Item 1A. Risk Factors
Item
1A. Risk Factors.
Our
business involves significant risks, some of which are described below. You should carefully consider the risks and uncertainties described
below, together with all of the other information in this Annual Report on Form 10-K. The risks and uncertainties described below are
not the only ones we face. Additional risk and uncertainties that we are unaware of or that we deem immaterial may also become important
factors that adversely affect our business. The realization of any of these risks and uncertainties could have a material adverse effect
on our reputation, business, financial condition, results of operations, growth and future prospects as well as our ability to accomplish
our strategic objectives. In that event, the market price of our common stock could decline and you could lose part or all of your investment.
Risks
Related to Our Business
We
have a history of losses. We have not been profitable historically and may not achieve or maintain profitability in the future.
We
have a history of losses. Our ability to forecast our future operating results is subject to a number of uncertainties, including our
ability to plan for and model future growth. We have encountered and will continue to encounter risks and uncertainties frequently experienced
by growing companies in rapidly evolving industries. If our assumptions regarding these uncertainties, which we use to plan our business,
are incorrect or change in reaction to changes in our markets, or if we do not address these risks successfully, our operating and financial
results could differ materially from expectations, our business could suffer and the trading price of our stock may decline.
We
have incurred net losses of $14.3 million and $0.9 million for the years ended December 31, 2021 and 2020, respectively. As of December
31, 2021, we had accumulated deficit of $15.7 million.
We
are not certain whether or when we will obtain a high enough volume of sales of our products and services to sustain or increase our
growth or achieve or maintain profitability in the future. We expect our costs to increase in future periods, which could negatively
affect our future operating results if our revenue does not increase. In particular, we expect to continue to expend substantial financial
and other resources on:
●
content
production related to our network operations, including investments in expanding our content and production teams;
Madison Technologies Inc. Form 10-K - 2021 Page 11
●
sales
and marketing, including a significant expansion of our sales organization;
●
continued
expansion of our business into adjacent geographic markets; and
●
general
administration expenses, including legal and accounting expenses related to being a public company.
These
investments may not result in increased revenue or growth in our business. If we are unable to increase our revenue at a rate sufficient
to offset the expected increase in our costs, our business, financial position and results of operations will be harmed, and we may not
be able to achieve or maintain profitability over the long term. Additionally, we may encounter unforeseen operating expenses, difficulties,
complications, delays and other unknown factors that may result in losses in future periods. If our revenue growth does not meet our
expectations in future periods, our financial performance may be harmed, and we may not be able to achieve or maintain profitability
in the future.
We
incurred debt in connection with our acquisitions of television station assets which could adversely affect our financial condition and
restrict our operating flexibility.
In
connection with our acquisitions of the Los Angeles Stations, the Houston Station and the Seattle Station completed in 2021, we issued
$16.5 million in convertible notes to Arena Investors LP. The convertible notes require us to make quarterly interest payments, based
on a fixed 11.0% interest rate interest, of approximately $0.4 million that commenced March 31, 2021 with a pro-rated payment of $0.2
million. The notes are convertible at any time, at the option of Arena Investors LP, into shares of our Common Stock at a price of $0.02,
subject to adjustment (the “Conversion Price”), subject to certain beneficial ownership limitations (with a maximum ownership
limit of 9.99%). The conversion price is also subject to adjustment due to certain events, including stock dividends, stock splits and
in connection with our issuance of Common Stock or common stock equivalents at an effective price per share lower than the conversion
price then in effect. Notwithstanding the foregoing, at any time during the continuance of any Event of Default, the Conversion Price
in effect shall be equal to 75% of the average volume weighted average price of our Common Stock for the five (5) Trading Days on the
Trading Market immediately preceding the date of conversion (the Alternative Conversion Price”); provided, however, that the Alternate
Conversion Price may not exceed $0.015 per share, as adjusted pursuant to the terms of the Notes. We man not redeem the Notes. The convertible
notes are secured by substantially all of our assets.
The
convertible notes include negative covenants that restrict our ability to, among other things: incur additional indebtedness; create
liens or other encumbrances on assets; make loans, guarantees, investments and acquisitions; sell or otherwise dispose of assets; cause
or permit a change of control; merge or consolidate with another entity; make negative pledges; enter into affiliate transactions; make
cash distributions to our stockholders; and change the nature of our business materially.
Outstanding
amounts under the convertible notes may be accelerated by Arena Investors LP upon the occurrence and continuance of certain events of
default, including without limitation: payment defaults; breach of covenants beyond applicable grace periods; breach of representations
and warranties; bankruptcy and insolvency defaults; and the occurrence of a material adverse effect (as defined). Acceleration is automatic
upon the occurrence of certain bankruptcy and insolvency defaults.
The
convertible notes and related obligations, including interest payments, covenants and restrictions, could have important consequences,
including the following:
reserving
cash in order to satisfy the obligations relating to the convertible notes could adversely
affect the amount or timing of investments to grow our business, impairing our ability to
invest in and successfully grow our business;
the
convertible notes could limit our ability to obtain additional financing on satisfactory
terms to fund our working capital requirements, capital expenditures, acquisitions, debt
obligations and other general corporate requirements;
Madison Technologies Inc. Form 10-K - 2021 Page 12
the
convertible notes may increase our vulnerability to general economic downturns, competition
and industry conditions and we may be unable to take advantage of opportunities that our
leverage prevents us from exploiting, placing us at a disadvantage to our competitors that
are less leveraged; and
the
convertible notes impose restrictions on the manner in which we conduct our business, including
restrictions on our ability to pay dividends, incur additional debt and sell assets.
The
obligations under the convertible notes could have an adverse effect on our business, financial condition, operating results or cash
flows. In addition, our failure to comply with the covenants under the convertible notes could result in an event of default and acceleration
of the outstanding balance, which could significantly harm our business and cause our stock price to decline. We have not yet made the
$0.4 million interest payments that were due on April 1, 2022 and July 1, 2022, and as a result, under terms of the convertible notes,
the interest rate is 20.0% per annum. We are currently in discussions with our lender, Arena Capital LP, on a plan of forbearance; however,
there is no assurance that we will be successful in completion of a plan, which may disrupt our operations and result in a restructuring
of obligations.
Our
broadcast facilities are vulnerable to disruption due to natural or other disasters, strikes and other events beyond our control.
A
major earthquake, fire, tsunami, hurricane, cyclone, or other disaster, such as a major flood, seasonal storms, nuclear event, or terrorist
attack affecting our facilities or the areas in which we are located, or affecting those of our customers or third-party manufacturers
or suppliers, could significantly disrupt our or their operations and delay or prevent product shipment or installation during the time
required to repair, rebuild or replace our or their damaged manufacturing facilities. These delays could be lengthy and costly. If our
third-party contract manufacturer’s, suppliers’ or customers’ facilities are negatively impacted by such a disaster,
production, shipment, and installation of our products could be delayed, which can impact the period in which it recognizes the revenue
related to that product sale. Additionally, customers may delay purchases of our products until operations return to normal. Even if
we can respond quickly to a disaster, the continued effects of the disaster could create uncertainty in our business operations. In addition,
concerns about terrorism, the effects of a terrorist attack, political turmoil, labor strikes, war, including the developing conflict
between Russia and Ukraine, or the outbreak of epidemic diseases (including the on-going COVID-19 pandemic) could have a negative effect
on our operations and sales.
If
we are unable to acquire new customers, our future revenues and operating results will be harmed. Likewise, potential customer turnover
in the future, or costs we incur to retain our existing customers, could materially and adversely affect our financial performance.
Our
success depends on our ability to acquire new customers in new and existing vertical markets, and in new and existing geographic markets.
If we are unable to attract a sufficient number of new customers, we may be unable to generate revenue growth at desired rates. The security
solutions market is competitive and many of our competitors have substantial financial, personnel and other resources that they utilize
to develop solutions and attract customers. As a result, it may be difficult for us to add new customers to our customer base. Competition
in the marketplace may also lead us to win fewer new customers or result in us providing discounts and other commercial incentives. Additional
factors that impact our ability to acquire new customers include the perceived need for AI-based weapons detection for security solutions,
the size of our prospective customers’ security budgets, the utility and efficacy of our existing and new products, whether proven
or perceived, and general economic conditions. These factors may have a meaningful negative impact on future revenues and operating results.
If
we are unable to sell additional services to our customers and maintain and grow our customer retention rates, our future revenue and
operating results will be harmed.
Our
future success depends, in part, on our ability to expand the deployment of our services with existing customers by selling them additional
services. This may require increasingly sophisticated and costly sales efforts and may not result in additional sales. In addition, the
rate at which our customers purchase additional services depends on a number of factors, including the perceived need for additional
TV entertainment, information and other content as well as general economic conditions. If our efforts to sell additional services to
our customers are not successful, our business may suffer.
Madison Technologies Inc. Form 10-K - 2021 Page 13
Our
business model is predicated, in part, on building a customer base that will generate a recurring stream of revenues. If that recurring
stream of revenues does not develop as expected, or if our business model changes as the industry evolves, our operating results may
be adversely affected.
Our
business model is dependent, in part, on our ability to maintain and increase distribution to generate recurring revenues. Existing and
future customers may not utilize our television broadcast assets at the same rate at which customers currently do. If our current and
future customers reduce their utilization, our recurring revenue stream relative to our total revenues would be reduced and our operating
results would be adversely affected.
Fluctuating
economic conditions make it difficult to predict revenue for a particular period, and a shortfall in revenue may harm our operating results.
Our
revenue depends significantly on general economic conditions. Economic weakness and customer financial difficulties may result in decreased
revenue and earnings. Such factors could make it difficult to accurately forecast our sales and operating results and could negatively
affect our ability to provide accurate forecasts of our costs and expenses. General economic weakness may also lead to longer collection
cycles for payments due from our customers, an increase in customer bad debt, restructuring initiatives and associated expenses and impairment
of investments.
Uncertainty
about future economic conditions also makes it difficult to forecast operating results and to make decisions about future investments.
Future or continued economic weakness for us or our customers, failure of our customers and markets to recover from such weakness and
customer financial difficulties could have a material adverse effect on demand, and consequently on our business, financial condition
and results of operations.
Our
brand, reputation and ability to attract, retain, and serve our customers are dependent in part upon the reliable performance of our
products and infrastructure.
Our
brand, reputation and ability to attract, retain, and serve our customers are dependent in part upon the reliable performance of, and
the ability of our existing customers and new customers to access and use our television broadcast assets. We have experienced, and may
in the future experience, disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes,
equipment failure, human or software errors, capacity constraints, and fraud or cybersecurity attacks. In some instances, we may not
be able to identify the cause or causes of these performance problems within an acceptable period of time.
Interruptions
in our systems or the third-party systems on which we rely, whether due to system failures, computer viruses, physical or electronic
break-ins, or other factors, could affect the security or availability of our television broadcast assets, network infrastructure, cloud
infrastructure and website.
Problems
with the reliability or security of our systems could harm our reputation. Damage to our reputation and the cost of remedying these problems
could negatively affect our business, financial condition and operating results.
Any
disruptions or other performance problems with our television broadcast assets could harm our reputation and business and may damage
our customers’ businesses. Interruptions in our service delivery might reduce our revenue, cause us to issue credits to customers,
subject us to potential liability and cause customers not to renew their subscription purchases of our products.
If
we are not able to maintain and enhance our brand or reputation as an industry leader, our business and operating results may be adversely
affected.
We
believe that maintaining and enhancing our reputation as the leader in next-generation television is critical to our relationship with
our existing end-user customers and our ability to attract new customers and reseller partners. The successful promotion of our brand
will depend on multiple factors, including our marketing efforts, our ability to continue to deliver a superior customer experience and
develop high-quality features and our ability to successfully differentiate our broadcast services from those of our competitors. Our
brand promotion activities may not be successful or yield increased revenue. The promotion of our brand requires us to make substantial
expenditures, and we anticipate that the expenditures will increase as our market becomes more competitive, as we expand into new geographies
and vertical markets. To the extent that these activities yield increased revenue; this revenue may not offset the increased expenses
we incur. If we do not successfully maintain and enhance our brand and reputation, our business and operating results may be adversely
affected.
Madison Technologies Inc. Form 10-K - 2021 Page 14
We
are dependent on the continued services and performance of our senior management and other key employees, as well as on our ability to
successfully hire, train, manage and retain qualified personnel, especially those in sales and marketing and research and development.
Our
future performance depends on the continued services and contributions of our senior management, particularly Philip Falcone, our President
and Chief Executive Officer, and other key employees to execute on our business plan and to identify and pursue new opportunities and
product innovations. We do not maintain key man insurance for any of our executive officers or key employees. From time to time, there
may be changes in our senior management team resulting from the termination or departure of our executive officers and key employees.
Our senior management and key employees are generally employed on an at-will basis, which means that they could terminate their employment
with us at any time. The loss of the services of our senior management, particularly Mr. Falcone, or
other key employees for any reason could significantly delay or prevent our development or the achievement of our strategic objectives
and harm our business, financial condition and results of operations.
Our
ability to successfully pursue our growth strategy will also depend on our ability to attract, motivate and retain our personnel, especially
those in sales and marketing and research and development. We face escalating compensation demands from new and prospective employees,
as well as intense competition for these employees from numerous technology, software and other companies, especially in certain geographic
areas in which we operate, and we cannot ensure that we will be able to attract, motivate and/or retain additional qualified employees
in the future. If we are unable to attract new employees and retain our current employees, we may not be able to adequately develop and
maintain new products, or market our existing products at the same levels as our competitors and it may, therefore, lose customers and
market share. Our failure to attract and retain personnel, especially those in sales and marketing and engineering positions could have
an adverse effect on our ability to execute our business objectives and, as a result, our ability to compete could decrease, our operating
results could suffer and our revenue could decrease. Even if we are able to identify and recruit a sufficient number of new hires, these
new hires will require significant training before they achieve full productivity and they may not become productive as quickly as we
would like, or at all.
If
we cannot maintain our company culture as it grows, we could lose the innovation, teamwork, passion and focus on execution that we believe
contributes to our success and as a result, our business may be harmed.
We
believe that a critical component to our success has been our mission-driven company culture based on our shared commitment to make television
accessible to younger consumers, which we believe fosters innovation, teamwork, passion for customers and focus on execution, and facilitates
critical knowledge transfer, knowledge sharing and professional growth. We have invested substantial time and resources in building our
team within this company culture. Any failure to preserve our culture could negatively affect our ability to retain and recruit personnel
and to effectively focus on and pursue our corporate objectives. As we grow and develop the infrastructure of a public company, we may
find it difficult to maintain these important aspects of our company culture. If we fail to maintain our company culture, our business
may be adversely impacted.
We
may acquire or invest in other companies or technologies in the future, which could divert management’s attention, fail to meet
our expectations, result in additional dilution to our stockholders, increase expenses, disrupt our operations or otherwise harm our
operating results.
We
may in the future acquire or invest in, businesses, television broadcast assets or technologies that we believe could complement or expand
our platform, enhance our technical capabilities or otherwise offer growth opportunities. We may not be able to fully realize the anticipated
benefits of any future acquisitions or anticipated benefits may not transpire. The pursuit of potential acquisitions may divert the attention
of management and cause us to incur various expenses related to identifying, investigating and pursuing suitable acquisitions, whether
or not they are consummated.
Madison Technologies Inc. Form 10-K - 2021 Page 15
There
are inherent risks in integrating and managing acquisitions. If we acquire additional businesses, we may not be able to assimilate or
integrate the acquired personnel, operations, products, services and technologies successfully or effectively manage the combined business
following the acquisition and our management may be distracted from operating our business. We also may not achieve the anticipated benefits
from the acquired business due to a number of factors, including, without limitation:
●
unanticipated
costs or liabilities associated with the acquisition;
●
incurrence
of acquisition-related costs, which would be recognized as a current period expense;
●
inability
to generate sufficient revenue to offset acquisition or investment costs;
●
inability
to maintain relationships with customers and partners of the acquired business;
●
difficulty
of incorporating acquired technology and rights into our platform and of maintaining quality and security standards consistent with
our brand;
●
delays
in customer purchases due to uncertainty related to any acquisition;
●
the
potential loss of key employees;
●
use
of resources that are needed in other parts of our business and diversion of management and employee resources;
●
inability
to recognize acquired deferred revenue in accordance with our revenue recognition policies; and
●
use
of substantial portions of our available cash and equity or the incurrence of debt to consummate the acquisition.
Acquisitions
also increase the risk of unforeseen legal liability, including for potential shareholder suits or potential violations of applicable
law or industry rules and regulations, arising from prior or ongoing acts or omissions by the acquired businesses that are not discovered
by due diligence during the acquisition process or new regulatory restrictions at the federal, state, or local levels. Generally, if
an acquired business fails to meet our expectations, our operating results, business and financial condition may suffer. Acquisitions
could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our business, results
of operations and financial condition.
In
addition, a significant portion of the purchase price of companies it acquires may be allocated to goodwill and other intangible assets,
which must be assessed for impairment at least annually. If our acquisitions do not ultimately yield expected returns, we may be required
to take charges to our operating results based on our impairment assessment process, which could harm our results of operations.
If
we are unable to compete effectively with new entrants and other potential competitors, our sales and profitability could be adversely
affected.
The
sales prices for our products and services may decline for a variety of reasons, including competitive pricing pressures, discounts,
a change in our mix of products and services, anticipation of the introduction of new products or promotional programs. Competition continues
to increase in the market segments in which we participate, and we expect competition to further increase in the future, thereby leading
to increased pricing pressures. Larger competitors with more diverse product and service offerings may reduce the price of products that
compete with theirs or may bundle them with other products and services. Additionally, currency fluctuations in certain countries and
regions may negatively impact prices that partners and customers are willing to pay in those countries and regions. We cannot be certain
that we will be successful in developing and introducing new products with enhanced functionality on a timely basis, or that our new
product offerings, if introduced, will enable it to maintain our prices and gross profits at levels that will allow us to maintain positive
gross margins and achieve profitability.
Madison Technologies Inc. Form 10-K - 2021 Page 16
Because
our services may collect and store viewer and related information, domestic and international privacy and cyber security concerns, and
other laws and regulations, could result in additional costs and liabilities to us or inhibit sales of our products.
We
may be affected by cyber-attacks and other means of gaining unauthorized access to our products, systems, and data. For instance, cyber
criminals or insiders may target us or third parties with which we have business relationships to obtain data, or in a manner that disrupts
our operations or compromises our products or the systems into which our products are integrated. The evolution of technology systems
introduces ever more complex security risks that are difficult to predict and defend against. An increasing number of companies, including
those with significant online operations, have recently disclosed breaches of their security, some of which involved sophisticated tactics
and techniques allegedly attributable to criminal enterprises or nation-state actors. While we take measures to protect the security
of personal information, it is possible that our security controls over personal information and other practices we follow may not prevent
the unauthorized access to, or the unintended release of, personal information. In addition, we do not know whether our current practices
will be deemed sufficient under applicable laws or whether new regulatory requirements might make our current practices insufficient.
If there is a breach of our computer systems and we know or suspect that certain personal information has been accessed, or used inappropriately,
we may need to inform the affected individual and may be subject to significant fines and penalties. In the event of a breach we could
face government scrutiny or consumer class actions.
Cybersecurity
incidents directed at us or our third-party vendors can range from uncoordinated individual attempts to gain unauthorized access to information
technology systems to sophisticated and targeted measures known as advanced persistent threats. Cybersecurity incidents are also constantly
evolving, increasing the difficulty of detecting and successfully defending against them. In the ordinary course of our business, we
and our third-party vendors collect and store personal information, as well as our proprietary business information and intellectual
property and that of our customers and employees. Additionally, we rely on third-parties and their security procedures for the secure
storage, processing, maintenance, and transmission of information that is critical to our operations. Despite measures designed to prevent,
detect, address, and mitigate cybersecurity incidents, such incidents may occur to us or our third-party providers and, depending on
their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data
and confidential or proprietary information (our own or that of third parties, including personal information of our customers and employees)
and the disruption of business operations. We have experienced and expect to continue to experience attempted routine cyber-attacks of
our information technology networks, such as through phishing scams and ransomware. Although none of these actual or attempted cyber-attacks
has had a material adverse impact on our operations or financial condition, we cannot guarantee that any such incidents will not have
such an impact in the future. For example, we are at risk for interruptions, outages and breaches of: operational systems, including
business, financial, accounting, product development, data processing or production processes, owned by us or our third-party vendors
or suppliers; facility security systems, owned by us or our third-party vendors or suppliers; in-product technology owned by us or our
third-party vendors or suppliers; the integrated software in our solutions; or customer or other data that we process or our third-party
vendors or suppliers process on our behalf. Such cyber incidents could materially disrupt operational systems; result in loss of intellectual
property, trade secrets or other proprietary or competitively sensitive information; compromise certain information of customers, employees,
suppliers, or others; jeopardize the security of our facilities; or affect the performance of in-product technology and the integrated
software in our solutions.
A
cyber incident could be caused by disasters, insiders (through inadvertence or with malicious intent) or malicious third parties (including
nation-states or nation-state supported actors) using sophisticated, targeted methods to circumvent firewalls, encryption and other security
defenses, including hacking, fraud, trickery or other forms of deception. The techniques used by cyber attackers change frequently and
may be difficult to detect for long periods of time. Although we maintain information technology measures designed to protect us against
intellectual property theft, data breaches and other cyber incidents, such measures will require updates and improvements, and we cannot
guarantee that such measures will be adequate to detect, prevent or mitigate cyber incidents.
Any
actual or alleged security breaches or alleged violations of federal or state laws or regulations relating to privacy and data security
could result in mandated user notifications, litigation, government investigations, significant fines, and expenditures; divert management’s
attention from operations; deterring people from using our platform; damage our brand and reputation; and a materially adversely affect
our business, results of operations, and financial condition. Defending against claims or litigation based on any security breach or
incident, regardless of their merit, will be costly and may cause reputation harm. In addition, we may incur significant costs for remediation
that may include liability for stolen assets or information, repair of system damage, and compensation to customers, employees, and business
partners. The successful assertion of one or more large claims against us that exceed available insurance coverage, denial of coverage
as to any specific claim, or any change or cessation in our insurance policies and coverages, including premium increases or the imposition
of large deductible requirements, could have a material adverse effect on our business, results of operations, and financial condition.
Madison Technologies Inc. Form 10-K - 2021 Page 17
We
are subject to governmental regulation and other legal obligations, particularly related to privacy, data protection and information
security, and our actual or perceived failure to comply with such obligations could harm our business.
We,
and our customers are subject to a number of domestic and international laws and regulations that apply to cloud services and the internet
generally. These laws, rules and regulations address a range of issues including data privacy and cyber security, breach notification
and restrictions or technological requirements regarding the collection, processing, use, storage, protection, disclosure, retention
or transfer of data. The regulatory framework for online services, data privacy and cyber security issues worldwide can vary substantially
from jurisdiction to jurisdiction, is rapidly evolving and is likely to remain uncertain for the foreseeable future. Many federal, state,
local and foreign government bodies and agencies have adopted or are considering adopting laws, rules and regulations regarding the collection,
processing, use, storage and disclosure of information, web browsing and geolocation data collection, data analytics, facial recognition,
cyber security and breach response and notification procedures. Furthermore, existing laws and regulations are constantly evolving, and
new laws and regulations that apply to our business are being introduced at every level of government in the United States, as well as
internationally. As we seek to expand our business, we are, and may increasingly become subject to various laws, regulations, and standards,
and may be subject to contractual obligations relating to data privacy and security in the jurisdictions in which we operate. Any significant
change to applicable laws, regulations or industry practices regarding the use or disclosure of personal information, or regarding the
manner in which the express or implied consent of customers for the use and disclosure of personal information is obtained, could require
us to modify our products and features, possibly in a material manner and subject to increased compliance costs, which may limit our
ability to develop new products and features that make use of the personal information that our customers voluntarily share. Any failure,
or perceived failure, by us to comply with any federal or state privacy or security laws, regulations, industry self-regulatory principles,
or codes of conduct, regulatory guidance, orders to which we may be subject, or other legal obligations relating to data privacy or security
could adversely affect our reputation, brand and business, and may result in claims, liabilities, proceedings or actions against us by
governmental entities, customers or others. Any such claims, proceedings or actions could hurt our reputation, brand and business, force
us to incur significant expenses in defense of such proceedings or actions, distract our management, increase our costs of doing business,
result in a loss of customers and result in the imposition of monetary penalties.
In
the United States, there are numerous federal and state data privacy and security laws, rules, and regulations governing the collection,
use, disclosure, retention, security, transfer, storage, and other processing of personal data, including federal and state data privacy
laws, data breach notification laws, and consumer protection laws. For example, the FTC and many state attorneys general are interpreting
federal and state consumer protection laws to impose standards for the online collection, use, dissemination, and security of data. Such
standards require us to publish statements that describe how we handle personal data and choices individuals may have about the way we
handle their personal data. If such information that we publish is considered untrue or inaccurate, we may be subject to government claims
of unfair or deceptive trade practices, which could lead to significant liabilities and consequences. Moreover, according to the FTC,
violating consumers’ privacy rights or failing to take appropriate steps to keep consumers’ personal data secure may constitute
unfair acts or practices in or affecting commerce in violation of Section 5(a) of the Federal Trade Commission Act. State consumer protection
laws provide similar causes of action for unfair or deceptive practices.
In
addition, many state legislatures have adopted legislation that regulates how businesses operate online, including measures relating
to privacy, data security, and data breaches. Such legislation includes the California Consumer Privacy Act (“CCPA”), which
came into effect in 2020, increases privacy rights for California consumers and imposes obligations on companies that process their personal
information. Among other things, the CCPA gives California consumers expanded rights related to their personal information, including
the right to access and delete their personal information and receive detailed information about how their personal information is used
and shared. The CCPA also provides California consumers the right to opt-out of certain sales of personal information and may restrict
the use of cookies and similar technologies for advertising purposes. The CCPA prohibits discrimination against individuals who exercise
their privacy rights, and provides for civil penalties for violations enforceable by the California Attorney General as well as a private
right of action for certain data breaches that result in the loss of personal information. This private right of action is expected to
increase the likelihood of, and risks associated with, data breach litigation. Many of the CCPA’s requirements as applied to personal
information of a business’s personnel and related individuals are subject to a moratorium set to expire on January 1, 2023. The
expiration of the moratorium may increase our compliance costs and our exposure to public and regulatory scrutiny, costly litigation,
fines and penalties. Additionally, in November 2020, California passed the California Privacy Rights Act (the “CPRA”), which
expands the CCPA significantly, including by expanding California consumers’ rights with respect to certain personal information
and creating a new state agency to oversee implementation and enforcement efforts, potentially resulting in further uncertainty and requiring
us to incur additional costs and expenses in an effort to comply. Many of the CPRA’s provisions will become effective on January
1, 2023. The costs of compliance with, and the other burdens imposed by, these and other laws or regulatory actions may increase our
operational costs, and/or result in interruptions or delays in the availability of systems.
Madison Technologies Inc. Form 10-K - 2021 Page 18
In
March 2021, the Governor of Virginia signed into law the Virginia Consumer Data Protection Act (the “VCDPA”). The VCDPA creates
consumer rights, similar to the CCPA, but also imposes security and assessment requirements for businesses. In addition, in July 2021,
Colorado enacted the Colorado Privacy Act (“COCPA”), becoming the third comprehensive consumer privacy law to be passed in
the United States (after the CCPA and VCDPA). The COCPA closely resembles the VCDPA, and both will be enforced by the respective states’
Attorney General and district attorneys, although the two differ in many ways. Once they become enforceable in 2023, we must comply with
each if our operations fall within the scope of these newly enacted comprehensive mandates, which may increase our compliance costs and
potential liability. Similar laws have been proposed in other states and at the federal level, reflecting a trend toward more stringent
privacy legislation in the United States. This legislation may add additional complexity, variation in requirements, restrictions and
potential legal risk, require additional investment in resources to compliance programs, could impact strategies and availability of
previously useful data, and could result in increased compliance costs and/or changes in business practices and policies.
In
addition, some laws may require us to notify governmental authorities and/or affected individuals of data breaches involving certain
personal information or other unauthorized or inadvertent access to or disclosure of such information. We may need to notify governmental
authorities and affected individuals with respect to such incidents. For example, laws in all 50 U.S. states may require businesses to
provide notice to consumers whose personal information has been disclosed as a result of a data breach. These laws are not consistent,
and compliance in the event of a widespread data breach may be difficult and costly. We also may be contractually required to notify
consumers or other counterparties of a security breach. Regardless of our contractual protections, any actual or perceived security breach
or breach of our contractual obligations could harm our reputation and brand, expose us to potential liability or require us to expend
significant resources on data security and in responding to any such actual or perceived breach.
We
strive to comply with all applicable laws, policies, legal obligations and industry codes of conduct relating to privacy and data protection
to the extent possible. Because the interpretation and application of privacy and data protection laws are still uncertain, it is possible
that these laws may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another or with our existing
practices or the features of our products and may conflict with other rules or regulations, making enforcement, and thus compliance requirements,
ambiguous, uncertain, and potentially inconsistent. Any failure or perceived failure by us to comply with our privacy policies, privacy-related
obligations to customers or other third parties, or our privacy-related legal obligations, or any compromise of security that results
in the unauthorized access to or unintended release of personally identifiable information or other customer data, may result in governmental
enforcement actions, litigation, or public statements against us by consumer advocacy groups or others. Any of these events could cause
us to incur significant costs in investigating and defending such claims and, if found liable, pay significant damages. Further, these
proceedings and any subsequent adverse outcomes may cause our customers to lose trust in us, which could have an adverse effect on our
reputation and business.
We
may also be subject to claims of liability or responsibility for the actions of third parties with whom we interact or upon whom it relies
in relation to various products, including but not limited to vendors and business partners. If so, in addition to the possibility of
fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our products,
which could have an adverse effect on our business. Any inability to adequately address privacy and/or data concerns, even if unfounded,
or comply with applicable privacy or data protection laws, regulations and policies, could result in additional cost and liability to
us, damage our reputation, inhibit sales and adversely affect our business.
Madison Technologies Inc. Form 10-K - 2021 Page 19
The
costs of compliance with, and other burdens imposed by, the laws, rules, regulations and policies that are applicable to the businesses
of our customers may limit the use and adoption of, and reduce the overall demand for, our software. Even the perception of privacy concerns,
whether or not valid, may harm our reputation, inhibit adoption of our products by current and future customers, or adversely impact
our ability to attract and retain workforce talent. Our failure to comply with applicable laws and regulations, or to protect such data,
could result in enforcement action against us, including fines, imprisonment of our officials and public censure, claims for damages
by customers and other affected individuals, damage to our reputation and loss of goodwill (both in relation to existing customers and
prospective customers), any of which could have a material adverse effect on our operations, financial performance and business.
Our
operating results may be harmed if we are required to collect taxes on our billings in jurisdictions where it has not historically done
so.
Taxing
jurisdictions, including state, local and federal taxing authorities, have differing rules and regulations governing taxes, and these
rules and regulations are subject to varying interpretations that may change over time. In particular, significant judgment is required
in evaluating our tax positions and our provision for taxes. While we believe that we are in material compliance with our obligations
under applicable taxing regimes, one or more states, localities or the federal government may seek to impose tax collection obligations
on us. It is possible that we could face tax audits and that such audits could result in tax-related liabilities for which we have not
accrued. A successful assertion that we should be collecting taxes in jurisdictions where it has not historically done so and do not
accrue for taxes could result in substantial tax liabilities for past sales, discourage customers from purchasing from us or otherwise
harm our business and operating results.
In
addition, our tax obligations and effective tax rates could be adversely affected by changes in the relevant tax, accounting and other
laws, regulations, principles and interpretations, including those relating to income tax nexus, jurisdictional mix of profits at varying
statutory tax rates, by changes in foreign currency exchange rates, or by changes in the valuation of our deferred tax assets and liabilities.
Although we believe our tax estimates are reasonable, the final determination of any tax audits or litigation could be materially different
from our historical tax provisions and accruals, which could have a material adverse effect on our operating results or cash flows in
the period or periods for which a determination is made.
We
may require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all.
We
intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges,
including the need to develop new features or enhance our products, improve our operating infrastructure or acquire complementary businesses
and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional
funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution,
and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock.
Any debt financing that we may secure in the future could involve restrictive covenants relating to our capital raising activities and
other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business
opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms favorable to it, if at all.
If we are unable to obtain adequate financing or financing on terms satisfactory to it when we require it, our ability to continue to
support our business growth and to respond to business challenges could be significantly impaired, and our business may be adversely
affected.
As
a result of being a public company, we are responsible for establishing and maintaining adequate internal control over financial reporting.
We have identified material weaknesses in our internal control over financial reporting, and if we are unable to remediate the material
weaknesses, or if we fail to develop and maintain effective disclosure controls and procedures and internal control over financial reporting,
our ability to produce timely and accurate consolidated financial statements or comply with applicable laws and regulations could be
impaired, which may adversely affect our business and stock price.
As
a public company, we are required to furnish a report by management on the effectiveness of our internal control over financial reporting
for each future Annual Report on Form 10-K to be filed with the SEC. This assessment will need to include disclosure of any material
weaknesses identified by our management in internal control over financial reporting. Effective internal control over financial reporting
is necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed
to prevent fraud. Any failure to implement new or improved controls, or difficulties encountered in their implementation, could cause
us to fail to meet our reporting obligations. Ineffective internal control over financial reporting could also cause investors to lose
confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.
Madison Technologies Inc. Form 10-K - 2021 Page 20
If
we are unable to assert that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy
and completeness of our financial reports, which could cause the trading price of our common stock to decline, and we may be subject
to investigation and/or sanctions by the SEC.
We
have identified material weaknesses in our internal control over financial reporting. If we are unable to remediate these material weaknesses,
these material weaknesses could result in a material misstatement of our consolidated financial statements.
We
have identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or combination
of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement
of the annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
We
did not design and maintain an effective control environment commensurate with our financial reporting requirements. Specifically, we
lacked a sufficient complement of personnel with an appropriate level of internal controls and accounting knowledge, training and experience
commensurate with our financial reporting requirements. Additionally, the limited personnel resulted in our inability to consistently
establish appropriate authorities and responsibilities in pursuit of our financial reporting objectives, as demonstrated by, among other
things, insufficient segregation of duties in our finance and accounting functions. This material weakness contributed to the following
additional material weaknesses:
(1)
lack of a functioning audit committee and lack of a majority of outside directors on our board of directors, resulting in ineffective
oversight in the establishment and monitoring of required internal controls and procedures;
(2)
inadequate segregation of duties consistent with control objectives;
(3)
insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application
of US GAAP and SEC disclosure requirements; and
(4)
ineffective controls over period end financial disclosure and reporting processes. The aforementioned material weaknesses were identified
and communicated to management in connection with the preparation and audit of our financial statements as of December 31, 2020 and the
preparation of our 2021 quarterly financial statements.
While
we are undertaking efforts to remediate these material weaknesses, the material weaknesses will not be considered remediated until our
remediation plan has been fully implemented, the applicable controls operate for a sufficient period of time, and we have concluded,
through testing, that the newly implemented and enhanced controls are operating effectively. At this time, we cannot predict the success
of such efforts or the outcome of our assessment of the remediation efforts. We can give no assurance that our efforts will remediate
these material weaknesses in our internal control over financial reporting, or that additional material weaknesses will not be identified
in the future.
The
effectiveness of our internal control over financial reporting is subject to various inherent limitations, including cost limitations,
judgments used in decision making, assumptions about the likelihood of future events, the possibility of human error and the risk of
fraud. If we are unable to remediate the material weaknesses, our ability to record, process and report financial information accurately,
and to prepare the consolidated financial statements within the time periods specified by the rules and regulations of the SEC, could
be adversely affected which, in turn, may adversely affect our reputation and business and the trading price of our common stock. Our
failure to design and maintain effective internal control over financial reporting could result in errors in our consolidated financial
statements that could result in a restatement of our financial statements, and could cause us to fail to meet our reporting obligations,
any of which could diminish investor confidence in us and cause a decline in the price of our common stock. In addition, any such failures
could result in litigation or regulatory actions by the SEC or other regulatory authorities, loss of investor confidence, delisting of
our securities and harm to our reputation and financial condition, or diversion of financial and management resources from the operation
of our business.
Madison Technologies Inc. Form 10-K - 2021 Page 21
Our
reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.
U.S.
generally accepted accounting principles (GAAP) are subject to interpretation by the Financial Accounting Standards Board (FASB), the
SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations
could have a significant effect on our reported results of operations and could affect the reporting of transactions already completed
before the announcement of such change.
The
continuation or worsening of the COVID-19 pandemic, or other similar public health developments, could have an adverse effect on business,
results of operations, and financial condition.
We
face various risks and uncertainties related to the global outbreak of COVID-19 and the new coronavirus strains or variants that have
developed. The continued COVID-19 pandemic has led to disruption and volatility in the global economy and capital markets, which increases
the cost of capital and adversely impacts access to capital. Government-enforced travel bans and business closures around the world have
significantly impacted our ability to sell, install and service our products especially given the nature of the markets we serve. It
has, and may continue to, disrupt third-party contract manufacturer and supply chain. We may also experience customer payment delays
for our products which could negatively impact our results of operations. We may also experience some delays in installation of our products
at customers’ facilities, which could lead to postponed revenue recognition for those transactions. Furthermore, if significant
portions of the workforce are unable to work effectively, including because of illness, quarantines, government actions, facility closures,
remote working or other restrictions in connection with the COVID-19 pandemic, operations will likely be adversely impacted.
We
have been experiencing supply chain challenges due to the COVID-19 pandemic. There is no guarantee that our operations will not be materially
adversely affected in the future in the supply chain interruptions intensify. Furthermore, although in the long-term, we believe that
the COVID 19 pandemic may encourage organizations to reassess their security screening processes and may continue to accelerate their
adoption of solutions such as touchless security screening, which could create additional demand for our products, there is no guarantee
that such organizations will choose to implement our solutions.
If
the COVID-19 pandemic continues for a prolonged duration, we or our customers may be unable to perform fully on our contracts, which
will likely result in increases in costs and reduction in revenue. These cost increases may not be fully recoverable or adequately covered
by insurance. The long-term effects of COVID-19 to the global economy and to us are difficult to assess or predict and may include a
further decline in the market prices of our products, risks to employee health and safety, risks for the deployment of our products and
services and reduced sales in geographic locations impacted. Any prolonged restrictive measures put in place to control COVID-19 or other
adverse public health developments in any of our targeted markets may have a material and adverse effect on our business operations and
results of operations.
Risks
Related to Our Common Stock
The
market price of our Common Stock is likely to be highly volatile, and you may lose some or all of your investment.
The
trading price of our common stock is likely to be highly volatile and may be subject to wide fluctuations in response to a variety of
factors, including the following:
●
the
impact of COVID-19 pandemic on our business;
●
the
inability to re-list our shares of Common Stock on the OTC Markets;
●
changes
in applicable laws or regulations;
Madison Technologies Inc. Form 10-K - 2021 Page 22
●
risks
relating to the uncertainty of our projected financial information; and
●
risks
related to the organic and inorganic growth of our business and the timing of expected business milestones.
In
addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market
prices of equity securities of many companies. These fluctuations have often been unrelated or disproportionate to the operating performance
of those companies. Broad market and industry factors, as well as general economic, political, regulatory and market conditions, may
negatively affect the market price of our common stock, regardless of our actual operating performance.
Volatility
in our share price could subject us to securities class action litigation.
In
the past, securities class action litigation has often been brought against a company following a decline in the market price of its
securities or the completion of a merger. If we face such litigation, it could result in substantial costs and a diversion of management’s
attention and resources, which could harm our business.
If
securities or industry analysts do not publish research or reports about us, or publish negative reports, 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. We do not have any control over these analysts. If our financial performance fails to meet analyst estimates or one or more of the
analysts who cover us downgrade our common stock, change their opinion, or reduce their target stock price on us, our stock price would
likely decline. If one or more of these analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility
in the financial markets, which could cause our stock price or trading volume to decline.
Because
we do not anticipate paying any cash dividends in the foreseeable future, capital appreciation, if any, would be your sole source of
gain.
We
currently anticipate that it will retain future earnings for the development, operation and expansion of our business and we do not anticipate
declaring or paying any cash dividends for the foreseeable future. As a result, capital appreciation, if any, of our common stock would
be your sole source of gain on an investment in such shares for the foreseeable future.
A
material portion of the outstanding shares of our common stock is currently restricted from resale but may be sold on a stock exchange
in the near future. The number of shares eligible for public sale upon the lapse of such restrictions could depress the market price
of our common stock.
In
connection with the issuance of convertible notes to Arena Investors LP, we issued to them Warrants to purchase an aggregate of 192,073,017
shares of Common Stock.
In
connection with the issuance of a promissory note to Z4 Management LLC, we issued to them Warrants to purchase 500,000 shares of our
Common Stock.
We
have 230,000 shares of Series D Preferred Stock that may be converted to 230,000,000 shares of Common Stock.
We
have 1,152,500 shares of Series E-1 Preferred Stock that may be converted to 1,152,500,000 shares of Common Stock.
Madison Technologies Inc. Form 10-K - 2021 Page 23
We
have 39,895 shares of Series H Preferred Stock that may be converted to 39,895,000 shares of Common Stock.
As
of December 31, 2021, the outstanding principal balance, including accrued interest of the third-party convertible debt was convertible
into 866,192,064 shares of Common Stock.
Sales
of our Common Stock as restrictions end may make it more difficult for us to sell equity securities in the future at a time and at a
price that we deem appropriate. These sales could also cause the trading price of our common stock to fall and make it more difficult
for us to sell shares of our Common Stock.
In
addition, FFO 1 Trust delivered 48,405,000 shares of Restricted Common Stock the New York State as partial payment for outstanding personal
taxes of Mr. Falcone. Any sale of this Common Stock could also cause the trading price our shares to fall.
Item
1B. Unresolved Staff Comments.
We
are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required
under this item.
Item
2. Properties.
We
are a remote-only company. Accordingly, we do not maintain a headquarters. Through four leases with remaining terms ranging from approximately
7 to 18 years, we lease TV production and broadcast transmission facilities in Los Angeles County, California, King County, Washington
and Harris County, Texas.
Item
3. Legal Proceedings.
We
are not a party to any pending legal proceedings and, to the best of our knowledge, none of our property or assets are the subject of
any pending legal proceedings.
Item
4. Mine Safety Disclosures.
Not
applicable.
PART
II