one or more of its significant customers; or
the failure or inability of any of AdRizer’s significant customers to make timely payment for its products and services.
AdRizer often has long sales cycles, which can result in significant time between initial contact with a prospect and onboarding a customer, making it difficult to project when, if at all, it will obtain new customers and when it will generate revenue from those customers.
When purchasing AdRizer’s products and services, AdRizer’s customers and prospects are often faced with a significant commitment of capital, the need to integrate new software and/or hardware platforms and other changes in company-wide operational procedures, all of which result in cautious deliberation and evaluation by prospective customers, longer sales cycles and delays in completing transactions. Depending on the size of a prospective customer’s business and its needs, AdRizer’s sell-side sales cycle often has a duration of 3-to-6 months, while its buy-side business sales cycle often has a duration of 1-to-2 months. As part of AdRizer’s sales cycle, it may incur significant expenses before it generates any revenue from a prospective customer. We have no assurance that the substantial time and money spent on AdRizer’s sales efforts will generate significant revenue or increase profitability. If conditions in the marketplace, generally or with a specific prospective customer, change negatively, it is possible that AdRizer will be unable to recover any of these expenses. AdRizer’s sales efforts involve educating its customers about the use, technical capabilities and benefits of its platform, and working through technical connections and troubleshooting technical issues with prospective customers. Some of AdRizer’s customers undertake an evaluation process that frequently involves not only its platform but also the offerings of its competitors. As a result, it is to predict when AdRizer will obtain new customers and begin generating revenue from these new customers. Even if AdRizer’s sales efforts result in obtaining a new customer, the customer controls when and to what extent it uses AdRizer’s platform and therefore the amount of revenue AdRizer generates, and it may not sufficiently justify the expenses incurred to acquire the customer and the related training support. As a result, AdRizer may not be to add customers, generate additional revenue, as quickly as we may expect, which could AdRizer’s and our growth prospects.
AdRizer’s future success and revenue growth are greatly dependent on adding new customers, effectively educating and training its existing customers on how to make full use of its platform and increasing usage of its platform by its customers.
AdRizer’s future success will be greatly dependent on regularly adding new customers and increasing its customers’ usage of its platform. AdRizer’s contracts and relationships with customers generally do not include long-term or exclusive obligations requiring them to use AdRizer’s platform or maintain or increase their use of the platform. AdRizer’s agreements with its customers allow them to change the amount of spending on its platform or terminate its services with limited notice. AdRizer’s customers typically have relationships with different providers and there is limited cost to moving budgets to AdRizer’s competitors. AdRizer’s customers may also choose to decrease their overall advertising spend for any reason. Accordingly, AdRizer must continually work to win new customers and retain existing customers, increase their usage of its platform and capture a larger share of their advertising spend. AdRizer may not be successful in educating and training customers, particularly the newer customers, on how to use its platform, in order for its customers to get the most benefit from its platform and increase their usage. If these efforts are unsuccessful or customers decide not to continue to maintain or increase their usage of AdRizer’s platform for any other reason, or if AdRizer to attract new customers, its revenue could or , which would materially and AdRizer’s and our business, results of operations, and financial condition. We cannot you that AdRizer’s customers will continue to use and increase their spend on AdRizer’s platform or that AdRizer will be to attract a sufficient number of new customers to continue to grow AdRizer’s business and revenue. If customers representing a significant portion of AdRizer’s business decide to materially reduce their use of its platform or using the platform altogether, AdRizer’s revenue could be significantly reduced, which could have a material effect on AdRizer’s and our business, operating results and financial condition. AdRizer may not be to replace customers who decrease or their usage of its platform with new customers that will use its platform to the same extent.
AdRizer must provide value to both publishers and buyers of advertising without being perceived as favoring one over the other or being perceived as competing with them through AdRizer’s service offerings.
AdRizer provides a platform that intermediates between publishers seeking to sell advertising space and buyers seeking to purchase that space. If AdRizer were to be perceived as favoring one side of the transaction to the detriment of the other, or presenting a competitive challenge to their own businesses, demand for AdRizer’s platform from publishers or buyers could decrease and AdRizer’s business, results of operations and financial condition would be adversely affected.
AdRizer is subject to payment-related risks and, if its customers do not pay or dispute their invoices, AdRizer’s business, financial condition and operating results may be adversely affected.
AdRizer may be involved in disputes with agencies and their advertisers over the operation of its platform, the terms of AdRizer’s agreements or its billings for purchases made by them through AdRizer’s platform. If AdRizer is unable to collect or make adjustments to bills to customers, AdRizer could incur write-offs for bad debt, which could have a material adverse effect on its results of operations for the periods in which the write-offs occur. In the future, bad debt may exceed reserves for such contingencies and AdRizer’s bad debt exposure may increase over time. Any increase in write-offs for bad debt could have a materially negative effect on AdRizer’s business, financial condition and operating results. Even if AdRizer is not paid by its customers on time or at all, AdRizer is still obligated to pay for the advertising inventory it has purchased for the advertising campaign, and as a consequence, AdRizer’s results of operations and financial condition would be adversely impacted.
AdRizer and its customers set up campaigns on our platform using a number of available variables. While AdRizer’s platform includes several checks and balances, it is possible for human error to result in significant over-spending. AdRizer offers a number of protections such as daily or overall spending caps. However, despite these protections, the risk of overspend exists. For example, campaigns which last for a period of time can be set to pace evenly or as quickly as possible. If a customer with a high credit limit enters an incorrect daily cap with a campaign set to a rapid pace, it is possible for a campaign to accidently go significantly over budget. AdRizer’s potential liability for such errors may be higher when they occur in situations in which AdRizer is executing purchases on behalf of a customer rather than the customer using the self-service feature of AdRizer’s platform. While AdRizer’s customer contracts state that customers are responsible for media purchased through AdRizer’s platform, AdRizer is ultimately responsible for paying the inventory providers and it may be unable to collect when such errors occur.
The market for programmatic advertising campaigns is relatively new and evolving. If this market develops slower or differently than we expect, AdRizer’s and our business, growth prospects and results of operations would be adversely affected.
The substantial majority of AdRizer’s revenue has been derived from customers that programmatically purchase or sell advertising inventory through its platform. We expect that spending on programmatic ad buying and selling will continue to be AdRizer’s primary source of revenue for the foreseeable future, and that its revenue growth will largely depend on increasing spend through its platform. The market for programmatic ad buying is an emerging market, and AdRizer’s current and potential customers may not shift quickly enough to programmatic ad buying from other buying methods, reducing its growth potential. Because this industry is relatively new, AdRizer will encounter risks and difficulties frequently encountered by early-stage companies in similarly rapidly evolving industries, including the need to:
maintain its reputation and build trust with advertisers and digital media property owners;
offer competitive pricing to publishers, advertisers and digital media agencies;
maintain quality and expand quantity of its advertising inventory;
continue to develop, launch and upgrade the technologies that enable AdRizer to provide its solutions;
respond to evolving government regulations and industry practice relating to the internet, telecommunications, mobile, privacy, marketing and advertising aspects of its business;
identify, attract, retain and motivate qualified personnel; and
cost-effectively manage AdRizer’s operations.
If the market for programmatic ad buying deteriorates or develops more slowly than we expect, it could reduce demand for AdRizer’s platform, and AdRizer’s and our business, growth prospects and financial condition would be adversely affected. In addition, revenue may not necessarily grow at the same rate as spend on AdRizer’s platform. Growth in spend may outpace growth in our revenue from AdRizer as the market for programmatic advertising matures due to a number of factors including quantity discounts and product, media, customer and channel mix shifts. A significant change in revenue as a percentage of spend could reflect an adverse change in AdRizer’s and our business and growth prospects. In addition, any such fluctuations, even if they reflect our strategic decisions, could cause our performance to fall below the expectations of securities analysts and investors, and adversely affect the price of our common stock.
Operational and performance issues with AdRizer’s platform, whether real or perceived, including a failure to respond to technological changes or to upgrade its technology systems, may adversely affect AdRizer’s and our business, operating results and financial condition.
AdRizer depends upon the sustained and uninterrupted performance of its Cortex technology platform to manage its advertising inventory supply; acquire advertising inventory for each campaign; collect, process and interpret data; and optimize campaign performance in real time and provide billing information to its financial systems. If AdRizer’s platform cannot scale to meet demand, if there are errors in its execution of any of these functions on its platform, or if AdRizer experiences outages, then its business may be harmed.
AdRizer’s Cortex technology platform is complex and multifaceted. Operational and performance issues could arise from the platform itself or from outside factors, such as cyberattacks or other third-party attacks. Errors, failures, vulnerabilities or bugs have been found in the past, and may be found in the future. AdRizer’s Cortex technology platform also relies on third-party technology and systems to perform properly. It is often used in connection with computing environments utilizing different operating systems, system management software, equipment and networking configurations, which may cause errors in, or failures of, AdRizer’s platform or such other computing environments. Operational and performance issues with AdRizer’s platform could include the failure of its user interface, outages, errors during upgrades or patches, discrepancies in costs billed versus costs paid, unanticipated volume overwhelming its databases, server or events affecting one or more server facilities. While AdRizer has built redundancies in its systems, full redundancies do not exist. Some will AdRizer’s platform down completely, others only partially. AdRizer provides service-level agreements to some of its customers, and if its platform is not available for specified amounts of time or if there are in the interaction between AdRizer’s platform, partner platform and third-party technologies, AdRizer may be required to provide credits or other financial compensation to its customers.
As we grow AdRizer’s business, we expect to continue to invest in technology services and equipment. Without these improvements, AdRizer’s operations might suffer from unanticipated system disruptions, slow transaction processing, unreliable service levels, impaired quality or delays in reporting accurate information regarding transactions in its platform, any of which could negatively affect AdRizer’s reputation and ability to attract and retain customers. AdRizer faces intense competition in the marketplace and needs to keep up with rapidly changing technology, evolving industry standards and consumer needs, regulatory changes, and the frequent introduction of new solutions by its competitors. AdRizer’s future success will depend in part upon its ability to enhance its platform and to develop and introduce new features and solutions in a timely manner with competitive prices that also meet the evolving needs of existing and prospective customers. AdRizer may not be to maintain its existing systems or replace or introduce new technologies and systems as quickly as we would like or in a cost- manner. In addition, the expansion and of AdRizer’s systems and infrastructure may require us to commit substantial financial, operational and technical resources, with no assurance that AdRizer’s and our business will grow. If we to respond to technological change or to maintain, expand, upgrade and develop AdRizer’s systems and infrastructure in a timely fashion, AdRizer’s and our growth prospects and results of operations could be affected.
Operational and performance issues with AdRizer’s Cortex technology platform could also result in negative publicity, damage to its brand and reputation, loss of or delay in market acceptance of its platform, increased costs or loss of revenue, loss of the ability to access its platform, loss of competitive position or claims by customers for losses sustained by them. Alleviating problems resulting from such issues could require significant expenditures of capital and other resources and could cause interruptions, delays or the cessation of AdRizer’s business, any of which may adversely affect our operating results and financial condition.
Significant system disruptions, loss of data center capacity or interruption of telecommunication links could adversely affect AdRizer’s business and results of operations.
AdRizer’s Cortex technology platform is currently hosted and managed on Amazon Web Services and takes full advantage of open standards for processing, storage, security and big data technology. Significant system disruptions, loss of data center capacity or interruption of telecommunication links could adversely affect AdRizer’s and our business, results of operations and financial condition. AdRizer’s business is heavily dependent upon highly complex data processing capability. The ability of AdRizer’s Cortex technology platform hosts and managers to protect these data centers against damage or interruption from fire, flood, tornadoes, power loss, telecommunications or equipment failure or other disasters is beyond AdRizer’s control and is critical to AdRizer’s ability to succeed.
The reliability of AdRizer’s product solutions is dependent on data from third-parties and the integrity and quality of that data .
Much of the data that AdRizer uses is licensed from third-party data suppliers, and AdRizer is dependent upon its ability to obtain necessary data licenses on commercially reasonable terms. AdRizer could suffer material adverse consequences if AdRizer’s data suppliers were to withhold their data from AdRizer. For example, data suppliers could withhold their data from AdRizer if there is a competitive reason to do so; if AdRizer breaches its contract with a supplier; if they are acquired by one of AdRizer’s competitors; if legislation is passed restricting the use or dissemination of the data they provide; if judicial interpretations are issued restricting use of such data; or if AdRizer is unable to acquire commercially useful data from its suppliers due to privacy changes recently made by Apple and expected to be made by Google with respect to tracking user activity across apps and websites. Additionally, AdRizer could terminate relationships with AdRizer’s data suppliers if they fail to adhere to AdRizer’s data quality standards. If a substantial number of data suppliers were to withdraw or withhold their data from AdRizer, or if AdRizer severs ties with its data suppliers based on their inability to meet AdRizer’s data standards, AdRizer’s ability to provide products and services to its customers could be materially impacted, which could result in decreased revenue.
The reliability of AdRizer’s solutions depends upon the integrity and quality of the data in AdRizer’s database. A failure in the integrity or a reduction in the quality of AdRizer’s data could cause a loss of customer confidence in AdRizer’s solutions, resulting in harm to the AdRizer brand, loss of revenue and exposure to legal claims. AdRizer may experience an increase in risks to the integrity of its database and quality of AdRizer’s data as AdRizer moves toward real-time, non-identifiable, consumer-powered data through its products. AdRizer must continue to invest in its database to improve and maintain the quality, timeliness and coverage of the data if AdRizer is to maintain its competitive position. Failure to do so could result in a material adverse effect on AdRizer’s and our business, growth and revenue prospects.
If the non-proprietary technology, software, products and services that AdRizer uses are unavailable, have future terms it cannot agree to, or do not perform as it expects, AdRizer’s and our business, results of operations and financial condition could be harmed.
AdRizer depends on various technology, software, products and services from third parties or available as open source, including for critical features and functionality of its platform and technology, payment processing, payroll and other professional services. Identifying, negotiating, complying with and integrating with third-party terms and technology are complex, costly and time-consuming matters. Failure by third-party providers to maintain, support or secure their technology either generally or for our accounts specifically, or downtime, errors or defects in their products or services, could materially and adversely impact AdRizer’s platform, its administrative obligations or other areas of its business. Having to replace any third-party providers or their technology, products or services could result in outages or difficulties in AdRizer’s ability to provide its services, which could have a material adverse effect on AdRizer’s and our business, results of operations and financial condition.
Third parties control AdRizer’s access to unique identifiers, and if the use of “third-party cookies” or other technology to uniquely identify devices is rejected by Internet users, restricted or otherwise subject to unfavorable regulation, blocked or limited by technical changes on end users’ devices and web browsers, or AdRizer’s and AdRizer’s customers’ ability to use data on AdRizer’s platform is otherwise restricted, AdRizer’s performance may decline and AdRizer may lose advertisers and revenue which could have an adverse effect on our business, operating results, and financial condition.
AdRizer’s ability to successfully leverage user data and generate revenue from opportunities to serve advertisements could be impacted by restrictions imposed by third parties, including restrictions on AdRizer’s ability to use or read cookies or device identifiers, track user activity across apps and websites or use real-time bidding networks or other bidding networks. For example, if publishers or supply-side platforms decide to limit the data that AdRizer receives in order to comply (in their view) with the opt-out of sale provisions of the California Consumer Privacy Act of 2018 (the “CCPA”) or a potential federal privacy law, or with opt-out of behavioral advertising provisions under the California Privacy Rights Act (the “CPRA”), Virginia Consumer Data Protection Act (the “VCDPA”) or Colorado Privacy Act, then AdRizer’s service may prove to be less valuable to AdRizer’s customers and AdRizer may find it more difficult to generate revenue. Third parties, such as Apple and Google, on whose operating systems AdRizer and its data suppliers have historically relied for data or opportunities to serve advertisements, have recently imposed or are expected to impose in the future privacy restrictions that will require AdRizer to develop new advertising strategies which its customers may not deem successful, which could have a material effect on AdRizer’s revenue.
Historically, digital advertising has relied primarily on the ability to uniquely identify devices across websites and applications, and to collect data about user interactions with those devices for purposes such as serving relevant ads and measuring the effectiveness of ads. Devices are identified through unique identifiers stored in cookies, provided by device operating systems for advertising purposes, or generated based on statistical algorithms applied to information about a device, such as the IP address and device type. AdRizer uses device identifiers to record information such as when an Internet user views an ad, clicks on an ad, or visits one of AdRizer’s advertiser’s websites or applications. Historically, AdRizer has used device identifiers to help it achieve the advertisers’ campaign goals, including to limit the instances that an Internet user sees the same advertisement, report information to AdRizer’s advertisers regarding the performance of their advertising campaigns, and detect and prevent malicious behavior and invalid traffic throughout AdRizer’s network of inventory. Historically, AdRizer has also used data associated with device identifiers to help AdRizer’s customers decide whether to bid on, and how to price, an opportunity to place an advertisement in a specific location, at a given time, in front of a particular Internet user. Additionally, AdRizer’s customers historically have relied on device identifiers to add information they have collected or acquired about users into AdRizer’s platform. Without such data, AdRizer’s customers may not have sufficient insight into an Internet user’s activity, which may compromise their and AdRizer’s ability to determine which inventory to purchase for a specific campaign and may the effectiveness of AdRizer’s platform or AdRizer’s ability to its platform and remain competitive.
Historically, digital advertising, including AdRizer’s platform, has made significant use of cookies to store device identifiers for the advertising activities described above. When AdRizer uses cookies, they are generally considered third-party cookies, which are cookies owned and used by parties other than the owners of the website visited by the Internet user. The most commonly used Internet browsers, including Chrome, Firefox, Internet Explorer and Safari, allow Internet users to modify their browser settings to prevent some or all cookies from being accepted by their browsers. Internet users can delete cookies from their computers at any time. Additionally, some browsers currently, or may in the future, block or limit some third-party cookies by default or may implement user control settings that algorithmically block or limit some cookies. Today, three major web browsers, Apple’s Safari, Mozilla’s Firefox and Microsoft’s Edge, block third-party cookies by default. Google’s Chrome has introduced new controls over third-party cookies and announced plans to deprecate support for third-party cookies and user agent strings entirely by late 2023. Some Internet users also download free or paid ad-blocking software that not only prevents third-party cookies from being stored on a user’s computer, but also blocks all interaction with a third-party ad server. In addition, Google has introduced ad-blocking software in its Chrome web browser that will block certain ads based on quality standards established under a multi-stakeholder coalition. If such a feature or blocks ads that are not within the established blocking standards, or if such capabilities become widely adopted and the advertising technology industry does not collaboratively develop alternative technologies, AdRizer’s business could be . The Interactive Advertising Bureau and Digital Advertising have also developed frameworks that allow users to opt out of the “sale” of their personal information under the CCPA in ways that stop or limit the ability to show targeted ads.
Advertising shown on mobile applications can also be affected by blocking or restricting use of mobile device identifiers. Data regarding interactions between users and devices are tracked mostly through stable, pseudonymous advertising identifiers that are built into the device operating system with privacy controls that allow users to express a preference with respect to data collection for advertising, including to disable the identifier. These identifiers and privacy controls are defined by the developers of the platforms through which the applications are accessed and could be changed by the platforms in a way that may negatively impact AdRizer’s business. For example, Apple has shifted to require user opt-in before permitting access to Apple’s unique identifier, or IDFA. This shift from enabling user opt-out to an opt-in requirement has had, and will likely continue to have, a substantial impact on the mobile advertising ecosystem and could adversely impact AdRizer’s growth in this channel.
Some consumers also download free or paid “ad blocking” software on their computers or mobile devices, not only for privacy reasons, but also to counteract the adverse effect advertisements can have on the consumer experience, including increased load times, data consumption, and screen overcrowding. Ad-blocking technologies and other privacy controls may prevent some third-party cookies, or other tracking technologies, from being stored on a consumer’s computer or mobile device. If more consumers adopt these measures, AdRizer’s business, operating results, and financial condition could be adversely affected. Ad-blocking technologies could have an adverse effect on AdRizer’s business, operating results, and financial condition if they reduce the volume or effectiveness and value of advertising. In addition, some ad blocking technologies block only ads that are targeted through use of third-party data, while allowing ads based on first-party data (i.e., data owned by the publisher). These ad blockers could place AdRizer at a disadvantage because AdRizer relies on third-party data, while some large competitors have troves of first-party data they use to direct advertising. Other technologies allow ads that are deemed “acceptable,” which could be defined in ways that place AdRizer or AdRizer’s advertisers at a disadvantage, particularly if such technologies are controlled or influenced by AdRizer’s competitors. Even if ad blockers do not ultimately have an effect on AdRizer’s business, investor about ad blockers could cause our stock price and ability to raise additional capital on acceptable terms or at all to be impacted.
In addition, in the EU, Directive 2002/58/EC (as amended by Directive 2009/136/EC), commonly referred to as the ePrivacy or Cookie Directive, directs EU member states to ensure that accessing information on an Internet user’s computer, such as through a cookie and other similar technologies, is allowed only if the Internet user has been informed about such access and given his or her consent. A ruling by the Court of Justice of the European Union clarified that such consent must be reflected by an affirmative act of the user, and European regulators are increasingly pressing for more robust forms of consent and bringing enforcement actions against major platforms, including Amazon, Facebook, and Google, concerning their cookie consent mechanisms. These developments may result in decreased reliance on implied consent mechanisms that have been used to meet requirements of the ePrivacy Directive in some markets. A replacement for the ePrivacy Directive is currently under discussion by EU member states to complement and bring electronic communication services in line with the General Data Protection Regulation (“GDPR”) and force a harmonized approach across EU member states. Like the GDPR, the proposed ePrivacy Regulation has extra-territorial application as it applies to businesses established outside the EU that provide publicly available electronic communications services to, or gather data from the devices of, users in the EU. Though still subject to debate, the proposed ePrivacy Regulation may further raise the bar for the use of cookies and the and for may be significant. AdRizer may be required to, or otherwise may determine that it is advisable to, make significant changes in AdRizer’s business operations and product and services to obtain user opt-in for cookies and use of cookie data, or develop or obtain additional tools and technologies to compensate for a of cookie data.
As the collection and use of data for digital advertising has received media attention over the past several years, some government regulators, such as the U.S. Federal Trade Commission (“FTC”), and privacy advocates have suggested creating a “Do Not Track” standard that would allow Internet users to express a preference, independent of cookie settings in their browser, not to have their online browsing activities tracked. “Do Not Track” has seen renewed emphasis from proponents of the CCPA, and the final regulations address browser-based or similar “do not sell” signals. California’s CPRA and the Colorado Privacy Act similarly contemplate the use of technical opt outs for the sale and sharing of personal information for advertising purposes as well as to opt out of the use of sensitive information for advertising purposes and allows for rulemaking to develop these technical signals. To the extent a “Do Not Track,” “Do Not Sell,” or similar control is adopted by many Internet users or if a “Do Not Track” standard is imposed by other states or by federal or foreign legislation or is agreed upon by standard setting groups, AdRizer may have to change AdRizer’s business practices, AdRizer’s customers may reduce their use of its platform, and AdRizer’s business, financial condition, and results of operations could be adversely affected.
AdRizer’s business practices with respect to data and consumer protection could give rise to liabilities or reputational harm as a result of governmental regulation, legal requirements or industry standards relating to consumer privacy, data protection and consumer protection.
Federal, state and international laws and regulations govern the collection, use, retention, sharing and security of data that AdRizer collects. AdRizer strives to comply with all applicable laws, regulations, self-regulatory requirements and legal obligations relating to privacy, data protection and consumer protection, including those relating to the use of data for marketing purposes. It is possible, however, that these requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or AdRizer’s practices. We cannot assure you that AdRizer’s practices have complied, comply, or will comply fully with all such laws, regulations, requirements and obligations. Any failure, or perceived failure, by AdRizer to comply with federal, state or international laws or regulations, including laws and regulations regulating privacy, data security, marketing communications or consumer protection, or other policies, self-regulatory requirements or legal obligations could result in harm to AdRizer’s and our reputation, a loss in business, and proceedings or actions against AdRizer and us by governmental entities, consumers, retailers or others. AdRizer may also be contractually liable to indemnify and hold harmless other third parties from the costs or consequences of with any laws, regulations, self-regulatory requirements or other legal obligations relating to privacy, data protection and consumer protection or any or use or disclosure of data that AdRizer stores or handles as part of operating the business. Any such proceeding or action, and any related indemnification obligation, could AdRizer’s reputation, us to incur significant expenses in defense of these proceedings, AdRizer’s and our management, increase our costs of doing business and cause consumers and retailers to decrease their use of AdRizer’s marketplace, and may result in the imposition of monetary liability. Furthermore, the costs of compliance with, and other imposed by, the data and privacy laws, regulations, standards and policies that are applicable to the businesses of AdRizer’s customers may limit the use and adoption of, and reduce the overall demand for, AdRizer’s products and services.
A significant breach of the confidentiality of the information AdRizer holds or of the security of AdRizer or its customers’, suppliers’, or traffic partners’ computer systems could be detrimental to AdRizer’s and our business, reputation and results of operations. AdRizer’s business requires the storage, transmission and utilization of data. Although AdRizer has security and associated procedures, AdRizer’s databases may be subject to unauthorized access by third parties. Such third parties could attempt to gain entry to AdRizer’s systems for the purpose of stealing data or disrupting the systems, including through ransomware. We believe AdRizer has taken appropriate measures to protect its systems from intrusion, but we cannot be certain that advances in criminal capabilities, discovery of new vulnerabilities in AdRizer’s systems and attempts to exploit those vulnerabilities, physical system or facility break-ins and data thefts or other developments will not compromise or the technology protecting AdRizer’s systems and the information it possesses. Furthermore, AdRizer faces increasing cyber security risks as it receives and collects data from new sources, and as AdRizer and its customers continue to develop and operate in cloud-based information technology environments. In the event that AdRizer’s protection efforts are , and AdRizer experiences an disclosure of confidential information or the security of such information or AdRizer’s systems are compromised, AdRizer and we could substantial . Any could result in one or more third parties obtaining access to AdRizer’s customers’ data or its data, including personally identifiable information, intellectual property and other confidential business information. Such a security could result in operational that AdRizer’s ability to meet its customers’ requirements, which could result in decreased revenues. Also, whether there is an actual or a perceived of AdRizer’s security, AdRizer’s reputation could , causing AdRizer’s current and prospective customers to its products and services in the future and data suppliers from supplying AdRizer data. Further, AdRizer and we could be to expend significant resources in response to a security , including repairing system , increasing cyber security protection costs by deploying additional personnel and protection technologies, increased cyber security insurance costs and and resolving legal and regulatory , all of which could the attention of AdRizer’s and our management and key personnel away from the business operations. In any event, a significant security could materially AdRizer’s and our business, financial condition and operating results.
Government regulation of the Internet, e-commerce and m-commerce is evolving, and unfavorable changes or failure by AdRizer to comply with these laws and regulations could substantially harm its business and results of operations.
AdRizer is subject to general business regulations and laws as well as regulations and laws specifically governing the Internet, e-commerce and m-commerce in a number of jurisdictions around the world. Existing and future regulations and laws could impede the growth of the Internet, e-commerce, m-commerce or other online services. These regulations and laws may involve taxation, tariffs, privacy and data security, anti-spam, data protection, content, copyrights, distribution, electronic contracts, electronic communications and consumer protection. It is not clear how existing laws and regulations governing issues such as property ownership, sales and other taxes, libel and personal privacy apply to the Internet as the vast majority of these laws and regulations were adopted prior to the advent of the Internet and do not contemplate or address the unique issues raised by the Internet, e-commerce or m-commerce. It is possible that general business regulations and laws, or those specifically governing the Internet, e-commerce or m-commerce may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or AdRizer’s practices. We cannot assure you that AdRizer’s practices have complied, comply or will comply fully with all such laws and regulations. Any , or perceived , by AdRizer to comply with any of these laws or regulations could result in to AdRizer’s and our reputation, a in business, and proceedings or actions AdRizer and us by governmental entities or others. Any such proceeding or action could AdRizer’s and our reputation, AdRizer and us to spend significant resources in defense of these proceedings, our management, increase AdRizer’s and our costs of doing business, and cause consumers and retailers to decrease their use of AdRizer’s marketplace, and may result in the imposition of monetary liability. AdRizer may also be contractually liable to indemnify and hold harmless third parties from the costs or consequences of with any such laws or regulations. In addition, it is possible that governments of one or more countries may seek to censor content available on AdRizer’s websites and mobile applications or may even attempt to completely block access to AdRizer’s marketplace. legal or regulatory developments could substantially AdRizer’s business. In particular, in the event that AdRizer is restricted, in whole or in part, from operating in one or more jurisdictions, AdRizer’s ability to retain or increase AdRizer’s customer base may be affected and AdRizer may not be to maintain or grow its net revenues as anticipated.
If AdRizer fails to detect advertising fraud, it could harm its reputation and hurt its ability to execute its business plan.
As AdRizer is in the business of providing services to publishers, advertisers and agencies, AdRizer must deliver effective digital advertising campaigns. Despite AdRizer’s efforts to implement fraud protection techniques in AdRizer’s platforms, some of its advertising and agency campaigns may experience fraudulent and other invalid impressions, clicks or conversions that advertisers may perceive as undesirable, such as non-human traffic generated by computers, known as “bots”, designed to simulate human users and artificially inflate user traffic on websites. These activities could overstate the performance of any given digital advertising campaign and could harm AdRizer’s reputation. It may be difficult for AdRizer to detect fraudulent or malicious activity because AdRizer does not own content and relies in part on its digital media properties to control such activity. Industry self-regulatory bodies, the FTC and certain members of Congress have increased their and awareness of, and have taken recent actions to address, advertising and other activity. If AdRizer to detect or prevent or other activity, the affected advertisers may experience or perceive a reduced return on their investment and AdRizer’s reputation may be . High levels of or activity could lead to with AdRizer’s products and services, to pay, refund or future credit demands or withdrawal of future business.
AdRizer needs to protect its intellectual property or its operating results may suffer.
AdRizer’s ability to generate revenues is based substantially upon its proprietary intellectual property that it owns and protects through trade secrets and agreements with AdRizer’s employees to maintain ownership of any improvements to AdRizer’s intellectual property. AdRizer’s ability to generate revenues now and in the future is based upon maintaining a competitive technology advantage over AdRizer’s competition. AdRizer can provide no assurances that its Cortex technology platform will remain competitive, as many of AdRizer’s competitors have significantly more experience, more extensive infrastructure and are better capitalized than AdRizer.
Third parties may infringe AdRizer’s intellectual property and it may suffer competitive injury or expend significant resources enforcing its rights. As AdRizer’s business is focused on data-driven results and analytics, AdRizer relies heavily on proprietary information technology. AdRizer’s proprietary portfolio consists of various intellectual property including source code, trade secrets, and know-how. The extent to which such rights can be protected is substantially based on federal, state and common law rights as well as contractual restrictions. The steps AdRizer has taken to protect its intellectual property may not prevent the misappropriation of AdRizer’s proprietary information or deter independent development of similar technologies by others. If AdRizer does not enforce its intellectual property rights vigorously and successfully, AdRizer’s competitive position may suffer, which could harm its and our operating results.
AdRizer could incur substantial costs and disruption to its business as a result of any claim of infringement of another party’s intellectual property rights, which could harm AdRizer’s business and operating results.
Third parties may claim that one or more of AdRizer’s products or services infringe their intellectual property rights. Any dispute or litigation regarding patents or other intellectual property could be costly and time-consuming due to the complexity of AdRizer’s technology and the uncertainty of intellectual property litigation, which could divert the attention of our management and key personnel away from AdRizer’s business operations. A claim of intellectual property infringement could force AdRizer to enter into a costly or restrictive license agreement, which might not be available under acceptable terms or at all, or could subject AdRizer to significant damages or to an injunction against development and sale of certain of AdRizer’s products or services.
AdRizer’s failure to recruit or the loss of management and highly trained and qualified personnel could adversely affect its operations.
AdRizer’s future success depends in large part on its current senior management team including its chief executive officer Kenneth Bond and its ability to attract and retain other high-quality management and operating personnel. AdRizer’s senior management team’s in-depth knowledge of and deep relationships with the participants in AdRizer’s industry are extremely valuable to AdRizer. AdRizer’s business also requires skilled technical and marketing personnel, who are in high demand and are often subject to competing offers. AdRizer’s failure to recruit and retain qualified personnel could hinder AdRizer’s ability to successfully develop and operate its business, which could have a material adverse effect on our financial position and operating results.
The complexity of AdRizer’s data products, processing functionality, software systems and services require highly trained professionals to operate, maintain, improve and repair them. While AdRizer presently has a sophisticated, dedicated and experienced team who have a deep understanding of AdRizer’s business, some of whom have been with AdRizer for years, the labor market for these individuals has historically been, and is currently, very competitive due to the limited number of people available with the necessary technical skills and understanding, compensation strategies, general economic conditions and various other factors. As the business information and marketing industries continue to become more technologically advanced, AdRizer anticipates increased competition for qualified personnel. The loss of the services of highly trained personnel like AdRizer’s current team of associates, or the inability to recruit and retain additional, qualified associates, could have a material adverse effect on AdRizer’s business, financial position or operating results.
AdRizer’s revenue and operating results are highly dependent on the overall demand for advertising. Factors that affect the amount of advertising spending, such as economic downturns and seasonality, particularly in the second and third quarters of each fiscal year, can make it difficult to predict AdRizer’s revenue and could adversely affect its business.
AdRizer’s business depends on the overall demand for advertising and on the economic health of AdRizer’s current and prospective publishers and advertisers. If advertisers reduce their overall advertising spending, AdRizer’s revenue and results of operations are directly affected. Many advertisers devote a disproportionate amount of their advertising budgets to the third and fourth quarters of the calendar year to coincide with the annual holiday purchasing season, and buyers may spend more in the second and third quarters for seasonality and budget reasons. As a result, if any events occur to reduce the amount of advertising spending during the second, third or fourth quarters, or reduce the amount of inventory available to advertisers during that period, it could have a disproportionate adverse effect on AdRizer’s revenue and operating results for that fiscal year. Economic downturns or instability in political or market conditions generally may cause current or new advertisers to reduce their advertising budgets. Reductions in inventory due to loss of sellers would make AdRizer’s solution less robust and attractive to buyers. Adverse economic conditions and general uncertainty about economic recovery are likely to affect AdRizer’s business prospects. In particular, uncertainty regarding inflation, consumer demand and the ongoing impacts of COVID-19 on the economy in the United States may continue to cause general business conditions in the United States and elsewhere to or become , which could cause advertisers to , decrease or purchases of AdRizer’s products and services, and AdRizer to increased credit risk on advertiser orders. Moreover, any changes in the tax treatment of advertising expenses and the deductibility thereof would likely cause a reduction in advertising demand.
Any decrease in the use of the advertising channels that AdRizer is primarily dependent upon, failure to expand the use of emerging channels, or unexpected shifts in use among the channels in which AdRizer operates, could harm its growth prospects, business, operating results and financial condition.
AdRizer’s customers have historically used its platform to purchase mobile, display, and video advertising inventory from publishers. We expect that these will continue to be significant channels used by AdRizer’s customers for digital advertising in the future. We also believe that AdRizer’s revenue growth may depend on its ability to expand within mobile, video, and, in particular, connected television (“CTV”), and AdRizer has been, and is continuing to, enhance its presence in these channels. AdRizer may not be able to accurately predict changes in overall advertiser demand for the channels in which it operates and we cannot assure you that AdRizer’s investment in any channel or channels will benefit from or influence any changes in such demand. Any decrease in the use of mobile, display, and video advertising, whether due to customers losing confidence in the value or effectiveness of such channels, regulatory restrictions or other causes, or any inability to further penetrate CTV or enter new and emerging advertising channels, could adversely affect AdRizer’s business, operating results, and financial condition.
AdRizer’s success in the mobile channel depends upon its ability to provide advertising for mobile connected devices, the major operating systems or Internet browsers that run on them, and the thousands of applications that are downloaded onto them. The design of mobile devices, operating systems and browsers is controlled by third parties that may introduce new products or modify existing ones. In addition, cellular network carriers may affect AdRizer’s ability to access specified content on mobile devices. For example, Apple recently announced its intent to eliminate the Identifier for Advertisers from the iOS operating system, and Google has announced its intention to eliminate a similar tracking feature from the Android operating system in the future, which AdRizer, along with its competitors and other advertisers, historically have used to deliver targeted advertisements to consumers. While the effects of this development remain uncertain and have caused AdRizer to modify its advertising strategies, and would not prevent AdRizer from operating its bidding technology on Apple devices, it could reduce the value of the ad impressions it offers. If AdRizer cannot operate effectively with popular devices, operating systems, or Internet browsers, including Apple devices and the Apple iOS operating system and Google devices and the Android operating system, AdRizer’s business, operating results, and financial condition would be adversely affected. Even if AdRizer is successful in modifying its advertising strategies in response to such privacy changes by Apple and Google, investor about such changes could cause our stock price and ability to raise additional capital on acceptable terms or at all to be impacted.
Risks Associated with an Investment in our Common Stock
The market price of our shares may fluctuate significantly.
The market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including the following :
our actual or projected operating results, financial condition, cash flows, and liquidity, or changes in business strategy or prospects;
equity issuances by us, or share resales by our stockholders, or the perception that such issuances or resales may occur;
loss of a major funding source;
actual or anticipated accounting problems;
publication of research reports about us, or the industries in which we operate;
changes in market valuations of similar companies;
adverse market reaction to any indebtedness we incur in the future;
the announcement of our entrance into a business combination or acquisition of a second company that has a material effect on us;
speculation in the press or investment community;
price and volume fluctuations in the overall stock market from time to time;
general market and economic conditions, trends including inflationary concerns, and the current state of the credit and capital markets;
significant volatility in the market price and trading volume of securities of companies in our sector, which are not necessarily related to the operating performance of these companies;
changes in law, regulatory policies or tax guidelines, or interpretations thereof;
any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;
operating performance of companies comparable to us;
short-selling pressure with respect to shares of our common stock generally;
uncertainty surrounding the strength of the United States economic recovery; and
the persistence of COVID-19 and the preventative measures implemented to help limit the spread of the illness in the United States or internationally which may continue to impact our business .
In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.
Your investment may suffer a decline in value as a result of the volatility of our stock.
The closing market price for our common stock has varied between a high of $10.82 on September 9, 2021, and a low of $2.03 on April 19, 2021, in the twelve-month period ended April 4, 2022. During this time, the price per share of common stock has ranged from an intra-day low of $1.94 per share to an intra-day high of $12.49 per share. As a result of fluctuations in the price of our common stock, you may be unable to sell your shares at or above the price you paid for them. The market price of our common stock is likely to continue to be volatile and subject to significant price and volume fluctuations in response to market, industry and other factors, including the other risk factors described in this section. The market price of our common stock may also be dependent upon the valuations and recommendations of the analysts who cover our business. If the results of our business do not meet these analysts’ forecasts, the expectations of investors or the financial guidance we provide to investors in any period, the market price of our common stock could decline.
In addition, the stock markets in general, and the markets for technology stocks in particular, have experienced significant volatility that has often been unrelated to the financial condition or results of operations of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock and, consequently, adversely affect the price at which you could sell the shares that you hold. In the past, following periods of volatility in the market or significant price declines, securities class-action litigation has often been instituted against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s attention and resources, which could materially and adversely affect our business, financial condition, results of operations and growth prospects.
Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.
If our stockholders sell substantial amounts of our common stock in the public market upon the expiration of any statutory holding period under Rule 144, or shares issued upon the exercise of outstanding options or warrants or upon the conversion of convertible notes, it could create a circumstance commonly referred to as an “overhang” and, in anticipation of which, the market price of our common stock could fall. The existence of an overhang, whether or not sales have occurred or are occurring, also could make more difficult our ability to raise additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.
In general, a non-affiliated person who has held restricted shares for a period of six months, under Rule 144, may sell into the market our common stock all of their shares, subject to the Company being current in its periodic reports filed with the SEC.
Historically, we have raised capital through equity issuances, used our shares of common stock to satisfy our outstanding debt obligations, as equity compensation, and as consideration for acquisitions and we expect to continue to do so in the future. The number of new shares of our common stock issued in connection with raising capital, satisfying our outstanding debt obligations, or as consideration for acquisitions, could constitute a material portion of the then-outstanding shares of our common stock. As of April 14, 2022, there were 28,274,454 shares issuable upon conversion of a total outstanding principal of $112,990,000 under our senior secured convertible notes, 160,701,887 shares subject to outstanding warrants, up to 10,000,000 shares to be issued pursuant our unit purchase agreement to acquire AdRizer, 80,000 shares subject to outstanding options under the Company’s equity incentive plans, 4,000,000 issuable under contingent purchase agreement, and an additional 3,267,040 shares reserved for future issuance under the Company’s equity incentive plans, which will become, or have already become, eligible for sale in the public market to the extent permitted by any applicable vesting requirements, lock-up agreements, if any, Rule 144 under the Securities Act or in connection with their registration under the Securities Act. Sales or issuances of substantial amounts of our common stock in the public market, or the perception that these sales or issuances could occur, could adversely affect the price of our common stock and could our ability to raise capital through the sale of additional shares.
If we take advantage of specified reduced disclosure requirements applicable to an “emerging growth company” under the JOBS Act, the information that we provide to stockholders may be different than they might receive from other public companies.
As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” under the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. The Company has elected not to use the extended transition period for complying with new or revised financial accounting standards but does still have reduced reporting requirements. These provisions include:
only two years of audited financial statements in addition to any required unaudited interim financial statements with correspondingly reduced “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” disclosure;
reduced disclosure about our executive compensation arrangements;
no non-binding advisory votes on executive compensation or golden parachute arrangements; and
exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting.
We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.07 billion in annual revenues, we have more than $700 million in market value of our stock held by non-affiliates, or we issue more than $1 billion of non-convertible debt over a three-year period. We may choose to take advantage of some but not all of these reduced burdens. We may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests.
The obligations associated with being a public company require significant resources and management attention, which may divert from our business operations.
We are subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act. The Exchange Act requires that we file annual, quarterly and current reports, proxy statements, and other information. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting. As a result, we incur significant legal, accounting and other expenses. Furthermore, the need to establish and maintain the corporate infrastructure demanded of a public company may divert management’s attention from implementing our growth strategy, which could prevent us from improving our business, results of operations and financial condition. We have made, and will continue to make, if necessary, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. In addition, we cannot predict or estimate the amount of additional costs we may incur in order to comply with these requirements. We anticipate that these costs could materially increase our selling, general and administrative expenses.
Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting. In connection with the implementation of the necessary procedures and practices related to internal control over financial reporting, we may identify deficiencies. Additionally, in the event we are no longer a smaller reporting company, as defined under the Exchange Act, and we are unable to comply with the internal controls requirements of the Sarbanes-Oxley Act, then we may not be able to obtain the independent registered public accountants’ certifications required by that act, which may preclude us from keeping our filings with the SEC current, and interfere with the ability of investors to trade our securities and our shares to continue to be listed on the Nasdaq Capital Market.
Some provisions of our Articles of Incorporation and Bylaws may deter takeover attempts, which may inhibit a takeover that stockholders consider favorable and limit the opportunity of our stockholders to sell their shares at a favorable price.
Under our Articles of Incorporation, our Board may issue additional shares of common or preferred stock. Our Board has the ability to authorize “blank check” preferred stock without future stockholder approval. This makes it possible for our Board to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us by means of a merger, tender offer, proxy contest or otherwise, including a transaction in which our stockholders would receive a premium over the market price for their shares and/or any other transaction that might otherwise be deemed to be in their best interests, and thereby protects the continuity of our management and limits an investor’s opportunity to profit by their investment in the Company. Specifically, if in the due exercise of its fiduciary obligations, the Board were to determine that a takeover proposal was not in our best interest, shares could be issued by our Board without stockholder approval in one or more transactions that might prevent or render more difficult or costly the completion of the takeover by:
diluting the voting or other rights of the proposed acquirer or insurgent stockholder group,
putting a substantial voting bloc in institutional or other hands that might undertake to support the incumbent Board, or
effecting an acquisition that might complicate or preclude the takeover.
Our indemnification of our officers and directors may cause us to use corporate resources to the detriment of our stockholders.
Our Articles of Incorporation require us to indemnify our directors and officers to the fullest extent permitted by Nevada law, including in circumstances in which indemnification is otherwise discretionary under Nevada law. Under Nevada law, we may indemnify our directors or officers or other persons who were, are or are threatened to be made a named defendant or respondent in a proceeding because the person is or was our director, officer, employee or agent, if we determine that the person:
conducted himself or herself in good faith and reasonably believed that his or her conduct was in our best interests or at least not opposed to our best interests; and
in the case of any criminal proceeding, had no reasonable cause to believe that his or her conduct was unlawful.
These persons may be indemnified against expenses, including attorneys’ fees, judgments, fines, including excise taxes, and amounts paid in settlement, actually and reasonably incurred by the person in connection with the proceeding. If the person is found liable to the corporation, no indemnification will be made unless the court in which the action was brought determines that the person is fairly and reasonably entitled to indemnity in an amount that the court will establish.
Insofar as indemnification for liabilities under the Securities Act may be permitted to directors, officers or persons controlling us under the above provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
We do not anticipate paying any cash dividends on our capital stock in the foreseeable future.
We currently intend to retain all of our future earnings to finance the growth and development of our business, and therefore, we do not anticipate paying any cash dividends on our capital stock in the foreseeable future. We believe it is likely that our board of directors will continue to conclude, that it is in the best interests of the Company and its stockholders to retain all earnings (if any) for the development of our business. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price, and trading volume could decline.
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on us. If no or too few securities or industry analysts commence coverage of us, the trading price for our stock would likely be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.
We may be or may become the target of securities litigation, which is costly and time-consuming to defend.
Following periods of market volatility in the price of a company’s securities or the reporting of unfavorable news, security holders may institute class action litigation. If the market value of our securities experience adverse fluctuations and we become involved in this type of litigation, regardless of the outcome, we could incur substantial legal costs and our management’s attention could be diverted from the operation of our business, causing our business to suffer.
