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+RISK FACTORS Any investment in our securities involves a high degree of risk. You should carefully consider the risks described below, which we believe represent the material risks to our business, together with the information contained elsewhere in this prospectus, before you make a decision to invest in our securities. If any of the following events occur, our business, financial condition and operating results may be materially adversely affected. In that event, the trading price of our securities could decline and you could lose all or part of your investment. Risks relating to our business and industry We have experienced a history of losses, we expect to incur future losses and we may be unable to obtain necessary additional capital to fund operations in the future. We have recorded minimal revenue to date and have incurred an accumulated deficit of approximately $283.4 million through September 30, 2014 and $266.4 million through December 31, 2013. Net loss allocable to common stockholders for the nine months ended September 30, 2014 was $17.0 million and net income allocable to common stockholders for the year ended December 31, 2013 was $1.6 million and the net loss for the year ended December 31, 2012 was $12.5 million. Our losses have resulted principally from costs incurred in research and development activities related to our efforts to develop clinical drug candidates and from the associated administrative costs. We expect to incur additional operating losses over the next several years. We also expect cumulative losses to increase if we expand research and development efforts and preclinical and clinical trials. Our net cash burn rate for the nine months ended September 30, 2014 was approximately $30,000 per month and for the year ended December 31, 2013 was approximately $289,000 per month. We require substantial capital for our development programs and operating expenses, to pursue regulatory clearances and to prosecute and defend our intellectual property rights. We believe that our existing capital resources, interest income, royalties and revenue from our licensing agreements and collaborative agreements will be sufficient to fund our currently expected operating expenses and capital requirements for the next twelve months. We will need to raise substantial additional capital to support our ongoing and planned operations. If we raise additional funds by issuing equity securities, further dilution to existing stockholders will result and future investors may be granted rights superior to those of existing stockholders. If adequate funds are not available to us through additional equity offerings, we may be required to delay, reduce the scope of or eliminate one or more of our research and development programs or to obtain funds by entering into arrangements with collaborative partners or others that require us to issue additional equity securities or to relinquish rights to certain technologies or drug candidates that we would not otherwise issue or relinquish in order to continue independent operations. Without obtaining adequate capital funding, we may not be able to continue as a going concern. The report of our independent registered public accounting firm for the fiscal year ended December 31, 2013, contained an explanatory paragraph to reflect its significant doubt about our ability to continue as a going concern as a result of our history of losses and our liquidity position. If we are unable to obtain adequate capital funding in the future, we may not be able to continue as a going concern, which would have an adverse effect on our business and operations, and investors investment in us may decline. We do not have significant operating revenue and may never attain profitability. To date, we have funded our operations primarily through private sales of common stock, preferred stock and convertible notes. Contract research payments and licensing fees from corporate alliances and mergers have also provided funding for our operations. Our ability to achieve significant revenue or profitability depends upon our ability to successfully market MuGard in North America, Europe, Korea and China or to complete the development of our drug candidates, to develop and obtain patent protection and regulatory approvals for our drug candidates and to manufacture and commercialize the resulting drugs. We are not expecting any significant revenues in the short-term from our products or product candidates. Furthermore, we may not be able to ever successfully identify, develop, commercialize, patent, manufacture, obtain required regulatory TABLE OF CONTENTS approvals and market any additional products. Moreover, even if we do identify, develop, commercialize, patent, manufacture, and obtain required regulatory approvals to market additional products, we may not generate revenues or royalties from commercial sales of these products for a significant number of years, if at all. Therefore, our proposed operations are subject to all the risks inherent in the establishment of a new business enterprise. In the next few years, our revenues may be limited to minimal product sales and royalties, and any amounts that we receive under strategic partnerships and research or drug development collaborations that we may establish and, as a result, we may be unable to achieve or maintain profitability in the future or to achieve significant revenues in order to fund our operations. We may not successfully commercialize our drug candidates. Our drug candidates are subject to the risks of failure inherent in the development of pharmaceutical products based on new technologies, and our failure to develop safe commercially viable drugs would severely limit our ability to become profitable or to achieve significant revenues. We may be unable to successfully commercialize our drug candidates because: some or all of our drug candidates may be found to be unsafe or ineffective or otherwise fail to meet applicable regulatory standards or receive necessary regulatory clearances; our drug candidates, if safe and effective, may be too difficult to develop into commercially viable drugs; it may be difficult to manufacture or market our drug candidates on a large scale; proprietary rights of third parties may preclude us from marketing our drug candidates; and third parties may market superior or equivalent drugs. The success of our research and development activities, upon which we primarily focus, is uncertain. Our primary focus is on our research and development activities and the commercialization of compounds covered by proprietary biopharmaceutical patents and patent applications. Research and development activities, by their nature, preclude definitive statements as to the time required and costs involved in reaching certain objectives. Actual research and development costs, therefore, could significantly exceed budgeted amounts and estimated time frames may require significant extension. Cost overruns, unanticipated regulatory delays or demands, unexpected adverse side effects or insufficient therapeutic efficacy will prevent or substantially slow our research and development effort and our business could ultimately suffer. We anticipate that we will remain principally engaged in research and development activities for an indeterminate, but substantial, period of time. We may be unable to successfully develop, market, or commercialize our products or our product candidates without establishing new relationships and maintaining current relationships and our ability to successfully commercialize, and market our product candidates could be limited if a number of these existing relationships are terminated. Our strategy for the research, development and commercialization of our potential pharmaceutical products may require us to enter into various arrangements with corporate and academic collaborators, licensors, licensees and others, in addition to our existing relationships with other parties. Specifically, we may seek to joint venture, sublicense or enter other marketing arrangements with parties that have an established marketing capability or we may choose to pursue the commercialization of such products on our own. We may, however, be unable to establish such additional collaborative arrangements, license agreements, or marketing agreements as we may deem necessary to develop, commercialize and market our potential pharmaceutical products on acceptable terms. Furthermore, if we maintain and establish arrangements or relationships with third parties, our business may depend upon the successful performance by these third parties of their responsibilities under those arrangements and relationships. TABLE OF CONTENTS We may be unable to successfully manufacture our products and our product candidates in clinical quantities or for commercial purposes without the assistance of contract manufacturers, which may be difficult for us to obtain and maintain. We have limited experience in the manufacture of pharmaceutical products in clinical quantities or for commercial purposes and we may not be able to manufacture any new pharmaceutical products that we may develop. As a result, we have established, and in the future intend to establish arrangements with contract manufacturers to supply sufficient quantities of products to conduct clinical trials and for the manufacture, packaging, labeling and distribution of finished pharmaceutical products if any of our potential products are approved for commercialization. If we are unable to contract for a sufficient supply of our potential pharmaceutical or biopharmaceutical products on acceptable terms, our preclinical and human clinical testing schedule may be delayed, resulting in the delay of our clinical programs and submission of product candidates for regulatory approval, which could cause our business to suffer. Our business could suffer if there are delays or difficulties in establishing relationships with manufacturers to produce, package, label and distribute our finished pharmaceutical or biopharmaceutical or other medical products, if any. Moreover, US contract manufacturers that we may use must adhere to current Good Manufacturing Practices, as required by the FDA. In this regard, the FDA will not issue a pre-market approval or product and establishment licenses, where applicable, to a manufacturing facility for the products until the manufacturing facility passes a pre-approval plant inspection. If we are unable to obtain or retain third party manufacturing on commercially acceptable terms, we may not be able to commercialize our products as planned. Our potential dependence upon third parties for the manufacture of our products may adversely affect our ability to generate profits or acceptable profit margins and our ability to develop and deliver such products on a timely and competitive basis. We are subject to extensive governmental regulation which increases our cost of doing business and may affect our ability to commercialize any new products that we may develop. The FDA and comparable agencies in foreign countries impose substantial requirements upon the introduction of pharmaceutical products through lengthy and detailed laboratory, preclinical and clinical testing procedures and other costly and time-consuming procedures to establish safety and efficacy. All of our drugs and drug candidates require receipt and maintenance of governmental approvals for commercialization. Preclinical and clinical trials and manufacturing of our drug candidates will be subject to the rigorous testing and approval processes of the FDA and corresponding foreign regulatory authorities. Satisfaction of these requirements typically takes a significant number of years and can vary substantially based upon the type, complexity and novelty of the product. Due to the time-consuming and uncertain nature of the drug candidate development process and the governmental approval process described above, we cannot assure you when we, independently or with our collaborative partners, might submit a New Drug Application, or NDA, for FDA or other regulatory review. Further, our ability to commence and/or complete development projects will be subject to our ability to raise enough funds to pay for the development costs of these projects. Government regulation also affects the manufacturing and marketing of pharmaceutical products. Government regulations may delay marketing of our potential drugs for a considerable or indefinite period of time, impose costly procedural requirements upon our activities and furnish a competitive advantage to larger companies or companies more experienced in regulatory affairs. Delays in obtaining governmental regulatory approval could adversely affect our marketing as well as our ability to generate significant revenues from commercial sales. Our drug candidates may not receive FDA or other regulatory approvals on a timely basis or at all. Moreover, if regulatory approval of a drug candidate is granted, such approval may impose limitations on the indicated use for which such drug may be marketed. Even if we obtain initial regulatory approvals for our drug candidates, our drugs and our manufacturing facilities would be subject to continual review and periodic inspection, and later discovery of previously unknown problems with a drug, manufacturer or facility may result in restrictions on the marketing or manufacture of such drug, including withdrawal of the drug from the market. The FDA and other regulatory authorities stringently apply regulatory standards and failure to comply with regulatory standards can, among other things, result in fines, denial or withdrawal of regulatory approvals, product recalls or seizures, operating restrictions and criminal prosecution. TABLE OF CONTENTS The uncertainty associated with preclinical and clinical testing may affect our ability to successfully commercialize new products. Before we can obtain regulatory approvals for the commercial sale of any of our potential drugs, the drug candidates will be subject to extensive preclinical and clinical trials to demonstrate their safety and efficacy in humans. Preclinical or clinical trials of future drug candidates may not demonstrate the safety and efficacy to the extent necessary to obtain regulatory approvals. In this regard, for example, adverse side effects can occur during the clinical testing of a new drug on humans which may delay ultimate FDA approval or even lead it to terminate our efforts to develop the drug for commercial use. Companies in the biotechnology industry have suffered significant setbacks in advanced clinical trials, even after demonstrating promising results in earlier trials. The failure to adequately demonstrate the safety and efficacy of a drug candidate under development could delay or prevent regulatory approval of the drug candidate. A delay or failure to receive regulatory approval for any of our drug candidates could prevent us from successfully commercializing such candidates and we could incur substantial additional expenses in our attempt to further develop such candidates and obtain future regulatory approval. We may incur substantial product liability expenses due to the use or misuse of our products for which we may be unable to obtain insurance coverage. Our business exposes us to potential liability risks that are inherent in the testing, manufacturing and marketing of pharmaceutical products. These risks will expand with respect to our drug candidates, if any, that receive regulatory approval for commercial sale and we may face substantial liability for damages in the event of adverse side effects or product defects identified with any of our products that are used in clinical tests or marketed to the public. Product liability insurance for the biotechnology industry is generally expensive, if available at all, and as a result, we may be unable to obtain insurance coverage at acceptable costs or in a sufficient amount in the future, if at all. We may be unable to satisfy any claims for which we may be held liable as a result of the use or misuse of products which we developed, manufactured or sold and any such product liability claim could adversely affect our business, operating results or financial condition. Intense competition may limit our ability to successfully develop and market commercial products. The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. Our competitors in the U.S. and elsewhere are numerous and include, among others, major multinational pharmaceutical and chemical companies, specialized biotechnology firms and universities and other research institutions. Many of our competitors have and employ greater financial and other resources, including larger research and development, marketing and manufacturing organizations. As a result, our competitors may successfully develop technologies and drugs that are more effective or less costly than any that we are developing or which would render our technology and future products obsolete and noncompetitive. In addition, some of our competitors have greater experience than we do in conducting preclinical and clinical trials and obtaining FDA and other regulatory approvals. Accordingly, our competitors may succeed in obtaining FDA or other regulatory approvals for drug candidates more rapidly than we can. Companies that complete clinical trials, obtain required regulatory agency approvals and commence commercial sale of their drugs before their competitors may achieve a significant competitive advantage. Drugs resulting from our research and development efforts or from our joint efforts with collaborative partners therefore may not be commercially competitive with our competitors' existing products or products under development. Our ability to successfully develop and commercialize our drug candidates will substantially depend upon the availability of reimbursement funds for the costs of the resulting drugs and related treatments. Market acceptance and sales of our product candidates may depend on coverage and reimbursement policies and health care reform measures. Decisions about formulary coverage as well as levels at which government authorities and third-party payers, such as private health insurers and health maintenance organizations, reimburse patients for the price they pay for our products as well as levels at which these payors pay directly for our products, where applicable, could affect whether we are able to commercialize these products. We cannot be sure that reimbursement will be available for any of these products. Also, we cannot be sure that coverage or reimbursement amounts will not reduce the demand for, or the price of, our products. We have TABLE OF CONTENTS not commenced efforts to have our product candidates reimbursed by government or third party payors. If coverage and reimbursement are not available or are available only at limited levels, we may not be able to commercialize our products. In recent years, officials have made numerous proposals to change the health care system in the U.S. These proposals include measures that would limit or prohibit payments for certain medical treatments or subject the pricing of drugs to government control. In addition, in many foreign countries, particularly the countries of the European Union, the pricing of prescription drugs is subject to government control. If our products are or become subject to government regulation that limits or prohibits payment for our products, or that subjects the price of our products to governmental control, we may not be able to generate revenue, attain profitability or commercialize our products. As a result of legislative proposals and the trend towards managed health care in the U.S., third-party payors are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement of new drugs. They may also impose strict prior authorization requirements and/or refuse to provide any coverage of uses of approved products for medical indications other than those for which the FDA has granted market approvals. As a result, significant uncertainty exists as to whether and how much third-party payors will reimburse patients for their use of newly-approved drugs, which in turn will put pressure on the pricing of drugs. The market may not accept any pharmaceutical products that we develop. The drugs that we are attempting to develop may compete with a number of well-established drugs manufactured and marketed by major pharmaceutical companies. The degree of market acceptance of any drugs developed by us will depend on a number of factors, including the establishment and demonstration of the clinical efficacy and safety of our drug candidates, the potential advantage of our drug candidates over existing therapies and the reimbursement policies of government and third-party payers. Physicians, patients or the medical community in general may not accept or use any drugs that we may develop independently or with our collaborative partners and if they do not, our business could suffer. Healthcare reform measures could hinder or prevent our product candidates commercial success. The U.S. government and other governments have shown significant interest in pursuing healthcare reform. Any government-adopted reform measures could adversely impact the pricing of healthcare products and services in the U.S. or internationally and the amount of reimbursement available from governmental agencies or other third party payors. The continuing efforts of the U.S. and foreign governments, insurance companies, managed care organizations and other payors of health care services to contain or reduce health care costs may adversely affect our ability to set prices for our products which we believe are fair, and our ability to generate revenues and achieve and maintain profitability. New laws, regulations and judicial decisions, or new interpretations of existing laws, regulations and decisions, that relate to healthcare availability, methods of delivery or payment for products and services, or sales, marketing or pricing, may limit our potential revenue, and we may need to revise our research and development programs. The pricing and reimbursement environment may change in the future and become more challenging due to several reasons, including policies advanced by the current executive administration in the U.S., new healthcare legislation or fiscal challenges faced by government health administration authorities. Specifically, in both the U.S. and some foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the health care system in ways that could affect our ability to sell our products profitably. For example, in March 2010, President Obama signed the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or the PPACA. This law will substantially change the way healthcare is financed by both government health plans and private insurers, and significantly impact the pharmaceutical industry. The PPACA contains a number of provisions that are expected to impact our business and operations in ways that may negatively affect our potential revenues in the future. For example, the PPACA imposes a non-deductible excise tax on pharmaceutical manufacturers or importers that sell branded prescription drugs to U.S. government programs which we believe will increase the cost of our products. In addition, as part of the PPACA s provisions closing a funding gap that currently exists in the TABLE OF CONTENTS Medicare Part D prescription drug program (commonly known as the donut hole ), we will be required to provide a discount on branded prescription drugs equal to 50% of the government-negotiated price, for drugs provided to certain beneficiaries who fall within the donut hole. Similarly, PPACA increases the level of Medicaid rebates payable by manufacturers of brand-name drugs from 15.1% to 23.1% and requires collection of rebates for drugs paid by Medicaid managed care organizations. The PPACA also includes significant changes to the 340B drug discount program including expansion of the list of eligible covered entities that may purchase drugs under the program. At the same time, the expansion in eligibility for health insurance benefits created under PPACA is expected to increase the number of patients with insurance coverage who may receive our products. While it is too early to predict all the specific effects the PPACA or any future healthcare reform legislation will have on our business, they could have a material adverse effect on our business and financial condition. Congress periodically adopts legislation like the PPACA and the Medicare Prescription Drug, Improvement and Modernization Act of 2003, that modifies Medicare reimbursement and coverage policies pertaining to prescription drugs. Implementation of these laws is subject to ongoing revision through regulatory and sub regulatory policies. Congress also may consider additional changes to Medicare policies, potentially including Medicare prescription drug policies, as part of ongoing budget negotiations. While the scope of any such legislation is uncertain at this time, there can be no assurances that future legislation or regulations will not decrease the coverage and price that we may receive for our proposed products. Other third-party payors are increasingly challenging the prices charged for medical products and services. It will be time consuming and expensive for us to go through the process of seeking coverage and reimbursement from Medicare and private payors. Our proposed products may not be considered cost-effective, and coverage and reimbursement may not be available or sufficient to allow us to sell our proposed products on a profitable basis. Further federal and state proposals and health care reforms are likely which could limit the prices that can be charged for the product candidates that we develop and may further limit our commercial opportunities. Our results of operations could be materially adversely affected by proposed healthcare reforms, by the Medicare prescription drug coverage legislation, by the possible effect of such current or future legislation on amounts that private insurers will pay and by other health care reforms that may be enacted or adopted in the future. In September 2007, the Food and Drug Administration Amendments Act of 2007 was enacted, giving the FDA enhanced post-marketing authority, including the authority to require post-marketing studies and clinical trials, labeling changes based on new safety information, and compliance with risk evaluations and mitigation strategies approved by the FDA. The FDA s exercise of this authority could result in delays or increased costs during product development, clinical trials and regulatory review, increased costs to assure compliance with post-approval regulatory requirements, and potential restrictions on the sale and/or distribution of approved products. Our business could suffer if we lose the services of, or fail to attract, key personnel. We are highly dependent upon the efforts of our senior management, including our Chief Executive Officer, Scott Schorer; our President and Chief Financial Officer, Harrison Wehner; and our consultant and board member Jeffrey B. Davis. The loss of the services of these individuals could delay or prevent the achievement of our research, development, marketing, or product commercialization objectives. We do not have employment contracts with our other key personnel. We do not maintain any key-man insurance policies on any of our key employees and we do not intend to obtain such insurance. In addition, due to the specialized scientific nature of our business, we are highly dependent upon our ability to attract and retain qualified scientific and technical personnel and consultants. In view of the stage of our development and our research and development programs, we have restricted our hiring to research scientists, consultants and a small administrative staff and we have made only limited investments in manufacturing, production, sales or regulatory compliance resources. There is intense competition among major pharmaceutical and chemical companies, specialized biotechnology firms and universities and other research institutions for qualified personnel in the areas of our activities, however, and we may be unsuccessful in attracting and retaining these personnel. TABLE OF CONTENTS Trends toward managed health care and downward price pressures on medical products and services may limit our ability to profitably sell any drugs that we may develop. Lower prices for pharmaceutical products may result from: third-party-payers' increasing challenges to the prices charged for medical products and services; the trend toward managed health care in the U.S. and the concurrent growth of HMOs and similar organizations that can control or significantly influence the purchase of healthcare services and products; and legislative proposals to reform healthcare or reduce government insurance programs. The cost containment measures that healthcare providers are instituting, including practice protocols and guidelines and clinical pathways, and the effect of any healthcare reform, could limit our ability to profitably sell any drugs that we may successfully develop. Moreover, any future legislation or regulation, if any, relating to the healthcare industry or third-party coverage and reimbursement, may cause our business to suffer. Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer. In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our suppliers and business partners, as well as personally identifiable information of clinical trial participants and employees. Similarly, our business partners and third party providers possess certain of our sensitive data. The secure maintenance of this information is critical to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information, including our data being breached at our business partners or third-party providers, could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, disrupt our operations, and damage our reputation which could adversely affect our business. Risks Related to our Intellectual Property It is difficult and costly to protect our proprietary rights, and we may not be able to ensure protection of such rights. Our commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection of our product candidates, and the methods used to manufacture them, as well as successfully defending these patents against third-party challenges. We will only be able to protect our product candidates from unauthorized making, using, selling and offering to sell or importation by third parties to the extent that we have rights under valid and enforceable patents or trade secrets that cover these activities. The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in biotechnology patents has emerged to date in the U.S. The biotechnology patent situation outside the U.S. is even more uncertain. Changes in either the patent laws or in interpretations of patent laws in the U.S. and other countries may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our issued patents or in third-party patents. The degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example: others may be able to produce compounds or molecules that are competitive with our product candidates but that are not covered by the claims of our patents; we may not have been the first to make the inventions covered by our pending patent applications; we may not have been the first to file patent applications for these inventions; TABLE OF CONTENTS others may independently develop similar or alternative technologies or duplicate any of our technologies; it is possible that our pending patent applications will not result in issued patents and it is possible that our issued patents could be narrowed in scope, invalidated, held to be unenforceable, or circumvented; we may not develop additional proprietary technologies that are patentable; or the patents of others may have an adverse effect on our business; or others may be able to misappropriate our trade secrets. We also may rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. While we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third party illegally obtained and is using our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how. We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights and we may be unable to protect our rights to, or use, our technology. If we choose to go to court to stop someone else from using the inventions claimed in our patents, that individual or company has the right to ask the court to rule that these patents are invalid and/or should not be enforced against that third party. These lawsuits are expensive and would consume time and other resources even if we were successful in stopping the infringement of these patents. In addition, there is a risk that the court will decide that these patents are not valid and that we do not have the right to stop the other party from using the inventions. There is also the risk that, even if the validity of these patents is upheld, the court will refuse to stop the other party on the ground that such other party s activities do not infringe our rights to these patents. Furthermore, a third party may claim that we are using inventions covered by the third party s patent rights and may go to court to stop us from engaging in our normal operations and activities, including making or selling our product candidates. These lawsuits are costly and could affect our results of operations and divert the attention of managerial and technical personnel. There is a risk that a court would decide that we are infringing the third party s patents and would order us to stop the activities covered by the patents. In addition, there is a risk that a court will order us to pay the other party damages for having violated the other party s patents. The biotechnology industry has produced a proliferation of patents, and it is not always clear to industry participants, including us, which patents cover various types of products or methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued for patent infringement, we would need to demonstrate that our products or methods of use either do not infringe the patent claims of the relevant patent and/or that the patent claims are invalid, and we may not be able to do this. Proving invalidity, in particular, is difficult since it requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents. Because some patent applications in the U.S. may be maintained in secrecy until the patents are issued, patent applications in the U.S. and many foreign jurisdictions are typically not published until eighteen months after filing, and publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications for technology covered by our issued patents or our pending applications or that we were the first to invent the technology. Our competitors have filed, and may in the future file, patent applications covering technology similar to ours. Any such patent application may have priority over our patent applications and could further require us to obtain rights to issued patents covering such technologies. If another party has filed a U.S. patent application on inventions similar to ours, we may have to participate in an interference proceeding declared by the PTO, to determine priority of invention in the U.S.. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful, resulting in a loss of our United States patent position with respect to such inventions. TABLE OF CONTENTS Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations. Pending and future litigation, including product liability claims, private securities litigation, shareholder derivative suits and contract litigation, may adversely affect our financial condition and results of operations or liquidity. The development, manufacture and marketing of pharmaceutical products of the types that we produce entail an inherent risk of product liability claims. A number of factors could result in an unsafe condition or injury to a patient with respect to these or other products that we manufacture or sell, including inadequate disclosure of product-related risks or product-related information. In addition, we may be the subject of litigation involving contract disputes, shareholder derivative suites or private securities litigation. The outcome of litigation, particularly class action lawsuits, is difficult to assess or quantify. Plaintiffs in these types of lawsuits often seek recovery of very large or indeterminate amounts, including not only actual damages, but also punitive damages. The magnitude of the potential losses relating to these lawsuits may remain unknown for substantial periods of time. In addition, the cost to defend against any future litigation may be significant. Product liability claims, securities and commercial litigation and other litigation in the future, regardless of the outcome, could have a material adverse effect on our financial condition, results of operations or liquidity. We are currently involved in a class action litigation, the outcome of which is uncertain and we may be required to pay damages. This litigation is described on page 46 under the heading Legal Proceedings. We may not be successful in protecting our intellectual property and proprietary rights. Our success depends, in part, on our ability to obtain U.S. and foreign patent protection for our drug candidates and processes, preserve our trade secrets and operate our business without infringing the proprietary rights of third parties. Legal standards relating to the validity of patents covering pharmaceutical and biotechnological inventions and the scope of claims made under such patents are still developing and there is no consistent policy regarding the breadth of claims allowed in biotechnology patents. The patent position of a biotechnology firm is highly uncertain and involves complex legal and factual questions. We cannot assure you that any existing or future patents issued to, or licensed by, us will not subsequently be challenged, infringed upon, invalidated or circumvented by others. We cannot assure you that any patents will be issued from any of the patent applications owned by, or licensed to, us. Furthermore, any rights that we may have under issued patents may not provide us with significant protection against competitive products or otherwise be commercially viable. Patents may have been granted to third parties or may be granted covering products or processes that are necessary or useful to the development of our drug candidates. If our drug candidates or processes are found to infringe upon the patents or otherwise impermissibly utilize the intellectual property of others, our development, manufacture and sale of such drug candidates could be severely restricted or prohibited. In such event, we may be required to obtain licenses from third parties to utilize the patents or proprietary rights of others. We cannot assure you that we will be able to obtain such licenses on acceptable terms, if at all. If we become involved in litigation regarding our intellectual property rights or the intellectual property rights of others, the potential cost of such litigation, regardless of the strength of our legal position, and the potential damages that we could be required to pay could be substantial. Risks related to our common stock The market price of our common stock may be volatile and adversely affected by several factors. The market price of our common stock could fluctuate significantly in response to various factors and events, including: our ability to integrate operations, technology, products and services; our ability to execute our business plan; operating results below expectations; TABLE OF CONTENTS announcements concerning product development results, including clinical trial results, or intellectual property rights of others; litigation or public concern about the safety of our potential products; our issuance of additional securities, including debt or equity or a combination thereof, which will be necessary to fund our operating expenses; announcements of technological innovations or new products by us or our competitors; loss of any strategic relationship; industry developments, including, without limitation, changes in healthcare policies or practices or third-party reimbursement policies; economic and other external factors; period-to-period fluctuations in our financial results; and whether an active trading market in our common stock develops and is maintained. 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. We have not paid cash dividends in the past and do not expect to pay cash dividends in the foreseeable future. Any return on investment may be limited to the value of our common stock. We have never paid cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future. The payment of dividends on our capital stock will depend on our earnings, financial condition and other business and economic factors affecting us at such time as the board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if the common stock price appreciates. Our quarterly operating results may fluctuate significantly. We expect our operating results to be subject to quarterly fluctuations. Our net loss and other operating results will be affected by numerous factors, including: variations in the level of expenses related to our development programs; addition or termination of clinical trials; any intellectual property infringement lawsuit in which we may become involved; regulatory developments affecting our product candidates; and our execution of any collaborative, licensing or similar arrangements, and the timing of payments we may make or receive under these arrangements. If our quarterly operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any quarterly fluctuations in our operating results may, in turn, cause the price of our common stock to fluctuate substantially. Provisions of our charter documents could discourage an acquisition of our company that would benefit our stockholders and may have the effect of entrenching, and making it difficult to remove, management. Provisions of our Certificate of Incorporation and By-laws may make it more difficult for a third party to acquire control of us, even if a change in control would benefit our stockholders. In particular, shares of our preferred stock may be issued in the future without further stockholder approval and upon such terms and conditions, and having such rights, privileges and preferences, as our Board of Directors may determine, including, for example, rights to convert into our common stock. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any of our preferred stock that may be issued in the future. The issuance of our preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of TABLE OF CONTENTS making it more difficult for a third party to acquire control of us. This could limit the price that certain investors might be willing to pay in the future for shares of our common stock and discourage these investors from acquiring a majority of our common stock. Further, the existence of these corporate governance provisions could have the effect of entrenching management and making it more difficult to change our management. We have adopted a shareholder rights plan, the purpose of which is, among other things, to enhance our board s ability to protect shareholder interests and to ensure that shareholders receive fair treatment in the event any coercive takeover attempt of our company is made in the future. The shareholder rights plan could make it more difficult for a third party to acquire, or could discourage a third party from acquiring, our company or a large block of our common stock. Failure to achieve and maintain effective internal controls could have a material adverse effect on our business. Effective internal controls are necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports, our operating results could be harmed. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Based on our evaluation, our management concluded that there is a material weakness in our internal control over financial reporting for the year ended December 31, 2013. The material weakness identified did not result in the restatement of any previously reported financial statements or any related financial disclosure, nor does management believe that it had any effect on the accuracy of our financial statements for the year ended December 31, 2013. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness relates to the monitoring and review of work performed by an accounting consultant who was formerly our Chief Financial Officer in the preparation of audit and financial statements, footnotes and financial data provided to our registered public accounting firm in connection with the annual audit. All of our financial reporting is currently carried out by our accounting consultant. This lack of accounting staff results in a lack of segregation of duties and accounting technical expertise necessary for an effective system of internal control. As soon as our finances allow, we will hire sufficient accounting staff and implement appropriate procedures for monitoring and review of work performed by our accounting consultant. Because of the material weakness described above, management concluded that, as of December 31, 2013, our internal control over financial reporting was not effective based on the criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ( COSO ). While we continue to evaluate and improve our internal controls, we cannot be certain that these measures will ensure adequate controls over our financial processes and reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. Failure to achieve and maintain an effective internal control environment could cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our stock price. Failure to comply with Section 404 could also potentially subject us to sanctions or investigations by the Securities and Exchange Commission ( SEC ) or other regulatory authorities. Our ability to use our net operating loss carry forwards may be subject to limitation. Generally, a change of more than 50% in the ownership of a company s stock, by value, over a three-year period constitutes an ownership change for U.S. federal income tax purposes. An ownership change may limit our ability to use our net operating loss carryforwards attributable to the period prior to the change. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards to offset U.S. federal taxable income may become subject to limitations, which could potentially result in increased future tax liability for us. At December 31, 2013, we had net operating loss carryforwards aggregating approximately $189 million. TABLE OF CONTENTS An investment in our common stock may be less attractive because it is not traded on a recognized public market. Our common stock has traded on the OTC Bulletin Board, or OTCBB since June 5, 2006 and the OTCQB since July 18, 2012. The OTCQB is viewed by most investors as a less desirable, and less liquid, marketplace. As a result, an investor may find it more difficult to purchase, dispose of or obtain accurate quotations as to the value of our common stock. Our common stock is subject to Rules 15g-1 through 15g-9 under the Exchange Act, which imposes certain sales practice requirements on broker-dealers who sell our common stock to persons other than established customers and accredited investors (as defined in Rule 501(c) of the Securities Act). For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to the sale. This rule adversely affects the ability of broker-dealers to sell our common stock and purchasers of our common stock to sell their shares of our common stock. Additionally, our common stock is subject to SEC regulations applicable to penny stock. Penny stock includes any non-NASDAQ equity security that has a market price of less than $5.00 per share and does not trade on a national exchange, subject to certain exceptions. The regulations require that prior to any non-exempt buy/sell transaction in a penny stock, a disclosure schedule proscribed by the SEC relating to the penny stock market must be delivered by a broker-dealer to the purchaser of such penny stock. This disclosure must include the amount of commissions payable to both the broker-dealer and the registered representative and current price quotations for our common stock. The regulations also require that monthly statements be sent to holders of penny stock that disclose recent price information for the penny stock and information of the limited market for penny stocks. These requirements adversely affect the market liquidity of our common stock. Ownership of our shares is concentrated in the hands of a few investors which could limit the ability of our other stockholders to influence the direction of the company. As calculated by SEC rules of beneficial ownership, SCO Capital Partners LLC and affiliates; Larry N. Feinberg (Oracle Partners LP, Oracle Institutional Partners LP and Oracle Investment Management Inc.); and Lake End Capital LLC each beneficially owned approximately 71.5%, 12.1%, and 6.8%, respectively, of our common stock on an as converted basis as of December 3, 2014. Accordingly, they collectively have the ability to significantly influence or determine the election of all of our directors or the outcome of most corporate actions requiring stockholder approval. They may exercise this ability in a manner that advances their best interests and not necessarily those of our other stockholders. Risks relating to this offering We will have broad discretion over the use of the net proceeds from this offering. We intend to use the net proceeds for the clinical development and validation of the Licensed technologies, for the continued commercialization of MuGard, ProctiGard, and for the development of follow-on portfolio products, for general corporate purposes, including working capital, and for the up-front payment of $ for Licensor exclusive license. Our judgment may not result in positive returns on your investment and you will not have an opportunity to evaluate the economic, financial, or other information upon which we base our decisions. Future sales by our stockholders may adversely affect our stock price and our ability to raise funds in new stock offerings. Sales of our common stock in the public market following this offering could lower the market price of our common stock. Sales may also make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that our management deems acceptable or at all. Of the 536,089 shares of common stock outstanding as of December 3, 2014, all shares are, or will be, freely tradable without restriction, unless held by our affiliates. Some of these shares may be resold under Rule 144. The sale of the shares issuable upon conversion of our outstanding Series A Preferred Stock, the sale of the shares issuable upon exchange of our outstanding Series B Preferred Stock and 577,756 shares issuable upon exercise of outstanding warrants could also lower the market price of our common stock. TABLE OF CONTENTS You will experience immediate and substantial dilution as a result of this offering and may experience additional dilution in the future. You will incur immediate and substantial dilution as a result of this offering. After giving effect to the sale by us of shares and warrants offered in this offering at an assumed public offering price of $ per share and $ per warrant, and after deducting underwriting discount and estimated offering expenses payable by us, investors in this offering can expect an immediate dilution of $ per share. In addition, in the past, we issued options and warrants to acquire shares of common stock. To the extent these options are ultimately exercised, you will sustain future dilution. We may also acquire or license other technologies or finance strategic alliances by issuing equity, which may result in additional dilution to our stockholders. In addition, pursuant to the license agreement with Licensor, upon FDA approval of a drug derived from the Licensor s proprietary SDF process, we will issue additional shares of common stock to Licensor. Risks Related to the Reverse Split On October 24, 2014, we effected a l-for-50 reverse stock split of our outstanding common stock in order to meet the minimum bid price requirement of the NASDAQ Capital Market. There can be no assurance that we will be able to continue to comply with the minimum bid price requirement of the NASDAQ Capital Market, in which case this offering may not be completed. The reverse stock split of our outstanding common stock has increased the market price of our common stock to exceed the minimum bid price requirement of the NASDAQ Capital Market. However, the effect of a reverse stock split upon the market price of our common stock cannot be predicted with certainty, and the results of reverse stock splits by companies in similar circumstances have been varied. There can be no assurance that the market price of our common stock following the reverse stock split will remain at the level required for continuing compliance with that requirement. It is not uncommon for the market price of a company's common stock to decline in the period following a reverse stock split. If the market price of our common stock declines following the reverse stock split, the percentage decline may be greater than would occur in the absence of a reverse stock split. In any event, other factors unrelated to the number of shares of our common stock outstanding, such as negative financial or operational results, could adversely affect the market price of our common stock and jeopardize our ability to meet or maintain the NASDAQ Capital Market's minimum bid price requirement. In addition to specific listing and maintenance standards, the NASDAQ Capital Market has broad discretionary authority over the initial and continued listing of securities, which it could exercise with respect to the listing of our common stock. Even if we do obtain a listing on the NASDAQ Capital Market, there can be no assurance that we will be able to comply with continued listing standards of the NASDAQ Capital Market. Even if we sustain a market price of our common stock sufficient to obtain an initial listing on the Nasdaq Capital Market, we cannot assure you that we will be able to continue to comply with the minimum bid price and the other standards that we are required to meet in order to maintain a listing of our common stock on the NASDAQ Capital Market. Our failure to continue to meet these requirements may result in our common stock being delisted from the NASDAQ Capital Market. The reverse stock split may decrease the liquidity of the shares of our common stock. The liquidity of the shares of our common stock may be affected adversely by the reverse stock split given the reduced number of shares that are outstanding following the reverse stock split, especially if the market price of our common stock does not increase as a result of the reverse stock split. In addition, the reverse stock split increased the number of stockholders who own odd lots (less than 100 shares) of our common stock, creating the potential for such stockholders to experience an increase in the cost of selling their shares and greater difficulty effecting such sales. Following the reverse stock split, the resulting market price of our common stock may not attract new investors, including institutional investors, and may not satisfy the investing requirements of those investors. Consequently, the trading liquidity of our common stock may not improve. Although we believe that a higher market price of our common stock may help generate greater or broader investor interest, there can be no assurance that the reverse stock split will result in a share price that will attract new investors, including institutional investors, In addition, there can be no assurance that the market price of our common stock will satisfy the investing requirements of those investors, As a result, the trading liquidity of our common stock may not necessarily improve. TABLE OF CONTENTS

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+Risk factors Investing in our common stock involves a high degree of risk. Before investing in our common stock, you should consider carefully the risks described below, together with the other information contained in this prospectus or incorporated by reference in this prospectus, including the risks and uncertainties discussed under Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2013, which are incorporated by reference herein in their entirety. If any of the following risks occur, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected. In these circumstances, the market price of our common stock could decline, and you may lose all or part of your investment. Risks related to our common stock and this offering Following this offering, our executive officers, directors and principal stockholders will continue to own a significant percentage of our stock and will be able to control matters submitted to stockholders for approval. Upon completion of this offering, our executive officers, directors and a small number of our stockholders will continue to own more than a majority of our outstanding common stock. As a result, if these stockholders were to choose to act together, they would be able to control all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if they choose to act together, would control the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of voting power could delay or prevent an acquisition of our company on terms that you may desire. If you purchase shares of common stock in this offering, you will suffer immediate dilution of your investment. The public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our net tangible book value per share after giving effect to this offering. To the extent shares are issued under outstanding options, you will incur further dilution. Based on an assumed public offering price of $40.67 per share, which was the last reported sale price of our common stock on The NASDAQ Global Select Market on April 17, 2014, you will experience immediate dilution of $34.42 per share, representing the difference between our as adjusted net tangible book value per share after giving effect to this offering at the assumed public offering price. We have broad discretion in the use of the net proceeds from this offering and may not use them effectively. Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. The failure by our management to apply these funds effectively could result in financial losses, and these financial losses could have a material adverse effect on our business, cause the price of our common stock to decline and delay the development of our product candidates. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value. Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be your sole source of gain. We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and 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. Table of Contents A significant portion of our total outstanding shares may be sold into the market in the near future, which could cause the market price of our common stock to drop significantly, even if our business is doing well. Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering, we will have outstanding 33,202,542 shares of common stock based on the number of shares outstanding as of December 31, 2013. This includes the shares that we are issuing and selling in this offering, which shares may be resold in the public market immediately without restriction, unless purchased by our affiliates. Of the remaining shares, 24,301,947 shares are restricted securities under Rule 144. Of these shares, 19,088,669 shares are subject to lock-up agreements entered into in connection with this offering, not including any shares that may be purchased by Celgene in this offering. After the lock-up period, these restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or 701 under the Securities Act or any other exemption. See the Shares eligible for future sale section of this prospectus. Moreover, following this offering, assuming that the underwriters do not exercise their option to purchase additional shares of common stock, based on information we have available to us, we believe holders of an aggregate of 19,262,768 shares of our common stock will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We have also registered shares of common stock that we have issued upon the exercise of stock options outstanding on December 31, 2013, and may in the future issue, under our equity compensation plans. These can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates and the lock-up agreements described in the Underwriting section of this prospectus. Table of Contents

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+RISK FACTORS An investment in our securities involves a high degree of risk. You should carefully consider the following risk factors, together with the other information contained in or incorporated by reference into this prospectus, including the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended March 31, 2014 and our Quarterly Reports on Form 10-Q for the periods ended June 30, 2013, September 30, 2013 and December 31, 2013, before making a decision to invest in our securities. We have described in this prospectus and in the documents incorporated by reference into this prospectus all material risks associated with our operations and an investment in our Common Stock or Series D Preferred Stock. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties that are not known to us or that we currently deem to be immaterial may also adversely affect our business, financial condition or results of operations. If any of the following risks actually occur, our business, financial condition and results of operations could be harmed and we may not be able to achieve our expectations, projections, intentions or beliefs about future events that are intended as forward looking statements under Private Securities Litigation Reform Act of 1995. These risk factors should be read in conjunction with the section entitled Forward Looking Statements. Risks Associated with our Business and Operations The Company will become subject to more stringent capital requirements, which may adversely impact our return on equity, or constrain us from paying dividends or repurchasing shares. In July 2013, the FDIC and the Federal Reserve approved a new rule that will substantially amend the regulatory risk-based capital rules applicable to the Bank and the Company. The final rule implements the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. The final rule includes new minimum risk-based capital and leverage ratios, which will be effective for the Bank and the Company on January 1, 2015, and refines the definition of what constitutes capital for purposes of calculating these ratios. The new minimum capital requirements will be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4%. The final rule also establishes a capital conservation buffer of 2.5%, and will result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%; (ii) a Tier 1 to risk-based assets capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement will be phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions. The application of more stringent capital requirements for the Bank and the Company could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions constraining us from paying dividends or repurchasing shares if we were to be unable to comply with such requirements. Our results of operations may be adversely affected by loan repurchases from U.S. Government Sponsored entities ( GSEs ). In connection with the sale of loans, we as the loan originator are required to make a variety of representations and warranties regarding the originator and the loans that are being sold. If a loan does not comply with the representations and warranties, Carver may be obligated to repurchase the loans, and in doing, so incur any loss directly. Prior to December 31, 2009 the Bank originated and sold loans to Fannie Mae ( FNMA ). During fiscal years 2012 through 2014, the Bank has been obligated to repurchase 19 loans previously sold to FNMA. There is no assurance that the Bank will not be required to repurchase additional loans in the future. Accordingly, any repurchase obligations to FNMA could materially and adversely affects the Bank's results of operations and earnings in the future. The prolonged negative effect of the recession and weak economic recovery will continue to adversely affect our financial performance. The severe recession and weak economic recovery has resulted in continued uncertainty in the financial and credit markets in general. There is also continued concern about the possibility of another economic downturn. The Federal Reserve, in an attempt to stimulate the overall economy, has, among other things, kept interest rates low through its targeted federal funds rate and purchased mortgage backed securities. While this has helped the economy from declining further and has reduced the Bank s cost of funds, the low rates have made it difficult for the Bank to earn interest income on investments and loans. If the Federal Reserve increases the federal funds rate, overall interest rates will likely rise which may negatively impact the housing markets, businesses ability to borrow, and the U.S. economic recovery. Regardless of the cause or the Federal Reserve s response, a prolonged weakness in the economy generally, and in the financial services industry in particular, could continue to negatively affect our operations in multiple ways, including the ability to originate new loans at reasonable rates and the continued deterioration of our loan portfolio, requiring increased provisions and costs to manage problem assets. The Company s results of operations are affected by economic conditions in the New York metropolitan area. At March 31, 2014, a significant majority of the Bank s lending portfolio is concentrated in the New York metropolitan area. As a result of this geographic concentration, our results of operations are largely dependent on economic conditions in this area. Further decreases in real estate values could adversely affect the value of property used as collateral for loans to its borrowers. Adverse changes in the economy caused by inflation, recession, unemployment or other factors beyond the Bank s control may also continue to have a negative effect on the ability of borrowers to make timely mortgage or business loan payments, which would have an adverse impact on earnings. Consequently, deterioration in economic conditions in the New York metropolitan area could have a material adverse impact on the quality of the Bank s loan portfolio, which could result in increased delinquencies, decreased interest income results as well as an adverse impact on loan loss experience with probable increased allowance for loan losses. Such deterioration also could adversely impact the demand for products and services, and, accordingly, further negatively affect results of operations. The Bank is operating in a challenging and uncertain economic environment, both nationally and locally. Financial institutions continue to be affected by sharp declines in the real estate market and constrained financial markets. Continued declines in real estate values, home sales volumes and financial stress on borrowers as a result of the ongoing economic recession, including job losses, could have an adverse effect on the Bank s borrowers or their customers, which could adversely affect the Bank s financial condition and results of operations. In addition, the Bank has experienced declines in real estate values in all markets in which it lends. Such decreases in real estate values, particularly where the original appraised values do not reflect current market conditions, could adversely affect the value of property used as collateral for loans. Further, significant increases in job losses and unemployment will have a negative impact on the financial condition of residential borrowers and their ability to remain current on their mortgage loans. A continuation or further deterioration in national and local economic conditions, including an accelerating pace of job losses, particularly in the New York metropolitan area, could have a material adverse impact on the quality of the Bank s loan portfolio, which could result in further increases in loan delinquencies, causing a decrease in the Bank s interest income as well as an adverse impact on the Bank s loan loss experience, causing an increase in the Bank s allowance for loan losses and related provision and a decrease in net income. Such deterioration could also adversely impact the demand for the Bank s products and services, and, accordingly, the Bank s results of operations. Current economic conditions may not improve and may worsen, which could result in a decrease in the Bank s interest income or an adverse impact on loan losses. Our business may be adversely affected by current conditions in the financial markets, the real estate market and economic conditions generally. Beginning in the latter half of 2007 and continuing into 2013, negative developments in the capital markets resulted in uncertainty and instability in the financial markets, and an economic downturn. The housing market declined, resulting in decreasing home prices and increasing delinquencies and foreclosures. The credit performance of residential and commercial real estate, construction and land loans resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. The declines in the performance and value of mortgage assets encompassed all mortgage and real estate asset types, leveraged bank loans and nearly all other asset classes, including equity securities. These write-downs have caused many financial institutions to seek additional capital or to merge with larger and stronger institutions. Some financial institutions have failed. Continued, and potentially increased, volatility, instability and weakness could affect our ability to sell investment securities and other financial assets, which in turn could adversely affect our liquidity and financial position. This instability also could affect the prices at which we could make any such sales, which could adversely affect our earnings and financial condition. Concerns over the stability of the financial markets and the economy have resulted in decreased lending by some financial institutions to their customers and to each other. This tightening of credit has led to increased loan delinquencies, lack of customer confidence, increased market volatility and a widespread reduction in general business activity. Competition among depository institutions for deposits has increased significantly, and access to deposits or borrowed funds has decreased for many institutions. It has also become more difficult to assess the creditworthiness of customers and to estimate the losses inherent in our loan portfolio. Current conditions, including high unemployment, soft real estate markets, and the decline of home sales and property values, could negatively affect the volume of loan originations and prepayments, the value of the real estate securing our mortgage loans, and borrowers ability to repay loan obligations, all of which could adversely impact our earnings and financial condition. Business activity across a wide range of industries and regions is greatly reduced, and local governments and many companies are in serious difficulty due to the lack of consumer spending and the lack of liquidity in the credit markets. A worsening of current conditions would likely adversely affect our business and results of operations, as well as those of our customers. As a result, we may experience increased foreclosures, delinquencies and customer bankruptcies, as well as more restricted access to funds. The soundness of other financial institutions could negatively affect the Company. Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due us. Any such losses could materially and adversely affect our results of operations. The allowance for loan losses could be insufficient to cover the Company s actual loan losses. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to our allowance. Material additions to the allowance would materially decrease net income. In addition, our regulators periodically review the allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. A material increase in the allowance for loan losses or loan charge-offs as required by the regulatory authorities would have a material adverse effect on the Company s financial condition and results of operations. Our concentration in multifamily loans and commercial real estate loans could, in a deteriorating economic climate, expose us to increased lending risks and related loan losses. Although Carver Federal has reduced its concentration in non-owner occupied commercial real estate, multifamily and construction loans to within board-approved policy limits, Carver Federal continues to maintain a high concentration in this area and has begun, on a select basis, renewing existing loans and making new loans. Further deterioration in the economy could expose Carver Federal to additional losses in this segment of its loan portfolio. Changes in interest rate environment may negatively affect the Company s net income, mortgage loan originations and valuation of available-for-sale securities. Our primary source of income is net interest income, which is the difference between the interest income generated by our interest-earning assets (consisting primarily of loans and, to a lesser extent, securities) and the interest expense produced by our interest-bearing liabilities (consisting primarily of deposits and wholesale borrowings). The cost of our deposits and short-term wholesale borrowings is largely based on short-term interest rates, the level of which is driven by the Federal Open Market Committee. However, the yields generated by our loans and securities are typically driven by intermediate-term (i.e., five-year) interest rates, which are set by the market and generally vary from day to day. The level of net interest income is therefore influenced by movements in such interest rates, and the pace at which such movements occur. If the interest rates on our interest-bearing liabilities increase at a faster pace than the interest rates on our interest-earning assets, the result could be a reduction in net interest income and with it, a reduction in our earnings. Our net interest income and earnings would be similarly impacted were the interest rates on our interest-earning assets to decline more quickly than the interest rates on our interest-bearing liabilities. In addition, such changes in interest rates could affect our ability to originate loans and attract and retain deposits; the fair values of our securities and other financial assets; the fair values of our liabilities; and the average lives of our loan and securities portfolios. Changes in interest rates could also have an effect on loan refinancing activity which, in turn, would impact the amount of prepayment penalty income we receive on our multi-family and commercial real estate loans. Because prepayment penalties are recorded as interest income, the extent to which they increase or decrease during any given period could have a significant impact on the level of net interest income and net income we generate during that time. In addition, changes in interest rates could have an effect on the slope of the yield curve. If the yield curve were to invert or become flat, our net interest income and net interest margin could contract, adversely affecting our net income and cash flows and the value of our assets. Further, the actual amount of time before mortgage and business loans and mortgage-backed securities are repaid can be significantly impacted by changes in mortgage prepayment rates and prevailing market interest rates impacting not only Carver Federal's interest income, but Carver Federal's liquidity. Mortgage prepayment rates will vary due to a number of factors, including the regional economy in the area where the underlying mortgages were originated, seasonal factors, demographic variables and the ability to assume the underlying mortgages. However, the major factors affecting prepayment rates are prevailing interest rates, related loan refinancing opportunities and competition. Finally, the estimated fair value of the Company's available-for-sale securities portfolio may increase or decrease materially depending on changes in interest rates. Carver Federal's securities portfolio is comprised primarily of fixed rate securities. The Company and Carver Federal may not be able to comply with the Orders, which could adversely affect our financial condition and results of operations. The Orders contain a number of requirements, including the requirement to raise sufficient capital to ensure that Carver Federal maintains Tier 1 Core capital and Total Risk Based capital of at least 9.00% and 13.00%, respectively, and the requirement to substantially resolve problem assets. On June 29, 2011, the Company raised $55 million and contributed $44 million to Carver Federal during the year ended March 31, 2012. Carver Federal is currently in compliance with the required minimum capital levels, but may not be able to maintain compliance. Carver Federal also continues to have a high level of problem assets and may not be able to resolve its problem assets using available capital or in a time period acceptable to the OCC. The Orders also place restrictions on growth in assets and changes in directors and management, as well as other requirements or restrictions. Compliance with some of the provisions set forth in the Orders, such as growth restrictions, may adversely affect our results of operations. In addition, as long as the Orders remain in effect, our ability to grow our business and make significant changes to our operations will be restricted, which could adversely affect our results of operations. Strong competition within the Bank s market areas could adversely affect profits and slow growth. The New York metropolitan area has a high density of financial institutions, of which many are significantly larger than Carver Federal and with greater financial resources. Additionally, various large out-of-state financial institutions may continue to enter the New York metropolitan area market. All are considered competitors to varying degrees. Carver Federal faces intense competition both in making loans and attracting deposits. Competition for loans, both locally and in the aggregate, comes principally from mortgage banking companies, commercial banks, savings banks and savings and loan associations. Most direct competition for deposits comes from commercial banks, savings banks, savings and loan associations and credit unions. The Bank also faces competition for deposits from money market mutual funds and other corporate and government securities funds as well as from other financial intermediaries such as brokerage firms and insurance companies. Market area competition is a factor in pricing the Bank s loans and deposits, which could reduce net interest income. Competition also makes it more challenging to effectively grow loan and deposit balances. The Company s profitability depends upon its continued ability to successfully compete in its market areas. Controls and procedures may fail or be circumvented, which may result in a material adverse effect on the Company s business. Management regularly reviews and updates the Company s internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on Carver s business, results of operations and financial condition. As of March 31, 2014, management assessed the effectiveness of the Company's internal control over financial reporting based upon the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (1992). As a result of this assessment, we identified deficiencies in our internal control over financial reporting that we considered to represent a material weakness". 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 company s annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness in internal control over financial reporting related to the ongoing monitoring and evaluation of the design and conduct of internal controls associated with infrequent process activities, including changes related to the Company s pension plan activities. As a result of the material weakness, errors were identified in the financial statements primarily related to pension costs associated with the termination of its pension plan. With the oversight of senior management and our finance and audit committee, we have begun taking steps and plan to take additional measures to remediate the underlying causes of the material weakness, primarily through the development and implementation of additional policies, improved processes, documented procedures and training related to infrequent processes. We expect the remediation plan to be fully implemented by September 30, 2014. The Bank and the Company operate in a highly regulated industry, which limits the manner and scope of business activities. Carver Federal is subject to extensive supervision, regulation and examination by the OCC and to a lesser extent the FDIC. The Company is subject to extensive supervision, regulation and examination by the Federal Reserve. As a result, the Bank and the Company are limited in the manner in which they conduct their business, undertake new investments and activities and obtain financing. This regulatory structure is designed primarily for the protection of the deposit insurance funds and the Bank s depositors, and not to benefit the Company s stockholders. This regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to capital levels, the timing and amount of dividend payments, the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. In addition, the Bank must comply with significant anti-money laundering and anti-terrorism laws. Government agencies have substantial discretion to impose significant monetary penalties on institutions which fail to comply with these laws. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act ) is significantly changing the current bank regulatory structure and affecting the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years. However, it is expected that the legislation and implementing regulations will materially increase our operating and compliance costs. The Dodd-Frank Act created the CFPB with broad powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit unfair, deceptive or abusive acts and practices. The CFPB has examination and enforcement authority over all banks with more than $10 billion in assets. However, institutions of less than $10 billion in assets, such as the Bank, will continue to be examined for compliance with consumer protection and fair lending laws and regulations by, and be subject to the primary enforcement authority of their prudential regulator rather than the Consumer Financial Protection Bureau. The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws. The Dodd-Frank Act requires minimum leverage (Tier 1) and risk-based capital requirements for bank and savings and loan holding companies that are no less than those applicable to banks, which will exclude certain instruments that previously have been eligible for inclusion by bank holding companies as Tier 1 capital, such as trust preferred securities. Effective July 21, 2011, the Dodd-Frank Act eliminated the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts, which could result in an increase in our interest expense. The Dodd-Frank Act also broadens the base for FDIC deposit insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution, rather than deposits. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009, and non-interest bearing transaction accounts had unlimited deposit insurance through December 31, 2012. The legislation also increases the required minimum reserve ratio for the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits, and directs the FDIC to offset the effects of increased assessments on depository institutions with less than $10 billion in assets. The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive compensation and so-called golden parachute payments. It also provides that the listing standards of the national securities exchanges shall require listed companies to implement and disclose clawback policies mandating the recovery of incentive compensation paid to executive officers in connection with accounting restatements. The legislation also directs the Federal Reserve to promulgate rules prohibiting excessive compensation paid to bank holding company executives. Restrictions on the Company and the Bank stemming from the Treasury s equity interest in the Company may have a material effect on results of operations. On January 20, 2009, the Company became a TARP CPP participant by completing the sale of $ 18.98 million in Series A preferred stock to Treasury. As a participant, among other things, the Company must adopt Treasury s standards for executive compensation and corporate governance for the period during which Treasury holds equity issued under this program. These standards would generally apply to the Company's CEO, CFO and the three next most highly compensated officers ( Senior Executive ). The standards include (1) ensuring that incentive compensation for Senior Executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2) required claw-back of any bonus or incentive compensation paid to a Senior Executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate; (3) prohibition on making golden parachute payments to Senior Executives; and (4) agreement not to deduct for tax purposes executive compensation in excess of $500,000 for each Senior Executive. In particular, the change to the deductibility limit on executive compensation would likely increase slightly the overall cost of the Company's compensation programs. The Company was also required to adopt certain monitoring and reporting processes. On August 27, 2010, the Company redeemed the Series A preferred stock and issued $18.98 million in Series B preferred stock in connection with the Company s changing its participation from TARP CPP to TARP Community Development Capital Initiative ( CDCI ). On October 25, 2011 the Company s shareholders voted and approved the exchange of TARP CDCI Series B preferred stock for common stock. On October 28, 2011 Treasury exchanged the CDCI Series B preferred stock for common stock. Under the terms of the agreement between the Treasury and the Company, the Company agreed that so long as the Treasury has an equity interest in the Company, it will continue to be bound by all of the current restrictions and requirements that the Treasury may choose to implement. The Company is unable to determine the impact that future restrictions and/or requirements resulting from the Treasury s ownership interest may have on the Company s results of operations. Future FDIC assessments would negatively impact the Company s results of operations. In November 2009, the FDIC issued a rule that required all insured depository institutions, with limited exceptions, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC also adopted a uniform three-basis point increase in assessment rates effective on January 1, 2011. Any additional emergency special assessment or increases in insurance premiums imposed by the FDIC will likely negatively impact the Company s earnings. The Company is subject to certain risks with respect to liquidity. Liquidity refers to the Company s ability to generate sufficient cash flows to support operations and to fulfill obligations, including commitments to originate loans, to repay wholesale borrowings, and to satisfy the withdrawal of deposits by customers. The Company s primary sources of liquidity are the cash flows generated through the repayment of loans and securities, cash flows from the sale of loans and securities, deposits gathered organically through the Bank s branch network, from socially motivated depositors, city and state agencies and deposit brokers; and borrowed funds, primarily in the form of wholesale borrowings from the Federal Home Loan Bank of New York ( FHLB-NY ). In addition, and depending on current market conditions, the Company has the ability to access the capital markets from time to time. Deposit flows, calls of investment securities and wholesale borrowings, and prepayments of loans and mortgage related securities are strongly influenced by such external factors as the direction of interest rates, whether actual or perceived; local and national economic conditions; and competition for deposits and loans in the markets the Bank serves. Furthermore, changes to the FHLB-NY s underwriting guidelines for wholesale borrowings may limit or restrict the Bank s ability to borrow, and could therefore have a significant adverse impact on liquidity. A decline in available funding could adversely impact the Bank s ability to originate loans, invest in securities, and meet expenses, or to fulfill such obligations as repaying borrowings or meeting deposit withdrawal demands. The Bank s ability to pay dividends or lend funds to the Company is subject to regulatory limitations which may prevent the Company from making future dividend payments or principal and interest payments on its debt obligation. The Company is a unitary savings and loan association holding company regulated by the Federal Reserve and almost all of its operating assets are owned by Carver Federal. The Company relies primarily on dividends from the Bank to pay cash dividends to its stockholders, to engage in share repurchase programs and to pay principal and interest on its trust preferred debt obligation. The OCC regulates all capital distributions by the Bank to the Company, including dividend payments, and the Federal Reserve regulates dividends by the Company. As the subsidiary of a savings and loan association holding company, Carver Federal must file a notice or an application (depending on the proposed dividend amount) with the OCC prior to each capital distribution. The OCC will disallow any proposed dividend that would result in Carver Federal s failure to meet minimum capital requirements. In accordance with the Orders, Carver Federal and the Company are currently prohibited from paying any dividends without prior regulatory approval, and, as such, the Company has suspended the regular quarterly cash dividend on its common stock. The Company may not be permitted to resume the payment of dividends in the foreseeable future. The Orders also preclude future payment of interests on debentures related to the preferred securities issued by Carver Statutory Trust I, and, accordingly, the Company has elected to deter such payments. The Company may not be able to utilize its income tax benefits. The Company s ability to utilize the deferred tax asset generated by New Markets Tax Credit income tax benefits as well as other deferred tax assets depends on its ability to meet the NMTC compliance requirements and its ability to generate sufficient taxable income from operations to generate taxable income in the future. Since the Bank has not generated sufficient taxable income to utilize tax credits as they were earned, a deferred tax asset has been recorded in the Company s financial statements. The future recognition of the Company s deferred tax asset is highly dependent upon its ability to generate sufficient taxable income. A valuation allowance is required to be maintained for any deferred tax assets that we estimate are more likely than not to be unrealizable, based on available evidence at the time the estimate is made. In assessing the Company s need for a valuation allowance, we rely upon estimates of future taxable income. Although we use the best available information to estimate future taxable income, underlying estimates and assumptions can change over time as a result of unanticipated events or circumstances influencing our projections. Valuation allowances related to deferred tax assets can be affected by changes to tax laws, statutory rates, and future taxable income levels. The Company determined that it would not be able to realize all of its net deferred tax assets in the future, as such a charge to income tax expense in the second quarter of fiscal 2011 was made. Conversely, if the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of the net carrying amounts, the Company would decrease the recorded valuation allowance through a decrease in income tax expense in the period in which that determination was made. On June 29, 2011, the Company raised $55 million of equity. The capital raise triggered a change in control under Section 382 of the Internal Revenue Code. Generally, Section 382 limits the utilization of an entity s net operating loss carry forwards, general business credits, and recognized built-in losses upon a change in ownership. The Company is subject to an annual limitation of approximately $0.9 million. The Company has a net deferred tax asset ( DTA ) of approximately $29.9 million. Based on management s calculations the Section 382 limitation has resulted in previous reductions of the deferred tax asset by $5.8 million. The Company also continues to maintain a full valuation allowance for the remaining net deferred tax asset of $24.1 million. The Company is unable to determine how much, if any of the remaining DTA will be utilized. The Company faces system failure risks and security risks. The computer systems and network infrastructure that we and our third party service providers use could be vulnerable to unforeseen problems. Fire, power loss or other failures may affect the Company s computer equipment and other technology, or that of its third party service providers. Also, the Company s computer systems and network infrastructure could be damaged by hacking and identity theft which could adversely affect the results of the Company s operations, or that of its third party service providers. The Company s business could suffer if it fails to retain skilled people. The Company s success depends on its ability to attract and retain key employees reflecting current market opportunities and challenges. Competition for the best people is intense, and the Company s size and limited resources may present additional challenges in being able to retain the best possible employees, which could adversely affect the results of operations. Risks Associated with Securities Offered by the Selling Stockholders. The securities will rank junior to all of our and our subsidiaries liabilities in the event of a bankruptcy, liquidation or winding up. In the event of bankruptcy, liquidation or winding up, our assets will be available to pay obligations on the securities only after all of our liabilities have been paid. Our Common Stock will rank junior to our Series D Preferred Stock. In addition, all of our preferred stock will rank in parity with the other series of preferred stock and will effectively rank junior to all existing and future liabilities of our subsidiaries and the capital stock (other than our Common Stock) of the subsidiaries held by entities or persons other than us or entities owned or controlled by us. In addition, upon our voluntary or involuntary liquidation, dissolution or winding up, holders of Common Stock share ratably in the assets remaining after payments to creditors and provision for the preference of any preferred stock. The rights of holders of our Common Stock and our Series D Preferred Stock to participate in the assets of our subsidiaries upon any liquidation, reorganization, receivership or conservatorship of Carver Federal will rank junior to the prior claims of that Carver Federal s creditors, depositors and equity holders. As of March 31, 2014, we had total consolidated liabilities of approximately $588.3 million. In the event of bankruptcy, liquidation or winding up, there may not be sufficient assets remaining, after paying our and our subsidiaries liabilities, to pay amounts due on any or all of the Common Stock or Series D Preferred Stock then outstanding. Treasury is a federal agency and your ability to bring a claim against Treasury under the federal securities laws may be limited. The doctrine of sovereign immunity, as limited by the Federal Tort Claims Act (the FTCA ), provides that claims may not be brought against the United States or any agency or instrumentality thereof unless specifically permitted by act of Congress. The FTCA bars claims for fraud or misrepresentation. At least one federal court, in a case involving a federal agency, has held that the United States may assert its sovereign immunity to claims brought under the federal securities laws. In addition, Treasury and its officers, agents, and employees are exempt from liability for any violation or alleged violation of the anti-fraud provisions of Section 10(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act ) by virtue of Section 3(c) thereof. Accordingly, any attempt to assert such a claim against the officers, agents or employees of Treasury for a violation of the Securities Act of 1933, as amended (the Securities Act ), or the Exchange Act, resulting from an alleged material misstatement in or material omission from this prospectus or the registration statement of which this prospectus is a part or resulting from any other act or omission in connection with the offerings of the shares of Common Stock by Treasury would likely be barred. Risks Associated with our Common Stock Certain provisions of our certificate of incorporation and bylaws may prevent or impede the holders of a minority of our Common Stock from obtaining representation on our board of directors and may also prevent or impede a change in control. Provisions in our certificate of incorporation and bylaws may prevent or impede holders of a minority of our Common Stock from obtaining representation on our board of directors. First, our board of directors is divided into three classes with staggered three-year terms. A classified board makes it more difficult for stockholders to change a majority of the directors because it generally takes at least two annual elections of directors for this to occur. Second, our certificate of incorporation provides that directors are elected by a plurality of the votes cast, which means that holder of less than a majority of our Common Stock may be able to elect directors. Third, our certificate of incorporation prohibits cumulative voting, which may make it more difficult for stockholders to elect stockholder nominees or to gain control of our board of directors. Fourth, our bylaws contain procedures and timetables for a stockholder wishing to make a nomination for the election of directors or a proposal for new business at a meeting of stockholders, the effect of which may be to give our management time to solicit its own proxies in an attempt to defeat any dissident slate of nominations if management thinks it is in the best interests of stockholders generally. Fifth, we have the ability to issue preferred stock with voting rights to third parties who may be friendly to our board of directors. Sixth, our certificate of incorporation prohibits certain transactions with stockholders, which may make it more difficult for a third party to take control of the Company. Finally, our certificate of incorporation prohibits any stockholder who holds more than 10% of our outstanding voting stock from casting a vote with respect to such shares held in excess of 10% of our outstanding voting stock. See Description of Securities-Anti-Takeover Law Provisions. These provisions may make it less likely that a third party will be able to acquire all of our outstanding shares or engage in other transactions with the Company that would otherwise be favorable to holders of Common Stock. In addition, our certificate of incorporation specifically permits Treasury to vote shares of our Common Stock that it holds in excess of 10% of our outstanding voting stock. Treasury currently owns approximately 62.8% of our outstanding Common Stock, which allows Treasury to control the outcome of some stockholder votes. After the conversion of all of the Series D Preferred Stock, Treasury would own approximately 25.2% of our outstanding Common Stock, which would allow Treasury to have significant influence over matters on which stockholders are asked to vote. We are subject to a number of restrictions on our ability to pay dividends on our Common Stock. The payment of dividends is within the discretion of our board of directors. The payment of cash dividends in the future will be contingent upon our revenues and earnings, if any, capital requirements and general financial condition. The Company Order prohibits us from paying any dividends without the prior consent of the Federal Reserve, and the Bank Order prohibits Carver Federal from paying any dividends to us without the prior consent of the OCC. We may not pay any dividends on our Common Stock if we do not simultaneously pay equivalent dividends on all outstanding Series D Preferred Stock. See -Risks Associated with our Business and Operations-The Bank s ability to pay dividends or lend funds to the Company is subject to regulatory limitations which may prevent the Company from making future dividend payments or principal and interest payments on its debt obligation. Your voting power may be severely diluted by the issuance of additional shares of Common Stock upon the conversion of the Series D Preferred Stock. We are authorized to issue 10,000,000 shares of Common Stock, and there are currently 3,697,892 shares of our Common Stock outstanding and 45,118 shares of our Series D Preferred Stock outstanding. If the selling stockholders sell shares of Series D Preferred Stock in certain transactions, the shares of Series D Preferred Stock automatically convert into shares of Common Stock. We will be required to issue up to 5,518,006 additional shares of Common Stock in the event that the Series D Preferred Stock converts. If this occurs, and you do not purchase additional shares of Common Stock, your ownership would be significantly diluted, up to 249% if all of the shares of Series D Preferred Stock are converted. Because the Series D Preferred Stock shares in dividends and distributions on an as-converted basis with the Common Stock, the primary effect of the issuance of additional shares of Common Stock will be on the voting power of any shares of Common Stock that you own. For example, if you purchase 10,000 shares of our Common Stock prior to the conversion of any Series D Preferred Stock, you would be entitled to vote approximately 0.27% of our outstanding Common Stock. If all of the Series D Preferred Stock subsequently converted, however, your 10,000 shares of Common Stock would represent approximately 0.11% of the Common Stock outstanding and entitled to vote. You would need to purchase an additional 14,881 shares of our Common Stock (or such number of shares of Series D Preferred Stock as would convert into 14,881 shares of our Common Stock, which at the current conversion price would be approximately 122 shares of Series D Preferred Stock) in order to maintain your ability to vote 0.27% of our outstanding Common Stock. Our Common Stock is relatively thinly traded, and the price of our Common Stock may decline. The price of our Common Stock declined from 2008 through 2013. In addition, our Common Stock is thinly traded. You may not be able to sell any shares of Common Stock at a price that is above your purchase price, if at all. In addition, the sale of a large number of shares of Common Stock in a short period of time, including by the selling stockholders pursuant to this prospectus, could depress the market price. Our Common Stock may be delisted if we are not able to meet the NASDAQ continued listing requirements. On November 30, 2011, we received notice from the NASDAQ Stock Market that the NASDAQ Hearings Panel had made a determination to transfer the listing of the Company s common stock from the NASDAQ Global Market to the NASDAQ Capital Market effective at the opening of the market on December 2, 2011. Although we believe that we are now in compliance with all continued listing requirements of The NASDAQ Capital Market, we may not be able to remain in compliance at all times. If we fail to meet the continued listing requirements, our shares of Common Stock may be delisted and we may be forced to list our shares of Common Stock on another exchange or quotation service. If this occurs, our Common Stock may become illiquid, and the price of our Common Stock may be negatively affected. Risks Associated with our Series D Preferred Stock You are likely to receive shares of Common Stock instead of Series D Preferred Stock due to circumstances beyond your control. The Series D Preferred Stock automatically converts into shares of Common Stock upon the following transfers to third parties, except for transfers to any holder who purchased shares of Series C Preferred Stock in our private placement transaction or any affiliate of such holder: a transfer in a widespread public distribution; a transfer in which no transferee (together with its affiliates and other transferees acting in concert with it) acquires more than 2% of our Common Stock or any other class or series of our voting stock; or a transfer to a transferee that (together with its affiliates and other transferees acting in concert with it) owns or controls more than 50% of our Common Stock, without regard to the transfer. Whether or not a transaction in which you purchase shares of Series D Preferred Stock will cause the Series D Preferred Stock to convert is largely dependent on the selling stockholder s actions and the number of other purchasers. Accordingly, when you purchase shares of Series D Preferred Stock, you may not be able to determine whether the transaction will cause the Series D Preferred Stock to convert into Common Stock and may have no ability to prevent the conversion. If the transaction in which you purchase shares of Series D Preferred Stock causes the conversion of the Series D Preferred Stock, you will receive shares of Common Stock rather than Preferred Stock. It is likely that any sale of shares of Series D Preferred Stock pursuant to this prospectus will cause the Series D Preferred Stock that is purchased to convert into shares of Common Stock. We are subject to a number of restrictions on our ability to pay dividends on the Series D Preferred Stock. The holders of Series D Preferred Stock are not entitled to the payment of dividends, except as and when declared by our board of directors. The payment of dividends is within the discretion of our board of directors. The payment of cash dividends in the future will be contingent upon our revenues and earnings, if any, capital requirements and general financial condition. The Company Order prohibits us from paying any dividends without the prior consent of the Federal Reserve, and the Bank Order prohibits Carver Federal from paying any dividends to us without the prior consent of the OCC. See -Risks Associated with our Business and Operations-The Bank s ability to pay dividends or lend funds to the Company is subject to regulatory limitations which may prevent the Company from making future dividend payments or principal and interest payments on its debt obligation. Holders of the Series D Preferred Stock will have no rights as holders of Common Stock until they acquire the Common Stock. If you purchase shares of Series D Preferred Stock in a transaction that does not cause the Series D Preferred Stock to convert into shares of Common Stock, you will have no rights with respect to the Common Stock, including voting rights (except in limited circumstances as described under Description of Securities-Series D Preferred Stock-Voting Rights and as required by applicable law), rights to respond to tender offers and rights to receive any dividends or other distributions on the Common Stock, and the value of your investment in our Series D Preferred Stock may be negatively affected by these events. If you purchase shares of Series D Preferred Stock in a transaction that results in the conversion of the Series D Preferred Stock into shares of Common Stock, you will be entitled to exercise the rights of a holder of Common Stock only as to matters for which the record date occurs on or after the applicable conversion date. For example, in the event that an amendment is proposed to our certificate of incorporation or bylaws requiring stockholder approval and the record date for determining the shareholders of record entitled to vote on the amendment occurs prior to the conversion date, you will not be entitled to vote on the amendment, although you will be subject to any changes in the powers, preferences or special rights of our Common Stock that may occur as a result of such amendment. The conversion price of the Series D Preferred Stock may not be adjusted for all dilutive events that could adversely affect the market price of the Series D Preferred Stock or the Common Stock issuable upon conversion of the Series D Preferred Stock. The number of shares of our Common Stock that you are entitled to receive upon conversion of a share of Series D Preferred Stock is subject to adjustment only upon the occurrence of certain events, including (1) subdivisions, splits and combinations of the Common Stock, (2) dividends or distributions in Common Stock, debt, capital stock or other assets, (3) issuances to all holders of our Common Stock of stock purchase rights or warrants, (4) increases in cash dividends, (5) certain self tender offers for Common Stock and (6) certain other events. See Description of Securities-Series D Preferred Stock-Conversion. We will not adjust the conversion price for other events, including offerings of Common Stock for cash by us or in connection with acquisitions. Certain events that adversely affect the value of the Series D Preferred Stock, but do not result in an adjustment to the conversion price, may occur. Further, if any of these other events adversely affects the market price of our Common Stock, it may also adversely affect the market price of the Series D Preferred Stock. In addition, we are not restricted from offering Common Stock in the future or engaging in other transactions that could dilute our Common Stock. There is no market for our Series D Preferred Stock. The Series D Preferred Stock is not eligible for listing on the NASDAQ Capital Market, and there is no current active market for the Series D Preferred Stock. An active market in the Series D Preferred Stock is not likely to develop. If you purchase shares of Series D Preferred Stock, you may not be able to sell your shares of Series D Preferred Stock at a favorable price, or at all.

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+The market price of our common stock may be volatile. The market price of our common stock may fluctuate and be affected by a number of factors, including, without limitation: Fluctuations in our operating results; our announcements of significant contracts, milestones, acquisitions; Announcements of innovations, new products or new patents by us or by our competitors; Governmental regulation; additions or departures of key personnel; significant sales of common stock or common stock equivalents or termination of stock transfer restrictions; changes in financial estimates by securities analysts; fluctuations in stock market price and volume; Patent or proprietary rights developments; and Proxy contests or litigation. Our stock price may be adversely affected if a significant amount of shares are sold in the public market. As of September 5, 2014, approximately 31,688,195 shares of our common stock constituted "restricted securities" as defined in Rule 144 under the Securities Act. Generally, pursuant to Rule 144, stockholders who are not affiliates of our company can resell their restricted securities after they have held them for at least six months. In addition, as of September 5, 2014, approximately 33,800,000 shares of common stock are issuable upon conversion of the Note and exercise of the Warrant, most of which shares are registered in this prospectus for public sale, and approximately 40,419,355 shares of common stock are issuable upon conversion of other debt and of preferred stock, which debt and preferred stock has been held for at least six months. Consequently, most of our restricted securities and securities issuable upon conversion of convertible debt and convertible preferred stock are or soon will be eligible for public sale. As of September 5, 2014, in addition to the Warrant, we had warrants outstanding for the purchase of an aggregate of 21,292,144 shares of our common stock. To the extent the exercise price of these warrants is less than the market price of the common stock, the holders of the warrants are likely to exercise them and, eventually, sell the underlying shares of common stock and to the extent that the exercise price of the warrants are adjusted pursuant to anti-dilution protection, the warrants could be exercisable or convertible for even more shares of common stock. Moreover, we most likely will issue additional shares of common stock and/or instruments convertible into or exercisable for common stock to raise funding or compensate employees, consultants and/or directors. We are unable to estimate the amount, timing or nature of future sales of outstanding common stock. Sales of substantial amounts of our common stock in the public market could cause the market price for our common stock to decrease. Furthermore, a decline in the price of our common stock would likely impede our ability to raise capital through the issuance of additional shares of common stock or other equity securities. Our common stock is considered a "penny stock". The application of the "penny stock" rules to our common stock could limit the trading and liquidity of our common stock, adversely affect the market price of our common stock and increase the transaction costs to sell shares of our common stock. Our common stock is a "low-priced" security or "penny stock" under rules promulgated under the Securities Exchange Act of 1934, as amended. In accordance with these rules, broker-dealers participating in transactions in low-priced securities must first deliver a risk disclosure document which describes the risks associated with such stocks, the broker-dealers duties in selling the stock, the customer s rights and remedies and certain market and other information. Furthermore, the broker-dealer must make a suitability determination approving the customer for low- priced stock transactions based on the customer s financial situation, investment experience and objectives. Broker-dealers must also disclose these restrictions in writing to the customer, obtain specific written consent from the customer, and provide monthly account statements to the customer. The effect of these restrictions will likely decrease the willingness of broker-dealers to make a market in our common stock, will decrease liquidity of our common stock and will increase transaction costs for sales and purchases of our common stock as compared to other securities. The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. PRELIMINARY PROSPECTUS, SUBJECT TO COMPLETION, DATED SEPTEMBER 11, 2014 PROSPECTUS INERGETICS, INC. 24,656,000 Shares of common stock This prospectus relates to the offer and sale of up to 24,656,000 shares of common stock, par value $0.001, of Inergetics, Inc., a Delaware corporation, by 31 Group LLC (the "Selling Stockholder"). The shares of common stock being offered by the Selling Stockholder have been or may be issued pursuant to conversion of a Subordinated Secured Convertible Promissory Note dated July 14, 2014 (the "Note") and exercise of a Common Stock Purchase Warrant dated July 14, 2014 (the "Warrant"). See "The 31 Group Transaction" in "Selling Stockholder" for a description of these securities and "Selling Stockholder" for additional information regarding the Selling Stockholder. There are no underwriting arrangements to sell the shares of common stock that are being offered by the Selling Stockholder hereunder. The prices at which the Selling Stockholder may sell shares will be determined by the prevailing market price for the shares or in privately negotiated transactions. See "Plan of Distribution" for more information about how the Selling Stockholder may sell the shares being registered pursuant to this prospectus. We are not selling any securities under this prospectus and will not receive any of the proceeds from the sale of shares by the Selling Stockholder. However, we may receive proceeds from the exercise of the Warrant. We will pay the expenses incurred in registering the shares, including legal and accounting fees. See "Plan of Distribution". Our common stock is currently quoted on the Over-the-Counter Bulletin Board, or the OTCBB, under the symbol "NRTI". On September 5, 2014, the last reported sale price of our common stock on the OTCBB was $0.04. Investment in the common stock involves a high degree of risk. You should consider carefully the risk factors beginning on page 2 of this prospectus as well as in any prospectus supplement related to these specific offerings before purchasing any of the shares offered by this prospectus. We may amend or supplement this prospectus from time to time by filing amendments or supplements as required. You should read the entire prospectus and any amendments or supplements carefully before you make your investment decision. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The date of this prospectus is September , 2014. This prospectus contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this prospectus and include statements regarding the intent, belief or current expectations of our management, directors or officers primarily with respect to our future operating performance. Prospective purchasers of our securities are cautioned that these forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in the forward-looking statements due to various factors. The accompanying information contained in this prospectus, including the information set forth below, identifies important factors that could cause these differences. See "Forward-Looking Statements" below. RISKS RELATED TO OUR BUSINESS We have operated at a loss and cannot assure that we will be able to attain profitable operations. Although we are generating revenues, we continue to operate at a loss. During the year ended December 31, 2013 and the six months ended June 30, 2014, we generated revenues of $847,834 and $1,003,417, respectively, from sales of our products. However, during these periods we realized net losses of $4,187,892 and $5,769,748, of which, respectively, $1,761,810 and $2,435,688 were non-cash items. The non-cash items are primarily related to issuance of shares and warrants for compensation in the amounts of $712,209 and $1,332,883, respectively, services in the amount of $202,270 and $199,609, respectively, and interest in the amount of $406,508 and $279,783, respectively, during these periods. Other non-cash items were, respectively, loss on derivatives mark to market of $91,000 and $472,000, amortization of debt discount of $444,450 and $169,003, amortization expense of $1,551 and $788 and change in inventory and accounts receivable reserve in the amount of $49,200 and $0. There was a gain on the conversion of debt in the amount of $46,978 and $18,378, respectively. We expect to continue incurring operating losses until we are able to derive meaningful revenues from marketing our four product lines and other products we intend to bring to market. We cannot assure that we will be able to attain profitable operations. We require additional funding to maintain our operations and to further develop our business. Our inability to obtain additional financing would have an adverse effect on our business. Our success depends on our ability to develop a market for our products and other nutraceutical supplements we intend to bring to market. This means having an adequate advertising and marketing budget and adequate funds to continue to promote our products, including making minimum royalty payments to Martha Stewart Living Omnimedia, Inc. (please see "Management s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources"). Although our revenues have increased, our operating expenses are significantly greater than our revenues. During 2013 and the first half of 2014, we obtained new capital in the form of debt resulting in the receipt by us of $4,826,718. These funds in conjunction with ongoing operating revenues provided adequate capital for our operating needs for these periods. We need to continue to raise funds to cover working capital and for other financial requirements until we are able to raise revenues to a point of positive cash flow. In this regard, we note that we were not able to make the payment that was due July 1, 2014 to Martha Stewart Living Omnimedia pursuant to our license agreement. While we are in discussions to work out terms of payment, we most likely will need to raise additional funds to meet our obligations under the license agreement. We plan to raise additional funds, as before, through additional equity or debt financings. We may not be able to raise such funds on terms acceptable to us or at all. Financings may be on terms that are dilutive or potentially dilutive to our stockholders. If sources of financing are insufficient or unavailable, we will be required to modify our operating plans to the extent of available funding or curtail or suspend operations. The Note and other debt instruments to which we are a party contain certain restrictions on the incurrence of indebtedness, the raising funds through the sale of securities or engaging in certain major transactions without the consent of the holders of these instruments. These restrictions could have a material adverse effect on our business. The Note and other debt instruments to which we are a party place restrictions on our ability to incur indebtedness, raise funds through the sale of securities or engage in certain major transactions without the consent of the holders of such instruments. Our inability to raise needed funds from borrowings or the sale of securities, or our inability to effect certain major business transactions could have a material adverse effect on our business. Our year end audited financial statements contain a "going concern" explanatory paragraph. Our inability to continue as a going concern would require a restatement of assets and liabilities on a liquidation basis, which would differ materially and adversely from the going concern basis on which our financial statements included in this report have been prepared. Our consolidated financial statements for the year ended December 31, 2013 included herein have been prepared on the basis of accounting principles applicable to a going concern. Our auditors report on the consolidated financial statements contained herein includes an additional explanatory paragraph following the opinion paragraph on our ability to continue as a going concern. A note to these consolidated financial statements describes the reasons why there is substantial doubt about our ability to continue as a going concern and our plans to address this issue. Our December 31, 2013 and 2012 consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our inability to continue as a going concern would require a restatement of assets and liabilities on a liquidation basis, which would differ materially and adversely from the going concern basis on which our consolidated financial statements have been prepared. We are subject to significant government regulation. The packaging, labeling, advertising, promotion, distribution and sale of Surgex , Bikini Ready , SlimTrim and Martha Stewart Essentials and other products we plan to produce and market are subject to regulation by numerous governmental agencies, the most active of which is the U.S. Food and Drug Administration, which regulates our products under the Federal Food, Drug and Cosmetic Act and regulations promulgated thereunder. Our products are also subject to regulation by, among other regulatory entities, the Consumer Product Safety Commission, the U.S. Department of Agriculture and the Environmental Protection Agency. Advertising and other forms of promotion and methods of marketing of our products are subject to regulation by the U.S. Federal Trade Commission, which regulates these activities under the Federal Trade Commission Act. The manufacture, labeling and advertising of our products are also regulated by various state and local agencies. Failure to comply with applicable regulatory requirements may result in, among other things, injunctions, product withdrawals, recalls, product seizures, and fines. In addition, we are unable to predict the nature of any future laws, regulations, interpretations, or applications, nor can we predict what effect additional governmental regulations or administrative orders, when and if promulgated, would have on our business in the future. They could, however, require the reformulation of certain products not possible to be reformulated, imposition of additional record keeping requirements, and expanded documentation of the properties of certain products, expanded or different labeling and scientific substantiation regarding product ingredients, safety or usefulness. Our inability to comply with any or all such current or future requirements could have a material adverse effect on our results of operations and financial condition. Please see "Business; Government Regulation". We have been dependent on a few major customers. If we are unable to develop more customers our business most likely will be adversely affected For the year ended December 31, 2013, three significant customers (defined as contributing at least 10%) accounted for 55% (31%, 13%, and 11%) of net sales. For the year ended December 31, 2012, one significant customer accounted for 57% of net sales. The loss of any of these customers could have a material adverse effect on our business. Our involvement in defending product liability claims could have a detrimental effect on our operations. Like other retailers and distributors of products designed for human consumption, we face an inherent risk of exposure to product liability claims in the event that the use of our products results in injury. We may be subjected to various product liability claims, including, among others, that our products include inadequate instructions for use or inadequate warnings concerning possible side effects and interactions with other substances. We carry $25,000,000 of product liability insurance. Thus, any product liabilities exceeding our coverage relating to our products could have a material adverse effect on our business, financial condition and results of operations. We face significant competition. The biotechnology and nutraceutical supplement industries are highly competitive and subject to significant and rapid technological change. Developments by our competitors may render our products obsolete or noncompetitive. Numerous companies compete in our market, many of which have greater size and financial, personnel, distribution and other resources greater than ours. Our principal competition in the distribution channels where we are marketing our current products and where we intend to market other products comes from a limited number of large nationally known manufacturers and many smaller manufacturers of nutraceutical supplements. In addition, large pharmaceutical companies compete with us on a limited basis in the nutraceutical supplement market. Increased competition from such companies could have a material adverse effect on us because such companies have greater financial and other resources available to them and possess distribution and marketing capabilities far greater than ours. We also face competition in mass market distribution channels from private label nutraceutical supplements offered by health and natural food store chains and drugstore chains. We cannot assure that we will be able to compete. If we are unable to protect our intellectual property or we infringe on intellectual property of others, our business and financial condition may be materially and adversely affected. We own all rights to the formulation of Resurgex , Resurgex Plus , Resurgex Select , Surgex , Bikini Ready and SlimTrim and have a use and compositional patent with respect to Resurgex (which covers Resurgex Plus ), and Resurgex Select . Surgex is patent pending. We also have registered trademarks for the names "Resurgex", "Resurgex Plus" and "Resurgex Select". "Surgex" has preliminary Trade mark reservation status. We have filed patent applications internationally with regards to all patents and patents pending. No assurance can be given that patents will be issued from pending applications or that there right, if issued and the rights from our existing patents and registered name will afford us adequate protections. In addition, we rely on trade secrets and unpatented proprietary technology. There is no assurance that others may not independently develop the same or similar technology or produce products which provide the same benefits as the current product lines. Although we will seek to ensure that our products do not infringe the intellectual property rights of others, there can be no assurance that third parties will not assert intellectual property infringement claims against us. Any infringement claims by third parties against us may have a material adverse effect on our business, financial condition and results of operations. RISKS RELATED TO OUR COMMON STOCK Because our Board can issue common stock and convertible preferred without stockholder approval and because certain of our convertible securities have conversion prices that could drop due to anti-dilution provisions, you could experience substantial dilution. Our Board of Directors has the authority to issue up to 2,000,000,000 shares of common stock, shares of preferred stock that can be converted into common stock at high ratios and options and warrants to purchase shares of our common stock without stockholder approval. In addition, we have issued convertible securities, including the Note, that contain anti-dilution provisions that could result in lower conversion prices. As of September 5, 2014, there were 341,762,145 shares issued and outstanding or reserved for issuance on a fully-diluted basis. Future issuance of additional shares of common stock could be at values substantially below the current market price of our common stock and, therefore, could represent substantial dilution to investors in this offering. In addition, our Board could issue large blocks of our common stock to fend off unwanted tender offers or hostile takeovers without further stockholder approval. Anti-takeover provisions of the Delaware General Corporation Law and our ability to issue preferred stock could discourage a merger or other type of corporate reorganization or a change in control even if they could be favorable to the interests of our stockholders. The Delaware General Corporation Law contains provisions which may enable our management to retain control and resist a takeover of us. These provisions generally prevent us from engaging in a broad range of business combinations with an owner of 15% or more of our outstanding voting stock for a period of three years from the date that this person acquires his stock. In addition, our Certificate of Incorporation allows us to issue shares of preferred stock without any vote or further action by our stockholders. Our Board of Directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our Board of Directors also has the authority to issue preferred stock without further stockholder approval. As a result, our Board of Directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock. Accordingly, these provisions could discourage or make more difficult a change in control or a merger or other type of corporate reorganization even if they could be favorable to the interests of our stockholders. We do not intend to pay cash dividends in the foreseeable future. We have not declared or paid cash dividends on our capital stock in many decades. We currently intend to retain all of our earnings, if any, for use in its business and do not anticipate paying any cash dividends in the foreseeable future. The payment of any future dividends will be at the discretion of our Board of Directors and will depend upon a number of factors, including future earnings, the success of our business activities, our general financial condition and future prospects, general business conditions and such other factors as the Board of Directors may deem relevant. In addition, no cash dividends may be declared or paid on our common stock if, and as long as, the Series B Preferred Stock is outstanding or there are unpaid dividends on outstanding shares of Series C Preferred Stock. No dividends may be declared on the Series C Preferred Stock if, and as long as, the Series B Preferred Stock is outstanding. Accordingly, it is unlikely that we will declare any cash dividends in the foreseeable future. The Series G Preferred Stock does not pay a cash dividend, but does pay a quarterly payment in kind dividend. The rights of the holders of our common stock will be subordinate to our creditors and to the holders of our preferred stock in a liquidation. No assurance can be given as to the amount of assets, if any, that would be available for common stockholders in the event of a liquidation. In liquidation, the rights of equity security holders like our common stockholders are subordinate to holders of our debt obligations. As of September 5, 2014, we owe approximately $12,037,848 to our creditors. In addition, the holders of our Series G Preferred Stock have a preference in liquidation over the holders of our common stock. Accordingly, in the event of liquidation, no assurance can be given as to the amount of remaining assets, if any, available for payment to common stockholder. We cannot assure that there will be a sustained public market for our common stock. At present, our common stock is quoted on the OTC Bulletin Board and tradable in the over-the-counter market. Our common stock is not traded on a sustained basis or with significant volume. In addition, we currently do not meet the requirements for listing our common stock on NASDAQ or a national securities exchange and we cannot assure if or when our common stock will be listed on such an exchange. For the foregoing reasons, we cannot assure that there will be a significant and sustained public market for the sale of our common stock. Accordingly, if you purchase our common stock, you may be unable to resell it. In the absence of any readily available secondary market for our common stock, you may experience great difficulty in selling your shares at or near the price that you originally paid. The market price of our common stock may be volatile. The market price of our common stock may fluctuate and be affected by a number of factors, including, without limitation: Fluctuations in our operating results; our announcements of significant contracts, milestones, acquisitions; Announcements of innovations, new products or new patents by us or by our competitors; Governmental regulation; additions or departures of key personnel; significant sales of common stock or common stock equivalents or termination of stock transfer restrictions; changes in financial estimates by securities analysts; fluctuations in stock market price and volume; Patent or proprietary rights developments; and Proxy contests or litigation. Our stock price may be adversely affected if a significant amount of shares are sold in the public market. As of September 5, 2014, approximately 31,688,195 shares of our common stock constituted "restricted securities" as defined in Rule 144 under the Securities Act. Generally, pursuant to Rule 144, stockholders who are not affiliates of our company can resell their restricted securities after they have held them for at least six months. In addition, as of September 5, 2014, approximately 33,800,000 shares of common stock are issuable upon conversion of the Note and exercise of the Warrant, most of which shares are registered in this prospectus for public sale, and approximately 40,419,355 shares of common stock are issuable upon conversion of other debt and of preferred stock, which debt and preferred stock has been held for at least six months. Consequently, most of our restricted securities and securities issuable upon conversion of convertible debt and convertible preferred stock are or soon will be eligible for public sale. As of September 5, 2014, in addition to the Warrant, we had warrants outstanding for the purchase of an aggregate of 21,292,144 shares of our common stock. To the extent the exercise price of these warrants is less than the market price of the common stock, the holders of the warrants are likely to exercise them and, eventually, sell the underlying shares of common stock and to the extent that the exercise price of the warrants are adjusted pursuant to anti-dilution protection, the warrants could be exercisable or convertible for even more shares of common stock. Moreover, we most likely will issue additional shares of common stock and/or instruments convertible into or exercisable for common stock to raise funding or compensate employees, consultants and/or directors. We are unable to estimate the amount, timing or nature of future sales of outstanding common stock. Sales of substantial amounts of our common stock in the public market could cause the market price for our common stock to decrease. Furthermore, a decline in the price of our common stock would likely impede our ability to raise capital through the issuance of additional shares of common stock or other equity securities. Our common stock is considered a "penny stock". The application of the "penny stock" rules to our common stock could limit the trading and liquidity of our common stock, adversely affect the market price of our common stock and increase the transaction costs to sell shares of our common stock. Our common stock is a "low-priced" security or "penny stock" under rules promulgated under the Securities Exchange Act of 1934, as amended. In accordance with these rules, broker-dealers participating in transactions in low-priced securities must first deliver a risk disclosure document which describes the risks associated with such stocks, the broker-dealers duties in selling the stock, the customer s rights and remedies and certain market and other information. Furthermore, the broker-dealer must make a suitability determination approving the customer for low- priced stock transactions based on the customer s financial situation, investment experience and objectives. Broker-dealers must also disclose these restrictions in writing to the customer, obtain specific written consent from the customer, and provide monthly account statements to the customer. The effect of these restrictions will likely decrease the willingness of broker-dealers to make a market in our common stock, will decrease liquidity of our common stock and will increase transaction costs for sales and purchases of our common stock as compared to other securities. If we fail to establish and maintain an effective system of internal control, we may not be able to report our financial results accurately and timely or to prevent fraud. In this regard, primarily due to our small size, our management has reported certain material weaknesses and significant deficiencies. Any inability to report and file our financial results accurately and timely could harm our reputation and adversely impact the trading price of our common stock. Effective internal control is necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed, and our business and reputation with investors may be harmed. In our recent periodic reports, our management identified the following material weakness and significant deficiency in its assessment of the effectiveness of internal control over financial reporting: Material weakness: we did not maintain effective controls over certain aspects of the financial reporting process because we lacked a sufficient complement of personnel with a level of accounting expertise and an adequate supervisory review structure that is commensurate with our financial reporting requirements. Significant deficiency: Given our limited personnel, inadequate segregation of duties. Our small size and any future internal control deficiencies may adversely affect our financial condition, results of operation and access to capital. We have not performed an in-depth analysis to determine if historical un-discovered failures of internal controls exist, and may in the future discover areas of our internal control that need improvement. Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us, you should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially

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+Risk Factors The common stock offered hereby involves a high degree of risk and should not be purchased by investors who cannot afford the loss of their entire investment. See "Risk Factors". RISK FACTORS An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this prospectus, before making an investment decision with regard to our securities. The statements contained in or incorporated into this prospectus that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. Our results of operations, financial condition and cash flows can be adversely affected by various risks. These risks include, but are not limited to, the principal factors listed below and the other matters set forth in this prospectus. You should carefully consider all of these risks before making an investment decision. Risks Related to Our Business and the Industry in Which We Compete Our independent auditors have expressed substantial doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing. The report of our independent auditors dated March 28, 2014 on our consolidated financial statements for the year ended December 31, 2013 included an explanatory paragraph indicating that there is substantial doubt about our ability to continue as a going concern. Our auditors doubts are based on our inability to generate sufficient cash flow to sustain our operations without securing additional financing, deficit accumulated during development stage, negative cash flows from operations and our limited cash balances and working capital deficit position. Our ability to continue as a going concern will be determined by our ability to obtain additional funding in the short term to enable us to realize the commercialization of our planned business operations. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertain. We are an early development stage company. We have not yet commenced with the construction of our Downdraft Towers or the production of electricity. The Company has a limited operating history and has primarily engaged in operations relating to the development of its business plan. As an early-stage entity, the Company is subject to many of the risks common to such enterprises, including the ability of the Company to implement its business plan, market acceptance of its proposed business, under-capitalization, cash shortages, limitations with respect to personnel, financing and other resources, and uncertainty of the Company s ability to generate revenues. There can be no assurance that the Company s activities will be successful or result in any revenues or profit for the Company, and the likelihood of the Company s success must be considered in light of the stage in its development. To date, the Company has generated no revenue and has generated losses. The Company believes it has engaged professionals and consultants experienced in the type of business contemplated by the Company; however, there can be no assurance that the predictions, opinions, analyses, or conclusions of such professionals will prove to be accurate. In addition, no assurance can be given that the Company will be able to consummate its business strategy and plans or that financial or other limitations may force the Company to modify, alter, significantly delay, or significantly impede the implementation of such plans or the Company s ability to continue operations. If the Company is unable to successfully implement its business strategy and plans, investors may lose their entire investment in the Company. Potential investors should also be aware of the difficulties normally encountered by new renewable energy companies. The likelihood of success must be considered in light of the problems, expenses, difficulties, complications and delays encountered in connection with the inception of the enterprise that we plan to undertake. These potential problems include, but are not limited to, unanticipated problems relating to construction, operation and distribution, and additional costs and expenses that may exceed current estimates. Future financings will involve a dilution of the interests of the stockholders of the Company upon the issuance of additional shares of Common Stock or other securities. We will need to engage in additional financings in the future. There can be no assurances that such financings will ever be completed, but any such financings will involve a dilution of the interests of our stockholders upon the issuance of additional shares of Common Stock or other securities. Attaining such additional financing may not be possible, or if additional capital may be otherwise available, the terms on which such capital may be available may not be commercially feasible or advantageous to existing shareholders. We expect to issue shares of our Common Stock and/or other securities in exchange for additional financing. We anticipate significant future capital needs and the availability of future capital is uncertain. The Company has experienced negative cash flows from operations since its inception. The Company will be required to spend substantial funds to continue research and development. The Company will need to raise additional capital. The Company s capital requirements will depend on many factors, primarily relating to the problems, delays, expenses and complications frequently encountered by development stage companies; the progress of the Company s research and development programs; the costs and timing of seeking regulatory approvals of the Company s products under development; the Company s ability to obtain such regulatory approvals; costs in filing, prosecuting, defending, and enforcing any patent claims and other intellectual property rights; the extent and terms of any collaborative research, manufacturing, marketing, or other arrangements; and changes in economic, regulatory, or competitive conditions or the Company s planned business. To satisfy its capital requirements, the Company may seek to raise funds in the public or private capital markets. The Company may seek additional funding through corporate collaborations and other financing vehicles. There can be no assurance that any such funding will be available to the Company, or if available, that it will be available on acceptable terms. If adequate funds are not available, the Company may be required to curtail significantly one or more of its research or development programs or it may be required to obtain funds through arrangements with future collaborative partners or others that may require the Company to relinquish rights to some or all of its technologies or products under development. If the Company is successful in obtaining additional financing, the terms of the financing may have the effect of diluting or adversely affecting the holdings or the rights of the holders of Common Stock. We have a history of losses. We expect to incur non-capitalized development costs and general and administrative expenses prior to the completion of construction and commencement of operation of our proposed projects. We cannot predict if we will ever achieve profitability and, if we do, we may not be able to sustain or increase our profitability. If we cannot achieve or maintain profitability, we may not be able to continue to absorb the resulting financial losses. If we continue to suffer financial losses, our business may be jeopardized and our shareholders may lose all of their investment in our shares. The Company s strategies for development of the business might not be successful. The Company is currently evaluating potential development strategies for its business. It may take several years, if ever, for the Company to achieve cumulative positive cash flow. The Company could experience significant difficulties in executing its business plan, including: inability to successfully implement the Company s business plan; changes in market conditions; inability to obtain necessary financing; delays in completion of the Company s projects or their underlying technologies; inaccurate cost estimates; changes in government or political reform; or the Company may not benefit from the proposed projects as the Company expected. The Company s inability to develop and market the Company s business successfully and to generate positive cash flows from these operations in a timely manner would have a material adverse effect on the Company s ability to meet the Company s working capital requirements. We expect to rely upon strategic relationships in order to execute our business plan and the Company may not be able to consummate the strategic relationships necessary to execute its business plan. The Company plans to enter into and rely on strategic relationships with other parties, in particular to acquire rights necessary to develop and build proposed projects and to develop and build such projects. These strategic relationships could include licensing agreements, partnerships, joint ventures, or even business combinations. The Company believes that these relationships will be particularly important to the Company s future growth and success due to the size and resources of the Company and the resources necessary to complete the Company s proposed projects. The Company may, however, not be able to successfully identify potential strategic relationships. Even if the Company does identify one or more potentially beneficial strategic relationships, it may not be able to consummate these relationships on favorable terms or at all, obtain the benefits it anticipates from such relationships or maintain such relationships. In addition, the dynamics of the Company s relationships with possible strategic partners may require the Company to incur expenses or undertake activities it would not otherwise be inclined to undertake in order to fulfill the Company s obligations to these partners or maintain the Company s relationships. To the extent the Company consummates strategic relationships; it may become reliant on the performance of independent third parties under such relationships. Moreover, certain potentially critical strategic relationships are only in the early stages of discussion and have not been officially agreed to and formalized. If strategic relationships are not identified, established or maintained, or are established or maintained on terms that become unfavorable, the Company s business prospects may be limited, which could have a negative impact on the Company s ability to execute the Company s business plan, diminish the Company s ability to conduct the Company s operations and/or materially and adversely affect the Company s business and financial results. Project development or construction activities may not be successful and proposed projects may not receive required permits or construction may not proceed as planned. The development and construction of our proposed projects will involve numerous risks. We may be required to spend significant sums for preliminary engineering, permitting, legal, and other expenses before we can determine whether a project is feasible, economically attractive or capable of being built. Success in developing a particular project is contingent upon, among other things: (i) negotiation of satisfactory engineering, procurement and construction agreements; (ii) receipt of required governmental permits and approvals, including the right to interconnect to the electric grid on economically acceptable terms; (iii) payment of interconnection and other deposits (some of which may be non-refundable); (iv) obtaining construction financing; and (v) timely implementation and satisfactory completion of construction. Successful completion of a particular project may be adversely affected by numerous factors, including: (i) delays in obtaining required governmental permits and approvals with acceptable conditions; (ii) uncertainties relating to land costs for projects on land subject to Bureau of Land Management procedures; (iii) unforeseen engineering problems; (iv) construction delays and contractor performance shortfalls; (v) work stoppages; (vi) cost over-runs; (vii) equipment and materials supply; (viii) adverse weather conditions; and (ix) environmental and geological conditions. The estimates and projections contained in this Annual Report may not be realized. Any estimates or projections in this Annual Report have been prepared on the basis of assumptions and hypotheses, which the Company believes to be reasonable. However, no assurance can be given that the potential benefits described in this Annual Report will prove to be available. Such assumptions are highly speculative and, while based on management s best estimates of projected sales levels, operational costs, consumer preferences, and the Company s general economic and competitive conditions in the industry, there can be no assurance that the Company will operate profitably or remain solvent. To date, the Company has not operated profitably and has a history of losses. If the Company s plans prove unsuccessful, investors could lose all or part of their investment. There can be no assurance that the Company will be able to generate any revenue or profits. Our business is subject to significant government regulation and, as a result, changes to such regulations may adversely affect our business. Although independent and small power producers may generate electricity and engage in wholesale sales of energy without being subject to the full panoply of state and/or provincial and federal regulation to the same extent as a public utility company, our planned operations will nonetheless be subject to changes in government regulatory requirements, such as regulations related to the environment, zoning and permitting, financial incentives, taxation, competition, pricing, and FERC and state PUC regulations on competition. The operation of our proposed projects will be subject to regulation by various U.S. government agencies at the federal, state and municipal level. There is always the risk of change in government policies and laws, including but not limited to laws and regulations relating to income, capital, sales, corporate or local taxes, and the removal of tax incentives. Changes in these regulations could have a negative impact on our potential profitability. Laws and tax policies may change and such changes may be favorable or unfavorable to the Company, which may result in the cancellation of proposed projects or reduce anticipated revenues and cash flow. We may be unable to acquire or lease land and/or obtain the approvals, licenses and permits necessary to build and operate our proposed projects in a timely and cost effective manner, and regulatory agencies, local communities or labor unions may delay, prevent or increase the cost of construction and operation of our proposed projects. In order to construct and operate our proposed projects, we need to acquire or lease land and obtain all necessary local, county, state and federal approvals, licenses and permits. We may be unable to acquire the land or lease interests needed, may not receive or retain the requisite approvals, permits and licenses or may encounter other problems which could delay or prevent us from successfully constructing and operating proposed projects. Proposed projects may be located on or require access through public lands administered by federal and state agencies pursuant to competitive public leasing and right-of-way procedures and processes. The authorization for the use, construction and operation of our proposed projects and associated transmission facilities on federal, state and private lands will also require the assessment and evaluation of mineral rights, private rights-of-way and other easements; environmental, agricultural, cultural, recreational and aesthetic impacts; and the likely mitigation of adverse impacts to these and other resources and uses. The inability to obtain the required permits and, potentially, excessive delay in obtaining such permits due, for example, to litigation, could prevent us from successfully constructing and operating our proposed projects. Moreover, project approvals subject to project modifications and conditions, including mitigation requirements and costs, could affect the financial success of our proposed projects. Our ability to manage our growth successfully is crucial to our future. We are subject to a variety of risks associated with a growing business. Our ability to operate successfully in the future depends upon our ability to finance, develop, and construct future renewable energy projects, implement and improve the administration of financial and operating systems and controls, expand our technical capabilities and manage our relationships with landowners and contractors. Our failure to manage growth effectively could have a material adverse effect on our business or results of operations. Notwithstanding the Recovery Act and other regulatory incentives, we may not be able to finance the development or the construction costs of building our planned projects. We do not have sufficient funds from the cash flow of our operations to fully finance the development or the construction costs of building our proposed projects. Additional funds will be required to complete the development and construction of our proposed projects, to find and carry out the development of properties, and to pay the general and administrative costs of operating our business. Additional financing may not be available on acceptable terms, if at all. If we are unable to raise additional funds when needed, we may be required to delay development and construction of our proposed projects, reduce the scope of our proposed projects, and/or eliminate or sell some or all of our development projects, if any. We may not be able to obtain access to the transmission lines necessary to deliver the power we plan to produce and sell. We will depend on access to transmission facilities so that we may deliver power to purchasers. If existing transmission facilities do not have available transmission capacity, we would be required to pay for the upgrade of existing transmission facilities or to construct new ones. There can be no assurance that we will be able to secure access to transmission facilities at a reasonable cost, or at all. As a result, expected profitability on a proposed project may be lower than anticipated or, if we have no access to electricity transmission facilities, we may not be able to fulfill our obligations to deliver power or to construct the project or we may be required to pay liquidated damages. Changes in interest rates and debt covenants and increases in turbine and generator prices and construction costs may result in our proposed projects not being economically feasible. Increases in interest rates and changes in debt covenants may reduce the amounts that we can borrow, reduce the cash flow, if any, generated by our proposed projects, and increase the equity required to complete the construction of our proposed projects. The cost of wind turbines, generators and construction costs have increased significantly over the last four years. Further increases may increase the cost of our proposed projects to the point that such projects are not feasible given the prices utilities are willing to pay. There can be no assurance that we will be able to negotiate power purchase agreements with sufficiently profitable electricity prices in the future. We may not be able to secure power purchase agreements. We may not be able to secure power purchase agreements for our proposed projects. In the event that we do secure power purchase agreements, if we fail to construct our proposed projects in a timely manner, we may be in breach of our power purchase agreements and such agreements may be terminated. The operation of our proposed projects may be subject to equipment failure. After the construction of our proposed projects, the electricity produced may be lower than anticipated because of equipment malfunction. Unscheduled maintenance can result in lower electricity production for several months or possibly longer depending on the nature of the outage, and correspondingly, in lower revenues. Changes in weather patterns may affect our ability to operate our proposed projects. Meteorological data we collect during the development phase of a proposed project may differ from actual results achieved after the project is erected. While long-term precipitation patterns have not varied significantly, short-term patterns, either on a seasonal or on a year-to-year basis may vary substantially. These variations may result in lower revenues and higher operating losses. Environmental damage on our properties may cause us to incur significant financial expenses. Environmental damage may result from the development and operation of our proposed projects. The construction of our proposed initial Downdraft Tower involves, among other things, land excavation and the installation of concrete foundations. Equipment can be a source of environmental concern, including noise pollution, damage to the soil as a result of oil spillage, and peril to certain migratory birds and animals that live, feed on, fly over, or cross the property. In addition, environmental regulators may impose restrictions on our operations, which would limit our ability to obtain the appropriate zoning or conditional use permits for our project. We may also be assessed significant financial penalties for any environmental damage caused on properties that are leased, and we may be unable to sell properties that are owned. Financial losses and liabilities that may result from environmental damage could affect our ability to continue to do business. Larger developers have greater resources and expertise in developing and constructing renewable energy projects. We face significant competition from large power project developers, including electric utilities and large independent power producers that have greater project development, construction, financial, human resources, marketing and management capabilities than the Company. They have a track record of completing projects and may be able to acquire funding more easily to develop and construct projects. They have also established relationships with energy utilities, transmission companies, turbine suppliers, and plant contractors that may make our access to such parties more difficult. Renewable energy must compete with traditional fossil fuel sources. In addition to competition from other industry participants, we face competition from fossil fuel sources such as natural gas and coal, and other renewable energy sources such as solar, traditional wind, hydro and geothermal. The competition depends on the resources available within the specific markets. Although the cost to produce clean, reliable, renewable energy is becoming more competitive with traditional fossil fuel sources, it generally remains more expensive to produce, and the reliability of its supply is less consistent than traditional fossil fuel. However, deregulation, legislative mandates for renewable energy, and consumer preference for environmentally more benign energy sources are becoming important factors in increasing the development of alternative energy projects. The wind energy industry in California is highly competitive since wind plays an integral role in the electricity portfolio in California. The Company is investigating the feasibility of locating a Downdraft Tower in California. Since wind plays an integral role in the electricity portfolio in California and wind energy requires a significant amount of land resource, the wind energy industry in California is highly competitive. Wind developers compete for leased and owned land with favorable wind characteristics, limited supply of turbines and contractors, and for purchasers and available transmission capacity. There is no guarantee that we will be able to acquire the significant land resources needed to develop projects in California. Our ability to hire and retain qualified personnel and contractors will be an important factor in the success of our business. Our failure to hire and retain qualified personnel may result in our inability to manage and implement our plans for expansion and growth. Competition for qualified personnel in the renewable energy industry is significant. To manage growth effectively, we must continue to implement and improve our management systems and to recruit and train new personnel. We may not be able to continue to attract and retain the qualified personnel necessary to carry on our business. If we are unable to retain or hire additional qualified personnel as required, we may not be able to adequately manage and implement our plans for expansion and growth. The market in which we operate is rapidly evolving and we may not be able to maintain our profitability. As a result of the emerging nature of the markets in which we plan to compete and the rapidly evolving nature of our industry, it is particularly difficult for us to forecast our revenues or earnings accurately. Our current and future expense levels are based largely on our investment plans and estimates of future revenues and are, to a large extent, fixed. We may not be able to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in revenues relative to our planned expenditures would have an immediate adverse effect on our business, results of operations and financial condition. We depend on key personnel, the loss of which could have a material adverse effect on us. Our performance depends substantially on the continued services and on the performance of our senior management and other key personnel. Our ability to retain and motivate these and other officers and employees is fundamental to our performance. The unexpected loss of services of one or more of these individuals could have a material adverse effect on us. We are not protected by a material amount of key-person or similar life insurance covering our executive officers and other directors. We have entered into employment agreements with our executive officers, but the non-compete period with respect to certain executive officers could, in some circumstances in the event of their termination of employment with the Company, end prior to the employment term set forth in their employment agreements. Certain legal proceedings and regulatory matters could adversely impact our results of operations. We may be subject from time to time to various claims involving alleged breach of contract claims, intellectual property and other related claims, and other litigations. Certain of these lawsuits and claims, if decided adversely to us or settled by us, could result in material liability to the Company or have a negative impact on the Company s reputation or relations with its employees, customers, licensees or other third parties. In addition, regardless of the outcome of any litigation or regulatory proceedings, such proceedings could result in substantial costs and may require that the Company devotes substantial time and resources to defend itself. Further, changes in governmental regulations in the U.S. could have an adverse impact on our results of operations. Our results may be adversely affected by the impact that disruptions in the credit and financial markets have on our customers and the energy industry. Beginning in late 2008 and continuing throughout 2009, energy and utility companies faced difficult conditions as a result of significant disruptions in the global economy, the repricing of credit risk and the deterioration of the financial markets. Continued volatility and further deterioration in the credit markets may reduce our access to financing. These events could negatively impact our operations and financial condition and our ability to raise the additional capital necessary to finance our operations. The effects of the recent global economic crisis may impact the Company s business, operating results, or financial condition. The recent global economic crisis has caused disruptions and extreme volatility in global financial markets and increased rates of default and bankruptcy, and has impacted levels of spending. These macroeconomic developments could negatively affect the Company s business, operating results, or financial condition in a number of ways. For example, potential clients may delay or decrease spending with the Company or may not pay the Company. The Company s insurance coverage may not be adequate. If the Company was held liable for amounts exceeding the limits of its insurance coverage in place at any given time or for claims outside the scope of that coverage, its business, results of operations and financial conditions could be materially and adversely affected. Our business is subject to extensive governmental regulation that could reduce our profitability, limit our growth, or increase competition. Our planned businesses are subject to extensive federal, state and foreign governmental regulation and supervision, which could reduce our potential profitability or limit our potential growth by increasing the costs of regulatory compliance, limiting or restricting the products or services we plan to sell or the methods by which we plan to sell our products and services, or subjecting our businesses to the possibility of regulatory actions or proceedings. In all jurisdictions the applicable laws and regulations are subject to amendment or interpretation by regulatory authorities. Generally, such authorities are vested with relatively broad discretion to grant, renew and revoke licenses and approvals and to implement regulations. Accordingly, we may be precluded or temporarily suspended from carrying on some or all of our planned activities or otherwise fined or penalized in a given jurisdiction. No assurances can be given that our business will be allowed to be, or continue to be, conducted in any given jurisdiction as we plan. Competition resulting from these developments could cause the supply of, and demand for, our planned products and services to change, which could adversely affect our results of operations and financial condition. Our planned operations will expose us to various international risks that could adversely affect our business. We are seeking to reach agreements for the provision of key aspects of our business with foreign operators, specifically in Mexico. Accordingly, we may become subject to legal, economic and market risks associated with operating in foreign countries, including: the general economic and political conditions existing in those countries; devaluations and fluctuations in currency exchange rates; imposition of limitations on conversion of foreign currencies or remittance of dividends and other payments by foreign subsidiaries; imposition or increase of withholding and other taxes on remittances and other payments by subsidiaries; hyperinflation in certain foreign countries; imposition or increase of investment and other restrictions by foreign governments; longer payment cycles; greater difficulties in accounts receivable collection; and the requirement of complying with a wide variety of foreign laws. Our ability to conduct business in foreign countries may be affected by legal, regulatory, political and economic risks. Our ability to conduct business in foreign countries is subject to risks associated with international operations. These include: the burdens of complying with a variety of foreign laws and regulations; unexpected changes in regulatory requirements; and new tariffs or other barriers in some international markets. We are also subject to general political and economic risks in connection with our international operations, including: political instability and terrorist attacks; changes in diplomatic and trade relationships; and general economic fluctuations in specific countries or markets. We cannot predict whether quotas, duties, taxes, or other similar restrictions will be imposed by the U.S. or foreign countries upon our business in the future, or what effect any of these actions would have on our business, financial condition or results of operations. Changes in regulatory, geopolitical, social or economic policies and other factors may have a material adverse effect on our business in the future or may require us to significantly modify our current business practices. The occurrence of natural or man-made disasters could adversely affect our financial condition and results of operations. We are exposed to various risks arising out of natural disasters, including earthquakes, hurricanes, fires, floods and tornadoes, and pandemic health events such as H1N1 influenza, as well as man-made disasters, including acts of terrorism and military actions. The continued threat of terrorism and ongoing military actions may cause significant volatility in global financial markets, and a natural or man-made disaster could trigger an economic downturn in the areas directly or indirectly affected by the disaster. These consequences could, among other things, result in a decline in business and increased claims from those areas. Disasters also could disrupt public and private infrastructure, including communications and financial services, which could disrupt our normal business operations. Our inability to successfully recover should we experience a disaster or other business continuity problem could cause material financial loss, loss of human capital, regulatory actions, reputational harm or legal liability. Should we experience a local or regional disaster or other business continuity problem, such as an earthquake, hurricane, terrorist attack, pandemic, security breach, power loss, telecommunications failure or other natural or man-made disaster, our continued success will depend, in part, on the availability of our personnel, our office facilities, and the proper functioning of our computer, telecommunication and other related systems and operations. Our operations are dependent upon our ability to protect our technology infrastructure against damage from business continuity events that could have a significant disruptive effect on our operations. We could potentially lose operation of our projects or experience material adverse interruptions to our operations or delivery of services to our clients in a disaster recovery scenario. We plan to regularly assess and take steps to improve upon our existing business continuity plans and key management succession. However, a disaster on a significant scale or affecting certain of our key operating areas within or across regions, or our inability to successfully recover should we experience a disaster or other business continuity problem, could materially interrupt our business operations and cause material financial loss, loss of human capital, regulatory actions, reputational harm, damaged client relationships or legal liability. Assertions by a third party that the Company infringes its intellectual property could result in costly and time-consuming litigation, expensive licenses or the inability to operate as planned. The energy and technology industries are characterized by the existence of a large number of patents, copyrights, trademarks and trade secrets and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. There is a possibility of intellectual property rights claims against the Company. The Company s technologies may not be able to withstand third-party claims or rights restricting their use. Companies, organizations or individuals, including the Company s competitors, may hold or obtain patents or other proprietary rights that would prevent, limit or interfere with the Company s ability to provide the Company s services or develop new products or services, which could make it more difficult for the Company to operate the Company s business. Any litigation or claims, whether or not valid, could be time-consuming, expensive to litigate or settle and could divert the Company s managements attention and financial resources. If the Company is determined to have infringed upon a third party s intellectual property rights, the Company may be required to pay substantial damages, stop using technology found to be in violation of a third party s rights or seek to obtain a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms, or at all, and may significantly increase the Company s operating expenses or may require the Company to restrict the Company s business activities in one or more respects. The Company may also be required to develop alternative non-infringing technology that could require significant effort and expense or may not be feasible. In the event of a successful claim of infringement against the Company and the Company s failure or inability to obtain a license to the infringed technology, the Company s business and results of operations could be harmed. The Company s business will be adversely affected if the Company is unable to protect its intellectual property rights from unauthorized use or infringement by third-parties. The Company intends to rely on a combination of trademark, patent, trade secret and copyright law, license agreements and contractual restrictions, including confidentiality agreements, invention assignment agreements and non-disclosure agreements with employees, contractors and suppliers, to protect the Company s proprietary rights, all of which provide only limited protection. The Company believes its intellectual property rights are valuable, and any inability to protect them could reduce the value of the Company s products, services and brand. Various events outside of the Company s control pose a threat to the Company s intellectual property rights as well as to the Company s products and services. The efforts the Company has taken to protect its proprietary rights may not be sufficient or effective, may not be enforceable or may be capable of being effectively circumvented. Any significant impairment of the Company s intellectual property rights could harm the Company s business or the Company s ability to compete. Also, protecting the Company s intellectual property rights is costly and time consuming. The Company also seeks to maintain certain intellectual property as trade secrets. The secrecy could be compromised by outside parties, or by the Company s employees, which would cause the Company to lose the competitive advantage resulting from these trade secrets. Risks Related to Our Securities There is little current trading of our shares. Our stock price is likely to be highly volatile. Although prices for our shares of Common Stock are quoted on the OTCBB, there is little current trading and no assurance can be given that an active public trading market will develop or, if developed, that it will be sustained. The OTCBB is generally regarded as a less efficient and less prestigious trading market than other national markets. There is no assurance if or when our Common Stock will be quoted on another more prestigious exchange or market. 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: changes in the communications technology industry and markets; volume and timing of subscriptions from major customers; competitive pricing pressures; our ability to obtain working capital financing; technological innovations or new competitors in our market; additions or departures of key personnel; our ability to execute our business plan; operating results that fall below expectations; loss of any strategic relationship; industry or regulatory developments; economic and other external factors; and period-to-period fluctuations in our financial results. 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 and for some time there will likely be a thin trading market for the stock, which causes trades of small blocks of stock to have a significant impact on the stock price. Because our Common Stock is likely to be considered a "penny stock," our trading will be subject to regulatory restrictions. Our Common Stock is currently, and in the near future will likely continue to be, considered a "penny stock." The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in "penny stocks." Penny stocks generally are equity securities with a price of less than $5. 00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the SEC, which specifies information about penny stocks and the nature and significance of risks of the penny stock market. The broker-dealer also must provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer and any salesperson in the transaction, and monthly account statements indicating the market value of each penny stock held in the customer s account. In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser s written agreement to the transaction. These disclosure and other requirements may adversely affect the trading activity in the secondary market for our Common Stock. We have not paid dividends in the past and do not expect to pay dividends for the foreseeable future, and any return on investment may be limited to potential future appreciation on the value of our Common Stock. We currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Our payment of any future dividends will be at the discretion of our Board of Directors after taking into account various factors, including without limitation, our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. To the extent we do not pay dividends, our stock may be less valuable because a return on investment will only occur if and to the extent our stock price appreciates, which may never occur. In addition, shareholders must rely on sales of their Common Stock after price appreciation as the only way to realize their investment, and if the price of our stock does not appreciate, then there will be no return on investment. Shareholders seeking cash dividends should not purchase our Common Stock. Our officers, directors and principal stockholders can exert significant influence over us and may make decisions that are not in the best interests of all stockholders. Our officers, directors and principal stockholders (greater than 5% stockholders) collectively own a majority of our outstanding Common Stock. As a result of such ownership, these stockholders will be able to affect the outcome of, or exert significant influence over, all matters requiring stockholder approval, including the election and removal of directors and any change in control. In particular, this concentration of ownership of our Common Stock could have the effect of delaying or preventing a change of control of us or otherwise discouraging or preventing a potential acquirer from attempting to obtain control of us. This, in turn, could have a negative effect on the market price of our Common Stock. It could also prevent our stockholders from realizing a premium over the market prices for their shares of Common Stock. Moreover, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders, and accordingly, they could cause us to enter into transactions or agreements that we would not otherwise consider. Anti-takeover provisions may limit the ability of another party to acquire us, which could cause our stock price to decline. Our Articles of Incorporation, as amended, our Bylaws and Nevada law contain provisions that could discourage, delay or prevent a third party from acquiring us, even if doing so may be beneficial to our stockholders. In addition, these provisions could limit the price investors would be willing to pay in the future for shares of our Common Stock.

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+RISK FACTORS You should carefully consider the following risk factors, in addition to the other information set forth in this Registration Statement, in connection with any investment decision regarding shares of our common stock. Each of these risk factors could adversely affect our business, operating results and financial condition, as well as adversely affect the value of an investment in our common stock. Some information in this Registration Statement may contain forward-looking statements that discuss future expectations of our financial condition and results of operation. The risk factors noted in this section and other factors could cause our actual results to differ materially from those contained in any forward-looking statements. Servicing our debt requires a significant amount of cash. On October 2, 2013, we entered into the Note Purchase Agreement, pursuant to which we issued an aggregate of $66,000,000 of senior secured notes due October 2, 2016, to certain purchasers. In addition, our prior debt of approximately $21,000,000 was renegotiated and assumed by one of our newly created subsidiaries. Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness depends on our ability to develop the assets acquired in the Recent Transactions and our legacy assets, generate cash flows from those assets and collect amounts owed to us by our third-party operators. Our acquisition of assets from Gastar, Navasota and Tauren presents certain risks to our business and operations. We recently consummated the acquisition of certain assets from Gastar, Navasota and Tauren. The acquisitions present numerous risks, including the following: The possibility that the expected benefits of such transaction may not materialize in the timeframe expected, or at all, or may be more costly to achieve than anticipated; The increase in our indebtedness that has resulted from entering into financing for the acquisitions; That the acquired assets may not produce as expected; That we are unable to successfully develop the assets; Stockholder reaction to the acquisitions; Risks associated with the ownership and operation of the acquired assets, which differ from those that we currently hold, in that the acquired assets are primarily oil producing, while our legacy assets are primarily gas producing; The integration of these transactions may require diversion of the attention of our management and other key employees from ongoing business activities, including the pursuit of other opportunities that could be beneficial to us; and That we have incurred substantial costs in connection with these transactions. One or more of these factors could negatively affect our business, financial condition or results of operations. Our common stockholders may experience dilution due to the exercise of warrants to purchase common stock. As part of the transactions consummated on October 2, 2013, we issued warrants exercisable into an aggregate of 65,834,549 shares of common stock at an exercise price of $0.01 per share, and warrants exercisable into an aggregate of 32,917,274 shares of common stock at an exercise price of $0.50 per share. As a result of the issuance of these warrants, the exercise price of warrants held by WFEC, which are exercisable into an aggregate of 8,500,000 shares of common stock, was adjusted to $0.1753 per share, and the exercise price of warrants exercisable into an aggregate of 787,294 shares of common stock was adjusted to $0.8389 per share. The issuance of additional shares of common stock upon exercise of any of these warrants would result in dilution to existing holders of common stock. In addition, the issuance of additional warrants or other securities convertible into common stock could result in the dilution of existing stockholder s equity interests. The issuance of additional shares of common stock or warrants or other securities convertible into common stock, could also trigger additional anti-dilution adjustments in the exercise price of outstanding warrants and other securities convertible into common stock. Fluctuations in oil and natural gas prices, which have been volatile at times, may adversely affect our revenues as well as our ability to maintain or increase our borrowing capacity, repay current or future indebtedness and obtain additional capital. Our future financial condition, access to capital, cash flows and results of operations depend upon the prices we receive for our oil and natural gas. Historically, we have been particularly dependent on prices for natural gas, but as a result of the Recent Transactions, we will become increasingly dependent on prices for oil. Historically, oil and natural gas prices have been volatile and are subject to fluctuations in response to changes in supply and demand, market uncertainty and a variety of additional factors that are beyond our control. Factors that affect the prices we receive for our oil and natural gas include: Table of Contents The level of domestic production; The availability of imported oil and natural gas; Political and economic conditions and events in foreign oil and natural gas producing nations, including embargoes, continued hostilities in the Middle East and other sustained military campaigns, and acts of terrorism or sabotage; The ability of members of OPEC to agree to and maintain oil price and production controls; The cost and availability of transportation and pipeline systems with adequate capacity; The cost and availability of other competitive fuels; Fluctuating and seasonal demand for oil, natural gas and refined products; Concerns about global warming or other conservation initiatives and the extent of governmental price controls and regulation of production; Weather; Foreign and domestic government relations; and Overall economic conditions, particularly the recent worldwide economic slowdown which has put downward pressure on oil and natural gas prices and demand. In the past, prices of oil and natural gas have been extremely volatile, and we expect this volatility to continue. During fiscal 2013, the Henry Hub spot price for natural gas fluctuated from a high of $4.38 per Mcf to a low of $2.66 per Mcf, while the NYMEX West Texas Intermediate crude oil price ranged from a high of $98.46 per Bbl to a low of $83.72 per Bbl. From January through December 2013, the Henry Hub spot price for natural gas fluctuated from a high of $4.52 per Mcf to a low of $3.08 per Mcf, while the NYMEX West Texas intermediate crude oil price ranged from a high of $110.62 per Bbl to a low of $86.65 per Bbl. Our revenues, cash flow and profitability and our ability to maintain or increase our borrowing capacity, to repay current or future indebtedness and to obtain additional capital depend substantially upon oil and natural gas prices. We face significant competition, and many of our competitors have resources in excess of our available resources. The oil and gas industry is highly competitive. We encounter competition from other oil and gas companies in all areas of our operations, including the acquisition of producing properties and exploratory prospects and sale of crude oil, natural gas and NGL. Our competitors include major integrated oil and gas companies and numerous independent oil and gas companies, individuals and drilling and income programs. Many of our competitors are large, well established companies with substantially larger operating staffs and greater capital resources than us. Such companies may be able to pay more for productive oil and gas properties and exploratory prospects and to define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. Our ability to acquire additional properties and to discover reserves in the future will depend upon our ability to evaluate and select suitable properties and to consummate transactions in this highly competitive environment. Exploratory drilling is a speculative activity that may not result in commercially productive reserves and may require expenditures in excess of budgeted amounts. Drilling activities are subject to many risks, including the risk that no commercially productive oil or gas reservoirs will be encountered. There can be no assurance that new wells drilled by us or in which we have an interest will be productive or that we will recover all or any portion of our investment. Drilling for oil and gas may involve unprofitable efforts, not only from dry wells, but also from wells that are productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs. The cost of drilling, completing and operating wells is often uncertain. Our drilling operations may be curtailed, delayed or canceled as a result of a variety of factors, many of which are beyond our control, including economic conditions, mechanical problems, pressure or irregularities in formations, title problems, weather conditions, compliance with governmental requirements and shortages in or delays in the delivery of equipment and services. Such equipment shortages and delays sometimes involve drilling rigs where inclement weather prohibits the movement of land rigs causing a high demand for rigs by a large number of companies during a relatively short period of time. Our future drilling activities may not be successful. Lack of drilling success could have a material adverse effect on our financial condition and results of operations. Table of Contents Our operations are also subject to all of the hazards and risks normally incident to the development, exploitation, production and transportation of, and the exploration for, oil and gas, including unusual or unexpected geologic formations, pressures, down hole fires, mechanical failures, blowouts, explosions, uncontrollable flows of oil, gas or well fluids and pollution and other environmental risks. These hazards could result in substantial losses to us due to injury and loss of life, severe damage to and destruction of property and equipment, pollution and other environmental damage and suspension of operations. We participate in insurance coverage maintained by the operators of our wells, although there can be no assurances that such coverage will be sufficient to prevent a material adverse effect to us if any of the foregoing events occur. Acquisition prospects are difficult to assess and may pose additional risks to our operations. Where appropriate, we may evaluate and pursue acquisition opportunities on terms our management considers favorable. The successful acquisition of natural gas and oil properties requires an assessment of: Recoverable reserves; Exploration potential; Future natural gas and oil prices; Operating costs; Potential environmental and other liabilities; and Permitting and other environmental authorizations required for our operations. In connection with such an assessment, we would expect to perform a review of the subject properties that we believe to be generally consistent with industry practices. Nonetheless, the resulting conclusions are inexact and their accuracy inherently uncertain and such an assessment may not reveal all existing or potential problems, nor will it necessarily permit a buyer to become sufficiently familiar with the properties to fully assess their merits and deficiencies. Inspections may not always be performed on every facility or well, and structural and environmental problems are not necessarily observable even when an inspection is undertaken. Future acquisitions could pose additional risks to our operations and financial results, including: Problems integrating the purchased operations, personnel or technologies; Unanticipated costs; Diversion of resources and management attention from our exploration business; Entry into regions or markets in which we have limited or no prior experience; and Potential loss of key employees, particularly those of the acquired organization. We have a history of operating losses and may not become profitable. If we are not able to achieve and maintain profitability in the future, we might not be able to access funds through debt or equity financings. We incurred losses available to common shareholders of $6,851,518 and $13,364,871 for the fiscal years ended June 30, 2013 and 2012, respectively. Our accumulated deficit as of June 30, 2013 was $85,757,066. Historically, we have funded our operating losses, acquisitions and drilling costs primarily through a combination of private offerings of convertible debt, senior secured debt, and equity securities. We must repay or refinance all amounts payable under the Note Purchase Agreement and to WFEC. Our success in obtaining the necessary capital resources to fund the repayment under the Note Purchase Agreement, the Credit Agreement with WFEC as well as future costs associated with our operations and drilling plans is dependent upon our ability to: (i) increase revenues through acquisitions and recovery of our proved producing and proved developed non-producing oil and gas reserves; (ii) maintain effective cost controls at the corporate administrative office and in field operations; and (iii) obtain additional financing. However, even if we achieve some success with our plans, there can be no assurance that we will be able to generate sufficient revenues to achieve significant profitable operations or to fund our drilling plans. Table of Contents We have substantial capital requirements necessary for undeveloped properties for which we may not be able to obtain adequate financing. Prior to the Recent Transactions and as of June 30, 2013, the majority of our oil and gas reserves were undeveloped. At June 30, 2013, we had proved undeveloped reserves of 40,200 MMcfe, which represented approximately 90% of our total proved reserves of 45,178 MMcfe. Recovery of our future undeveloped reserves will require significant capital expenditures to further develop these reserves for the foreseeable future. In addition to our results of operations, our derivative sales contracts can potentially affect cash flow negatively, if prices for natural gas or oil exceed their respective strike prices. Pursuant to the derivative sales contracts, we are required to pay to the counterparty the difference between the strike price and actual sales price for volumes subject to the respective contract, to the extent the actual sales price exceeds the strike price. If our capital resources are utilized for that purpose, we would have fewer capital resources available for development of our undeveloped properties. No assurance can be given that our financing sources will be sufficient to fund our costs for third-party operators development activities or that development activities will be either successful or in accordance with our schedule. Additionally, if natural gas prices do not increase or if our costs of development significantly increase, we could experience a significant reduction in the number of gas wells drilled and/or reworked. No assurance can be given that any wells will produce oil or gas in commercially profitable quantities. Development of our properties could require capital resources in addition to amounts available to us as a result of our Recent Transactions. There can be no assurance that sufficient cash on hand or additional financing (on either favorable or unfavorable terms) will be available, when required, to fund the development. In the event of product price increases resulting in payments by us under the derivative sales contracts, no assurances can be given that we will have increases in oil and/or gas production in excess of the notional amounts of oil and/or gas specified in our derivative sales contracts. Any inability to obtain additional financing could have a material adverse effect on us, including requiring us to cease our oil and gas development plans or not being able to maintain our working interest due to failure to pay our share of expenses. Any additional financing may involve substantial dilution to the interests of our stockholders at that time. Our natural gas and oil sales and our related hedging activities expose us to potential regulatory risks. The Federal Trade Commission, the Federal Energy Regulatory Commission ( FERC ), and the U.S. Commodity Futures Trading Commission ( CFTC ) hold statutory authority to monitor certain segments of the physical and futures energy commodities markets. These agencies have imposed broad regulations prohibiting fraud and manipulation of such markets. With regard to our physical sales of natural gas and oil and any related hedging activities that we undertake, we are required to observe the market-related regulations enforced by these agencies, which hold substantial enforcement authority. Our sales may also be subject to certain reporting and other requirements. Failure to comply with such regulations, as interpreted and enforced, could have a material adverse effect on our business, results of operations and financial condition. To the extent that we enter into transportation contracts with natural gas pipelines that are subject to FERC regulation, we are subject to FERC requirements related to use of such capacity. Any failure on our part to comply with the FERC s regulations and policies, or with an interstate pipeline s tariff, could result in the imposition of civil and criminal penalties. We could incur significant costs and liabilities in responding to contamination that occurs as a result of our operations. There is inherent risk of incurring significant environmental costs and liabilities in the performance of our operations or in operations in which we own a working interest as a result of the handling of petroleum hydrocarbons and wastes, because of air emissions and wastewater discharges related to operations, and due to historical industry operations and waste disposal practices. Under certain environmental laws and regulations, we could be subject to strict, joint and several liabilities for the removal or remediation of previously released materials or property contamination. Private parties, including the owners of properties upon which our wells or the wells in which we own a working interest are drilled and facilities where our petroleum hydrocarbons or wastes are taken for reclamation or disposal, also may have the right to pursue legal actions to enforce compliance as well as to seek damages for non-compliance with environmental laws and regulations or for personal injury or property or natural resource damages. Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent or costly well drilling, construction, completion or water management activities, or waste handling, storage, transport, disposal or cleanup requirements could require us to make significant expenditures to attain and maintain compliance and may otherwise have a material adverse effect on our own results of operations, competitive position or financial condition. Table of Contents Technological changes could affect our operations. The natural gas and oil industry is characterized by rapid and significant technological advancements and introductions of new products and services utilizing new technologies. As others use or develop new technologies, we may be placed at a competitive disadvantage, and competitive pressures may force us to implement such new technologies at substantial costs. In addition, many other natural gas and oil companies have greater financial, technical and personnel resources that may allow them to enjoy technological advantages and may in the future allow them to implement new technologies before we can. We may be unable to respond to such competitive pressures and implement such technologies on a timely basis or at an acceptable cost. If one or more of the technologies that we currently use or may implement in the future were to become obsolete or if we are unable to use the most advanced commercially available technology, it could have a material adverse effect on our financial condition, future cash flows and the results of operations. We are subject to uncertainties in reserve estimates and future net cash flows. This prospectus contains estimates of our oil and gas reserves as of June 30, 2013 and the expected future net cash flows from those reserves, most of which have been prepared by an independent petroleum consultant. These estimates do not reflect the assets acquired in the Recent Transactions. There are numerous uncertainties inherent in estimating quantities of reserves of oil and gas and in projecting future rates of production and the timing of development expenditures, including many factors beyond our control. The reserve estimates in this prospectus are based on various assumptions, including, for example, constant oil and gas prices, operating expenses, capital expenditures and the availability of funds, and, therefore, are inherently imprecise indications of future net cash flows. Actual future production, cash flows, taxes, operating expenses, development expenditures and quantities of recoverable oil and gas reserves may vary substantially from those assumed in the estimates. Any significant variance in these assumptions could materially affect the estimated quantity and value of reserves set forth in this prospectus. Additionally, our reserves may be subject to downward or upward revision based upon actual production performance, results of future development and exploration, prevailing oil and gas prices and other factors, many of which are beyond our control. The present value of future net reserves discounted at 10% (the PV-10 ) of proved reserves referred to in this prospectus should not be construed as the current market value of the estimated proved reserves of oil and gas attributable to our properties. In accordance with applicable requirements of the SEC, the estimated discounted future net cash flows from proved reserves are based on an average price as of the first day of each month during the applicable 12 months. For oil volumes, the average West Texas Intermediate posted price of $88.13 per barrel is adjusted by field for quality, transportation fees, and a regional price differential. For gas volumes, the average Henry Hub spot price of $3.45 per MMBTU is adjusted by field for energy content, transportation fees, and a regional price differential. All prices are held constant throughout the lives of the properties. For the proved reserves, the average adjusted product prices weighted by production over the remaining lives of the properties are $85.13 per barrel of oil, $55.02 per barrel of NGL, and $3.62 per Mcf of gas. Actual future net cash flows also will be affected by: (i) the timing of both production and related expenses; (ii) changes in consumption levels; and (iii) governmental regulations or taxation. In addition, the calculation of the present value of the future net cash flows using a 10% discount as required by the SEC is not necessarily the most appropriate discount factor based on interest rates in effect from time to time and risks associated with our reserves or the oil and gas industry in general. Hedging of our production may result in losses or prevent us from benefiting to the fullest extent possible from increases in prices for natural gas and oil. We entered into New York Mercantile Exchange ( NYMEX ) futures contracts as hedges on natural gas production and crude oil production, as part of the Recent Transactions, in the form of a Call Option Structured Derivative with a third party. Although these hedges may partially protect us from declines in commodity prices, the use of these arrangements also may limit our ability to benefit from significant increases in the prices of natural gas and oil. If the counterparties to the derivative instruments we use to hedge our business risks default or fail to perform, we may be exposed to risks we had sought to mitigate, which could materially adversely affect our financial condition and results of operations. Following the end of fiscal 2013, as part of the Recent Transactions, we began to use hedges to mitigate our natural gas and oil price risk with counterparties. This is a more pronounced risk to us in view of the recent stresses suffered by financial institutions. We cannot provide assurance that our counterparties will honor their obligations now or in the future. Table of Contents The enactment of the Dodd Frank Act could have an adverse impact on our ability to hedge risks associated with our business. Recently enacted comprehensive financial reform legislation, known as the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act ), was enacted that establishes federal oversight and regulation of the over-the-counter derivatives market and entities, including us, that participate in that market. The Dodd-Frank Act requires the CFTC, the SEC and other regulators to promulgate rules and regulations implementing the new legislation. In its rulemaking under the Dodd-Frank Act the CFTC has issued final regulations to set position limits for certain futures and option contracts in the major energy markets and for swaps that are their economic equivalents. Certain bona fide hedging transactions would be exempt from these position limits. The position limits rule was vacated by the United States District Court for the District of Colombia in September 2012 although the CFTC has stated that it is appealing the District Court s decision. The CFTC also has finalized other regulations, including critical rulemakings on the definition of swap , security-based swap , swap dealer and major swap participant . The Dodd-Frank Act and CFTC rules also may require us in connection with certain derivatives activities to comply with clearing and trade-execution requirements (or take steps to qualify for an exemption to such requirements). In addition, new regulations may require us to comply with margin requirements although these regulations are not finalized and their application to us is uncertain at this time. Other regulations also remain to be finalized, and the CFTC recently has delayed the compliance dates for various regulations already finalized. As a result, it is not possible at this time to predict with certainty the full effects of the Dodd-Frank Act and CFTC rules on us and the timing of such effects. The Dodd-Frank Act also may require the counterparties to our derivative instruments to spin off some of their derivatives activities to a separate entity, which may not be as creditworthy as the current counterparty. The Dodd-Frank Act and any new regulations could significantly increase the cost of derivatives contracts (including from swap recordkeeping and reporting requirements and through requirements to post collateral which could adversely affect our available liquidity), materially alter the terms of derivatives contracts, reduce the availability of derivatives to protect against risks we encounter, reduce our ability to monetize or restructure our existing derivatives contracts, and increase our exposure to less creditworthy counterparties. If we reduce our use of derivatives as a result of the Dodd-Frank Act and regulations, our results of operations may become more volatile and our cash flows may be less predictable, which could adversely affect our ability to plan for and fund capital expenditures. Finally, the Dodd-Frank Act was intended, in part, to reduce the volatility of oil and natural gas prices, which some legislators attributed to speculative trading in derivatives and commodity instruments related to oil and natural gas. Our revenues could therefore be adversely affected if a consequence of the Dodd-Frank Act and regulations is to lower commodity prices. Any of these consequences could have a material adverse effect on us, our financial condition, and our results of operations. We are subject to various operating and other casualty risks that could result in liability exposure or the loss of production and revenues. Our oil and gas business involves a variety of operating risks, including, but not limited to, unexpected formations or pressures, uncontrollable flows of oil, gas, brine or well fluids into the environment (including groundwater contamination), blowouts, fires, explosions, pollution and other risks, any of which could result in personal injuries, loss of life, damage to properties and substantial losses. Although we carry insurance at levels that we believe are reasonable, we are not fully insured against all risks. We do not carry business interruption insurance. Losses and liabilities arising from uninsured or under-insured events could have a material adverse effect on our financial condition and operations. From time to time, due primarily to contract terms, pipeline interruptions or weather conditions, the producing wells in which we own an interest have been subject to production curtailments. The curtailments range from production being partially restricted to wells being completely shut-in. The duration of curtailments varies from a few days to several months. In most cases, we are provided only limited notice as to when production will be curtailed and the duration of such curtailments. We cannot control the development of the properties we own but do not operate, which may adversely affect our production, revenues and results of operations. As of June 30, 2013, third parties operated wells that represented substantially all of our proved reserves as of that date. Following the end of fiscal 2013, third-parties continue to operate a significant portion of our properties. As a result, the success and timing of our drilling and development activities on those properties depend upon a number of factors outside of our control, including: the timing and amount of capital expenditures; the operators expertise and financial resources; the approval of other participants in drilling wells; and the selection of suitable technology. Table of Contents If drilling and development activities are not conducted on our properties or are not conducted on a timely basis, we may be unable to increase our production or offset normal production declines, which may adversely affect our production, revenues and results of operations. Our business may suffer if we lose key personnel. We depend to a large extent on the services of Calvin A. Wallen, III, our President, Chairman of the Board, and Chief Executive Officer. The loss of the services of Mr. Wallen would have a material adverse effect on our operations. Certain of our affiliates control a majority of the voting power of our securities, which may affect other stockholders ability to influence matters submitted to a vote of stockholders. As of July 17, 2014, Mr. Wallen and the Investors, collectively, control over 70% of the voting power with respect to matters submitted to the holders of the Common Stock. As a result, they have the ability to control much of our business affairs, including the ability to control the election of directors and results of voting on all matters requiring stockholder approval. The Investors and Mr. Wallen can effectively prevent a change of control of the Company and determine the outcome of all matters submitted to the Company s shareholders. Certain of our affiliates have engaged in business transactions with us, which may result in conflicts of interest. Certain officers, directors and related parties, including entities controlled by Mr. Wallen, our President, Chairman of the Board and Chief Executive Officer, have engaged in business transactions with us which were not the result of arm s length negotiations between independent parties. Our management believes that the terms of these transactions were as favorable to us as those that could have been obtained from unaffiliated parties under similar circumstances. All future transactions between us and our affiliates will be on terms no less favorable than could be obtained from unaffiliated third parties and will be approved by a majority of the independent members of our Board of Directors. The liquidity, market price and volume of our stock are volatile. The trading price of our common stock could be subject to wide fluctuations in response to quarter-to-quarter variations in our operating results, announcements of our drilling results and other events or factors. In addition, the U.S. stock markets have from time to time experienced extreme price and volume fluctuations that have affected the market price for many companies and which often have been unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of our securities. Currently, our common stock is traded on the OTCQB, the mid-tier on the OTC Markets, which is not a nationally recognized exchange. We may experience adverse consequences because of required indemnification of officers and directors. Provisions of our Certificate of Formation and Bylaws provide that we will indemnify any director and officer as to liabilities incurred in their capacity as a director or officer and on those terms and conditions set forth therein to the fullest extent of Texas law. Further, we may purchase and maintain insurance on behalf of any such persons whether or not we would have the power to indemnify such person against the liability insured against. The foregoing could result in substantial expenditures by us and prevent any recovery from our officers, directors, agents and employees for losses incurred by us as a result of their actions. Certain anti-takeover provisions may discourage a change in control. Provisions of Texas law and our Certificate of Formation and Bylaws may have the effect of delaying or preventing a change in control or acquisition of the Company. Our Certificate of Formation and Bylaws include blank check preferred stock (the terms of which may be fixed by our Board of Directors without stockholder approval), and certain procedural requirements governing stockholder meetings. These provisions could have the effect of delaying or preventing a change in control of the Company. As a result of the Voting Agreement, the Investors and Mr. Wallen control all votes of shareholders, and can effectively prevent a change of control. Table of Contents We do not intend to declare cash dividends on our common stock in the foreseeable future. Our Board of Directors presently intends to retain all of our earnings, if any, for the repayment of debt, the payment of dividends on our preferred stock and the expansion of our business. We therefore do not anticipate the distribution of cash dividends on our common stock in the foreseeable future. Any future decision of our Board of Directors to pay cash dividends on our common stock will depend, among other factors, upon our earnings, financial position and cash requirements. Our internal controls over financial reporting may not be effective, which could have a significant and adverse effect on our business. Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC, which we collectively refer to as Section 404, require us to evaluate our internal controls over financial reporting to allow management to report on those internal controls as of the end of each year. Effective internal controls are necessary for us to produce reliable financial reports and are important in our effort to prevent financial fraud. In the course of our Section 404 evaluations, we may identify conditions that may result in significant deficiencies or material weaknesses and we may conclude that enhancements, modifications or changes to our internal controls are necessary or desirable. Implementing any such matters would divert the attention of our management, could involve significant costs, and may negatively impact our results of operations. We note that there are inherent limitations on the effectiveness of internal controls, as they cannot prevent collusion, management override or failure of human judgment. If we fail to maintain an effective system of internal controls or if management or our independent registered public accounting firm were to discover material weaknesses in our internal controls, we may be unable to produce reliable financial reports or prevent fraud, and it could harm our financial condition and results of operations, result in a loss of investor confidence and negatively impact our share price. We may not have satisfactory title or rights to all of our current or future properties. Prior to acquiring undeveloped properties, our contract land professionals review title records or other title review materials relating to substantially all of such properties. The title investigation performed by us prior to acquiring undeveloped properties is thorough, but less rigorous than that conducted prior to drilling, consistent with industry standards. Prior to drilling, we obtain a title opinion on the drill site. However, a title opinion does not necessarily ensure satisfactory title. We believe we have satisfactory title to our producing properties in accordance with standards generally accepted in the oil and gas industry. Our properties are subject to customary royalty interests, liens incident to operating agreements, liens for current taxes and other burdens, which we believe do not materially interfere with the use of or affect the value of such properties. In the normal course of our business, title defects and lease issues of varying degrees arise, and, if practicable, reasonable efforts are made to cure such defects and issues. At June 30, 2013, we believe that our leaseholds for all of our net acreage were being kept in force by virtue of production in paying quantities. The majority of our acreage prior to the Recent Transactions was in Northwest Louisiana, and the legal climate in Northwest Louisiana has become increasingly hostile and litigious towards oil and gas companies. The legal climate in Texas, the location of a majority of the properties acquired in the Recent Transactions, is also becoming more litigious towards oil and gas companies. Many mineral owners are seeking opportunities to make additional money from their minerals rights, including pursuit of claims of lease expiration by asserting that production does not exist in paying quantities. We are a defendant in a lawsuit brought by a mineral owner in Northwest Louisiana alleging, among other things, that all or part of our mineral lease lapsed. If the outcome of this lawsuit were to be determined entirely in favor of the mineral owner, our total acreage position, as of June 30, 2013, could decrease by a maximum of 17%, or a maximum of 3.6% after giving effect to the Recent Transactions. We are vigorously defending our position in this lawsuit. Governmental regulations could adversely affect our business. Our business is subject to certain federal, state and local laws and regulations on taxation, the exploration for and development, production and marketing of oil and natural gas, and environmental and safety matters. Many laws and regulations require drilling permits and govern the spacing of wells, rates of production, prevention of waste and other matters. These laws and regulations have increased the costs of our operations. In addition, these laws and regulations, and any others that are passed by the jurisdictions where we have production, could limit the total number of wells drilled or the allowable production from successful wells, which could limit our revenues. Laws and regulations relating to our business frequently change, and future laws and regulations, including changes to existing laws and regulations, could adversely affect our business. Table of Contents In particular and without limiting the foregoing, various tax proposals currently under consideration could result in an increase and acceleration of the payment of federal income taxes assessed against independent oil and natural gas producers, for example by eliminating the ability to expense intangible drilling costs, removing the percentage depletion allowance and increasing the amortization period for geological and geophysical expenses. Any of these changes would increase our tax burden. The States of Texas and Louisiana and many other states require permits for drilling operations, drilling bonds and reports concerning operations and impose other requirements relating to the exploration for and production of oil and gas. Such states also have statutes or regulations addressing conservation matters, including provisions for the unitization or pooling of oil and gas properties, the establishment of maximum rates of production from wells and the regulation of spacing, plugging and abandonment of such wells. The statutes and regulations of these states limit the rate at which oil and gas can be produced from our properties. However, we do not believe we will be affected materially differently by these statutes and regulations than any other similarly situated oil and gas company. Environmental liabilities could adversely affect our business. In the event of a release of oil, natural gas or other pollutants from our operations into the environment, we could incur liability for any and all consequences of such release, including personal injuries, property damage, cleanup costs and governmental fines. We could potentially discharge these materials into the environment in several ways, including: from a well or drilling equipment at a drill site; leakage from gathering systems, pipelines, transportation facilities and storage tanks; damage to oil and natural gas wells resulting from accidents during normal operations; and blowouts, cratering and explosions. In addition, because we may acquire interests in properties that have been operated in the past by others, we may be liable for environmental damage, including historical contamination, caused by such former operators. Additional liabilities could also arise from continuing violations or contamination that we have not yet discovered relating to the acquired properties or any of our other properties. To the extent we incur any environmental liabilities, it could adversely affect our results of operations or financial condition. Climate change legislation, regulation and litigation could materially adversely affect us. There is an increased focus by local, state and national regulatory bodies on greenhouse gas ( GHG ) emissions and climate change. Various regulatory bodies have announced their intent to regulate GHG emissions, including the United States Environmental Protection Agency, which promulgated several GHG regulations in 2010 and late 2009. As these regulations are under development or are being challenged in the courts, we are unable to predict the total impact of these potential regulations upon our business, and it is possible that we could face increases in operating costs in order to comply with GHG emission legislation. Passage of legislation or regulations that regulate or restrict emissions of GHG, or GHG-related litigation instituted against us, could result in direct costs to us and could also result in changes to the consumption and demand for natural gas and carbon dioxide produced from our oil and natural gas properties, any of which could have a material adverse effect on our business, financial position, results of operations and prospects. Horizontal drilling activities could be subject to increased regulation and could expose us to environmental risks that could adversely affect us. Legislation relating to horizontal drilling activities that could impose new permitting disclosure or other environmental restrictions or obligations on our operations is currently being considered at the federal level, and may in the future be considered at the state or local level. In particular, the U.S. Congress recently signaled a renewed interest in certain downhole injection activities, some of which we utilize in our operations. The focus may lead to new legislation or regulations that could affect our operations. Any additional requirements or restrictions on our operations could result in delays, increased operating costs or a requirement to change or eliminate certain drilling and injection activities in a manner that may materially adversely affect us. In addition, because horizontal drilling involves fracture stimulation Table of Contents through the injection of water, sand and chemicals under pressure into rock formations to stimulate natural gas production, it is also possible that our drilling and the fracturing process could adversely affect the environment, which could result in a requirement to perform investigations or clean-ups or in the incurrence of other unexpected material costs or liabilities. We may be responsible for additional costs in connection with abandonment of properties. We are responsible for payment of plugging and abandonment costs on our oil and gas properties pro rata to our working interest. Based on our experience, we anticipate that the ultimate aggregate salvage value of lease and well equipment located on our properties will exceed the costs of abandoning such properties. There can be no assurance, however, that we will be successful in avoiding additional expenses in connection with the abandonment of any of our properties. In addition, abandonment costs and their timing may change due to many factors, including actual production results, inflation rates and changes in environmental laws and regulations. Our stock is categorized as a penny stock. Trading of our stock may be restricted by the SEC s penny stock regulations which may limit a stockholder s ability to buy and sell our stock. Our stock is categorized as a penny stock . The SEC has adopted Rule 15g-9 which generally defines penny stock to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and accredited investors. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock. FINRA sales practice requirements may also limit a stockholder s ability to buy and sell our stock. In addition to the penny stock rules described above, the Financial Industry Regulatory Authority ( FINRA ) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares. Table of Contents

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+RISK FACTORS You should carefully consider the risks described below and the risk factors included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2013 and our Quarterly Reports on Form 10-Q for the fiscal quarters ended August 30, 2013, November 30, 2013 and February 28, 2014, which are incorporated by reference in this prospectus, as well as the other information contained in this prospectus and in our Annual Report on Form 10-K for the fiscal year ended May 31, 2013, and in our Quarterly Reports on Form 10-Q for the fiscal quarters ended August 30, 2013, November 30, 2013 and February 28, 2014, before investing in the notes. We cannot assure you that any of the events discussed in or incorporated by reference into this prospectus will not occur. In such case, you may lose all or part of your original investment in the notes. Table of Contents Risks Related to Our Indebtedness and the Notes Our substantial level of indebtedness could materially adversely affect our ability to generate sufficient cash to fulfill our obligations under the notes and any other outstanding indebtedness, our ability to react to changes in our business and our ability to incur additional indebtedness to fund future needs. We are highly leveraged. As of February 28, 2014, we had total indebtedness of $5,831.7 million (compared to total indebtedness of $5,966.4 million as of May 31, 2013). The following chart shows our level of indebtedness as of February 28, 2014 and May 31, 2013: (in millions) February 28, 2014 May 31, 2013 Debt Instruments European facility $ $ 2.3 China facility 2.3 6.0 Term loan facilities 3,070.6 3,295.4 Cash flow revolving credit facility Asset-based revolving credit facility 100.0 6.500% Senior Notes due 2020 1,825.0 1,825.0 6.500% Senior Subordinated Notes due 2020 800.0 800.0 Premium on notes 33.8 37.7 Total debt $ 5,831.7 $ 5,966.4 As of February 28, 2014, we had outstanding approximately $3,070.6 million in aggregate principal amount of indebtedness under our senior secured credit facilities that bears interest at a floating rate and we had a $100.0 million outstanding principal balance under our asset-based revolving credit facility. We have also entered into a series of interest rate swap agreements to fix the interest rates on approximately 44% of the borrowings under our senior secured credit facilities as of February 28, 2014. Table of Contents Our substantial level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of our indebtedness. Our substantial indebtedness, combined with our other financial obligations and contractual commitments, could have important consequences. For example, it could: make it more difficult for us to satisfy our obligations with respect to our indebtedness, including the notes, and any failure to comply with the obligations under any of our debt instruments, including restrictive covenants, could result in an event of default under such instruments, including the indentures; require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing funds available for working capital, capital expenditures, acquisitions, research and development and other purposes; increase our vulnerability to adverse economic and industry conditions, which could place us at a competitive disadvantage compared to our competitors that have relatively less indebtedness; increase the risk we assess with our counterparties which could affect the fair value of our derivative instruments related to our debt facilities noted above; place us at a competitive disadvantage compared to our competitors that are less highly leveraged and therefore able to take advantage of opportunities that our indebtedness prevents us from exploiting; limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate; limit our noteholders rights to receive payments under the notes and any other outstanding notes if secured creditors have not been paid; limit our ability to borrow additional funds, or to dispose of assets to raise funds, if needed, for working capital, capital expenditures, acquisitions, research and development, debt service requirements, execution of our business strategy and other corporate purposes; and prevent us from raising the funds necessary to repurchase all notes tendered to us upon the occurrence of certain changes of control, which would constitute a default under the indentures. Restrictions imposed by our indentures, our senior secured credit facilities and our other outstanding indebtedness may limit our ability to operate our business and to finance our future operations or capital needs or to engage in other business activities. The agreements governing our indebtedness, including the indentures, contain various covenants that limit our discretion in the operation of our business and also require us to meet financial maintenance tests and other covenants. The failure to comply with such tests and covenants could have a material adverse effect on us. The agreements governing our indebtedness, including the indentures, restrict our and our restricted subsidiaries ability, among other things, to: incur additional indebtedness; pay dividends on our capital stock or redeem, repurchase or retire our capital stock or indebtedness; make investments, loans, advances and acquisitions; create restrictions on the payment of dividends or other amounts to us from our restricted subsidiaries; engage in transactions with our affiliates; sell assets, including capital stock of our subsidiaries; consolidate or merge; create liens; and enter into sale and lease-back transactions. Table of Contents The terms of our senior secured credit facilities also restrict Parent from conducting any business or operations other than, among others, (i) owning Biomet, (ii) maintaining its legal existence, (iii) performing its obligations with respect to the senior secured credit facilities and the indentures governing the notes, (iv) publicly offering its common stock, (v) financing activities, including the issuance of securities, incurrence of debt, payment of dividends, making contributions to the capital of its subsidiaries and guaranteeing the obligations of its subsidiaries, or (vi) providing indemnification to our officers and directors. In addition, if borrowing availability under our senior secured revolving credit facilities is less than 10% of the sum of aggregate commitments under our asset-based revolving credit facility and the revolving credit commitments under our cash flow credit facilities at any time, we are required to maintain a fixed charge coverage ratio as of the end of the most recently ended fiscal quarter that must be greater than or equal to 1.00 to 1.00. In the event of a default under any of our senior secured credit facilities, the lenders could elect to declare all amounts outstanding under the agreements governing our senior secured credit facilities to be immediately due and payable. If the indebtedness under our senior secured credit facilities, or the notes were to be accelerated, our assets may not be sufficient to repay such indebtedness in full. In particular, noteholders will be paid only if we have assets remaining after we pay amounts due on our secured indebtedness, including our senior secured credit facilities. We, including our subsidiaries, have the ability to incur substantially more indebtedness, including senior secured indebtedness, and our noteholders right to receive payments on each series of notes is effectively junior to the right of lenders who have a security interest in our assets to the extent of the value of those assets. Our obligations under the notes and our guarantors obligations under their guarantees of the notes are unsecured, but our obligations under our senior secured credit facilities and each guarantor s obligations under its guarantee of our senior secured credit facilities are secured by a security interest in substantially all of our domestic tangible and intangible assets, including the stock of substantially all of our wholly-owned U.S. subsidiaries and a portion of the stock of certain of our non-U.S. subsidiaries. If we are declared bankrupt or insolvent, or if we default under our senior secured credit facilities, the lenders could declare all of the funds borrowed thereunder, together with accrued interest, immediately due and payable. If we were unable to repay such indebtedness, the lenders could foreclose on the pledged assets to the exclusion of holders of the notes, even if an event of default exists at such time under the indentures. Furthermore, if the lenders foreclose and sell the pledged equity interests in any guarantor under the notes, then that guarantor will be released from its guarantee of the notes automatically and immediately upon such sale. In any such event, because the notes are not secured by any of our assets or the equity interests in the guarantors, it is possible that there would be no assets remaining from which noteholders claims could be satisfied or, if any assets remained, they might be insufficient to satisfy noteholders claims in full. Subject to the restrictions in our senior secured credit facilities and the indentures, we, including our subsidiaries, may incur significant additional indebtedness. As of February 28, 2014: we and the guarantors had approximately $330.0 million available for borrowing under our cash flow revolving credit facilities, which, if borrowed, would be senior secured indebtedness; we and the guarantors had $348.1 million available for borrowing under our asset-based revolving credit facility, subject to borrowing base limitations, which, if borrowed, would be senior secured indebtedness; we and the guarantors have the option to incur additional incremental term loans or increase the cash flow revolving credit facilities commitments under our senior secured credit facilities up to an amount that would cause our Senior Secured Leverage Ratio (as defined in our senior secured credit facilities) to be equal to or less than 4.50 to 1.00, which, if borrowed, would be senior secured indebtedness; and we and the guarantors have the option to increase the asset-based revolving credit facility commitments under our asset-based revolving credit facility by up to $100.0 million, which, if borrowed, would be senior secured indebtedness. Although the terms of our senior secured credit facilities and the indentures contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of important exceptions, and indebtedness incurred in compliance with these restrictions could be substantial. If we and our restricted subsidiaries incur significant additional indebtedness, the related risks that we face could intensify. As of February 28, 2014, we also had $17.7 million available for borrowing under our China Facility which is net of $2.3 million of outstanding borrowings. Table of Contents We may not be able to generate sufficient cash to service all of our indebtedness, including the notes, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful. Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness, including the notes. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures or to sell assets, seek additional capital or restructure or refinance our indebtedness, including the notes. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments, including the indentures, may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could limit our ability to incur additional indebtedness. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Our senior secured credit facilities and indentures restrict our ability to dispose of assets and use the proceeds from the disposition. We may not be able to consummate those dispositions or to obtain the proceeds that we could realize from them and these proceeds may not be adequate to meet any debt service obligations then due. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. Repayment of our debt, including the notes, is dependent on cash flow generated by our subsidiaries. Our subsidiaries own a significant portion of our assets and conduct a significant portion of our operations. Accordingly, repayment of our indebtedness, including the notes, is dependent, to a significant extent, on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Unless they are guarantors of the notes, our subsidiaries do not have any obligation to pay amounts due on the notes or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness, including the notes. Each subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. While the indentures limit the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to certain qualifications and exceptions. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness, including the notes. Claims of noteholders will be structurally subordinated to claims of creditors of all our non-U.S. subsidiaries and some of our U.S. subsidiaries because they will not guarantee the notes. The notes are not guaranteed by any of our non-U.S. subsidiaries or any of our less than wholly owned U.S. subsidiaries. Accordingly, claims of holders of the notes will be structurally subordinated to the claims of creditors of these non-guarantor subsidiaries, including trade creditors. Therefore, all obligations of our non-guarantor subsidiaries will have to be satisfied before any of the assets of such subsidiaries would be available for distribution, upon a liquidation or otherwise, to us or a guarantor of the notes. For the nine months ended February 28, 2014 and the fiscal years ended May 31, 2013 and 2012, our non-guarantor subsidiaries accounted for $859.3 million, or 36% of our consolidated net sales, $1,130.6 million, or 37% of our consolidated net sales and $1,068.3 million or 38% of our consolidated net sales, respectively. As of February 28, 2014 and May 31, 2013 and 2012, our non-guarantor subsidiaries accounted for approximately $2,420.5 million, or 25%, $2,622.1 million, or 27%, and $2,734.3 million, or 26% of our consolidated assets, respectively, and approximately $499.8 million, or 6.5%, $439.4 million, or 5.6%, and $413.1 million, or 5.3% of our consolidated liabilities, respectively. All amounts are presented after giving effect to intercompany eliminations. The lenders under our senior secured credit facilities will have the discretion to release any guarantors under these facilities in a variety of circumstances, which will cause those guarantors to be released from their guarantees of the notes. While any obligations under our senior secured credit facilities remain outstanding, any guarantee of the notes may be released without action by, or consent of, any holder of the notes or the trustee under the indentures, at the discretion of lenders under our senior secured credit facilities, if the related guarantor is no longer a guarantor of obligations under our senior secured credit facilities or any other indebtedness. The lenders under our senior secured credit facilities will have the discretion to release the guarantees under our senior secured credit facilities in a variety of circumstances. Noteholders will not have a claim as a creditor against any subsidiary that is no longer a guarantor of the notes, and the indebtedness and other liabilities, including trade payables, whether secured or unsecured, of those subsidiaries will effectively be senior to claims of noteholders. Table of Contents If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the notes. Any default under the agreements governing our indebtedness, including a default under our senior secured credit facilities that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness, could prevent us from paying principal, premium, if any, and interest on the notes and substantially decrease the market value of the notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants in the instruments governing our indebtedness (including covenants in our senior secured credit facilities and the indentures), we could be in default under the terms of the agreements governing such indebtedness, including our senior secured credit facilities and the indentures. In the event of such default: the holders of such indebtedness may be able to cause all of our available cash flow to be used to pay such indebtedness and, in any event, could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest; the lenders under our senior secured credit facilities could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against our assets; we could be forced into bankruptcy or liquidation; and the subordination provisions in senior subordinated notes may prevent us from paying any obligation with respect to such notes. If our operating performance declines, we may in the future need to obtain waivers from the required lenders under our senior secured credit facilities to avoid being in default. If we breach our covenants under our senior secured credit facilities and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under our senior secured credit facilities, the lenders could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation. Your right to receive payments on the senior subordinated notes will be junior to the rights of the lenders under our senior secured credit facilities and all of our other senior debt (including the senior notes) and any of our future senior indebtedness. The senior subordinated notes will be general unsecured senior subordinated obligations that will rank junior in right or payment to all of our existing and future senior indebtedness. We may not pay principal, premium, if any, interest or other amounts on account of the notes in the event of a payment default or certain other defaults in respect of certain of our senior indebtedness, including the senior notes and borrowings under our senior secured credit facilities, unless the senior indebtedness has been paid in full or the default has been cured or waived. In addition, in the event of certain other defaults with respect to certain of our senior indebtedness, we may not be permitted to pay any amount on account of the notes for a designated period of time. Because of the subordination provisions in the indenture governing the senior subordinated notes, in the event of our bankruptcy, liquidation or dissolution, our assets will not be available to pay obligations under the senior subordinated notes until we have made all payments in cash on our senior indebtedness, see Description of Senior Subordinated Notes. Sufficient assets may not remain after all these payments have been made to make any payments on the senior subordinated notes, including payments of principal or interest when due. See Description of Other Indebtedness for a description of the outstanding indebtedness that will rank senior to the senior subordinated notes. We may not be able to repurchase the notes upon a change of control. Upon the occurrence of specific kinds of change of control events, we will be required to offer to repurchase all outstanding notes at 101% of their principal amount plus accrued and unpaid interest, if any. The source of funds for any such purchase of the notes will be our available cash or cash generated from our subsidiaries operations or other sources, including borrowings, sales of assets or sales of equity. We may not be able to repurchase the notes upon a change of control because we may not have sufficient financial resources to purchase all of the notes that are tendered upon a change of control. Further, we Table of Contents will be contractually restricted under the terms of our senior secured credit facilities from repurchasing all of the notes tendered by holders upon a change of control. Accordingly, we may not be able to satisfy our obligations to purchase the notes unless we are able to refinance or obtain waivers under our senior secured credit facilities. Our failure to repurchase the notes upon a change of control would cause a default under the indentures and a cross default under our senior secured credit facilities. Our senior secured credit facilities also provide that a change of control will be a default that permits lenders to accelerate the maturity of borrowings thereunder. Any of our future debt agreements may contain similar provisions. The trading prices for the notes will be directly affected by many factors, including our credit rating. Credit rating agencies continually revise their ratings for companies they follow. The condition of the financial and credit markets and prevailing interest rates have fluctuated in the past and are likely to fluctuate in the future. Any such fluctuation may impact the trading price of the notes. In addition, developments in our business and operations could lead to a ratings downgrade which could adversely affect the trading price of the notes, or the trading market for the notes. An adverse rating of the notes may cause their trading price to fall. If a rating agency rates the notes, it may assign a rating that is lower than the rating expected by the noteholders. Ratings agencies also may lower ratings on the notes or any of our other debt in the future, or may choose to cease providing ratings on the notes or such other debt. If rating agencies assign a lower than expected rating or reduce, or indicate that they may reduce, their ratings of our debt in the future, the trading price of the notes could significantly decline. Certain covenants under the indentures will be suspended if and for so long as the notes are rated investment grade by both Standard & Poor s and Moody s and no default has occurred and is continuing. These covenants restrict, among other things, our and our restricted subsidiaries ability to incur or guarantee debt or issue certain stock, pay dividends, make distributions on, or redeem or repurchase, capital stock and enter into transactions with affiliates. Because these restrictions would not apply if the notes are rated investment grade, we would be able to incur additional debt and consummate transactions that may impair our ability to satisfy our obligations with respect to the notes. In addition, we would not have to make certain offers to repurchase the notes. These covenants would be reinstated if the credit ratings assigned to the notes later declined below investment grade or a default occurs and is continuing. Federal and state fraudulent transfer laws may permit a court to void the notes and the guarantees, subordinate claims in respect of the notes and the guarantees, and require noteholders to return payments received. If this occurs, noteholders may not receive any payments on the notes. Federal and state fraudulent transfer and conveyance statutes may apply to the issuance of the notes and the incurrence of any guarantees. Under federal bankruptcy law and comparable provisions of state fraudulent transfer or conveyance laws, which may vary from state to state, the notes or guarantees could be voided as a fraudulent transfer or conveyance if (1) we or any of the guarantors, as applicable, issued the notes or incurred the guarantees with the intent of hindering, delaying or defrauding creditors or (2) we or any of the guarantors, as applicable, received less than reasonably equivalent value or fair consideration in return for either issuing the notes or incurring the guarantees and, in the case of (2) only, one of the following is also true at the time thereof: we or any of the guarantors, as applicable, were insolvent or rendered insolvent by reason of the issuance of the notes or the incurrence of the guarantees; the issuance of the notes or the incurrence of the guarantees left us or any of the guarantors, as applicable, with an unreasonably small amount of capital to carry on the business; we or any of the guarantors intended to, or believed that we or such guarantor would, incur debts beyond our or such guarantor s ability to pay such debts as they mature; or we or any of the guarantors was a defendant in an action for money damages, or had a judgment for money damages docketed against us or such guarantor if, in either case, after final judgment, the judgment is unsatisfied. Table of Contents A court would likely find that we or a guarantor did not receive reasonably equivalent value or fair consideration for the notes or such guarantee if we or such guarantor did not substantially benefit directly or indirectly from the issuance of the notes or the applicable guarantee. As a general matter, value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or an antecedent debt is secured or satisfied. We cannot be certain as to the standards a court would use to determine whether or not we or the guarantors were solvent at the relevant time or, regardless of the standard that a court uses, that the issuance of the guarantees would not be further subordinated to our or any of our guarantors other debt. Generally, however, an entity would be considered insolvent if, at the time it incurred indebtedness: the sum of its debts, including contingent liabilities, was greater than the fair value of all its assets; the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or it could not pay its debts as they become due. If a court were to find that the issuance of the notes or the incurrence of the guarantee was a fraudulent transfer or conveyance, the court could void the payment obligations under the notes or such guarantee or further subordinate the notes or such guarantee to presently existing and future indebtedness of ours or of the related guarantor, or require the holders of the notes to repay any amounts received with respect to such guarantee. In the event of a finding that a fraudulent transfer or conveyance occurred, noteholders may not receive any repayment on the notes. Further, the voidance of the notes could result in an event of default with respect to our and our subsidiaries other debt that could result in acceleration of such debt. Although each guarantee entered into by a guarantor will contain a provision intended to limit that guarantor s liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent transfer, this provision may not be effective to protect those guarantees from being voided under fraudulent transfer law, or may reduce that guarantor s obligation to an amount that effectively makes its guarantee worthless. We are indirectly owned and controlled by the Sponsors, and the Sponsors interests as equity holders may conflict with the interests of noteholders as creditors. Biomet is a subsidiary of Parent, which is controlled by the Sponsors, and, accordingly, the Sponsors have the ability to control our policies and operations. The interests of the Sponsors may not in all cases be aligned with our noteholders interests. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of our equity holders might conflict with our noteholders interests. In addition, our equity holders may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investments, even though such transactions might involve risks to holders of the notes. Furthermore, the Sponsors may in the future own businesses that directly or indirectly compete with us. The Sponsors also may pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. Table of Contents

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+Risk Factors Prior to making an investment decision, you should carefully consider all of the information in this prospectus and, in particular, you should evaluate the risk factors set forth under the caption Risk Factors beginning on page 2. Trading Symbol ISCI RISK FACTORS Risks Related to the Company We will need to raise capital to fund our operations and service our debt in addition to capital received from recent financings. If such capital is not available to us on a timely basis, on acceptable terms or at all, we will not be able to continue as a going concern. Despite capital received from recent debt and equity financings, we will require additional capital to meet our working capital needs, fund our operations and meet our debt service obligations. No assurances can be given that any additional capital from financings or other sources will be available on a timely basis, on acceptable terms, or at all, or that the proceeds from any financings will be sufficient to address our near term liquidity requirements. If we are unable to obtain needed additional capital, our business, financial condition and results of operations will be materially and adversely affected, and we will not be able to continue as a going concern. We anticipate that our future capital requirements will depend on many factors, including but not limited to: our ability to meet our current obligations, including trade payables, payroll and fixed costs; our required service and settlement on our debt and capital leases payable over the next twelve months; our ability to obtain revenue, and the timing of our deliverables to earn the revenue; our ability to attract investors by demonstrating our technology s proof point through the generation of sales revenue; the timing of payments from our customers; our ability to control costs; our ability to commercialize our technologies and achieve broader market acceptance for those technologies; our ability to divest assets as we deem necessary; technological advancements and competitors responses to our products; our relationships with customers and suppliers; general economic conditions including the effects of potential future economic slowdowns, acts of war or terrorism and the current international conflicts; and general regulatory conditions that can impact our ability to sell cyber security technologies. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ISC8 INC. (Exact Name of Registrant as Specified in its Charter) Delaware 7373 33-0280334 (State or Other Jurisdiction of Incorporation or Organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 151 Kalmus Dr., Suite A-203 Costa Mesa, California 92626 (714) 444-8753 (Address, including zip code and telephone number, including area code, of registrant s principal executive offices) John Vong Chief Financial Officer 151 Kalmus Dr., Suite A-203 Costa Mesa, California 92626 (714) 444-8753 (Name, address, including zip code and telephone number, including area code, of agent for service) Copy of correspondence to: Daniel W. Rumsey, Esq. Disclosure Law Group One American Plaza 600 West Broadway, Suite 700 San Diego, CA 92101 (619) 795-1134 From time to time after the effective date of this Registration Statement. (Approximate date of commencement of proposed sale to the public) If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] Table of Contents Our ability to raise additional capital may be limited because, as a company that is quoted on the OTCQB marketplace ( OTCQB ), we are no longer eligible to use Form S-3 to register the resale of securities issued in private financings. Even if available, financings can involve significant costs and expenses, such as legal and accounting fees, diversion of management s time and efforts, or substantial transaction costs or break-up fees in certain instances. Financings may also involve substantial dilution to existing stockholders, and may cause additional dilution through adjustments to certain of our existing securities under the terms of their anti-dilution provisions. If adequate funds are unavailable on a timely basis on acceptable terms, or at all, our business and revenues may be adversely affected and we may be unable to continue our operations at current levels, develop or enhance our products, expand our sales and marketing programs, capitalize on our future opportunities or respond to competitive pressures. We are currently in breech of a contract with a vendor, which could, in turn, have a materially adverse effect on our business, financial condition and results of operation. Although we have negotiated a repayment plan, no assurances can be given that we can cure the breach or otherwise satisfy our remaining obligation. On November 15, 2013, we failed to satisfy a first year minimum payment obligation of $100,000 under a contract with a certain vendor, resulting in a contractual breach and a requirement that we immediately pay all fees and a guarantee payment of $1.8 million (the Guarantee Payment ). We have not cured this breach of contract, but have successfully negotiated a payment plan with this vendor (the Payment Plan ) of four equal monthly payments of $25,000, plus interest, beginning February 2014. Due to our anemic working capital, if we are unable to make payments under the Payment Plan as they come due we will be required to pay the Guarantee Payment in full and our business, financial condition and results of operations could be materially and adversely affected. Certain holders of the Company s senior subordinated debt in the principal amount of approximately $1.0 million have notified the Company that such debt was due and payable as of November 1, 2013. Although the Company disputes this position, in the event the Company cannot successfully defend its position, the Company may be considered in default on such debt. On December 6, 2013, a certain holder of Senior Subordinated Convertible Promissory Notes (the Notes ) who chose not to convert into the Series D Offering (the Non-Converting Note Holder ), totaling approximately $1.0 million, notified the Company that they interpreted the Notes to require the Company to use the net proceeds from the Series D Offering to repay certain outstanding debts. In August 2013, however, the Company and the Non-Converting Note Holder amended the terms of the Notes to extend the maturity date of the Notes to January 31, 2014 (the Amendment ). The Non-Converting Note Holder has objected to the Company s interpretation of the Amendment, and has taken the position that the Notes are currently due and payable from proceeds of the Series D Offering, notwithstanding the Company s position that Amendment extended the maturity date of the Notes to January 31, 2014. Although the Company disputes the Non-Converting Note Holder's position, and believes that the Amendment extended the maturity date of the Notes to January 31, 2014, we may not prevail. As of February 19, 2014, the Notes remained due and payable, and the Company is continuing negotiations with the Non-Converting Note Holder to extend the maturity date of the Notes. In the event we are unable to reach an accommodation or negotiated settlement with the Non-Converting Note Holders, and are otherwise unsuccessful in defending our position, the Notes may become immediately due and payable, in which case we may be considered in default on the Notes. In the event that we are unable to repay our debt when due, we may have to seek additional financing, and no assurances can be given that such financing would be available on a timely basis, on terms that are acceptable or at all. Failure to meet the repayment or other obligations of our existing debt upon demand by any of our creditors on or before its due date could have a material adverse affect our business, results of operations and financial condition and threaten our financial viability. We may consider divesting certain assets in the future to improve our liquidity to focus our business operations. To address our working capital needs, we sold a large portion of our patent portfolio in 2009 and assets relating to our former thermal imaging business (the Thermal Imaging Business ) in January 2012. We may enter into agreements to sell other assets in the future. We also may wish to divest assets to focus our resources on selected business opportunities, as we did in March 2013 with the cessation of our government-focused business (the Government Business ), and focus on our cyber-security business. We may not be able to complete other divestitures, if any, on acceptable terms, on a timely basis or at all, and such sales, if any, could materially adversely affect our future revenues. Furthermore, we have lenders with security interests in substantially all of our assets, and such sales would therefore require such lenders consent and are unlikely to generate any direct benefits to stockholders and could materially impair our ability to maintain our current operations. We have historically generated substantial losses, which, if continued, could make it difficult to fund our operations or successfully execute our business plan, and could adversely affect our stock price. Since our inception, we have generated net losses in most of our fiscal periods. We experienced a net loss of approximately $28.0 million in fiscal 2013 and $513,000 during the three-months ended December 31, 2013. We can provide no assurance that we will be able to achieve or sustain profitability in the future. In addition, because we have significant expenses that are fixed or difficult to change rapidly, we are generally unable to reduce expenses significantly in the short-term to compensate for any unexpected delay or decrease in anticipated revenues. We are dependent on support from subcontractors to meet our operating plans and susceptible to losses when such support is delayed or withheld. These factors could cause us to continue to experience net losses in future periods, which would make it difficult to fund our operations and execute our business plan, and could cause the market price of our common stock to decline. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b 2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X] (do not check if a smaller reporting company ) CALCULATION OF REGISTRATION FEE Title of Each Class of Securities to be Registered Amount to be Registered (2) Proposed Maximum Aggregate Offering Price (3) Amount of Registration Fee (3) Common Stock, par value $0.01 per share 244,228,141 (1) $ 9,769,125.64 $ 1,258.26 (1) Consists of up to (i) 195,382,505 shares of common stock issuable upon conversion of shares of Series D Convertible Preferred Stock ( Series D Preferred ) issued in a series of private placement transactions, first consummated on October 30, 2013 (the Private Placements ) and/or in exchange for certain of the Registrant s outstanding convertible debt (the Note Exchanges ); and (ii) 48,845,636 shares of common stock issuable upon exercise of warrants issued in connection with the Private Placements and Note Exchanges. (2) In the event of a stock split, stock dividend or similar transaction involving the common stock of the Registrant, in order to prevent dilution, the number of shares registered shall be automatically increased to cover additional shares in accordance with Rule 416(a) under the Securities Act of 1933, as amended ( Securities Act ). (3) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(c) under the Securities Act based on the average of the high and low prices of the common stock on February 19, 2014 as reported on the OTCQB. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Table of Contents We are currently under audit of final indirect rates for fiscal years 2005 through 2012, related to our legacy government businesses. We are currently under audit by the Defense Contract Audit Agency ( DCAA ) for our final indirect rate submissions for fiscal years 2005 through 2012. We believe the indirect costs have been properly recorded for the outstanding audit years. If the outcome of the outstanding audits results in unfavorable adjustments, there could be a material adverse effect on our results of operation and cash flow. As a result of the discontinuation of our Government and Thermal Imaging Businesses, we are dependent on our cyber-security business. If we are unable to commercialize our technology, we may not be able to generate or increase our revenues or achieve or sustain profitability. As a result of the discontinuance of our Government and Thermal Imaging Businesses, we are now dependent on our cyber security business for future revenue growth. No assurances can be given that our cyber security business will be successful, or if successful, that we will derive sufficient revenue to generate positive cash flow from operations. In prior years, we have made significant investments to commercialize our technologies without significant success. Furthermore, a majority of our historical total revenues have been generated directly or indirectly from U.S. government customers. Our ability to raise capital to fund continuing operations will be negatively impacted if we are unable to successfully develop our cyber security products. Our ability to raise additional capital to fund our continuing operations and continue as a going concern will be negatively affected if we are unable to successfully develop our cyber security products. Additionally, our goodwill and intangible assets will be subject to impairment if we are unable to successfully develop our cyber security products. We have engaged in multiple financings, which have significantly diluted existing stockholders and will likely result in substantial additional dilution in the future. Assuming conversion or exercise of all of our existing convertible securities currently authorized and outstanding, approximately 244.2 million additional shares of Common Stock would be outstanding, a 105% increase from the 231,681,176 shares of Common Stock currently issued and outstanding. Between October 30, 2013 and February 19, 2014, the Company issued approximately: (i) 2,782.10 shares of Series D Convertible Preferred Stock ( Series D Preferred ), convertible into approximately 662.4 million shares of Common Stock; (ii) warrants to purchase approximately 165.6 million shares of Common Stock; and (iii) 101.4 million shares of restricted Common Stock. Conversion of all or a portion of the shares of Series D Preferred, convertible promissory notes and/or exercise of all or a portion of the recently issued warrants would have a substantial and material dilutive effect on the Company s existing stockholders and on the Company s earnings per share. In addition, the sale of Common Stock issuable upon conversion of shares of Series D Preferred and/or exercise warrants by the Selling Stockholders could have a materially adverse impact on the price of the Company s Common Stock, as reported on the OTCQB. Through participation in our debt financings, our primary investors obtained majority control over stockholder voting and substantial control over Board decisions. As of February 19, 2014, Costa Brava and Griffin, our largest stockholders and debt holders, collectively controlled approximately 53% of our issued and outstanding Common Stock and have the ability, following conversion of certain derivative securities, to substantially increase their aggregate percentage ownership. In addition, certain stockholders, including Griffin, have nominated three of the four directors that presently serve on our Board of Directors. Accordingly, Costa Brava and Griffin have significant influence over the outcome of matters that require a stockholder vote or actions by our Board of Directors, and the ability of other stockholders to influence such outcomes has been correspondingly diminished. Table of Contents If we fail to scale our operations adequately, we may be unable to meet competitive challenges or exploit potential market opportunities, and our business could be materially and adversely affected. Our consolidated total revenues in fiscal 2013 and the three months ended December 31, 2013 were $501,000 and $93,000, respectively. To become and remain profitable, we need to materially grow our total revenues or substantially reduce our operating expenses. Such challenges are expected to place a significant strain on management, personnel, infrastructure and resources. To implement our current business and product plans, we need to expand, train, manage and motivate our workforce, and expand our operational and financial systems, as well as our manufacturing and service capabilities. All of these endeavors will require substantial additional capital and considerable effort by our management. If we are unable to effectively manage changes in our operations, we may be unable to scale our business quickly enough to meet competitive challenges or exploit potential market opportunities, and our current or future business could be materially and adversely affected. We are subject to risk of misuse of our technologies by our employees and related partners, which may materially affect our competitiveness in the marketplace. We treat technical data as confidential and generally rely on internal nondisclosure safeguards, including confidentiality agreements with employees, and on laws protecting trade secrets, to protect our proprietary information and maintain barriers to competition. However, we cannot assure you that these measures will adequately protect the confidentiality of our proprietary information, or that others will not independently develop products or technology that are equivalent or superior to ours. Our ability to exploit our own technologies may be constrained by the rights of third parties who could prevent us from selling our products in certain markets or could require us to obtain costly licenses. Other companies may hold or obtain patents or inventions, or may otherwise claim proprietary rights to technology useful or necessary to our business. We cannot predict the extent to which we may be required to seek licenses under such proprietary rights of third parties and the cost or availability of these licenses. While it may be necessary or desirable in the future to obtain licenses relating to one or more proposed products or relating to current or future technologies, we cannot assure you that we will be able to do so on commercially reasonable terms, if at all. If our technology is found to infringe upon the rights of third parties, or if we are unable to obtain sufficient rights to use key technologies, our ability to compete would be harmed and our business, financial condition and results of operations would be materially and adversely affected. Producing, enforcing, and protecting patents and other proprietary information can be costly. If we are unable to adequately protect or enforce our proprietary information or if we become subject to infringement claims by others, our business, results of operations and financial condition may be materially adversely affected. We may need to engage in future litigation to enforce our intellectual property rights or the rights of our customers, to protect our trade secrets or to determine the validity and scope of proprietary rights of others, including our customers. No assurances can be given that, in the future, we will be able to continue to pursue patents to protect our various cyber security technologies from infringement by our competitors. We may also need to engage in litigation to enforce patent rights with respect to future patents, if any. In addition, we may receive communications from third parties asserting that our products infringe the proprietary rights of third parties. We cannot assure you that any such claims would not result in protracted and costly litigation. Any such litigation could result in substantial costs and diversion of our resources and could materially and adversely affect our business, financial condition and results of operations. Furthermore, we cannot assure you that we will have the financial resources to vigorously defend our proprietary information. Table of Contents We are subject to significant competition that could harm our ability to obtain new business or attract strategic partnerships and could increase the price pressure on our products. We face strong competition from a wide variety of competitors, including large cyber-security and security technology firms. Most of our competitors have considerably greater financial, marketing and technological resources than we do, which may make it difficult for us to win new customers or to attract strategic partners. This competition impacts our ability to increase the average selling prices for our products. We cannot assure you that we will be able to compete successfully with these companies. Certain of our competitors have a presence in key markets, greater name recognition, larger customer bases and significantly greater financial, sales and marketing, distribution, technical and other resources than us. As a result, these competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. They may also be able to devote greater resources to the promotion and sale of their products. Increased competition has, in the past, resulted in price reductions, reduced gross margins and loss of market share. This trend may continue in the future. We cannot assure you that we will be able to compete successfully or that competitive pressures will not materially and adversely affect our business, financial condition and results of operations. We must continually adapt to unforeseen technological advances, or we may be unable to successfully compete with our competitors. We operate in industries characterized by rapid and continuing technological development and advancements. Accordingly, we anticipate that we will be required to devote substantial resources to improve already technologically complex products. Many companies in these industries devote considerably greater resources to research and development than we do. Developments by any of these companies could have a materially adverse effect on us if we are unable to keep up with the same developments. Our future success will depend on our ability to successfully adapt to any new technological advances in a timely manner. If we are not able to attract and retain key personnel as required, we may be unable to implement our business plan and our results of operations could be materially and adversely affected. We depend to a large extent on the abilities and continued participation of our key employees, including our executive officers. The loss of any key employee could have a material adverse effect on our business. While we have adopted employee equity incentive plans designed to attract and retain key employees, our stock price has declined in recent periods, and no assurances can be given that options or non-vested stock granted under our plans will be effective in retaining key employees. We believe that, as our activities increase and change in character, additional experienced personnel will be required to implement our business plan. Competition for such personnel is intense and we cannot assure you that they will be available when required, or that we will have the ability to attract and retain them. The information in this prospectus is not complete and may be changed. The Selling Stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting offers to buy these securities in any state where the offer or sale is not permitted. PRELIMINARY PROSPECTUS (Subject to Completion) Dated ____________, 2014 244,228,141 Shares of Common Stock ISC8 INC. We are registering 244,228,141 shares of our common stock, $0.01 per share, of ISC8 Inc. ( we, us, or the Company ), by selling stockholders listed beginning on page 37 of this prospectus ( Selling Stockholders ). All of the shares being offered, when sold, will be sold by the Selling Stockholders. The shares of common stock registered for resale under this registration statement include: up to 195,382,505 shares of common stock, par value $0.01 per share ( Common Stock ) issuable upon conversion of shares of Series D Convertible Preferred Stock ( Series D Preferred ) issued in a series of private placement transactions, first consummated on October 30, 2013 (the Private Placements ) and/or in exchange for certain of the Registrant s outstanding convertible debt (the Note Exchanges ); and up to 48,845,636 shares of Common Stock issuable upon exercise of warrants issued in connection with the Private Placements and Note Exchanges; We will not receive any proceeds from the sale of the shares by the Selling Stockholders; however, if the warrants are exercised we will receive the exercise price of the warrants, if exercised at all. We will pay the expenses of registering the shares sold by the Selling Stockholders. See Selling Stockholders beginning on page 37 of this prospectus for a list of the Selling Stockholders. The shares of Common Stock are being registered to permit the Selling Stockholders to sell the shares from time to time, in amounts and at prices and on terms determined at the time of the offering. The Selling Stockholders may sell the shares of our Common Stock covered by this prospectus in a number of different ways and at prevailing market prices or privately negotiated transactions. We provide more information about how the Selling Stockholders may sell the shares in the section entitled Plan of Distribution beginning on page 40 of this prospectus. Our Common Stock is quoted on the OTCQB under the symbol ISCI. The last reported sale price of our Common Stock on February 21, 2014 was $0.04 per share. No underwriter or other person has been engaged to facilitate the sale of shares of common stock in this offering. You should rely only on the information contained in this prospectus. We have not, and the Selling Stockholders have not, authorized anyone to provide you with different information. No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. If anyone provides you with different information, you should not rely on it. We are not, and the Selling Stockholders are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information contained in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date. Table of Contents

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+RISK FACTORS You should carefully consider the risks described below and the risk factors included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2013 and our Quarterly Reports on Form 10-Q for the fiscal quarters ended August 30, 2013, November 30, 2013 and February 28, 2014, which are incorporated by reference in this prospectus, as well as the other information contained in this prospectus and in our Annual Report on Form 10-K for the fiscal year ended May 31, 2013, and in our Quarterly Reports on Form 10-Q for the fiscal quarters ended August 30, 2013, November 30, 2013 and February 28, 2014, before investing in the notes. We cannot assure you that any of the events discussed in or incorporated by reference into this prospectus will not occur. In such case, you may lose all or part of your original investment in the notes. Table of Contents Risks Related to Our Indebtedness and the Notes Our substantial level of indebtedness could materially adversely affect our ability to generate sufficient cash to fulfill our obligations under the notes and any other outstanding indebtedness, our ability to react to changes in our business and our ability to incur additional indebtedness to fund future needs. We are highly leveraged. As of February 28, 2014, we had total indebtedness of $5,831.7 million (compared to total indebtedness of $5,966.4 million as of May 31, 2013). The following chart shows our level of indebtedness as of February 28, 2014 and May 31, 2013: (in millions) February 28, 2014 May 31, 2013 Debt Instruments European facility $ $ 2.3 China facility 2.3 6.0 Term loan facilities 3,070.6 3,295.4 Cash flow revolving credit facility Asset-based revolving credit facility 100.0 6.500% Senior Notes due 2020 1,825.0 1,825.0 6.500% Senior Subordinated Notes due 2020 800.0 800.0 Premium on notes 33.8 37.7 Total debt $ 5,831.7 $ 5,966.4 As of February 28, 2014, we had outstanding approximately $3,070.6 million in aggregate principal amount of indebtedness under our senior secured credit facilities that bears interest at a floating rate and we had a $100.0 million outstanding principal balance under our asset-based revolving credit facility. We have also entered into a series of interest rate swap agreements to fix the interest rates on approximately 44% of the borrowings under our senior secured credit facilities as of February 28, 2014. Table of Contents Our substantial level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of our indebtedness. Our substantial indebtedness, combined with our other financial obligations and contractual commitments, could have important consequences. For example, it could: make it more difficult for us to satisfy our obligations with respect to our indebtedness, including the notes, and any failure to comply with the obligations under any of our debt instruments, including restrictive covenants, could result in an event of default under such instruments, including the indentures; require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing funds available for working capital, capital expenditures, acquisitions, research and development and other purposes; increase our vulnerability to adverse economic and industry conditions, which could place us at a competitive disadvantage compared to our competitors that have relatively less indebtedness; increase the risk we assess with our counterparties which could affect the fair value of our derivative instruments related to our debt facilities noted above; place us at a competitive disadvantage compared to our competitors that are less highly leveraged and therefore able to take advantage of opportunities that our indebtedness prevents us from exploiting; limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate; limit our noteholders rights to receive payments under the notes and any other outstanding notes if secured creditors have not been paid; limit our ability to borrow additional funds, or to dispose of assets to raise funds, if needed, for working capital, capital expenditures, acquisitions, research and development, debt service requirements, execution of our business strategy and other corporate purposes; and prevent us from raising the funds necessary to repurchase all notes tendered to us upon the occurrence of certain changes of control, which would constitute a default under the indentures. Restrictions imposed by our indentures, our senior secured credit facilities and our other outstanding indebtedness may limit our ability to operate our business and to finance our future operations or capital needs or to engage in other business activities. The agreements governing our indebtedness, including the indentures, contain various covenants that limit our discretion in the operation of our business and also require us to meet financial maintenance tests and other covenants. The failure to comply with such tests and covenants could have a material adverse effect on us. The agreements governing our indebtedness, including the indentures, restrict our and our restricted subsidiaries ability, among other things, to: incur additional indebtedness; pay dividends on our capital stock or redeem, repurchase or retire our capital stock or indebtedness; make investments, loans, advances and acquisitions; create restrictions on the payment of dividends or other amounts to us from our restricted subsidiaries; engage in transactions with our affiliates; sell assets, including capital stock of our subsidiaries; consolidate or merge; create liens; and enter into sale and lease-back transactions. Table of Contents The terms of our senior secured credit facilities also restrict Parent from conducting any business or operations other than, among others, (i) owning Biomet, (ii) maintaining its legal existence, (iii) performing its obligations with respect to the senior secured credit facilities and the indentures governing the notes, (iv) publicly offering its common stock, (v) financing activities, including the issuance of securities, incurrence of debt, payment of dividends, making contributions to the capital of its subsidiaries and guaranteeing the obligations of its subsidiaries, or (vi) providing indemnification to our officers and directors. In addition, if borrowing availability under our senior secured revolving credit facilities is less than 10% of the sum of aggregate commitments under our asset-based revolving credit facility and the revolving credit commitments under our cash flow credit facilities at any time, we are required to maintain a fixed charge coverage ratio as of the end of the most recently ended fiscal quarter that must be greater than or equal to 1.00 to 1.00. In the event of a default under any of our senior secured credit facilities, the lenders could elect to declare all amounts outstanding under the agreements governing our senior secured credit facilities to be immediately due and payable. If the indebtedness under our senior secured credit facilities, or the notes were to be accelerated, our assets may not be sufficient to repay such indebtedness in full. In particular, noteholders will be paid only if we have assets remaining after we pay amounts due on our secured indebtedness, including our senior secured credit facilities. We, including our subsidiaries, have the ability to incur substantially more indebtedness, including senior secured indebtedness, and our noteholders right to receive payments on each series of notes is effectively junior to the right of lenders who have a security interest in our assets to the extent of the value of those assets. Our obligations under the notes and our guarantors obligations under their guarantees of the notes are unsecured, but our obligations under our senior secured credit facilities and each guarantor s obligations under its guarantee of our senior secured credit facilities are secured by a security interest in substantially all of our domestic tangible and intangible assets, including the stock of substantially all of our wholly-owned U.S. subsidiaries and a portion of the stock of certain of our non-U.S. subsidiaries. If we are declared bankrupt or insolvent, or if we default under our senior secured credit facilities, the lenders could declare all of the funds borrowed thereunder, together with accrued interest, immediately due and payable. If we were unable to repay such indebtedness, the lenders could foreclose on the pledged assets to the exclusion of holders of the notes, even if an event of default exists at such time under the indentures. Furthermore, if the lenders foreclose and sell the pledged equity interests in any guarantor under the notes, then that guarantor will be released from its guarantee of the notes automatically and immediately upon such sale. In any such event, because the notes are not secured by any of our assets or the equity interests in the guarantors, it is possible that there would be no assets remaining from which noteholders claims could be satisfied or, if any assets remained, they might be insufficient to satisfy noteholders claims in full. Subject to the restrictions in our senior secured credit facilities and the indentures, we, including our subsidiaries, may incur significant additional indebtedness. As of February 28, 2014: we and the guarantors had approximately $330.0 million available for borrowing under our cash flow revolving credit facilities, which, if borrowed, would be senior secured indebtedness; we and the guarantors had $348.1 million available for borrowing under our asset-based revolving credit facility, subject to borrowing base limitations, which, if borrowed, would be senior secured indebtedness; we and the guarantors have the option to incur additional incremental term loans or increase the cash flow revolving credit facilities commitments under our senior secured credit facilities up to an amount that would cause our Senior Secured Leverage Ratio (as defined in our senior secured credit facilities) to be equal to or less than 4.50 to 1.00, which, if borrowed, would be senior secured indebtedness; and we and the guarantors have the option to increase the asset-based revolving credit facility commitments under our asset-based revolving credit facility by up to $100.0 million, which, if borrowed, would be senior secured indebtedness. Although the terms of our senior secured credit facilities and the indentures contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of important exceptions, and indebtedness incurred in compliance with these restrictions could be substantial. If we and our restricted subsidiaries incur significant additional indebtedness, the related risks that we face could intensify. As of February 28, 2014, we also had $17.7 million available for borrowing under our China Facility which is net of $2.3 million of outstanding borrowings. Table of Contents We may not be able to generate sufficient cash to service all of our indebtedness, including the notes, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful. Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness, including the notes. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures or to sell assets, seek additional capital or restructure or refinance our indebtedness, including the notes. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments, including the indentures, may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could limit our ability to incur additional indebtedness. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Our senior secured credit facilities and indentures restrict our ability to dispose of assets and use the proceeds from the disposition. We may not be able to consummate those dispositions or to obtain the proceeds that we could realize from them and these proceeds may not be adequate to meet any debt service obligations then due. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. Repayment of our debt, including the notes, is dependent on cash flow generated by our subsidiaries. Our subsidiaries own a significant portion of our assets and conduct a significant portion of our operations. Accordingly, repayment of our indebtedness, including the notes, is dependent, to a significant extent, on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Unless they are guarantors of the notes, our subsidiaries do not have any obligation to pay amounts due on the notes or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness, including the notes. Each subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. While the indentures limit the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to certain qualifications and exceptions. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness, including the notes. Claims of noteholders will be structurally subordinated to claims of creditors of all our non-U.S. subsidiaries and some of our U.S. subsidiaries because they will not guarantee the notes. The notes are not guaranteed by any of our non-U.S. subsidiaries or any of our less than wholly owned U.S. subsidiaries. Accordingly, claims of holders of the notes will be structurally subordinated to the claims of creditors of these non-guarantor subsidiaries, including trade creditors. Therefore, all obligations of our non-guarantor subsidiaries will have to be satisfied before any of the assets of such subsidiaries would be available for distribution, upon a liquidation or otherwise, to us or a guarantor of the notes. For the nine months ended February 28, 2014 and the fiscal years ended May 31, 2013 and 2012, our non-guarantor subsidiaries accounted for $859.3 million, or 36% of our consolidated net sales, $1,130.6 million, or 37% of our consolidated net sales and $1,068.3 million or 38% of our consolidated net sales, respectively. As of February 28, 2014 and May 31, 2013 and 2012, our non-guarantor subsidiaries accounted for approximately $2,420.5 million, or 25%, $2,622.1 million, or 27%, and $2,734.3 million, or 26% of our consolidated assets, respectively, and approximately $499.8 million, or 6.5%, $439.4 million, or 5.6%, and $413.1 million, or 5.3% of our consolidated liabilities, respectively. All amounts are presented after giving effect to intercompany eliminations. The lenders under our senior secured credit facilities will have the discretion to release any guarantors under these facilities in a variety of circumstances, which will cause those guarantors to be released from their guarantees of the notes. While any obligations under our senior secured credit facilities remain outstanding, any guarantee of the notes may be released without action by, or consent of, any holder of the notes or the trustee under the indentures, at the discretion of lenders under our senior secured credit facilities, if the related guarantor is no longer a guarantor of obligations under our senior secured credit facilities or any other indebtedness. The lenders under our senior secured credit facilities will have the discretion to release the guarantees under our senior secured credit facilities in a variety of circumstances. Noteholders will not have a claim as a creditor against any subsidiary that is no longer a guarantor of the notes, and the indebtedness and other liabilities, including trade payables, whether secured or unsecured, of those subsidiaries will effectively be senior to claims of noteholders. Table of Contents If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the notes. Any default under the agreements governing our indebtedness, including a default under our senior secured credit facilities that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness, could prevent us from paying principal, premium, if any, and interest on the notes and substantially decrease the market value of the notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants in the instruments governing our indebtedness (including covenants in our senior secured credit facilities and the indentures), we could be in default under the terms of the agreements governing such indebtedness, including our senior secured credit facilities and the indentures. In the event of such default: the holders of such indebtedness may be able to cause all of our available cash flow to be used to pay such indebtedness and, in any event, could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest; the lenders under our senior secured credit facilities could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against our assets; we could be forced into bankruptcy or liquidation; and the subordination provisions in senior subordinated notes may prevent us from paying any obligation with respect to such notes. If our operating performance declines, we may in the future need to obtain waivers from the required lenders under our senior secured credit facilities to avoid being in default. If we breach our covenants under our senior secured credit facilities and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under our senior secured credit facilities, the lenders could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation. Your right to receive payments on the senior subordinated notes will be junior to the rights of the lenders under our senior secured credit facilities and all of our other senior debt (including the senior notes) and any of our future senior indebtedness. The senior subordinated notes will be general unsecured senior subordinated obligations that will rank junior in right or payment to all of our existing and future senior indebtedness. We may not pay principal, premium, if any, interest or other amounts on account of the notes in the event of a payment default or certain other defaults in respect of certain of our senior indebtedness, including the senior notes and borrowings under our senior secured credit facilities, unless the senior indebtedness has been paid in full or the default has been cured or waived. In addition, in the event of certain other defaults with respect to certain of our senior indebtedness, we may not be permitted to pay any amount on account of the notes for a designated period of time. Because of the subordination provisions in the indenture governing the senior subordinated notes, in the event of our bankruptcy, liquidation or dissolution, our assets will not be available to pay obligations under the senior subordinated notes until we have made all payments in cash on our senior indebtedness, see Description of Senior Subordinated Notes. Sufficient assets may not remain after all these payments have been made to make any payments on the senior subordinated notes, including payments of principal or interest when due. See Description of Other Indebtedness for a description of the outstanding indebtedness that will rank senior to the senior subordinated notes. We may not be able to repurchase the notes upon a change of control. Upon the occurrence of specific kinds of change of control events, we will be required to offer to repurchase all outstanding notes at 101% of their principal amount plus accrued and unpaid interest, if any. The source of funds for any such purchase of the notes will be our available cash or cash generated from our subsidiaries operations or other sources, including borrowings, sales of assets or sales of equity. We may not be able to repurchase the notes upon a change of control because we may not have sufficient financial resources to purchase all of the notes that are tendered upon a change of control. Further, we Table of Contents will be contractually restricted under the terms of our senior secured credit facilities from repurchasing all of the notes tendered by holders upon a change of control. Accordingly, we may not be able to satisfy our obligations to purchase the notes unless we are able to refinance or obtain waivers under our senior secured credit facilities. Our failure to repurchase the notes upon a change of control would cause a default under the indentures and a cross default under our senior secured credit facilities. Our senior secured credit facilities also provide that a change of control will be a default that permits lenders to accelerate the maturity of borrowings thereunder. Any of our future debt agreements may contain similar provisions. The trading prices for the notes will be directly affected by many factors, including our credit rating. Credit rating agencies continually revise their ratings for companies they follow. The condition of the financial and credit markets and prevailing interest rates have fluctuated in the past and are likely to fluctuate in the future. Any such fluctuation may impact the trading price of the notes. In addition, developments in our business and operations could lead to a ratings downgrade which could adversely affect the trading price of the notes, or the trading market for the notes. An adverse rating of the notes may cause their trading price to fall. If a rating agency rates the notes, it may assign a rating that is lower than the rating expected by the noteholders. Ratings agencies also may lower ratings on the notes or any of our other debt in the future, or may choose to cease providing ratings on the notes or such other debt. If rating agencies assign a lower than expected rating or reduce, or indicate that they may reduce, their ratings of our debt in the future, the trading price of the notes could significantly decline. Certain covenants under the indentures will be suspended if and for so long as the notes are rated investment grade by both Standard & Poor s and Moody s and no default has occurred and is continuing. These covenants restrict, among other things, our and our restricted subsidiaries ability to incur or guarantee debt or issue certain stock, pay dividends, make distributions on, or redeem or repurchase, capital stock and enter into transactions with affiliates. Because these restrictions would not apply if the notes are rated investment grade, we would be able to incur additional debt and consummate transactions that may impair our ability to satisfy our obligations with respect to the notes. In addition, we would not have to make certain offers to repurchase the notes. These covenants would be reinstated if the credit ratings assigned to the notes later declined below investment grade or a default occurs and is continuing. Federal and state fraudulent transfer laws may permit a court to void the notes and the guarantees, subordinate claims in respect of the notes and the guarantees, and require noteholders to return payments received. If this occurs, noteholders may not receive any payments on the notes. Federal and state fraudulent transfer and conveyance statutes may apply to the issuance of the notes and the incurrence of any guarantees. Under federal bankruptcy law and comparable provisions of state fraudulent transfer or conveyance laws, which may vary from state to state, the notes or guarantees could be voided as a fraudulent transfer or conveyance if (1) we or any of the guarantors, as applicable, issued the notes or incurred the guarantees with the intent of hindering, delaying or defrauding creditors or (2) we or any of the guarantors, as applicable, received less than reasonably equivalent value or fair consideration in return for either issuing the notes or incurring the guarantees and, in the case of (2) only, one of the following is also true at the time thereof: we or any of the guarantors, as applicable, were insolvent or rendered insolvent by reason of the issuance of the notes or the incurrence of the guarantees; the issuance of the notes or the incurrence of the guarantees left us or any of the guarantors, as applicable, with an unreasonably small amount of capital to carry on the business; we or any of the guarantors intended to, or believed that we or such guarantor would, incur debts beyond our or such guarantor s ability to pay such debts as they mature; or we or any of the guarantors was a defendant in an action for money damages, or had a judgment for money damages docketed against us or such guarantor if, in either case, after final judgment, the judgment is unsatisfied. Table of Contents A court would likely find that we or a guarantor did not receive reasonably equivalent value or fair consideration for the notes or such guarantee if we or such guarantor did not substantially benefit directly or indirectly from the issuance of the notes or the applicable guarantee. As a general matter, value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or an antecedent debt is secured or satisfied. We cannot be certain as to the standards a court would use to determine whether or not we or the guarantors were solvent at the relevant time or, regardless of the standard that a court uses, that the issuance of the guarantees would not be further subordinated to our or any of our guarantors other debt. Generally, however, an entity would be considered insolvent if, at the time it incurred indebtedness: the sum of its debts, including contingent liabilities, was greater than the fair value of all its assets; the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or it could not pay its debts as they become due. If a court were to find that the issuance of the notes or the incurrence of the guarantee was a fraudulent transfer or conveyance, the court could void the payment obligations under the notes or such guarantee or further subordinate the notes or such guarantee to presently existing and future indebtedness of ours or of the related guarantor, or require the holders of the notes to repay any amounts received with respect to such guarantee. In the event of a finding that a fraudulent transfer or conveyance occurred, noteholders may not receive any repayment on the notes. Further, the voidance of the notes could result in an event of default with respect to our and our subsidiaries other debt that could result in acceleration of such debt. Although each guarantee entered into by a guarantor will contain a provision intended to limit that guarantor s liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent transfer, this provision may not be effective to protect those guarantees from being voided under fraudulent transfer law, or may reduce that guarantor s obligation to an amount that effectively makes its guarantee worthless. We are indirectly owned and controlled by the Sponsors, and the Sponsors interests as equity holders may conflict with the interests of noteholders as creditors. Biomet is a subsidiary of Parent, which is controlled by the Sponsors, and, accordingly, the Sponsors have the ability to control our policies and operations. The interests of the Sponsors may not in all cases be aligned with our noteholders interests. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of our equity holders might conflict with our noteholders interests. In addition, our equity holders may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investments, even though such transactions might involve risks to holders of the notes. Furthermore, the Sponsors may in the future own businesses that directly or indirectly compete with us. The Sponsors also may pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. Table of Contents

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+RISK FACTORS You should carefully consider the following risk factors and all other information contained in this prospectus, including the section Management s Discussion and Analysis of Financial Condition and Results of Operations and our financial statements and related notes, before deciding whether to invest in the 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 deem immaterial, also may become important factors that affect us. If any of the following risks occur, our business, financial condition or results of operations could be materially and adversely affected. In that case, the trading price of the notes could decline or we may not be able to make payments of interest and principal on the notes, and you may lose some or all of your investment. Risks Related to Our Indebtedness Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our debt obligations. As a result of being acquired on August 11, 2005 by a consortium of private equity investment funds, we are highly leveraged and our debt service requirements are significant. Our high degree of debt-related leverage could have important consequences, including: making it more difficult for us to make payments on our debt obligations; increasing our vulnerability to general economic and industry conditions; requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities; exposing us to the risk of increased interest rates as certain of our borrowings, including borrowings under our senior secured credit facilities, are at variable rates of interest; restricting us from making acquisitions or causing us to make non-strategic divestitures; limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes; and limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged. We and our subsidiaries may be able to incur substantial additional indebtedness in the future, subject to the restrictions contained in our senior secured credit agreement and the indentures relating to our senior notes due 2018 and 2020 and senior subordinated notes due 2019. If new indebtedness is added to our current debt levels, the related risks that we now face could intensify. Our debt agreements contain restrictions that limit our flexibility in operating our business. Our senior secured credit agreement and the indentures governing our senior notes due 2018 and 2020 and senior subordinated notes due 2019 contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our ability to, among other things: incur additional indebtedness or issue certain preferred shares; pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments; Table of Contents make certain investments; sell certain assets; create liens; consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and enter into certain transactions with our affiliates. In addition, under the senior secured credit agreement, under certain circumstances, we are required to satisfy and maintain a specified financial ratio and other financial condition tests. Our ability to meet the financial ratio and tests can be affected by events beyond our control, and we may not be able to meet the ratio and tests. A breach of any of these covenants could result in a default under the senior secured credit agreement. Upon an event of default under the senior secured credit agreement, the lenders could elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders under the senior secured credit agreement could proceed against the collateral granted to them to secure that indebtedness. We have pledged a significant portion of our assets as collateral under the senior secured credit agreement. If the lenders under the senior secured credit agreement accelerate the repayment of borrowings, we may not have sufficient assets to repay the senior secured credit facilities and the senior notes, as well as our unsecured indebtedness. Risks Related to Our Business Our business depends largely on the economy and financial markets, and a slowdown or downturn in the economy or financial markets could adversely affect our business and results of operations. When there is a slowdown or downturn in the economy, a drop in stock market levels or trading volumes, or an event that disrupts the financial markets, our business and financial results may suffer for a number of reasons. Customers may react to worsening conditions by reducing their capital expenditures in general or by specifically reducing their IT spending. In addition, customers may curtail or discontinue trading operations, delay or cancel IT projects, or seek to lower their costs by renegotiating vendor contracts. Moreover, competitors may respond to market conditions by lowering prices and attempting to lure away our customers to lower cost solutions. If any of these circumstances remain in effect for an extended period of time, there could be a material adverse effect on our financial results. Because our financial performance tends to lag behind fluctuations in the economy, our recovery from any particular downturn in the economy may not occur until after economic conditions have generally improved. Our business depends to a significant degree on the financial services industry, and a weakening of, or further consolidation in, or new regulations affecting, the financial services industry could adversely affect our business and results of operations. Because our customer base is concentrated in the financial services industry, our business is largely dependent on the health of that industry. When there is a general downturn in the financial services industry, or if our customers in that industry experience financial or business problems, including bankruptcies, our business and financial results may suffer. If financial services firms continue to consolidate, there could be a material adverse effect on our business and financial results. When a customer merges with a firm using its own solution or another vendor s solution, it could decide to consolidate on a non-SunGard system, which could have an adverse effect on our financial results. To the extent newly adopted regulations negatively impact the business, operations or financial condition of our customers, our business and financial results could be adversely affected. We could be required to invest a significant amount of time and resources to comply with additional regulations or to modify the manner in which Table of Contents we provide products and services to our customers; and such regulations could limit how much we can charge for our services. We may not be able to update our existing products and services, or develop new ones at all or in a timely manner, to satisfy our customers needs. Any of these events, if realized, could have a material adverse effect on our business and financial results. Catastrophic events may disrupt or otherwise adversely affect the markets in which we operate, our business and our profitability. Our business may be adversely affected by a war, terrorist attack, natural disaster or other catastrophe. A catastrophic event could have a direct negative impact on us or an indirect impact on us by, for example, affecting our customers, the financial markets or the overall economy. The potential for a direct impact is due primarily to our significant investment in our infrastructure. Although we maintain redundant facilities and have contingency plans in place to protect against both man-made and natural threats, it is impossible to fully anticipate and protect against all potential catastrophes. Despite our preparations, a security breach, criminal act, military action, power or communication failure, flood, severe storm or the like could lead to service interruptions and data losses for customers, disruptions to our operations, or damage to our important facilities. If any of these events happen, we may be exposed to unexpected liability, our customers may leave, our reputation may be tarnished, and there could be a material adverse effect on our business and financial results. Our information systems processing environments may be subject to disruptions that could adversely affect our reputation and our business. Our information systems processing environments maintain and process confidential data on behalf of our customers, some of which is critical to their business operations. For example, our capital markets systems maintain account and trading information for our customers and their clients, and our wealth management and insurance systems maintain investor account information for retirement plans, insurance policies and mutual funds. There is no guarantee that the systems and procedures that we maintain to protect against unauthorized access to such information are adequate to protect against all security breaches or cyber security threats. If our processing environments are disrupted or fail for any reason, or if our systems or facilities are infiltrated or damaged by unauthorized persons, our customers could experience data loss, financial loss, harm to reputation and significant business interruption. If that happens, we may be exposed to unexpected liability, our customers may leave, our reputation may be tarnished, and there could be a material adverse effect on our business and financial results. Because the sales cycle for our software is typically lengthy and unpredictable, our results may fluctuate from period to period. Our operating results may fluctuate from period to period and be difficult to predict in a particular period due to the timing and magnitude of software sales. We offer a number of our software solutions on a license basis, which means that the customer has the right to run the software on its own computers. The customer usually makes a significant up-front payment to license software, which we generally recognize as revenue when the license contract is signed and the software is delivered. The size of the up-front payment often depends on a number of factors that are different for each customer, such as the number of customer locations, users or accounts. As a result, the sales cycle for a software license may be lengthy and take unexpected turns. Thus, it is difficult to predict when software sales will occur or how much revenue they will generate. Since there are few incremental costs associated with software sales, our operating results may fluctuate from quarter to quarter and year to year due to the timing and magnitude of software sales. Rapid changes in technology and our customers businesses could adversely affect our business and financial results. Our business may suffer if we do not successfully adapt our products and services to changes in technology and changes in our customers businesses. These changes can occur rapidly and at unpredictable intervals and we may not be able to respond adequately. If we do not successfully update and integrate our products and services Table of Contents to adapt to these changes, or if we do not successfully develop new products and services needed by our customers to keep pace with these changes, then our business and financial results may suffer. Our ability to keep up with technology and business changes is subject to a number of risks and we may find it difficult or costly to, among other things: update our products and services and to develop new products fast enough to meet our customers needs; make some features of our products and services work effectively and securely over the Internet; integrate more of our FS solutions; update our products and services to keep pace with business, regulatory and other developments in the financial services industry, where many of our customers operate; and update our services to keep pace with advancements in hardware, software and telecommunications technology. Some technological changes may render some of our products and services less valuable or eventually obsolete. In addition, because of ongoing, rapid technological changes, the useful lives of some technology assets have become shorter and customers are therefore replacing these assets more often. As a result, our customers are increasingly expressing a preference for contracts with shorter terms, which could make our revenue less predictable in the future. Our securities brokerage operations are highly regulated and are riskier than our other businesses. Domestic and foreign regulatory and self-regulatory organizations, such as the SEC, the Financial Industry Regulatory Authority, and the (U.K.) Financial Services Authority can, among other things, fine, censure, issue cease-and-desist orders against, and suspend or expel a broker-dealer or its officers or employees for failure to comply with the many laws and regulations that govern brokerage activities. Such sanctions may arise out of currently-conducted activities or those conducted in prior periods. Our ability to comply with these laws and regulations is largely dependent on our establishment, maintenance, and enforcement of an effective brokerage compliance program. Failure to establish, maintain, and enforce proper brokerage compliance procedures, even if unintentional, could subject us to significant losses, lead to disciplinary or other actions, and tarnish our reputation. Regulations affecting the brokerage industry may change, which could adversely affect our financial results. We are exposed to certain risks relating to the execution services provided by our brokerage operations to our customers and counterparties, which include other broker-dealers, active traders, hedge funds, asset managers, and other institutional and non-institutional clients. These risks include, but are not limited to, customers or counterparties failing to pay for or deliver securities, trading errors, the inability or failure to settle trades, and trade execution system failures. In our other businesses, we generally can disclaim liability for trading losses that may be caused by our software, but in our brokerage operations, we may not be able to limit our liability for trading losses or failed trades even when we are not at fault. As a result, we may suffer losses that are disproportionately large compared to the relatively modest profit contributions of our brokerage operations. If we fail to comply with government regulations in connection with our business or by providing technology services to certain financial institutions, our business and results of operations may be adversely affected. Because we act as a third-party service provider to financial institutions and provide mission-critical applications for many financial institutions that are regulated by one or more member agencies of the Federal Financial Institutions Examination Council ( FFIEC ), we are subject to examination by the member agencies of the FFIEC. More specifically, we are a Multi-Regional Data Processing Servicer of the FFIEC because we provide mission critical applications for financial institutions from several data centers located in different Table of Contents geographic regions. As a result, the FFIEC conducts periodic reviews of certain of our operations in order to identify existing or potential risks associated with our operations that could adversely affect the financial institutions to whom we provide services, evaluate our risk management systems and controls, and determine our compliance with applicable laws that affect the services we provide to financial institutions. In addition to examining areas such as our management of technology, data integrity, information confidentiality and service availability, the reviews also assess our financial stability. Our incurrence of significant debt in connection with the LBO increases the risk of an FFIEC agency review determining that our financial stability has been weakened. A sufficiently unfavorable review from the FFIEC could result in our financial institution customers not being allowed to use our technology services, which could have a material adverse effect on our business and financial condition. If we fail to comply with any regulations applicable to our business, we may be exposed to unexpected liability and/or governmental proceedings, our customers may leave, our reputation may be tarnished, and there could be a material adverse effect on our business and financial results. In addition, the future enactment of more restrictive laws or rules on the federal or state level, or, with respect to our international operations, in foreign jurisdictions on the national, provincial, state or other level, could have an adverse impact on business and financial results. If we are unable to retain or attract customers, our business and financial results will be adversely affected. If we are unable to keep existing customers satisfied, sell additional products and services to existing customers or attract new customers, then our business and financial results may suffer. A variety of factors could affect our ability to successfully retain and attract customers, including the level of demand for our products and services, the level of customer spending for information technology, the level of competition from customers that develop their own solutions internally and from other vendors, the quality of our customer service, our ability to update our products and develop new products and services needed by customers, and our ability to integrate and manage acquired businesses. Further, the markets in which we operate are highly competitive and we may not be able to compete effectively. Our services revenue, which has been largely recurring in nature, comes from the sale of our products and services under fixed-term contracts. We do not have a unilateral right to extend these contracts when they expire. Revenue from our broker/dealer businesses is not subject to minimum or ongoing contractual commitments on the part of brokerage customers. If customers cancel or refuse to renew their contracts, or if customers reduce the usage levels or asset values under their contracts, there could be a material adverse effect on our business and financial results. If we fail to retain key employees, our business may be harmed. Our success depends on the skill, experience and dedication of our employees. If we are unable to retain and attract sufficiently experienced and capable personnel, especially in product development, sales and management, our business and financial results may suffer. For example, if we are unable to retain and attract a sufficient number of skilled technical personnel, our ability to develop high quality products and provide high quality customer service may be impaired. Experienced and capable personnel in the technology industry remain in high demand, and there is continual competition for their talents. When talented employees leave, we may have difficulty replacing them, and our business may suffer. There can be no assurance that we will be able to successfully retain and attract the personnel that we need. We are subject to the risks of doing business internationally. A portion of our revenue is generated outside the United States, primarily from customers located in Europe. Over the past few years we have expanded our operations in certain emerging markets in Asia, Africa, Europe, the Middle East and South America. Because we sell our services outside the United States, our business is subject to risks associated with doing business internationally. Accordingly, our business and financial results could be adversely affected due to a variety of factors, including: changes in a specific country s or region s political and cultural climate or economic condition; Table of Contents unexpected or unfavorable changes in foreign laws and regulatory requirements; difficulty of effective enforcement of contractual provisions in local jurisdictions; inadequate intellectual property protection in foreign countries; trade-protection measures, import or export licensing requirements such as Export Administration Regulations promulgated by the U.S. Department of Commerce and fines, penalties or suspension or revocation of export privileges; the effects of applicable and potentially adverse foreign tax law changes; significant adverse changes in foreign currency exchange rates; longer accounts receivable cycles; managing a geographically dispersed workforce; and difficulties associated with repatriating cash in a tax-efficient manner. In foreign countries, particularly in those with developing economies, certain business practices may exist that are prohibited by laws and regulations applicable to us, such as the U.S. Foreign Corrupt Practices Act and other anti-corruption laws. Although our policies and procedures require compliance with these laws and are designed to facilitate compliance with these laws, our employees, contractors and agents may take actions in violation of applicable laws or our policies. Any such violation, even if prohibited by our policies, could have a material adverse effect on our business and reputation. Our acquisitions may not be successful and we may not be able to successfully integrate and manage acquired businesses. Generally, we seek to acquire businesses that broaden our existing product lines and service offerings and expand our geographic reach. There can be no assurance that our acquisitions will be successful or that we will be able to identify suitable acquisition candidates and successfully complete acquisitions. In addition, we may finance any future acquisition with debt, which would increase our overall levels of indebtedness and related interest costs. If we are unable to successfully integrate and manage acquired businesses, then our business and financial results may suffer. It is possible that the businesses we have acquired and businesses that we acquire in the future may perform worse than expected, be subject to an adverse litigation outcome or prove to be more difficult to integrate and manage than expected. If that happens, there may be a material adverse effect on our business and financial results for a number of reasons, including: we may have to devote unanticipated financial and management resources to the acquired businesses; we may not be able to realize expected operating efficiencies or product integration benefits from our acquisitions; we may have to write-off goodwill or other intangible assets; and we may incur unforeseen obligations or liabilities (including assumed liabilities not fully indemnified by the seller) in connection with acquisitions. We could lose revenue due to fiscal funding or termination for convenience clauses in certain customer contracts, especially in our K-12 and PS businesses. Certain of our customer contracts, particularly those with governments and school districts, may be partly or completely terminated by the customer due to budget cuts or sometimes for any reason at all. These types of clauses are often called fiscal funding or termination for convenience clauses. If a customer exercises one of these clauses, the customer would be obligated to pay for the services we performed up to the date of exercise, but would not have to pay for any further services. In addition, governments and school districts may require contract terms that differ from our standard terms. While we have not been materially affected by exercises of Table of Contents these clauses or other unusual terms in the past, we may be in the future. If customers that collectively represent a substantial portion of our revenue were to invoke the fiscal funding or termination for convenience clauses of their contracts, our future business and results of operations could be adversely affected. The private equity firms that acquired the Company ( Sponsors ) control us and may have conflicts of interest with us. Investment funds associated with or designated by the Sponsors indirectly own, through their ownership in the Parent Companies, a substantial portion of our capital stock. As a result, the Sponsors have control over our decisions to enter into any corporate transaction regardless of whether our bondholders believe that any such transaction is in their own best interests. For example, the Sponsors could cause us to make acquisitions or pay dividends that increase the amount of indebtedness that is secured or that is senior to our senior subordinated notes, or to sell assets. Additionally, the Sponsors are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. One or more of the Sponsors may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. So long as investment funds associated with or designated by the Sponsors continue to indirectly own a significant amount of the outstanding shares of our common stock, even if such amount is less than 50%, the Sponsors will continue to be able to strongly influence or effectively control our decisions. If we are unable to protect our proprietary technologies and defend infringement claims, we could lose one of our competitive advantages and our business could be adversely affected. Our success depends in part on our ability to protect our proprietary products and services and to defend against infringement claims. If we are unable to do so, our business and financial results may suffer. To protect our proprietary technology, we rely upon a combination of copyright, patent, trademark and trade secret law, confidentiality restrictions in contracts with employees, customers and others, software security measures, and registered copyrights and patents. Despite our efforts to protect the proprietary technology, unauthorized persons may be able to copy, reverse engineer or otherwise use some of our technology. It also is possible that others will develop and market similar or better technology to compete with us. Furthermore, existing patent, copyright and trade secret laws may afford only limited protection, and the laws of certain countries do not protect proprietary technology as well as United States law. For these reasons, we may have difficulty protecting our proprietary technology against unauthorized copying or use. If any of these events happens, there could be a material adverse effect on the value of our proprietary technology and on our business and financial results. In addition, litigation may be necessary to protect our proprietary technology. This type of litigation is often costly and time-consuming, with no assurance of success. We may be sued for violating the intellectual property rights of others. The software industry is characterized by the existence of a large number of trade secrets, copyrights and the growing number of issued patents, as well as frequent litigation based on allegations of infringement or other violations of intellectual property rights. We may unknowingly violate the intellectual property rights of others. Some of our competitors or other third parties may have been more aggressive than us in applying for or obtaining patent rights for innovative proprietary technologies both in the United States and internationally. In addition, we use a limited amount of open source software in our products and may use more open source software in the future. Because open source software is developed by numerous independent parties over whom we exercise no supervision or control, allegations of infringement for using open source software are possible. Although we monitor our use and our suppliers use of open source software to avoid subjecting our products to conditions we do not intend, the terms of many open source licenses have not been interpreted by United States or other courts, and there is a risk that these licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products. Table of Contents As a result of all of these factors, there can be no assurance that in the future third parties will not assert infringement claims against us and preclude us from using a technology in our products or require us to enter into royalty and licensing arrangements on terms that are not favorable to us, or force us to engage in costly infringement litigation, which could result in us paying monetary damages or being forced to redesign our products to avoid infringement. Additionally, our licenses and service agreements with our customers generally provide that we will defend and indemnify them for claims against them relating to our alleged infringement of the intellectual property rights of third parties with respect to our products or services. We might have to defend or indemnify our customers to the extent they are subject to these types of claims. Any of these claims may be difficult and costly to defend and may lead to unfavorable judgments or settlements, which could have a material adverse effect on our reputation, business and financial results. For these reasons, we may find it difficult or costly to add or retain important features in our products and services. At present, we are vigorously defending a number of patent infringement cases. While we do not believe we have a potential liability for damages or royalties from any known current legal proceedings or claims related to the infringement of patent or other intellectual property rights that would individually or in the aggregate materially adversely affect our financial condition and operating results, the results of such legal proceedings cannot be predicted with certainty. Should we fail to prevail in any of the matters related to infringement of patent or other intellectual property rights of others or should several of these matters be resolved against us in the same reporting period, it could have a material adverse effect on our business and financial results. Defects, design errors or security flaws in our products could harm our reputation and expose us to potential liability. Most of our products are very complex software systems that are regularly updated. No matter how careful the design and development, complex software often contains errors and defects when first introduced and when major new updates or enhancements are released. If errors or defects are discovered in our current or future products, we may not be able to correct them in a timely manner, if at all. In our development of updates and enhancements to our products, we may make a major design error that makes the product operate incorrectly or less efficiently. In addition, certain of our products include security features that are intended to protect the privacy and integrity of customer data. Despite these security features, our products and systems, and our customers systems may be vulnerable to break-ins and similar problems caused by third parties, such as hackers bypassing firewalls and misappropriating confidential information. Such break-ins or other disruptions could jeopardize the security of information stored in and transmitted through our computer systems and those of our customers, subject us to liability and tarnish our reputation. We may need to expend significant capital resources in order to eliminate or work around errors, defects, design errors or security problems. Any one of these problems in our products may result in the loss of or a delay in market acceptance of our products, the diversion of development resources, a lower rate of license renewals or upgrades and damage to our reputation, and in turn may increase service and warranty costs. A material weakness in our internal controls could have a material adverse effect on us. Effective internal controls are necessary for us to provide reasonable assurance with respect to our financial reports and to effectively prevent fraud. If we cannot provide reasonable assurance with respect to our financial reports and effectively prevent fraud, our reputation and operating results could be harmed. Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Further, the complexities of our quarter- and year-end closing processes increase the risk that a weakness in internal control over financial reporting may go undetected. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. In addition, projections of any Table of Contents evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that the control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 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 Company s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness in our internal control over financial reporting could adversely impact our ability to provide timely and accurate financial information. If we are unable to report financial information timely and accurately or to maintain effective disclosure controls and procedures, we could be subject to, among other things, regulatory or enforcement actions by the SEC, any one of which could adversely affect our business prospects. Unanticipated changes in our income tax provision or the enactment of new tax legislation, issuance of regulations or relevant judicial decisions could affect our profitability or cash flow. We are subject to income taxes in the United States and many foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. We regularly are under examination by tax authorities. Although we believe our income tax provision is reasonable, the final determination of our tax liability could be materially different from our historical income tax provisions, which could have a material effect on our financial position, results of operations or cash flows. In addition, tax-law amendments in the U.S. and other jurisdictions could significantly impact how U.S. multinational corporations are taxed. Although we cannot predict whether or in what form such legislation will pass, if enacted it could have a material adverse effect on our business and financial results. Risks Related to the Notes We may not be able to generate sufficient cash to service all of our indebtedness, including the notes, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful. Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness, including the notes. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness, including the notes. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Our senior secured credit agreement and the indentures governing the senior notes due 2018, senior notes due 2020 and the senior subordinated notes restrict our ability to dispose of assets and use the proceeds from the disposition. We may not be able to consummate those dispositions or to obtain the proceeds that we could realize from them and these proceeds may not be adequate to meet any debt service obligations then due. See Description of Senior Notes Due 2018, Description of Senior Notes Due 2020 and Description of Senior Subordinated Notes. Repayment of our debt, including the notes, is dependent on cash flow generated by our subsidiaries. Our subsidiaries own a significant portion of our assets and conduct a significant portion of our operations. Accordingly, repayment of our indebtedness, including the notes, is dependent, to a significant extent, on the generation of cash flow by our subsidiaries and their ability to make cash available to us, by dividend, debt Table of Contents repayment or otherwise. Our non-guarantor subsidiaries do not have any obligation to pay amounts due on the notes or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness, including the notes. Each subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. While the indentures governing the senior notes due 2018, senior notes due 2020 and the senior subordinated notes limit the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to certain qualifications and exceptions. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness, including the notes. Your right to receive payments on each series of notes is effectively junior to those lenders who have a security interest in our assets. Our obligations under the notes and our guarantors obligations under their guarantees of the notes are unsecured, but our obligations under our senior secured credit facilities and each guarantor s obligations under their respective guarantees of the senior secured credit facilities are secured by a security interest in substantially all of our domestic tangible and, in the case of the senior secured credit facilities, intangible assets, including the stock of most of our wholly owned U.S. subsidiaries, and a portion of the stock of certain of our non-U.S. subsidiaries. If we are declared bankrupt or insolvent, or if we default under our senior secured credit agreement, the lenders could declare all of the funds borrowed thereunder, together with accrued interest, immediately due and payable. If we were unable to repay such indebtedness, the lenders could foreclose on the pledged assets to the exclusion of holders of the notes, even if an event of default exists under the indentures governing the notes offered hereby at such time. Furthermore, if the lenders foreclose and sell the pledged equity interests in any subsidiary guarantor under the notes, then that guarantor will be released from its guarantee of the notes automatically and immediately upon such sale. In any such event, because the notes are not secured by any of our assets or the equity interests in subsidiary guarantors, it is possible that there would be no assets remaining from which your claims could be satisfied or, if any assets remained, they might be insufficient to satisfy your claims fully. As of June 30, 2014, we had $2,458 million of senior secured indebtedness, which does not include availability of $591 million under our revolving credit facility after giving effect to certain outstanding letters of credit. Your right to receive payments on the senior subordinated notes will be junior to the rights of the lenders under our senior secured credit facilities and all of our other senior debt and any of our future senior indebtedness. The senior subordinated notes are general unsecured obligations that are junior in right of payment to all of our existing and future senior indebtedness. As of June 30, 2014, the senior subordinated notes and related guarantees ranked junior to the senior indebtedness under the senior secured credit facilities, the senior notes, the receivables facility and $2 million of payment obligations relating to foreign bank debt and capital lease obligations, all of which totaled approximately $3,671 million. An additional $591 million is available to be drawn under our revolving credit facility after giving effect to certain outstanding letters of credit. We may not pay principal, premium, if any, interest or other amounts on account of the senior subordinated notes in the event of a payment default or certain other defaults in respect of certain of our senior indebtedness, including debt under the senior secured credit facilities, unless the senior indebtedness has been paid in full or the default has been cured or waived. In addition, in the event of certain other defaults with respect to the senior indebtedness, we may not be permitted to pay any amount on account of the senior subordinated notes for a designated period of time. Because of the subordination provisions in the senior subordinated notes, in the event of our bankruptcy, liquidation or dissolution, our assets will not be available to pay obligations under the senior subordinated notes Table of Contents until we have made all payments in cash on our senior indebtedness. We cannot assure you that sufficient assets will remain after all these payments have been made to make any payments on the senior subordinated notes, including payments of principal or interest when due. Claims of noteholders will be structurally subordinate to claims of creditors of all of our non-U.S. subsidiaries and some of our U.S. subsidiaries because they will not guarantee the notes. The notes are not guaranteed by any of our non-U.S. subsidiaries, our less than 100% owned U.S. subsidiaries, our receivables subsidiaries or certain other U.S. subsidiaries. Accordingly, claims of holders of the notes will be structurally subordinate to the claims of creditors of these non-guarantor subsidiaries, including trade creditors. All obligations of our non-guarantor subsidiaries will have to be satisfied before any of the assets of such subsidiaries would be available for distribution, upon a liquidation or otherwise, to us or a guarantor of the notes. Our non-guarantor subsidiaries accounted for $1,265 million, or 46%, of our total revenue and $266 million, or 97%, of our total EBITDA, for the twelve months ended June 30, 2014, and approximately $2,350 million, or 37%, of our total assets, and approximately $772 million, or 12%, of our total liabilities, as of June 30, 2014. If we default on our obligations to pay our indebtedness, we may not be able to make payments on the notes. Any default under the agreements governing our indebtedness, including a default under the senior secured credit agreement, that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness, could prevent us from paying principal, premium, if any, and interest on the notes and substantially decrease the market value of the notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness (including covenants in our senior secured credit agreement and the indentures governing senior notes due 2018, senior notes due 2020 and the senior subordinated notes), we could be in default under the terms of the agreements governing such indebtedness (including our senior secured credit agreement and the indentures governing senior notes due 2018, senior notes due 2020 and the senior subordinated notes). In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under our senior secured credit facilities could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to obtain waivers from the required lenders under our senior secured credit facilities to avoid being in default. If we breach our covenants under our senior secured credit facilities and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under our senior secured credit agreement, the lenders could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation. We may not be able to repurchase the notes upon a change of control. Upon the occurrence of specific kinds of change of control events, we will be required to offer to repurchase all outstanding notes at 101% of their principal amount plus accrued and unpaid interest. The source of funds for any such purchase of the notes will be our available cash or cash generated from our subsidiaries operations or other sources, including borrowings, sales of assets or sales of equity. We may not be able to repurchase the notes upon a change of control because we may not have sufficient financial resources to purchase all of the notes that are tendered upon a change of control. Further, we will be contractually restricted under the terms of our senior secured credit agreement from repurchasing all of the notes tendered by holders upon a change of control. Accordingly, we may not be able to satisfy our obligations to purchase the notes unless we are able to refinance or obtain waivers under our senior secured credit agreement. Our failure to repurchase the notes upon a change of control would cause a default or cross-default under the senior secured credit agreement and our Table of Contents indentures governing the senior notes due 2018, senior notes due 2020 and the senior subordinated notes, as applicable. The senior secured credit agreement also provides that a change of control will be a default that permits lenders to accelerate the maturity of borrowings thereunder. Any of our future debt agreements may contain similar provisions. Noteholders may not be able to determine when a change of control giving rise to their right to have the notes repurchased has occurred following a sale of substantially all of our assets. The definition of change of control in the indentures governing the notes includes a phrase relating to the sale of all or substantially all of our assets. There is no precise established definition of the phrase substantially all under applicable law. Accordingly, the ability of a holder of the notes to require us to repurchase its notes as a result of a sale of less than all our assets to another person may be uncertain. Many of the covenants in the indentures will not apply while the notes are rated investment grade by both Moody s and Standard & Poor s. Many of the covenants in the indentures governing the notes will not apply to us if the notes are rated investment grade by both Moody s Investors Services, Inc. ( Moody s ) and Standard & Poor s Ratings Services ( S&P ), provided at such time no default or event of default has occurred and is continuing. There can be no assurance that the notes will ever be rated investment grade, or that if they are rated investment grade, that the notes will maintain these ratings. However, termination or suspension of the these covenants would allow us to engage in certain transactions that would not be permitted while the covenants were in effect. To the extent that the suspended covenants are subsequently reinstated, any such actions taken while the covenants were suspended would not result in an event of default under the indentures governing the notes. See Description of Senior Notes Due 2018, Description of Senior Notes Due 2020 and Description of Senior Subordinated Notes. Ratings of the notes may cause their trading price to fall and affect the marketability of the notes. The notes are rated by Moody s and S&P. A rating agency s rating of the notes is not a recommendation to purchase, sell or hold any particular security. Such ratings are limited in scope, and do not comment as to material risks relating to an investment in the notes. An explanation of the significance of such rating may be obtained from such rating agency. There is no assurance that such credit ratings will remain in effect for any given period of time. Rating agencies also may lower, suspend or withdraw ratings on the notes or our other debt in the future. Noteholders will have no recourse against us or any other parties in the event of a change in or suspension or withdrawal of such ratings. Any lowering, suspension or withdrawal of such ratings may have an adverse effect on the market prices or marketability of the notes. The lenders under the senior secured credit facilities will have the discretion to release the guarantors under the senior secured credit agreement in a variety of circumstances, which will cause those guarantors to be released from their guarantees of the notes. While any obligations under the senior secured credit facilities remain outstanding, any guarantee of the notes may be released without action by, or consent of, any holder of the notes or the trustee under the indentures governing the notes offered hereby, at the discretion of lenders under the senior secured credit facilities, if the related guarantor is no longer a guarantor of obligations under the senior secured credit facilities or certain of our other indebtedness. See Description of Senior Notes Due 2018, Description of Senior Notes Due 2020 and Description of Senior Subordinated Notes. The lenders under the senior secured credit facilities will have the discretion to release the guarantees under the senior secured credit facilities in a variety of circumstances. You will not have a claim as a creditor against any subsidiary that is no longer a guarantor of the notes, and the indebtedness and other liabilities, including trade payables, whether secured or unsecured, of those subsidiaries will effectively be senior to claims of noteholders. Table of Contents Federal and state fraudulent transfer laws may permit a court to void the notes and the related guarantees of the notes, and, if that occurs, you may not receive any payments on the notes. Federal and state fraudulent transfer and conveyance statutes may apply to the issuance of the notes and the incurrence of the related guarantees. Under federal bankruptcy law and comparable provisions of state fraudulent transfer or conveyance laws, which may vary from state to state, the notes or related guarantees could be voided as a fraudulent transfer or conveyance if (1) we or any of the guarantors, as applicable, issued the notes or incurred the related guarantees with the intent of hindering, delaying or defrauding creditors or (2) we or any of the guarantors, as applicable, received less than reasonably equivalent value or fair consideration in return for either issuing the notes or incurring the related guarantees and, in the case of (2) only, one of the following is also true at the time thereof: we or any of the guarantors, as applicable, were insolvent or rendered insolvent by reason of the issuance of the notes or the incurrence of the related guarantees; the issuance of the notes or the incurrence of the related guarantees left us or any of the guarantors, as applicable, with an unreasonably small amount of capital to carry on the business; we or any of the guarantors intended to, or believed that we or such guarantor would, incur debts beyond our or such guarantor s ability to pay as they mature; or we or any of the guarantors was a defendant in an action for money damages, or had a judgment for money damages docketed against us or such guarantor if, in either case, after final judgment, the judgment is unsatisfied. If a court were to find that the issuance of the notes or the incurrence of the related guarantees was a fraudulent transfer or conveyance, the court could void the payment obligations under the notes or such related guarantees or further subordinate the notes or such related guarantees to presently existing and future indebtedness of ours or of the related guarantor, or require the holders of the notes to repay any amounts received with respect to such related guarantees. In the event of a finding that a fraudulent transfer or conveyance occurred, you may not receive any repayment on the notes. Further, the voidance of the notes could result in an event of default with respect to our and our subsidiaries other debt that could result in acceleration of such debt. As a general matter, value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or an antecedent debt is secured or satisfied. A debtor will generally not be considered to have received value in connection with a debt offering if the debtor uses the proceeds of that offering to make a dividend payment or otherwise retire or redeem equity securities issued by the debtor. We cannot be certain as to the standards a court would use to determine whether or not we or the guarantors were solvent at the relevant time or, regardless of the standard that a court uses, that the issuance of the related guarantees would not be further subordinated to our or any of our guarantors other debt. Generally, however, an entity would not be considered solvent if, at the time it incurred indebtedness: the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all its assets; or the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or it could not pay its debts as they become due. Although each guarantee entered into by a guarantor subsidiary will contain a provision intended to limit that guarantor s liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent transfer, this provision may not be effective to protect those guarantees Table of Contents from being voided under fraudulent transfer law, or may reduce that guarantor s obligation to an amount that effectively makes its guarantee worthless. In a recent Florida bankruptcy case, this kind of provision was found to be ineffective to prohibit the guarantees. Your ability to transfer the notes may be limited by the absence of an active trading market, and there is no assurance that any active trading market will develop for the notes. We do not intend to apply for a listing of the notes on a securities exchange or on any automated dealer quotation system. There is currently no established market for the notes and we cannot assure you as to the liquidity of markets that may develop for the notes, your ability to sell the notes or the price at which you would be able to sell the notes. If such markets were to exist, the notes could trade at prices that may be lower than their principal amount or purchase price depending on many factors, including prevailing interest rates, the market for similar notes, our financial and operating performance and other factors. Therefore, an active market for the notes may not develop or, if developed, may not continue. Historically, the market for non-investment grade debt has been subject to disruptions that have caused substantial volatility in the prices of securities similar to the notes. The market, if any, for the notes may not be free from similar disruptions and any such disruptions may adversely affect the prices at which you may sell your notes. Risks Related to the Split-Off There could be significant liability for us if all or part of the Split-off were determined to be taxable for U.S. federal or state income tax purposes. We received opinions from outside tax counsel to the effect that the Split-off should qualify for tax-free treatment as transactions described in Section 355 and related provisions of the Internal Revenue Code (the Code ) as well as relevant state income tax authority. Notwithstanding this, the tax-free treatment is not free from doubt, and there is a risk that cannot be dismissed that the Internal Revenue Service (the Service ), a state taxing authority or a court could conclude to the contrary that the separation of the Availability Services business from the Company, through internal spin-offs, certain related transactions and the exchange of a portion of shares of SunGard Capital Corp. II Preferred Stock for all of the shares of SpinCo should not qualify as tax-free transactions. An opinion of tax counsel is not binding on the Service, state taxing authorities or any court and as a result there can be no assurance that a tax authority will not challenge the tax-free treatment of all or part of the Split-off or that, if litigated, a court would not agree with the Service or a state taxing authority. Further, these tax opinions rely on certain facts, assumptions, representations, warranties and covenants from the Company, SpinCo and from some of our shareholders regarding the past and future conduct of the companies respective businesses, share ownership and other matters. If any of the facts, assumptions, representations, warranties and covenants on which the opinions rely is inaccurate or incomplete or not satisfied, the opinions may no longer be valid. Moreover, the Service or state taxing authority could determine on audit that the Split-off is taxable if it determines that any of these facts, assumptions, representations, warranties or covenants are not correct or have been violated or if it disagrees with one or more conclusions in the opinions or for other reasons. In addition, actions taken following the split-off, including certain 50 percent or greater changes by vote or value of our stock ownership or that of SpinCo, may cause the Split-off to be taxable to the Company. If the Split-off is determined to be taxable, the Company and possibly its shareholders could incur significant income tax liabilities. These tax liabilities could have a material adverse effect on our business, financial condition, results of operations and cash flows. Actions taken by SpinCo or its shareholders could cause the Split-off to fail to qualify as a tax-free transaction, and SpinCo may be unable to fully indemnify us for the resulting significant tax liabilities. Pursuant to the Tax Sharing and Disaffiliation Agreement that we entered into with SpinCo ( Tax Sharing Agreement ), SpinCo is required to indemnify us for certain taxes relating to the Split-off that result from (i) any breach of the representations or the covenants made by SpinCo regarding the preservation of the intended tax- Table of Contents free treatment of the Split-off, (ii) any action or omission that is inconsistent with the representations, statements, warranties and covenants provided to tax counsel in connection with their delivery of tax opinions to us with respect to the Split-off, and (iii) any other action or omission that was likely to give rise to such taxes when taken, in each case, by SpinCo or any of its subsidiaries. Conversely, if any such taxes are the result of such a breach or certain other actions or omissions by the Company, we would be wholly responsible for such taxes. In addition, if any part of the Split-off fails to qualify for the intended tax-free treatment for reasons other than those for which we or SpinCo would be wholly responsible pursuant to the provisions described above, SpinCo will be obligated to indemnify us for 23% of the liability for taxes imposed in respect of the AS Separation and we would bear the remainder of such taxes. If SpinCo is required to indemnify us for any of the foregoing reasons, SpinCo s indemnification liabilities could potentially exceed its net asset value and SpinCo may be unable to fully reimburse or indemnify us for our significant tax liabilities arising from the Split-off as provided by the Tax Sharing Agreement. We might not be able to engage in certain strategic transactions because we have agreed to certain restrictions to comply with U.S. federal income tax requirements for a tax-free split-off. To preserve the intended tax-free treatment of the Split-off, we must comply with restrictions under current U.S. federal income tax laws for split-offs such as (i) refraining from engaging in certain transactions that would result in a 50 percent or greater change by vote or by value in our stock ownership, (ii) continuing to own and manage our historic businesses and (iii) limiting sales or redemptions of our common stock. If these restrictions and certain others are not followed, the Split-off could be taxable to SunGard and possibly SunGard s stockholders. These tax liabilities could have a material adverse effect on our business, financial condition, results of operations and cash flows. In the Tax Sharing Agreement, we (i) represent that we have no plan or intention to take or fail to take any action that would be inconsistent with the representations, statements, warranties and covenants provided to tax counsel in connection with their delivery of opinions to us with respect to the split-off and related transactions and (ii) covenant that during the two-year period following the split-off, we will not, except in certain specified transactions, (a) sell, issue or redeem our equity securities (or those of certain of our subsidiaries) or (b) liquidate, merge or consolidate with another person or sell or dispose of a substantial portion of our assets (or those of certain of our subsidiaries). During this two-year period, we may take certain actions prohibited by these covenants if we provide SpinCo with a ruling from the Service or a favorable opinion of tax counsel or of a nationally recognized accounting firm, reasonably satisfactory to SpinCo, to the effect that these actions should not affect the tax-free nature of the Split-off. These restrictions could limit our strategic and operational flexibility, including our ability to make acquisitions using equity securities, finance our operations by issuing equity securities, repurchase our equity securities, raise money by selling assets or enter into business combination transactions. Table of Contents

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+Many of our current and potential competitors have longer operating histories, significantly greater financial, marketing and other resources than we do. These factors may allow our competitors to respond more quickly than we can to new or emerging technologies. These competitors may engage in more extensive research and development efforts, undertake more far-reaching marketing campaigns and adopt more aggressive pricing policies, which may allow them to generate revenue more effectively than we do. Our business depends substantially on the continuing efforts of our sole officer and director, and our business may be severely disrupted if we lose his services. Our future success heavily depends on the continued service of our sole officer and director. Although we plan to increase the size of our Board of Directors, appoint additional officers and engage various consultants as our business grows, if he is unable or unwilling to continue to work for us in his present capacities, we may have to spend a considerable amount of time and resources searching, recruiting and integrating one or more replacements into our operations, which would severely disrupt our business. This may also adversely affect our ability to execute our business strategy. Moreover, if our sole officer and director joins a competitor or forms a competing company, we may lose customers, suppliers, know-how and key employees. Our sole officer and director s limited experience managing a publicly traded company may divert management s attention from operations and harm our business. Our sole officer and director has limited experience managing a publicly traded company and complying with federal securities laws, including compliance with recently adopted disclosure requirements on a timely basis. Our management will be required to design and implement appropriate programs and policies in responding to increased legal, regulatory compliance and reporting requirements, and any failure to do so could lead to the imposition of fines and penalties and harm our business. We may be unable to attract and retain qualified, experienced, highly skilled personnel, which could adversely affect the implementation of our business plan. Our success depends to a significant degree upon our ability to attract, retain and motivate skilled and qualified personnel. As we become a more mature company in the future, we may find recruiting and retention efforts more challenging. If we do not succeed in attracting, hiring and integrating excellent personnel, or retaining and motivating existing personnel, we may be unable to grow effectively. The loss of any key employee, including members of our management, and our inability to attract highly skilled personnel with sufficient experience in our industry could harm our business. Product liability exposure may expose us to significant liability. We may face an inherent business risk of exposure to product liability and other claims and lawsuits in the event that the development or use of our technology or prospective products is alleged to have resulted in adverse effects. We may not be able to avoid significant liability exposure. Although we believe our insurance coverage to be adequate, we may not have sufficient insurance coverage, and we may not be able to obtain sufficient coverage at a reasonable cost. An inability to obtain product liability insurance at acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of our products. A product liability claim could hurt our financial performance. Even if we avoid liability exposure, significant costs could be incurred that could hurt our financial performance and condition. Our inability to protect our intellectual property rights may force us to incur unanticipated costs. Our success will depend, in part, on our ability to obtain and maintain protection in the United States and other countries for certain intellectual property incorporated into our home mist tanning system. To date, we have obtained a United States Patent entitled "Apparatus for Spray Application of a Sunless Tanning Product" in respect of our home mist tanning system, and we have also filed patents in Canada, Australia, China and Europe to protect our product. Our United States Patent is a "utility patent", which in general terms protects the way an article is used and works. A "design patent", on the other hand, protects the way an article looks. Other primary distinguishing features between the two types of patents are as follows: the term of a "utility patent" is 20 years measured from the filing date, whereas the term of a "design patent" is 14 years measured from the grant date; the holder of a "utility patent" is required to pay maintenance fees whereas the holder of a "design patent" is not; and the holder of a "utility patent" is able to file an international application naming various countries under the Patent Cooperation Treaty (PCT), whereas the holder of a "design patent" is not. Our intellectual property may be challenged, narrowed, invalidated or circumvented, which could limit our ability to prevent competitors from marketing similar solutions that limit the effectiveness of our patent protection and force us to incur unanticipated costs. In addition, existing laws of some countries in which we may provide services or solutions may offer only limited protection of our intellectual property rights. Our products may infringe the intellectual property rights of third parties, and third parties may infringe our proprietary rights, either of which may result in lawsuits, distraction of management and the impairment of our business. As the number of patents, copyrights, trademarks and other intellectual property rights in our industry increases, products based on our technology may increasingly become the subject of infringement claims. Third parties could assert infringement claims against us in the future. Infringement claims with or without merit could be time consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Royalty or licensing agreements, if required, might not be available on terms acceptable to us, or at all. We may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Litigation to determine the validity of any claims, whether or not the litigation is resolved in our favor, could result in significant expense to us and divert the efforts of our personnel from productive tasks. If there is an adverse ruling against us in any litigation, we may be required to pay substantial damages, discontinue the use and sale of infringing products, and expend significant resources to develop non-infringing technology or obtain licenses to infringing technology. Our failure to develop or license a substitute technology could prevent us from selling our products. Since our sole officer and director and our business assets are located in Canada, investors may be limited in their ability to enforce U.S. civil actions against them for damages to the value of our common stock. Our business assets are located in Canada and our sole officer and director is a resident of Canada. Consequently, U.S. investors may experience difficulty affecting service of process on our sole officer and director within the United States or enforcing a civil judgment of a U.S. court in Canada if a Canadian court determines that the U.S. court in which the judgment was obtained did not have jurisdiction in the matter. There is also substantial doubt whether an original action predicated solely upon civil liability may successfully be brought in Canada against either our sole officer and director or our business assets. As a result, investors may not be able to recover damages as compensation for a decline in the value of their investment. We may indemnify our directors and officers against liability to us and our security holders, and such indemnification could increase our operating costs. Our By-Laws allow us to indemnify our officers and directors against claims associated with carrying out the duties of their offices. Our By-Laws also allow us to reimburse them for the costs of certain legal defenses. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our officers, directors or control persons, we have been advised by the SEC that such indemnification is against public policy and is therefore unenforceable. Since our officers and directors are or will be aware that they may be indemnified for carrying out the duties of their offices, they may be less motivated to meet the standards required by law to properly carry out such duties, which could increase our operating costs. Further, if any of our officers and directors files a claim against us for indemnification, the associated expenses could also increase our operating costs. Failure to comply with the Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences. As a Nevada corporation, we are subject to the Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Some foreign companies, including some that may compete with us, may not be subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices may occur from time-to-time in the countries in which we conduct our business. However, our employees or other agents may engage in conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations. We are an "emerging growth company", and any decision on our part to comply only with certain reduced disclosure requirements applicable to "emerging growth companies" could make our common stock less attractive to investors. We are an "emerging growth company" as defined in the JOBS Act, and, for as long as we continue to be an "emerging growth company", we may choose to take advantage of exemptions from various reporting requirements that apply to other public companies but not to "emerging growth companies", including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an "emerging growth company" for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (ii) the date that we become a "large accelerated filer" as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period. In addition, Section 107 of the JOBS Act also provides that an "emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an "emerging growth company" can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to opt in to the extended transition period for complying with the revised accounting standards. Because we have elected to defer compliance with new or revised accounting standards, our financial statement disclosure may not be comparable to similar companies. We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS Act. This allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of our election, our financial statements may not be comparable to companies that comply with public company effective dates. Our status as an "emerging growth company" under the JOBS Act may make it more difficult to raise capital as and when we need it. Because of the exemptions from various reporting requirements provided to us as an "emerging growth company" and because we will have an extended transition period for complying with new or revised financial accounting standards, we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it. Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting is not as transparent as other companies in our industry. If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected. Risks Related to Ownership of Our Common Stock Because there is no public trading market for our common stock, investors may not be able to resell their shares. There is currently no public trading market for our common stock. Therefore, there is no central place, such as stock exchange or electronic trading system, to resell any shares of our common stock. If investors wish to resell our shares, they will have to locate a buyer and negotiate their own sale. As a result, they may be unable to sell their shares or may be forced to sell them at a loss. We intend to apply to have our common stock quoted on the OTC Bulletin Board, which will require a market maker to submit an application on our behalf. If our common stock becomes listed and a market for the stock develops, the actual price of our shares will be determined by prevailing market prices at the time of the sale. We cannot assure investors that there will be a market in the future for our common stock. The trading of securities on the OTC Bulletin Board is often sporadic and investors may have difficulty buying and selling our shares or obtaining market quotations for them, which may have a negative effect on the market price of our common stock. As a result, they may not be able to sell their shares at their purchase price or at any price at all. Our sole officer and director has voting control over matters submitted to a vote of the stockholders, and he may take actions that conflict with the interests of our other stockholders and holders of our debt securities. In connection with the Share Exchange, our sole officer and director received 32,093,377 Exchangeable Shares. Each Exchangeable Share entitles the holder thereof to one vote on all matters submitted to a vote of our stockholders. Accordingly, he controls more than 35% of the votes eligible to be cast by stockholders in the election of directors and generally. As a result, our sole officer and director has the power to control all matters requiring the approval of our stockholders, including the election of directors and the approval of mergers and other significant corporate transactions. Because we became public by means of a "reverse merger", we may not be able to attract the attention of major brokerage firms. Additional risks may exist since we will become public through a "reverse merger". Securities analysts of major brokerage firms may not provide coverage of us since there is little incentive to brokerage firms to recommend the purchase of our common stock. We cannot assure investors that brokerage firms will want to conduct any secondary offerings on our behalf in the future. The sale of securities by us in any equity or debt financing could result in dilution to our existing stockholders and have a material adverse effect on our earnings. Any sale of common stock by us in a future private placement offering could result in dilution to our existing stockholders as a direct result of the issuance of additional shares of our capital stock. In addition, our business strategy may include expansion through internal growth, by acquiring distribution lists, or by establishing strategic relationships with targeted customers and vendors. In order to do so, or to finance the cost of our other activities, we may issue additional equity securities that could dilute our stockholders stock ownership. We may also assume additional debt and incur impairment losses related to goodwill and other tangible assets if we acquire another company and this could negatively impact our earnings and results of operations. We are subject to penny stock regulations and restrictions and investors may have difficulty selling shares of our common stock. Our common stock is subject to the provisions of Section 15(g) and Rule 15g-9 of the Exchange Act, commonly referred to as the "penny stock rules". Section 15(g) sets forth certain requirements for transactions in penny stock, and Rule 15g-9(d) incorporates the definition of "penny stock" that is found in Rule 3a51-1 of the Exchange Act. The Securities and Exchange Commission (the "SEC") generally defines a penny stock to be any equity security that has a market price less than US$5.00 per share, subject to certain exceptions. We are subject to the SEC s penny stock rules. Since our common stock is deemed to be penny stock, trading in the shares of our common stock is subject to additional sales practice requirements on broker-dealers who sell penny stock to persons other than established customers and accredited investors. "Accredited investors" are generally persons with assets in excess of US$1,000,000 (excluding the value of such person s primary residence) or annual income exceeding US$200,000 or US$300,000 together with their spouse. For transactions covered by these rules, broker-dealers must make a special suitability determination for the purchase of such security and must have the purchaser s written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the first transaction, of a risk disclosure document relating to the penny stock market. A broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information for the penny stocks held in an account and information to the limited market in penny stocks. Consequently, these rules may restrict the ability of broker-dealer to trade and/or maintain a market in our common stock and may affect the ability of our stockholders to sell their shares of common stock. There can be no assurance that our shares of common stock will qualify for exemption from the penny stock rules. In any event, even if our common stock was exempt from the penny stock rules, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of penny stock if the SEC finds that such a restriction would be in the public interest. We do not expect to pay dividends for the foreseeable future. We do not intend to declare dividends for the foreseeable future, as we anticipate that we will reinvest any future earnings in the development and growth of our business. Therefore, our stockholders will not receive any funds unless they sell their common stock, and stockholders may be unable to sell their shares on favorable terms or at all. Investors may face significant restrictions on the resale of their shares due to state "blue sky" laws. Each state has its own securities laws, commonly known as "blue sky" laws, which (1) limit sales of securities to a state s residents unless the securities are registered in that state or qualify for an exemption from registration, and (2) govern the reporting requirements for broker-dealers doing business directly or indirectly in the state. Before a security is sold in a state, there must be a registration in place to cover the transaction, or it must be exempt from registration. The applicable broker-dealer must also be registered in that state. We do not know whether our securities will be registered or exempt from registration under the laws of any state. A determination regarding registration will be made by those broker-dealers, if any, who agree to serve as market makers for our common stock. There may be significant state blue sky law restrictions on the ability of investors to sell, and on purchasers to buy, our securities. They should therefore consider the resale market for our common stock to be limited, as they may be unable to resell their shares without the significant expense of state registration or qualification.

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+Risk factors This offering and an investment in our common stock involve a high degree of risk. You should carefully consider the risks described below, together with the financial and other information contained in this prospectus, before you decide to purchase shares of our common stock. If any of the following risks actually occurs, our business, financial condition, results of operations, cash flows and prospects could be materially and adversely affected. As a result, the trading price of our common stock could decline and you could lose all or part of your investment in our common stock. Risks related to our business and industry We have a history of operating losses and may be unable to continue operations unless we can generate sufficient operating income from the sale of our products. We have sustained operating losses since our inception, and as of September 30, 2013, we had an accumulated deficit of $702.6 million. As evidenced by these financial results, we may not be able to achieve or maintain profitability on a consistent basis. Continuing losses may exhaust our capital resources and force us to discontinue our operations. We have yet to achieve positive cash flow, and our ability to generate positive cash flow is uncertain. If we are unable to obtain sufficient capital when needed, our business and future prospects will be adversely affected and we could be forced to suspend or discontinue operations. Our operations have not generated positive cash flow for any reporting period since our inception, and we have funded our operations primarily through the issuance of common and preferred stock and short-term and long-term debt. The actual amount of funds that we will need to meet our operating needs will be determined by a number of factors, many of which are beyond our control. These factors include the timing and volume of sales transactions, the success of our marketing strategy, market acceptance of our products, the success of our research and development efforts and the transition of our product manufacturing (including any unanticipated delays or quality control issues), our manufacturing and labor costs, the costs associated with obtaining and enforcing our intellectual property rights, regulatory changes, competition, technological developments in the market, evolving industry standards and the amount of working capital investments we are required to make. Our ability to continue to operate until our cash flow from operations turns positive will depend on our ability to continue to raise funds through public or private sales of shares of our capital stock or through debt issuances. We are currently party to the Wells Fargo Facility and a Second Lien Letter of Credit Facility (the Ares Letter of Credit Facility ) with Ares Capital Corporation ( Ares Capital ). The Wells Fargo Facility provides us with borrowing capacity of up to a maximum of $50.0 million, which capacity is equal to the sum of (i) 85% of our eligible accounts receivable plus $7.5 million of eligible inventory less certain allowances established against such accounts receivable and inventory by Wells Fargo from time to time pursuant to the Wells Fargo Facility, plus (ii) unrestricted cash held in a Wells Fargo deposit account ( Qualified Cash ), plus (iii) the amount of pledged letters of credit provided by Ares Capital in favor of Wells Fargo under our Ares Letter of Credit Facility. On April 1, 2013, Wells Fargo agreed to extend the maturity date of the Wells Fargo Facility from November 22, 2013 to April 2, 2014. In addition, Ares Capital agreed to extend the maturity date of the Ares Letter of Credit Facility from February 20, 2014 to April 2, 2014. As of September 30, 2013, the balance outstanding on the Wells Fargo Facility was approximately $30.5 million and we had approximately $14.1 million of additional borrowing capacity. We have experienced limited access to the capital and credit markets, and it remains uncertain whether we will be able to obtain outside capital when we need it or on terms that would be acceptable to us. We have historically been dependent on affiliates of Pegasus Capital for our liquidity needs because other sources of liquidity have been insufficient or unavailable to meet our needs. If we are able to raise funds by selling additional shares of our capital stock, the ownership interest of our existing stockholders will be diluted. If we are unable to obtain sufficient outside capital when needed, our business and future prospects will be adversely affected and we could be forced to suspend or discontinue operations. If we are unable to manage any future growth effectively, our profitability and liquidity could be adversely affected. Our growth in 2010, 2011, and 2012 placed a significant strain on our limited research and development, selling, distribution and administrative resources and our projected growth may continue to challenge these resources. To manage any future growth, we must continue to improve our operational and financial systems and expand, train and manage our employee base. We also need to continue to improve our supply chain management and quality control operations and hire and train new employees, including sales and customer service representatives and operations managers. If we are unable to manage our growth effectively, our profitability and liquidity could be adversely affected. We may experience difficulties in the transfer of production capabilities to our contract manufacturers. We continue to streamline our operations as we wind down operations at our manufacturing facility in Satellite Beach, FL and transfer our manufacturing processes to our contract manufacturers in China. However, we will only benefit from such transition to the extent that our contract manufacturers can produce our products at competitive prices with similar product quality. Uncertainty is inherent within the transfer of our manufacturing process, and unforeseen circumstances could offset the anticipated benefits, disrupt service to customers and impact product quality. The LED lighting industry is characterized by constant and rapid technological change, product obsolescence, price erosion, evolving standards, short product life cycles and fluctuations in supply and demand. If we fail to anticipate and adapt to these changes and fluctuations, our sales, gross margins and profitability will be adversely affected. In the LED lighting industry, rapid technological changes and short product life cycles often lead to price erosion and product obsolescence. Companies within the LED lighting industry are continuously developing new products with heightened performance and functionality, putting pricing pressure on existing products. Further, the industry has experienced significant fluctuations, often in connection with, or in anticipation of, product cycles and changes in general economic conditions. These fluctuations have been characterized by lower product demand, production overcapacity, higher inventory levels and increased pricing pressure. Our failure to accurately anticipate the introduction of new technologies or adapt to fluctuations in the industry can, as it has in the past, lead to our having significant amounts of obsolete inventory that can only be sold at substantially lower prices and profit margins than anticipated. Pricing pressure and obsolescence also cause the stated value of our inventory to decline. For the nine months ended September 30, 2013 and the years ended December 31, 2012 and 2011, we recorded an inventory valuation allowance of $5.7, $15.8 and $20.5 million, respectively, and a provision for expected losses on non-cancellable purchase commitments of $1.9, $5.6 and $8.5 million, respectively. In addition, if we are unable to develop planned new technologies or if the transition of our manufacturing operations are unsuccessful, we may be unable to compete effectively due to our failure to offer products most demanded by the marketplace. If any of these failures occur, our sales, gross margins and profitability will be adversely affected. If we are unable to effectively develop, manage and expand our sales and distribution channels for our products, our operating results may suffer. We sell a substantial portion of our products to retailers and OEMs who then sell our products on a co-branded or private label basis. Orders from our retail and OEM customers are dependent upon their internal target inventory levels for our products which can vary significantly based upon current and projected market cycles and other factors over which we typically have very little, if any, control. We rely on these retailers and OEMs to develop and expand the customer base for our products and to accurately forecast demand from their customers. If they are not successful in either task, our growth and profitability may be adversely impacted. Table of Contents If our developed technology or technology under development does not achieve market acceptance, prospects for our growth and profitability would be limited. Our future success depends on continued market acceptance of our LED technology and the technology currently under development. Despite the continued market acceptance of LED lighting, we believe that the adoption of LED lighting products for general illumination is in its early stages, is still limited and faces significant challenges. Potential customers may be reluctant to adopt LED lighting products as an alternative to traditional lighting technology because of its higher initial cost or perceived risks relating to its novelty, reliability, usefulness, light quality and cost-effectiveness when compared to other established lighting sources available in the market. Changes in economic and market conditions may also affect the marketability of some traditional lighting technologies such as declining energy prices in certain regions or countries may favor existing lighting technologies that are less energy efficient reducing the rate of adoption for LED lighting products in those areas. Moreover, if existing sources of light other than LED lighting products achieve or maintain greater market adoption, or if new sources of light are developed, our current products and technologies could become less competitive or obsolete. Even if LED lighting products continue to achieve performance improvements and cost reductions, limited customer awareness of the benefits of LED lighting products, lack of widely accepted standards governing LED lighting products and customer unwillingness to adopt LED lighting products in favor of entrenched solutions could significantly limit the demand for LED lighting products and adversely impact our results of operations. We rely on our relationship with The Home Depot, and the loss of this material relationship or any other significant relationship would have a material adverse effect on our results of operations, our future growth prospects and our ability to distribute our products. We form business relationships and strategic alliances with retailers and other lighting companies to market our products, generally under private or co-branded labels. In certain cases, such relationships are important to our introduction of new products and services, and we may not be able to successfully collaborate or achieve expected synergies with these retailers or lighting companies. We do not control these retailers or lighting companies and they may make decisions regarding their business undertakings with us that may be contrary to our interests, or may terminate their relationships with us altogether. If these retailers or lighting companies change their business strategies, for example, due to business volume fluctuations, our sales, revenues and margins are materially affected by fluctuations in the buying patterns of these customers. Change in general economic conditions, mergers and acquisitions and/or performance issues, fail to pay or terminate the relationship altogether, our business could be adversely affected. For the nine months ended September 30, 2013 and for the year ended December 31, 2012, The Home Depot accounted 52% and 48% of our net sales, respectively. While we anticipate The Home Depot will remain a significant customer in 2014, our contractual commitment with The Home Depot does not contain any minimum purchase obligations. Further, our Strategic Purchasing Agreement with The Home Depot expires in July 2016 and The Home Depot is not obligated to renew or extend such agreement. A loss of The Home Depot as a customer, a significant decline in their purchases, or their failure to pay us would have a material adverse effect on our results of operations, our future growth prospects and our product distribution. The Home Depot has required, and we expect will continue to require, increased service and order accommodations as well as incremental promotional investments. We may face increased expenses to meet these demands, which would reduce our margins. In addition, we generally have little or no influence on The Home Depot s promotional or pricing policies, which may impact our margins, and, if we are unable to accomodate their requests, sales volume to them. We issued a Warrant to The Home Depot that included incentive-based vesting conditions through 2015 based on annual 20% increases in product purchases made under the Strategic Purchasing Agreement. For both 2011 and 2012, the 20% volume increase was reached and The Home Depot vested in 40% of the warrants. However, The Home Depot did not purchase a sufficient quantity of products from us to achieve the incentive-based vesting condition for 2013. We may be unable to profitably produce our products in this competitive pricing environment. Aggressive pricing actions by our competitors may affect our growth prospects and profitability. We may not be able to increase prices to cover the rising costs of the production of our products or to improve our profitability or margins. Even if production costs were to decline, we may still need to reduce our prices to remain competitive, which could negatively impact both net sales and gross margins. Our products may contain defects that could result in costs associated with the recall of those items, result in claims against us, damage our reputation in the market and reduce our sales. The manufacture of our products involves highly complex processes. Despite testing by us, our contract manufacturers and our customers, defects have been and could be found in our existing or future products. These defects may cause us to incur significant warranty, support and repair costs. The costs associated with a recall may divert the attention of our engineering personnel from our product development efforts and harm our relationships with customers and our reputation in the marketplace. We generally provide a five year warranty on our products, and such warranty may require us to repair, replace or reimburse the purchaser for the purchase price of the product, at the customer s discretion. Moreover, even if our products meet standard specifications, our customers may attempt to use our products in applications they were not designed for or in products that were not designed or manufactured properly, resulting in product failures and creating customer dissatisfaction. These problems could result in, among other things, a delay in the recognition or loss of revenue, loss of market share or failure to achieve market acceptance. Defects, integration issues or other performance problems in our products could also result in personal injury or financial or other damages to our customers for which they might seek legal recourse against us. We may be the target of product liability lawsuits and could suffer losses from a significant product liability judgment against us if the use of our products at issue is determined to have caused injury. A significant product recall or product liability claim could also adversely affect our results of operations and result in negative publicity, damage to our reputation and a loss of customer confidence in our products. Table of Contents If we are unable to increase production capacity for our products with our contract manufacturer in a cost effective and timely manner, we may incur delays in shipment and our revenue and reputation in the marketplace could be harmed. An important part of our business plan is the transfer and expansion of production capacity for our products. In order to fulfill anticipated demand for our products, we place orders with our contract manufacturers in advance of actual customer orders, typically based on preliminary, non-binding indications of future demand. As customer demand for our products changes, we must be able to secure modified production capacity to meet demand while keeping costs down. Unforeseen circumstances could offset the anticipated benefits of our transition to our contract manufacturers, disrupt our ability to provide products to our customers and impact the quality of our manufactured products. Our ability to successfully obtain production capacity to increase our product output in a cost effective and timely manner will depend on a number of factors, including the following: our ability to sustain relationships with our contract manufacturers without disruption and the ability of our contract manufacturers to allocate more of their existing capacity to us or their ability to add new capacity quickly; the ability of any future contract manufacturers to successfully implement our manufacturing processes; the availability of critical components and subsystems used in the manufacture of our products; our ability to effectively establish adequate management information systems, demand forecasting, financial controls and supply chain management and quality control procedures; and the occurrence of equipment failures, power outages, environmental risks or variations in the manufacturing process. If we are unable to obtain increased production capacity for our products in a cost effective and timely manner while maintaining adequate quality, we may incur delays in shipment or be unable to meet any increased demand for our products which could harm our revenue and operating margins and damage our reputation and our relationships with current and prospective customers. Our recent issuances of Series H Convertible Preferred Stock, Series I Convertible Preferred Stock and Series J Convertible Preferred Stock may limit our ability to raise additional capital and/or take certain corporate action. Between May 25 and September 25, 2012, we issued an aggregate of 114,051 shares of our Series H Convertible Preferred Stock, par value $0.001 per share ( Series H Preferred Stock ) and 62,365 shares of our Series I Convertible Preferred Stock, par value $0.001 per share ( Series I Preferred Stock ). Between September 11, 2013 and January 14, 2014, we issued an aggregate of 37,430 shares of our Series J Convertible Preferred Stock, par value $0.001 per share ( Series J Preferred Stock , and together with the Series H Preferred Stock and Series I Preferred Stock, the Preferred Shares ). The Certificates of Designation governing the Preferred Shares limit our ability to take certain actions, including, among other things: redeem, reacquire, pay dividends or make other distributions on our securities; engage in any recapitalization, merger, consolidation, reorganization or similar transaction; incur any indebtedness (A) in excess of $50.0 million; or (B) that includes any provision that would limit our ability to redeem any Preferred Shares for a period that exceeds that contained in the Wells Fargo Facility or Ares Letter of Credit Facility; issue any equity securities having an aggregate value in excess of $15.0 million; enter into any new agreements or transactions with any of our affiliates or any holder of five percent (5%) or more of our common stock or any affiliates of any such stockholder or amend or modify the terms of any such agreements then-existing; and acquire, license, transfer, or sell any property, rights or assets or enter into any joint venture where (A) the aggregate consideration to be paid or received, or (B) the fair market value of the relevant property, rights or assets, exceeds $5.0 million. Further, the Certificates of Designation governing the Series H Preferred Stock and Series I Preferred Stock require us to have consolidated earnings before interest, taxes, depreciation, and amortization ( EBITDA ) that is at least $20.0 million for the year ended December 31, 2015 and each fiscal year thereafter. A breach of the terms of the Preferred Shares could entitle each holder to redeem their Preferred Shares, which could have a material adverse effect on our liquidity and financial condition. If we do not properly anticipate the need for our products, we may be unable to meet the demands of our customers and end-users, which could reduce our competitiveness, cause a decline in our market share and have a material adverse effect on our results of operations. The lighting industry is subject to significant fluctuations in the availability of raw materials, components and subsystems. Our contract manufacturers depend on suppliers for certain standard electronic components as well as custom components critical to the manufacture of our lighting devices. The principal raw materials and components used in the manufacture of our products are packaged LEDs and printed circuit boards, MOSFETS, magnetic and standard electrical components such as capacitors, resistors and diodes, wire, plastics for optical systems and aluminum for housings and heat sinks. From time to time, packaged LEDs and electronic components have been in short supply due to demand and production constraints. If we do not accurately forecast demand for our products, our contract manufacturers may not be able to find an adequate alternative source of supply at an acceptable cost. Any significant interruption in the supply of these raw materials, components and subsystems or our products could have a material adverse effect on our results of operations. We utilize contract manufacturers to manufacture our products and any disruption in these relationships may cause us to fail to meet our customers demands and may damage our customer relationships and adversely affect our business. We depend on contract manufacturers to manufacture our products and provide the necessary facility and labor to manufacture our products, which are primarily high volume products and components that we intend to distribute to customers in North America. Our reliance on these contract manufacturers involve certain risks, including the following: lack of direct control over production capacity and delivery schedules; risk of equipment failures, natural disasters, civil unrest, industrial accidents, power outages and other business interruptions; lack of direct control over quality assurance and manufacturing yield; and risk of loss of inventory while in transit. If our current contract manufacturers, or any other contract manufacturers we may engage in the future, were to terminate their arrangement with us or fail to provide the required capacity and quality on a timely basis, we would experience delays in the manufacture and shipment of our products until alternative manufacturing services could be contracted or offsetting internal manufacturing processes could be implemented. Any significant shortages or interruption may cause us to be unable to timely deliver sufficient quantities of our products to satisfy our contractual obligations and particular revenue expectations. Moreover, even if we timely locate substitute products, if their price materially exceeds the original expected cost of such products, our margins and results of operations would be adversely affected. Furthermore, to qualify new contract manufacturers, familiarize them with our products, quality standards and other requirements and commence volume production may be a costly and time-consuming process. If we are required or choose to change contract manufacturers for any reason, our revenue, gross margins and customer relationships could be adversely affected. Our industry is highly competitive and if we are not able to compete effectively, including against larger lighting manufacturers with greater resources, our prospects for future success will be jeopardized. Our industry is highly competitive. We face competition from both traditional lighting technologies provided by numerous vendors as well as from LED-based lighting products provided by a growing roster of industry participants. The LED lighting industry is characterized by rapid technological change, short product lifecycles and frequent new product introductions, and a competitive pricing environment. These characteristics increase the need for continual innovation and provide entry points for new competitors as well as opportunities for rapid share shifts. Table of Contents Currently, we view our primary competition to be from large, established companies in the traditional general lighting industry. Certain of these companies also provide, or have undertaken initiatives to develop, LED lighting products as well as other energy efficient lighting products. Additionally, we face competition from a fragmented group of smaller niche or low-cost offshore providers of LED lighting products. We also anticipate that larger LED chip manufacturers, including some of those that currently supply us, may seek to compete with us by introducing more complete retrofit lamps or luminaires. We also expect other large technology players with packaged LED chip technology that are currently focused on other end markets for LEDs, such as backlighting for LCD displays, to increasingly focus on the general illumination market as their existing markets saturate and LED use in general illumination grows. In addition, we may compete in the future with vendors of new technological solutions for energy efficient lighting. Some of our current and future competitors are larger companies with greater resources to devote to research and development, manufacturing and marketing, as well as greater brand name recognition. Some of our more diversified competitors could also compete more aggressively with us by subsidizing losses in their LED lighting businesses with profits from other lines of business. Moreover, if one or more of our competitors or suppliers were to merge with one another, the change in the competitive landscape could adversely affect our customer, channel or supplier relationships, or our competitive position. Additionally, any loss of a key channel partner, whether to a competitor or otherwise, could severely and rapidly damage our competitive position. For the nine months ended September 30, 2013 and the year ended December 31, 2012, Osram Sylvania accounted for 0% and 21% of our net sales, respectively. Our Master Supply Agreement with Osram Sylvania expired in 2013. To the extent that competition in our markets intensifies, we may be required to reduce our prices in order to remain competitive. If we do not compete effectively, or if we reduce our prices without making commensurate reductions in our costs, our revenue, gross margins and profitability and our future prospects for success, may be harmed. Our financial results may vary significantly from period-to-period due to unpredictable sales cycles in certain of the markets into which we sell our products, which may lead to volatility in our stock price. The size and timing of our revenue from sales to our customers is difficult to predict and is market dependent. Our revenue in each period may also vary significantly as a result of purchases, or lack thereof, by The Home Depot or other significant customers. Because most of our operating and capital expenses are incurred based on the estimated number of product purchases and their timing, they are difficult to adjust in the short term. As a result, if our revenue falls below our expectations or is delayed in any period, we may not be able to proportionately reduce our operating expenses or contract manufacturing costs for that period. As a result of these factors, we believe that quarter-to-quarter comparisons of our operating results are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of future performance. Our debt obligations contain restrictions that impact our business and expose us to risks that could adversely affect our liquidity and financial condition. On November 22, 2010, we entered into the Wells Fargo Facility, which has a term of three years and currently provides us with a maximum borrowing capacity of $50.0 million. On September 20, 2011, we entered into the Ares Letter of Credit Facility, which has a term of three years and provides us with a $25.0 million letter of credit issued in favor of Wells Fargo that is used in its entirety to support $25.0 million of the Wells Fargo Facility borrowing capacity. The Wells Fargo Facility borrowing base is comprised of: (i) up to 85% of our applicable and eligible inventory and accounts receivable plus qualified cash, plus (ii) the amount of pledged letters of credit provided by Ares Capital in favor of Wells Fargo under our Ares Letter of Credit Facility. As of September 30, 2013, the balance outstanding on the Wells Fargo Facility was $30.5 million and we had $14.1 million of additional borrowing capacity. Under the Wells Fargo Facility, we are required to pay certain fees to Wells Fargo, including an unused line fee ranging from 0.375% to 1.0% of the unused portion of the facility. Outstanding loans may be prepaid without penalty or premium, except that we are required to pay a termination fee ranging from $250,000 to $500,000 (depending on the date of termination) if the Wells Fargo Facility is terminated by us prior to the scheduled maturity date or by Wells Fargo during a default period. Under the Ares Letter of Credit Facility, we are required to pay certain fees to Ares Capital, including a fronting fee equal to 0.75% of the average daily undrawn face amount of the pledged letter of credit and a letter of credit fee of 10.0% of the average daily undrawn face amount of the pledged letter of credit. Borrowings under the Wells Fargo Facility and the Ares Letter of Credit Facility are secured by substantially all of our assets. All of our existing and future domestic subsidiaries are required to guaranty our obligations and pledge their assets to secure the repayment of our obligations under the Wells Fargo Facility, on a first lien basis, and under the Ares Letter of Credit Facility, on a second lien basis. The Wells Fargo Facility contains customary covenants, which limit our and certain of our subsidiaries ability to, among other things: incur additional indebtedness or guarantee indebtedness of others; create liens on our assets; Table of Contents enter into mergers or consolidations; dispose of assets; prepay indebtedness or make changes to our governing documents and certain of our agreements; pay cash dividends or make other distributions on our capital stock, redeem or repurchase our capital stock; make investments, including acquisitions; and enter into transactions with affiliates. We are also required to maintain a minimum of $5.0 million of qualified cash, minimum excess borrowing availability of $5.0 million and would be required to comply with certain specified EBITDA requirements in the event that we have less than $2.0 million available for borrowing on the Wells Fargo Facility. The Wells Fargo Facility also contains customary events of default and affirmative covenants. The Ares Letter of Credit Facility contains similar covenants but we are not required to separately comply with such covenants so long as the pledged letter of credit remains undrawn. If we are unable to generate sufficient cash flow or otherwise obtain the funds necessary to make required payments under the Wells Fargo Facility and the Ares Letter of Credit Facility, or if we fail to comply with the requirements of our indebtedness, we could default under these facilities. Any default that is not cured or waived could result in the acceleration of the obligations under these facilities, an increase in the applicable interest rate under these facilities and a requirement that our subsidiaries that have guaranteed these facilities pay the obligations in full, and would permit our lenders to exercise remedies with respect to all of the collateral securing these facilities, including substantially all of our and our subsidiary guarantors assets. Any such default could have a material adverse effect on our liquidity and financial condition. Additionally, the covenants in such agreements or future debt agreements may restrict the conduct of our business, which could adversely affect our business by, among other things, limiting our ability to take advantage of financings, mergers, acquisitions and other corporate opportunities that may be beneficial to the business. If we are unable to obtain and protect our intellectual property rights, our ability to commercialize our products could be substantially limited. As of September 30, 2013, we had filed 299 U.S. patent applications covering various inventions related to the design and manufacture of LED lighting technology. From these applications, 175 U.S. patents had been issued, 102 were pending approval and 22 Table of Contents were no longer active. When we believe it is appropriate and cost effective, we make corresponding international, regional or national filings to pursue patent protection in other parts of the world. Our patent applications may not be granted. Because patents involve complex legal, technical and factual questions, the issuance, scope, validity and enforceability of patents cannot be predicted with certainty. Competitors may develop products similar to our products that do not conflict with our patent rights. Others may challenge our patents and, as a result, our patents could be narrowed or invalidated. In some cases, we may rely on confidentiality agreements or trade secret protections to protect our proprietary technology. Such agreements, however, may not be honored and particular elements of our proprietary technology may not qualify as protectable trade secrets under applicable law. In addition, others may independently develop similar or superior technology, and in the absence of applicable prior patents, we would have no recourse against them. Our business may be impaired by claims that we, or our customers, infringe on the intellectual property rights of others. Our industry is characterized by vigorous protection and pursuit of intellectual property rights. These traits have resulted in significant and often protracted and expensive litigation. In addition, we may inadvertently infringe on patents or rights owned by others and licenses might not be available to us on reasonable or acceptable terms or at all. Litigation to determine the validity of patents or claims by third parties of infringement of patents or other intellectual property rights could result in significant legal expense and divert the efforts of our technical personnel and management, even if the litigation results in a determination favorable to us. Third parties have and may in the future attempt to assert infringement claims against us, or our customers, with respect to our products. In the event of an adverse result in such litigation, we could be required to pay substantial damages; stop the manufacture, use and sale of products found to be infringing; incur asset impairment charges; discontinue the use of processes found to be infringing; expend significant resources to develop non-infringing products or processes; or obtain a license to use third party technology and whether or not the result is adverse to us, we may have to indemnify our customers if they were brought into the litigation. Failure to achieve and maintain effective internal controls could have a material adverse effect on our operations and our stock price. We are subject to Section 404 of the Sarbanes-Oxley Act of 2002, which requires an annual management assessment of the effectiveness of our internal control over financial reporting. Effective internal controls are necessary for us to produce reliable financial reports, and failure to achieve and maintain effective internal controls over financial reporting could cause investors to lose confidence in our operating results, and could have a material adverse effect on our business and on the price of our common stock. Because of our status as a smaller reporting company registrant as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the Exchange Act ) the independent registered public accounting firm auditing our financial statements has not been required to attest to, and report on, the effectiveness of our internal control over financial reporting. After the consummation of this offering, our filing status may change so that our independent registered public accounting firm may be required to attest to, and report on, the effectiveness of our internal control over financial reporting in our Form 10-K for the year ending December 31, 2014. For the year ended December 31, 2012 we concluded that our disclosure controls and procedures were effective in achieving management s desired controls and procedures objectives in our internal control over financial reporting. However, during the evaluation of disclosure controls and procedures for each of the years ended December 31, 2011 and 2010, we concluded that our disclosure controls and procedures were not effective in reaching a reasonable level of assurance of achieving management s desired controls and procedures objectives in our internal control over financial reporting. We believe that many of the previously observed material weaknesses resulted from our position as a small company with immature processes and inadequate staffing in our financial accounting and reporting functions to support our rapid growth. Over the last few years we have endeavored to enhance our reporting and control standards to accommodate this growth and believe that this has been achieved. We plan to continue to assess our internal controls and procedures and intend to take further action as necessary or appropriate to address Table of Contents any other deficiencies we may identify. The process of designing and implementing effective internal controls and procedures is a continuous effort, however, that requires us to anticipate and react to changes in our business and economic and regulatory environments. Additionally, we or our independent registered public accounting firm may identify additional deficiencies or weaknesses. Complying with the requirements to maintain internal controls may place a strain on our personnel, information technology systems and resources and divert managements attention from other business concerns. Certification and compliance are important to the sale and adoption of our lighting products, and failure to obtain such certification or compliance would harm our business. We are required to comply with certain legal requirements governing the materials used in our products. Although we are not aware of any efforts to amend existing legal requirements or implement new legal requirements in a manner with which we cannot comply, our revenue might be materially harmed if such changes were to occur. Moreover, although not legally required to do so, we strive to obtain certification for substantially all of our products. In the United States, we seek, and to date have obtained, certification for substantially all of our products from Underwriters Laboratories, Inc., or UL . We design our products to be UL/cUL and Federal Communications Commission, or FCC, compliant. We have also obtained ENERGY STAR qualification for 102 of the products that we were producing as of February 10, 2014. Although we believe that our broad knowledge and experience with electrical codes and safety standards have facilitated certification approvals, we cannot be certain that we will be able to obtain any such certifications for our new products or that, if certification standards are amended, we will be able to maintain any such certifications for our existing products, especially since virtually all existing codes and standards were not created with LED lighting products in mind. The failure to obtain such certifications or compliance could harm our business. The reduction or elimination of investments in, or incentives to adopt, LED lighting or the elimination of, or changes in, policies, incentives or rebates in certain states or countries that encourage the use of LEDs over some traditional lighting technologies could cause the growth in demand for our products to slow, which could materially and adversely affect our revenue, profits and margins. We believe the near-term growth of the LED market will be accelerated by government policies in certain countries that either directly promote the use of LEDs or discourage the use of some traditional lighting technologies. Today, the upfront cost of LED lighting exceeds the upfront cost for some traditional lighting technologies that provide similar lumen output in many applications. However, some governments around the world have used policy initiatives to accelerate the development and adoption of LED lighting and other non-traditional lighting technologies that are seen as more environmentally friendly compared to some traditional lighting technologies. Reductions in (including as a result of any budgetary constraints), or the elimination of, government investment and favorable energy policies could result in decreased demand for our products and decrease our revenue, profits and margins. Further, if our products fail to qualify for any financial incentives or rebates provided by governmental agencies or utilities for which our competitors products qualify, such programs may diminish or eliminate our ability to compete by offering products at lower prices than our competitors. Table of Contents Changes in the mix of products we sell during a period could have an impact on our results of operations. Our profitability from period-to-period may also vary significantly due to the mix of products that we sell in different periods. As we expand our product offerings we expect to sell more retrofit lamps and luminaires into additional target markets. These products are likely to have different cost profiles and will be sold into markets governed by different business dynamics. Consequently, sales of individual products may not necessarily be consistent across periods, which could affect product mix and cause gross and operating profits to vary significantly. Given the potentially large size of purchase orders for our products, particularly in the infrastructure market, the loss of or delay in the signing of a customer order could significantly reduce our revenue in any period. In addition, we spend substantial amounts of time and money on our efforts to educate our customers about the use and benefits of our products, including their technical and performance characteristics, and these investments may not produce any sales within expected time frames or at all. We rely upon key members of our management team and other key personnel and a loss of key personnel could prevent or significantly delay the achievement of our goals. Our success will depend to a large extent on the abilities and continued services of key members of our management team including Thomas Shields, our Chief Financial Officer and Fredric Maxik, our Chief Technology Officer, as well as other key personnel. The loss of these key members of our management team or other key personnel could prevent or significantly delay the implementation of our business plan, research and development and marketing efforts. In particular, Fredric Maxik is critical to our research and development efforts. If we continue to grow, we will need to add additional management and other personnel. Our success will depend on our ability to attract and retain highly skilled personnel including a new Chief Executive Officer and our efforts to obtain or retain such personnel may not be successful. Our international operations are subject to legal, political and economic risks. Our financial condition, operating results and future growth could be significantly affected by risks associated with our international activities, including economic and labor conditions, political instability, laws (including U.S. taxes on foreign subsidiaries), changes in the value of the U.S. dollar versus foreign currencies, differing business cultures, foreign regulations that may conflict with domestic regulations, intellectual property protection and trade secret risks, differing contracting process including the ability to enforce agreements, increased dependence on foreign manufacturers, shippers and distributors and import and export restrictions and tariffs. Compliance with U.S. and foreign laws and regulations that apply to our international operations, including import and export requirements, anti-corruption laws, including the Foreign Corrupt Practices Act, tax laws (including U.S. taxes on foreign subsidiaries), foreign exchange controls, anti-money laundering and cash repatriation restrictions, data privacy requirements, labor laws and anti-competition regulations, increases the costs of doing business in foreign jurisdictions, and any such costs, which may rise in the future as a result of changes in these laws and regulations or in their interpretation. We have not implemented formal policies and procedures designed to ensure compliance with these laws and regulations. Any such violations could individually or in the aggregate materially adversely affect our reputation, financial condition or operating results. Table of Contents Risks related to this offering and ownership of our common stock Prior to this offering, our common stock has been thinly traded and an active trading market may not develop. The trading volume of our common stock has historically been low, partially because we are not listed on an exchange and our common stock is only traded on the over-the-counter bulletin board (the OTC Bulletin Board ). In addition, our public float has been further limited due to the fact that the vast majority of our outstanding common stock has historically been beneficially owned by affiliates of Pegasus Capital. A more active trading market for our common stock may not develop as a result of this offering or as a result of our proposed listing on the NASDAQ stock market, or if developed, may not continue, and a holder of any of our securities may find it difficult to dispose of, or to obtain accurate quotations as to the market value of, our common stock. We intend to elect to be a controlled company under the NASDAQ Marketplace Rules, controlled by Pegasus Capital, whose interests in our business may be different from yours. Affiliates of Pegasus Capital beneficially owned approximately 86.8% of our common stock as of February 10, 2014, and upon completion of this offering, Pegasus Capital will beneficially own approximately % of our common stock, or % of our common stock if the underwriters exercise their over-allotment option in full. As a result of this ownership, Pegasus Capital has a controlling influence on our affairs and its voting power constitutes a quorum of our stockholders voting on any matter requiring the approval of our stockholders. Such matters include the nomination and election of directors, the issuance of additional shares of our capital stock or payment of dividends, the adoption of amendments to our Amended and Restated Certificate of Incorporation ( Certificate of Incorporation ) and Amended and Restated Bylaws ( Bylaws ) and approval of mergers or sales of substantially all of our assets. This concentration of ownership may also have the effect of delaying or preventing a change in control of our company or discouraging others from making tender offers for our shares, which could prevent stockholders from receiving a premium for their shares. Pegasus Capital may cause corporate actions to be taken even if the interests of Pegasus Capital conflict with the interests of our other stockholders. Because of the equity ownership of Pegasus Capital, we intend to elect to be considered a controlled company for purposes of the NASDAQ Marketplace Rules. As such, we will be exempt from the NASDAQ corporate governance requirement that a majority of our Board meet the specified standards of independence and exempt from the requirement that we have a compensation and governance committee made up entirely of directors who meet such independence standards. Such independence standards are intended to ensure that directors who meet the independence standard are free of any conflicting interest that could influence their actions as directors. It is possible that the interests of Pegasus Capital may in some circumstances conflict with our interests and the interests of our other stockholders, including you. Because our stock price is volatile, it can be difficult for stockholders to predict the value of our shares at any given time and you may not be able to sell your shares at or above the public offering price. The public offering price for the shares of our common stock sold in this offering was determined by negotiation between the representatives of the underwriters and us. This price may not reflect the market price of our common stock following this offering. In addition, the market price of our common stock is likely to be highly volatile and may fluctuate substantially due to many factors, including, but not limited to: changes in expectations as to our future financial performance; announcements of technological innovations or new products by us or our competitors; Table of Contents announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; changes in laws and government regulations; developments concerning our proprietary rights; public perception relating to the commercial value or reliability of any of our lighting products; future sales of our common stock or issues of other equity securities convertible into or exercisable for the purchase of common stock; our involvement in litigation; the acquisition or divestiture by Pegasus Capital or its affiliates of part or all of its holdings; and general stock market conditions. Investors in this offering will experience immediate dilution in net tangible book value per share. The public offering price per share will significantly exceed the net tangible book value per share of our common stock. As a result, investors in this offering will experience immediate dilution of $ in net tangible book value per share as of based on an public offering price of $ , which is the midpoint of the price range set forth on the cover page of this prospectus. This dilution occurs in large part because our earlier investors paid substantially less than the public offering price when they purchased their shares. Investors in this offering may also experience additional dilution as a result of the exercise of outstanding stock options and warrants. Accordingly, in the event that we are liquidated, investors may not receive the full amount or any of their investment. Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment. After the repayment of any existing indebtedness on our Wells Fargo Facility, our management will have broad discretion to use our net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management might not apply our net proceeds of this offering in ways that increase the value of your investment. After repayment of the Wells Fargo Facility, we expect to use the net proceeds to us from this offering for general corporate purposes, including investments in our research and development activities, expansion of our sales force and working capital needs in support of our planned business activities. Our management might not be able to yield a significant return, if any, on any investment of these net proceeds. You will not have the opportunity to influence our decisions on how to use our net proceeds from this offering. Securities analysts may not provide coverage of our common stock or may issue negative reports, which may have a negative impact on the market price of our common stock. Securities analysts have not historically provided research coverage of our common stock and may elect not to do so after the completion of this offering. If securities analysts do not cover our common stock after the completion of this offering, the lack of research coverage may cause the market price of our common stock to decline. The trading market for our common stock may be affected in part by the research and reports that industry or financial analysts publish about our business. If one or more of the analysts who elects to cover us downgrades our stock, our stock price would likely decline substantially. If one or more of these analysts ceases coverage of us, we could lose visibility in the market, which in turn could cause our stock price to decline. In addition, rules mandated by the Sarbanes-Oxley Act of 2002 and a global settlement reached in 2003 between the SEC, other regulatory agencies and a number of investment banks have led to a number of fundamental changes in how analysts are reviewed and compensated. In particular, many investment banking firms are required to contract with independent financial analysts for their stock research. It may be difficult for companies such as ours, with smaller market capitalizations, to attract independent financial analysts that will cover our common stock. This could have a negative effect on the market price of our stock. Table of Contents We do not intend to pay cash dividends and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock. We have never declared or paid cash dividends on our common stock and we do not anticipate paying any cash dividends in the foreseeable future. We have a history of losses and currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business. In addition, the terms of the Wells Fargo Facility restrict our ability to pay cash dividends and any future credit facilities and loan agreements may further restrict our ability to pay cash dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of potential gain for the foreseeable future. Anti-takeover provisions in our Certificate of Incorporation and Bylaws, and Delaware law, contain provisions that could discourage a takeover. Anti-takeover provisions of our Certificate of Incorporation and Bylaws and Delaware law may have the effect of deterring or delaying attempts by our stockholders to remove or replace management, engage in proxy contests and effect changes in control. The provisions of our charter documents include: procedures for advance notification of stockholder nominations and proposals; the inability of less than a majority of our stockholders to call a special meeting of the stockholders; the ability of our Board to create new directorships and to fill any vacancies on the Board; the ability of our Board to amend our Bylaws without stockholder approval; and the ability of our Board to issue shares of preferred stock without stockholder approval upon the terms and conditions and with the rights, privileges and preferences as our Board may determine. In addition, as a Delaware corporation, we are subject to Delaware law, including Section 203 of the Delaware General Corporation Law (the DGCL ). In general, Section 203 prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder unless certain specific requirements are met as set forth in Section 203. These provisions, alone or together, could have the effect of deterring or delaying changes in incumbent management, proxy contests or changes in control. Future sales or the possibility of future sales of a substantial amount of our common stock may depress the price of shares of our common stock. Future sales or the availability for sale of substantial amounts of our common stock in the public market could adversely affect the prevailing market price of our common stock and could impair our ability to raise capital through future sales of equity securities. Upon consummation of this offering, based on the midpoint of the price range set forth on the cover page of this prospectus, there will be shares of our common stock outstanding. All shares of our common stock sold in this offering will be freely transferable without restriction or further registration under the Securities Act of 1933, as amended (the Securities Act ). We may issue shares of our common stock or other securities from time to time to raise capital to fund our operating expenses pursuant to the exercise of outstanding stock options or warrants or as consideration for future acquisitions and investments. If any such issuance, acquisition or investment is significant, the number of shares of our common stock, or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be substantial. We may also grant registration rights covering those shares of our common stock or other securities in connection with any such acquisitions and investments. We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares of our common stock issued in connection with an acquisition or by Pegasus Capital or its affiliates), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock. Table of Contents

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+RISK FACTORS Investing in our securities involves a high degree of risk. You should carefully consider the risks described below, together with the other information contained in this prospectus, including our financial statements and the related notes appearing at the end of this prospectus, before making your decision to invest in our securities. We cannot assure you that any of the events discussed in the risk factors below will not occur. These risks could have a material and adverse impact on our business, results of operations, financial condition or prospects. If that were to happen, the trading price of our common stock and warrants could decline, and you could lose all or part of your investment. This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this prospectus. See Information Regarding Forward-Looking Statements for information relating to these forward-looking statements. Risks Related to Our Business We have incurred significant losses, expect continued losses and may never achieve profitability. If we continue to incur losses, we may have to curtail our operations, which may prevent us from successfully achieving our operating plan and expanding our business. We have not been profitable and expect continued losses. Historically, we have relied upon cash from financing activities to fund substantially all of the cash requirements of our activities and have incurred significant losses and experienced negative cash flows. As of June 30, 2014, we had an accumulated deficit of $35.9 million. For our fiscal years ended September 30, 2012 and 2013 and the nine months ended June 30, 2014, we incurred net losses of $4.5 million, $2.6 million and $2.3 million, respectively. We cannot predict when we will become profitable or if we ever will become profitable. We may continue to incur losses for an indeterminate period of time and may never achieve or sustain profitability. Even if we are able to achieve profitability, we may be unable to sustain or increase our profitability on a quarterly or annual basis. An extended period of losses and negative cash flow may prevent us from successfully achieving our operating plan. Our independent registered public accounting firm has issued a report on our audited financial statements which raises substantial doubt about our ability to continue as a going concern. This may impair our ability to raise additional financing and adversely affect the price of our common stock. The report of our independent registered public accounting firm on our audited financial statements for the years ended September 30, 2012 and 2013 includes a paragraph that explains that we have incurred substantial losses and have a net capital deficiency that raises substantial doubt about our ability to continue as a going concern. Reports of independent registered public accounting firms including such doubt about a company s ability to continue as a going concern are generally viewed unfavorably by analysts and investors. This may make it difficult for us to raise additional debt or equity financing necessary to continue our operations. We urge potential investors to review this report before making a decision to invest in our company. Table of Contents There can be no assurance that we will be able to generate or secure sufficient funding to support our growth strategy. We intend to finance future acquisitions, including the Advent Cleaners Acquisition, and new store openings with cash from operations, the issuance of capital stock, borrowings, and the net proceeds from the sale of debt and/or equity securities, including the sale of securities hereby. If we do not have sufficient cash from operations, funds available under credit facilities and/or the ability to raise cash through the sale of debt and/or equity securities, or cannot issue our capital stock on suitable terms, we will be unable to pursue our growth strategy, which could have a material adverse effect on our ability to increase revenue and net income (or reduce net loss, as applicable), and on our financial condition and ability to sustain our operations. Our independent registered public accounting firm has identified material weaknesses in our internal controls for the years ended September 30, 2012 and 2013 that, if not properly remediated, could result in material misstatements in our financial statements in future periods and impair our ability to comply with the accounting and reporting requirements applicable to public companies. In connection with the audit of our financial statements for fiscal years 2012 and 2013, our independent registered public accounting firm identified material weaknesses in our internal control over financial reporting. As defined in the standards established by the Public Company Accounting Oversight Board of the United States, a material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses identified by our independent registered accounting firm are the following: (i) we have an inadequate segregation of duties consistent with control objectives; (ii) we have inadequate written documentation of internal control policies and procedures; (iii) we have inadequate controls over the identification, assessment and accounting for complex financial instruments and transactions and unusual and non-recurring transactions and (iv) we have ineffective controls over period end financial disclosure and reporting processes resulting in a significant number of post-closing adjustments. Our remediation efforts are still in process and have not yet been completed. Because of these material weaknesses, there is heightened risk that a material misstatement of our annual or quarterly financial statements will not be prevented or detected. In addition, the remediation steps we have taken, are taking and expect to take may not effectively remediate these material weaknesses, in which case our internal control over financial reporting would continue to be ineffective. We cannot guarantee that we will be able to complete our remedial actions successfully. Even if we are able to complete these actions successfully, these measures may not adequately address our material weaknesses. In addition, it is possible that we will discover additional material weaknesses in our internal control over financial reporting. We will be required to evaluate and disclose changes made to our internal control and procedures on a quarterly basis. As a result of our evaluation of our internal controls and procedures, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff. Our remediation efforts may not enable us to avoid material weaknesses in the future. Ensuring that we have adequate internal financial and accounting controls and procedures in place to help produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be evaluated frequently. Table of Contents If we are unable to adequately remediate the foregoing material weaknesses or comply or continue to comply with the foregoing obligations, it could subject us to a variety of administrative sanctions, including the suspension or delisting of our common stock from the NASDAQ Capital Market and the inability of registered broker-dealers to make a market in our common stock, which could reduce the market price of our common stock. In addition, in the event that we do not adequately remediate these material weaknesses, or if we fail to maintain proper and effective internal controls in future periods, our business, results of operations and financial condition and our ability to run our business effectively could be adversely affected and investors could lose confidence in our financial reporting. Our industry is highly competitive. The dry cleaning industry is highly competitive. We believe there could be as many as 40,000 dry cleaning stores in the United States, and we face intense competition for customers and access to suitable store locations. We will compete with other dry cleaner operators in each of our projected markets. Some of our competitors could have greater financial and marketing resources, market share, and/or name recognition than us. In addition, our proposed business could be affected by fashion trends, the economy, and a reduction in our markets population growth and/or financial conditions and habits. There can be no assurance that we will be able to compete successfully with such entities in the future. Pricing pressures from existing competitors and/or an influx of new competitors may have an adverse effect on our operating results. The competition in our market from the incumbent providers of dry cleaning services, especially discount or single price per piece operators, may place downward pressure on prices for our services, which can adversely affect our operating results. In addition, we could face competition from other companies we have not yet identified or which may later enter into our existing operating regions. If we are not able to compete effectively with these industry participants, or if our potential customer base is diluted by an influx of new stores, our operating results would be adversely affected. Many of our competitors and potential competitors could have superior resources, which could place us at a cost and price disadvantage. Thus, we may never realize revenues sufficient to sustain our operations, and we may fail in our business and cease operations. Many of our competitors, including those with franchised operations, and potential competitors may have significant competitive advantages, including greater market presence; name recognition; superior financial, technological and personnel resources; superior services and marketing capabilities; and significantly larger customer bases. As a result, some of our competitors and potential competitors could raise capital at a lower cost than we can, and they may be able to adapt more swiftly to new or emerging technologies and changes in customer requirements, take advantage of acquisition and other opportunities more readily, and devote greater resources to the development, marketing, and sale of services than we can. Also, our competitors and potential competitors greater brand-name recognition may require us to price our services at lower levels in order to win business. Our competitors and potential competitors financial advantages may give them the ability to reduce their prices for an extended period of time if they so choose. Table of Contents Our ability to implement our growth strategy may be limited by our ability to consummate acquisitions, and there can be no assurance that future acquisitions, including the Advent Cleaners Acquisition, will have a beneficial effect on our operating results. Our growth strategy includes acquisitions. We will have limited knowledge about the specific operating history, trends, and customer patterns of the dry cleaning stores to be acquired in connection with future acquisitions, including the Advent Cleaners Acquisition. Management will also be relying upon certain representations, warranties, and indemnities made by the sellers with respect to the acquisitions, as well as our own due diligence investigation. There can be no assurance that such representations and warranties will be true and correct or that our due diligence will uncover all material adverse facts relating to the operations and financial condition of the store acquired. Any material misrepresentation could have a material adverse effect on our financial condition and results of operations. Consequently, there can be no assurance that we will make future acquisitions at favorable prices, that acquired stores will perform as well as they had performed historically, or that we will have sufficient information to accurately analyze the markets in which we elect to make acquisitions. Further, while the acquired operations are being integrated into our existing operations, and even thereafter, the acquired operations may not achieve levels of revenue or profitability comparable to our existing operations, or otherwise perform as expected, particularly in the fiscal quarters immediately following the consummation of such transactions. Our financial results after the Advent Cleaners Acquisition may differ materially from the unaudited pro forma financial statements included in this prospectus. The pro forma financial statements contained in this prospectus are presented for illustrative purposes only, are based on various adjustments, assumptions and preliminary estimates and may not be an indication of the combined financial condition or results of operations following consummation of the Advent Cleaners Acquisition for several reasons. See the sections entitled Prospectus Summary Historical Financial and Operating Data and Summary Unaudited Pro Forma Data and Unaudited Pro Forma Financial Information. Thus, the actual financial condition and results of operations of the Advent Cleaners Acquisition may not be consistent with, or evident from, these pro forma financial statements. In addition, the assumptions used in preparing the pro forma financial information may not prove to be accurate, and other factors may affect our financial condition or results of operations following the Advent Cleaners Acquisition. Any potential decline in our financial condition or results of operations may cause significant variations in the stock price of our company after the Advent Cleaners Acquisition. See Prospectus Summary Recent Developments Advent Cleaners Acquisition. Our future results will suffer if we do not effectively manage our expanded operations following the Advent Cleaners Acquisition. Following the Advent Cleaners Acquisition, the size of our operations will increase significantly, adding 14 dry stores, three mini-hubs with retail operations and a central processing hub. We will also acquire several large commercial laundry contracts with some of the largest resorts and hotels in Las Vegas, Nevada. Our future success depends, in part, upon our ability to manage this expanded business, which will pose substantial challenges for management, including challenges related to the integration of point of service systems, billing, collections and accounting and associated increased costs and complexities. There can be no assurances that we will realize the expected operating efficiencies, revenue enhancements or other benefits currently anticipated from Advent Cleaners Acquisition. Table of Contents Third parties may terminate or alter existing assigned contracts under the Advent Cleaners Acquisition. Advent Cleaners has contracts with suppliers, lessors, and other business partners that have change of control or similar clauses that may make it difficult for Advent Cleaners to directly assign such contracts to us. In several instances, we may be required to enter into new contracts with these business partners. We will seek to obtain consent from these other parties, but if these third party consents cannot be obtained, or if we are required to enter into new contracts on unfavorable terms, the revenues associated with any such contract or relationship could be eliminated or significantly reduced and our financial condition and results of operations could be adversely impacted. After the Advent Cleaners Acquisition is completed, we may be subject to work stoppages at Advent facilities, which could seriously impact our operations and the profitability of our business. Currently, of Advent Cleaners 235 employees, 130 are members of the Culinary Local 226 labor union, or Local 226 Union, and Advent Cleaners is a party to a collective bargaining agreement with the Local 226 Union, or Advent CBA. While we do not intend to terminate any of Advent Cleaners unionized employees upon the closing of the Advent Cleaners Acquisition, the Advent CBA is not automatically assignable. Although we intend to enter into a new collective bargaining agreement with the Local 226 Union, we may not be able to enter into a new agreement on terms that are satisfactory to us, if at all. In addition, the terms of a new collective bargaining agreement could significantly increase our labor costs or negatively affect our ability to increase operational efficiency. Our unionized workers could engage in a strike, work stoppage or other slowdown in the future for any number of reasons, including disputes that may arise from negotiating the new collective bargaining agreement, disputes under collective bargaining agreements with labor unions in the future, or other reasons. A work stoppage or other disruption at our facilities for any reason (including but not limited to labor disputes, natural or man-made disasters, tight credit markets or other financial distresses) could have a substantial adverse effect on our financial condition and results of operation. Competition for acquisitions could adversely affect our ability to continue our growth. If other companies seek to acquire the same dry cleaning operations that we seek to acquire, acquisition prices would likely increase, resulting in fewer acquisition opportunities, which could have a material adverse effect on our growth. Our long-term success is also dependent on our ability to open new stores and is subject to many unpredictable factors. One of the key means of achieving our organic growth strategy will be through opening new stores and operating those stores on a profitable basis. We intend to develop new stores in our existing markets, especially in geographic regions that can be serviced by our existing hubs or mini-hubs, expand our footprint into adjacent markets and selectively enter into new markets. However, there are numerous factors involved in identifying and securing appropriate sites, including, but not limited to, the identification and availability of suitable locations with the appropriate population demographics, traffic patterns, local retail and business attractions and infrastructure that will drive high levels of customer traffic and store level sales. Further, competition for identified sites is intense, and other dry cleaning operators and retail concepts that compete for those sites may have unit economic models that permit them to bid more aggressively for those sites than we can. Our ability to open stores also depends on other factors, including, negotiating leases with acceptable terms, identifying, hiring and training qualified employees in each local market, and securing required governmental permits in a timely manner. Table of Contents There is no guarantee that a sufficient number of suitable sites will be available in desirable areas or on terms that are acceptable to us in order to achieve our organic growth plan. We may not be able to successfully develop critical market presence in new geographical markets, as we may be unable to find and secure attractive locations and attract new customers. If we are unable to fully implement our organic growth plans, our business, financial condition and results of operations could be materially adversely affected. The success of our expansion strategy depends on the continued loyalty of the customers of the acquired stores. The success of the dry cleaning stores to be acquired in any acquisition, including the Advent Cleaners Acquisition, depends in large part on our ability to retain customers from the operations we acquire. To the extent that customers have developed loyalty to former owners/operators, such transitions could result in a loss of customers. A significant loss of customers would have a material adverse effect on our financial condition and results of operations. No independent market studies have been made to confirm the continued demand for our dry cleaning services. No independent market studies have been made that confirm the demand for our dry cleaning services. If there is not a sufficient market for our dry cleaning services, we may suffer or fail in our business and cease operations. Changes in the cost of supplies, utilities and other operating costs beyond our control could adversely affect our results of operations. We purchase our supplies, including dry cleaning solvents, wire hangers and packaging materials from several large suppliers and the price for such supplies is subject to change. Our utility costs fluctuate during certain peak seasons, primarily during prolonged periods of cold in Virginia and Indiana and heat in California. Because we provide competitively priced dry cleaning and laundry services, our ability to pass along commodity price increases to our customers is limited. Significant increases in gasoline prices could also result in a decrease of customer traffic at our stores and increases in expenses attributed to our delivery routes, each of which could adversely affect our profit margins. If we face labor shortages or increased labor costs, our growth and operating results could be adversely affected. Labor is a primary component in the cost of operating our stores. If we face labor shortages or increased labor costs because of increased competition for employees, higher employee turnover rates, increases in the federal, state or local minimum wage or other employee benefits costs (including costs associated with health insurance coverage), our operating expenses could increase and our growth could be adversely affected. In addition, our growth depends in part upon our ability to attract, motivate and retain a sufficient number of well-qualified management personnel, as well as a sufficient number of other qualified employees, including customer service and equipment maintenance personnel. Difficulty in recruiting employees or high employee turnover in existing stores could have a material adverse effect on our business, financial condition and results of operations. Table of Contents In addition, some of our employees are paid at rates related to the United States federal minimum wage, and increases in the minimum wage would increase our labor costs. Further, costs associated with workers compensation are rising, and these costs may continue to rise in the future. We may be unable to increase our prices in order to pass these increased labor costs on to consumers, in which case our margins would be negatively affected, which could materially adversely affect our business, financial condition and results of operations. We rely on licensed third-party point-of-sale software and systems to manage customer orders and operate our back office management systems. The failure of this software and systems could harm our business. We rely on point-of-sale software and systems licensed from third-parties to operate our point-of-sale transactions including issuing pick-up and delivery receipts and tracking dry cleaning and laundry inventory while being processed. A substantial failure of the software and systems could restrict and limit our ability to track orders and fulfill orders in a timely manner. This could reduce the attractiveness of our services and cause our patrons to visit other dry cleaners. In addition, we rely on this software to transmit data required to coordinate payroll, track sales, generate operating reports to analyze store and regional performance and monitor loss prevention. Disruption in, changes to, or a failure of the software and systems could result in the loss of important data, and increase our expenses. Our business could suffer if we lose key management or are unable to attract and retain the talent required for our business. Our performance is significantly impacted by the efforts and abilities of our senior management team. We are highly dependent upon the members of our management team, including Mr. Alexander Bond, Ms. Kari Minton and Mr. Timothy Stickler, and each of our regional managers. Our executives have significant regulatory, industry, sales and marketing, operational and/or corporate finance experience. If we lose the services of one or more of our key executives, we may not be able to successfully manage our business or achieve our business objectives. If we are unable to recruit and retain qualified management personnel in a timely manner our results of operations and financial condition could suffer. If we are unable to attract and retain qualified personnel with dry cleaning service-related experience, our business could suffer. Our current and future success depends in part on our ability to identify, attract, hire, assimilate, train, retain, and motivate professional, highly-skilled technical, managerial, sales, marketing, and customer service personnel with dry cleaning service-related experience. If we fail to attract and retain the necessary managerial, sales and marketing, technical, and customer service personnel, we may not develop a sufficient customer base to adequately develop our proposed operations and our business could suffer or fail. Our business is seasonal and is also affected by severe weather. Our business is seasonal. Demand for our services, and therefore our sales, is lower during the summer months when customers tend to take more time off work and therefore require less occupation-related dry cleaning and laundry. Our business is also affected by weather, especially severe weather conditions such as hurricanes and tropical storms in Virginia and Hawaii, snow storms in Indiana and high temperatures in California. Table of Contents Proposed Symbols: We have applied for listing of our common stock and the warrants sold in this offering on The NASDAQ Capital Market under the symbols DCLN and DCLNW , respectively. No assurance can be given that such listings will be approved. Table of Contents Changes in economic conditions and other unforeseen conditions could materially affect our ability to maintain or increase sales. The dry cleaning industry depends, in large part, on consumer discretionary spending. The United States in general and the specific markets in which we operate, may suffer from depressed economic activity, recessionary economic cycles, higher fuel or energy costs, low consumer confidence, high levels of unemployment, reduced home values, increases in home foreclosures, investment losses, personal bankruptcies, reduced access to credit or other economic factors that may affect consumer discretionary spending. Sales in our stores could decline if consumers are unemployed reducing the demand for dry cleaning services, including uniforms, or choose to reduce the amount they spend on dry cleaning. Negative economic conditions and trends may cause consumers to make long-term changes to their discretionary spending behavior, including the continued adoption of business-casual and other workplace changes. In addition, given our geographic concentrations in specific regions of the United States, economic conditions in those particular areas of the country could have a disproportionate impact on our overall results of operations, and regional occurrences such as local strikes, terrorist attacks, increases in energy prices, and natural or man-made disasters could materially adversely affect our business, financial condition and results of operations. If sales decrease, our profitability could decline as we spread fixed costs across a lower level of sales. Reductions in staff levels, asset impairment charges and potential store closures could result from prolonged negative sales, which could materially adversely affect our business, financial condition and results of operations. Compliance with environmental laws may negatively affect our business. We are subject to federal, state and local laws and regulations concerning waste disposal, pollution, protection of the environment, and the presence, discharge, storage, handling, release and disposal of, and exposure to, hazardous or toxic substances. These environmental laws provide for significant fines and penalties for noncompliance and liabilities for remediation, sometimes without regard to whether the owner or operator of the property knew of, or was responsible for, the release or presence of hazardous or toxic substances. Third parties may also make claims against owners or tenants of properties or businesses for personal injuries and property damage associated with releases of, or actual or alleged exposure to, such hazardous or toxic substances at, on or from our stores. Environmental conditions relating to releases of hazardous substances at prior, existing or future store sites could materially adversely affect our business, financial condition and results of operations. Further, environmental laws, and the administration, interpretation and enforcement thereof, are subject to change and may become more stringent in the future, each of which could materially adversely affect our business, financial condition and results of operations. The effect of changes to healthcare laws in the United States may increase the number of employees who choose to participate in our healthcare plans, which may significantly increase our healthcare costs and negatively impact our financial results. In 2010, the Patient Protection and Affordable Care Act, or PPACA, was signed into law in the United States to require health care coverage for many uninsured individuals and expand coverage to those already insured. The healthcare reform law will require us to offer healthcare benefits to all full-time employees (including full-time hourly employees) that meet certain minimum requirements of coverage and affordability, or face penalties. If we elect to offer such benefits, we may incur substantial additional expense. If we fail to offer such benefits, or the benefits we elect to offer do not meet the applicable requirements, we may incur penalties. The healthcare reform law also requires individuals to obtain coverage or face individual penalties, so employees who are currently eligible but elect not to participate in our healthcare plans may find it more advantageous to do so when such individual mandates take effect. It is also possible that by making changes or failing to make changes in the healthcare plans offered by us, we will become less competitive in the market for our labor. Finally, implementing the requirements of healthcare reform applicable to us, including the requirement to offer affordable, minimum essential coverage to our full time employees beginning in 2015, is likely to impose additional administrative costs. The costs and other effects of these new healthcare requirements cannot be determined with certainty, but they may significantly increase our healthcare coverage costs and could materially adversely affect our business, financial condition and results of operations. Table of Contents We may pursue businesses in which we have limited or no experience, including tuxedo and eveningwear rental, and such businesses could fail to generate anticipated returns. Several of our competitors incorporate additional businesses into their dry cleaning and laundry operations. We may pursue similar businesses, and, in particular, are contemplating introducing tuxedo and eveningwear rentals into certain of our retail stores, even though we do not have experience operating such additional businesses. If we are not able to successfully integrate these additional business opportunities or if the costs associated with such businesses opportunities are greater than we project, our operating results could be adversely affected. Risks Relating to this Offering We may allocate net proceeds from this offering in ways which differ from our estimates based on our current plans and assumptions discussed in the section entitled Use of Proceeds and with which you may not agree. The allocation of net proceeds of the offering set forth in the Use of Proceeds section below represents our estimates based upon our current plans and assumptions regarding industry and general economic conditions, our future revenues and expenditures. The amounts and timing of our actual expenditures will depend on numerous factors, including market conditions, cash generated by our operations, business developments, suitable acquisition opportunities and related rate of growth. We may find it necessary or advisable to use portions of the proceeds from this offering for other purposes. Circumstances that may give rise to a change in the use of proceeds and the alternate purposes for which the proceeds may be used are discussed in the section entitled Use of Proceeds below. You may not have an opportunity to evaluate the economic, financial or other information on which we base our decisions on how to use our proceeds. As a result, you and other stockholders may not agree with our decisions. See Use of Proceeds section for additional information. Future sales by our stockholders may adversely affect our stock price and our ability to raise funds in new stock offerings. Sales of our common stock by our stockholders and option holders following this offering could lower the market price of our common stock. Sales may also make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that our management deems acceptable or at all. Of the 2,685,924 shares of common stock outstanding as of October 2, 2014, 1,559,501 shares are not restricted and will be freely tradable without restriction, unless held by our affiliates. You will experience immediate and substantial dilution in the book value per share of the common stock you purchase and may experience additional dilution in the future. Because the public offering price is expected to be substantially higher than the book value per share of our common stock, you will suffer substantial dilution in the net tangible book value of the common stock you purchase in this offering. Based on an assumed public offering price of $5.99 per share of common stock, which is the midpoint of the range of the purchase price for a share of common stock set forth on the cover page of this prospectus, after giving effect to the sale by us of up to 2,000,000 shares of common stock and after deducting underwriter commissions and estimated offering expenses payable by us, investors in this offering can expect an immediate dilution of $5.23 per share, based on the net tangible book value as of June 30, 2014, or 87%, at the public offering price, assuming no exercise of the warrants issued in this offering. Accordingly, should we be liquidated at our book value, you would not receive the full amount of your investment. See the section entitled Dilution elsewhere in this prospectus for a more detailed discussion of the dilution you will incur if you purchase securities in this offering. Table of Contents The issuance of warrants in this offering will cause you to experience additional dilution if those warrants are exercised for shares of our common stock. In addition to the shares of common stock we are issuing in this offering, we are also issuing an equal number of warrants. The warrants being issued are exercisable for an equal number of additional shares of common stock. If the holders of our warrants exercise their warrants, you will experience dilution at the time they exercise warrants. In addition to the warrants we are offering to purchasers in this offering, we are issuing warrants to the representative of the underwriters in this offering that are exercisable for up to 184,000 shares of our common stock (assuming full exercise of the underwriters over-allotment option). If the representative of the underwriters exercises these warrants, you will experience additional dilution. Furthermore, we have granted the representative of the underwriters in this offering the right to purchase additional shares of common stock and warrants from us to cover over-allotments, if any. If the representative of the underwriters exercises this option in whole or in part, you will experience additional dilution. Holders of warrants will have no rights as common stockholders until such holders exercise their warrants and acquire our common stock. Until holders of warrants acquire shares of our common stock upon exercise of the warrants, holders of warrants will have no rights with respect to the shares of our common stock underlying such warrants. Upon exercise of the warrants, the holders will be entitled to exercise the rights of a common stockholder only as to matters for which the record date occurs after the exercise date. Risks Relating to Our Common Stock and Warrants An active trading market for our common stock and warrants may not develop, and you may not be able to sell your common stock or warrants at or above the initial public offering price. There was no public market for our common stock or warrants immediately prior to the completion of this offering. An active trading market for our common stock and warrants may never develop or be sustained following this offering. If an active trading market does not develop, you may have difficulty selling your common stock or warrants at an attractive price, or at all. The price for our securities in this offering will be determined by negotiations among us and the representative of the underwriters, and it may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell your common stock or warrants at or above the initial public offering price or at any other price or at the time that you would like to sell. An inactive market may also impair our ability to raise capital by selling our securities, and it may impair our ability to attract and motivate our employees through equity incentive awards and our ability to acquire other companies by using our securities as consideration. Table of Contents The market prices of our common stock and warrants may fluctuate substantially. The market prices of our common stock and warrants could be subject to significant fluctuations after this offering. You should consider an investment in our securities to be risky, and you should invest in our securities only if you can withstand a significant loss and wide fluctuations in the market value of your investment. Some factors that may cause the market prices of our common stock and warrants to fluctuate, in addition to the other risks mentioned in this Risk Factors section and elsewhere in this prospectus, are: variations in our operating results; sale of our common stock by our stockholders, executives, and directors; sale of our warrants by our warrant holders; volatility and limitations in trading volumes of our shares of common stock and warrants; our ability to obtain financings; our cash position; changes in general economic, political and market conditions in any of the regions in which we conduct our business; changes in industry conditions or perceptions; changes in valuations of similar companies or groups of companies; departures and additions of key personnel; disputes and litigation related to contractual obligations; changes in applicable laws, rules, regulations, or accounting practices and other dynamics; and other events or factors, many of which may be out of our control. Upon the completion of this offering we will have significant equity overhang which could adversely affect the market price of our common stock and impair our ability to raise additional capital through the sale of equity securities. Upon completion of this offering, 2,184,000 shares of our common stock will be issuable upon exercise of the warrants issued to investors and the representative of the underwriters in this offering (assuming full exercise of the underwriters over-allotment option). The possibility that substantial amounts of our common stock may be issued to and then sold by investors or the perception that such issuances and sales could occur, often called equity overhang, could adversely affect the market price of our common stock and could impair our ability to raise additional capital through the sale of equity securities in the future. The consummation of the exercise of warrants for common stock would significantly increase the amount of our common stock outstanding and the amount of the equity overhang. Table of Contents U.S. Dry Cleaning Services Corporation Selected Historical and Unaudited Pro Forma Financial Data Unaudited Pro Forma Year Ended September 30, Year Ended September 30, 2012 2013 2013 Statements of Operations Data: Net Sales $ 21,374,671 $ 21,408,049 $ 31,273,009 Cost of sales (exclusive of depreciation and amortization show separately below) 9,637,552 9,360,266 14,735,439 Gross profit (exclusive of depreciation and amortization shown separately below) 11,737,119 12,047,783 16,537,570 Operating expenses: Stores and plant 8,428,456 8,367,537 11,515,178 Regional 2,464,607 2,224,889 2,914,742 Corporate 2,418,539 1,725,664 2,240,952 Depreciation and amortization 432,331 469,547 656,118 Operating loss (2,006,814 ) (739,854 ) (789,420 ) Other income (expense), net Interest expense (3,347,182 ) (2,510,495 ) (1,490,509 ) Gain on extinguishment of debt 833,873 654,935 654,935 Gain (loss) other 13,477 895 (30,652 ) Other expense net (2,499,832 ) (1,854,665 ) (866,226 ) Loss before provision for income taxes (4,506,646 ) (2,594,519 ) (1,655,646 ) Provision for income taxes 9,100 9,100 9,100 Net loss $ (4,515,746 ) $ (2,603,619 ) $ (1,664,746 ) Net loss attributable to common stockholders $ (4,515,746 ) $ (2,603,619 ) $ (1,664,746 ) Net loss per share basic and diluted $ (16.06 ) $ (3.85 ) $ (0.47 ) Weighted average shares outstanding basic and diluted 281,218 676,699 3,521,254 Pro forma net loss per share basic and diluted (unaudited) $ (0.74 ) $ (0.47 ) Pro forma weighted average common shares outstanding basic and diluted (unaudited) 3,521,254 3,521,254 Other Financial Information: EBITDA (1) $ (1,574,483 ) $ (270,307 ) $ 277,698 Table of Contents Raising additional capital, including through future sales and issuances of our common stock, the exercise of warrants or the exercise of rights to purchase common stock pursuant to our equity incentive plan could result in additional dilution of the percentage ownership of our stockholders, could cause our share price to fall and could restrict our operations. We expect that significant additional capital will be needed in the future to continue our planned operations, including acquisitions, purchasing of capital equipment, hiring new personnel, and continuing activities as an operating public company. To the extent we seek additional capital through a combination of public and private equity offerings, debt financings and strategic partnerships and alliances, our stockholders may experience substantial dilution. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders may be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of our stockholders. Debt and receivables financings may be coupled with an equity component, such as warrants to purchase shares of our common stock, which could also result in dilution of our existing stockholders ownership. The incurrence of indebtedness would result in increased fixed payment obligations and could also result in certain restrictive covenants, such as limitations on our ability to incur additional debt and other operating restrictions that could adversely impact our ability to conduct our business. A failure to obtain adequate funds may cause us to curtail certain operational activities, including sales and marketing, in order to reduce costs and sustain the business, and would have a material adverse effect on our business and financial condition. Under our 2014 Plan, we may grant equity awards covering up to an additional 1,250,000 shares of our common stock. As of the date of this offering, we have granted options to purchase up to 636,000 shares of common stock under the 2014 Plan. We plan to register the number of shares issuable upon outstanding awards and available for issuance under our 2014 Plan. Sales of shares issued upon exercise of options or granted under our 2014 Plan may result in material dilution to our existing stockholders, which could cause our share price to fall. Our issuance of shares of preferred stock could adversely affect the market value of our common stock, dilute the voting power of common stockholders and delay or prevent a change of control. Upon the completion of this offering and the conversion of all shares of our Series A Preferred Stock into shares of our common stock, our board of directors will have the authority to cause us to issue, without any further vote or action by the stockholders, up to 6,000,000 shares of preferred stock in one or more series, to designate the number of shares constituting any series, and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, voting rights, rights and terms of redemption, redemption price or prices and liquidation preferences of such series. The issuance of shares of preferred stock with dividend or conversion rights, liquidation preferences or other economic terms favorable to the holders of preferred stock could adversely affect the market price for our common stock by making an investment in the common stock less attractive. For example, investors in the common stock may not wish to purchase common stock at a price above the conversion price of a series of convertible preferred stock because the holders of the preferred stock would effectively be entitled to purchase common stock at the lower conversion price causing economic dilution to the holders of common stock. Further, the issuance of shares of preferred stock with voting rights may adversely affect the voting power of the holders of our other classes of voting stock either by diluting the voting power of our other classes of voting stock if they vote together as a single class, or by giving the holders of any such preferred stock the right to block an action on which they have a separate class vote even if the action were approved by the holders of our other classes of voting stock. The issuance of shares of preferred stock may also have the effect of delaying, deferring or preventing a change in control of our company without further action by the stockholders, even where stockholders are offered a premium for their shares. Table of Contents We do not intend to pay cash dividends on our shares of common stock so any returns will be limited to the value of our shares of common stock. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to stockholders will therefore be limited to the increase, if any, of our share price. We have applied for listing of our common stock and the warrants issued in this offering on The NASDAQ Capital Market in connection with this offering. There is no guarantee that our common stock and/or warrants will be listed on The NASDAQ Capital Market. We have applied to have our shares of common stock and the warrants we plan to issue in this offering listed for trading on The NASDAQ Capital Market. On the date of this prospectus, we believe that we will satisfy the listing requirements and expect that our common stock and warrants we plan to issue in this offering will be listed on The NASDAQ Capital Market. These listings, however, are not guaranteed. If our application is not approved, we will seek to have our common stock and warrants issued in this offering quoted on the OTC Bulletin Board. Even if such listing is approved, there can be no assurance any broker will be interested in trading our common stock or warrants issued in this offering. Therefore, it may be difficult to sell any shares or warrants you purchase in this offering if you desire or need to sell them. Our lead underwriter, Maxim Group LLC, is not obligated to make a market in our common stock or warrants, and even after making a market, can discontinue market making at any time without notice. Neither we nor the underwriters can provide any assurance that an active and liquid trading market in our common stock or warrants will develop or, if developed, that the market will continue. Due to the speculative nature of warrants, there is no guarantee that it will ever be profitable for holders of the warrants to exercise the warrants. The warrants being offered hereby do not confer any rights of common stock ownership on its holders, such as voting rights or the right to receive dividends, but rather merely represent the right to acquire shares of common stock at a formulaic price that is subject to adjustment for a limited period of time. Specifically, commencing on the pricing of this offering when the warrants are issued, holders of the warrants may exercise their right to acquire additional shares of our common stock. In order to do so, they must pay an exercise price equal to 100% of the public offering price in this offering within the 60 months following the date of issuance, after which date any unexercised warrants will expire and have no further value. There can be no assurance that the market price of our common stock will equal or exceed the exercise price of the warrants, and consequently, whether it will ever be profitable for holders of the warrants to exercise the warrants. Financial reporting obligations of being a public company in the United States are expensive and time-consuming, and our management will be required to devote substantial time to compliance matters. As a public company, we expect to incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, new and changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations promulgated and to be promulgated thereunder, as well as under the Sarbanes-Oxley Act, have created uncertainty for public companies and increased costs and time that boards of directors and management must devote to complying with these rules and regulations. The Sarbanes-Oxley Act and related rules of the Securities and Exchange Commission and The NASDAQ Stock Market regulate corporate governance practices of public companies. These rules require the establishment and maintenance of effective disclosure and financial controls and procedures, internal control over financial reporting and changes in corporate governance practices, among many other complex rules that are often difficult to implement, monitor and maintain compliance with. Moreover, the reporting requirements, rules, and regulations will make some activities more time-consuming and costly. In addition, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance. Our management and other personnel will need to devote a substantial amount of time to ensure that we comply with all of these requirements and to keep pace with new regulations, otherwise we may fall out of compliance and risk becoming subject to litigation or being delisted, among other potential problems. Table of Contents U.S. Dry Cleaning Services Corporation Selected Historical and Unaudited Pro Forma Financial Data Unaudited Pro Forma Nine Months Ended June 30 Nine Months Ended June 30, 2013 2014 2014 Statements of Operations Data: Net Sales $ 16,281,848 $ 15,804,521 $ 23,483,419 Cost of sales (exclusive of depreciation and amortization show separately below) 7,093,772 6,798,241 10,971,460 Gross profit (exclusive of depreciation and amortization shown separately below) 9,188,076 9,006,280 12,511,959 Operating expenses: Stores and plant 6,223,346 6,358,005 8,854,703 Regional 1,702,414 1,551,211 2,126,504 Corporate 1,260,095 1,579,768 1,982,720 Depreciation and amortization 349,447 346,658 517,156 Operating loss (347,226 ) (829,362 ) (969,124 ) Other income (expense), net Interest expense (1,855,496 ) (1,549,063 ) (521,929 ) Gain on extinguishment of debt 122,945 55,558 55,558 Gain other 855 6,007 9,507 Other income (expense) net (1,731,696 ) (1,487,498 ) (456,864 ) Loss before provision for income taxes (2,078,922 ) (2,316,860 ) (1,425,988 ) Provision for income taxes 9,100 9,100 9,100 Net loss $ (2,088,022 ) $ (2,325,960 ) $ (1,435,088 ) Series A Cumulative Convertible Preferred Stock Dividends (512,103 ) Net loss attributable to common stockholders $ (2,088,022 ) $ (2,838,063 ) $ (1,435,088 ) Net loss per share basic and diluted $ (3.27 ) $ (1.48 ) $ (0.28 ) Weighted average shares outstanding basic and diluted 638,855 1,923,490 5,119,335 Pro forma net loss per share basic and diluted (unaudited) $ (0.45 ) $ (0.28 ) Pro forma weighted average common shares outstanding basic and diluted (unaudited) 5,119,335 5,119,335 Other Financial Information: EBITDA (1) $ 2,221 $ (482,704 ) $ (143,718 ) Table of Contents Failure to establish and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price. We are not currently required to comply with the rules of the Securities and Exchange Commission implementing Section 404 of the Sarbanes-Oxley Act and therefore are not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a publicly traded company, we will be required to comply with the Securities and Exchange Commission s rules implementing Section 302 and 404 of the Sarbanes-Oxley Act, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. Though we will be required to disclose changes made in our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the Securities and Exchange Commission. At this time, our independent registered public accounting firm is not required to conduct an audit of the effectiveness of our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act. To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring additional accounting or internal audit staff. As described above, in connection with the audit of our financial statements for fiscal years 2012 and 2013, our independent registered public accounting firm identified four material weaknesses in our internal control over financial reporting. In addition to the current material weaknesses that have been identified by our independent registered public accounting firm, we or they may identify additional material weaknesses in our internal control over financial reporting that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act. If we identify weaknesses in our internal control over financial reporting, are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the exchange on which our securities are listed, the Securities and Exchange Commission or other regulatory authorities, which could require additional financial and management resources. Table of Contents Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable. Provisions in our restated certificate of incorporation and restated bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our board of directors has the right to determine the authorized number of directors and to elect directors to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to control the size of or fill vacancies on our board of directors. Our board of directors may issue, without stockholder approval, shares of undesignated preferred stock. The ability to authorize undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us. Table of Contents U.S. Dry Cleaning Services Corporation Selected Historical and Unaudited Pro Forma Financial Data June 30, 2014 Actual Unaudited Pro Forma Balance Sheet Data: Cash $ 342,167 $ 7,008,127 Total assets 3,810,197 14,480,153 Related party and other long-term debt net (1) 12,528,096 1,178,156 Other noncurrent liabilities 541,226 541,226 Capital lease obligations 48,711 48,711 Total stockholders equity (deficit) (13,308,700 ) 8,499,132 Table of Contents

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+RISK FACTORS Investing in our common stock involves significant risks. We strongly encourage you to review the "Risk Factors" disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the SEC. See "WHERE YOU CAN OBTAIN MORE INFORMATION" and "INCORPORATION BY REFERENCE" below for information on how to obtain this Annual Report. In addition, you should review the additional and updated risk factors described below prior to making any decision about making an additional investment in our common stock by participating in this rights offering. Many risks we face are beyond our control. If any of these risks actually occurs, our business, financial condition, and/or results of operations could be negatively affected, and you could lose part or all of your investment. Risks Relating to Our Business Our subsidiary bank remains subject to a Consent Order issued by its federal regulator that will result in increased costs and reduced earnings to us for the foreseeable future and could lead to more severe regulatory action against us. Our subsidiary bank has been subject to a Consent Order with its primary federal regulator since September 2009. On October 31, 2013, the September 2009 Consent Order was replaced with a new Consent Order. We expect to remain subject to the new Consent Order for some period of time following completion of this rights offering. The Consent Order requires management to take a number of actions, including maintaining certain minimum regulatory capital ratios. As described under "THE COMPANY" below, the Bank completed a private placement transaction in December 2013 that caused the Bank to meet these minimum capital ratios as of December 31, 2013. However, there is no assurance that the Bank will be able to maintain these minimum capital ratios in 2014 or thereafter. We currently project that the Company will need to contribute up to approximately $430,000 of additional funds to the Bank in the first quarter of 2014 in order for the Bank to maintain its minimum capital ratios through the balance of 2014. If so, and if we do not raise sufficient proceeds in this rights offering and do not otherwise have a sufficient amount of cash available at the holding company to contribute to the Bank, our Bank will not be able to maintain the minimum capital ratios required by the Consent Order. This risk exists even if we sell the maximum number of shares being offered in this rights offering. If the Bank's capital ratios fall below the minimum ratios required by the Consent Order and we are not able to raise additional capital or take other steps to increase the capital ratios, it is possible the OCC will take additional regulatory enforcement action against our Bank or require the Bank to remain subject to the Consent Order for an extended period of time. In addition to the minimum capital ratios, the Consent Order requires the Board of Directors and management of the Bank to take a number of actions designed to improve the Bank's operations, including several measures intended to enhance the Bank's risk management policies and practices. Although the Bank has been subject to a Consent Order for over four years, the Bank's regulator believes the Bank has not made sufficient improvements to its operations and risk management policies and practices. In addition, the Bank's regulator has cited the Bank for various violations of laws and regulations. It is possible our efforts to comply with the requirements of the Consent Order will not be sufficient for the Bank to be deemed in compliance with the Consent Order or will not sufficiently improve our risk management policies and practices. As a result, there continues to be a risk of further regulatory enforcement action against our Bank. In addition, our financial condition and results of operations may be more susceptible to adverse consequences until our risk management policies and practices have been sufficiently improved. Continuing to be subject to a Consent Order will result in increased expenses and reduced earnings. Our expenses will be higher because of the additional actions we are required to take by the Consent Order or as a result of being subject to the Consent Order that we might not otherwise take, including ongoing periodic reporting obligations. In addition, the premiums we pay for FDIC insurance will remain higher as long as we remain subject to the Consent Order. In addition to these increased expenses, we will likely have less opportunity to increase our earnings than would be the case if we were not subject to a Consent Order. This is because we are required obtain approval from the Bank's regulator before taking certain actions to expand our business activities or to engage in certain significant transactions. We may not be permitted to pursue expanded business activities, new product lines, or other transactions as long as the Bank's regulator believes we have not implemented the appropriate risk management policies and practices related to such efforts. As a result of the foregoing, we expect that our financial condition and results of operations in the foreseeable future will continue to be negatively impacted as a result of the existence of the Consent Order and the conditions at the Bank that warranted imposition of the Consent Order. Risks Relating to this Offering and Our Common Stock One of our directors controls over 40% of our outstanding voting stock and has the ability to exert significant influence over our management and operations. As described under

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+RISK FACTORS Investing in our common stock involves a number of risks. You should carefully consider all of the information contained or incorporated by reference in this prospectus, including the risk factors set forth below, before investing in the common stock offered by this prospectus. The risks described below may impair or adversely affect our business, results of operations and financial condition. In such case, you may lose all or part of your original investment. Risks Related to Our Business As a financial institution, we are subject to a number of risks relating to our daily business. Among the risks we face as a financial institution are the following: Credit risk: the risk that loan customers or other parties will be unable to perform their contractual obligations; Market risk: the risk that changes in market interest rates and prices will adversely affect our financial condition or results of operation; Liquidity risk: the risk that River Valley or the Bank will have insufficient cash or access to cash to meet its operating needs; Operational risk: the risk of loss resulting from fraud, inadequate or failed internal processes, people and systems, or external events; Economic risk: the risk that the economy in our markets could decline further resulting in increased unemployment, decreased real estate values and increased loan charge-offs; and Compliance risk: the risk of additional action by our regulators or additional regulation that could hinder our ability to do business profitably. Many of the foregoing risks are outside of our control. Difficult market conditions have adversely affected our industry. We are particularly exposed to downturns in the U.S. housing market. Dramatic declines in the housing market over the past six years, with falling home prices and increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of mortgage loans and market value of securities and resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities, major commercial and investment banks, and regional financial institutions. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have continued to observe tight lending standards, including with respect to other financial institutions. These market conditions have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence and increased market volatility. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry. In particular, we may face the following risks in connection with these events: We are experiencing, and expect to continue experiencing increased regulation of our industry, particularly as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") and the Consumer Financial Protection Bureau (the "CFPB"). Compliance with such regulation is expected to increase our costs and may limit our ability to pursue business opportunities. Table of Contents Our ability to assess the creditworthiness of our customers may be impaired if the models and approach we use to select, manage and underwrite our customers become less predictive of future behaviors. The process we use to estimate losses inherent in our credit exposure requires difficult, subjective and complex judgments, including forecasts of economic conditions and how these economic predictions might impair the ability of our borrowers to repay their loans, which may no longer be capable of accurate estimation which may, in turn, impact the reliability of the process. Our ability to borrow from other financial institutions on favorable terms or at all could be adversely affected by further disruptions in the capital markets or other events. Competition in our industry could intensify as a result of the increasing consolidation of financial services companies in connection with current market conditions. We may be required to pay significantly higher deposit insurance premiums if market developments deplete the insurance fund of the FDIC and reduce the ratio of reserves to insured deposits. A downturn in the economy, particularly in southern Indiana where our business is primarily conducted, could have an adverse effect on our business, results of operations and financial condition. We operate in branch offices concentrated in south central and southeastern Indiana and adjacent areas along the Ohio River in Kentucky. Our success depends upon the business activity, population, income levels, deposits and real estate activity in these markets. Although our customers' business and financial interests may extend well beyond these market areas, adverse economic conditions that affect these market areas could reduce our growth rate, affect the ability of our customers to repay their loans to us and generally affect our financial condition and results of operations. Following the national subprime lending crisis in 2008 and the national recession that followed, our market areas experienced depressed real estate activity and increased unemployment levels. Jefferson County, at the heart of our market area, typically has unemployment rates at or slightly above Indiana and the U.S. generally, but has recovered to a point where the current rate is below the statewide average. The Jefferson County unemployment rate peaked at 11.9% in June 2009 and as of March 31, 2014 was at 5.9% compared to 6.3% for Indiana and 6.8% nationally. The current rate of 5.9% marks a full two percentage point decrease from one year ago. Part of this job growth is due to an overall increase in manufacturing employment in the county, which is now at its highest level since 2008.The total county-wide labor force (16,199) is gradually increasing after declines due to the 2009 recession, and total employment in the county (15,018) is now at its highest level since 2008. The area's manufacturing base continues to supply much of the recent growth in jobs and wages. Since the end of 2008, average weekly manufacturing wages have increased nearly $200. This contributed in part to the per capita income of Jefferson County reaching its highest level (inflation adjusted) in a decade in 2012. According to a survey conducted by the Jefferson County Industrial Development Corporation, businesses invested over $25 million in new equipment in 2013 and anticipated hiring nearly 100 new workers in 2014. One example is Madison Precision Products, the third largest manufacturer in Jefferson County, which is currently completing a $17 million expansion of its facility and which employs nearly 500 persons. A sustained downturn in economic conditions, particularly within our primary market areas, could result in a decrease in demand for our products and services, an increase in loan delinquencies and defaults, and high or increased levels of problem assets and foreclosures. Moreover, because of our geographic concentration, we are less able than other regional or national financial institutions to diversify our credit risks across multiple markets. Table of Contents The soundness of other financial institutions could adversely affect us. Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Many of these transactions expose us to credit risk in the event of default by our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due us. There is no assurance that any such losses would not materially and adversely affect our results of operations or earnings. Future reductions in liquidity in the banking system could harm us. The Federal Reserve Bank has been injecting vast amounts of liquidity into the banking system to compensate for weaknesses in short-term borrowing markets and other capital markets. However, the Federal Reserve has recently announced that it will begin cutting back and reducing its bond-buying program during 2014. A reduction in the Federal Reserve's activities or capacity could reduce liquidity in the markets, thereby increasing our funding costs or reducing the availability of funds available to us to finance our existing operations and our growth strategies. Liquidity risks could affect our operations and jeopardize our business, results of operations and financial condition. Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our primary sources of funds consist of cash from operations, investment maturities and sales and deposits. Additional liquidity is provided by our ability to borrow from the Federal Home Loan Bank. Our access to funding sources in amounts adequate to finance or capitalize our activities or on terms that are acceptable to us could be impaired by factors that affect us directly or the financial services industry or economy in general, such as further disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry. We may experience difficulties in managing our growth, and our growth strategy involves risks that may negatively impact our results of operations. Although we do not have any agreements to do so, we may expand into additional communities or attempt to strengthen our position in our current markets through opportunistic acquisitions of all or part of other financial institutions and/or by continuing to open new branches. To the extent that we undertake acquisitions and/or organic growth, we are likely to experience the effects of higher operating expenses relative to operating income from the new operations, which may have an adverse effect on our levels of reported net income, return on average equity and return on average assets. Other effects of engaging in such growth strategies may include potential diversion of our management's time and attention and general disruption to our business. To the extent that we grow organically and/or through acquisitions, we cannot assure you that we will be able to adequately and profitably manage this growth. Acquiring other banks and businesses will involve similar risks to those commonly associated with branching, but may also involve additional risks, including: potential exposure to unknown or contingent liabilities of banks and businesses we acquire; exposure to potential asset quality issues of the acquired bank or related business; difficulty and expense of integrating the operations and personnel of banks and businesses we acquire; Table of Contents the possible loss of key employees and customers of the banks and businesses we acquire; and the need to enhance or expand our management team to handle appropriately our growth. Attractive acquisition opportunities may not be available to us in the future. We expect that other banking and financial service companies, many of which have significantly greater resources than us, will compete with us in seeking to acquire other financial institutions if we pursue such acquisitions. This competition could increase the purchase price of potential acquisitions that we believe are attractive. Also, acquisitions are subject to various regulatory approvals. If we fail to receive the appropriate regulatory approvals, we will not be able to consummate an acquisition that we believe is in our best interests. Among other things, our regulators consider our capital, liquidity, profitability, regulatory compliance and levels of goodwill and intangibles when considering acquisition and expansion proposals. Any acquisition could be dilutive to our earnings and shareholders' equity. We may need additional capital resources in the future and these capital resources may not be available when needed or at all, without which our financial condition, results of operations and prospects could be materially impaired. If we continue to experience significant growth, we may need to raise additional capital. Our ability to raise capital, if needed, will depend upon our financial performance and condition and on conditions in the capital markets, as well as economic conditions generally. Accordingly, such financing may not be available to us on acceptable terms or at all. If we cannot raise additional capital when needed, it would have a material adverse effect on our business, financial condition and results of operations. Interest rates and other conditions impact our results of operations. Our profitability is significantly driven by the spread between the interest rates earned on investments and loans and the interest rates paid on deposits and other interest-bearing liabilities. Like most banking institutions, our net interest spread and margin will be affected by general economic conditions and other factors, including fiscal and monetary policies of the federal government, that influence market interest rates and our ability to respond to changes in such rates. At any given time, our assets and liabilities will be affected differently by a given change in interest rates. As a result, an increase or decrease in rates, the length of loan terms or the mix of adjustable and fixed rate loans in our portfolio could have a positive or negative effect on our net income, capital and liquidity. We measure interest rate risk under various rate scenarios and using specific criteria and assumptions. Significant fluctuations in interest rates may have an adverse effect on our business, results of operations and financial condition. Changes in interest rates can also affect our loan volumes. For instance, an increase in interest rates could cause a decrease in the demand for one- to four-family residential mortgage loans, which as of March 31, 2014, represented $136.1 million, or 42.8%, of our loan portfolio. This would result in a decline in our revenue stream. Increases in interest rates may also make it more difficult for borrowers to repay adjustable rate loans. Declines in asset values may result in impairment charges and adversely affect the value of our investments, financial performance and capital. As of March 31, 2014, we had a net unrealized loss of $1.5 million on our $117.3 million portfolio of investment securities available for sale. This compares to an unrealized loss of $2.8 million, on a $119.9 million portfolio at December 31, 2013. In assessing the impairment of investment securities, which we do quarterly, we consider the length of time and extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuers, whether the market decline was affected by macroeconomic conditions and whether we have the intent to sell the security or will Table of Contents be required to sell the security before its anticipated recovery. We also use economic models and independent third party analysts to assist in the valuation of some of our investment securities. If our investment securities experience a decline in value and we determine the decline represents an other-than-temporary impairment, we will be required to record a write-down or loss and a charge to our earnings. We must effectively manage our credit risk. There are risks inherent in making any loan, including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and risks resulting from changes in economic and industry conditions. We cannot assure you that such approval and monitoring procedures will reduce these credit risks. Our allowance for loan losses may prove to be insufficient to absorb potential losses in our loan portfolio. Our business depends on the creditworthiness of our customers. We determine our allowance for loan losses pursuant to our established guidelines and practices and maintain a level considered adequate by management to absorb loan losses that are inherent in the portfolio. The amount of future loan losses is susceptible to changes in economic, operating and other conditions (in our markets as well as the United States), including changes in interest rates, which may be beyond our control, and such losses may exceed current estimates. At March 31, 2014, our allowance for loan losses as a percentage of total loans was 1.32% and as a percentage of total non-performing loans (excluding performing troubled debt restructured loans) was 36.49%. This compares to 1.41% and 39.17%, respectively, at December 31, 2013. We cannot predict loan losses with certainty, and we cannot assure you that our allowance for loan losses will prove sufficient to cover actual loan losses in the future. Loan losses in excess of our reserves may adversely affect our business, results of operations and financial condition. A sustained decline in the mortgage loan markets or the related real estate markets could reduce loan origination activity or increase delinquencies, defaults and foreclosures, which could adversely affect our financial results. Historically, our mortgage loan business has provided a significant portion of our revenue and our ability to maintain or grow that revenue is dependent upon our ability to originate loans and sell them on the secondary market. Mortgage loan origination is sensitive to changes in economic conditions, including decreased economic activity, a slowdown in the housing market, or higher market interest rates, and has historically been cyclical, enjoying periods of strong growth and profitability followed by periods of lower volumes and market-wide losses. During periods of rising interest rates, refinancing originations for many mortgage products tend to decrease as the economic incentives for borrowers to refinance their existing mortgage loans are reduced. In addition, the mortgage loan origination business is affected by changes in real property values. A reduction in real property values could also negatively affect our ability to originate mortgage loans because the value of the real properties underlying the loans is a primary source of repayment in the event of foreclosure. The national market for residential mortgage loan refinancing has experienced a decline in recent years, and a continuation of that trend may adversely impact our business. A decline in originations will mean a decline in sales in the secondary market. We also have a substantial portion of our loan portfolio in agricultural land, specifically, $28.4 million at March 31, 2014, or 8.9% of total loans. A decline in demand for agricultural mortgage loans or the value of agricultural land, including as a result of volatility of crop values, could result in lower revenue and increased delinquencies. Any sustained period of increased delinquencies, foreclosures or losses could negatively affect our ability to originate and sell mortgage loans and the price received on the sale of such loans, which could have a material adverse effect on our business, financial condition and results of operations. Table of Contents Our loan portfolio includes nonresidential real estate loans, which involve risks specific to real estate value. Nonresidential real estate loans were $112.1 million, or approximately 35.2% of our total loan portfolio, as of March 31, 2014. This compares to $118.9 million, or 36.5%, at December 31, 2013. These loans are extended to churches, farms and small business properties and include land used for agricultural production. The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. Continued adverse developments affecting real estate values in one or more of our markets could increase the credit risk associated with our loan portfolio. Additionally, nonresidential real estate lending typically involves higher loan principal amounts and the repayment of the loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic events or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties. If the loans that are collateralized by real estate become troubled and the value of the real estate has been significantly impaired, then we may not be able to recover the full contractual amount of principal and interest that we anticipated at the time of originating the loan, which could cause us to increase our provision for loan losses and adversely affect our operating results and financial condition. In addition, we may face increased risk on these loans compared to some of our larger competitors because we focus our marketing efforts on, and make a majority of our nonresidential real estate loans to, small and medium-sized businesses. Smaller companies tend to be at a competitive disadvantage and generally have limited operating histories, less sophisticated internal record keeping and financial planning capabilities and fewer financial resources than larger companies. As a result, it may be more difficult to evaluate borrowers' creditworthiness and lending risks, and they may be more susceptible to economic downturns. Lending to these companies may be more risky than lending to larger, more established enterprises. In the event of a real estate recession or natural disaster, our risks could increase due to our concentration in real estate. A significant portion of our loan portfolio is secured by real estate. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. A weakening of the real estate market in our primary market area could result in an increase in the number of borrowers who default on their loans and a reduction in the value of the collateral securing their loans, which in turn could have an adverse effect on our profitability and asset quality. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our earnings and capital could be adversely affected. Historically, Indiana and Kentucky have experienced, on occasion, significant natural disasters, including tornadoes and floods. The availability of insurance for losses for such catastrophes is limited. Our operations could also be interrupted by such natural disasters. Acts of nature, including tornadoes and floods, which may cause uninsured damage and other loss of value to real estate that secures our loans or interruption in our business operations, may also negatively impact our operating results or financial condition. Our commercial and consumer loans generally have a higher degree of risk of default than our other loans. At March 31, 2014, commercial loans totaled $22.5 million, or 7.1% of our total loan portfolio, while consumer loans totaled $3.7 million, or 1.2% of our total loan portfolio. These figures compare to $24.7 million, or 7.6%, and $4.3 million, or 1.3%, respectively, at December 31, 2013. Commercial loans generally have much larger loan balances and greater credit risk than our residential mortgage loans. Consumer loans typically have shorter terms and lower balances with higher yields as compared to one-to-four family residential loans, but generally carry higher risks of default and greater losses upon default. They are generally unsecured or secured by assets that depreciate in value, like Table of Contents automobiles. Commercial and consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal and business circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on these loans. We rely on our management team and could be adversely affected by the unexpected loss of key officers. Our future success and profitability is substantially dependent upon our management and the abilities of our senior executives. We believe that our future results will also depend in part upon our ability to attract and retain highly skilled and qualified management and our ability to place the right people in the right positions based on talents and skills. Competition for senior personnel is intense, and we may not be successful in attracting and retaining such personnel. Changes in key personnel and their responsibilities may be disruptive to our businesses and could have a material adverse effect on our businesses, financial condition and results of operations. In particular, the loss of our chief executive officer, Matthew P. Forrester, could have a material adverse effect on our business, financial condition and results of operations. The preparation of our financial statements requires the use of estimates that may vary from actual results. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make significant estimates that affect the financial statements. One of our most critical estimates is the level of the allowance for loan losses. Due to the inherent nature of these estimates, we cannot provide absolute assurance that we will not have to increase the allowance for loan losses and/or sustain loan losses that are significantly higher than the provided allowance. Because of our holding company structure, we depend on capital distributions from the Bank to fund our operations. We are a separate and distinct legal entity from the Bank and have no business activities other than our ownership of the Bank. As a result, we primarily depend on dividends, distributions and other payments from the Bank to fund our obligations. The ability of the Bank to pay dividends to us is limited by state and federal law and depends generally on the Bank's ability to generate net income. If we are unable to comply with applicable provisions of these statutes and regulations, the Bank may not be able to pay dividends to us, and we would not be able to pay dividends on our outstanding common stock. Our inability to continue to accurately process large volumes of transactions could adversely impact our business and financial results. In the normal course of business, we process large volumes of transactions. If systems of internal control should fail to work as expected, if systems are used in an unauthorized manner, or if employees subvert the system of internal controls, significant losses could result. We are exposed to numerous types of operational risk. Operational risk resulting from inadequate or failed internal processes, people and systems includes the risk of fraud by persons inside or outside River Valley, the execution of unauthorized transactions by employees, errors relating to transaction processing and systems, and breaches of the internal control system and compliance requirements. This risk of loss also includes the potential legal actions that could arise as a result of the operational deficiency or as a result of noncompliance with applicable regulatory standards. From time to time, losses from operational risk may occur, including the consequences of operational errors. There can be no assurance that future losses will not occur. Table of Contents Exhibit No. Description 10 (12)* Amended and Restated Employment Agreement (John Muessel) is incorporated by reference to Exhibit 10.3 to the Registrant's Form 8-K filed on November 26, 2007 (SEC File/Film Number 000-21765/071265974); First Amendment thereto dated September 17, 2009, is incorporated by reference to Exhibit 10(13) to the Registrant's Form 10-K filed on March 18, 2014 10 (13)* Amended and Restated Director Deferred Compensation Master Agreement, is incorporated by reference to Exhibit 10.4 to the Registrant's Form 8-K filed on November 26, 2007 (SEC File/Film Number 000-21765/071265974) 10 (14)* Form of Directors' Deferral Plan Deferral and Distribution Election Form is incorporated by reference to Exhibit 10.14 to the Registrant's Form 10-K filed on March 16, 2010 10 (15) Form of Investment Agreement for Series A Preferred Stock is incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K filed on November 24, 2009 10 (16)* 2013 River Valley Financial Bank Incentive Plan is incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K filed on December 13, 2012 10 (17) Branch Purchase and Assumption Agreement, dated September 4, 2013, is incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K filed on September 5, 2013 10 (18)* 2014 River Valley Financial Bank Incentive Plan is incorporated by reference to Exhibit 10(20) to the Registrant's Form 10-K filed on March 18, 2014 10 (19)* 2014 Stock Option and Incentive Plan is incorporated by reference to Exhibit 10.1 to Registrant's Form 8-K filed on April 17, 2014 10 (20)* Form of Nonqualified Stock Option Agreement for 2014 Stock Option and Incentive Plan is incorporated by reference to Exhibit 10.2 to Registrant's Form 8-K filed on April 17, 2014 10 (21)* Form of Incentive Stock Option Agreement for 2014 Stock Option and Incentive Plan is incorporated by reference to Exhibit 10.3 to Registrant's Form 8-K filed on April 17, 2014 10 (22)* Form of Agreement for Restricted Stock Grant under the 2014 Stock Option and Incentive Plan is incorporated by reference to Exhibit 10.4 to Registrant's Form 8-K filed on April 17, 2014 21 Subsidiaries of the Registrant is incorporated by reference to Exhibit 21 to the Registrant's Form 10-K filed on March 18, 2014 23 (1)** Consent of BKD, LLP 23 (2) Consent of Barnes & Thornburg LLP (included in Exhibit 5(1)) Table of Contents We continually encounter technological changes. The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements, and we may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations. System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities. The computer systems and network infrastructure that we rely on heavily to conduct our business could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us. There can be no assurance that any security measures we undertake to prevent such disruptions or breaches will be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. We may not have the resources or technical sophistication to anticipate and prevent rapidly evolving types of cyber attacks. A failure of such security measures could result in significant legal and financial exposure, damage to our reputation and a loss of confidence in our security measures, which could have a material adverse effect on our financial condition and results of operations. Damage to our reputation could damage our business. Our business depends upon earning and maintaining the trust and confidence of our customers, investors and employees. Damage to our reputation could cause significant harm to our business and prospects. Harm to our reputation can arise from numerous sources, including, among others, employee misconduct, compliance failures, litigation or regulatory outcomes or governmental investigations. In addition, a failure to deliver appropriate standards of service and quality, or a failure or perceived failure to treat customers and clients fairly, can result in customer dissatisfaction, litigation, privacy breach and heightened regulatory scrutiny, all of which can lead to lost revenue, higher operating costs and harm to our reputation. Adverse publicity about River Valley, whether or not true, may result in harm to our prospects. Should any events or factors that can undermine our reputation occur, there is no assurance that the additional costs and expenses that we may need to incur to address the issues giving rise to the reputational harm would not adversely affect our earnings and results of operations. Table of Contents We face intense competition in all phases of our business from other banks and financial institutions. The banking and financial services business in our market areas is highly competitive. Our competitors include large regional banks, local community banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market mutual funds, credit unions, farm credit services and other non-bank financial service providers. Many of these competitors are not subject to the same regulatory restrictions as we are and are able to provide customers with a feasible alternative to traditional banking services. Increased competition in our market areas may also result in a decrease in the amounts of our loans and deposits, reduced spreads between loan rates and deposit rates or loan terms that are more favorable to the borrower. Any of these results could have a material adverse effect on our ability to grow and remain profitable. If increased competition causes us to significantly discount the interest rates we offer on loans or increase the amount we pay on deposits, our net interest income could be adversely impacted. If increased competition causes us to relax our underwriting standards, we could be exposed to higher losses from lending activities. Additionally, many of our competitors are much larger in total assets and capitalization, have greater access to capital markets, possess larger lending limits and offer a broader range of financial services than we can offer. Risks Related to the Regulation of Our Industry We operate in a highly regulated environment, which could restrain our growth and profitability. We operate in a highly regulated environment and are subject to supervision and regulation by a number of governmental regulatory agencies, including the Federal Reserve, the FDIC, and the Indiana Department of Financial Institutions. In addition, the CFPB, created under the Dodd-Frank Act, continues to adopt rules affecting us. Regulations adopted by these agencies, which are generally intended to provide protection for depositors and customers, rather than shareholders, govern a comprehensive range of matters relating to ownership and control of our shares, our acquisition of other companies and businesses, permissible activities for us to engage in, maintenance of adequate capital levels and other aspects of our operations. These bank regulators possess broad authority to prevent or remedy unsafe or unsound practices or violations of law. The laws and regulations applicable to the banking industry could change at any time and we cannot predict the effects of these changes on our business and profitability. Increased regulation could increase our cost of compliance and adversely affect profitability. For example, new legislation or regulation may limit our ability to offer new products, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads. Also, the Bank could experience higher credit losses because of federal or state legislation or bankruptcy court action that reduces the amount the Bank's borrowers are otherwise contractually required to pay under existing loan contracts or that limits or makes economically unfeasible the Bank's ability to foreclose on property or other collateral. Negative developments in the financial industry and the credit markets may subject us to additional regulation. As a result of ongoing challenges facing the United States economy, the potential exists for new laws and regulations regarding lending and funding practices and liquidity standards to be promulgated, and bank regulatory agencies are expected to be active in responding to concerns and trends identified in examinations, including the expected issuance of many formal enforcement orders. Negative developments in the financial industry and credit markets, and the impact of new legislation in response to those developments, may negatively impact our operations by restricting our business operations, including our ability to originate or sell loans, and may adversely impact our financial performance. Table of Contents to the source of the selected financial information and additional considerations related to the financial information for the three-month periods ended March 31, 2014 and 2013. As of and For the Three Months Ended March 31, As of and For the Year Ended December 31, 2014 2013 2013 2012 2011 2010 2009 (In thousands, except share data) Total assets $ 483,943 $ 482,640 $ 482,837 $ 472,855 $ 406,643 $ 386,609 $ 396,162 Total loans, including loans held for sale 316,806 299,220 321,079 309,476 257,186 270,343 279,377 Deposits 401,246 393,458 395,015 384,255 305,226 286,337 276,586 Net income 1,066 1,006 4,440 4,012 1,772 2,320 1,696 Diluted earnings per share .63 .60 2.66 2.40 0.93 1.29 1.09 Return on average equity(1) 11.84 % 11.22 % 12.69 % 11.72 % 5.41 % 7.23 % 6.48 % Return on average assets(1) 0.88 0.84 0.92 0.96 0.45 0.59 0.44 Net yield on interest-earning assets 3.48 3.34 3.41 3.17 3.19 3.05 2.68 Non-performing assets to total assets 3.21 3.49 3.22 3.45 4.74 4.53 2.30 Net charge-offs to average total loans outstanding(1) 0.61 (0.01 ) 0.69 0.98 0.53 0.94 Dividend payout ratio 33.33 35.00 39.47 35.00 90.32 65.12 77.06 Tangible book value per share of common stock(2) $ 18.52 $ 19.09 $ 17.17 $ 19.39 $ 18.39 $ 17.29 $ 17.03 Tangible common equity to tangible assets(2) 5.91 % 6.05 % 5.49 % 6.27 % 6.85 % 6.78 % 6.47 % Table of Contents Federal and state regulators periodically examine our business, and we may be required to remediate adverse examination findings. The Federal Reserve, the FDIC and the Indiana Department of Financial Institutions periodically examine our business, including our compliance with laws and regulations. If, as a result of an examination, a federal banking agency were to determine that our financial condition, capital resource, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin "unsafe or unsound" practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil monetary penalties against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership or conservatorship. Any regulatory action against us could have a material adverse effect on our business, financial condition and results of operations. Increases in insurance premiums could increase our expenses. The FDIC insures the Bank's deposits up to certain limits. Among other responsibilities, the FDIC takes control of failed banks and ensures payment of deposits up to insured limits using the resources of the Deposit Insurance Fund. The FDIC charges us premiums to maintain the Deposit Insurance Fund at a long-term target reserve ratio set at 2% of insured deposits. Due to the recent increase in bank failures following the subprime lending crisis of 2008 and the resulting economic turmoil, the FDIC insurance fund reserve ratio has fallen below the statutory minimum. The FDIC has implemented a restoration plan that is intended to return the reserve ratio to an acceptable level. In June 2011, the FDIC changed the assessment from a deposit-based assessment to an asset-based assessment, and reevaluated the base rate assessed to financial institutions. As a result of these changes, we experienced a decrease in premiums. However, further increases in premium assessments are also possible and would increase our expenses. Increased assessment rates and special assessments could have a material impact on our results of operations. The short-term and long-term impact of recently adopted regulatory capital rules is uncertain and a significant increase in our capital requirements could have an adverse effect on our business. In July 2013, the federal banking agencies approved rules that will significantly change the regulatory capital requirements of all banking institutions in the United States. The new rules are designed to implement the recommendations with respect to regulatory capital standards, commonly known as Basel III, approved by the International Basel Committee on Bank Supervision. We will become subject to the new rules over a multi-year transition period commencing January 1, 2015 through 2019. The new rules establish a revised regulatory capital standard based on Tier 1 common equity and increase the minimum leverage and risk-based capital ratios. The rules also change how a number of the regulatory capital components are calculated. The new rules will generally require us and the Bank to maintain greater amounts of regulatory capital. A significant increase in our capital requirements could have a material adverse effect on our business, financial condition and results of operations. We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions. The Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The Department of Justice and other federal agencies are responsible for enforcing these Table of Contents laws and regulations. A successful regulatory challenge to an institution's performance under the Community Reinvestment Act or fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution's performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition and results of operations. We are subject to numerous laws designed to protect U.S. citizens against illegal or terrorist activity, and failure to comply with these laws could lead to a wide variety of sanctions. The Bank Secrecy Act, the USA PATRIOT Act of 2001 and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. We are also subject to increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control. If our policies, procedures and systems are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could have a material adverse effect on our business, financial condition and results of operations. Risks Related to Our Common Stock Our stock price can fluctuate. The volatility in the price of our common stock and the NASDAQ Capital Market, where our common stock is listed, may make it difficult for you to resell your common stock when you want and at prices you find attractive. Our stock price can fluctuate significantly in response to a variety of factors including, among other things: actual or anticipated variations in our quarterly results of operations; recommendations by securities analysts; operating and stock price performance of other companies that investors deem comparable to us; news reports relating to trends, concerns and other issues in the financial services industry, including the failures of other financial institutions in the current economic climate; perceptions in the marketplace regarding us or our competitors and other financial services companies; new technology used, or services offered, by competitors; and changes in government regulations. General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause our stock price to decrease regardless of our operating results. Table of Contents There is a limited trading market for our shares of common stock, and you may not be able to resell your shares at or above the price you paid for them. Although our shares of common stock are listed for trading on the NASDAQ Capital Market, the trading in our shares of common stock has less liquidity than many other companies quoted on the NASDAQ Capital Market. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the market of willing buyers and sellers of our shares of common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. The prices of thinly traded stocks, such as ours, are typically more volatile than stocks traded in a large, active public market and can be more easily impacted by sales or purchases of large blocks of stock. We cannot assure you that volume of trading in our shares of common stock will increase in the future. Because of the low volume of trades, you may be unable to sell your shares when you desire to do so. Additionally, general market forces may have a negative effect on our stock price, independent of factors affecting our stock specifically. We will retain broad discretion in using the net proceeds from this offering. We intend to use the net proceeds of this offering to redeem all of our 5,000 issued and outstanding Series A preferred shares for $5,000,000 (plus accrued and unpaid dividends) some time on or after December 15, 2014. We also intend to use the proceeds for general corporate purposes, which may include, without limitation, providing capital to support the growth of the Bank, to fund organic growth in our existing markets and opportunistic acquisitions of all or part of other financial institutions. We do not have any plans, arrangements or understandings relating to any material acquisition. We have not designated the amount of net proceeds we will use for any particular purpose. Accordingly, our management will retain broad discretion to allocate the net proceeds of this offering. The net proceeds may be applied in ways that you do not support. Moreover, our management may use the proceeds for corporate purposes that may not increase our market value or make us more profitable. In addition, other than our intent to redeem the Series A preferred shares on or after December 15, 2014, we do not have a timetable for use of the proceeds, and it may take us some time to effectively deploy them. Until the proceeds are effectively deployed, our return on equity and earnings per share may be negatively impacted. Management's failure to use the net proceeds of this offering effectively could have an adverse effect on our business, results of operations and financial condition. Our shares of common stock are not an insured deposit and you could lose your entire investment. Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this "Risk Factors" section and elsewhere in this prospectus and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire our common stock, you may lose some or all of your investment. Our ability to pay dividends is limited, and we may be unable to pay future dividends. Our ability to pay dividends is limited by regulatory restrictions, our need to maintain sufficient consolidated capital, and our need to pay dividends on our Series A preferred shares and interest on our $7,217,000 in principal amount of Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures ("trust preferred securities"). The ability of the Bank to pay dividends to us is limited by its obligations to maintain sufficient capital and liquidity and by other general restrictions on dividends that are applicable to the Bank, including the requirement under Indiana law that it may not pay dividends that exceed the sum of the Bank's net income for the year combined with its retained net income for the previous two years without the approval of the Indiana Department of Financial Table of Contents Institutions. If these regulatory requirements are not met, the Bank will not be able to pay dividends to us, and we may be unable to pay dividends on our common stock. In addition, as a bank holding company, our ability to declare and pay dividends is subject to the guidelines of the Federal Reserve regarding capital adequacy and dividends. The Federal Reserve guidelines generally require us to review the effects of the cash payment of dividends on common stock and other Tier 1 capital instruments (i.e., perpetual preferred stock and trust preferred debt) in light of our earnings, capital adequacy and financial condition. As a general matter, the Federal Reserve indicates that the board of directors of a bank holding company should eliminate, defer or significantly reduce the dividends if: the company's net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; the prospective rate of earnings retention is inconsistent with the company's capital needs and overall current and prospective financial condition; or the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. River Valley is also subject to an Indiana law that would prohibit us from paying a dividend if, after giving effect to the payment of that dividend, we would not be able to pay our debts as they become due in the usual course of business or if our total assets would be less than the sum of our total liabilities plus preferential rights of preferred shareholders. Finally, for so long as any of our Series A preferred shares remain issued and outstanding, no dividend or distribution can be declared or paid on River Valley's common stock unless all accrued and unpaid dividends on the Series A preferred shares have been or will be first paid in full. We may issue additional shares of common or preferred stock in the future, which could dilute existing shareholders. Our articles of incorporation authorize our board of directors to, among other things, issue additional shares of common stock up to a total of 5,000,000 shares outstanding shares or preferred stock up to a total of 2,000,000 outstanding shares. The issuance of any additional shares of common stock could be dilutive to a shareholder's ownership of our common stock. To the extent that we issue options or warrants to purchase common stock in the future, such as the 150,000 shares of common stock reserved for issuance under our 2014 Stock Option and Incentive Plan, and the options or warrants are exercised, our shareholders may experience further dilution. In addition, we may issue preferred stock that is convertible into shares of our common stock that upon conversion would result in our common shareholders' ownership interest being diluted. Holders of shares of our common stock have no preemptive rights that entitle holders to purchase their pro rata share of any offering of any class or series of our capital stock and, therefore, shareholders may not be permitted to invest in future issuances of common or preferred stock. Federal banking laws limit the acquisition and ownership of our common stock. With certain limited exceptions, federal regulations prohibit a purchaser from, directly or indirectly, acquiring more than 10% (5% if the acquirer is a bank holding company) of any class of our voting stock or obtaining the ability to control in any manner the election of a majority of our directors or otherwise direct the management or policies of our Company without prior notice or application to and the approval of the Federal Reserve. Accordingly, prospective investors need to be aware of and comply with these requirements, if applicable, in connection with any purchase of shares of our common stock. Table of Contents Certain provisions of our articles of incorporation, as well as Indiana and federal law, may discourage, delay or prevent transactions you might favor, including our sale or merger. Certain provisions included in our articles of incorporation, as amended, and our bylaws, as well as certain provisions of the Indiana Business Corporation Law and federal law, may have an anti-takeover effect. While the purpose of these provisions is to strengthen the negotiating position of the board of directors in the event of a hostile takeover attempt, the overall effects of these provisions may discourage, delay or prevent potential acquisitions of control of us, despite possible benefits to our shareholders. See "Description of Capital Stock Common Stock Anti-Takeover Provisions." These provisions may discourage potential takeover attempts, discourage bids for our common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of, our common stock. These provisions could also discourage proxy contests and make it more difficult for holders of our common stock to elect directors other than the candidates nominated by our board of directors. If we are unable to redeem the outstanding Series A preferred shares, the annual dividend rate will increase substantially. If for any reason we are unable to redeem the outstanding Series A preferred shares on or after December 15, 2014, the annual dividend rate on the Series A preferred shares will increase to 9.0% from 7.25%, which could have an adverse effect on our financial condition and results of operations. Table of Contents

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+RISK FACTORS An investment in our common stock involves certain risks and uncertainties. The material risks and uncertainties that management believes affect your investment in our common stock are described below, and in our Annual Report on Form 10-K for the year ended December 31, 2012 and our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 incorporated by reference herein. Before making an investment decision, you should carefully consider the risks and uncertainties described below and information included or incorporated by reference in this prospectus. The risks described below are not the only ones we face in our business. In addition to the risks and uncertainties described below, other risks and uncertainties not currently known to us or that we currently believe to be immaterial also may impair our business operations. If any of the following risks or uncertainties are realized, our business, financial condition, capital levels, cash flows, liquidity, results of operations and prospects could be materially and adversely affected and the market price of our common stock could decline significantly and you could lose some or all of your investment. Risk Factors Related to Our Business Our business has been and may continue to be adversely affected by conditions in the financial markets and economic conditions generally. Since late 2007, the U.S. economy has generally experienced challenging economic conditions. Business activity across a range of industries and regions remains reduced from historical levels, and some businesses have experienced difficulty in remaining profitable. Likewise, many local governments have been experiencing lower tax revenues, impacting their ability to cover costs. Unemployment also generally increased during this period and remains at elevated levels. For the past few years, the financial services industry has generally been affected by significant declines in the values of many significant asset classes, reduced levels of liquidity and the lack of opportunities to originate new loans. As a result of these economic conditions, the Bank experienced declines in the performance of its loans from historical norms. In addition, these economic conditions have also resulted in a decline of the values of real estate collateral supporting many of the Bank s loans, and this decline may continue. If the overall economic climate in the United States, generally, or our market areas, specifically, fails to continue to improve or declines further, this may affect consumer confidence levels and may cause adverse changes in payment patterns, causing increases in delinquencies and default rates, which may impact our charge-offs and provisions for credit losses. A worsening of these conditions likely would exacerbate the adverse effects of the recent market conditions on us. Our loan/lease portfolio is comprised in part of real estate loans, which involve risks specific to real estate values. Real estate lending comprises a significant portion of our lending business. Real estate loans were $353.3 million, or approximately 75.6% of our total loan/lease portfolio, as of September 30, 2013. The market value of real estate securing our real estate loans can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located, and in the past several years our market areas have experienced a general weakening in real estate valuations. Continued adverse developments affecting real estate values in one or more of our markets could increase the credit risk associated with our loan portfolio. Additionally, real estate lending typically involves higher loan principal amounts and the repayment of the loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic events or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties. The problems that have occurred in the residential real estate and mortgage markets throughout much of the United States in recent years also affected the commercial real estate market. Our operations are heavily concentrated in Greene and Christian Counties, which are in the southwestern corner of Missouri, including the cities of Springfield, Nixa and Ozark, Missouri (our Market Area ). In our Market Area, we generally experienced a downturn in credit performance by our commercial real estate loan customers in recent years relative to historical norms. Despite recent improvements in certain aspects of the economy, a level of uncertainty continues to exist in the economy and credit markets nationally and in our Market Area, and there can be no guarantee that we will not experience further deterioration in the performance of commercial real estate and other real estate loans in the future. In such case, we may not be able to realize the amount of security that we anticipated at the time of originating the loan, including the support of personal guarantees, if any, which could cause us to increase our provision for loan losses and adversely affect our operating results, financial condition and/or capital. Rapidly changing interest rate environments could reduce net interest margin and otherwise negatively impact our results of operations. Interest and fees on loans and securities, net of interest paid on deposits and borrowings, are a large part of our net income. Interest rates are the key drivers of the Company s net interest margin and are subject to many factors beyond the control of management. As interest rates change, our net interest income is affected. Rapid increases in interest rates in the future could result in our interest expense increasing faster than interest income because of mismatches in the maturities of the Company s assets and liabilities. Furthermore, substantially higher rates generally reduce loan demand and may result in slower loan growth for us. Decreases or increases in interest rates could have a negative effect on the spreads between our interest rates earned on assets and our rates of interest paid on liabilities, and therefore decrease our net interest income. Interest rate changes may affect borrowers repayment schedules, negatively impacting our financial condition. Interest rate increases often result in larger payment requirements for our borrowers, which increases the potential for default. At the same time, the marketability of underlying collateral may be adversely affected by any reduced demand resulting from higher interest rates. In a declining interest rate environment, there may be an increase in prepayments on certain of our loans as borrowers refinance at lower rates. Fluctuation in interest rates may therefore change borrowers timing of repayment of, or ability to repay, loans, which could have a material adverse impact on our financial condition. Changes in interest rates could negatively impact our nonperforming assets, decreasing net interest income. Changes in interest rates also can affect the value of loans. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in our nonperforming assets and a reduction of income recognized, which could have a material adverse effect on our results of operations and cash flows. Further, when we place a loan on nonaccrual status, we reverse any accrued but unpaid interest receivable, which decreases interest income. Subsequently, we continue to have a cost to fund the loan, which is reflected as interest expense, without any interest income to offset the associated funding expense. Thus, an increase in the amount of nonperforming assets would have an adverse impact on net interest income. The financial condition of the Bank s customers and borrowers could adversely affect the Bank s liquidity. Two of the Bank s primary source of funds are customer deposits and loan repayments. Though scheduled loan repayments are a relatively stable source of liquidity, they are subject to the ability of the borrowers to repay their loans. The ability of the borrowers to repay their loans can be adversely affected by a number of factors, including changes in the economic conditions, adverse trends or events affecting the business environment, natural disasters and various other factors. Customer deposit levels may be affected by a number of factors, including the competitive interest rate environment in both the national market and our Market Area, local and national economic conditions, natural disasters and other various events. A decrease in cash flows from our investment portfolio may adversely affect our liquidity. Another primary source of liquidity for the Bank is cash flows from investment instruments. Cash flows from the investment portfolio may be affected by changes in interest rates, resulting in excessive levels of cash flow during periods of declining interest rates and lower levels of cash flow during periods of rising interest rates. These changes may be beyond our control and could significantly influence our available cash. Difficult U.S. economic conditions could adversely affect the Company s ability to borrow or raise capital. As discussed above, since late 2007, the U.S. economy has experienced challenging economic conditions. As a result of such market conditions, the Company s stock prices have generally been negatively affected over this time period, and the ability of the Company to raise capital or borrow in the debt markets has become more difficult than it had been prior to 2007. If we cannot raise additional capital when needed or desired, our ability to continue or expand our operations could be materially impaired and our financial condition and liquidity could be materially adversely affected. Liquidity needs could adversely affect the Company s results of operations and financial condition. Liquidity issues have been particularly acute for the Bank, as a community bank, as many of the larger financial institutions have significantly curtailed their lending to regional and community banks to reduce their exposure to the risks of other banks. In addition, many of the larger correspondent lenders have reduced or even eliminated federal funds lines for their correspondent customers. Furthermore, regional and community banks, including the Bank, generally have less access to the capital markets than do the national and super-regional banks because of their smaller size and limited analyst coverage. Any decline in available funding could adversely impact the Company s ability to originate loans, invest in securities, meet its expenses, pay dividends to its stockholders, or fulfill obligations such as repaying its borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on its liquidity, business, results of operations and financial condition. If the Company is required to rely on secondary sources of liquidity, those sources may not be immediately available. The Company may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations. Such sources include the Federal Home Loan Bank advances, brokered deposits and federal funds lines of credit from correspondent banks. The Company may also pledge investments as collateral to borrow money from third parties. In certain cases, the Company may sell investment instruments for sizable losses to meet liquidity needs, reducing net income. While the Company believes that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity needs. Our future success is dependent on our ability to compete effectively in the highly competitive banking industry. We face competition in attracting and retaining deposits, making loans, and providing other financial services throughout our market area. Our competitors include other community banks, regional and super-regional banking institutions, national banking institutions, and a wide range of other financial institutions such as credit unions, government-sponsored enterprises, mutual fund companies, insurance companies, brokerage companies, and other non-bank businesses. Many of these competitors have substantially greater resources than the Company and are not subject to the same regulatory restrictions as the Company is subject. Many of our unregulated competitors compete across geographic boundaries and are able to provide customers with a feasible alternative to traditional banking services. In addition, challenging economic conditions nationally and in our Market Area have resulted in an increase in competition for the Bank with other depository institutions for deposits and quality loans. Increased competition in our markets may result in a decrease in the amounts of our loans and deposits, reduced spreads between loan rates and deposit rates or loan terms that are more favorable to the borrower as we try to meet our competitors terms and pricing. Any of these results could have a material adverse effect on its ability to grow and remain profitable. If increased competition causes us to significantly discount the interest rates we offer on loans or increase the amount we pay on deposits, our net interest income could be adversely impacted. If increased competition causes us to modify our underwriting standards, we could be exposed to higher losses from lending activities. Inability to hire or retain certain key professionals, management and staff could adversely affect our revenues, net income and growth plans. We rely on key personnel to manage and operate our business, including major revenue generating functions such as our loan and deposit portfolios. None of our employees, including those who comprise our key management team on whom we rely to operate the Company successfully and to grow it, are subject to employment contracts with us. Such employees are at-will and thus are not restricted from terminating their employment with us. The loss of key management and staff may adversely affect our ability to maintain and manage these portfolios effectively, which could negatively affect our revenues. In addition, loss of key personnel could result in increased recruiting, hiring, and training expenses, resulting in lower net income. The lack of employment contracts with key employees could also have a material adverse impact on our ability to retain such employees to implement our acquisition strategy and therefore effectively use capital for such purposes. The Company is subject to extensive regulation that can limit or restrict its activities. The Company operates in a highly regulated industry and is subject to examination, supervision, and comprehensive regulation by various agencies, including the Federal Reserve, the MDF and FDIC. The Company s regulatory compliance is costly. The Company is also subject to capitalization guidelines established by its regulators, which require it and the Bank to maintain adequate capital to support its and the Bank s growth. The laws and regulations applicable to the banking industry can change at any time, and the Company cannot predict the effects of these changes on its business. To the extent activities of the Company and/or the Bank are restricted or limited by regulation or regulators supervisory authority, the Company s future profitability may be adversely affected. Financial reform legislation has, among other things, tightened capital standards, resulted in the creation of a new Consumer Financial Protection Bureau and resulted in and will result in new regulations that have already increased and are expected to further increase our costs of operations. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act ) was signed into law on July 21, 2010 and, although it became generally effective in July 2010, many of its provisions have extended implementation periods and delayed effective dates and will require extensive rulemaking by regulatory authorities although some new regulations are already effective. The Dodd-Frank Act, including future rules implementing its provisions and the interpretation of those rules, could result in a number of adverse impacts on us. The levels of capital and liquidity with which the Company must operate may be subject to more stringent capital requirements, as described in more detail below. Another aspect of the Dodd-Frank Act that may adversely affect the Company is that it allows financial institutions to pay interest on business checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact on our interest expense. The Dodd-Frank Act created a Consumer Financial Protection Bureau as a new independent entity within the Federal Reserve. This entity has broad rulemaking, supervisory and enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-equity loans and credit cards. These and other provisions of the Dodd-Frank Act may impose significant additional costs on the Company, impede its growth opportunities and place it at a competitive disadvantage. These provisions, as well as any other aspects of current or proposed regulatory or legislative changes to laws applicable to the financial industry, may impact the profitability of our business activities and may change certain of our business practices, including the ability to offer new products, obtain financing, attract deposits, make loans, and achieve satisfactory interest spreads, and could expose us to additional costs, including increased compliance costs. These changes also may require us to invest significant management attention and resources to make any necessary changes to operations in order to comply, and could therefore also materially and adversely affect our business, financial condition and results of operations. Our management is actively reviewing the provisions of the Dodd-Frank Act, many of which are to be phased-in over the next several months and years, and assessing the probable impact on our operations. However, the ultimate effect of these changes on the financial services industry in general, and us in particular, is uncertain at this time. The short-term and long-term impact of the changing regulatory capital requirements and anticipated new capital rules on the Company is uncertain. In July 2013, the U.S. federal banking authorities approved the implementation of the Basel III regulatory capital reforms and issued rules effecting certain changes required by the Dodd-Frank Act (the Basel III Rules ). The Basel III Rules are applicable to all U.S. banks that are subject to minimum capital requirements, as well as to bank and savings and loan holding companies other than small bank holding companies (generally bank holding companies with consolidated assets of less than $500 million). The Basel III Rules not only increase most of the required minimum regulatory capital ratios, but they introduce a new Common Equity Tier 1 Capital ratio and the concept of a capital conservation buffer. The Basel III Rules also expand the definition of capital as in effect currently by establishing criteria that instruments must meet to be considered Additional Tier 1 Capital (Tier 1 Capital in addition to Common Equity) and Tier 2 Capital. A number of instruments that now generally qualify as Tier 1 Capital will not qualify, or their qualifications will change when the Basel III Rules are fully implemented. The Basel III Rules also permit banking organizations with less than $15.0 billion in assets to retain, through a one-time election, the existing treatment for accumulated other comprehensive income, which currently does not affect regulatory capital. The Basel III Rules have maintained the general structure of the current prompt corrective action framework, while incorporating the increased requirements. The prompt corrective action guidelines were also revised to add the Common Equity Tier 1 Capital ratio. In order to be a well-capitalized depository institution under the new regime, a bank and holding company must maintain a Common Equity Tier 1 Capital ratio of 6.5% or more; a Tier 1 Capital ratio of 8% or more; a Total Capital ratio of 10% or more; and a leverage ratio of 5% or more. Generally, financial institutions become subject to the new Basel III Rules on January 1, 2015, with phase-in periods for many of the changes. Our management is actively reviewing the provisions of the Basel III Rules. The application of the more stringent capital requirements for the Company and the Bank could, among other things, result in lower returns on invested capital, require the issuance of additional capital, and result in regulatory actions if we were unable to comply with such requirements. However, the ultimate effect of these changes on the financial services industry in general, and us in particular, is uncertain at this time. Management s analysis of the necessary funding for the allowance for loan loss account may be incorrect or may suddenly change resulting in lower earnings. The funding of the allowance for loan loss account is the most significant estimate made by management in its financial reporting to stockholders and regulators. The determination of the appropriate level of the allowance for loan losses involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which are subject to material changes. Although management believes that the allowance for loan/lease losses as of September 30, 2013 was adequate to absorb losses on any existing loans/leases that may become uncollectible, in light of the current economic environment, which remains challenging, the Company cannot predict loan losses with certainty, and the Company cannot assure you that our allowance for loan losses will prove sufficient to cover actual loan losses in the future, particularly if economic conditions are more difficult than management currently expects. If negative changes to the performance of the Company s loan portfolio were to occur, management may find it necessary or be required to fund the allowance for loan loss account through additional charges to the Company s provision for loan loss expense. These changes may occur suddenly and be dramatic in nature. Additional provisions to the allowance for loan losses and loan losses in excess of the Company s allowance for loan losses may adversely affect our business, financial condition and results of operations. The Series A Preferred Stock impacts net income available to our common stockholders and earnings per common share. The dividends declared on the Series A Preferred Stock that the Company intends to attempt to redeem with the proceeds of this offering, reduce the net income available to common stockholders and our earnings per common share. The Series A Preferred Stock also receives preferential treatment in the event of liquidation, dissolution or winding up of the Company. Though we intend to redeem the Series A Preferred Stock as soon as practicable after this offering, there can be no assurance that we will receive the necessary regulatory approvals to redeem the Series A Preferred Stock. System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities. The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, as well as that of our customers engaging in internet banking activities, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage, there can be no assurance that these security measures will be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms used to encrypt and protect customer transaction data. Any interruption in, or breach of security of, our computer systems and network infrastructure, or that of our internet banking customers, could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations. We are dependent upon outside third parties for processing and handling of our records and data. We rely on third-party service providers for a substantial portion of our communications, information, operating and financial control systems technology. While we have selected these third-party vendors carefully, we do not control their actions. If any of these third-party service providers experience financial, operational or technological difficulties, security breaches, or if there is any disruption in our relationships with them, we may be required to locate alternative sources for these services. There can be no assurance that we could negotiate terms as favorable to us or obtain services with similar functionality as we currently have without the expenditure of substantial resources. Any of these circumstances could have a material adverse effect on our business. We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors. Employee errors and employee and customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence. We maintain a system of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures and errors and customer or employee fraud. If our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, such failures could have a material adverse effect on our business, financial condition and results of operations. Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of operations. In addition to being affected by general economic conditions, including economic conditions specifically in our Market Area, our earnings and growth are affected by the policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve to implement these objectives are open market operations in U.S. government securities, adjustments of the discount rate and changes in reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits. The effects of the monetary policies and regulations of the Federal Reserve upon our business, financial condition and results of operations in the future cannot be predicted, but have had a significant effect on the operating results of commercial banks, including our Bank, in the past. We could recognize losses on securities held in our securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate. As of September 30, 2013, the fair value of our securities portfolio was approximately $106.0 million. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. For example, fixed-rate securities acquired by us are generally subject to decreases in market value when interest rates rise. Additional factors include, but are not limited to, rating agency downgrades of the securities, defaults by the issuer or individual mortgagors with respect to the underlying securities, and continued instability in the credit markets. Any of the foregoing factors could cause an other-than-temporary impairment in future periods and result in realized losses. The process for determining whether impairment is other-than-temporary usually requires us to make difficult, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. Because of changing economic and market conditions affecting interest rates, the financial condition of issuers of the securities and the performance of the underlying collateral, we may recognize realized and/or unrealized losses in future periods, which could have an adverse effect on our financial condition and results of operations. Our business is concentrated in and largely dependent upon the continued growth and welfare of the general geographical markets in which we operate. Our operations are heavily concentrated in our Market Area and, as a result, our financial condition, results of operations and cash flows are significantly impacted by changes in the economic conditions in those areas. Our success depends to a significant extent upon the business activity, population, income levels, deposits and real estate activity in these markets. Although our customers' business and financial interests may extend well beyond these market areas, adverse economic conditions that affect these market areas could reduce our growth rate, affect the ability of our customers to repay their loans to us, affect the value of collateral underlying loans and generally affect our financial condition and results of operations. Because of our geographic concentration, we are less able than other regional or national financial institutions to diversify our credit risks across multiple markets. The soundness of other financial institutions could negatively affect the Company. Our ability to engage in routine funding and other transactions could be negatively affected by the actions and commercial soundness of other financial institutions. Financial services institutions, including the Bank, are interrelated as a result of trading, clearing, counterparty or other relationships. Defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and losses of depositor, creditor and counterparty confidence and could lead to losses or defaults by us or by other institutions. We could experience increases in deposits and assets as a result of the difficulties or failures of other banks, which would increase the capital we need to support our growth. Our reputation could be damaged by negative publicity. Reputational risk, or the risk to us from negative publicity, is inherent in our business. Negative publicity can result from actual or alleged conduct in a number of areas, including legal and regulatory compliance, lending practices, corporate governance, litigation, inadequate protection of customer data, ethical behavior of our employees, and from actions taken by regulators, ratings agencies and others as a result of that conduct. Damage to our reputation could impact our ability to attract new or maintain existing loan and deposit customers, employees and business relationships. The repeal of federal prohibitions on payment of interest on business demand deposits could increase our interest expense and have a material adverse effect on us. All federal prohibitions on the ability of financial institutions to pay interest on business demand deposit accounts were repealed as part of the Dodd-Frank Act. As a result, some financial institutions have commenced offering interest on these demand deposits to compete for customers. If competitive pressures require us to pay interest on these demand deposits to attract and retain business customers, our interest expense would increase and our net interest margin would decrease. This could have a material adverse effect on us. Further, the effect of the repeal of the prohibition could be more significant in a higher interest rate environment as business customers would have a greater incentive to seek interest on demand deposits. The preparation of our consolidated financial statements requires us to make estimates and judgments, which are subject to an inherent degree of uncertainty and which may differ from actual results. Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles and general reporting practices within the financial services industry, which require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Some accounting policies, such as those pertaining to our allowance for loan losses, require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty and actual results may differ from these estimates and judgments under different assumptions or conditions, which may have a material adverse effect on our financial condition or results of operations in subsequent periods. Our compensation expense may increase substantially now that Treasury no longer owns the Series A Preferred Stock and we are no longer subject to certain restrictions moving forward. As a result of our participation in the CPP, among other things, we were subject to Treasury s standards for executive compensation and corporate governance for the period during which Treasury held any of our shares of Series A Preferred Stock. These standards are set forth in the Interim Final Rule on TARP Standards for Compensation and Corporate Governance, published June 15, 2009. Except as noted below, because Treasury sold all of its shares of Series A Preferred Stock, we will no longer be subject to any restrictions on executive compensation that we may pay in the future or additional certification obligations beyond 2013 that were previously imposed on us as participants in the CPP. We do, however, remain subject to the administration of a restriction on the Chief Executive Officer s previously awarded restricted stock and to the modified certification obligation to be satisfied in 2014 with respect to a portion of our fiscal 2013. Due to the restrictions on executive compensation no longer being applicable coupled with this capital raise and the potential implementation of our intended growth strategy, our compensation expense for our executive officers and other senior employees, including expenses relating to the hiring of new employees to implement our growth strategy, may increase substantially. Risks Related to Investing in Our Common Stock There is a limited trading market for our common shares, and you may not be able to resell your shares at or above the price you paid for them. Although our common stock is listed for trading on the NASDAQ Global Market, it has a low average daily trading volume relative to many other stocks whose shares are also quoted on the NASDAQ Global Market. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the market of willing buyers and sellers of our common shares at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. We cannot assure you that the volume of trading in our common stock will increase in the future. Additionally, general market forces may have a negative effect on our stock price, independent of factors affecting our stock specifically. The price of our common stock may fluctuate significantly, and this may make it difficult for you to resell our common stock when you want or at prices you find attractive. We cannot predict how our common stock will trade in the future. The market value of our common stock will likely continue to fluctuate in response to a number of factors including the following, most of which are beyond our control, as well as the other factors described in this Risk Factors section: actual or anticipated quarterly fluctuations in our operating and financial results; developments related to investigations, proceedings or litigation that involve us; changes in financial estimates and recommendations by financial analysts; dispositions, acquisitions and financings; actions of our current stockholders, including sales of common stock by existing stockholders and our directors and executive officers; fluctuations in the stock price and operating results of our competitors; regulatory developments; and developments related to the financial services industry. The market value of our common stock may also be affected by conditions affecting the financial markets in general, including price and trading fluctuations. These conditions may result in (i) volatility in the level of, and fluctuations in, the market prices of stocks generally and, in turn, our common stock and (ii) sales of substantial amounts of our common stock in the market, in each case that could be unrelated or disproportionate to changes in our operating performance. These broad market fluctuations may adversely affect the market value of our common stock. Our common stock also has a low average daily trading volume relative to many other stocks, which may limit an investor s ability to quickly accumulate or divest themselves of large blocks of our stock. This can lead to significant price swings even when a relatively small number of shares are being traded. The Bank recently acted to terminate its Employee Stock Ownership Plan (ESOP), which may result in additional shares in the market. The ESOP is a tax-qualified retirement plan sponsored and maintained by the Bank for the benefit of employees of the Company and the Bank. Effective as of December 31, 2012, the Bank s Board of Directors approved the termination of the ESOP. Prior to distributing participant account balances held under the ESOP, the Bank allocated any unallocated shares held by the ESOP as of December 31, 2012. The Bank also submitted to the Internal Revenue Service an application for a determination letter in connection with the termination of the ESOP. By letter dated September 9, 2013, the Service indicated that, based upon the information contained in the Bank s application, it had determined that the termination of the ESOP does not adversely affect its qualification for federal tax purposes. Based on the Service s issuance of a favorable determination letter, the Bank distributed all 233,224 shares of common stock held in the account balances to all of the ESOP s 145 participants by December 31, 2013, including 19,739 shares distributed to executive officers subject to the 90-day lock-up discussed under Underwriting beginning on page 47. As a result of such distribution, shares owned by participants are freely tradable in the market, except where shares are subject to restrictions on trading by employees or restrictions on sales by executive officers, including the 90-day lock-up. There may be future sales of additional common stock or preferred stock or other dilution of our equity, which may adversely affect the market price of our common stock. We are not restricted from issuing additional common stock or preferred stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities. The market value of our common stock could decline as a result of sales by us of a large number of shares of common stock or preferred stock or similar securities in the market or the perception that such sales could occur. Anti-takeover provisions could negatively impact our stockholders. Provisions in our restated certificate of incorporation and bylaws, the General Corporation Law of the State of Delaware (the DGCL ) and federal regulations could delay or prevent a third party from acquiring us, despite the possible benefit to our stockholders, or otherwise adversely affect the market price of any class of our equity securities, including our common stock. These provisions include, but are not limited to: a prohibition on voting shares of common stock beneficially owned in excess of 10% of total shares outstanding without prior Board approval; supermajority voting requirements for certain business combinations with any person who beneficially owns 10% or more of our outstanding common stock; the election of directors to staggered terms of three years; advance notice requirements for nominations for election to our Board of Directors and for proposing matters that stockholders may act on at stockholder meetings; a requirement that only directors may fill a vacancy in our Board of Directors; supermajority voting requirements to remove any of our directors and the other provisions described under Description of Capital Stock Anti-takeover Effects beginning on page 36. Our restated certificate of incorporation also authorizes our Board of Directors to issue preferred stock, and preferred stock could be issued as a defensive measure in response to a takeover proposal (subject to the voting rights of Series A Preferred Stock with respect to any such preferred stock ranking senior to the Series A Preferred Stock; see Description of Capital Stock Preferred Stock Voting Rights beginning on page 34). In addition, because we are a bank holding company, purchasers of 10% or more of our common stock may be required to obtain approvals under the Change in Bank Control Act of 1978, as amended, or the Bank Holding Company Act of 1956, as amended (the BHCA ) (and in certain cases such approvals may be required at a lesser percentage of ownership). Specifically, under regulations adopted by the Federal Reserve, (a) any other bank holding company may be required to obtain the approval of the Federal Reserve to acquire or retain 5% or more of our common stock and (b) any person other than a bank holding company may be required to obtain the approval of the Federal Reserve to acquire or retain 10% or more of our common stock. These provisions may discourage potential takeover attempts, discourage bids for our common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of, our common stock. These provisions could also discourage proxy contests and make it more difficult for holders of our common stock to elect directors other than the candidates nominated by our Board of Directors. There are restrictions on our ability to pay dividends on and repurchase our common stock. Holders of our common stock are entitled to receive dividends only when, as and if declared by our Board of Directors. Although we historically paid cash dividends on our common stock, we were not required to do so. In the third quarter of 2008, our Board of Directors decided to suspend the payment of quarterly cash dividends on our common stock. Our ability to pay dividends is limited by Delaware law, as well as regulatory restrictions and the need to maintain sufficient consolidated capital. The ability of the Bank to pay dividends to us is limited by its obligation to maintain sufficient capital and liquidity and by other general restrictions on dividends that are applicable to the Bank. If current or any future regulatory requirements are not met, the Bank will not be able to pay dividends to us, and we may be unable to pay dividends on our common stock. The DGCL provides that dividends by a Delaware corporation may be paid only from: (1) surplus determined in the manner described in the DGCL, or (2) in case there is no surplus, net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Dividends paid from the second source may not be paid unless the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets at current market value is intact. Moreover, as a bank holding company, our ability to declare and pay dividends is subject to the guidelines of the Federal Reserve regarding capital adequacy and dividends. The Federal Reserve guidelines generally require us to review the effects of the cash payment of dividends on common stock and other Tier 1 capital instruments (i.e., perpetual preferred stock and trust preferred debt) in light of our earnings, capital adequacy and financial condition. As a general matter, the Federal Reserve indicates that the Board of Directors of a bank holding company should eliminate, defer or significantly reduce the dividends if: the company s net income available to stockholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; the prospective rate of earnings retention is inconsistent with the company s capital needs and overall current and prospective financial condition; or the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. As long as the Series A Preferred Stock is outstanding, dividend payments and repurchases or redemptions relating to certain equity securities, including our common stock, are prohibited until all accrued and unpaid dividends are paid on such preferred stock, subject to certain limited exceptions. Furthermore, in the future if we default on certain of our outstanding debts or elect to defer interest payments on our trust preferred securities, we will be prohibited from making dividend payments on our common stock until such payments have been brought current. Failure to pay interest on our debt or dividends on our preferred stock may adversely impact our ability to pay common stock dividends. As of September 30, 2013, we had $15.5 million of junior subordinated debentures held by two business trusts. Interest payments on the Company s existing debentures, which totaled $556,000 for 2012, must be paid before the Company can pay dividends on its capital stock, including its common stock. The Company has the right to defer interest payments on the debentures for up to 20 consecutive quarters. However, if it elects to defer interest payments, all deferred interest must be paid before the Company can pay dividends on its capital stock. In addition, as of September 30, 2013, the Company had 12,000 shares of the Series A Preferred Stock issued and outstanding. So long as any of the Series A Preferred Stock remain outstanding, we generally may not declare or pay a dividend or other distribution on our common stock and we generally may not directly or indirectly purchase, redeem or otherwise acquire any shares of our common stock, unless all accrued and unpaid dividends on the Series A Preferred Stock for all past dividend periods are paid in full. Although the Company expects to be able to pay all required interest on the junior subordinated debentures and dividends on any Series A Preferred Stock that is not redeemed or repurchased following the offering, there is no guarantee that it will be able to do so. Our common stock is equity and is subordinate to our and our subsidiaries' indebtedness and any preferred stock. Shares of the common stock are equity interests in us and do not constitute indebtedness. As such, shares of our common stock rank junior to all current and future indebtedness and other nonequity claims on us with respect to assets available to satisfy claims on us, including in a liquidation of our company. We may incur additional indebtedness from time to time and may increase our aggregate level of outstanding indebtedness. Additionally, holders of our common stock are subject to the prior dividend and liquidation rights of any holders of our preferred stock, if any, then outstanding. Our Board of Directors is authorized to cause us to issue preferred stock, in one or more series, without any action on the part of our stockholders. If we issue shares of preferred stock that have a preference over our common stock with respect to the payment of dividends or upon liquidation, or if we issue shares of preferred stock with voting rights that dilute the voting power of the common stock, then the rights of holders of our common stock or the market price of our common stock could be adversely affected. The Series A Preferred Stock negatively impacts net income available to our common stockholders and earnings per common shares. If the Company is unable to repurchase the Series A Preferred Stock with the proceeds of this offering, then the dividends declared on the Series A Preferred Stock will continue to reduce both the net income available to common stockholders and our earnings per common share. Dividends on the Series A Preferred Stock increased from 5% per annum to 9% per annum in February 2014, which further reduces both the net income available to common stockholders and our earnings per common share. The Series A Preferred Stock will also receive preferential treatment over the common stock in the event of liquidation, dissolution or winding up of the Company. We may be unable able to redeem our Series A Preferred Stock resulting in dilution of the common stock without the benefits of eliminating the Series A Preferred Stock. Any redemption of the Series A Preferred Stock by the Company will require regulatory approval. There can be no assurance that the Company will receive all required regulatory approvals to permit us to redeem the Series A Preferred Stock. In such event, all of the shares of the Company s common stock held by the stockholders, including the stockholders who purchase our common stock in this offering, will be diluted without obtaining the benefit of eliminating the Series A Preferred Stock and the Company will have far more current capital than it needs for the reasonably foreseeable future. The voting limitation provision in our restated certificate of incorporation could limit your voting rights as a holder of our common stock. Our restated certificate of incorporation provides that any person or group who acquires beneficial ownership of our common stock in excess of 10% of the outstanding shares may not vote the excess shares without prior Board approval. Accordingly, if you acquire beneficial ownership of more than 10% of the outstanding shares of our common stock, your voting rights with respect to the common stock might not be commensurate with your economic interest in our company. To maintain adequate capital levels, we may be required to raise additional capital in the future, but that capital may not be available when it is needed and could be dilutive to our existing stockholders. We are required by regulatory authorities to maintain adequate levels of capital to support our operations. In order to ensure our ability to support the operations of the Bank we may need to limit or terminate cash dividends that can be paid to our stockholders. In addition, we may need to raise capital in the future. Our ability to raise capital, if needed, will depend in part on our financial performance and conditions in the capital markets at that time, and accordingly, we cannot provide assurance of our ability to raise capital on terms acceptable to us. In addition, if we decide to raise equity capital in the future, the interest of our stockholders could be diluted. Any issuance of common stock at prices below tangible book value would dilute the ownership of our current stockholders. In addition, the market price of our common stock could decrease as a result of the sale of a large number of shares or similar securities, or the perception that such sales could occur. If we cannot raise capital when needed, our ability to serve as a source of strength to the Bank, pay dividends, maintain adequate capital levels and liquidity, or further expand our operations could be materially impaired. Summary Consolidated Financial Data The following tables present our summary consolidated financial data as of or for the nine months ended September 30, 2013 and 2012 and each of the five years ended December 31, 2012. Financial data as of or for the nine months ended September 30, 2013 and 2012 is derived from our unaudited consolidated financial statements, and financial data as of or for each of the five years ended December 31, 2012 is derived from our audited consolidated financial statements. You should read this table together with the historical consolidated financial information contained in our consolidated financial statements and related notes and Management s Discussion and Analysis of Financial Condition and Results of Operations beginning on page 28 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 and beginning on page 5 of our 2012 Annual Report, filed as Exhibit 13 to our Annual Report on Form 10-K for the year ended December 31, 2012, which have been filed with the SEC and are incorporated by reference in this prospectus. As of or For the Nine Months Ended September 30, As of or For the Year Ended December 31, 2013 2012 2012 2011 2010 2009 2008 (Unaudited) (Dollar Amounts in Thousands, Except Per Share Data) Selected Balance Sheet Data: Total assets $ 640,503 $ 653,584 $ 660,432 $ 648,506 $ 682,668 $ 737,780 $ 675,670 Net loans 459,594 466,266 468,376 482,664 504,665 528,503 558,327 Total deposits 510,724 493,377 500,015 484,584 480,694 513,051 447,079 Total borrowings 78,415 108,515 108,515 108,515 148,265 171,265 187,651 Total common shareholder's equity 37,729 38,250 39,079 37,809 35,891 35,536 37,313 Total preferred equity 11,935 11,741 11,789 16,426 16,150 15,875 - Operating Data: Interest income $ 19,236 $ 20,559 $ 27,606 $ 30,376 $ 32,331 $ 33,873 $ 36,363 Interest expense 3,939 5,286 6,858 9,611 14,806 20,527 19,524 Net interest income 15,297 15,273 20,748 20,765 17,525 13,346 16,839 Provision for loan losses 850 5,600 5,950 3,350 5,200 6,900 14,744 Net interest income after provision for loan losses 14,447 9,673 14,798 17,415 12,325 6,446 2,095 Noninterest income 4,580 2,264 3,256 4,485 4,279 4,240 2,316 Noninterest expense 13,968 12,053 16,241 17,361 15,530 15,161 12,760 Income (loss) before income taxes 5,059 (116 ) 1,813 4,539 1,074 (4,475 ) (8,349 ) Provision (credit) for income taxes 1,193 (578 ) (131 ) 703 (57 ) (2,134 ) (2,989 ) Net income (loss) $ 3,866 $ 462 $ 1,944 $ 3,836 $ 1,131 $ (2,341 ) $ (5,360 ) Preferred stock dividends and discount accretion 596 878 1,077 1,126 1,126 1,032 - Net income (loss) available to common shareholders $ 3,270 $ (416 ) $ 867 $ 2,710 $ 5 $ (3,373 ) $ (5,360 ) Per Share Data: Diluted income (loss) per common share $ 1.16 $ (0.15 ) $ 0.30 $ 1.01 $ - $ (1.29 ) $ (2.06 ) Tangible book value per common share $ 13.81 $ 14.05 $ 14.34 $ 14.07 $ 13.51 $ 13.49 $ 14.28 Average share outstanding , basic 2,734,487 2,712,446 2,715,186 2,675,654 2,644,355 2,622,895 2,604,440 Average share outstanding , diluted 2,812,559 2,712,446 2,859,929 2,676,480 2,644,355 2,622,895 2,604,440 Performance Ratios: Return on average assets (1) 0.80 % 0.09 % 0.30 % 0.57 % 0.16 % -0.32 % -0.83 % Return on average equity (2) 10.21 % 1.15 % 3.67 % 7.08 % 2.12 % -4.48 % -13.02 % Net interest margin (3) 3.38 % 3.37 % 3.40 % 3.29 % 2.59 % 1.86 % 2.71 % Efficiency ratio (4) 70.27 % 68.73 % 67.66 % 68.76 % 71.23 % 86.21 % 66.61 % Asset Quality Ratios: Nonperforming assets to total assets 3.52 % 3.69 % 3.01 % 4.17 % 4.91 % 5.56 % 3.90 % Nonperforming loans to total loans 3.98 % 3.85 % 3.21 % 3.45 % 4.44 % 6.32 % 3.60 % Net charge-offs to average total loans, net 0.32 % 2.14 % 1.68 % 1.19 % 1.25 % 1.86 % 0.70 % Allowance for loan losses to total loans 1.81 % 1.80 % 1.83 % 2.15 % 2.53 % 2.59 % 2.91 % Allowance for loan losses to nonperforming assets 37.63 % 35.11 % 44.01 % 39.29 % 38.99 % 34.29 % 63.49 % Capital Ratios: Tangible common equity to tangible assets 5.89 % 5.85 % 5.92 % 5.83 % 5.26 % 4.82 % 5.52 % Leverage ratio 10.58 % 9.72 % 9.91 % 10.42 % 9.31 % 8.81 % 7.51 % Tier 1 risk-based capital ratio 13.22 % 12.89 % 13.25 % 13.19 % 12.06 % 11.19 % 8.92 % Total risk-based capital ratio 14.47 % 14.14 % 14.50 % 14.44 % 13.32 % 12.45 % 10.19 %

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+RISK FACTORS An investment in our securities involves a high degree of risk. In addition to the other information included in this prospectus, you should carefully consider each of the risk factors set forth in our most recent Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q on file with the SEC, which are incorporated by reference into this prospectus. Before making an investment decision, you should carefully consider these risks as well as other information we include or incorporate by reference in this prospectus and any prospectus supplement. The risks and uncertainties not presently known to us or that we currently deem immaterial may also materially harm our business, operating results and financial condition and could result in a complete loss of your investment.

parsed_sections/risk_factors/2014/CIK0001071760_ecosphere_risk_factors.txt

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+RISK FACTORS Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors before deciding whether to invest in Ecosphere. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations or our financial condition. If any of the events discussed in the risk factors below occur, our business, consolidated financial condition, results of operations or prospects could be materially and adversely affected. In such case, the value and marketability of the common stock could decline, and you may lose all or part of your investment. Risk Factors Relating to Our Company If we do not generate positive cash flow, we will be required to engage in a future financing. We will continue to be dependent upon our ability to monetize our intellectual property or a future financing. Recently we raised approximately $1.85 million from the sale of the Notes and warrants. We are seeking to raise an additional $3.15 million from the sale of Notes and warrants. However, we cannot assure you that we will be successful in raising sufficient capital to run our operations. We also are currently conducting an offering of ownership interests in one of our subsidiaries, Ecosphere Mining, LLC. If this offering is not successful, we might be required to raise funds through Ecosphere in order to enter into new industries and applications which may dilute our existing shareholders. Our business model focuses on inventing and patenting solutions to environmental problems, proving our patented solution works, and then monetizing our intellectual property through sales and licensing. Thus, there will be times in the future as it has been in the past where we may need to raise capital to continue operations or expand our operations to deal with increased business. Because of the difficulties which microcap companies have in raising capital, the lack of available credit for companies like us and our stock price, we may be hampered in our ability to raise the necessary working capital. Even if we do find a source of additional capital, we may not be able to negotiate terms and conditions for receiving the additional capital that are acceptable to us. Any future capital investments may dilute or otherwise materially and adversely affect the holdings or rights of our existing shareholders. In addition, new equity or debt securities issued by us to obtain financing could have rights, preferences and privileges senior to our common stock. We cannot give you any assurance that any additional financing will be available to us, or if available, will be on terms favorable to us. In such event, our ability to continue as a going concern is in doubt and we may not be able to remain in business. Although we believe we have the most proven and commercialized non chemical solution for treating industrial wastewaters including recycling frac flowback water and produced water stemming from the production of oil and natural gas wells, we face severe competition from a number of sources including service companies and various chemical companies which may adversely affect our future results of operations and financial condition. In its providing services to oil and gas drilling companies, FNES competes with oil and gas service companies and the various chemical companies. Service companies actually use the chemicals supplied by chemical companies in the drilling process. Oil and gas exploration companies rely heavily on the service companies for many aspects of the drilling and fracking process, and FNES has limited market share. These competitors are substantially larger than FNES and have substantially more resources. If FNES is not able to expand its service business, it may adversely affect our future results of operations and financial condition. If the current price of natural gas or oil decreases, energy companies may reduce their drilling operations in shale deposits, which could adversely affect the attractiveness of our Ecosphere Ozonix business in the oil and gas industry. The development of new horizontal drilling techniques and the discovery of unconventional oil and gas in new shale areas throughout the U.S. and world market has opened up an enormous opportunity for our Ozonix technology to replace traditional chemicals used to kill bacteria in waters used for hydraulic fracturing. These fracturing operations rely on enormous supplies of clean water to be pumped downhole to break the rock that holds the oil and gas. Much of the water used in drilling oil and natural gas wells and the resulting water that flows back needs to be treated and creates an opportunity for our Ecosphere Ozonix technology. Horizontal drilling in shale areas is very expensive; however, if prices for natural gas and oil are sufficiently high this expense can be justified. If current prices decline, horizontal drilling may not be cost-effective and the lack thereof may adversely affect our Ecosphere Ozonix technology. Because our Ozonix products are designed to provide a solution which competes with existing methods; we are likely to face resistance to change, which could impede our ability to commercialize this business. Our Ozonix products are designed to provide a solution to replacing traditional chemicals that are used in the treatment of bacteria and scaling in industrial water processes. Specifically, we believe it can provide a cost effective and environmentally friendly solution in the oil and gas, mining, food and beverage, agriculture marine, and other industries that consume large amounts of water in their industrial processes. Currently, large and well-capitalized service companies provide traditional chemical equipment and services in these areas. These competitors have strong relationships with their customers personnel, and there is a natural reluctance for businesses to change to new technologies. This reluctance is increased when potential customers make significant capital investments in competing technologies. Because of these obstacles, we may face substantial barriers to commercializing our business. If chemical companies engage in predatory pricing, our licensee may lose customers, which could materially and adversely affect us. In the oil and gas business, energy companies traditionally have used liquid chemicals to treat the water used to fracture wells. The chemical companies represent a significant competitive factor. The chemical companies which supply chemicals to the service companies that offer their services to the oil and gas exploration companies may, in order to maintain their business relationship with their customers, drastically reduce their price and seek to undercut the pricing at which we can realistically charge for our products or services. While predatory pricing that is designed to drive us or any sub-licensee out of business may be illegal under the United States anti-trust and other laws, we may lose customers as a result of any future predatory pricing and be required to file lawsuits against any companies who engage in such improper tactics. Any such litigation may be very expensive which will further impact us and affect their financial condition. As a result, predatory pricing by chemical companies could materially and adversely affect us. If we do not achieve broad market acceptance of our clean technology products, we may not be successful. Although all of our products and services serve existing needs, our delivery of these products and services is unique and subject to broad market acceptance. As is typical of any new product or service, the demand for, and market acceptance of, these products and services are highly uncertain. We cannot assure you that any of our products and services will be commercialized on a widespread basis. If we are unable to sell or license all or part of our Ecos PowerCube , or if our efforts are delayed, our business and future results of operations could be adversely effected. Our most recently patented technology is the Ecos PowerCube , a self-contained micro-utility that uses solar power to provide electricity in remote, off-grid locations. Although we believe that the Ecos PowerCube serves an existing need and can provide many benefits to the military and disaster relief efforts, there is no guarantee that it will receive market acceptance in the time frame as we expect it will. If the markets for our products and services fail to develop on a meaningful basis, if they develop more slowly than we anticipate or if our products and services fail to achieve sufficient market acceptance, our business and future results of operations could be adversely affected. Our growth strategy reflected in our business plan may not be achievable or may not result in profitability. Our growth strategy reflected in our business plan may not be able to be implemented at all or rapidly enough for us to achieve profitability. Our growth strategy is dependent on several factors, such as our ability to respond to the technological needs of our customers and others in the markets in which we compete and a degree of market acceptance of our products and services. We cannot assure you the potential customers we intend to target will purchase our products or services in the future or that if they do, our revenues and profit margins will be sufficient to achieve profitability. Because our operating results have and may continue to fluctuate dramatically, particularly from quarter to quarter, investors should not rely upon our results in any given quarter as being part of a trend. In the past, our quarterly operating results fluctuated and may continue to do so in the future as a result of a number of factors, including the following: Our receipt of orders; The availability of components from our suppliers for Ecosphere Ozonix systems; Operating results from our Ecosphere Ozonix units and the announcement of future agreements for our Ecosphere Ozonix units; Our raising necessary working capital and any associated costs which will be charged as expenses to our future results of operations; Our continuing to develop new technologies; Pricing pressures; General economic and political conditions; Our ability, or our subsidiaries ability, to finance new verticals and develop commercial relationships for those verticals; Our sales or licensing of our technologies. As a result of these and other factors, we have experienced, and may continue to experience, fluctuations in revenues and operating results. As a consequence, it is possible that fluctuations in our future operating results may cause the price of our common stock to fall. If we cannot manage our growth effectively, we may not become profitable. Businesses which grow rapidly often have difficulty managing their growth. We have been growing rapidly. If this growth continues, we will need to expand our management by recruiting and employing experienced executives and key employees capable of providing the necessary support. We cannot assure you that our management will be able to manage our growth effectively or successfully. Our failure to meet these challenges could cause us to lose money, and your investment could be lost. Because our business model is centered on sales and licensing our technologies to third parties, we may not be able to control key aspects of the timing of the commercialization of our business, which can adversely affect our future results of operations. Our business model is to invent and develop environmentally responsible technologies and once we prove that they are commercially viable, we sell and license these patented technologies to financially stable companies to service their customers,. Thus our ability to commercialize our future business will be dependent upon third parties, which we will not be in a position to control and, as a result, we could be adversely affected if the third parties do not perform on their agreements with us in the manner we anticipate. If federal and state legislation and regulatory initiatives relating to horizontal drilling are passed, it could materially and adversely affect our results of operations. FNES business relies upon supplying chemical-free solutions for cleaning the large amounts of water used in hydraulic fracturing applications. Objections have been raised by environmentalists, some land owners and some government officials including environmental authorities that there have been adverse side effects affecting the purity of the water supply as a result of the injection of chemicals and water in connection with horizontal drilling. Although we believe that FNES has a chemical-free solution which should result in increased business, we cannot assure you that legislation or rules will not be passed or action taken by environmental authorities that will preclude the use of horizontal drilling. At the state level, certain states and localities have implemented moratoriums and certain obligations on oil gas companies using horizontal drilling. The adoption of any future federal, state or local laws or implementing regulations imposing reporting or permitting obligations on, or otherwise limiting, the horizontal drilling process could make it more difficult to perform, or even prohibit oil and gas companies from using horizontal drilling, to complete gas and oil wells. These additional costs to drillers could result in reduced oil and gas drilling. This would reduce our potential service revenue and adversely affect our ability to sell Ozonix Units. If this were to occur more widely in the United States, the demand for FNES services may be eliminated or substantially reduced. If any such federal or state legislation on horizontal fracturing were passed, our revenues and results of operations could be adversely affected. If we are unable to protect our patented technologies, our business could be harmed. Our intellectual property including our patents is our key asset. In addition to our existing patents, we have filed United States patent applications covering certain technologies. Competitors may also be able to design around our patents and to compete effectively with us. The cost to prosecute infringements of our intellectual property or the cost to defend our products against patent infringement or other intellectual property litigation by others could be substantial. We cannot assure you that: Pending and future patent applications will result in issued patents; Patents we own or which are licensed by us will not be challenged by competitors; The patents will be found to be valid or sufficiently broad to protect our technology or provide us with a competitive advantage; and We will be successful in defending against future patent infringement claims asserted against our products. Both the patent application process and the process of managing patent disputes can be time consuming and expensive. In addition, changes in U.S. patent laws could prevent or limit us from filing patent applications or patent claims to protect our products and/or technologies or limit the exclusivity periods that are available to patent holders. In September 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was recently signed into law and includes a number of significant changes to U.S. patent law, including the transition from a "first-to-invent" system to a "first-to-file" system and changes to the way issued patents are challenged. These changes may favor larger and more established companies that have more resources than we do to devote to patent application filing and prosecution. The U.S. Patent and Trademark Office recently issued new Regulations effective March 16, 2013 to administer the Leahy-Smith Act. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will ultimately have on the cost of prosecuting our patent applications, our ability to obtain patents based on our discoveries and our ability to enforce or defend our issued patents. However, it is possible that in order to adequately protect our patents under the "first-to-file" system, we will have to allocate significant additional resources to the establishment and maintenance of a new patent application process designed to be more streamlined and competitive in the context of the new "first-to-file" system, which would divert valuable resources from other areas of our business. In addition to pursuing patents on our technology, we have taken steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. Such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements, and we may not be able to prevent such unauthorized disclosure. Monitoring unauthorized disclosure is difficult, and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate. If we are subject to intellectual property infringement claims, it could cause us to incur significant expenses and pay substantial damages. Third parties may claim that our equipment or services infringe or violate their intellectual property rights. Any such claims could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages and prevent us from using licensed technology that may be fundamental to our business service delivery. Even if we were to prevail, any litigation regarding its intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations. We may also be obligated to indemnify our business partners in any such litigation, which could further exhaust our resources. Furthermore, as a result of an intellectual property challenge, we may be prevented from providing some of our services unless we enter into royalty, license or other agreements. We may not be able to obtain such agreements at all or on terms acceptable to us, and as a result, we may be precluded from offering some of our equipment and services. Risks Related to Our Common Stock Because our common stock does not trade on a securities exchange, a number of investors can not purchase our common stock, which has a depressive effect on our stock price. Our common stock trades on the Bulletin Board which is not a national securities exchange. As a result of that and our stock price being under $5.00 most institutions can not buy our stock and brokers generally can not recommend to investors that they buy our stock. If an active market for our common stock is not sustained, the price may decline in the future. Because we are subject to the penny stock rules, brokers cannot generally solicit the purchase of our common stock which adversely affects its liquidity and market price. The SEC has adopted regulations which generally define penny stock to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock on the Bulletin Board has been substantially less than $5.00 per share and therefore we are currently considered a penny stock according to SEC rules. This designation requires any broker-dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules limit the ability of broker-dealers to solicit purchases of our common stock and therefore reduce the liquidity of the public market for our shares. Due to factors beyond our control, our stock price may be volatile. Any of the following factors could affect the market price of our common stock: Our announcements about completing any financings; Our announcements of and progress with commercialization in other business besides U.S. onshore oil and gas; Our failure to generate increasing revenues through the sale of our intellectual property; Short selling activities; The loss of key personnel; Our failure to achieve and maintain profitability; Actual or anticipated variations in our quarterly results of operations; Announcements by us or our competitors of significant contracts, new products, acquisitions, commercial relationships, joint ventures or capital commitments; The loss of major customers or product or component suppliers; The loss of significant business relationships; Our failure to meet financial analysts performance expectations; Changes in earnings estimates and recommendations by financial analysts; or Changes in market valuations of similar companies. In the past, following periods of volatility in the market price of a company s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs and divert our management s time and attention, which would otherwise be used to benefit our business. We may issue preferred stock without the approval of our shareholders, which could make it more difficult for a third party to acquire us and could depress our stock price. Our Board may issue, without a vote of our shareholders, one or more additional series of preferred stock that have more than one vote per share. This could permit our Board to issue preferred stock to investors who support our management and give effective control of our business to our management. Additionally, issuance of preferred stock could block an acquisition resulting in both a drop in our stock price and a decline in interest of our common stock. This could make it more difficult for shareholders to sell their common stock. This could also cause the market price of our common stock shares to drop significantly, even if our business is performing well. If the holders of our outstanding securities exercise or convert their securities into common stock, we will issue a substantial number of shares, which will materially dilute the voting power of our currently outstanding common stock. As of January 14, 2014, we had approximately 164 million shares of our common stock outstanding, 17.3 million shares underlying warrants, 8.7 million shares underlying outstanding convertible notes and 56.1 million shares underlying stock options. If the holders of the securities described in this risk factor exercise or convert their securities, it will materially dilute the voting power of our outstanding common stock. An investment in Ecosphere will be diluted in the future as a result of the issuance of additional securities, the exercise of options or warrants or the conversion of outstanding preferred stock. In order to raise additional capital to fund our strategic plan, we may sell (and currently are engaged in the sale of) additional shares of common stock or securities convertible, exchangeable or exercisable into common stock from time to time, which could result in substantial dilution to investors. We cannot assure you that we will be successful in raising additional capital. Because our management and employees do not solely by virtue of their ownership of our common stock control Ecosphere, it is possible that third parties could obtain control and change the direction of our business. Our officers and directors own approximately 2.1 million shares of our common stock or approximately 1.3% of the shares actually outstanding. By including shares of common stock which are issuable upon exercise of outstanding vested options held by them, they beneficially own approximately 35.9 million shares or 18.1%. If all of our equity equivalents outstanding as of January 14, 2014 were exercised, we would have approximately 247 million shares outstanding. For that reason, a third party could obtain control of Ecosphere and change the direction of our business. Since we intend to retain any earnings for development of our business for the foreseeable future, you will likely not receive any dividends for the foreseeable future. We have not and do not intend to pay any dividends in the foreseeable future, as we intend to retain any earnings for development and expansion of our business operations. As a result, you will not receive any dividends on your investment for an indefinite period of time. Because almost all of our outstanding shares are freely tradable, sales of these shares could cause the market price of our common stock to drop significantly, even if our business is performing well. As of January 14, 2014, we had 164,138,402 shares of common stock outstanding of which our directors and executive officers own approximately 2.1 million shares which are subject to the limitations of Rule 144 under the Securities Act. Most of the remaining outstanding shares, including a substantial amount of shares issuable upon exercise of options, are and will be freely tradable. In general, Rule 144 provides that any non-affiliate of Ecosphere, who has held restricted common stock for at least six months, is entitled to sell their restricted stock freely, provided that we stay current in our SEC filings. After one year, a non-affiliate may sell without any restrictions. An affiliate of Ecosphere may sell after six months with the following restrictions: (i) we are current in our filings, (ii) certain manner of sale provisions, and (iii) filing of Form 144. Because almost all of our outstanding shares are freely tradable and a number of shares held by our affiliates may be freely sold (subject to Rule 144 limitation), sales of these shares could cause the market price of our common stock to drop significantly, even if our business is performing well. Because we may not be able to attract the attention of major brokerage firms, it could have a material impact upon the price of our common stock. It is not likely that securities analysts of major brokerage firms will provide research coverage for our common stock since the firm itself cannot recommend the purchase of our common stock under the penny stock rules referenced in an earlier risk factor. The absence of such coverage limits the likelihood that an active market will develop for our common stock. It may also make it more difficult for us to attract new investors at times when we require additional capital.

parsed_sections/risk_factors/2014/CIK0001096950_advanced_risk_factors.txt

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+Risk factors:
+ 
+ Investors should
+ carefully read and consider the information set forth under the caption Risk Factors beginning on page 4 and
+ all other information set forth in this Prospectus before investing in the Common Stock.
+
+ Trading Symbol:
+ 
+ ACOL
+
+ 
+
+RISK FACTORS
+
+ 
+
+An investment in the Common Stock involves a high
+degree of risk. You should carefully consider the risks described below, together with all of the other information included
+in this Prospectus, before making an investment decision. If any of the events associated with the risk factors described
+below actually occurs, our business, financial condition or results of operations could suffer or we could be unable to
+continue to operate. In that case, the trading price of the Common Stock could decline, and you could lose all
+or a part of your investment. You should read the section entitled Forward-Looking Statements on page 4 for a
+discussion of what types of statements are forward-looking statements, as well as the significance of such statements in the
+context of this Prospectus.
+
+ 
+
+ Table of Contents-4- 
+
+ 
+
+ 
+
+Risk Factors Related to
+Our Financial Condition
+
+ 
+
+If we are unsuccessful
+in obtaining revenues and raising funding, we may cease to continue as a going concern.
+
+ 
+
+Our ability to continue as
+a going concern is dependent on the successful execution of our business plan, which is aimed at developing our business and obtaining
+market penetration to attain revenues and operating cash flows, investing in research and product development, entering into complementary
+markets, obtaining satisfactory overall gross margins, and securing financing to fund our operations.
+
+ 
+
+This plan includes the generation of revenues, profits and related positive
+operating cash flows. There are various uncertainties affecting our revenues, including the current market environment, our
+ability to obtain orders, the development of products, price competition, and the ability of customers to finance purchases.
+In addition, we will also require substantial funding and there are uncertainties
+surrounding our ability to access capital, including the volatility in economic conditions in recent months and years.
+
+ 
+
+Such funding may be in the form of debt or equity or a hybrid
+instrument, depending on the demands of the investor. Given economic and credit market conditions, we may not be able to
+raise cash resources through these sources of financing. Accordingly, while we are continuing to review these sources of
+financing, we may also explore other sources of financing, such as alliances with strategic partners, sales of assets or
+licensing of our technology, a combination of operating and related initiatives or a substantial reorganization of
+our business. Certain provisions contained in a promissory note that we made in favor of Richard S. Astrom, our president
+and sole director until March 4, 2014, limit our ability to raise capital in the public markets. See "Directors,
+Executive Officers, Promoters and Control Persons Related Party Transactions Exchange Transaction" on
+page 37.
+
+ 
+
+There can be no assurance
+we will obtain revenue or achieve profitability or positive cash flows or be able to obtain funding or that, if obtained, they
+will be sufficient, or whether any other initiatives will be successful, such that we will be able to continue as a going concern.
+
+ 
+
+We face significant
+competition in the market for our products. If we are unable to compete successfully, we may not be able to sell
+products or to sell them at sufficient profit margins.
+
+ 
+
+We face intense competition in the sale of our products and
+compete with multiple companies principally on the basis of price, service, quality, product characteristics and the ability
+to supply products to customers in a timely manner. Our products also compete with metal, glass, paper and other packaging
+materials as well as plastic and resin packaging materials made through different manufacturing processes. Most of our
+existing and potential competitors have greater brand name recognition and their products may enjoy greater initial market
+acceptance among our potential customers. In addition, many of these competitors have significantly greater
+financial, technical, sales, marketing, distribution, service and other resources than we have and may also be better able to
+adapt quickly to customers changing demands and changes in technology, to enhance existing products, to develop
+and introduce new products and new production technologies and to respond timely changing market conditions and customer
+demands. If we are not able to compete successfully in the face of our competitors advantages, our ability to gain
+market share or market acceptance for the products that we sell could be limited, our revenues and our profit margins could
+suffer, and we may never become profitable.
+
+ 
+
+While we believe that the patent under which our TSOS Container
+is manufactured (see Description of Business Patents, Trademarks and Other Intellectual Property on
+page 27) may afford us some protection from competition by similar products, no assurance can be given that a competing product
+cannot be developed without infringing our patent.
+
+ 
+
+Our inability to generate
+sufficient cash flows, raise capital, and actively manage our liquidity may impair our ability to execute our business plan, and
+result in our reducing or eliminating product development and commercialization efforts, reducing our sales and marketing efforts,
+and having to forego attractive business opportunities.
+
+ Table of Contents-5- 
+
+ 
+
+ 
+
+At December 31, 2013, and March 31, 2014, respectively, we had approximately $3,376
+and $1,759 in cash. There are uncertainties related to the timing and use of our cash resources and working capital requirements.
+These uncertainties include, among other things, our ability to raise capital, to purchase products for resale, to develop additional
+products, the timing and volume of commercial sales and the associated gross margins of our products and the development of markets
+for, and customer acceptance of, new products.
+
+ 
+
+To the extent possible, we
+will attempt to limit these risks by; (i) continually monitoring our sales prospects, (ii) continually aiming to reduce product
+cost and (iii) advancing our technology and product designs. However, because these above factors are not within our control,
+we may not be able to accurately predict our necessary cash expenditures or obtain financing in a timely manner to cover any shortfalls.
+
+ 
+
+If we are unable to generate
+sufficient cash flows or obtain adequate financing, we may be prevented from executing our business plan on a timely basis or
+at all. In addition, we may be forced to reduce our sales and marketing efforts or forego attractive business opportunities.
+
+ 
+
+In order to remain in business, we are also dependent on funds provided by the Company s
+two officers for our day-to-day expenses and their willingness to work for the Company at salaries that are not commensurate with
+their contributions and abilities. If these officers ceased funding our day-to-day expenses, we could not continue to operate
+for more than a few weeks. For further information respecting these matters and the risks that they present to us, see Risk
+Factors - Risks Related to Our Business - We Could Lose Our Officers on page 8.
+
+ 
+
+We are seeking equity and/or
+debt financing in an amount of at least $1.5 million that will enable us to continue to meet our capital needs for the next 12
+months, but cannot give any assurance as to whether, when or in what amounts we will obtain it. We have met with several sources
+of financing, but have not been successful in obtaining funds. We intend to persist in seeking financing and intend to identify
+possible sources of financing and attempt to interest in us.
+
+ 
+
+All of the membership
+units in D&C, which holds substantially all of our assets, have been pledged to secure indebtedness that
+ we may be unable to repay.
+
+ 
+
+All of the membership units in D&C, through we operate, and
+which holds substantially all of our assets, have been pledged to secure our obligations under a convertible promissory note
+in the principal amount of $400,000, $360,000 of which is unpaid. For further information about this convertible promissory
+note, the circumstances under which it was issued, its holder and the pledge, see Directors, Executive Officers and
+Control Persons Related Party Transactions Exchange Transaction on page 37. If we are unable to pay this
+convertible promissory note when it is due on March 4, 2015, or arrange for an extension of its maturity date, or if we
+defaults under any of covenant under this convertible promissory note or the pledge agreement by which it is secured, the
+holder of the convertible promissory note will be able to foreclose on these membership units.
+
+ 
+
+In this event, our shareholders could lose all, or substantially
+all, of their investment.We do not presently have funds sufficient to pay the holder of this convertible
+promissory note. No assurance can be given that we will be able to obtain the funds necessary to make
+payments when due or at all.
+
+ 
+
+We incurred losses during
+2013 and if we continue to do so, we may not be able to implement our business strategy and the price of the Common
+Stock may decline.
+
+ 
+
+We incurred a net loss of
+$104,167 for the year ended December 31, 2013. While we made a small
+profit during the first quarter of 2014, we may incur losses during 2014 and beyond. Our current business strategy is to pursue
+our business plan as described in this Prospectus. In so doing, we will continue to incur significant expenditures. As a result,
+we will need to generate and sustain significant revenues and positive gross margins to achieve and sustain profitability.
+
+ 
+
+While we hope to execute our
+business plan successfully, no assurance can be given that we will be able to do so. If we are unable to do so, we may not be
+able to continue as a going concern and investors may lose their entire investment.
+
+ 
+
+ Table of Contents-6- 
+
+ 
+
+ 
+
+In order to grow, we will need additional
+financing. If we cannot meet our future capital requirements, our business will suffer or we will
+be unable to continue to operate. Our shareholders may be adversely affected by the terms of such financing.
+
+ 
+
+Since we commenced business, our primary methods to obtain the
+cash necessary for our operating needs have been investments made by our founders, Curtis Fairbrother and Douglas Heldoorn.
+We need to raise additional funds through public or private debt or equity financings in order to continue operating and in
+particular to fund operating losses; increase our sales and marketing capacities; take advantage of opportunities for
+internal expansion or acquisitions; hire, train and retain employees; develop and complete existing and new products; and
+respond to economic and competitive pressures. We will not be able to grow and become profitable without additional capital
+in the form of equity or borrowed money of approximately $1,500,000 to execute our business plan during the next 12 months.
+Our current liquidity presents a material risk to investors because we do not currently have sufficient funds to finance our
+business plan. See Management s Discussion and Analysis of Financial Condition and Results of Operations 
+Liquidity and Capital Resources on page 31. Although we are seeking additional capital, we have received no commitment
+for financing from investors or banks and no assurance can be given that any such commitment will be forthcoming or, if so,
+in what amount.
+
+ 
+
+If adequate funds are not
+available or are not available on acceptable terms, our operating results and financial condition may suffer, the price of the
+Common Stock may decline and we may not be able to continue as a going business. We can give no assurance that we will be able
+to obtain such capital in sufficient amounts or on acceptable terms.
+
+ 
+
+If our capital needs are met
+through the issuance of equity or convertible debt securities, the percentage ownership of the holders of the Common Stock will
+be reduced and may be diluted.
+
+ 
+
+Acology s
+two officers also comprise its board of directors and may change the terms of their employment with the Company to the detriment
+of the our shareholders.
+
+ 
+
+As the sole directors of the Company, Messrs. Fairbrother and
+Heldoorn could establish terms of their employment to the detriment of the Company and our shareholders by using funds that
+would otherwise be available for the development of the business of the Company to pay unreasonable compensation. If they
+were to do so, the funds available to the Company for such development would be decreased. If their compensation were of
+sufficient magnitude, the Company would be unable to continue to operate and our shareholders could lose all or
+substantially all of their investment.
+
+ 
+
+Risk Factors Related to
+Our Business 
+
+We
+could lose our supply contract.
+
+We have entered into an agreement
+with Polymation Medical Products, LLC ("Polymation") under which we purchase all of our TSOS Containers. For a
+description of these containers, see "Description of Business – Source of Products" on page 26 and for a
+description of this agreement, see "Description of Business – Products" on page 24. We are currently
+required to purchase at least 30,000 units per month, but this requirement will increase by 10% on each anniversary of the
+effective date of the agreement, but we have not complied with these purchase requirements. During 2013, we were required to
+purchase 150,000 units, but purchased only 58,540 units and during the quarter ended March 31, 2014, we were required to
+purchase 90,000 units, but purchased only 47,000 units. As a result, we are in default under this agreement and Polymation
+has the right to terminate it. We have discussed this situation with Polymation and have an orally understanding that at some
+point in the future, we will either purchase the 91,469 units that we failed to purchase in 2013 and the 43,000 units that we
+failed to purchase in the first quarter of 2014 or reimburse Polymation for its lost profits, the amount of which is unknown
+to us, but is less than the $67,234 contract price for the units. We have not entered into a written amendment of the agreement
+memorializing this oral understanding and we may therefore be unable to enforce it. While we believe that Polymation will
+comply with this oral understanding, we can give no assurance as to whether or for how long it will do so.
+
+ Table of Contents-7- 
+
+ 
+
+ 
+
+If this agreement were to be terminated, we
+would be unable to acquire TSOS Containers from another source without the consent of Polymation, because Polymation holds a patent
+relating to the TSOS Container. If this consent were not forthcoming, our business would likely fail, since we have no other products
+with which we could replace the TSOS Container. In that case, our shareholders would lose all, or substantially all, of their investment.
+
+ 
+
+We Could Lose Our Officers
+
+ 
+
+We are unable to pay regular salaries to our officers, who are our
+only employees. We are currently paying them sporadically and in varying amounts as our financial condition permits and we believe
+that the amounts that we are paying to them are not commensurate with their contributions and abilities. We also have no employment
+agreements with them and they are not obligated to continue to be employed by us. While neither of our officers has indicated
+when or if they would terminate their employment if we continue to pay them on the basis set forth above, we believe that they
+may not work for us indefinitely without appropriate fixed compensation. If we were to lose one of our officers, our ability to
+operate would be materially impaired; if we were to lose both officers, we could not continue to operate. For further information,
+see Management s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital
+Resources on page 31.
+
+ 
+
+Our business depends substantially on recruiting members of management and
+key personnel yet to be hired, and our business could be severely disrupted if we were unable to
+hire such personnel or lose their services.
+
+ 
+
+Curtis Fairbrother, our Chairman of the Board and Chief Executive
+Officer, and Douglas Heldoorn, our President and Chief Operating Officer, are presently the only members of our management
+and therefore, we will need to attract, hire and retain other managers and key employees. If we were unable to hire
+additional management or if, after being hired, one or more of the members of our management were unable or unwilling to
+continue to work for us, we would have to spend a considerable amount of time and resources searching, recruiting, and
+integrating their replacements, which would substantially divert management s attention from and severely disrupt our
+business. We could face difficulties in attracting and retaining additional management and, if we were to lose any of them,
+in attracting and retaining their replacements, because we are not presently in a position to pay competitive compensation
+and our future is uncertain. 
+
+ 
+
+Markets for our products
+may never develop or may develop more slowly than we anticipate. This would significantly harm our ability to generate revenues
+and may cause us to be unable to recover the expenses that we expect to incur in the development and acquisition of our products.
+
+ 
+
+Markets may never develop
+for our products or they may develop more slowly than we anticipate. Any such delay or failure would significantly harm our revenues
+and we may be unable to recover the losses that we have incurred and may continue to incur in our business. If this were
+to occur, our business could fail. Our ability to market our products may be affected by many factors, some of which are beyond
+our control, including: the emergence of more competitive technologies and products; the future cost of raw materials; the manufacturing
+and supply costs for our products; and the perceptions of potential customers and the general public regarding these products.
+
+ 
+
+Some activities of some of our
+customers, while believed to be compliant with the laws of many states, are illegal under federal law. We may be deemed to be aiding
+and abetting illegal activities through the products that we provide to those customers. As a result, we may be subject to actions
+by law enforcement authorities, which would materially and adversely affect our business. 
+
+The use of marijuana for medical and
+recreational use is lawful in many states and the District of Columbia. However, under United States federal law and the laws of
+the other states, the possession, use, cultivation, storage, processing and/or transfer of marijuana is illegal. Federal and state
+law enforcement authorities have prosecuted persons engaged in these activities. While we do not believe that we engage in any
+of these activities, any of these law enforcement authorities might bring an action against
+us in connection with the engagement of others in them, including, but not limited, to a claim of aiding and abetting their criminal
+activities. Such an action would have a material and adverse effect on our business and operations.
+
+ Table of Contents-8- 
+
+ 
+
+ 
+
+We could be prosecuted under federal
+law if law enforcement authorities were to determine that our products are "drug paraphernalia."
+
+Under federal law, it is unlawful to
+sell or offer for sale, to use the mails or any other facility of interstate commerce to transport or to import or export drug
+paraphernalia. The term "drug paraphernalia" includes any equipment, product, or material of any kind which is primarily
+intended or designed for use in manufacturing, compounding, converting, concealing, producing, processing, preparing, injecting,
+ingesting, inhaling, or otherwise introducing into the human body a controlled substance. One of the factors that these authorities
+may consider in determining whether our products are drug paraphernalia are our national and local advertising concerning its use
+and we have advertised our products as usable for marijuana-related purposes. However, we do not believe that our products were
+designed or are intended for any of these purposes or that our products are drug paraphernalia, as defined in federal law, and we
+plan to promote our products primarily to be used for other purposes. If federal authorities were to take a different view, they
+might bring a criminal action against us. Such an action would have a material and adverse
+effect on our business and operations.
+
+Our websites are visible in jurisdictions
+where medicinal and/or recreational use of marijuana is not permitted and as a result we may be found to be violating the laws
+of those jurisdictions.
+
+Our websites, which advertise our products
+for use in connection with marijuana, are visible in jurisdictions where the medical and recreational use of marijuana is unlawful.
+As a result, we may face legal action brought against us by such jurisdiction for engaging in an activity illegal in that jurisdiction.
+Such an action would have a material and adverse effect on our business and operations.
+
+We may not be able to
+manage successfully an expansion of our operations.
+
+ 
+
+Our anticipated expansion
+in facilities, staff and operations may place serious demands on our managerial, technical, financial and other resources. We
+may be required to make significant investments in our business, as well as retain, motivate and effectively manage our employees. While we intend continually to monitor our sales
+outlook and adjust our business plan as necessary, our management skills and systems currently in place may not enable us to implement
+our strategy or to attract and retain the personnel that are required to expand our business. Our failure to manage our growth
+effectively or to implement our strategy in a timely manner may significantly harm our ability to achieve profitability.
+
+ 
+
+ Table of Contents-9- 
+
+ 
+
+ 
+
+We may acquire technologies or companies in the future, and these acquisitions
+could disrupt our business and dilute shareholders interests.
+
+ 
+
+We may acquire additional
+technologies or other companies in the future and we cannot assure that we will be able to successfully integrate their operations
+or that the cost savings we anticipate will be fully realized. Entering into an acquisition entails many risks,
+any of which could materially harm our business, including: diversion of management s attention from other business concerns;
+failure to effectively assimilate the acquired technology, employees or other assets into our business; the loss of key employees
+from either our current business or the acquired business; and the assumption of significant liabilities of the acquired company.
+
+ 
+
+If we complete
+acquisitions, we may dilute the ownership of current shareholders. In addition, achieving the expected returns and cost savings
+from acquisitions will depend in part on our ability to integrate the products and services, technologies,
+research and development programs, operations, sales and marketing functions, finance, accounting and administrative functions,
+and other personnel of these businesses into our business in an efficient and effective manner. We cannot ensure we will be able
+to do so or that the acquired businesses will perform at anticipated levels. If we are unable to successfully integrate acquired
+businesses, our anticipated revenues may be lower and our operational costs may be higher.
+
+ 
+
+We may become responsible for unexpected liabilities that we
+failed or were unable to discover in the course of performing due diligence in connection with our acquisitions. Although we
+may ask persons from whom we acquire businesses to indemnify us against undisclosed liabilities, we may not be able to obtain
+satisfactory indemnification and such indemnification, if obtained, may not be enforceable, collectible or sufficient in
+amount, scope or duration. Such liabilities, individually or in the aggregate, could have a material adverse effect on our
+business, financial condition and results of operations.
+
+ 
+
+Risk Factors Related to
+the Development of Our Products and Technology
+
+ 
+
+We may not be able to
+sell our products at competitive prices. If we fail to do so, we will not generate sufficient revenues to achieve
+and sustain profitability.
+
+ 
+
+While we plan to sell our
+products at competitive prices, we may not be able to do so. The prices of our products at which we acquire our products from
+our manufacturer are dependent largely on material and manufacturing costs. This manufacturer may not be able purchase raw materials
+at the prices and/or to maintain manufacturing costs at the levels at which it will be able to sell them to us at prices at which
+we can resell them at satisfactory margins.
+
+ 
+
+The manufacture of our products
+requires large quantities of medical-grade polypropylene no. 5 resin, which is subject to price fluctuations that arise principally
+from supply shortages and changes in the prices of natural gas, crude oil and other petrochemicals from which this
+resin is produced. Over the past several years, these prices have fluctuated, sometimes rapidly. These fluctuations could materially
+and adversely affect us.
+
+ 
+
+We may depend on intellectual
+property and our failure to protect that intellectual property could adversely affect our future growth and success.
+
+ 
+
+Failure to protect our intellectual property rights may
+reduce our ability to prevent others from using technology that we may develop. We will rely on a combination of patent,
+trade secret, trademark and copyright laws to protect our intellectual property. Some of our intellectual property is
+currently not covered by any patent or patent application. Patent protection is subject to complex factual and legal criteria
+that may give rise to uncertainty as to the validity, scope and enforceability of a particular patent. Accordingly, we cannot
+assure that any patents or third party patents licensed to us will not be invalidated, circumvented, challenged,
+rendered unenforceable, or licensed to others or that any that we may obtain of our future patent applications will be
+issued with the breadth of protection that we seek, if at all.
+
+ 
+
+In addition, effective patent,
+trademark, copyright and trade secret protection may be unavailable, limited, not applied for, or unenforceable in foreign countries.
+
+ Table of Contents-10- 
+
+ 
+
+ 
+
+While we intend to seek to protect our proprietary intellectual property
+through contracts, including confidentiality and similar agreements, with our customers and employees, we cannot assure that
+the parties who enter into such agreements with us will not breach them, that we will have adequate remedies for any such
+breach or that such parties will not assert rights to intellectual property of which they learn
+from relationships with us.
+
+ 
+
+If necessary or desirable,
+we may seek licenses under the patents or other intellectual property rights of others. However, we cannot as sure we will obtain
+such licenses or that the terms of any offered licenses will be acceptable to us. Our failure to obtain a license from a third
+party for intellectual property we use in the future could cause us to incur substantial liabilities and to suspend the manufacture
+and shipment of products or our use of processes that exploit such intellectual property. In addition, failure to obtain such
+a license could affect our ability to manufacture competitive products.
+
+ 
+
+For information about a patent under which one of our products
+is manufactured, see Description of Business Patents, Trademarks and Other Intellectual Property on
+page 27.
+
+ 
+
+Our involvement in intellectual
+property litigation could negatively affect our business.
+
+ 
+
+In order to
+establish and maintain such a competitive position, we may need to prosecute claims against others who we believe are
+infringing our rights and defend claims brought against us by others who believe that we are infringing their rights.
+Our involvement in intellectual property litigation could result in significant expense to us, adversely affect sales of any
+products involved or the use or licensing of related intellectual property and divert the efforts of our technical and
+management personnel from their principal responsibilities, regardless of whether such litigation is resolved in our favor.
+If we are found to be infringing on the intellectual property rights of others, we may, among other things, be required to
+pay substantial damages; cease the development, manufacture, use, sale or importation of products that infringe on such
+intellectual property rights; discontinue processes incorporating the infringing technology; expend significant resources to
+develop or acquire non-infringing intellectual property or products; or obtain licenses to the relevant intellectual property.
+
+ 
+
+We cannot offer any assurance that we will prevail in any
+such intellectual property litigation or that, if we were not to prevail in such litigation, licenses to the intellectual
+property or products we are found to be infringing on would be available on commercially reasonable terms, if at all. The
+cost of intellectual property litigation as well as the damages, licensing fees or royalties that we might be required to pay
+could have a material adverse effect on our business and financial results.
+
+ 
+
+Current and future regulatory
+requirements could adversely affect our financial condition and our ability to conduct our business. 
+
+ 
+
+The Food and Drug Administration (the FDA )
+regulates the material content of our products pursuant to the Federal Food, Drug and Cosmetic Act and the Consumer Product
+Safety Commission (the CPSC ) regulates certain aspects of our products pursuant to various federal laws,
+including the Consumer Product Safety Act and the Poison Prevention Packaging Act. The FDA and the CPSC can require the
+manufacturer of defective products to repurchase or recall these products and may also impose fines or penalties on the
+manufacturer. Similar laws exist in some states, cities and other countries in which we sell or intend to sell our products.
+In addition, certain state laws restrict the sale of packaging with certain levels of heavy metals and impose fines and
+penalties for noncompliance. Although FDA-approved resins and pigments are used in our products that directly contact food
+and drugs and we believe our products are in material compliance with all applicable regulatory requirements (although we are
+not required to submit them to either the FDA or the CPSC for review), we are remain subject to the risk that our products
+could be found not to be in compliance with these and/or other requirements. A recall of any of our products or any fines and
+penalties imposed in connection with noncompliance could have a materially adverse effect on us.
+
+ Table of Contents-11- 
+
+ 
+
+ 
+
+Our officers have limited experience in connection with the fabrication and sale
+of products similar to those fabricated and sold by the Company.
+
+ 
+
+Our officers have limited experience in connection with sale
+of products similar to those sold by the Company. Accordingly, there is a significant risk that they may not be able to
+manage the Company and its operations successfully. We act as our own distributor for approximately 26% of our products and
+may not be able to do so successfully. While these risks can be partially eliminated hiring more experienced personnel, no
+assurance can be given that the Company will be able to do so. To the extent that our officers are unable to manage the
+Company and its operations successfully and the Company is unable to hire more experienced personnel, investors may
+experience diminution or total loss of their investments.
+
+ 
+
+Adverse capital and
+credit market conditions may significantly affect our access to capital and cost of capital.
+
+ 
+
+Capital and credit markets
+have experienced significant volatility in recent years. In many cases, these markets have exerted downward pressure on the availability
+of liquidity and credit capacity for issuers. We need liquidity for future growth and development of our business. Without sufficient
+liquidity, we may not be able to purchase additional lots or develop projects, which could adversely affect our financial results.
+
+ 
+
+Natural disasters and
+severe weather conditions could delay deliveries and increase costs.
+
+ 
+
+Current and planned operations
+of the Company and its suppliers are located in areas that are subject to earthquakes and other natural disasters. The occurrence
+of natural disasters can delay deliveries, increase costs by damaging inventories and reducing the availability of materials in
+affected areas. Furthermore, since we have no insurance covering business interruptions or losses resulting from these events,
+our earnings, liquidity, or capital resources could be adversely affected.
+
+ 
+
+If we do not effectively
+implement measures to sell our products, we may not achieve sustained revenues and you could lose your entire investment. 
+
+ 
+
+We have been manufacturing
+and selling our products for approximately 1 year and have limited sales. Our sales and marketing efforts may not achieve intended
+results and therefore may not generate the revenue we hope to achieve. There can be no assurance that our operating plan will
+be successful. If we are not able to successfully address markets for our products, we may not be able to grow our business, compete
+effectively or achieve profitability. 
+
+ 
+
+If we are unable to
+successfully manage growth, our operations could be adversely affected.
+
+ 
+
+Our progress is expected to
+require the full utilization of our management, financial and other resources, which to date has occurred with limited working
+capital. Our ability to manage growth effectively will depend on our ability to improve and expand operations, including our financial
+and management information systems, and to recruit, train and manage sales personnel. There can be no absolute assurance that
+management will be able to manage growth effectively. 
+
+ 
+
+If we do not properly manage
+the growth of our business, we may experience significant strains on our management and operations and disruptions in our business.
+Various risks arise when companies and industries grow quickly. If our business or industry grows too quickly, our ability to
+meet customer demand in a timely and efficient manner could be challenged. We may also experience development delays as we seek
+to meet increased demand for our products. Our failure to properly manage the growth that we or our industry might experience
+could negatively impact our ability to execute on our operating plan and, accordingly, could have an adverse impact on our business,
+our cash flow and results of operations, and our reputation with our current or potential customers.
+
+ Table of Contents-12- 
+
+ 
+
+ 
+
+Our officers have no experience in managing a public company, which increases
+the risk that we will be unable to establish and maintain all required controls and procedures and internal controls
+over financial reporting and meet the public reporting and the financial requirements for our business. 
+
+ 
+
+Our management has a legal and fiduciary duty to establish and
+maintain disclosure controls and control procedures in compliance with the securities laws, including the requirements
+mandated by the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002. Although our officers have substantial
+business experience, they have no experience in managing a public company. The standards that must be met for management to
+assess the internal control over financial reporting as effective are complex, and require significant documentation,
+testing and possible remediation to meet the detailed standards. Because our officers have no prior experience with the
+management of a public company, we may encounter problems or delays in completing activities necessary to make an assessment
+of our internal control over financial reporting, and disclosure. If we cannot assess our internal
+control over financial reporting as effective or provide adequate disclosure controls or implement sufficient control
+procedures, investor confidence and share value may be negatively impacted. 
+
+ 
+
+Risk Factors Related to
+Ownership of the Common Stock
+
+ 
+
+Two shareholders own
+approximately 85% of the Common Stock and may authorize or prevent corporate actions to the detriment of other shareholders.
+
+ 
+
+Our two officers and directors
+beneficially own shares of the outstanding Common Stock representing approximately 85% of the votes eligible to be cast by shareholders
+in the election of directors and on other matters. Accordingly, they have power to control all matters requiring the approval
+of the shareholders, including the election of directors and the approval of mergers and other significant corporate transactions.
+Their interests could conflict with the interests of other shareholders.
+
+The Common Stock is quoted
+on OTC Pink and the Company has applied for its quotation on OTCQB. Quotation on either OTC Pink or OTCQB may limit the liquidity
+and price of the Common Stock more than if it were quoted or listed on a national securities exchange, the NASDAQ Stock Market
+or the OTC Bulletin Board. Further, as long as our Common Stock is quoted on OTC Pink, or if it were to be quoted on OTCQB and
+ were removed from OTCQB back to OTC Pink, its liquidity and price may limited in comparison to OTCQB.
+
+ 
+
+The Common Stock will be quoted on OTC Pink, which provides a significantly
+more limited market and may limit the liquidity and price of the Common Stock more greatly than would be the case if it were listed
+or quoted on a national securities exchange, the NASDAQ Stock Market, the OTC Bulletin Board or OTC Pink. Some investors may perceive
+the Common Stock to be less attractive because it is quoted on OTC Pink or, if our application be accepted, on OTCQB. In addition,
+as a company whose Common Stock is quoted on either OTC Pink or OTCQB, we may not attract the extensive analyst coverage that
+is received by companies listed or quoted elsewhere. Further, institutional and other investors may have investment guidelines
+that restrict or prohibit their investing in securities quoted on these tiers. These factors may have an adverse impact on the
+trading and price of the Common Stock and a long-term adverse impact on our ability to raise capital.
+
+The standards for
+quotation on OTCQB changed effective May 1, 2014. Prior to that date, shares were eligible to be quoted without regard to
+their price, upon the effectiveness of a registration statement, but after that date, companies such as ours that are not
+quoted on the OTCQB must file an application with OTC Markets Group Inc. and meet an initial bid price test of $0.01 per
+share as of the close of business for each of the previous 30 calendar days. Once the application is accepted, shares must
+meet an ongoing minimum bid price test of $0.01 per share as of the close of business for at least one of every 30 calendar
+days; if they fail to do so, they will be removed from OTCQB and be placed in the OTC Pink tier. If this were to occur, the
+liquidity and price of the Common Stock could be impaired. No assurance can be given our application for quotation on OTCQB
+will be accepted or, if it be, that the Common Stock will continue to meet the ongoing minimum price test.
+
+ Table of Contents-13- 
+
+ 
+
+ 
+
+The Company
+may not attract the attention of major brokerage firms.
+
+ 
+
+Securities analysts of major
+brokerage firms may not provide coverage of the Company since there is little incentive to brokerage firms to recommend the purchase
+of the Common Stock. There is no assurance that brokerage firms will be interested in conducting secondary offerings on behalf
+of the Company or in privately placing the Company s securities with their customers.
+
+ 
+
+Sales of the
+Common Stock in the public market could lower its price and impair our ability to raise
+funds in securities offerings.
+
+ 
+
+If the Company s shareholders
+sell substantial amounts of their Common Stock in the public markets, or if it is perceived that such sales may occur, the price
+of the Common Stock could fall and make it more difficult for the Company to sell equity, or equity-related securities at a price
+that the Company deems appropriate.
+
+ 
+
+The trading price of
+the Common Stock may decrease due to factors beyond our control.
+
+ 
+
+The securities markets, and in particular the market for
+securities quoted on OTCQB and OTC Pink, have from time to time experienced extreme price and volume fluctuations which
+have often been unrelated to the financial performance of the companies listed or quoted thereon. These fluctuations may
+adversely affect the market price of the Common Stock and make it more difficult for the Company to sell equity, or
+equity-related securities at a price that the Company deems appropriate.
+
+ 
+
+The market price of the Common
+Stock may also fluctuate significantly in response to a number of factors, many of which are unpredictable or beyond our control,
+regardless of our actual performance. Among these factors are: variations in our quarterly operating results; changes in general
+economic conditions; changes in market valuations of similar companies; announcements by us or our competitors of significant
+new contracts, acquisitions, strategic partnerships or joint ventures, or capital commitments; loss of a major supplier, customer,
+partner or joint venture participant post-merger; and the addition or loss of key management personnel. As a result, holders of
+Common Stock may be unable to sell their shares, or may be forced to sell them at a loss.
+
+ 
+
+The market price for the Common Stock may be particularly
+volatile given the Company s status as a relatively unknown company whose shares have been
+thinly traded, a limited operating history, a lack of profits and an uncertain future. You may be
+unable to sell the Common Stock at or above your purchase price, which may result in substantial losses to you.
+
+The market for the
+Common Stock may be subject to significant price volatility for the indefinite future for a number of reasons. The Common
+Stock has historically been very thinly traded and such trading has been extremely limited, sporadic and highly volatile.
+During 2012, approximately 203 shares (adjusted for the 1-for-1,000 reverse stock split that was implemented on February 14,
+2014) were traded; during 2013, approximately 68 shares (as so adjusted) were traded; and in 2014 through June 30, 2014, 301
+shares (as so adjusted) have been traded. If this level of activity persists, the trading of relatively small quantities of
+shares may disproportionately affect their price. Also, the price for the Common Stock could decline precipitously in the
+event that a large number of shares were offered or sold without commensurate demand. In addition, the Common Stock is a
+speculative or "risky" investment due to the Company s limited operating history, the Company s lack
+of profits and its uncertain future. As a consequence, investors may be inclined to sell their shares more quickly and at
+lower prices than would be the case with the stock of a less risky issuer. We can make no predictions as to the future prices
+for shares of the Common Stock.
+
+ Table of Contents-14- 
+
+ 
+
+ 
+
+In light of the facts that
+there are only 14,785 shares of Common Stock that can be traded in the public markets and that trading in the Common Stock has
+been sporadic, we do believe that there is not an effective public for the Common Stock or that dealer quotation for these shares
+will necessarily continue at their present levels.
+
+ 
+
+No Dividends. The Company
+does not intend to pay dividends for the foreseeable future and you must rely on increases in the market price
+of the Common Stock for returns on your investment. If you are seeking cash dividends,
+you should not purchase the Common Stock.
+
+ 
+
+For the foreseeable future,
+the Company intends to retain its earnings, if any, to finance the development and expansion of our business, and the Company
+does not anticipate paying any cash dividends on the Common Stock. Accordingly, investors must be prepared to rely on sales of
+their Common Stock, after price appreciation, to earn an investment return, but no assurance can be given that the price of the
+Common Stock will appreciate or, if it does, that it will remain at or rise above the level to which it has appreciated. Any determination
+to pay dividends in the future will be made at the discretion of the Company s board of directors and will depend on our
+results of operations, financial condition, capital needs, contractual restrictions, restrictions imposed by applicable law and
+other factors the Company s board of directors deems relevant.
+
+ 
+
+The Company
+will be subject to penny stock regulations and restrictions and you may have difficulty selling shares of the
+Common Stock.
+
+ 
+
+The SEC has adopted regulations
+which generally define a penny stock as an equity security that has a market price of less than $5.00 per share
+or an exercise price of less than $5.00 per share, subject to certain exemptions. The Company expects that initially and for an
+undeterminable period, the Common Stock will be a penny stock, and that transactions in the Common Stock will be
+subject to Rule 15g-9 under the Exchange Act, or the so-called Penny Stock Rule, which imposes additional sales
+practice requirements on broker-dealers that sell such securities to persons other than established customers and accredited
+investors (generally, individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000
+together with their spouses). For transactions subject to Rule 15g-9, a broker-dealer must make a special suitability determination
+for the purchaser and receive the purchaser s written consent to the transaction prior to sale. As a result, this rule may
+affect the ability of broker-dealers to effectuate trades in or sell, and in turn the ability of shareholders to sell, the Common
+Stock.
+
+ 
+
+For any transaction involving
+a penny stock, unless exempt, a disclosure schedule prepared by the SEC relating to the penny stock market must be delivered prior
+to any transaction. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered
+representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent
+price information for the penny stock held in the account and information as to the limited market for penny stock.
+
+ 
+
+There can be no assurance
+that the Common Stock would qualify for exemption from the Penny Stock Rule. In any event, even if the Common Stock were to be
+exempt from the Penny Stock Rule, Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person
+from participating in a distribution of penny stock if the SEC finds that such a restriction would be in the public interest,
+would be applicable.
+
+ Table of Contents-15- 
+
+ 
+
+ 
+
+Since the Company will be an issuer of penny stock, the
+protection provided by the federal securities laws relating to forward looking statements will not apply to us.
+
+ 
+
+Although federal securities
+laws provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities
+laws, this safe harbor is not available to issuers of penny stocks. As a result, since the Company will be an issuer of penny
+stock, it will not have the benefit of this safe harbor protection in the event of any legal action based upon a claim that the
+material provided by the Company contained a material misstatement of fact or was misleading in any material respect because of
+the Company s failure to include any statements necessary to make the statements not misleading. Such an action could adversely
+affect our financial condition.
+
+ 
+
+The Common Stock is
+subject to risks arising from restrictions on reliance on Rule 144 by shell companies or former shell companies.
+
+ 
+
+Under a regulation of the SEC known as Rule 144, a
+person who beneficially owns restricted securities of an issuer and who is not an affiliate of that issuer may sell them
+without registration under the Securities Act provided that certain conditions have been met. One of these conditions is that
+such person has held the restricted securities for a prescribed period, which will be 6 months or 1 year, depending on
+various facts. However, Rule 144 is unavailable for the resale of securities issued by an issuer that is a shell company
+(other than a business combination related shell company) or, unless certain conditions are met, that has been at any
+time previously a shell company. The SEC defines a shell company as a company that has (a) no or nominal operations
+and (b) either (i) no or nominal assets, (ii) assets consisting solely of cash and cash equivalents; or
+(iii) assets consisting of any amount of cash and cash equivalents and nominal other assets. Until the Merger, the
+Company was a shell company.
+
+ 
+
+ Rule 144 is available for the resale of securities of former
+shell companies, such as ours, if and for as long as the following conditions are met:
+
+ 
+
+ 
+ (i) the issuer of the securities that was formerly a shell company has ceased to be a shell company,
+
+ 
+ 
+
+ 
+ (ii) the issuer of the securities is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act,
+
+ 
+ 
+
+ 
+ (iii) the issuer of the securities has filed all Exchange Act reports and material required to be filed, as applicable,
+ during the preceding 12 months (or such shorter period that the issuer was required to file such reports and materials), other
+ than Current Reports on Form 8-K; and
+
+ 
+ 
+
+ 
+ (iv) at least one year has elapsed from the time that the issuer filed current comprehensive disclosure with the SEC reflecting
+ its status as an entity that is not a shell company known as Form 10 Information. 
+
+ 
+
+Although the Company has filed Form 10 Information with the SEC
+in the registration statement of which this Prospectus forms a part, shareholders who receive the Company s restricted
+securities will not be able to sell them pursuant to Rule 144 without registration until the Company has met the other
+conditions of this exception and then for only as long as the Company continues to meet the conditions described in
+subparagraph (iii), above, and is not a shell company. No assurance can be given that the Company will meet these
+ conditions or that, if it has met them, it will continue to do so, or that it will not again be a shell company.
+
+ 
+
+The Company would cease to be subject to the reporting
+requirements of section 13 or 15(d) of the Exchange Act if, at the end of any year in which it was subject to
+these requirements under said section 13, it had less than 300 record shareholders and failed prior to the end of that year
+to register the Common Stock under section 12 of the Exchange Act. In that Event, Rule 144 would not be available for resales
+or our securities until we had so registered the Common Stock and had filed reports under the Exchange Act for 1 year.
+
+ Table of Contents-16- 
+
+ 
+
+ 
+
+The Company will incur increased costs as a result of being a public
+company, which could affect our profitability and operating results.
+
+ 
+
+The Company is obligated to file annual, quarterly and current
+reports with the SEC pursuant to the Exchange Act. In addition, the Sarbanes-Oxley Act of 2002 ( Sarbanes-Oxley )
+and the rules thereunder implemented by the SEC and the Public Company Accounting Oversight Board (the
+ PCAOB ) have imposed various requirements on public companies. The Company expects these rules and regulations to increase its legal and financial
+compliance costs and to make some of our activities more time-consuming and costly. The Company expects to spend at least
+$50,000, and perhaps substantially more, in legal and accounting expenses annually to comply with the Company s
+reporting obligations and Sarbanes-Oxley. These costs could affect our profitability and our results of operations. As
+indicated below, the so-called Jobs Act has relieved the Company of certain obligations with respect to
+reporting.
+
+ 
+
+Because the Common Stock
+is not registered under the Exchange Act, the Company will not be subject to the federal proxy rules
+and the Company s directors, executive offices and 10% beneficial holders will not be subject
+to Section 16 of the Exchange Act. In addition, the Company s reporting obligations under Section 15(d) of
+the Exchange Act may be suspended automatically if the Company has fewer than 300 shareholder s of
+record on the first day of a fiscal year.
+
+ 
+
+The Common Stock is not registered under the Exchange Act and
+the Company does not intend to register the Common Stock thereunder for the foreseeable future. However, the Company will
+register the Common Stock thereunder if the Company has, after the last day of the Company s fiscal year, total assets
+of more than $10,000,000 and 2,000 record holders or 500 record holders who are not accredited investors, in accordance with
+Section 12(g) of the Exchange Act. As of the date of this Prospectus, the Company had approximately 400 shareholders of
+record and assets far below $10,000,000. The Company is currently required to file annual, quarterly, and current reports
+pursuant to Section 15(d) of the Exchange Act. However, the Company will not be subject to Section 14 of the Exchange Act,
+which, among other things, prohibits companies that have securities registered under the Exchange Act from soliciting proxies
+or consents from shareholders without filing with the SEC and furnishing to them a proxy or information statement and, in the
+case of a proxy solicitation a form of proxy complying with the SEC s rules. In addition, as long as the Common Stock
+is not registered under Section 12 of the Exchange Act, the Company s directors, executive officers and beneficial
+holders of 10% or more of the Company s outstanding Common Stock and other equity securities will not be subject to
+Section 16 of the Exchange Act. Section 16(a) of the Exchange Act requires these persons to file with the SEC initial
+statements of beneficial ownership, reports of changes in ownership and annual reports providing information concerning their
+ownership of Common Stock and other equity securities. Such information will be available only through such periodic reports
+that the Company files and registration statements that the Company may file with the SEC.
+
+ 
+
+Furthermore, as long as the
+Common Stock is not registered under the Exchange Act, the Company s obligation to file reports under Section 15(d) of the
+Exchange Act will be suspended if, on the first day of any fiscal year (other than a fiscal year in which a registration statement
+under the Securities Act has become effective), the Company has fewer than 300 shareholders of record. This suspension is automatic
+and does not require any filing with the SEC. In this event, the Company may cease providing periodic reports and current or periodic
+information, including operational and financial information, may not be available with respect to our results of operations.
+
+ 
+
+The JOBS Act has reduced
+the information that the Company is required to disclose, which could adversely affect the price
+of the Common Stock.
+
+ 
+
+Under the Jumpstart Our Business
+Startups Act (the Jobs Act ), the information that the Company is required to disclose has been reduced in a number
+of ways.
+
+ Table of Contents-17- 
+
+ 
+
+ 
+
+ 
+
+Before the adoption of the
+Jobs Act, the Company was required to register the Common Stock under the Exchange Act within 120 days after the last day of the
+first fiscal year in which the Company had total assets exceeding $1,000,000 and 500 record holders of the Common Stock; the Jobs
+Act has changed this requirement such that the Company must register the Common Stock under the Exchange Act within 120 days after
+the last day of the first fiscal year in which the Company has total assets exceeding $10,000,000 and 2,000 record holders or
+500 record holders who are not accredited investors. As a result, the Company is now required to register the Common Stock under
+the Exchange Act substantially later than previously.
+
+ 
+
+As a company that had gross revenues of less than $1 billion during the Company s
+last fiscal year, the Company is an emerging growth company, as defined in the Jobs Act (an EGC ).
+The Company will retain that status until the earliest of (A) the last day of the fiscal year which the Company has total annual
+gross revenues of $1,000,000,000 (as indexed for inflation in the manner set forth in the Jobs Act) or more; (B) the last day
+of the fiscal year of following the fifth anniversary of the date of the first sale of the Common Stock pursuant to an effective
+registration statement under the Securities Act (December 20, 2016); (C) the date on which the Company has, during the previous
+3-year period, issued more than $1,000,000,000 in non-convertible debt; or (D) the date on which the Company is deemed to be a
+ large accelerated filer, as defined in Rule 12b-2 under the Exchange Act or any successor thereto. As an EGC, the
+Company is relieved from the following:
+
+ 
+
+ The Company
+ is excluded from Section 404(b) of Sarbanes-Oxley, which otherwise would have required
+ the Company s auditors to attest to and report on the Company s internal
+ control over financial reporting. The JOBS Act also amended Section 103(a)(3) of Sarbanes-Oxley
+ to provide that (i) any new rules that may be adopted by the PCAOB requiring mandatory
+ audit firm rotation or changes to the auditor s report to include auditor discussion
+ and analysis (each of which is currently under consideration by the PCAOB) shall not
+ apply to an audit of an EGC and (ii) any other future rules adopted by the PCAOB will
+ not apply to the Company s audits unless the SEC determines otherwise.
+
+ The JOBS Act
+ amended Section 7(a) of the Securities Act to provide that the Company need not present
+ more than two years of audited financial statements in an initial public offering registration
+ statement and in any other registration statement, need not present selected financial
+ data pursuant to Item 301 of Regulation S-K for any period prior to the earliest audited
+ period presented in connection with such initial public offering. In addition, the Company
+ is not required to comply with any new or revised financial accounting standard until
+ such date as a private company (i.e., a company that is not an issuer as
+ defined by Section 2(a) of Sarbanes-Oxley) is required to comply with such new or revised
+ accounting standard. Corresponding changes have been made to the Exchange Act, which
+ relates to periodic reporting requirements, which would be applicable if the Company
+ were required to comply with them.
+
+ As long as
+ the Company is an EGC, the Company may comply with Item 402 of Regulation S-K, which
+ requires extensive quantitative and qualitative disclosure regarding executive compensation,
+ by disclosing the more limited information required of a smaller reporting company. 
+
+ In the event
+ that the Company registers the Common Stock under the Exchange Act, the JOBS Act will
+ also exempt the Company from the following additional compensation-related disclosure
+ provisions that were imposed on U.S. public companies pursuant to the Dodd-Frank Act:
+ (i) the advisory vote on executive compensation required by Section 14A(a) of the
+ Exchange Act, (ii) the requirements of Section 14A(b) of the Exchange Act relating to
+ shareholder advisory votes on golden parachute compensation, (iii) the
+ requirements of Section 14(i) of the Exchange Act as to disclosure relating to the relationship
+ between executive compensation and our financial performance, and (iv) the requirement
+ of Section 953(b)(1)of the Dodd-Frank Act, which requires disclosure as to the relationship
+ between the compensation of the Company s chief executive officer and median employee
+ pay.
+
+ 
+
+Since the Company is not required,
+among other things, to file reports under Section 13 of the Exchange Act or to comply with the proxy requirements of Section 14
+of the Exchange Act until such registration occurs or to comply with certain provisions of Sarbanes-Oxley and the Dodd-Frank Act
+and certain provisions and reporting requirements of or under the Securities Act and the Exchange Act or to comply with new or
+revised financial accounting standards as long as the Company is an EGC, and the Company s officers, directors and 10% shareholders
+are not required to file reports under Section 16(a) of the Exchange Act until such registration occurs, the Jobs Act has had
+the effect of reducing the amount of information that the Company and its officers, directors and 10% shareholders are required
+to provide for the foreseeable future.
+
+ Table of Contents-18- 
+
+ 
+
+ 
+
+Section 102(b)(1) of the JOBS Act provides that, as an emerging growth company, the
+Company (A) need not present more than 2 years of audited financial statements in order for the Company s registration statement
+with respect to an initial public offering of its common equity securities to be effective, and in any other registration statement
+that it files with the SEC, the Company need not present selected financial data prescribed by the SEC in its regulations for
+any period prior to the earliest audited period presented in connection with the Company s initial public offering; and
+(B) may not be required to comply with any new or revised financial accounting standard until such date that a company that is
+not an issuer (as defined under section 2(a) of the Sarbanes-Oxley Act of 2002 is required to comply with such new or revised
+accounting standard, if such standard applies to companies that are not issuers. The term issuer generally
+means any person who issues or proposes to issue any security, an issuer the securities of which are registered under section
+12 of the Exchange Act or that is required to file reports under section of the Exchange Act, or that files or has filed a registration
+statement that has not yet become effective under the Securities Act and that it has not withdrawn. While the Company is permitted
+to opt out of these provisions, the Company has not done so and do not intend to do so. As a result, our financial statements
+may not be comparable to companies that that elect to opt out of these provisions.
+
+ 
+
+As a result of such reduced
+disclosure, the price for the Common Stock may be adversely affected.
+
+ 
+
+FORWARD-LOOKING STATEMENTS
+
+ 
+
+Statements in this Prospectus may be
+ forward-looking statements. Forward-looking statements include, but are not limited to, statements that express
+our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or
+other future events or conditions. These statements are based on current expectations, estimates and projections about our
+business based, in part, on assumptions made by management. These statements are not guarantees of future performance and
+involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may, and
+are likely to, differ materially from what is expressed or forecast in forward-looking statements due to numerous factors,
+including those described under Risk Factors on page 4 and Management s Discussion and Analysis of
+Financial Condition and Results of Operations on page 29 and elsewhere in this Prospectus and in other documents which
+the Company will file with the SEC.
+
+ 
+
+In addition, the outcome of
+our forward-looking statements could be affected by risks and uncertainties related to our ability to raise the capital that we
+require for our operations, competition, government regulations and requirements, pricing and development difficulties, our ability
+to make acquisitions and successfully integrate them with our business, as well as general industry and market conditions and
+growth rates, and general economic conditions. Any forward-looking statements speak only as of the date of this Prospectus and
+the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date
+of this Prospectus.
+
+ 
+
+USE OF PROCEEDS
+
+ 
+
+The selling shareholders will
+receive all of the proceeds from the sale of the Common Stock offered by them under this Prospectus. The Company will not receive
+any of these proceeds.
+
+ 
+
+SELLING SHAREHOLDERS
+
+The selling shareholders may
+sell up to 700,000,000 shares of Common Stock from time to time in one or more offerings under this Prospectus. All of these shares
+were acquired by the selling shareholders in the Private Placement. None of the selling shareholders is a broker-dealer.
+
+ 
+
+The following table sets forth
+the name of each selling shareholder, the number of shares of Common Stock owned by each of them before this offering,
+the number of shares that may be offered by each of them for resale under this Prospectus and the number of shares to be owned
+by each of them after this offering is completed, assuming that all of the shares offered by each of them are sold. However, because
+each selling shareholder may offer all, some or none of the shares that he or it holds, and because, based upon information provided
+to the Company, there are currently no agreements, arrangements, or understandings with respect to the sale of any of the shares,
+no definitive estimate as to the number of shares that will be held by any selling shareholder after the offering can be provided.
+
+ Table of Contents-19- 
+
+ 
+
+ 
+
+ Name of selling shareholder
+ Amount
+ of 
+
+ securities of the 
+
+ class owned by 
+
+ the selling shareholder before 
+
+ the offering
+ Amount
+ of
+
+ Securities to be
+
+ offered for the
+
+ selling shareholder s
+
+ account
+ Amount
+ and (if one 
+
+ percent or more) 
+
+ percentage of the 
+
+ class to be owned by the selling shareholder after the offering is 
+
+ complete
+
+ Dixie Assets Management,
+ Inc.1
+ 200,000,000
+ 200,000,000
+ 0
+
+ Carrizo LLC2
+ 200,000,000
+ 200,000,000
+ 0
+
+ Rajbir Singh Husson
+ 300,000,000
+ 300,000,000
+ 0
+
+ TOTAL
+ 700,000,000
+ 700,000,000
+ 0
+
+ 
+
+1The natural person
+ with voting and dispositive power for Dixie Assets Management, Inc. is Richard S. Astrom.
+ Mr. Astrom served as president and sole director of the Company until March 4, 2014.
+
+2The natural
+ person with voting and dispositive power for Carrizo LLC is Pamela Astrom, who is the
+ spouse of Richard S. Astrom.
+
+ 
+
+None of the Selling Shareholders is an affiliate of the Company.
+Richard S. Astrom, who is the natural person with voting and dispositive power for Dixie Assets Management, Inc., served as
+president and sole director of Acology from January 1, 2012, until March 4, 2014. As indicated under the caption
+"Directors, Executive Officers and Control Persons – Related Parties –Exchange Transaction" on page 37,
+Mr. Astrom beneficially owned 35,000,000 shares of pre-split common stock, which he surrendered prior to this offering as an
+incident of the Merger.
+
+ 
+
+PLAN OF DISTRIBUTION
+
+ 
+
+This Prospectus relates to
+700,000,000 shares of Common Stock offered by the selling shareholders.
+
+As of the date of
+this Prospectus, the Common Stock is quoted on and traded over OTC Pink under the symbol "ACOL." Acology has
+applied to OTC Markets Group Inc. to have the Common Stock quoted on OTCQB under the same symbol. No assurance can be given
+that this application will be accepted or if it be accepted, that Acology will be able to meet the standards for maintaining
+quotation on OTCQB. If it were to fail to meet the standards the Common Stock would be moved back to and quoted on OTC
+Pink.
+
+ 
+
+The selling shareholders or
+their respective pledgees, donees, transferees or other successors in interest will publicly offer all or a portion of their shares
+at market prices prevailing at the time of sale or privately at negotiated prices. The selling shareholders may offer their shares
+at various times in one or more of the following transactions:
+
+ 
+
+ on any national
+ securities exchange, or other market on which the Common Stock may be listed at the time
+ of sale;
+
+ 
+ 
+
+ in the over-the-counter
+ market;
+
+ 
+ 
+
+ through block
+ trades in which the broker or dealer so engaged will attempt to sell the shares as agent,
+ but may position and resell a portion of the block as principal to facilitate the transaction;
+
+ 
+ 
+
+ through purchases
+ by a broker or dealer as principal and resale by such broker or dealer for its account
+ pursuant to this Prospectus;
+
+ 
+ 
+
+ in ordinary
+ brokerage transactions and transactions in which the broker solicits purchasers;
+
+ 
+ 
+
+ through options,
+ swaps or derivatives;
+
+ 
+
+ Table of Contents-20- 
+
+ 
+
+ 
+
+ 
+
+ in privately
+ negotiated transactions; or
+
+ 
+ 
+
+ in transactions
+ to cover short sales.
+
+ 
+
+In addition, the selling shareholders
+may sell their shares that qualify for sale pursuant to Rule 144 under the Securities Act under the terms thereof rather than
+pursuant to this Prospectus if that rule becomes available for the sale of their shares.
+
+ 
+
+The selling shareholders may sell their shares directly to purchasers or may use brokers,
+dealers, underwriters or agents to sell their shares upon terms and conditions that will be described in a supplement to this
+Prospectus. In effecting sales, brokers and dealers engaged by the selling shareholders may arrange for other brokers or dealers
+to participate. Brokers or dealers may receive commissions, discounts or concessions from the selling shareholders or, if any
+such broker-dealer acts as agent for the purchaser of such shares, from such purchaser in amounts to be negotiated. Such compensation
+may, but is not expected to, exceed that which is customary for the types of transactions involved. Broker-dealers may agree with
+the selling shareholders to sell a specified number of such shares at a stipulated price per share, and, to the extent such broker-dealer
+is unable to do so acting as agent for the selling shareholders, to purchase as principal any unsold shares at the price required
+to fulfill the broker-dealer commitment to the selling shareholder. Broker-dealers who acquire shares as principal may thereafter
+resell such shares from time to time in transactions which may involve block transactions and sales to and through other broker-dealers,
+including transactions of the nature described above, in the over-the-counter market or otherwise at prices and on terms then
+prevailing at the time of sale, at prices then related to the then-current market price or in negotiated transactions. In connection
+with such resales, broker-dealers may pay to or receive from the purchasers of such shares commissions as described above.
+
+ 
+
+The selling shareholders and
+any broker-dealers or agents that participate with the selling shareholders in sales of the shares may be deemed to be underwriters 
+within the meaning of the Securities Act in connection with such sales.
+
+ 
+
+In such event, any commissions
+received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting
+commissions or discounts under the Securities Act of 1933.
+
+ 
+
+From time to time the selling
+shareholders may engage in short sales, short sales against the box, puts and calls and other hedging transactions the Common
+Stock, to the extent permitted by applicable law and regulations, and may sell and deliver shares in connection with such transactions
+or in settlement of securities loans. These transactions may be entered into with broker-dealers or other financial institutions.
+In addition, from time to time, if permitted by applicable law and regulation, the selling shareholders may pledge their shares
+under the margin provisions of their customer agreements with their respective broker-dealers. Upon delivery of the shares or
+a default by the selling shareholder, the broker-dealer or financial institution may offer and sell the pledged shares from time
+to time.
+
+The Common Stock is quoted
+on and trades over OTC Pink. Acology has applied for quotation on OTCQB. If this application is accepted the Common Stock
+will be quoted on that tier, until the Common Stock fails to meet the standards for such quotation, in which case, the Common
+Stock will be quoted on OTC Pink, or the Company determines that it is able to bear the costs of being quoted on the Over-the-Counter
+Bulletin Board, NASDAQ or a national securities exchange after meeting the costs associated with its business plan and until an
+application for listing the Common Stock is thereon is accepted, which the Company does not believe will occur during the period
+in which Common Stock will be offered or sold pursuant to this Prospectus. In addition, if the Company determines that it is desirable
+for the Common Stock to trade on the Over-the-Counter Bulletin Board, it may not file a listing application on its own behalf,
+but must find a broker-dealer willing to do so. The Company cannot predict the extent to which investor interest in the Company
+will lead to the development of an active, liquid trading market. Active trading markets generally result in lower price volatility
+and more efficient execution of buy and sell orders for investors. There is no assurance as to the price at which the Common Stock
+will trade as prices for the Common Stock in any public market which may develop will be determined in the marketplace and may
+be influenced by many factors, including the depth and liquidity of the market for the Common Stock, investor perception of us
+and general economic and market conditions.
+
+ Table of Contents-21- 
+
+ 
+
+ 
+
+The selling shareholders,
+alternatively, may sell all or any part of the shares offered in this Prospectus through an underwriter. To the knowledge of the
+Company, no selling shareholder has entered into any agreement with an underwriter.
+
+ 
+
+If a selling shareholder notifies
+the Company that it has a material arrangement with a broker-dealer for the resale of the Common Stock, the Company would be required
+to amend the registration statement of which this Prospectus is a part, and file a prospectus supplement to describe the agreements
+between the selling shareholder and the broker-dealer.
+
+ 
+
+The Company has agreed to use its best efforts to keep this Prospectus
+effective until the earlier of (i) the date when all of the shares covered by the registration statement of which this prospectus
+is a part have been sold or (ii) the date on which these shares may be sold without restriction pursuant to Rule 144. 
+
+ 
+
+ Acology has agreed to indemnify each selling shareholder and certain persons
+related or connected to each selling shareholder against certain liabilities, including liabilities under the Securities Act
+or, in the event that such indemnification is unavailable because of a failure or refusal of a governmental authority to
+enforce such indemnification in accordance with its terms (by reason of public policy or otherwise), to contribute to the
+payments that the selling shareholder or such persons may be required to make in respect of such liabilities.
+
+ 
+
+Acology has agreed to indemnify each of the selling
+shareholders, or their transferees or assignees, against certain liabilities, including liabilities under the Securities Act
+or to contribute to payments the selling shareholder or their respective pledgees, donees, transferees or other successors in
+interest, may be required to make in respect of such liabilities.
+
+ 
+
+Acology is paying all
+fees and expenses incident to the registration of the shares, including fees and disbursements of counsel to the selling shareholders,
+other than brokerage commissions or underwriter discounts.
+
+ 
+
+DESCRIPTION OF SECURITIES
+
+ 
+
+Acology s authorized capital stock consists of
+6,000,000,000 shares of Common Stock, par value $0.00001 per share, and 10,000,000 shares of preferred stock, par value
+$0.00001 per share, which are issuable in series. As of December 31, 2013, there were 49,442,762 shares of Common Stock
+outstanding and no shares of preferred stock outstanding. For information respecting recent transactions that have affected
+the number of shares of Acology s common stock outstanding, see

parsed_sections/risk_factors/2014/CIK0001115128_quotient_risk_factors.txt

@@ -0,0 +1 @@
+RISK FACTORS An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below and all of the other information contained in this prospectus before deciding whether to purchase our common stock. Our business, prospects, financial condition or operating results could be materially and adversely affected by any of these risks, as well as other risks not currently known to us or that we currently consider immaterial. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing the risks described below, you should also refer to the other information contained in this prospectus, including our consolidated financial statements and the related notes, before deciding to purchase any shares of our common stock. Risks Related to Our Business We have incurred net losses since inception and we may not be able to generate sufficient revenues to achieve or subsequently maintain profitability. We have incurred net losses of $23.0 million, $59.2 million and $11.2 million in 2011, 2012 and 2013, respectively, and had an accumulated deficit of $168.8 million as of December 31, 2013. We anticipate that our costs and expenses will increase in the foreseeable future as we continue to invest in: sales and marketing; research and development, including new product development; our technology infrastructure; general administration, including legal and accounting expenses related to our growth and being a public company; efforts to expand into new markets; and strategic opportunities, including commercial relationships and acquisitions. For example, we have incurred and expect to continue to incur significant expenses developing our new point of sale solution. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenues sufficiently to offset these expenses. If we are unable to gain efficiencies in our operating costs, our business could be adversely impacted. We cannot be certain that we will be able to attain or maintain profitability on a quarterly or annual basis. If we are unable to effectively manage these risks and difficulties as we encounter them, our business, financial condition and results of operations may suffer. We may not maintain our recent revenue growth. Our revenues have increased significantly quarter over quarter since the quarter ended September 30, 2012. We may not be able to maintain our recent rate of revenue growth, and we may not be able to generate sufficient revenues to achieve profitability. In addition, historically the growth rate of our business, and as a result, our revenue growth, has varied from quarter-to-quarter and year-to-year, and we expect that variability to continue. For example, our revenue growth was adversely affected in the first half of 2012 because as we scaled our technology infrastructure to support our growth, our technology for securely identifying unique users and devices inadvertently prevented our personalization algorithms from optimally displaying our digital coupons to consumers. In addition, our revenues may fluctuate due to changes in promotional spending budgets of CPGs and retailers and Table of Contents the timing of their promotional spending. Decisions by major CPGs or retailers to delay or reduce their promotional spending or divert spending away from digital promotions could slow our revenue growth or reduce our revenues. We believe that our continued revenue growth will depend on increasing the number of transactions on our platform, and, in particular, on our ability to: increase our share of CPG spending on overall trade promotions, increase the number of brands that are using our platform within each CPG, increase media advertising spending on our platform, increase our share of retailer spending on coupon codes and maximize the lifetime value of our consumers across all of our products; further integrate our digital promotions into retailers in-store and point of sale systems; grow the number of CPGs and retailers in our current customer base and add new industry segments such as convenience, specialty/franchise retail, restaurants and entertainment; expand the use by consumers of our newest digital promotion offerings and broaden the selection and use of digital coupons; obtain high quality coupons and increase the number of CPG-authorized activations; expand the number, variety and relevance of digital coupons available on our web, mobile and social channels, as well as those of our CPGs, retailers and network of publishers; increase the awareness of our brand and earn and preserve our reputation; hire, integrate and retain talented personnel; effectively manage growth in our personnel and operations; and successfully compete with existing and new competitors. However, we cannot assure you that we will successfully implement any of these actions. Failure to do so could harm our business and cause our operating results to suffer. If we are unable to successfully respond to changes in the digital promotions market and continue to grow the market, our business could be harmed. As consumer demand for digital coupons has increased, promotion spending has shifted from traditional coupons through traditional channels, such as newspapers and direct mail, to digital coupons. However, it is difficult to predict whether the pace of transition from traditional to digital coupons will continue at the same rate and whether the growth of the digital promotions market will continue. In order to expand our business, we must appeal to and attract consumers who historically have used traditional promotions to purchase goods or may prefer alternatives to our offerings, such as those of our competitors. If the demand for digital coupons does not continue to grow as we expect, or if we fail to successfully address this demand, our business will be harmed. For example, the continued growth of our revenues will require increasing the number of brands that are using our platform within each CPG and further integrating our digital promotions into retailers in-store and point of sale systems. We expect that the market will evolve in ways which may be difficult to predict. It is also possible that digital coupon offerings generally could lose favor with CPGs, retailers or consumers. In the event of these or any other changes to the market, our continued success will depend on our ability to successfully adjust our strategy to meet the changing market dynamics. In addition, we will need to continue to grow demand for our digital promotions platform by CPGs, retailers and consumers. If we are unable to grow or successfully respond to changes in the digital promotions market, our business could be harmed and our results of operations could be negatively impacted. Table of Contents We expect a number of factors to cause our operating results to fluctuate on a quarterly and annual basis, which may make it difficult to predict our future performance. Historically, our revenue growth has varied from quarter-to-quarter and year-to-year, and we expect that variability to continue. In addition, our operating costs and expenses have fluctuated in the past, and we anticipate that our costs and expenses will increase over time as we continue to invest in growing our business and incur additional costs of being a public company. Our operating results could vary significantly from quarter-to-quarter and year-to-year as a result of these and other factors, many of which are outside of our control, and as a result we have a limited ability to forecast the amount of future revenues and expenses, which may adversely affect our ability to predict financial results accurately, and our operating results may vary from quarter-to-quarter and may fall below our estimates or the expectations of public market analysts and investors. Fluctuations in our quarterly operating results may lead analysts to change their long-term models for valuing our common stock, cause us to face short-term liquidity issues, impact our ability to retain or attract key personnel or cause other unanticipated issues, all of which could cause our stock price to decline. As a result of the potential variations in our quarterly revenues and operating results, we believe that quarter-to-quarter comparisons of our net revenues and operating results may not be meaningful and the results of any one quarter or historical patterns should not be considered indicative of our future sales activity, expenditure levels or performance. In addition to other factors discussed in this section, factors that may contribute to the variability of our quarterly and annual results include: our ability to continue to grow our revenues by increasing our share of CPG spending and the number of brands using our platform within each CPG, increasing media advertising spending on our platform, further integrating with our retailers and increasing the use of retailer coupon codes by consumers, adding new CPGs and retailers to our network and growing our core current customer base and expanding into new industry segments such as convenience, specialty/franchise retail, restaurants and entertainment; our ability to successfully respond to changes in the digital promotions market and continue to grow the market and demand for our platform; our ability to grow consumer selection and use of our digital promotion offerings and attract new consumers to our platform; the amount and timing of digital promotions by CPGs, which are affected by budget cycles, economic conditions and other factors; the impact of global business or macroeconomic conditions, including the resulting effects on the level of trade promotion spending by CPGs and spending by consumers; the impact of competitors or competitive products and services, and our ability to compete in the digital promotions market; our ability to obtain high quality coupons and increase the number of CPG-authorized activations; changes in consumer behavior with respect to digital promotions and how consumers access digital coupons and our ability to develop applications that are widely accepted and generate revenues; the costs of investing in and maintaining and enhancing our technology infrastructure; the costs of developing new products and solutions and enhancements to our platform; our ability to manage our growth; Table of Contents the success of our sales and marketing efforts; government regulation of e-commerce and m-commerce and requirements to comply with security and privacy laws and regulations affecting our business, and changes in government regulation affecting our business or our becoming subject to new government regulation; our ability to deal effectively with fraudulent transactions or customer disputes; the attraction and retention of qualified employees and key personnel; the effectiveness of our internal controls; and changes in U.S. generally accepted accounting principles or tax laws. If we fail to attract and retain CPGs, retailers and publishers and expand our relationships with them, our revenues and business will be harmed. The success of our business depends in part on our ability to increase our share of CPG spending on overall trade promotions, increase media advertising spending on our platform, increase the number of brands that are using our platform within each CPG, increase our share of retailer spending on coupon codes, and maximize the lifetime value of our consumers across all of our products. It also depends on our ability to further integrate our digital promotions into retailers in-store and point of sale systems. In addition, we must acquire new CPGs and retailers in our current customer base and add new industry segments such as convenience, specialty/franchise retail, restaurants and entertainment. If CPGs and retailers do not find that offering digital promotions on our platform enables them to reach consumers and sufficiently increase sales with the scale and effectiveness that is compelling to them, CPGs and retailers may not increase their distribution of digital promotions on our platform, or they may decrease them or stop offering them altogether, and new CPGs and retailers may decide not to use our platform. For example, if CPGs decide that utilizing our platform provides a less effective means of connecting with consumers, we may not be able to increase our prices or CPGs may pay us less. Likewise if retailers decide that our platform is less effective at increasing sales to and loyalty of existing and new consumers, retailers may demand a higher percentage of the total proceeds from each digital promotion that is activated or demand minimum guaranteed payments. In addition, we expect to face increased competition, and competitors may accept lower payments from CPGs to attract and acquire new CPGs, or provide retailers and publishers a higher distribution fee than we currently offer to attract and acquire new retailers and publishers. In addition, we may experience attrition in our CPGs, retailers and publishers in the ordinary course of business resulting from several factors, including losses to competitors, changes in CPG budgets, and decisions by CPGs, retailers and publishers to offer digital coupons through their own websites or other channels without using a third-party platform such as ours. If we are unable to retain and expand our relationships with existing CPGs, retailers and publishers or if we fail to attract new CPGs, retailers and publishers to the extent sufficient to grow our business, or if too many CPGs, retailers and publishers are unwilling to offer digital coupons with compelling terms through our platform, we may not increase the number of transactions on our platform and our revenues, gross margin and operating results will be adversely affected. If the distribution fees that we pay as a percentage of our revenues increases, our gross profit and business will be harmed. When we deliver a digital coupon on a retailer s website or through its loyalty reward program, or the website of a publisher, we generally pay a distribution fee to the retailer or publisher. Such fees have increased as a percentage of our revenues in recent periods. If such fees as a percentage of our revenues continue to increase, our cost of revenues as a percentage of revenues could increase and our operating results would be adversely affected. Table of Contents If we fail to maintain and expand the use by consumers of digital coupons on our platform, our revenues and business will be harmed. We must continue to maintain and expand the use by consumers of digital coupons in order to increase the attractiveness of our platform to CPGs and retailers and to increase revenues and achieve profitability. If consumers do not perceive that we offer a broad selection of personalized and high quality digital coupons, we may not be able to attract or retain consumers on our platform. If we are unable to maintain and expand the use by consumers of digital coupons on our platform and do so to a greater extent than our competitors, CPGs may find that offering digital promotions on our platform does not reach consumers with the scale and effectiveness that is compelling to them. Likewise retailers may find that using our platform does not increase sales of the promoted products and consumer loyalty to the retailer to the extent they expect, the revenues we generate may not increase to the extent we expect or may decrease. Either of these would adversely affect our operating results. We depend in part on third-party advertising agencies as intermediaries, and if we fail to maintain these relationships, our business may be harmed. A portion of our business is conducted indirectly with third-party advertising agencies acting on behalf of CPGs and retailers. Third-party advertising agencies are instrumental in assisting CPGs and retailers to plan and purchase advertising and promotions, and each third-party advertising agency generally allocates advertising and promotion spend from CPGs and retailers across numerous channels. We do not have exclusive relationships with third-party advertising agencies and we depend in part on third-party agencies to work with us as they embark on marketing campaigns for CPGs and retailers. While in most cases we have developed relationships directly with CPGs and retailers, we nevertheless depend in part on third-party advertising agencies to present to their CPG and retailer clients the merits of our platform. Inaccurate descriptions of our platform by third-party advertising agencies, over whom we have no control, negative recommendations regarding use of our service offerings or failure to mention our platform at all could hurt our business. In addition, if a third-party advertising agency is disappointed with our platform on a particular campaign or generally, we risk losing the business of the CPG or retailer for whom the campaign was run, and of other CPGs and retailers represented by that agency. Since many third-party advertising agencies are affiliated with other third-party agencies in a larger corporate structure, if we fail to maintain good relations with one third-party advertising agency in such an organization, we may lose business from the affiliated third-party advertising agencies as well. Our sales could be adversely impacted by industry changes relating to the use of third-party advertising agencies. For example, if CPGs or retailers seek to bring their campaigns in-house rather than using an agency, we would need to develop direct relationships with the CPGs or retailers, which we might not be able to do and which could increase our sales and marketing expenses. Moreover, to the extent that we do not have a direct relationship with CPGs or retailers, the value we provide to CPGs and retailers may be attributed to the third-party advertising agency rather than to us, further limiting our ability to develop long-term relationships directly with CPG and retailers. CPGs and retailers may move from one third-party advertising agency to another, and we may lose the underlying business. The presence of third-party advertising agencies as intermediaries between us and the CPGs and retailers thus creates a challenge to building our own brand awareness and affinity with the CPGs and retailers that are the ultimate source of our revenues. In addition, third-party advertising agencies conducting business with us may offer their own digital promotion solutions. As such, these third-party advertising agencies are, or may become, our competitors. If they further develop their own capabilities they may be more likely to offer their own solutions to advertisers, and our ability to compete effectively could be significantly compromised and our business, financial condition and operating results could be adversely affected. Table of Contents Competition presents an ongoing threat to the success of our business. We expect competition in digital promotions to continue to increase. The market for digital promotions is highly competitive, fragmented and rapidly changing. We compete against a variety of companies with respect to different aspects of our business, including: traditional offline coupon and discount services, as well as newspapers, magazines and other traditional media companies that provide coupon promotions and discounts on products and services in free standing inserts or other forms, including Valassis Interactive, Inc., News America Marketing Interactive, Inc. and Catalina Marketing Corporation; providers of digital coupons such as Valassis Redplum.com and News America Marketing s SmartSource, companies that offer coupon codes such as RetailMeNot, Inc., Exponential Interactive, Inc. s TechBargains.com, Savings.com, Inc. and Ebates Performance Marketing, Inc., and companies providing other e-commerce based services that allow consumers to obtain direct or indirect discounts on purchases; Internet sites that are focused on specific communities or interests that offer coupons or discount arrangements related to such communities or interests; and companies offering other advertising and promotion related services. We believe the principal factors that generally determine a company s competitive advantage in our market include the following: scale and effectiveness of reach in connecting CPGs and retailers to consumers; ability to attract consumers to use digital coupons delivered by it; platform security, scalability, reliability and availability; number of channels by which a company engages with consumers; integration of products and solutions; rapid deployment of products and services for customers; breadth, quality and relevance of the company s digital coupons; ability to deliver digital coupons that are widely available and easy to use in consumers preferred form; integration with retailer applications; brand recognition; quality of tools, reporting and analytics for planning, development and optimization of promotions; and breadth and expertise of the company s sales organization. We are subject to potential competition from large, well-established companies which have significantly greater financial, marketing and other resources than we do and have current offerings that may compete with our platform or may choose to offer digital promotions as an add-on to their core business on their own or in partnership with one of our competitors that would directly compete with ours. Many of our larger potential competitors may have the resources to significantly change the nature of the digital promotions industry to their advantage, which could materially disadvantage us. For example, Google, Yahoo!, Bing and Facebook and online retailers such as Amazon have highly trafficked industry platforms which they could leverage to distribute digital coupons or other digital promotions that could negatively affect our business. In addition, these potential competitors may be Table of Contents able to respond more quickly than we can to new or emerging technologies and changes in consumer habits. These competitors may engage in more extensive research and development efforts, undertake more far-reaching marketing campaigns and adopt more aggressive pricing policies, which may allow them to attract more consumers and, as a result, more CPGs and retailers, or generate revenues more effectively than we do. Our competitors may offer digital coupons that are similar to the digital coupons we offer or that achieve greater market acceptance than those we offer. We are also subject to potential competition from smaller companies that launch new products and services that we do not offer and that could gain market acceptance. Our success depends on the effectiveness of our platform in connecting CPGs and retailers with consumers and with attracting consumer use of the digital coupons delivered through our platform. To the extent we fail to provide digital coupons for high quality, relevant products, consumers may become dissatisfied with our platform and decide not to use our digital coupons and elect to use the digital coupons distributed by one of our competitors. As a result of these factors, our CPGs and retailers may not receive the benefits they expect, and CPGs may use the offerings of one of our competitors and retailers may elect to handle coupon codes themselves or exclude us from integrating with their in-store and point of sale systems, and our operating results would be adversely affected. We also face significant competition for trade promotion spending. We compete against online and mobile businesses, including those referenced above, and traditional advertising outlets, such as television, radio and print, for trade promotion spending. In order to grow our revenues and improve our operating results, we must increase our share of CPG spending on digital coupons and advertising relative to traditional sources and relative to our competitors, many of whom are larger companies that offer more traditional and widely accepted advertising products. We also directly and indirectly compete with retailers for consumer traffic. Many retailers market and offer their own digital coupons directly to consumers using their own websites, email newsletters and alerts, mobile applications and social media channels. Our retailers could be more successful than we are at marketing their own digital coupons or could decide to terminate their relationship with us. We may face competition from companies we do not yet know about. If existing or new companies develop, market or offer competitive digital coupon solutions, acquire one of our existing competitors or form a strategic alliance with one of our competitors, our ability to compete effectively could be significantly compromised and our operating results could be harmed. If we fail to effectively manage our growth, our business and financial performance may suffer. We have significantly expanded our operations and anticipate expanding further to pursue our growth strategy. Such expansion increases the complexity of our business and places significant demands on our management, operations, technical performance, financial resources and internal control over financial reporting functions. Continued growth could strain our ability to deliver digital coupons on our platform, develop and improve our operational, financial, legal and management controls, and enhance our reporting systems and procedures. For example, our revenue growth was adversely affected in the first half of 2012 because as we scaled our technology infrastructure to support our growth, our technology for securely identifying unique users and devices inadvertently prevented our personalization algorithms from optimally displaying our digital coupons to consumers. Failure to manage our expansion may limit our growth, damage our reputation and negatively affect our financial performance and harm our business. To effectively manage this growth, we will need to continue to improve our operational, financial and management controls, and our reporting systems and procedures. If we do not effectively manage the growth of our business and operations, the quality and scalability of our platform could suffer. Table of Contents Our current and planned personnel, systems, procedures and controls may not be adequate to support and effectively manage our future operations. We may not be able to hire, train, retain, motivate and manage required personnel. As we continue to grow, we must effectively integrate, develop and motivate a large number of new employees. We intend to continue to expand our research and development, sales and marketing, and general and administrative organizations, and over time, expand our international operations. To attract top talent, we have had to offer, and believe we will need to continue to offer, highly competitive compensation packages before we can validate the productivity of those employees. If we fail to effectively manage our hiring needs and successfully integrate our new hires, our efficiency and ability to meet our forecasts and our employee morale, productivity and retention could suffer, and our business and operating results could be adversely affected. Providing our products and services to our CPGs, retailers and consumers is costly and we expect our expenses to continue to increase in the future as we grow our business with existing and new CPGs and retailers and develop new products and services that require enhancements to our technology infrastructure. In addition, our operating expenses, such as our research and development expenses and sales and marketing expenses are expected to continue to grow to support our anticipated future growth. As a public company we will incur significant legal, accounting and other expenses that we did not incur as a private company. Our expenses may grow faster than our revenues, and our expenses may be greater than we anticipate. Managing our growth will require significant expenditures and allocation of valuable management resources. If we fail to achieve the necessary level of efficiency in our organization as it grows, our business, operating results and financial condition would be harmed. If we do not effectively grow and train our sales team, we may be unable to add new CPGs and retailers or increase sales to our existing CPGs and retailers and our business will be adversely affected. We continue to be substantially dependent on our sales team to obtain new CPGs and retailers and to drive sales from our existing CPGs and retailers. We believe that there is significant competition for sales personnel with the skills and technical knowledge that we require. Our ability to achieve significant revenue growth will depend, in large part, on our success in recruiting, training, integrating and retaining sufficient numbers of sales personnel to support our growth. New hires require significant training and it may take significant time before they achieve full productivity. Our recent hires and planned hires may not become productive as quickly as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals in the markets where we do business or plan to do business. In addition, if we continue to grow rapidly, a large percentage of our sales team will be new to the company and our solution. If we are unable to hire and train sufficient numbers of effective sales personnel, or the sales personnel are not successful in obtaining new CPGs and retailers or increasing sales to our existing CPGs and retailers, our business will be adversely affected. Our sales cycle with new CPGs and retailers is long and unpredictable and may require us to incur expenses before executing a customer agreement, which makes it difficult to project when, if at all, we will obtain new CPGs and retailers and when we will generate additional revenues from those customers. We market our services and products directly to CPGs and retailers. New CPG and retailer relationships typically take time to obtain and finalize. A significant time period may pass between selection of our services and products by key decision-makers and the signing of a contract. The length of time between the initial sales call and the realization of a final contract is difficult to predict. As a result, it is difficult to predict when we will obtain new CPGs and retailers and when performance and delivery of services will be initiated with these potential CPGs and retailers. As part of our sales cycle, Table of Contents we may incur significant expenses before executing a definitive agreement with a prospective CPG or retailer and before we are able to generate any revenues from such agreement. If conditions in the marketplace generally or with a specific prospective CPG or retailer change negatively, it is possible that no definitive agreement will be executed, and we will be unable to recover any expenses incurred before a definitive agreement is executed, which would in turn have an adverse effect on our business, financial condition and results of operations. Our business depends on our ability to maintain and scale the network infrastructure necessary to operate our websites and platform, and any significant disruption in service on our websites or platform could result in a loss of CPGs, retailers and consumers. We deliver digital coupons through our websites, those of our CPGs and retailers as well as our publisher websites. Our reputation and ability to acquire, retain and serve CPGs and retailers, as well as consumers who use digital coupons on our platform are dependent upon the reliable performance of our platform. As the number of our CPG customers, retailers and consumers and the number of digital promotions and information shared through our platform continue to grow, we will need an increasing amount of network capacity and computing power. Our technology infrastructure is hosted across two data centers in co-location facilities in California and Nevada. In addition, we use two other co-location facilities in California and Virginia to host our in-development new point of sale solution. We have spent and expect to continue to spend substantial amounts on data centers and equipment and related network infrastructure to handle the traffic on our platform. The operation of these systems is expensive and complex and could result in operational failures. In the event that the number of transactions or the amount of traffic on our platform grows more quickly than anticipated, we may be required to incur significant additional costs. Interruptions in these systems or service disruptions, whether due to system failures, computer viruses or physical or electronic break-ins, could affect the security or availability of our websites and platform, and prevent CPGs, retailers or consumers from accessing our platform. For example, as we scaled our technology infrastructure to support our growth, our technology for securely identifying unique users and devices inadvertently prevented our personalization algorithms from optimally displaying our digital coupons to consumers. A substantial portion of our network infrastructure is hosted by third-party providers. Any disruption in these services or any failure of these providers to handle existing or increased traffic could significantly harm our business. Any financial or other difficulties these providers face may adversely affect our business, and we exercise little control over these providers, which increases our vulnerability to problems with the services they provide. If we do not maintain or expand our network infrastructure successfully or if we experience operational failures, we could lose current and potential CPGs and retailers and consumers, which could harm our operating results and financial condition. If we are not successful in responding to changes in consumer behavior and do not develop products and solutions that are widely accepted and generate revenues, our results of operations and business could be adversely affected. The methods by which consumers access digital coupons are varied and evolving. Our platform has been designed to engage consumers at the critical moments when they are choosing the products they will buy and where they will shop. Consumers can select our digital coupons both online through web and mobile and in-store. In order for us to maintain and increase our revenues, we must be a leading provider of digital coupons in each of the forms by which consumers access them. As consumer behavior in accessing digital coupons changes and new distribution channels emerge, if we do not successfully respond and do not develop products or solutions that are widely accepted and generate revenues we may be unable to retain consumers or attract new consumers and as a result, CPGs and retailers, and our business may suffer. Table of Contents If our websites or those of our publishers fail to rank prominently in unpaid search results from search engines like Google, Yahoo! and Bing, traffic to our websites could decline and our business would be adversely affected. Our success depends in part on our ability to attract consumers through unpaid Internet search results on search engines like Google, Yahoo! and Bing. The number of consumers we attract to our websites from search engines is due in large part to how and where our websites rank in unpaid search results. These rankings can be affected by a number of factors, many of which are not in our direct control, and they may change frequently. For example, a search engine may change its ranking algorithms, methodologies or design layouts. As a result, links to our websites may not be prominent enough to drive traffic to our websites, and we may not know how or otherwise be in a position to influence the results. In some instances, search engine companies may change these rankings in order to promote their own competing products or services or the products or services of one or more of our competitors. Our websites have experienced fluctuations in search result rankings in the past, and we anticipate fluctuations in the future. In addition, websites must comply with search engine guidelines and policies. These guidelines and policies are complex and may change at any time. If we fail to follow such guidelines and policies properly, search engines may rank our content lower in search results or could remove our content altogether from their index. Any reduction in the number of consumers directed to our websites could reduce the effectiveness of our digital promotions for CPGs and retailers and could adversely impact our business and results of operations. Factors adversely affecting performance marketing programs and our relationships with performance marketing networks, or the termination of these relationships, may adversely affect our ability to attract and retain business and our coupon codes business. A portion of our business is based upon consumers using coupon codes in connection with the purchase of goods or services. The commissions we earn for coupon codes accessed through our platform are tracked by performance marketing networks. Third-party performance marketing networks provide CPGs and retailers with affiliate tracking links for revenues attributable to publishers and the ability to distribute digital promotions to multiple publishers. When a consumer executes a purchase on a CPG s, a retailer s or a publisher s website as a result of a performance marketing program, most performance marketing conversion tracking tools credit the most recent link or ad clicked by the consumer prior to that purchase. This practice is generally known as last-click attribution. We generate revenues through transactions for which we receive last-click attribution. Risks that may adversely affect our performance marketing programs and our relationships with performance marketing networks include the following, some of which are outside our control: we may not be able to adapt to changes in the way in which CPGs and retailers attribute credit to us in their performance marketing programs, whether it be first-click attribution or multichannel attribution, which applies weighted values to each of a retailer s advertisements and tracks how each of those advertisements contributed to a purchase, or otherwise; refund rates for products delivered by CPGs and retailers that may be greater than we estimate; performance marketing networks may not provide accurate and timely reporting on which we rely, we could fail to properly recognize and collect and report revenues and misstate financial reports, projections and budgets and misdirect our advertising, marketing and other operating efforts for a portion of our business; we primarily rely on a small number of performance marketing networks in non-exclusive arrangements, the loss of which could adversely affect our coupon codes business; industry changes relating to the use of performance marketing networks could adversely impact our commission revenues; Table of Contents to the extent performance marketing networks serve as intermediaries between us and CPGs and retailers, it may create challenges to building our own brand awareness and affinity with CPGs and retailers, and the termination of our relationship with the performance marketing networks would terminate our ability to receive payments from CPGs and retailers we service through that network; and performance marketing networks may compete with us. If we fail to continue to obtain high quality coupons and sufficient numbers of CPG-authorized activations available through our platform, our revenue growth or our revenues may be harmed. We generate revenues as consumers select, or activate, a digital coupon through our platform. Our business model depends upon the quality of digital coupons and the specified number of CPG-authorized activations available, which we do not control. CPGs and retailers have a variety of channels through which to promote their products and services. If CPGs and retailers elect to distribute their digital coupons through other channels or not to promote digital coupons at all, or if our competitors are willing to accept lower prices than we are, our ability to obtain high quality digital coupons and sufficient numbers of CPG-authorized activations available on our platform may be impeded and our business, financial condition and operating results will be adversely affected. If we cannot maintain sufficient digital coupons inventory to offer through our platform, consumers may perceive our service as less relevant, consumer traffic to our websites and those of our publishers will decline and, as a result, CPGs and retailers may decrease their use of our platform to deliver digital coupons and our revenue growth or revenues may be harmed. Our business relies in part on email and other messaging, including SMS text messages, and any technical, legal or other restrictions on the sending of emails or messages or an inability to timely deliver such communications could harm our business. Our business is in part dependent upon email and other messaging. We provide emails and mobile alerts and other messages to consumers informing them of the digital coupons on our websites, and we believe these communications help generate a significant portion of our revenues. Because of the importance of email and other messaging services to our business, if we are unable to successfully deliver emails or other messages to consumers, if there are legal restrictions on delivering these messages to consumers, or if consumers do not open our emails or messages, our revenues and profitability would be adversely affected. Changes in how webmail applications organize and prioritize email may result in our emails being delivered in a less prominent location in a consumer s inbox or viewed as spam by consumers and may reduce the likelihood of that consumer opening our emails. Actions by third parties to block, impose restrictions on or charge for the delivery of emails or other messages could also harm our business. From time to time, Internet service providers or other third parties may block bulk email transmissions or otherwise experience technical difficulties that result in our inability to successfully deliver emails or other messages to consumers. Changes in the laws or regulations that limit our ability to send such communications or impose additional requirements upon us in connection with sending such communications would also adversely impact our business. We also rely on social networking messaging services to send communications. Changes to the terms of these social networking services to limit promotional communications, any restrictions that would limit our ability or our customers ability to send communications through their services, disruptions or downtime experienced by these social networking services or decline in the use of or engagement with social networking services by customers and potential customers could harm our business. We rely on a third-party service for the delivery of daily emails, and delay or errors in the delivery of such emails or other messaging we send may occur and be beyond our control, which could result in damage to our reputation or harm our business, financial condition and operating results. If we were Table of Contents unable to use our current email service or other messaging services, alternate services are available; however, we believe our sales could be impacted for some period as we transition to a new provider. Any disruption or restriction on the distribution of our emails or other messages, termination or disruption of our relationship with our messaging service providers, including our third-party service that delivers our daily emails, or any increase in our costs associated with our email and other messaging activities could harm our business. If our security measures are compromised, or if our platform is subject to attacks that degrade or deny the ability of consumers to access our content, CPGs, retailers and consumers may curtail or stop use of our platform. We deliver digital coupons via our platform and we collect and maintain data about consumers, including personally identifiable information, as well as other confidential or proprietary information. Like all online services, our platform is vulnerable to computer viruses, break-ins, phishing attacks, attempts to overload our servers with denial-of-service or other attacks and similar disruptions from unauthorized use of our computer systems, any of which could lead to interruptions, delays, or website shutdowns, causing loss of critical data or the unauthorized disclosure or use of personally identifiable or other confidential information. If we experience compromises to our security that result in performance or availability problems, the complete shutdown of one or more of our websites or the loss or unauthorized disclosure of confidential information, CPGs and retailers as well as consumers may lose trust and confidence in us and decrease their use of our platform or stop using our platform entirely. Because the techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently, often are not recognized until launched against a target and may originate from less regulated and remote areas around the world, we may be unable to proactively address these techniques or to implement adequate preventative measures. In addition, consumer information including email addresses and data on consumer usage of our websites could be hacked, hijacked, altered or otherwise claimed or controlled by unauthorized persons. Any or all of these issues could negatively impact our reputation and our ability to attract and retain CPGs and retailers as well as consumers or could reduce the frequency with which our platform is used, cause existing or potential CPG or retailer customers to cancel their contracts or subject us to third-party lawsuits, regulatory fines or other action or liability, thereby harming our results of operations. Failure to deal effectively with fraudulent transactions could harm our business. Digital coupons are issued in the form of redeemable coupons or coupon codes with unique identifiers. It is possible that third parties will seek to create counterfeit digital coupons or coupon codes in order to fraudulently claim discounts or credits for redemption. While we use advanced anti-fraud technologies, it is possible that individuals will attempt to circumvent our anti-fraud systems using increasingly sophisticated methods. In addition, our service could be subject to employee fraud or other internal security breaches, and we may be required to reimburse CPGs and retailers for any funds stolen or revenues lost as a result of such breaches. Our CPGs and retailers could also request reimbursement, or stop using digital coupons, if they are affected by buyer fraud or other types of fraud. We may incur significant losses from fraud and counterfeit digital coupons. If our anti-fraud measures do not succeed, our business will suffer. Our business is subject to complex and evolving laws, regulations and industry standards, and unfavorable interpretations of, or changes in, or failure by us to comply with these laws, regulations and industry standards could substantially harm our business and results of operations. We are subject to a variety of laws, regulations and industry standards that involve matters related to our business, including the Internet, privacy, anti-spam, data protection, intellectual property, Table of Contents e-commerce, competition and price discrimination, consumer protection, and taxation and state, local and municipal laws related to the use of promotions. Many of these laws and regulations are still evolving and being tested in courts and industry standards are still developing. Our business, including our ability to operate and expand, could be adversely affected if legislation, regulations or industry standards are adopted, interpreted or implemented in a manner that is inconsistent with our current business practices and that require changes to these practices or the design of our platform. Existing and future laws, regulations and industry standards could restrict our operations, and our ability to retain or increase our CPGs and retailers and consumers use of digital promotions delivered on our platform may be adversely affected and we may not be able to maintain or grow our revenues as anticipated. Failure to comply with federal, state and international privacy and marketing laws, regulations and industry standards, or the expansion of current or the enactment of new privacy and marketing laws, regulations or the adoption of new industry standards, could adversely affect our business. We are subject to a variety of federal, state and international laws, regulations and industry standards regarding privacy and marketing, which address the collection, storing, sharing, using, processing, disclosure and protection of personal information as well as the tracking of consumer behavior and other consumer data. Many of these laws, regulations and industry standards are changing and may be subject to differing interpretations, costly to comply with or inconsistent among countries and jurisdictions. For example, the Federal Trade Commission, or the FTC, expects companies like ours to comply with guidelines issued under the Federal Trade Commission Act that govern the collection, use and storage of consumer information, and establish principles relating to notice, consent, access and data integrity and security. Our practices are designed to comply with these guidelines as described in our published privacy policy. For example, we disclose that we collect process, store, share, disclose and use information about consumers using our websites and our mobile and other applications which may include, depending upon the information that the consumer voluntarily provides to us and their interaction with our platform, name, mailing address, phone number, email address and any other information that the consumer provides to us. While we do not sell or share personally identifiable information to or with third parties, we use this consumer information in the aggregate, and may share this information with third parties for research and internal purposes, advertising and marketing and to improve our business, among other purposes. We believe our policies and practices comply with FTC privacy guidelines and other applicable laws and regulations. However, if our belief proves incorrect, or if these guidelines, laws or regulations or their interpretation change or new legislation or regulations are enacted, we may be compelled to provide additional disclosures to our consumers, obtain additional consents from our consumers before collecting or using their information or implement new safeguards to help our consumers manage our use of their information, among other changes. We have posted privacy policies and practices concerning the collection, use and disclosure of consumer data on our websites and platform. Several Internet companies have incurred penalties for failing to abide by the representations made in their privacy policies and practices. In addition, several states have adopted legislation that requires businesses to implement and maintain reasonable security procedures and practices to protect sensitive personal information and to provide notice to consumers in the event of a security breach. Various industry standards on privacy have been developed and are expected to continue to develop, which may be adopted by industry participants at any time. We comply with industry standards and are subject to the terms of our privacy policies and privacy-related obligations to third parties (including voluntary third-party certification bodies such as TRUSTe). We strive to comply with applicable laws, policies, and legal obligations and certain applicable industry standards of conduct relating to privacy and data protection. However, it is possible that these obligations may be interpreted and applied in new ways and/or in a manner that is Table of Contents inconsistent from one jurisdiction to another and may conflict with other rules or our practices or that new regulations could be enacted. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any data-related consent orders, FTC requirements or orders or other federal, state or, as we continue to expand internationally, international privacy or consumer protection-related laws, regulations or industry self-regulatory principles could result in claims, proceedings or actions against us by governmental entities or others or other liabilities, which could adversely affect our business. In addition, a failure or perceived failure to comply with industry standards or with our own privacy policies and practices could result in a loss of consumers using our digital coupons or loss of CPGs and retailers and adversely affect our business. Federal, state and international governmental authorities continue to evaluate the privacy implications inherent in the use of third-party web cookies for behavioral advertising. The regulation of these cookies and other current online advertising practices could adversely affect our business. Additionally, if third parties we work with violate applicable laws, our policies or other policy-related obligations, such violations may also put our consumers information at risk and could in turn have an adverse effect on our business. In addition, certain laws impose restrictions on communications with persons by email, sms text messages and other means of delivery. We strive to comply with applicable laws; however, it is possible that these obligations may be interpreted and applied in new ways and/or in a manner that is inconsistent from one jurisdiction to another. In addition, various federal, state and, as we continue to expand internationally, foreign legislative and regulatory bodies may expand current or enact new laws regarding privacy matters. Public scrutiny of Internet privacy and security issues may result in increased regulation and different industry standards, which could deter or prevent us from delivering digital coupons on our platform consistent with our current business practices and may require changes to these practices or the design of our platform, thereby harming our business. We may not be able to adequately protect our intellectual property rights or may be accused of infringing intellectual property rights of third parties. We regard our trademarks, service marks, copyrights, patents, trade dress, trade secrets, proprietary technology and similar intellectual property as critical to our success, and we rely on trademark, copyright and patent law, trade secret protection and confidentiality and/or license agreements with our employees and others to protect our proprietary rights. Effective intellectual property protection may not be available in every country in which we offer digital promotions. We also may not be able to acquire or maintain appropriate domain names or trademarks in all countries in which we do business. Furthermore, regulations governing domain names may not protect our trademarks and similar proprietary rights. We may be unable to prevent third parties from acquiring and using domain names that are similar to, infringe upon or diminish the value of our trademarks and other proprietary rights. We may be unable to prevent third parties from using and registering our trademarks, or trademarks that are similar to, or diminish the value of, our trademark in some countries. We may not be able to discover or determine the extent of any unauthorized use of our proprietary rights. Third parties that license our proprietary rights also may take actions that diminish the value of our proprietary rights or reputation. The protection of our intellectual property may require the expenditure of significant financial and managerial resources. For example, from time to time we have identified and shut down websites that have attempted to misappropriate our brand and proprietary rights and sell fraudulent digital coupons. Moreover, the steps we take to protect our intellectual property may not adequately protect our rights or prevent third parties from infringing or misappropriating our proprietary rights. We are currently subject to litigation and disputes related to our intellectual property and service offerings. We may in the future be subject to additional litigation and disputes. The costs of supporting such litigation and disputes are considerable, and there can be no assurances that favorable outcomes will be obtained. Table of Contents In the past, we have been subject to third-party claims of infringement and we expect to be subject to infringement claims in the future. Such claims, whether or not meritorious, may result in the expenditure of significant financial and managerial resources, injunctions against us or the payment of damages by us. We may need to obtain licenses from third parties who allege that we have infringed their rights, but such licenses may not be available on terms acceptable to us or at all. These risks have been amplified by the increase in third parties whose sole or primary business is to assert such claims. Failure to protect or enforce our intellectual property rights could harm our business and results of operations. We regard the protection of our trade secrets, copyrights, trademarks and domain names as critical to our success. In particular, we must maintain, protect and enhance the Coupons.com brand. We pursue the registration of our domain names, trademarks, and service marks in the United States and in certain jurisdictions abroad. We strive to protect our intellectual property rights by relying on federal, state and common law rights, as well as contractual restrictions. We typically enter into confidentiality and invention assignment agreements with our employees and contractors, and confidentiality agreements with parties with whom we conduct business in order to limit access to, and disclosure and use of, our proprietary information. However, these contractual arrangements and the other steps we have taken to protect our intellectual property may not prevent the misappropriation or disclosure of our proprietary information nor deter independent development of similar technologies by others. Effective trade secret, copyright, trademark and domain name protection is expensive to develop and maintain, both in terms of initial and ongoing registration requirements and expenses and the costs of defending our rights. We are seeking to protect our trademarks and domain names in an increasing number of jurisdictions, a process that is expensive and may not be successful or which we may not pursue in every location. Litigation may be necessary to enforce our intellectual property rights, protect our respective trade secrets or determine the validity and scope of proprietary rights claimed by others. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs and diversion of management and technical resources, any of which could adversely affect our business and operating results. We may incur significant costs in enforcing our trademarks against those who attempt to imitate our Coupons.com brand. If we fail to maintain, protect and enhance our intellectual property rights, our business and operating results may be harmed. Our business depends on a strong brand, and if we are not able to maintain and enhance our brand, or if we receive unfavorable media coverage, our ability to retain and expand our number of CPGs, retailers and consumers will be impaired and our business and operating results will be harmed. We believe that the brand identity that we have developed has significantly contributed to the success of our business. We also believe that maintaining and enhancing our brands are critical to expanding our base of CPGs, retailers and consumers. Maintaining and enhancing our brand may require us to make substantial investments and these investments may not be successful. If we fail to promote and maintain the Coupons.com brand, or if we incur excessive expenses in this effort, our business would be harmed. We anticipate that, as our market becomes increasingly competitive, maintaining and enhancing our brand may become increasingly difficult and expensive. Maintaining and enhancing our brand will depend on our ability to continue to provide sufficient quantities of reliable, trustworthy and high quality digital coupons, which we may not do successfully. Unfavorable publicity or consumer perception of our websites, platform, practices or service offerings, or the offerings of our CPGs and retailers, could adversely affect our reputation, resulting in Table of Contents difficulties in recruiting, decreased revenues and a negative impact on the number of CPGs and retailers we feature and our user base, the loyalty of our consumers and the number and variety of digital coupons we offer. As a result, our business could be harmed. We may be unable to continue to use the domain names that we use in our business, or prevent third parties from acquiring and using domain names that infringe on, are similar to, or otherwise decrease the value of our brand or our trademarks or service marks. We have registered domain names for our websites that we use in our business, such as Coupons.com. If we lose the ability to use a domain name, whether due to trademark claims, failure to renew the applicable registration, or any other cause, we may be forced to market our products under new domain names, which could cause us substantial harm, or to incur significant expense in order to purchase rights to the domain names in question. In addition, our competitors and others could attempt to capitalize on our brand recognition by using domain names similar to ours. Domain names similar to ours have been registered in the United States and elsewhere. We may be unable to prevent third parties from acquiring and using domain names that infringe on, are similar to, or otherwise decrease the value of our brand or our trademarks or service marks. Protecting and enforcing our rights in our domain names may require litigation, which could result in substantial costs and diversion of management s attention and harm our business. Some of our solutions contain open source software, which may pose particular risks to our proprietary software and solutions. We use open source software in our solutions and will use open source software in the future. From time to time, we may face claims from third parties claiming ownership of, or demanding release of, the open source software and/or derivative works that we developed using such software (which could include our proprietary source code), or otherwise seeking to enforce the terms of the applicable open source license. These claims could result in litigation and could require us to purchase a costly license or cease offering the implicated solutions unless and until we can re-engineer them to avoid infringement. This re-engineering process could require significant additional research and development resources. In addition to risks related to license requirements, use of certain open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on the origin of software. Any of these risks could be difficult to eliminate or manage, and, if not addressed, could have a negative effect on our business and operating results. Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement and other losses. Our agreements with CPGs, retailers and other third parties may include indemnification provisions under which we agree to indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement or other liabilities relating to or arising from our products, services or other contractual obligations. The term of these indemnity provisions generally survives termination or expiration of the applicable agreement. Large indemnity payments could harm our business. Acquisitions, joint ventures and strategic investments could result in operating difficulties, dilution and other harmful consequences. We expect to evaluate and consider a wide array of potential strategic transactions, including acquisitions and dispositions of businesses, joint ventures, technologies, services, products and other assets and strategic investments. At any given time, we may be engaged in discussions or negotiations with respect to one or more of these types of transactions. Any of these transactions could be material to our financial condition and results of operations. We have limited experience managing Table of Contents acquisitions and integrating acquired businesses. The process of integrating any acquired business may create unforeseen operating difficulties and expenditures and is itself risky. The areas where we may face difficulties include: diversion of management time, as well as a shift of focus from operating the businesses to issues related to integration and administration; the need to integrate the acquired company s accounting, management, information, human resource and other administrative systems to permit effective management, and the lack of control if such integration is delayed or not implemented; retention of key employees from the acquired company and cultural challenges associated with integrating employees from the acquired company into our organization; the need to implement or improve controls, procedures and policies appropriate for a public company at companies that prior to acquisition had lacked such controls, procedures and policies; in some cases, the need to transition operations and customers onto our existing platforms; liability for activities of the acquired company before the acquisition, including violations of laws, rules and regulations, commercial disputes, tax liabilities and other known and unknown liabilities; write-offs or charges; and litigation or other claims in connection with the acquired company, including claims from terminated employees, users, former stockholders or other third parties and intellectual property infringement claims. Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments could cause us to fail to realize the anticipated benefits of any or all of our acquisitions or joint ventures, or we may not realize them in the time frame expected or cause us to incur unanticipated liabilities, and harm our business. Future acquisitions or joint ventures may require us to issue dilutive additional equity securities, spend a substantial portion of our available cash, incur debt or contingent liabilities, amortize expenses related to intangible assets or incur incremental operating expenses or write-offs of goodwill, which could adversely affect our results of operations and harm our business. Our business is subject to interruptions, delays or failures resulting from earthquakes, other natural catastrophic events or terrorism. Our headquarters is located in Mountain View, California. Our current technology infrastructure is hosted across two data centers in co-location facilities in California and Nevada. In addition, we use two other co-location facilities in California and Virginia to host our in-development new point of sale solution. Our services, operations and the data centers from which we provide our services are vulnerable to damage or interruption from earthquakes, fires, floods, power losses, telecommunications failures, terrorist attacks, acts of war, human errors, break-ins and similar events. A significant natural disaster, such as an earthquake, fire or flood, could have a material adverse impact on our business, financial condition and results of operations and our insurance coverage may be insufficient to compensate us for losses that may occur. Acts of terrorism could cause disruptions to the Internet, our business or the economy as a whole. We may not have sufficient protection or recovery plans in certain circumstances, such as natural disasters affecting areas where data centers upon which we rely are located, and our business interruption insurance may be insufficient to compensate us for losses that may occur. Such disruptions could negatively impact our ability to run our websites, which could harm our business. Table of Contents If we fail to expand effectively in international markets, our revenues and our business may be harmed. We currently generate almost all of our revenues from the United States. We also operate to a limited extent in the United Kingdom and continental Europe. The CPGs and retailers on our platform have global operations and we plan to grow our operations and offerings through expansion in existing international markets and by partnering with our CPGs and retailers to enter new geographies that are important to them. Further expansion into international markets will require management attention and resources and we have limited experience entering new geographic markets. Entering new foreign markets will require us to localize our services to conform to a wide variety of local cultures, business practices, laws and policies. The different commercial and Internet infrastructure in other countries may make it more difficult for us to replicate our business model. In some countries, we will compete with local companies that understand the local market better than we do, and we may not benefit from first-to-market advantages. We may not be successful in expanding into particular international markets or in generating revenues from foreign operations. As we expand internationally, we will be subject to risks of doing business internationally, including the following: competition with strong local competitors and preference for local providers, or foreign companies entering the same markets; the cost and resources required to localize our platform; burdens of complying with a wide variety of different laws and regulations, including intellectual property laws and regulation of digital coupon terms, Internet services, privacy and data protection, anti-competition regulations and different liability standards, which may limit or prevent us from offering of our solutions in some jurisdictions or limit our ability to enforce contractual obligations; differences in how trade promotion spending is allocated; differences in the way digital coupons and advertising are delivered and how consumers access and use digital coupons; technology compatibility; difficulties in recruiting and retaining qualified employees and managing foreign operations; different employee/employer relationships and the existence of workers councils and labor unions; shorter payment cycles, different accounting practices and greater problems in collecting accounts receivable; higher product return rates; seasonal reductions in business activity; adverse tax effects and foreign exchange controls making it difficult to repatriate earnings and cash; and political and economic instability. Changes in the U.S. taxation of international activities may increase our worldwide effective tax rate and harm our financial condition and results of operations. The taxing authorities of the jurisdictions in which we plan to operate may challenge our methodologies for valuing developed technology or intercompany arrangements, including our transfer pricing, or determine that the manner in which we operate our business does not achieve the intended tax consequences, which could increase our worldwide effective tax rate and harm our financial position and results of operations. Significant judgment will be required in evaluating our tax positions and determining our provision for Table of Contents income taxes. During the ordinary course of business, there will be many transactions and calculations for which the ultimate tax determination is uncertain. As we expand our business to operate in numerous taxing jurisdictions, the application of tax laws may be subject to diverging and sometimes conflicting interpretations by tax authorities of these jurisdictions. It is not uncommon for taxing authorities in different countries to have conflicting views. In addition, tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. In particular, there is uncertainty in relation to the U.S. tax legislation in terms of the future corporate tax rate but also in terms of the U.S. tax consequences of income derived from intellectual property earned overseas in low tax jurisdictions. Our planned corporate structure and intercompany arrangements will be implemented in a manner we believe is in compliance with current prevailing tax laws. However, the tax benefits which we intend to eventually derive could be undermined if we are unable to adapt the manner in which we operate our business and due to changing tax laws. Our failure to manage these risks and challenges successfully could materially and adversely affect our business, financial condition and results of operations. We are exposed to fluctuations in currency exchange rates and interest rates. To date, we have generated almost all of our revenues from within the United States. As a result, we currently do not have significant revenues or expenses in our international operations and we do not hedge our foreign currency exchange risk. However, we plan to grow our operations and offerings through expansion in existing international markets and by partnering with our existing CPGs and retailers to enter new geographies that are important to them. As we expand our business outside the United States we will face exposure to adverse movements in currency exchange rates. Our foreign operations will be exposed to foreign exchange rate fluctuations as the financial results are translated from the local currency into U.S. dollars upon consolidation. If the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions will result in increased revenues, operating expenses and net income. Similarly, if the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency denominated transaction will result in decreased revenues, operating expenses and net income. As exchange rates vary, sales and other operating results, when translated, may differ materially from expectations. Our risks related to currency fluctuations will increase as our international operations become an increasing portion of our business. In addition, we face exposure to fluctuations in interest rates which may impact our investment income unfavorably. The loss of one or more key members of our management team, or our failure to attract, integrate and retain other highly qualified personnel in the future, could harm our business. We currently depend on the continued services and performance of the key members of our management team, including Steven R. Boal, our Chief Executive Officer. Mr. Boal is one of our founders and his leadership has played an integral role in our growth. Key institutional knowledge remains with a small group of long-term employees and directors whom we may not be able to retain. The loss of key personnel, including key members of management as well as our marketing, sales, product development and technology personnel, could disrupt our operations and have an adverse effect on our ability to grow our business. Moreover, some of our management, including our chief financial officer, are new to our team. As we become a more mature company, we may find our recruiting and retention efforts more challenging. We are seeking to continue to hire a significant number of personnel, including certain key management personnel. If we do not succeed in attracting, hiring and integrating excellent personnel, or retaining and motivating existing personnel, we may be unable to grow effectively. Table of Contents Our management team has limited experience managing a public company, and regulatory compliance may divert its attention from the day-to-day management of our business. Our management team has limited experience managing a publicly-traded company and limited experience complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition to being a public company that will be subject to significant regulatory oversight and reporting obligations under the federal securities laws. In particular, these new obligations will require substantial attention from our senior management and could divert their attention away from the day-to-day management of our business, which could adversely impact our business operations. Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from growing. We may in the future be required to raise capital through public or private financing or other arrangements. Such financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could harm our business. Additional equity financing may dilute the interests of our stockholders, and debt financing, if available, may involve restrictive covenants and could reduce our profitability. If we cannot raise funds on acceptable terms, we may not be able to grow our business or respond to competitive pressures. Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations. In general, under Section 382 of the U.S. Internal Revenue Code of 1986, as amended, or the Code, and similar state law provisions, a corporation that undergoes an ownership change is subject to limitations on its ability to utilize its pre-change net operating losses, or NOLs, to offset future taxable income. If our existing NOLs are subject to limitations arising from ownership changes, possibly including, but not limited to, this initial public offering, our ability to utilize NOLs could be limited by Section 382 of the Code. Future changes in our stock ownership, some of which are outside of our control, also could result in an ownership change under Section 382 of the Code. There is also a risk that our NOLs could expire, or otherwise be unavailable to offset future income tax liabilities due to changes in the law, including regulatory changes, such as suspensions on the use of NOLs or other unforeseen reasons. For these reasons, we may not be able to utilize a material portion of the NOLs, even if we attain profitability. Risks Related to this Offering and Ownership of our Common Stock There has been no prior market for our common stock. An active market may not develop or be sustainable, and investors may not be able to resell their shares at or above the initial public offering price. Before this offering, there has not been a public market for our common stock, and an active public market for our common stock may not develop or be sustained after this offering. The initial public offering price will be determined by negotiations between the representative of the underwriters and us and may vary from the market price of our common stock at the completion of this offering. The price of our stock may change in response to variations in our operating results and also may change in response to other factors, including factors specific to technology companies, many of which are beyond our control. As a result, our stock price may experience significant volatility. Among other factors that could affect our stock price are: the financial projections that we or analysts may choose to provide to the public, any changes in these projections or our failure for any reason to meet these projections; Table of Contents the development and sustainability of an active trading market for our common stock; success of competitive products or services; the public s response to press releases or other public announcements by us or others, including our filings with the Securities and Exchange Commission, or SEC; announcements relating to litigation; speculation about our business in the press or the investment community; future sales of our common stock by our significant stockholders, officers and directors; changes in our capital structure, such as future issuances of debt or equity securities; our entry into new markets; regulatory developments in the United States or foreign countries; strategic actions by us or our competitors, such as acquisitions or restructurings; and changes in accounting principles. In particular, we cannot assure you that you will be able to resell your shares of our common stock at or above the initial public offering price. Substantial future sales of shares by our stockholders could negatively affect our stock price after this offering. Sales of a substantial number of shares of our common stock in the public market after this offering, or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. Based on the total number of shares of our common stock outstanding as of December 31, 2013, upon completion of this offering, we will have 72,669,807 shares of common stock outstanding, assuming no exercise of our outstanding options or vesting of our outstanding restricted stock units. All of the shares of common stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act of 1933, as amended, or the Securities Act, except for any shares held by our affiliates as defined in Rule 144 under the Securities Act. Substantially all of the remaining 62,669,807 shares of common stock outstanding after this offering, based on shares outstanding as of December 31, 2013, will be restricted as a result of securities laws, lock-up agreements or other contractual restrictions that restrict transfers for at least 180 days after the date of this prospectus. Goldman, Sachs & Co. may, in its sole discretion, release all or some portion of the shares subject to lock-up agreements prior to expiration of the lock-up period. Our equity incentive plans allow us to issue, among other things, stock options, restricted stock and restricted stock units. We intend to file a registration statement under the Securities Act as soon as practicable after the completion of this offering to cover the issuance of shares upon the exercise or vesting of awards granted under those plans. As a result, any shares issued or granted under the plans after the completion of this offering also will be freely tradable in the public market, subject to lock-up agreements as applicable. If equity securities are issued under the plans and it is perceived that they will be sold in the public market, then the price of our common stock could decline substantially. Holders of 40,912,253 shares of our common stock issuable upon conversion of preferred stock have rights, subject to some conditions, to require us to file registration statements for the public resale of such shares or to include such shares in registration statements that we may file for us or other Table of Contents stockholders. Once we have registered the resale of these shares, they can be sold in the public market. If these additional shares are sold, or it is perceived that they will be sold, the trading price of our common stock could decline. The concentration of our common stock ownership with our executive officers, directors and affiliates will limit your ability to influence corporate matters. We anticipate that our executive officers, directors and owners of 5% or more of our outstanding common stock will together own approximately 61.7% of our outstanding common stock after this offering, based on the number of shares outstanding as of December 31, 2013. These stockholders will therefore have significant influence over management and affairs and over all matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets, for the foreseeable future. This concentrated control will limit your ability to influence corporate matters and, as a result, we may take actions that our stockholders do not view as beneficial. This ownership could affect the value of your shares of common stock. If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired. As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of the New York Stock Exchange, or the NYSE. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time consuming and costly, and place significant strain on our personnel, systems and resources. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also continuing to improve our internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including accounting-related costs and significant management oversight. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls or our internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of management evaluations and independent registered public accounting firm audits of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the NYSE. Table of Contents We are not currently required to comply with the SEC rules that implement Section 404 of the Sarbanes-Oxley Act, and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company, we will be required provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our second annual report on Form 10-K. Our independent registered public accounting firm is not required to audit the effectiveness of our internal control over financial reporting until after we are no longer an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it concludes that our internal control is not effective. Any failure to maintain effective disclosure controls and internal control over financial reporting could have a material and adverse effect on our business and operating results, and cause a decline in the price of our common stock. We are an emerging growth company and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors. We are an emerging growth company , as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced financial disclosure obligations, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments not previously approved. We may take advantage of these provisions 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 upon the earliest to occur of: the last day of the fiscal year in which we have more than $1.0 billion in annual revenues; the date we are deemed a large accelerated filer as defined in the Exchange Act; and the last day of the fiscal year ending after the fifth anniversary of this offering. We may choose to take advantage of some but not all of these reduced reporting burdens. If we take advantage of any of these reduced reporting burdens in future filings, the information that we provide our security holders may be different than you might get from other public companies in which you hold equity interests. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We will have broad discretion in using our net proceeds from this offering, and the benefits from our use of the proceeds may not meet investors expectations. Our management will have broad discretion over the allocation of our net proceeds from this offering as well as over the timing of their use without stockholder approval. We have not yet determined how the net proceeds of this offering will be used, other than for working capital and other general corporate purposes. We also may use a portion of the net proceeds to satisfy our anticipated tax withholding and remittance obligations related to the settlement of our outstanding RSUs. As a result, investors will be relying upon management s judgment with only limited information about our specific intentions for the use of our net proceeds from this offering. Our failure to apply these proceeds effectively could cause our business to suffer. Table of Contents If securities analysts do not publish research or if securities analysts or other third parties publish inaccurate or unfavorable research about us, the price of our common stock could decline. The trading market for our common stock will rely in part on the research and reports that securities analysts and other third parties choose to publish about us. We do not control these analysts or other third parties. The price of our common stock could decline if one or more securities analysts downgrade our common stock or if one or more securities analysts or other third parties publish inaccurate or unfavorable research about us or cease publishing reports about us. Because our existing investors paid substantially less than the initial public offering price when they purchased their shares, new investors will incur immediate and substantial dilution in their investment. Investors purchasing shares of common stock in this offering will incur immediate and substantial dilution in net tangible book value per share because the price that new investors pay will be substantially greater than the net tangible book value per share of the shares acquired. This dilution is due in large part to the fact that our existing investors paid substantially less than the initial public offering price when they purchased their shares of common stock. In addition, upon the completion of this offering, there will be options to purchase 12,635,707 shares of our common stock outstanding and 4,521,191 restricted stock units, based on the number of such awards outstanding on December 31, 2013. To the extent shares of common stock are issued with respect to such awards in the future, there will be further dilution to new investors. We do not intend to pay dividends for the foreseeable future. We intend to retain all of our earnings for the foreseeable future to finance the operation and expansion of our business and do not anticipate paying cash dividends on our common stock. The terms of our credit and security agreement also restrict our ability to pay dividends. As a result, you can expect to receive a return on your investment in our common stock only if the market price of the stock increases. Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable. Provisions in our certificate of incorporation and by-laws, as amended and restated prior to the closing of this offering, may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following: authorize the issuance of blank check preferred stock that could be issued by our board of directors to defend against a takeover attempt; establish a classified board of directors, as a result of which the successors to the directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following their election; require that directors only be removed from office for cause and only upon a supermajority stockholder vote; provide that vacancies on the board of directors, including newly created directorships, may be filled only by a majority vote of directors then in office rather than by stockholders; prevent stockholders from calling special meetings; and prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders. Table of Contents In addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in a broad range of business combinations with any interested stockholder for a period of three years following the date on which the stockholder becomes an interested stockholder. For a description of our capital stock, see the section titled Description of Capital Stock. We may expend substantial funds in connection with the tax liabilities that arise upon the initial settlement of RSUs in connection with this offering, and the manner in which we fund that expenditure may have an adverse effect on our financial condition. We may expend substantial funds to satisfy tax withholding and remittance obligations when we settle a portion of our RSUs granted prior to the date of this prospectus. Our RSUs vest upon the satisfaction of both a service condition and a liquidity-event condition. The service condition for the majority of the RSUs is satisfied over a period of four years. The liquidity-event condition will be satisfied on the earlier of (i) six months after the effective date of this initial public offering or (ii) March 15, 2015; and (iii) the time immediately prior to the consummation of a change in control. On the settlement dates for the RSUs, we may withhold shares and remit income taxes on behalf of the holders of the RSUs at the applicable minimum statutory rates, which we refer to as a net settlement. We expect the applicable minimum statutory rates to be approximately 40% on average, and the income taxes due would be based on the then-current value of the underlying shares of our common stock. Based on the number of RSUs outstanding as of December 31, 2013 for which the service condition had been satisfied on that date, and assuming (i) the liquidity-event condition had been satisfied on that date and (ii) that the price of our common stock at the time of settlement was equal to $13.00, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, we estimate that this tax obligation on the initial settlement date would be approximately $4.0 million in the aggregate. The amount of this obligation could be higher or lower, depending on the price of our common stock on the initial settlement date for the RSUs. To settle these RSUs on the initial settlement date, assuming a 40% tax withholding rate, if we choose to undertake a net settlement of all of these awards, we would expect to deliver an aggregate of approximately 457,000 shares of our common stock to RSU holders and withhold an aggregate of approximately 305,000 shares of our common stock. In connection with these net settlements, we would withhold and remit the tax liabilities on behalf of the RSU holders to the relevant tax authorities in cash. If we choose to undertake a net settlement of our RSUs, then in order to fund the tax withholding and remittance obligations on behalf of our RSU holders, we would expect to use a substantial portion of our cash and cash equivalent balances, or, alternatively, we may choose to borrow funds or a combination of cash and borrowed funds to satisfy these obligations. Table of Contents

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+RISK FACTORS You should consider the following risk factors, in addition to the other information presented or incorporated by reference into this prospectus, in evaluating our business and your investment in us. Investing in the Company s common stock involves a high degree of risk. Investors and potential investors should carefully consider the following risk factors, together with all of the other information included in this report, before making investment decisions about shares of our common stock. The risks and uncertainties described below are not the only risks and uncertainties facing the Company in the future. Additional risks and uncertainties not presently known or that are currently considered to be immaterial may also materially and adversely affect the Company s business operations or the stock price of the Company s common stock. If any of the following risks or uncertainties occurs, the Company s business, financial condition, operating results and future growth prospects could materially suffer. In that event, the trading price of your securities could decline, and you may lose all or part of your investment. Risks Related to this Offering Management will have broad discretion as to the use of certain of the proceeds from this offering, and we may not use these proceeds effectively. We intend to use the net proceeds from this offering for working capital and general corporate purposes. We may also use a portion of the net proceeds from this offering to support our growth strategy, which may include funding expansion of our business through the future acquisition of businesses, technologies and products, although we have no current understandings, commitments or arrangements to do so. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to us from this offering. Accordingly, our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. Our failure to apply these funds effectively could have a material adverse effect on our business and cause the price of our common stock to decline. You will experience immediate and substantial dilution in the net tangible book value per share of the common stock you purchase. We expect that the price per share of our common stock being offered will be substantially higher than the net tangible book value per share of our common stock. As a result, you will suffer substantial dilution in the net tangible book value of the common stock you purchase in this offering. Based on the sale of 700,000 shares of our common stock in this offering at an assumed public offering price of $5.00 per share, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and based on a net tangible book value of our common stock of $0.38 per share as of June 30, 2014, if you purchase shares of common stock in this offering, you will suffer immediate and substantial dilution of $4.06 per share in the net tangible book value of common stock. See the section entitled Dilution below for a more detailed discussion of the dilution you will incur if you purchase common stock in this offering. Risks Related to Our Business and Industry Our past results may not be indicative of future results, and, therefore, we may be unable to achieve continued growth. Our revenues in 2013 totaled $23,961,000 and grew 17% compared to 2012. However, our revenue in 2012 was essentially the same as in 2011. Increasing revenues by growing our business operations is a key component of our strategy. These expansion plans have placed and may continue to place significant demands on our management, operational and financial resources. You should not consider our 2013 revenue growth as indicative of our future performance. In future periods, we may not have any revenue growth, or our revenues could decline. We have incurred operating losses in the past and may incur operating losses in the future. Although we had income from operations in 2013 of $256,000, we reported a loss from operations of $135,000 during the six months ended June 30, 2014. Additionally, we reported losses from operations of $957,000 in 2012, $423,000 in 2011 and $3,050,000 in 2010. Throughout most of our history, we have TABLE OF CONTENTS experienced net losses and negative cash flows from operations. We expect our operating expenses to increase in the future as we expand our operations. Furthermore, as a public company, we incur significant legal, accounting and other expenses. If our revenues do not grow to offset these increased expenses, we may not be profitable. Additionally, we cannot assure you that we will be able to maintain any profitability that we do achieve. We may need additional financing in the future, which may not be available, and any such financing will likely dilute our existing stockholders. We have a $1.5 million credit facility with Silicon Valley Bank, which expires in March of 2015. While we expect the funds available from the credit facility and the proceeds of this offering will satisfy our financing needs for the foreseeable future, it is possible that we may require additional financing in the future, which could be sought from a number of sources, including, but not limited to, additional sales of equity or debt securities or loans from banks or other financial institutions. There can be no certainty that any such financing will be available to us or, if available, on terms favorable to us. If additional funds are raised by the future issuance of our equity securities, such as through the issuance of stock, convertible securities, or the issuance and exercise of warrants, then the ownership interests of our existing stockholders will be diluted. If we raise additional funds by issuing debt or other instruments, we may become subject to certain operational limitations, and such securities may have rights senior to those of our common stock. If adequate funds are not available on acceptable terms, we may be unable to fund our operations or the expansion of our business. Our failure to obtain any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our business strategy and on our financial performance and stock price, and could require us to delay or abandon our growth strategy. We do not have long-term contracts with our customers who provide us with recurring revenue, and our success will depend on our ability to maintain a high level of customer satisfaction and a strong reputation in the global multilingual content delivery industry. Our contracts with our customers who provide us with recurring revenue typically allow the customer to cancel the contract for any reason with 30 days prior notice to us. Because our customers do not make long-term commitments to use our solutions, our ability to retain, receive recurring revenue from and expand our relationship with our customers depends significantly on our ability to consistently and repeatedly meet or exceed the expectations of these customers. In addition, if our reputation in the global multilingual content delivery industry is harmed or diminished for any reason, this may cause our recurring revenue customers to terminate their relationships with us on short notice and seek alternative globalization and translation solutions. If a significant number of recurring revenue customers terminate their relationships with us, our business, results of operations and financial condition would be adversely affected in a short period of time. Such an occurrence could result in a precipitous decline in the value of our stock. We rely on a limited number of customers, and the loss of or reduction in revenue from a major customer could negatively affect our business, financial condition and operations. We derive a significant portion of our revenues from a limited number of large customers. In the first six months of 2014 and the 2013 fiscal year, respectively, we had one customer that accounted for 14% and 16% of our revenue. In 2012, two customers accounted for 18% and 11% of revenue, respectively. On a combined basis, 50% of our revenue in 2013 and 57% of our revenue in 2012 came from our ten largest customers. Because we do not have long-term contracts with our customers, we may not be able to retain these major customers. The loss of any major customer or a significant reduction in a large customer s use of our language translation solutions could materially reduce our revenue and cash flow and adversely affect our business, financial condition and operations. Continued global economic weakness and uncertainty could adversely affect our revenue, lengthen our sales cycle and make it difficult for us to forecast operating results accurately. Our revenues depend significantly on general economic conditions and the health of companies that sell products internationally. Economic weakness and constrained globalization spending may result in slower growth or reductions in our revenue in 2014. We have experienced, and may experience in the future, reduced TABLE OF CONTENTS spending in our business due to the current financial conditions affecting the U.S. and global economy and other macroeconomic factors affecting spending behavior. Uncertainty about future economic conditions makes it difficult for us to forecast operating results and to make decisions about future investments. In addition, economic conditions or uncertainty may cause current and potential customers to reduce or delay globalization expenditures, including purchases of our solutions. Our sales cycle may lengthen if purchasing decisions are delayed as a result of uncertain information technology or contracted development budgets or if contract negotiations become more protracted or difficult as customers institute additional internal approvals for globalization and information technology purchases. Delays or reductions in globalization and information technology spending could have a material adverse effect on demand for our services, and consequently on our business, financial condition and results of operations. If we are unable to attract new customers or sell additional solutions, or if our customers do not increase their use of our solutions, our revenue growth and profitability will be adversely affected. Due to our relatively limited customer base and our lack of long-term contracts with our customers, we must regularly add new customers and our customers must increase their use of our solutions they currently utilize in order to be able to increase our revenues and maintain profitability. We intend to grow our business by, among other things, hiring additional inside sales personnel and increasing our marketing activities. If we are unable to hire or retain quality sales personnel, convert customer prospects into paying customers, or ensure the effectiveness of our marketing programs, or if our existing or new customers do not perceive our solutions to be of sufficiently high value and quality, we might not be able to increase revenues, and our operating results will be adversely affected. In addition, if we fail to sell our new solutions to existing or new customers, we will not generate anticipated revenues from these solutions, our operating results will suffer and we might be unable to grow our revenues or achieve or maintain profitability. Our strategy includes pursuing acquisitions, and our potential inability to successfully integrate newly-acquired companies, businesses or technologies may adversely affect our financial results. We believe part of our growth will be driven by acquisitions of other companies or their businesses or technologies. However, growth through acquisitions will be dependent upon our ability to identify high quality acquisition targets that we can acquire at prices that we determine are acceptable and for which we have sufficient capital. Moreover, when we do identify suitable targets, we will not always be able to successfully negotiate final acquisition terms and complete the acquisition of such targets. As a result, we have in the past and may in the future expend funds and resources on the pursuit of acquisitions that are not ultimately completed. If we complete acquisitions, we will face many risks commonly encountered with growth through acquisitions, including: incurring significantly higher than anticipated capital expenditures and operating expenses; failing to assimilate the operations and personnel of the acquired company or business; loss of customers that were obtained in the acquisition; disrupting our ongoing business; dissipating our management resources; failing to maintain uniform standards, controls and policies; and impairing relationships with employees and customers as a result of changes in management. Fully integrating other acquired companies, business or technology into our operations may take a significant amount of time. We cannot assure you that we will be successful in overcoming these risks or any other problems encountered with acquisitions. To the extent we do not successfully avoid or overcome the risks or problems related to any acquisitions, our results of operations and financial condition could be adversely affected. Future acquisitions also could impact our financial position and capital needs, and could cause substantial fluctuations in our quarterly and yearly results of operations. In addition, future acquisitions could include significant goodwill and intangible assets, which may result in future amortization or impairment charges that would reduce our stated earnings. TABLE OF CONTENTS Our inability to adapt to rapid technological change could impair our ability to remain competitive. The global multilingual content delivery industry in which we compete could in the future be altered by rapid technological change, introductions of new products and evolving industry standards. Our ability to attract new customers and increase revenues from customers will depend in significant part on our ability to anticipate industry standards and to continue to enhance existing solutions or introduce or acquire new solutions on a timely basis to keep pace with technological developments. The success of any enhancement or new solution depends on several factors, including the timely completion, introduction and market acceptance of any enhancement to our solution. Any new solution we develop or acquire might not be introduced in a timely or cost-effective manner and might not achieve the broad market acceptance necessary to generate significant revenues. If any of our competitors implement new technologies before we are able to implement them, those competitors may be able to provide more effective solutions than ours at lower prices. Any delay or failure in the introduction of new or enhanced solutions could adversely affect our business, results of operations and financial condition. If our solutions are not accepted by the market, our business will not grow and we will not be profitable. Our market is intensely competitive, and we expect competition to increase in the future from established competitors, consolidations and new market entrants. Competitors solutions may in the future perform better or faster, offer better features, or be offered at lower prices than our solutions, including Transplicity, our translation management system, or embody new technologies, which could render our existing solutions obsolete or less attractive to customers. In addition, our competitors have existing relationships with many of the companies that are in our target market. These existing relationships will make it difficult for us to convince such prospective customers to choose our solutions, even if our solutions are competitive with or superior to those of our competitors. In addition, our proposed technology solution approaches translation from a subscription software model, rather than a services model, which is a model that potential customers have not been receptive to in the past and may not be receptive to in the future. If our solutions do not gain broad market acceptance and maintain that acceptance, our business, results of operations and financial condition will be adversely affected. Our business may be harmed by defects or errors in the services we provide to customers. Many of the services we provide are critical to the business operations of our customers. While we maintain general liability insurance, including coverage for errors and omissions, defects or errors in the services we provide could interrupt our customers abilities to provide products and services to their customers, resulting in delayed or lost revenue. This could damage our reputation through negative publicity, make it difficult to attract new and retain existing customers, and cause customers to terminate our contracts and seek damages. We may incur additional costs to correct errors or defects. There can be no assurance that our general liability and errors and omissions insurance coverage will be available in amounts sufficient to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claims. An interruption or failure of our information technology and communications systems could impair our ability to effectively provide our services, which could damage our reputation and business. The provision of our services depends on the continuing operation of our information technology and communications systems. Any damage to or failure of our systems could result in interruptions in our services. Interruptions in our services could reduce our revenues and profits, and the Sajan brand could be damaged if people believe our system is unreliable. Our systems are vulnerable to damage or interruption from terrorist attacks, floods, tornados, fires, power loss, telecommunications failures, and computer viruses or attempts to harm our systems. Our data centers may be subject to break-ins, sabotage and intentional acts of vandalism, and to other potential disruptions. Some of our systems may not be fully redundant, and our disaster recovery planning may not be able to account for all eventualities. The occurrence of a natural disaster, a decision to close a facility we are using without adequate notice for financial reasons, or other unanticipated problems at our data centers could result in lengthy interruptions in our services. Any unscheduled interruption in our service will put a burden on the entire organization and would result in an immediate loss of revenue. If we experience frequent or persistent system failures on our web site, our reputation and the Sajan brand could be permanently harmed, which would make it difficult for us to retain existing customers and attract new TABLE OF CONTENTS customers. The steps required to increase the reliability and redundancy of our systems are expensive, will reduce our operating margins, and may not be successful in reducing the frequency or duration of unscheduled downtime. The intellectual property of our customers may be damaged, misappropriated, stolen, or lost while in our possession, subjecting us to litigation and other adverse consequences. In the course of providing globalization and language translation services to our customers, we take possession of or are granted access to certain intellectual property of our customers. If such intellectual property is damaged, misappropriated, stolen, or lost, we could suffer, among other consequences: claims under indemnification provisions in customer agreements or other liability for damages; delayed or lost revenue due to adverse customer reaction; negative publicity; and litigation that could be costly and time consuming. Any adverse impact attributable to any of the foregoing factors would have a material adverse effect on our business and revenues. We rely on third parties for key aspects of the process of providing services to our customers, and any failure or interruption in the services provided by these third parties could harm our ability to operate our business and damage our reputation. We rely on third-party vendors, including data center and bandwidth providers, and we also rely on third parties for key aspects of the process of providing language translation services to our customers. Our revenues and margins are subject to our ability to continue to maintain satisfactory relationships with single language vendors, or SLVs, who provide us with translation services and who are in high demand worldwide for specific languages. Any disruption in the network access or co-location services provided by these third-party providers or any failure of these third-party providers and SLVs to handle current or higher volumes of use could significantly harm our business. Any financial or other difficulties the providers face may have negative effects on our business, the nature and extent of which cannot be predicted. We exercise little control over these third party vendors, which increases our vulnerability to problems with the services they provide. We also license technology and related databases from third parties to facilitate aspects of our translation processes and our data center and connectivity operations including, among others, Internet traffic management and search services. Any errors, failures, interruptions or delays experienced in connection with these third-party technologies and information services could negatively impact our relationships with customers and adversely affect the Sajan brand, and could expose us to liabilities to third parties. In addition, many of our third party translators are located outside of the United States, and our contracts with them may require payments in their local currencies. As a result, the cost of services may increase based on changes in foreign currency exchange rates. Evolving regulation of the Internet may increase our expenditures related to compliance efforts, which may adversely affect our financial condition. As Internet commerce continues to evolve, increasing regulation by federal, state or foreign agencies becomes more likely. We are particularly sensitive to these risks because the Internet is a critical component of our on-demand business model. In addition, taxation of services provided over the Internet or other charges imposed by government agencies or by private organizations for accessing the Internet may be imposed. Any regulation imposing greater fees for Internet use or restricting information exchange over the Internet could result in a decline in the use of the Internet and the viability of Internet-based services, which could harm our business. We depend on intellectual property rights to protect proprietary technologies, although we may not be able to successfully protect these rights. We rely on our proprietary technology to enhance our software and service offerings. We use a combination of patent, trademark, trade secret and copyright law in addition to contractual restrictions to TABLE OF CONTENTS protect our technology. Although we have received a patent from the U.S. Patent and Trademark Office covering certain aspects of our technology, there can be no assurance that this patent will adequately protect our technology or provide us with a competitive advantage. We may apply for patent protection on our future technology developments to the extent we believe such protection is available and economically warranted. However, there is no assurance that we will file additional applications for patent protection in the United States or in other countries, that any application that we may file will result in an issued patent, or that any issued patent will provide us with a competitive advantage. We have not filed any applications for patent protection in any country other than the United States. As a result, we do not have the right to enforce our rights under any United States patent, if issued, in any foreign country, or to prevent others in foreign countries from utilizing the proprietary technology covered by our patents. As our business expands outside of the United States, our intellectual property rights may not be sufficient to adequately protect our intellectual property abroad. Despite our efforts, there can be no assurance that others will not independently develop technology that is similar to our technology or offer or sell products or services in foreign countries that utilize our technology. The development by others of technology that is similar to our technology, or the sale of products or services in foreign countries that incorporate our technology, would harm our competitive position and have a material adverse effect on our business, results of operations and financial condition. We may be involved in disputes from time to time relating to our intellectual property and the intellectual property of third parties. We may become parties to disputes from time to time over rights and obligations concerning intellectual property, and we may not prevail in these disputes. Third parties may raise claims against us alleging infringement or violation of the intellectual property of that third party. Even if we prevail in such disputes, the costs we incur in defending such dispute may be material and costly. Some third party intellectual property rights may be extremely broad, and it may not be possible for us to conduct our operations in such a way as to avoid violating those intellectual property rights. Any such intellectual property claim could subject us to costly litigation and impose a significant strain on our financial resources and management personnel regardless of whether such claim has merit. Our liability insurance, if any, may not cover potential claims of this type adequately or at all, and we may be required to alter products or pay monetary damages or license fees to third parties, which could have a material adverse effect on our financial condition and results of operations. The markets in which we operate are highly competitive, and our failure to compete successfully would make it difficult for us to add and retain customers and would reduce or impede the growth of our business. The markets for global multilingual content delivery software and services are increasingly competitive and global. We expect competition to increase in the future both from existing competitors and new companies that may enter our markets. In addition to our existing competitors, we may face competition in the future from companies that do not currently offer globalization or translation services. We may also face competition from internal globalization departments of Fortune 1000 and large emerging companies. Technology companies, information technology services companies, business process outsourcing companies, web consulting firms, technical support call centers, hosting companies and content management providers may choose to broaden their range of services to include globalization or language translation as they expand their operations internationally. Increased competition could result in pricing pressure, reduced sales, lower margins or the failure of our solutions to achieve or maintain broad market acceptance. New or established competitors may offer solutions that are superior to or lower in price than ours. We may not have sufficient resources to continue the investments in all areas of software development and marketing needed to maintain our competitive position. In addition, some of our competitors are better capitalized than us, which may provide them with an advantage in developing, marketing or servicing new solutions. Increased competition could reduce our market share, revenues and operating margins, increase our costs of operations and otherwise adversely affect our business. TABLE OF CONTENTS If we fail to retain our Chief Executive Officer and other key personnel, our business would be harmed and we might not be able to implement our business plan successfully. Given the complex nature of the technology on which our business is based and the speed with which such technology advances, our future success is dependent, in large part, upon our ability to attract and retain highly qualified managerial, technical and sales personnel. In particular, Shannon Zimmerman, our President and Chief Executive Officer, is critical to the management of our business and operations. Competition for talented personnel is intense, and we cannot be certain that we can retain our managerial, technical and sales personnel or that we can attract, assimilate or retain such personnel in the future. Our inability to attract and retain such personnel could have an adverse effect on our business, results of operations and financial condition. Our continued growth could strain our personnel resources and infrastructure, and if we are unable to implement appropriate controls and procedures to manage our growth, we will not be able to implement our business plan successfully. We grew our revenues by 17% in 2013, and by 15% in the first six months of 2014 compared to the same period in 2013. To the extent that we are able to sustain such growth, it will place a significant strain on our management, administrative, operational and financial infrastructure. Our success will depend in part upon the ability of our senior management to manage this growth effectively. To do so, we must continue to hire, train and manage new employees as needed. If our new hires perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees, or if we are not successful in retaining our existing employees, our business would be harmed. To manage the expected growth of our operations and personnel, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. The additional headcount we are adding will increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by reducing expenses in the short term. If we fail to successfully manage our growth, we will be unable to execute our business plan. Because our long-term success depends, in part, on our ability to expand the sales of our solutions to customers located outside of the United States, our business will be susceptible to risks associated with international operations. We have limited experience operating in foreign jurisdictions. In 2009, we opened Sajan Software in Dublin, Ireland, in 2010 we opened Sajan Spain, in 2011 we opened Sajan Singapore and in 2013 we opened Sajan Brazil. Our inexperience in operating our business outside of North America increases the risk that our current and any future international expansion efforts will not be successful. Conducting international operations subjects us to risks that, generally, we have not faced in the United States, including: fluctuations in currency exchange rates; unexpected changes in foreign regulatory requirements; longer accounts receivable payment cycles and difficulties in collecting accounts receivable; difficulties in managing and staffing international operations; potentially adverse tax consequences, including the complexities of foreign value-added tax systems and restrictions on the repatriation of earnings; the burdens of complying with a wide variety of foreign laws and different legal standards, including laws and regulations related to privacy; increased financial accounting and reporting burdens and complexities; political, social and economic instability abroad, and terrorist attacks and security concerns in general; and reduced or varied protection for intellectual property rights in some countries. The occurrence of any one of these risks could negatively affect our international business and, consequently, our results of operations generally. Additionally, operating in international markets also requires TABLE OF CONTENTS significant management attention and financial resources. We cannot be certain that the investment and additional resources required in establishing, acquiring, operating or integrating operations in other countries will produce desired levels of revenues or profitability. Compliance with public company regulatory requirements, including those relating to our internal control over financial reporting, have and will likely continue to result in significant expenses and if we are unable to maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected. As a public reporting company, we are subject to the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, as well as to the information and reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and other federal securities laws. As a result, we incur significant legal, accounting, and other expenses, including costs associated with our public company reporting requirements and corporate governance requirements. As an example of public reporting company requirements, we evaluate the effectiveness of disclosure controls and procedures and of our internal control over financing reporting in order to allow management to report on such controls. In addition, any updates to our finance and accounting systems, procedures and controls, which may be required as a result of our ongoing analysis of internal controls, or results of testing by our independent auditor, may require significant time and expense. As a company with limited accounting resources, a significant amount of management s time and attention has been and will continue to be diverted from our business to ensure compliance with these regulatory requirements. This diversion of management s time and attention may have a material adverse effect on our business, financial condition and results of operations. Management works to continuously monitor and improve its internal controls over financial reporting. Although we have never had a significant deficiency or material weakness, in the event significant deficiencies or material weaknesses are identified in our internal control over financial reporting that we cannot remediate in a timely manner, investors and others may lose confidence in the reliability of our financial statements and the trading price of our common stock and ability to obtain any necessary equity or debt financing could suffer. This would likely have an adverse effect on the trading price of our common stock and our ability to secure any necessary additional equity or debt financing, and could result in the delisting of our common stock from the Nasdaq Capital Market, which would severely limit the liquidity of our common stock. Risks Related to Ownership of Our Common Stock An active trading market in our common stock may not develop or be adequately maintained, and our common stock may be subject to volatile price and volume fluctuations. An active trading market in our common stock may not develop or be adequately maintained. Shares of our common stock are currently quoted on the OTCQB Marketplace, and, while we have applied for listing on the Nasdaq Capital Market, our application may not be accepted and our shares may never be listed on any stock exchange, which may limit your ability to sell your shares of our common stock. The overall market for securities in recent years has experienced extreme price and volume fluctuations that have particularly affected the market prices of many smaller companies. These fluctuations have been extremely volatile and are often unrelated or disproportionate to operating performance. Consequently, you may not be able to sell our common stock at prices equal to or greater than the price you paid for your shares. In addition to the factors discussed elsewhere in this section, many factors, most of which are outside of our control, could cause the market price of our common stock to decrease significantly, including: variations in our quarterly operating results; decreases in market valuations of similar companies; the failure of securities analysts to cover our common stock or changes in financial estimates by analysts who cover us, our competitors or our industry; and fluctuations in stock market prices and volumes. These broad market fluctuations could result in extreme fluctuations in the price of our common stock, which could cause a decline in the value of our common stock. TABLE OF CONTENTS We may be unable to cause our securities to be listed on the Nasdaq Capital Market, which could limit investors ability to make transactions in our securities and subject stockholders to additional trading restrictions. We intend to continue to be listed on the OTCQB Marketplace until such time we satisfy the relevant listing requirements to have our common stock listed on the Nasdaq Capital Market. However, there can be no assurance we will ever be able to meet the Nasdaq Capital Market initial listing requirements or that, once our common stock is listed on the Nasdaq Capital Market, that we will meet the continued listing requirements. If we do not meet such requirements, our securities may continue to be listed on the OTCQB Marketplace indefinitely or may be relisted on the OTCQB Marketplace after listing on the Nasdaq Capital Market. If we are unable to cause our securities to be listed on the Nasdaq Capital Market or maintain such listing, we and our stockholders could face significant material adverse consequences, including: a limited availability of market quotations for our securities; a determination that our common stock is a penny stock, which will require brokers trading in our common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our common stock; a limited amount of news and analyst coverage; and a decreased ability to issue additional securities or obtain additional financing in the future. Our quarterly results of operations may fluctuate in the future, which could result in volatility in our stock price. Our quarterly revenues and results of operations have varied in the past and may fluctuate as a result of a variety of factors. If our quarterly revenues or results of operations fluctuate, the price of our common stock could decline substantially. Fluctuations in our results of operations may be due to a number of factors, including, but not limited to, those listed below and identified throughout this Risk Factors section: our ability to retain and increase sales to current customers and attract new customers, including our ability to maintain and increase our number of recurring revenue customers; the timing and success of introductions of new solutions or upgrades by us or our competitors; the strength of the economy, in particular as it affects globalization activity; changes in our pricing policies or those of our competitors; changes in the payment terms for our products and services; the need for, and availability of, additional financing to support operations; competition, including entry into the industry by new competitors and new offerings by existing competitors; the amount and timing of expenditures related to operating as a public company, expanding our operations, research and development, acquisitions, or introducing new solutions; and changes in our mix of business and languages. Due to these and other factors, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance. TABLE OF CONTENTS Current members of our management own a significant percentage of the outstanding shares of our common stock, which could limit other stockholders influence on corporate matters. Shannon Zimmerman and Angela Zimmerman, who are directors and executive officers, collectively own approximately 32% of the outstanding shares of our common stock and will collectively own approximately 27% of the outstanding shares of our common stock following completion of this offering, without the exercise of the underwriter s over-allotment option. Accordingly, these individuals are able to, and will continue to be able to, exert substantial influence over our affairs, including the election and removal of directors and all other matters requiring stockholder approval, including the future merger, consolidation or sale of our Company. This concentrated control could discourage others from initiating any potential merger, takeover, or other change-of-control transactions that may otherwise be beneficial to our stockholders. Furthermore, this concentrated control will limit the practical effect of our stockholders participation in our corporate matters, through stockholder votes and otherwise. As a result, the return on your investment in our common stock through the sale of your shares could be adversely affected. Provisions in our charter documents and Delaware law may inhibit a takeover, which could limit the price potential investors might be willing to pay in the future for our common stock and could entrench management. Our certificate of incorporation and bylaws contain provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in our best interests. Our board of directors has the ability to designate the terms of and issue new series of preferred stock which could be issued to create different or greater voting rights which may affect an acquirer s ability to gain control of our Company. As a Delaware corporation, we are subject to anti-takeover provisions under Delaware law, which could delay or prevent a change of control. Together, these provisions may make it more difficult to remove management and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our shares. Our certificate of incorporation grants our board of directors the power to designate and issue additional shares of common and preferred stock. Pursuant to authority granted by our certificate of incorporation, our board of directors, without any action by our stockholders, may designate and issue shares in such classes or series (including classes or series of preferred stock) as it deems appropriate, and establish the rights, preferences, and privileges of such shares, including dividends, liquidation, and voting rights. The rights of holders of other classes or series of preferred stock that may be issued could be superior to the rights of our common stock. The designation and issuance of shares of capital stock having preferential rights could adversely affect other rights appurtenant to the shares of our common stock. Any issuances of additional capital stock (common or preferred) will dilute the percentage of ownership interest of our stockholders. Our certificate of incorporation and bylaws limit directors liability to stockholders. As permitted by Delaware law, our certificate of incorporation and bylaws provide that each director shall have no personal liability for monetary damages for any breach of fiduciary duties to us, subject to certain exceptions. These provisions may reduce the likelihood of derivative litigation against directors and may discourage stockholders from bringing a lawsuit against directors for any breach of our fiduciary duties. We do not intend to pay dividends on our common stock for the foreseeable future. We currently intend to retain all future earnings for the operation and expansion of our business and, therefore, do not anticipate declaring or paying cash dividends on our common stock in the foreseeable future. Any payment of cash dividends on our common stock will be at the discretion of our board of directors and will depend upon our results of operations, earnings, capital requirements, financial condition, future prospects, contractual restrictions and other factors deemed relevant by our board of directors. Therefore, you should not expect to receive dividend income from shares of our common stock. TABLE OF CONTENTS Risks Associated with Our Reverse Stock Split There are risks associated with the 1-for-4 Reverse Stock Split that we effected on June 16, 2014. On June 16, we effected a 1-for-4 Reverse Stock Split. As a result of the Reverse Stock Split we will be subject to certain risks, including the following: We have additional authorized shares of common stock, with each share reflecting a greater ownership interest of the company, that the Board could issue in the future without stockholder approval, and such additional shares could be issued, among other purposes, in financing transactions or to resist or frustrate a third-party transaction that is favored by a majority of the independent stockholders. This could have an anti-takeover effect, in that additional shares could be issued, within the limits imposed by applicable law, in one or more transactions that could make a change in control or takeover of us more difficult. There can be no assurance that the Reverse Stock Split will achieve the benefits that we hope it will achieve, namely increasing the market price of our common stock in order to comply with the minimum bid price requirements of stock exchange listing rules. The total market capitalization of our common stock and the Company in the period after the Reverse Stock Split may be lower than the total market capitalization before the Reverse Stock Split. We cannot assure you that we will be able to continue to comply with the minimum bid price requirement of the Nasdaq Capital Market. The Reverse Stock Split was intended, among other reasons, to allow us to achieve the requisite increase in the market price of our common stock to be in compliance with the minimum bid price of the Nasdaq Capital Market. Although our stock price as of August 25, 2014 meets such minimum bid price requirements, there is no guarantee that the price of our common stock will stay above the minimum requirements for the time period required by the Nasdaq Capital Market. Further, there can be no assurance that the market price of our common stock will remain at the level required for continuing compliance with the minimum price requirements. It is not uncommon for the market price of a company s common stock to decline in the period following a reverse stock split. If the market price of our common stock declines, the percentage decline may be greater than would have occurred in the absence of the Reverse Stock Split. If the market price of our common were to experience such a decline, or if other factors unrelated to the number of shares of our common stock outstanding, such as negative financial or operational results, adversely affect the market price of our common stock, that may jeopardize our ability to meet or maintain the minimum bid price requirement of whichever exchange on which our common stock is listed. Even if the market price of our common stock continues to meet the minimum bid price requirements, there can be no assurance that we will be able to comply with other continued listing standards of the Nasdaq Capital Market. Even if the market price of our common stock continues at a level that allows us to comply with the minimum bid price requirement, we cannot assure you that we will be able to comply with the other standards that we are required to meet in order to maintain a listing of our common stock on the Nasdaq Capital Market. Our failure to meet these requirements may result in our common stock being delisted from such exchange, irrespective of our compliance with the applicable minimum bid price requirement. In addition to specific listing and maintenance standards, the Nasdaq Capital Market has broad discretionary authority over the initial and continued listing of securities, which such exchange could exercise with respect to the listing of our common stock. The liquidity of the shares of our common stock may be decreased as a result of the Reverse Stock Split. The liquidity of the shares of our common stock may be affected adversely by the Reverse Stock Split given the reduced number of shares that are now outstanding, especially if the market price of our common stock does not increase as a result of the Reverse Stock Split. In addition, the Reverse Stock Split may increase the number of stockholders who own odd lots (less than 100 shares) of our common stock, creating the potential for such stockholders to experience an increase in the cost of selling their shares and greater difficulty effecting such sales. TABLE OF CONTENTS Although we believe that a higher market price of our common stock may help generate greater or broader investor interest, there can be no assurance that our increased share price following the Reverse Stock Split will actually attract new investors, including institutional investors. In addition, there can be no assurance that the market price of our common stock will satisfy the investing requirements of those investors. As a result, the trading liquidity of our common stock may not necessarily improve. TABLE OF CONTENTS

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+RISK FACTORS The securities offered herein are highly speculative and should only be purchased by persons who can afford to lose their entire investment in us. You should carefully consider the following risk factors and other information in this Prospectus before deciding to become a holder of our common stock. If any of the following risks actually occur, our business and financial results could be negatively affected to a significant extent. The below risk factors include a discussion of all material risks which we believe are applicable to the Company, its operations and its securities. We Will Need To Obtain Additional Financing To Continue To Execute On Our Business Plan and Repay Outstanding Liabilities. The availability of financing sources depends, in part, on factors outside of our control, including the availability of bank liquidity in general. The current disruptions in the capital markets have caused banks and other credit providers to restrict availability of new credit facilities and require more collateral and higher pricing upon renewal of existing credit facilities, if such facilities are renewed at all. Accordingly, in order to obtain new financing to refinance our currently outstanding credit and debt facility or to obtain additional credit facilities, we may be required to provide more collateral in the form of finance receivables or cash to support borrowing levels which will affect our financial position, liquidity, and results of operations. In addition, higher pricing would increase our cost of funds and adversely affect our profitability. We do not currently have any commitments of additional capital from third parties or from our sole officer and director or majority shareholders. As such, additional financing may not be available on favorable terms, if at all. If we choose to raise additional capital through the sale of debt or equity securities, such sales may cause substantial dilution to our existing shareholders. If we are not able to extend our credit and debt facilities, obtain new credit facilities or to raise the capital necessary to repay the facilities and our outstanding notes payable, we may be forced to abandon or curtail our business plan, which may cause any investment in the Company to become worthless. If we are unable to continue our operations and/or repay our outstanding liabilities, we may be forced to file for bankruptcy protection, may be forced to cease our filings with the Securities and Exchange Commission, and the value of our securities may decline in value or become worthless. Our Working Capital Will Be Limited As A Result Of The Terms And Conditions Of The Amended Note And We May Not Have Enough Funds To Repay Such Amended Note. In addition to the monthly interest due on the Amended and Restated Secured Term Loan Note (the Amended Note ) (the terms of which is described below under Description of Business Corporate History MNH Loan Agreement ), and our requirement to immediately repay any amount of the Amended Note which exceeds the borrowing base, described below under Description of Business Corporate History MNH Loan Agreement , the principal amount of the Amended Note is payable in eighteen (18) consecutive monthly installments of principal in the amount of $258,333, commencing on May 12, 2014, with a balloon payment equal to the remaining amount of the note due on November 19, 2015. We may not have sufficient available cash on hand to pay the required principal payments and may not be able to repay or refinance the Amended Note when it comes due. Additionally, in connection with the Amended and Restated Loan and Security Agreement (the Loan Agreement ) and the transactions contemplated therein, we agreed to pay MNH Management LLC ( MNH ) a collateral monitoring fee of 1/12th of one percent of the balance of the Amended Note per month during the term of the note, as well as certain other expenses described in greater detail in the Amended Note. Finally, we are required to pay any funds received upon the sale of any motor vehicles to MNH as a prepayment of the Amended Note. As a result of the above, the cash we have available for working capital will be severely limited, we may be forced to borrow additional funding in the future, which may not be available on favorable terms, if at all, and our revenues, results of operations and ability to acquire new leases may be limited in the future. We do not currently have any commitments of additional capital from third parties or from our sole officer and director or majority shareholders. As such, additional financing may not be available on favorable terms, if at all. If we choose to raise additional capital through the sale of debt or equity securities, such sales may cause substantial dilution to our existing shareholders and/or trigger the anti-dilution protection of the warrants granted to MNH (described in greater detail below in the risk factor entitled The Outstanding Warrants Held By MNH And Its Assignee Include Certain Covenants And Requirements, Including A Put Right, Which May Have An Adverse Effect On Our Liquidity And Ability To Raise Funds In The Future. Additionally, We May Not Have Adequate Funds To Pay Amounts Due In Connection With The Put Right, If Exercised. ). If we are not able to obtain additional funding to repay the Amended Loan and our other outstanding notes payable and debt facilities, we may be forced to abandon or curtail our business plan, which may cause any investment in the Company to become worthless. If we are unable to continue our operations and/or repay our outstanding liabilities, we may be forced to file for bankruptcy protection, may be forced to cease our filings with the Securities and Exchange Commission, and the value of our securities may decline in value or become worthless. Our Moody Credit Facility Requires Us To Observe Certain Covenants, And Our Failure To Satisfy Such Covenants Could Result In An Event of Default. Effective August 3, 2009, the Company entered into a secured $10,000,000 revolving credit agreement (the Revolver ) with Moody National Bank ( Moody and Moody Bank ). Our Moody facility requires the Company to comply with certain affirmative and negative covenants customary for restricted indebtedness, including covenants requiring that: we make timely payments of principal and interest; maintain certain financial ratios; that Jerry Parish, our Chief Executive Officer and sole director maintains at least 50% of the ownership of the Company, and that Jerry Parish continues to serve as the Chief Executive Officer of the Company. At September 30, 2014, the outstanding balance on the Revolver was $244,593 . Additionally, at September 30, 2014, we were in compliance with the covenants required by the Revolver. Subject to notice and cure period requirements where they are provided for, any unwaived and uncured breach of the covenants applicable to our credit facilities could result in acceleration of the amounts owed and the cross-default and acceleration of indebtedness owing to other lenders, which default may cause the value of our securities to decline in value or become worthless. The Outstanding Warrants Held By MNH And Its Assignee Include Certain Covenants And Requirements, Including A Put Right, Which May Have An Adverse Effect On Our Liquidity And Ability To Raise Funds In The Future. Additionally, We May Not Have Adequate Funds To Pay Amounts Due In Connection With The Put Right, If Exercised. The outstanding warrants to purchase 19.9 million shares of our common stock at an exercise price of $0.05 per share which are held by MNH and its assignee (the Warrants ) contain various restrictive covenants and other requirements. For example, the exercise price of the Warrants is subject to anti-dilution protection in the event the Company issues or is deemed to issue any shares for a price per share of less than the then applicable exercise price of the Warrants, subject to certain limited exceptions including securities (i) issued in a bona fide public offering pursuant to a firm commitment underwriting, (ii) issued in connection with an acquisition of a business or technology, including the financing thereof, that is approved by the Company s Board of Directors (currently only Mr. Parish as sole director of the Company), (iii) issued pursuant to a transaction with a vendor, including equipment lease providers, if such transaction is approved by the Company s Board of Directors; (iv) issued upon exercise of the Company s convertible securities that are outstanding as of the grant date of the Warrants (other than the Series B Preferred Stock), or (v) granted to the Company s officers, directors, consultants (in a manner consistent with past practice) and employees as approved by the Company s Board of Directors under a plan or plans adopted by the Company s Board of Directors that are in effect as of the date of the Warrants. Additionally, the shares of common stock issuable upon exercise of the Warrants (the Warrant Shares ) are subject to a put option (the Put ) pursuant to which the Company is required to purchase any or all of the Warrant Shares, at the option of the holder, for a total of $ 1.99 million ($0.10 per Warrant Share), pro-rated for any portion thereof (the Put Price ) at any time and after the earliest of (1) the date of prepayment in full of the Amended Loan; (2) the date of MNH s acceleration of the amount due under the Amended Note upon an event of default, (3) November 19, 2015, or (4) the date that a Fundamental Transaction (as defined in the Warrants) occurs, including a change in control, certain mergers and similar transactions (as described in greater detail in the Warrants). Due to the above covenants and restrictions, we may be unable to raise funds in the future without triggering the anti-dilutive protection of the Warrants. Additionally, we may not have sufficient funds available to pay the Put Price if the holders exercise their Put rights. In the event we do not have available funds to pay the Put Price and cannot raise funds, MNH can declare an event of default and take action to enforce their security interest over our assets. Such inability to pay the Put Price or our inability to issue shares below the applicable exercise price of the Warrants, as well as other restrictions in the Warrants, could have a material adverse effect on our liquidly, results of operations and could force us to curtail or abandon our operations, causing any investment in the Company to become worthless. The Warrants are described in greater detail below under Description of Business Corporate History MNH Loan Agreement . We Are Required to Immediately Repay Any Amounts Borrowed Under the Amended Note Over the Amount of the Borrowing Base. The Amended Note provides that we are required to repay immediately, any amount of the note that exceeds the lesser of (a) the sum of (A) sixty percent (60%) of then-current receivables under eligible leases provided as collateral for the note, plus (B) sixty percent (60%) of the residual value at lease-end of the underlying motor vehicles then leased under eligible leases, plus (C) sixty percent (60%) of the National Automobile Dealers Association (NADA) loan value (the NADA Loan Value ) of all motor vehicles which we own that are not under leases, which we have not leased within 120 days and which MNH has a first priority lien in connection with (not to exceed $850,000)( Eligible Owned Vehicles ); and (b) the sum of (A) seventy percent (70%) of the then-current NADA Loan Value for the underlying motor vehicles on the eligible leases, plus (B) sixty percent (60%) of the NADA Loan Value of Eligible Owned Vehicles (not to exceed $850,000)(collectively, the Borrowing Base ). In the event we are required to repay any amount of the Amended Note at any time because the amount of such note exceeds the Borrowing Base, we may have to borrow additional funds which may not be available on favorable terms, if at all, or we may be forced to liquidate our inventory at a loss. In the event we are unable to pay any amount in excess of the Borrowing Base, MNH can declare a default and enforce their security interest, which could have a material adverse effect on our operations and cause the value of our securities to decline in value. The Amended Note is described in greater detail below under Description of Business Corporate History MNH Loan Agreement . The Repayment of the Amended Note Is Secured By A Security Interest In All Of Our Assets. The repayment of the Amended Note is secured by a security interest in all of our assets, the assignment of all of our outstanding leases, and the securities of The Mint Leasing, Inc. (Texas) and The Mint Leasing South, Inc. (Texas) our wholly-owned subsidiaries. The Amended Note is also personally guaranteed by Jerry Parish, our sole director and Chief Executive Officer. If we default in the repayment of the Amended Note or the Loan Agreement and/or any of the terms and conditions thereof MNH may enforce its security interest over our assets which secure the repayment of such note, and we could be forced to curtail or abandon our current business plans and operations. If that were to happen, the Company s securities could become worthless. The Amended Note is described in greater detail below under Description of Business Corporate History MNH Loan Agreement . The Exercise Of Outstanding Warrants May Cause Significant Dilution To Existing Shareholders. The Company granted MNH and its assignee warrants to purchase up to an aggregate of 20 million shares of the Company s common stock (of which 19.9 million remain outstanding), which have a term of seven years and an exercise price of $0.05 per share as additional consideration for entering into the Loan Agreement and pursuant to a Securities Issuance Agreement. The Warrants include cashless exercise rights. The exercise of the Warrants may cause significant dilution to existing shareholders. The Warrants are described in greater detail below under Description of Business Corporate History MNH Loan Agreement . Our Planned Acquisition Of MotorMax May Not Be Completed Which Could Adversely Affect Our Business And Results Of Operations. As described in greater detail below under Description of Business Corporate History Recent Events MotorMax Letter of Intent , we have entered into a Letter of Intent, pursuant to which, upon execution of a definitive Securities Purchase Agreement, we will have rights to acquire MotorMax for $30 million, which includes $25 million payable in cash, which funds we hope to raise from the sale of securities offered pursuant to this Prospectus, and $5 million payable in stock. The MotorMax Acquisition is subject to among other things, us and MotorMax entering into a definitive Stock Purchase Agreement on mutually agreeable terms, which pursuant to the MotorMax LOI is required to occur prior to January 15, 2015. We plan to issue the $5 million of the purchase price payable in stock as restricted common stock, subject to the shareholders of MotorMax making representations and confirmations in the definitive purchase agreement sufficient for us to rely on an exemption from registration for the issuance of such securities. In the event we are unable to raise sufficient funding for the MotorMax Acquisition, are unable to agree to mutually acceptable terms for such Stock Purchase Agreement, or the MotorMax Acquisition is not completed for any other reason, our anticipated business and results of operations could be adversely affected and there is no guarantee that we could subsequently acquire equally attractive assets or operations. Furthermore, any and all expenses we have incurred in connection with the negotiation of such transaction and the preparation of such Stock Purchase Agreement through such termination date may adversely affect our working capital. Our failure to complete the MotorMax Acquisition on favorable terms could cause the value of our securities to decline in value or become worthless. We Rely Heavily On Jerry Parish, Our Chief Executive Officer and Sole Director, And If He Were To Leave, We Could Face Substantial Costs In Securing A Similarly Qualified Officer and Director. Our success depends in large part upon the personal efforts and abilities of Jerry Parish, our Chief Executive Officer and sole director. Our ability to operate and implement our business plan and operations is heavily dependent on the continued service of Mr. Parish and our ability to attract and retain other qualified senior level employees. We face continued competition for our employees, and may face competition for the services of Mr. Parish in the future. We currently have $1,000,000 of key man insurance on Mr. Parish. We also have an employment agreement in place with Mr. Parish which expires on July 10, 2017. Mr. Parish is our driving force and is responsible for maintaining our relationships and operations. We may not be able to retain Mr. Parish and/or attract and retain qualified employees in the future. The loss of Mr. Parish, and/or our inability to attract and retain qualified employees on an as-needed basis could have a material adverse effect on our business and operations. Mr. Parish, Our Sole Director, May, At His Own Discretion And Without Notice To Shareholders, Increase The Salary That He Pays Himself To The Amount Already Provided For In His Employment Agreement Or Any Other Amount He Determines In His Sole Discretion. On July 18, 2008, the Company assumed a three year employment agreement between The Mint Leasing, Inc., a Texas corporation and Mr. Parish, originally effective as of July 10, 2008, which has since been extended through July 10, 2017. The employment agreement provides for a salary $675,000 per annum and a bonus payable quarterly equal to 2% of the Company s modified EBITDA (as defined in the employment agreement), as well as a discretionary bonus payable at the option of the Company s Board of Directors (currently consisting solely of Mr. Parish). During 2013, 2012, 2011 and 2010, Mr. Parish received cash compensation of $315,000, $315,000, $315,000 and $379,995, respectively. Mr. Parish has agreed to forgo any additional cash compensation he would be entitled to under his employment agreement for 2010, 2011, 2012 and 2013. However, Mr. Parish can require the Company to pay him the full amount due under the employment agreement (i.e., $675,000 per year plus a quarterly bonus of 2% of the Company s modified EBITDA ) at any time, at his own discretion, and without notice to the shareholders, subject only to the requirements of the Moody credit facility which requires that his salary remain below $400,000 per year. Additionally, as Mr. Parish is the Company s sole director, he can unilaterally and without shareholder notice or approval, increase the amount he is paid under this employment agreement at any time (for example in September 2014, Mr. Parish, as sole director of the Company, unilaterally approved a decrease in the exercise of certain options previously granted to Mr. Parish from $3.00 per share to $0.10 per share, in consideration for services rendered). In the event that Mr. Parish was to request to be paid the full amount due pursuant to the terms of his employment agreement, or he was to increase the amount he was due pursuant to the terms of the employment agreement, such increased payments would significantly increase the Company s quarterly expenses and could materially adversely affect the Company s results of operations, resulting in a decrease in the value of the Company s common stock. Additionally, a significant increase in Mr. Parish s salary could prohibit the Company from paying its liabilities as they come due, decrease the funds the Company has available for working capital, and force the Company to curtail its operations and business plan. Our Success In Executing On Our Business Plan Is Dependent Upon The Company s Ability To Attract And Retain Qualified Personnel. Our success depends heavily on the continued services of our executive management (i.e., our sole officer and director) and employees. Our employees are the nexus of our operational experience and customer relationships. Our ability to manage business risk and satisfy the expectations of our customers, stockholders and other stakeholders is dependent upon the collective experience of our employees and our sole officer and director. The loss or interruption of services provided by our sole officer and director could adversely affect our results of operations. Additionally, the Company s ability to successfully expand the business in the future will be directly impacted by its ability to hire and retain highly qualified personnel. The Company Has Established Preferred Stock Which Can Be Designated By The Company s Sole Director Without Shareholder Approval And Has Established Series A and Series B Preferred Stock, Which Gives The Holders Majority Voting Power Over The Company. The Company has 20,000,000 shares of preferred stock authorized and 185,000 shares of Series A Convertible Preferred Stock and 2,000,000 shares of Series B Convertible Preferred Stock designated. As of the date of this Prospectus, the Company has no Series A Convertible Preferred Stock shares issued and outstanding and 2,000,000 Series B Convertible Preferred Stock shares issued and outstanding, which shares are held by the Company s Chief Executive Officer and sole director, Jerry Parish. The Company s Series A Convertible Preferred Stock allows the holder to vote 200 votes each on shareholder matters and Series B Convertible Preferred Stock shares allow the holder to vote a number of voting shares equal to the total number of voting shares of the Company s issued and outstanding stock as of any record date for any shareholder vote plus one additional share. As a result, due to Mr. Parish s ownership of the Series B Convertible Preferred Stock shares, he has majority control over the Company. Mr. Parish also beneficially owns approximately 29.7% of the Company s outstanding common stock and 64.6% of the Company s voting stock, and will continue to own approximately 20.3% of the Company s outstanding common stock and 60.0% of the Company s voting stock after the offering (assuming the sale of all shares offered herein). The Series B Convertible Preferred Stock holds a liquidation preference of $0.001 per share ($2,000 in aggregate) which is paid, upon liquidation or winding up of the Company, prior to any distributions of assets of the Company to shareholders of the Company s common stock. Additional shares of preferred stock of the Company may be issued from time to time in one or more series, each of which shall have distinctive designation or title as shall be determined by the Board of Directors of the Company, currently consisting solely of Mr. Parish ( Board of Directors ), prior to the issuance of any shares thereof. The preferred stock shall have such voting powers, full or limited, or no voting powers, and such preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof as adopted by the Board of Directors. Because the Board of Directors is able to designate the powers and preferences of the preferred stock without the vote of a majority of the Company s shareholders, shareholders of the Company will have no control over what designations and preferences the Company s preferred stock will have. As a result of this, the Company s shareholders may have less control over the designations and preferences of the preferred stock and as a result the operations of the Company. Jerry Parish, Our Chief Executive Officer and sole Director, Can Exercise Voting Control Over Corporate Decisions And Will Continue To Be Able To Exercise Voting Control Following This Offering. Jerry Parish beneficially holds voting control over (a) 2,000,000 Series B Convertible Preferred Stock shares, which provide him the ability to vote the total number of outstanding shares of voting stock of the Company plus one vote, and (b) approximately 29.0% of the Company s outstanding common stock; which in aggregate provides him voting control over approximately 64.3% of our total voting securities. Mr. Parish will continue to own approximately 20.0% of the Company s outstanding common stock and 59.8% of the Company s voting stock after the offering (assuming the sale of all shares offered herein). As a result, Mr. Parish will exercise control in determining the outcome of all corporate transactions or other matters, including the election of directors, mergers, consolidations, the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control. The interests of Mr. Parish may differ from the interests of the other stockholders and thus result in corporate decisions that are adverse to other shareholders. Due To The Fact That The Company Leases Its Office and Warehouse Space and Automobile Lot From An Entity Partially Owned By Mr. Parish, The Company s Majority Shareholder, Sole Officer And Sole Director, If Mr. Parish Was To Step Down As An Officer And Director Of The Company, The Company Could Be Forced To Seek Alternative Office, Warehouse and/or Automobile Lot Space. The Company leases an approximately 27,000 square foot facility, which includes 6,000 square feet of office space and certain other adjacent property which it uses an automobile lot from a limited liability corporation that is owned by the Company s sole officer and director, Jerry Parish and Victor Garcia, a significant shareholder, at the rate of $15,000 per month. The lease was renewed for a term of one year on July 31, 2014, 2013 and 2012. The Company also has the right to one additional one year extension. Any extensions under the lease shall be at a monthly rental cost mutually agreeable by the parties. The payment of the rental costs due under the lease is secured by a lien on all of the Company s goods and personal property located within the leased premises. Because of the fact that the entity which leases the property to the Company is partially owned by Mr. Parish, our sole officer and director, it is possible that if Mr. Parish were to resign as an officer and/or director of the Company, he could choose not to renew the lease arrangement and we could be forced to find an alternative location for our operations and automobiles. Such alternative lease location may be a higher monthly cost than our current lease arrangement and as such, our expenses could increase, creating a materially adverse effect on our results of operations and consequently, the value of our securities. Our Quarterly and Annual Results Could Fluctuate Significantly. The Company s quarterly and annual operating results could fluctuate significantly due to a number of factors. These factors include: access to additional capital in the form of debt or equity; the number and range of values of the transactions that might be completed each quarter; fluctuations in the values of and number of our leases; the timing of the recognition of gains and losses on such leases; accounting for outstanding derivative securities; the degree to which we encounter competition in our markets; and other general economic conditions. As a result of these factors, quarterly and annual results are not necessarily indicative of the Company s performance in future quarters and future years. A Prolonged Economic Slowdown Or A Lengthy Or Severe Recession Could Harm Our Operations, Particularly If It Results In A Higher Number Of Customer Defaults. The risks associated with our business are more acute during periods of economic slowdown or recession, such as the one we are currently in, because these periods may be accompanied by loss of jobs as well as an increased rate of delinquencies and defaults on our outstanding leases. These periods may also be accompanied by decreased consumer demand for automobiles and declining values of automobiles, which weakens our collateral coverage with our financing source. Significant increases in the inventory of used automobiles during periods of economic recession may also depress the prices at which repossessed or resale automobiles may be sold or delay the timing of these sales. Additionally, higher gasoline prices, unstable real estate values, reset of adjustable rate mortgages to higher interest rates, increasing unemployment levels, general availability of consumer credit or other factors that impact consumer confidence or disposable income, could increase loss frequency and decrease consumer demand for automobiles as well as weaken collateral values on certain types of automobiles. If the current economic slowdown continues to worsen, our business could experience significant losses and we could be forced to curtail or abandon our business operations. There Are Risks That We Will Not Be Able To Implement Our Business Strategy. Our financial position, liquidity, and results of operations depend on our sole officer and director s ability to execute our business strategy. Key factors involved in the execution of the business strategy include achieving the desired leasing volume, the use of effective credit risk management techniques and strategies, implementation of effective lease servicing and collection practices, and access to significant funding and liquidity sources. Our failure or inability to execute any element of our business strategy could materially adversely affect our financial position, liquidity, and results of operations. A Substantial Part of the Company s Target Consumer Base Includes Customers Which Are Inherently at High Risk for Defaults and Delinquencies. A substantial number of our leases involve at-risk customers, which do not meet traditional dealerships qualifications for leases. Specifically, while the total number of sub-prime leases varies from time to time, we estimate that approximately 6% of our total leases (or between approximately 50-75 leases) are with sub-prime borrowers. While we take steps to reduce the risks associated with such customers, including post-verification of the information in their lease applications and requiring down-payments ranging up to thirty percent of the manufacturer s suggested retail price (MSRP) of the vehicles we lease, our methods for reducing risk may not be effective in the future. In the event that we underestimate the default risk or under-price or under-secure leases we provide, our financial position, liquidity, and results of operations would be adversely affected, possibly to a material degree. The Company believes that the expansion into the fleet leasing segment discussed above will help to reduce this risk over time. The Company May Experience Write-Offs for Losses and Defaults, Which Could Adversely Affect Its Financial Condition And Operating Results. It is common for the Company to recognize losses resulting from the inability of certain customers to pay lease costs and the insufficient realizable value of the collateral securing such leases. Additional losses will occur in the future and may occur at a rate greater than the Company has experienced to date. If these losses were to occur in significant amounts, our financial position, liquidity, and results of operations would be adversely affected, possibly to a material degree. We Incur Significant Costs As A Result Of Operating As A Fully Reporting Company And Our Management Is Required To Devote Substantial Time To Compliance Initiatives. We incur significant legal, accounting and other expenses in connection with our status as a fully reporting public company. Specifically, we are required to prepare and file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission ( SEC ). Additionally, our sole officer and director and significant shareholders are required to file Form 3, 4 and 5 s and Schedule 13d/g s with the SEC disclosing their ownership of the Company and changes in such ownership. Furthermore, the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act ) and rules subsequently implemented by the SEC have imposed various new requirements on public companies, including requiring changes in corporate governance practices. As a result, our management (i.e., our sole officer and director) and other personnel are required to devote a substantial amount of time and resources to the preparation of required filings with the SEC and SEC compliance initiatives. Moreover, these filing obligations, rules and regulations increase our legal and financial compliance costs and quarterly expenses and make some activities more time-consuming and costly than they would be if we were a private company. In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure of controls and procedures. Our testing has previously revealed deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. The costs and expenses of compliance with SEC rules and our filing obligations with the SEC, or our identification of deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, could materially adversely affect our results of operations or cause the market price of our stock to decline in value. We Are Governed Solely By A Single Executive Officer And Director, And, As Such, There May Be Significant Risk To Us From A Corporate Governance Perspective. Mr. Parish, our sole officer and director, makes decisions such as the approval of related party transactions, the compensation of executive officers (provided that Mr. Parish currently serves as our sole officer), and the oversight of the accounting function. Additionally, because we only have one executive officer, there may be limited segregation of executive duties, and thus, there may not be effective disclosure and accounting controls. In addition, Mr. Parish will exercise full control over all matters that require the approval of the Board of Directors, as he currently serves as the sole director of the Company. Accordingly, the inherent controls that arise from the segregation of executive duties and review and/or approval of those duties by the Board of Directors may not prevail. We have not adopted formal policies and procedures for the review, approval or ratification of transactions with our executive officers, directors and significant shareholders (provided that Mr. Parish currently serves as our sole officer and director). As such, the Company s lease agreement with a partnership, which is owned by the Company s two majority shareholders (Mr. Parish and Mr. Garcia), the Company s notes payable to Jerry Parish, Victor Garcia, and a partnership which is owned by Mr. Parish and Mr. Garcia, the Company s employment agreement with Mr. Parish and the amounts previously paid to Mr. Garcia in consideration for consulting services rendered (each as described in greater detail below under Certain Relationships And Related Transactions ), were only approved by Mr. Parish as the Company s sole director, without Mr. Parish undertaking any formal review of those transactions. We have not adopted corporate governance measures such as an audit or other independent committees as we presently do not have any independent directors. Prospective investors should bear in mind our current lack of corporate governance measures in formulating their investment decisions. Due to the Company s lack of formal policies and procedures for the review and approval of transactions with our executive officer, sole director and significant shareholders, Mr. Parish will have the authority in his sole and absolute discretion to approve related party transactions. This authority could lead to perceived or actual conflicts of interest between Mr. Parish and the Company. Additionally, Mr. Parish may approve transactions or the terms of transactions which independent directors may not have approved. Investors should keep in mind that they will have no say in the related party transactions that Mr. Parish approves, that Mr. Parish has the sole authority to approve all related party transactions, and because of the above, Mr. Parish may approve transactions which are adverse to the interests of the shareholders of the Company. Actual or perceived conflicts of interest between Mr. Parish and the Company s other shareholders could cause the value of the Company s common stock to decline in value or trade at levels lower than similarly situated companies that have policies and procedures in place for the review and approval of related party transactions. The KBM Worldwide, Inc. Convertible Note Is Convertible Into Shares Of Our Common Stock At A Discount To Market. The conversion price of the outstanding convertible note held by KBM Worldwide, Inc. in the amount of $158,500 (the Convertible Note , described in greater detail below under Description of Business - Corporate History - Third Party Promissory Notes and Related Party Promissory Notes - KBM Worldwide, Inc. Convertible Note ) is equal to the greater of (a) $0.00005 per share, and (b) 61% multiplied by the average of the three lowest trading prices of the Company s common stock on the ten trading days before any conversion (representing a discount of 39%). As a result, any conversion of the Convertible Note and sale of shares of common stock issuable in connection with the conversion thereof will likely cause the value of our common stock, if any, to decline in value, as described in greater detail under the Risk Factors below. Notwithstanding the above, we plan to repay the Convertible Note in full before any conversions take place. The Issuance And Sale Of Common Stock Upon Conversion Of The Convertible Note May Depress The Market Price Of Our Common Stock. If sequential conversions of the Convertible Note and sales of such converted shares take place, the price of our common stock may decline, and as a result, the holder of the Convertible Note will be entitled to receive an increasing number of shares in connection with its conversions, which shares could then be sold in the market, triggering further price declines and conversions for even larger numbers of shares, to the detriment of our investors. The shares of common stock which the Convertible Note is convertible into may be sold without restriction pursuant to Rule 144. As a result, the sale of these shares may adversely affect the market price, if any, of our common stock. In addition, the common stock issuable upon conversion of the Convertible Note may represent overhang that may also adversely affect the market price of our common stock. Overhang occurs when there is a greater supply of a company s stock in the market than there is demand for that stock. When this happens the price of the company s stock will decrease, and any additional shares which shareholders attempt to sell in the market will only further decrease the share price. The Convertible Note will be convertible into shares of our common stock at a discount to market of 39% of the three lowest trading prices of the Company s common stock on the ten trading days before any conversion, and such discount to market provides the holder with the ability to sell their common stock at or below market and still make a profit. In the event of such overhang, the note holder will have an incentive to sell their common stock as quickly as possible. If the share volume of our common stock cannot absorb the discounted shares, then the value of our common stock will likely decrease. Notwithstanding the above, we plan to repay the Convertible Note in full before any conversions take place. The Issuance Of Common Stock Upon Conversion Of The Convertible Note Will Cause Immediate And Substantial Dilution. The issuance of common stock upon conversion of the Convertible Note will result in immediate and substantial dilution to the interests of other stockholders since the holder of the Convertible Note may ultimately receive and sell the full amount of shares issuable in connection with the conversion of such Convertible Note. Although the Convertible Note may not be converted if such conversion would cause the holder thereof to own more than 4.99% of our outstanding common stock, this restriction does not prevent the holder of the Convertible Note from converting some of its holdings, selling those shares, and then converting the rest of its holdings, while still staying below the 4.99% limit. In this way, the holder of the Convertible Note could sell more than this limit while never actually holding more shares than this limit allows. If the holder of the Convertible Note chooses to do this, it will cause substantial dilution to the then holders of our common stock. Notwithstanding the above, we plan to repay the Convertible Note in full before any conversions take place. The Continuously Adjustable Conversion Price Feature Of The Convertible Note Could Require Us To Issue A Substantially Greater Number Of Shares, Which May Adversely Affect The Market Price Of Our Common Stock And Cause Dilution To Our Existing Stockholders. Our existing stockholders will experience substantial dilution of their investment upon any conversion of the Convertible Note. The Convertible Note is convertible into shares of common stock at a conversion price equal to 39% of the three lowest trading prices of the Company s common stock on the ten trading days before any conversion. As a result, the number of shares issuable could prove to be significantly greater in the event of a decrease in the trading price of our common stock, which decrease would cause substantial dilution to our existing stockholders. As sequential conversions and sales take place, the price of our common stock may decline, and if so, the holder of the Convertible Note would be entitled to receive an increasing number of shares, which could then be sold, triggering further price declines and conversions for even larger numbers of shares, which would cause additional dilution to our existing stockholders and would likely cause the value of our common stock to decline. The Continuously Adjustable Conversion Price Feature Of Our Convertible Note May Encourage The Holder Of The Convertible Note To Sell Short Our Common Stock, Which Could Have A Depressive Effect On The Price Of Our Common Stock. The Convertible Note is convertible into shares of our common stock at a conversion price equal to 39% of the three lowest trading prices of the Company s common stock on the ten trading days before any conversion. The significant downward pressure on the price of our common stock as the holder of the Convertible Note converts and sells material amounts of our common stock could encourage investors to short sell our common stock. This could place further downward pressure on the price of our common stock. In addition, not only the sale of shares issued upon conversion of the Convertible Note, but also the mere perception that these sales could occur, may adversely affect the market price of our common stock. Notwithstanding the above, we plan to repay the Convertible Note in full before any conversions take place. We Are Selling This Offering Without An Underwriter And May Be Unable To Sell Any Shares. This offering is self-underwritten, which means that we are not going to engage the services of an underwriter to sell the shares; we intend to sell our shares through our sole officer and director, Jerry Parish, who will receive no commissions. He will offer the shares to friends, family members, and business associates; however, there is no guarantee that he will be able to sell any of the shares. Unless he is successful in selling all of the shares and we receive the proceeds from this offering, we may have to seek alternative financing to implement our business plan. You Will Experience Immediate And Substantial Dilution As A Result Of This Offering And May Experience Additional Dilution In The Future. The offering price of our common stock will be substantially higher than the pro forma net tangible book value per share of our outstanding common stock. As a result, you will incur immediate and substantial dilution as a result of this offering. After giving effect to the sale by us of up to 70,000,000 shares offered in this offering at a public offering price of $0.60 per share, and after deducting estimated offering expenses payable by us, investors in this offering can expect an immediate dilution of $0.412 per share, at the public offering price, assuming the full amount of securities offered herein are sold (see also Dilution on Page 34). In addition, in the past, we issued options and warrants to acquire shares of common stock. To the extent these options are ultimately exercised, you will sustain further dilution. The Offering Price Of Our Common Stock Should Not Be Used As An Indicator Of The Future Market Price Of The Securities. The Offering Price Bears No Relationship To Our Actual Value, And May Make Our Shares Difficult To Sell. The offering price of the securities offered in this offering bears no relationship to the book value, assets or earnings of our company or any other recognized criteria of value. As such, investors may be unable to sell any shares or make any profit from an investment in such offering. While The Terms And Conditions Of Our Share Exchange Agreement With Sunset Have Been Agreed To Between The Parties And We Believe Such Transaction Has Officially Closed, Neither Party Has Yet Delivered The Consideration Due Pursuant To Such Share Exchange Agreement. As described below under Description of Business Corporate History Recent Events Share Exchange , in September 2014, we entered into an Exchange Agreement, whereby we agreed to exchange 62,678,872 shares of our restricted common stock with Sunset in consideration for ownership rights to an entity which owned 52 Gem Assets 52 Sapphires from the King and Crown of Thrones collection , which have a total carat weight of 3,925.17, and have been appraised by a Gemological Institute of America Inc. (GIA) graduate gemologist, to have a Retail Replacement Value as of August 30, 2014 of $108,593,753 and a Fair Market Value (65% of the Retail Replacement Value) of $70,585,940. Notwithstanding the above, during the period ended September 30, 2014, we recorded an asset impairment charge of $10,028,620 related to our acquisition of Investment Capital Fund Group, LLC Series 20. The impairment charge was based on our recognition of the book value at $0 as of September 23, 2014, compared to the consideration given of $10,028,620 on September 23, 2014. ICFG and the assets acquired currently have a book value of $0 on our balance sheet. While the Exchange Agreement has been executed by both parties and we believe the transactions contemplated by such agreement have closed to date and that both parties are fully obligated to perform under the agreement, we have yet to deliver the shares due to Sunset and Sunset has yet to deliver us physical possession of the gemstones. Notwithstanding the above, we believe in good faith that the failure of each party to deliver the consideration due in connection with the Exchange Agreement is solely due to desire of such parties to meet face-to-face with consideration in hand to complete the transaction, which has been unable to be scheduled to date. We Will Need Additional Capital To Complete Our Proposed Acquisition of MotorMax And Our Ability To Obtain The Necessary Funding Is Uncertain. Additionally, We Will Need To Mutually Agree On Final Terms Of A Securities Purchase Agreement To Complete the MotorMax Acquisition, Which Terms The Parties May Be Unable To Agree Upon. As described in greater detail below under Description of Business Corporate History Recent Events MotorMax Letter of Intent , we have entered into a Letter of Intent to acquire MotorMax, but will need at least $25 million of additional funding to complete such acquisition. Furthermore, as described below under Use of Proceeds , the first approximately $9.4 million of funding raised through the offering described in this Prospectus will be used to repay amounts owed to our senior creditors and due on our convertible note payable, and thereafter, assuming at least $12 million in total funding is raised, an additional $1 million will be used to pay amounts associated with the Option Agreement described in greater detail under Description of Business - Corporate History - Recent Events - Option Agreement , (which has expired, but which agreement the Company plans to seek an extension of subsequent to the date of this Prospectus), and we will not use funds raised through the sale of securities offered pursuant to this Prospectus for the MotorMax acquisition unless at least $25 million is available from the funds raised through the offering after the repayment of the amounts owed to our senior creditors and convertible note holder and amounts due in connection with the Option Agreement. Consequently, we will need to raise a minimum of approximately $34.5 million in the offering described in this Prospectus to have sufficient funding available from the offering to complete the acquisition of MotorMax. We may be unable to raise a sufficient amount of funding in the offering described in this Prospectus to complete the MotorMax acquisition, which is required to close by January 15, 2015, unless such date is further extended by the parties, and sufficient funding for such acquisition may not be available on favorable terms, if at all. Additionally, the closing of the transactions contemplated by the Letter of Intent with MotorMax is subject to among other things, us and the owners of MotorMax negotiating a mutually acceptable Securities Purchase Agreement, our due diligence, and the approval of the acquisition by our senior lender. If we are unable to raise sufficient funding to complete the MotorMax acquisition, are unable to enter into a mutually agreeable Securities Purchase Agreement, are unable to obtain favorable results of our due diligence, or are unable to obtain the consent of our senior lender, such transaction will not be completed. The acquisition of MotorMax represents a significant business opportunity for us and, if we fail to complete the MotorMax acquisition or the acquisition is not successful, our anticipated business, results of operations and the value of our securities could be adversely affected. Assuming Such Acquisition Is Completed, The Acquisition Of MotorMax May Not Be Successful And May Adversely Affect Our Financial Results. The negotiation of a definitive Securities Purchase Agreement with MotorMax pursuant to the terms of the Letter of Intent, and/or the operations of MotorMax, if such pending acquisition of MotorMax is completed, may require significant managerial attention, which may divert management from our other activities and may impair the operation of our existing business. Additionally, the acquisition of MotorMax, assuming such acquisition is completed, could entail a number of additional risks, including: the failure to successfully integrate the acquired business or facilities of MotorMax into our operations; incurring significantly higher than anticipated capital expenditures and operating expenses; disrupting our ongoing business; dissipating our management resources; failing to maintain uniform standards, controls and policies; the inability to maintain key pre-acquisition business relationships; loss of key personnel of MotorMax; exposure to unanticipated liabilities; and the failure to realize efficiencies, synergies and cost savings. The consolidation of our operations with the operations of MotorMax, including the consolidation of systems, procedures, personnel and facilities, the relocation of staff, and the achievement of anticipated cost savings, economies of scale and other business efficiencies, presents significant challenges to our management. Fully integrating MotorMax into our operations, assuming we are able to successfully acquire MotorMax, may take a significant amount of time. We may not be successful in overcoming these risks or any other problems encountered with such acquisition. To the extent we do not successfully avoid or overcome the risks or problems related to such acquisition, our results of operations and financial condition could be adversely affected. The Offering Price Of The Securities Offered Pursuant To This Prospectus Has Been Determined By Management On A Forward-Looking Basis Taking Into Account The Potential Acquisition Of Motormax. As described under

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+RISK FACTORS
+
+ 
+
+Our business is subject to numerous risks. We caution you
+that the following important factors, among others, could cause our actual results to differ materially from those expressed in
+forward-looking statements made by us or on our behalf in filings with the SEC, press releases, communications with investors and
+oral statements. Any or all of our forward-looking statements in this and in any other public statements we make may turn out to
+be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors
+mentioned in the discussion below will be important in determining future results. Consequently, no forward-looking statement can
+be guaranteed. Actual future results may vary materially from those anticipated in forward-looking statements. We undertake no
+obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. You are
+advised, however, to consult any further disclosure we make in our reports filed with the SEC.
+
+ 
+
+RISKS RELATED TO OUR BUSINESS
+
+ 
+
+Finding sources of capital to operate
+or grow the Company has been difficult.
+
+ 
+
+In the past, the Company
+has needed to borrow from our two officers to fund operations since other sources of capital were not available to us. It is unclear
+whether we will be able to find other sources of capital or whether our officers will be willing to continue to provide capital
+to meet our needs.
+
+ 
+
+We may need to raise additional capital.
+If we are unable to raise additional capital, our business may fail.
+
+ 
+
+We may need to raise additional
+capital to provide cash for our operations. Our current working capital is not expected to be sufficient to carry out all of our
+plans and to fund our operating losses until we are able to generate enough revenues to sustain our business. Uncertainty regarding
+our ability to generate significant revenues may make it difficult for us to find financing on acceptable terms. If we are unable
+to obtain adequate funding, we may not be able to successfully develop and market our services and our business will most likely
+fail. To secure additional financing, we may need to borrow money or sell more securities. Under these circumstances, we may be
+unable to secure additional financing on favorable terms or at all.
+
+ 
+
+We have changed the focus of
+our business.
+
+ 
+
+Until relatively
+recently, our business operations were focused exclusively on the health care industry. Following the sale of the majority of our
+assets in 2012 management decided to pursue opportunities in the interior design industry. Although we have hired an experienced
+interior designer, our management team does not have experience in this industry. This inexperience increases the risk that we
+will not be successful with our current business model.
+
+ 
+
+Our limited operating history in our current industry makes
+it difficult to evaluate our current business and future prospects.
+
+ 
+
+We have only recently begun operating in the
+interior design business. Previously we were involved in unrelated businesses. Therefore, we have an extremely limited operating
+history in executing our current business model. Our lack of operating history makes it difficult to evaluate our current business
+model and future prospects.
+
+ 
+
+In light of the costs, uncertainties,
+delays and difficulties frequently encountered by companies in the early stages of development with limited operating history,
+there is a significant risk that we will not be able to implement or execute our current business plan, or demonstrate that our
+business plan is sound. If we cannot execute any one of the foregoing or similar matters relating to our operations, our business
+may fail.
+
+ Table of Contents-5- 
+
+ 
+
+ 
+
+We are dependent on the services of our Chief Executive Officer
+and the loss of her services would have a material adverse effect on our business.
+
+ 
+
+We are highly dependent on the services of Ozzie
+Bloom, our Chief Executive Officer. Ms. Bloom maintains responsibility for our overall corporate operational strategy. Ms. Bloom
+has a strong background in health care management and has supported, grown, marketed and integrated the Company's business plan
+with hospitals and various entities accessing the inpatient care continuum. The loss of the services of Ms. Bloom would have a
+material adverse effect upon our business and prospects.
+
+ 
+
+We are
+an emerging growth company under the JOBS Act of 2012 and we cannot be certain if the reduced disclosure requirements
+applicable to emerging growth companies will make our common stock less attractive to investors.
+
+ 
+
+We are an emerging growth company, 
+as defined in the Jumpstart Our Business Startups Act of 2012 ( JOBS Act ), and we may take advantage of certain exemptions
+from various reporting requirements that are applicable to other public companies (other than smaller reporting companies) that
+are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation
+requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our
+periodic reports and proxy statements. We are also currently able to take advantage of these exemptions as a smaller reporting
+company. In addition, emerging growth companies are entitled to take advantage of exemptions from the requirements of holding
+a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously
+approved. By comparison, smaller reporting companies (unless they are also emerging growth companies) are subject to the requirements
+of holding nonbinding advisory votes on executive compensation, and shareholder approval of any golden parachute payments not
+previously approved. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions.
+If some investors find our common stock less attractive as a result, there may be a less active trading market for our common
+stock and our stock price may be more volatile.
+
+ 
+
+Furthermore, Section 107 of the JOBS Act also provides
+that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B)
+of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company 
+can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are
+choosing to take advantage of the extended transition period for complying with new or revised accounting standards. As a result, our financial statements may not be comparable to those of companies that comply with public
+company effective dates.
+
+ 
+
+We will remain
+an emerging growth company for up to five years, although we will lose that status sooner if our revenues exceed
+$1 billion, if we issue more than $1 billion in non-convertible debt in a three year period, or if the market value of our common
+stock that is held by non-affiliates exceeds $700 million as of any June 30.
+
+ 
+
+Our status as an emerging
+growth company under the JOBS Act of 2012 may make it more difficult to raise capital as and when we need it.
+
+ 
+
+Because of
+the exemptions from various reporting requirements provided to us as an emerging growth company and because we will
+have an extended transition period for complying with new or revised financial accounting standards, we may be less attractive
+to investors and it may be difficult for us to raise additional capital as and when we need it. Investors may be unable to compare
+our business with other companies in our industry if they believe that our financial accounting is not as transparent as other
+companies in our industry. If we are unable to raise additional capital as and when we need it, our financial condition and results
+of operations may be materially and adversely affected.
+
+ 
+
+Both of our Directors are also officers of the Company and
+have the ability to set their own compensation.
+
+ 
+
+Because our only directors are also officers of
+the Company, we do not have any disinterested director who can determine the appropriate amount of compensation for our officers.
+Additionally, our officers do not have employment contracts or any other agreement in place regarding their compensation. Accordingly,
+there is a risk that the directors will approve compensation for themselves that may be considered excessive.
+
+ Table of Contents-6- 
+
+ 
+
+ 
+
+Our executive officers are not subject to supervision or review
+by an independent board or audit committee.
+
+ 
+
+Our board of directors consists of Osnah Bloom and Hina Sharma M.D.,
+our executive officers. Accordingly, we do not have any independent directors. Also we do not have an independent audit or compensation
+committee. As a result, the activities of our executive officers are not subject to the review and scrutiny of an independent board
+of directors or an audit or compensation committee.
+
+ 
+
+The interior design industry might be affected by general
+economic decline and this could adversely affect our operating results and could lead to lower revenues than expected.
+
+ 
+
+The interior design industry might be affected by general economic
+decline. Any downturn or delay in growth of the housing market may materially and detrimentally affect this offering or the results
+of our operations. We expect that this could also lead to lower revenues than expected in which case the value of your shares would
+likely decline and your ability to sell the shares at any price may be impacted.
+
+ 
+
+ 
+
+Risks related to our Common Stock.
+
+ 
+
+Our stock trades at low prices per share and trades on the
+OTC: Pink electronic quotation system, which provides limited liquidity and significant volatility.
+
+ 
+
+Our Common Stock is currently quoted on the
+OTC Market Group s OTC: Pink electronic quotation system (the OTC: Pink ). Although this ostensibly qualifies
+the Company as publicly trading, minimal actual trading occurs. Since our common stock is quoted on OTC: Pink, investors may find
+it difficult to obtain accurate quotations of our common stock and may experience a lack of buyers to purchase such stock or a
+lack of market makers to support the stock price. Our Common Stock is referred to as a "penny stock" and is
+subject to various regulations involving certain disclosures that must be given to prospective buyers prior to their purchase of
+any penny stocks. These disclosures require purchasers to acknowledge they understand the risk associated with buying penny stocks
+and that they can absorb the entire loss of their investment. Accordingly, it is commonly believed that teing a penny stock limits
+the liquidity of our common stock and the coverage of our stock by analysts. The OTC: Pink generally provides less liquidity
+than stock exchanges like NYSE or Nasdaq. Stocks trading on the OTC markets may be very thinly traded and highly volatile. Therefore,
+holders of the Company s common stock may be unable to sell their shares at any price, whether or not such shares have been
+registered for resale. A public trading market having the desired characteristics of depth, liquidity and orderliness
+depends on the presence in the marketplace of willing buyers and sellers of our common shares at any given time. This
+presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given
+the lower trading volume of our common shares, significant sales of our common shares, or the expectation of these sales, could
+cause our share price to fall.
+
+ 
+
+There may be a limited public market for our securities; we
+presently fail to qualify for listing on any national securities exchanges.
+
+ 
+
+Our common stock currently does not
+meet all of the requirements for initial listing on a national securities exchange. Specifically, the bid price of our common stock
+is less than the minimum bid price required to obtain a listing. Trading in our common stock continues to be conducted in the over-the-counter
+market. As a result, an investor may find it difficult to dispose of or to obtain accurate quotations as to the market value of
+our common stock, and our common stock may be less attractive for margin loans, for investment by larger financial institutions,
+as consideration in possible future acquisition transactions or other purposes.
+
+ Table of Contents-7- 
+
+ 
+
+ 
+
+Our stock price will likely be highly volatile, which may negatively
+affect our ability to obtain additional financing in the future.
+
+ 
+
+The market price of our common stock is likely
+to be highly volatile due to the risks and uncertainties described in this risk factors section, as well as other factors, and
+could be subject to wide fluctuations in response to various factors. Some of the factors that may cause the market price of our
+common stock to fluctuate include:
+
+ 
+
+ 
+ conditions and publicity regarding the industry in which we operate, as well as the specific areas our product candidates seek to address;
+
+ 
+ fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;
+
+ 
+ competition in our industry;
+
+ 
+ price and volume fluctuations in the stock market at large that are unrelated to our operating performance;
+
+ 
+ changes in estimates of our financial results or recommendations by securities analysts;
+
+ 
+ failure of our services to achieve or maintain market acceptance;
+
+ 
+ changes in market valuations of similar companies;
+
+ 
+ significant products, contracts, acquisitions or strategic alliances of our competitors;
+
+ 
+ success of competing products or services;
+
+ 
+ changes in our capital structure, such as future issuances of securities or the incurrence of additional debt;
+
+ 
+ regulatory developments in the United States or foreign countries;
+
+ 
+ litigation involving our company, our general industry or both;
+
+ 
+ additions or departures of key personnel;
+
+ 
+ investors general perception of us; and
+
+ 
+ changes in general economic, industry and market conditions.
+
+ 
+
+As a result of this volatility, an investment in our stock is subject
+to substantial risk. Furthermore, the volatility of our stock price could negatively impact our ability to raise capital in the
+future.
+
+ 
+
+We do not currently intend to pay dividends on our common
+stock and, consequently, the ability to achieve a return on an investment in our common stock will depend on appreciation in the
+price of our common stock.
+
+ 
+
+We do not expect to pay cash dividends on our
+common stock. Any future dividend payments are within the absolute discretion of our Board of Directors and will depend on, among
+other things, our results of operations, working capital requirements, capital expenditure requirements, financial condition, contractual
+restrictions, business opportunities, anticipated cash needs, provisions of applicable law and other factors that our Board of
+Directors may deem relevant. We may not generate sufficient cash from operations in the future to pay dividends on our common stock.
+As a result, the success of an investment in our common stock will depend on future appreciation in its value. The price of our
+common stock may not appreciate in value or even maintain the price at which you purchased our shares.
+
+ 
+
+You may experience dilution of your ownership interests due
+to the future issuance of additional shares of our common stock.
+
+ 
+
+As of that date of this registration statement,
+we have 48,612,365 shares of our common stock issued and outstanding. We are authorized to issue up to 100,000,000 shares of common
+stock and 10,000,000 shares of preferred stock. We also have outstanding a total of 250,000 shares of Preferred Stock, which are
+convertible into 2,500,000 shares of our common stock at the election of the holder. The outstanding Preferred Stock provides no
+preferential rights to its holder. We may also issue additional shares of our common stock or other securities that are convertible
+into or exercisable for common stock in connection with the hiring of personnel, future acquisitions, future private placements
+of our securities for capital raising purposes or for other business purposes. Future sales of substantial amounts of our common
+stock, or the perception that sales could occur, could have a material adverse effect on the price of our common stock. If we need
+to raise additional capital to expand or continue operations, it may be necessary for us to issue additional equity or convertible
+debt securities. If we issue equity or convertible debt securities, the net tangible book value per share may decrease, the percentage
+ownership of our current stockholders may be diluted and such equity securities may have rights, preferences or privileges senior
+or more advantageous to our common stockholders.
+
+ Table of Contents-8- 
+
+ 
+
+ 
+
+Our common stock is considered to be a "Penny Stock."
+
+ 
+
+We anticipate that our common stock will continue to be a low-priced
+security, or a penny stock as defined under rules promulgated under the Exchange Act. A stock is a "penny stock"
+if it meets one or more of the definitions in Rules 15g-2 through 15g-6 promulgated under Section 15(g) of the Exchange Act. These
+include but are not limited to the following: (i) the stock trades at a price less than $5.00 per share; (ii) it is not traded
+on a "recognized" national exchange; (iii) it is not quoted on The NASDAQ Stock Market, or even if so, has a price less
+than $5.00 per share; or (iv) is issued by a company with net tangible assets less than $2.0 million, if in business more than
+a continuous three years, or with average revenues of less than $6.0 million for the past three years. The principal result or
+effect of being designated a "penny stock" is that securities broker-dealers cannot recommend the stock but must trade
+in it on an unsolicited basis.
+
+ 
+
+In accordance with these rules, broker-dealers
+participating in transactions in low-priced securities must first deliver a risk disclosure document which describes the risks
+associated with such stocks, the broker-dealer s duties in selling the stock, the customer s rights and remedies and
+certain market and other information. Furthermore, the broker-dealer must make a suitability determination approving the customer
+for low-priced stock transactions based on the customer s financial situation, investment experience and objectives. Broker-dealers
+must also disclose these restrictions in writing to the customer, obtain specific written consent from the customer, and provide
+monthly account statements to the customer. The effect of these restrictions probably decreases the willingness of broker-dealers
+to make a market in our common stock, decreases liquidity of our common stock and increases transaction costs for sales and purchases
+of our common stock as compared to other securities.
+
+ 
+
+Broker-dealer requirements may affect trading and liquidity.
+
+ 
+
+Section 15(g) of the Securities Exchange Act of 1934, as amended,
+and Rule 15g-2 promulgated there under by the SEC require broker-dealers dealing in penny stocks to provide potential investors
+with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document
+before effectuating any transaction in a penny stock for the investor's account. Moreover, Rule 15g-9 requires broker-dealers in
+penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor.
+This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation,
+investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny
+stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable
+of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis
+on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from
+the investor, confirming that it accurately reflects the investor's financial situation, investment experience and investment objectives.
+Compliance with these requirements may make it more difficult for holders of our common stock to resell their shares to third parties
+or to otherwise dispose of them in the market or otherwise.
+
+ 
+
+Shares eligible for future sale may adversely affect the market
+price of our common stock, as the future sale of a substantial amount of our restricted stock in the public marketplace could reduce
+the price of our common stock.
+
+ 
+
+From time to time, certain of our stockholders may be eligible to
+sell their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144 of the Securities
+Act of 1933, as amended, subject to certain compliance requirements. In general, under Rule 144, unaffiliated stockholders (or
+stockholders whose shares are aggregated) who have satisfied a six month holding period may sell shares of our common stock, so
+long as we have filed all required reports under Section 13 or 15(d) of the Exchange Act during the applicable period preceding
+such sale. Generally, once a period of six months has elapsed since the date the common stock was acquired from us or from an affiliate
+of ours, unaffiliated stockholders can freely sell shares of our common stock so long as the requisite conditions of Rule 144 and
+other applicable rules have been satisfied. Also generally, twelve months after acquiring shares from us or an affiliate, unaffiliated
+stockholders can freely sell their shares without any restriction or requirement that we are current in our SEC filings. Any substantial
+sales of common stock pursuant to Rule 144 may have an adverse affect on the market price of our common stock.
+
+ Table of Contents-9- 
+
+ 
+
+ 
+
+Failure to Achieve and Maintain Internal Controls in Accordance
+with Sections 302 and 404(a) of the Sarbanes-Oxley Act of 2002 Could Have A Material Adverse Effect on Our Business and Stock
+Price.
+
+ 
+
+If we fail to maintain adequate internal controls or fail to implement
+required new or improved controls, as such control standards are modified, supplemented or amended from time to time, we may not
+be able to assert that we can conclude on an ongoing basis that we have effective internal controls over financial reporting. Effective
+internal controls are necessary for us to produce reliable financial reports and are important in the prevention of financial fraud.
+If we cannot produce reliable financial reports or prevent fraud, our business and operating results could be harmed, investors
+could lose confidence in our reported financial information, and there could be a material adverse effect on our stock price.
+
+ 
+
+Our shares may never be quoted on the OTC Bulletin Board or
+listed on an exchange.
+
+ 
+
+We intend to seek the quotation of our shares of common stock on
+the OTC Bulletin Board or to have them listed on an exchange. We believe that doing so will bring greater liquidity to our shareholders.
+If our shares of common stock are not approved for quotation on the OTC Bulletin Board or listed on an exchange, the terms of this
+registration statement require that any shares of common stock sold pursuant to the registration statement be sold at a fixed price
+of $0.009 per share. At such time as shares of our common stock are eligible for trading pursuant to an exemption from registration
+such as Rule 144, such shares would be eligible to be sold at prices other than $0.009 per share whether or not our common stock
+is quoted on the OTC Bulletin Board or listed on an exchange. There is no guarantee that our shares will ever be quoted on the
+OTC Bulletin Board or listed on any exchange.
+
+ Table of Contents-10- 
+
+ 
+
+ 
+
+CAUTIONARY NOTE REGARDING FORWARD-LOOKING
+STATEMENTS
+
+ 
+
+Statements in this prospectus may be forward-looking statements. 
+Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies,
+predictions or any other statements relating to our future activities or other future events or conditions. These statements are
+based on current expectations, estimates and projections about our business based, in part, on assumptions made by management.
+These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to
+predict. Therefore, actual outcomes and results may, and are likely to, differ materially from what is expressed or forecasted
+in the forward-looking statements due to numerous factors, including those described above and those risks discussed from time
+to time in this prospectus, including the risks described under Risk Factors, Management s Discussion
+and Analysis and Our Business. 
+
+ 
+
+There are important factors that could cause our actual results
+to differ materially from those in the forward-looking statements. These factors, include, without limitation, the following: our
+ability to develop our services; our ability to sell our services; our ability to protect our intellectual property; the risk that
+we will not be able to develop our business platform in the current projected timeframe; the risk that our services will not achieve
+reasonable performance standards; the risk that we will not be successful in implementing our strategic, operating and personnel
+initiatives; the risk that we will not be able to commercialize our services; any of which could impact sales, costs and expenses
+and/or planned strategies. Additional information regarding factors that could cause results to differ can be found in this prospectus
+and in our other filings with the Securities and Exchange Commission.

parsed_sections/risk_factors/2014/CIK0001200720_jazz_risk_factors.txt

@@ -0,0 +1 @@
+RISK FACTORS In considering whether to invest in our notes, you should carefully consider the following risk factors, in addition to the other information included in this prospectus. The risks described below are not the only risks we face. Any of the following risks could materially and adversely affect our business, financial condition, results of operations and our ability to meet our financial obligations. In such case, you could lose all or part of your investment. Risks Related to the Notes Your ability to transfer the notes may be limited by the absence of an active trading market, and there is no assurance that any active trading market will develop for the notes. There is no established public market for the notes, and we cannot assure you that an active trading market for the notes will develop. If no active trading market develops, you may not be able to resell your notes at their fair market value or at all. We do not intend to apply for listing the notes on any securities exchange. Future trading prices of the notes will depend on many factors, including, among other things, prevailing interest rates, our operating results, our financial condition and the market for similar securities. We cannot assure you as to the development or liquidity of any trading market for the notes. The liquidity of any market for the notes will depend on a number of factors, including: the number of holders of notes; our operating performance and financial condition; the market for similar securities; the interest of securities dealers in making a market in the notes; and prevailing interest rates. Historically, the market for non-investment grade debt has been subject to disruptions that have caused substantial volatility in the prices of securities similar to the notes. We cannot assure you that the market, if any, for the notes will be free from similar disruptions or that any such disruptions may not adversely affect the prices at which you may sell your notes. Therefore, we cannot assure you that you will be able to sell your notes at a particular time or the price that you receive when you sell will be favorable. If you hold the notes in book-entry form, you must rely on the procedures of the relevant clearing systems to exercise any rights and remedies. Unless and until definitive notes are issued in exchange for book-entry interests in the notes, owners of the book-entry interests will not be considered owners or holders of notes. Instead, the common depositary, or its nominee, will be the sole holder of the notes. Payments of principal and interest and any other amounts owing on or in respect of the notes in global form will be made to U.S. Bank National Association, as paying agent, which will make payments to DTC. Thereafter, these payments will be credited to DTC participants accounts that hold book-entry interests in the notes in global form and credited by such participants to indirect participants. After payment to DTC or the common depository, none of us, any of our affiliates, the trustee or any payment agent will have any responsibility or liability for any aspect of the records relating to or payments of interest, principal or other amounts to DTC or to owners of book-entry interests. Unlike holders of the notes themselves, owners of book-entry interests will not have the direct right to act upon solicitations for consents or requests for waivers or other actions from holders of the notes. Instead, if you own a book-entry interest, you will be permitted to act only to the extent you have received appropriate proxies to do so from DTC or, if applicable, from a participant. We cannot assure you that procedures implemented for the granting of such proxies will be sufficient to enable you to vote on any requested actions on a timely basis. The information in this prospectus is not complete and may be changed. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted until the registration statement is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED MAY 22, 2014 PROSPECTUS JAZZ TECHNOLOGIES, INC. $58,307,000 Aggregate Principal Amount of 8% Convertible Senior Notes due 2018 Our company, Jazz Technologies, Inc., previously issued $58,307,000 aggregate principal amount of 8% convertible senior notes due December 2018. Our subsidiaries, Jazz Semiconductor, Inc., and Newport Fab, LLC, have guaranteed the notes on a senior unsecured basis. The notes are convertible, under specified circumstances, into ordinary shares of Tower Semiconductor, Ltd., our parent company. The notes are not listed for trading on any national securities exchange or other trading market. The selling security holders identified herein may, from time to time, use this prospectus to resell the notes. Neither our company nor any of our subsidiaries or parent company will sell any securities under this prospectus or receive any of the proceeds from any securities sold under this prospectus. Interest is payable on the notes at a rate of 8% per annum, in cash, semiannually in arrears on July 15 and January 15 of each year commencing on July 15, 2014. The notes will mature on December 31, 2018, at which time principal and any accrued and unpaid interest will become due and payable. The notes may be converted into ordinary shares of Tower at a conversion price of $10.07 per share. The notes are senior unsecured obligations of our company, rank pari passu in right of payment with all of our other senior unsecured indebtedness, and are effectively subordinated to our up to $70 million credit line from Wells Fargo Bank and all of our other secured indebtedness to the extent of the value of the collateral securing such indebtedness. The notes rank senior to all of our future indebtedness to the extent the future indebtedness is expressly subordinated to the notes. Investing in our securities involves certain risks. See Risk Factors beginning on page 5. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The date of this prospectus is , 2014 The lack of physical certificates could also: result in payment delays on your notes because the trustee will be sending distributions on the notes to DTC instead of directly to you; make it difficult for you to pledge your notes if physical certificates are required by the party demanding the pledge; and hinder your ability to resell your notes because some investors may be unwilling to buy securities that are not in physical form. Risks Related to Our Company We have a large amount of debt and other liabilities and our business and financial position may be adversely affected if we will not be able to timely fulfill our debt obligations and other liabilities. There is no assurance that we will be able to obtain sufficient funding sources in a timely manner to allow us to re-finance it and/or repay our debt obligations and other liabilities. Our debt par value as of March 31, 2014 was approximately $126 million, comprised of approximately $ 49 million par value of debentures due June 2015, $58 million par value of debentures convertible into Tower s ordinary shares due December 2018, unless converted earlier, and approximately $19 million borrowing under the Wells Fargo line of credit. Carrying such a large amount of debt and other liabilities may have significant negative consequences, including: requiring the use of a substantial portion of our cash to service our indebtedness rather than investing our cash to explore M&A activities, explore business growth direction and fund our growth plans, working capital and capital expenditures; increasing our vulnerability to general adverse economic and industry conditions; limiting our ability to obtain additional financing; limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; placing us at a competitive disadvantage with respect to less leveraged competitors and competitors that have better access to capital resources; affecting our ability to make interest payments and other required debt service on our debt; enforcement by the lenders under the Wells Fargo line of credit of their liens against our assets in the event of default; and/or limiting our ability to fulfill our debt obligations and other liabilities. In order to serve our debt and other cash needs, in addition to cash on hand and cash flow from operating activities , we continue to explore measures to obtain funds from additional sources, including debt and/ or equity restructuring and/ or re-financing, sale of new securities, sale of other assets, intellectual property licensing, as well as additional financing alternatives. Our ability to make payments on, or repay or refinance, our debt and to fund capital expenditures, working capital and other cash needs will depend largely upon our future operating performance, our ability to refinance the debt and our ability to drawdown additional funds, if required, from Wells Fargo. Our future operating performance, to a certain extent, is subject to general economic conditions, financial market, competitive, legislative, regulatory and other factors that are beyond our control. However, there is no assurance that our business will generate sufficient cash flow from operations or we will be able to obtain sufficient funding, if at all, from the financing sources detailed above in a timely manner (or on commercially reasonable terms) in order to allow us to cover our ongoing fixed costs, capital expenditure costs and other liabilities and obligations, fully or partially repay our short term and long term debt in a timely manner and fund our growth plans and working capital needs. In December 2013, we entered into an agreement with Wells Fargo Capital Finance, part of Wells Fargo & Company ( Wells Fargo ), for a five-year secured asset-based revolving credit line in the total amount of up to $70 million maturing in December 2018 (the Credit Line Agreement ). Loans under the Credit Line Agreement bear interest at a rate equal to, at lender s option, either the lender s prime rate plus a margin ranging from 0.50% to 1.0% or the LIBOR rate plus a margin ranging from 1.75% to 2.25% per annum. The outstanding borrowing availability varies from time to time based on the levels of the Company's eligible accounts receivable, eligible equipment, eligible inventories and other terms and conditions described in the Credit Line Agreement. The Credit Line Agreement is secured by the assets of the Company. The Loan Agreement contains customary covenants and other terms, including covenants, as well as customary events of default. If we default on payment of the notes at maturity, such default would trigger a cross default under the Wells Fargo line of credit, which would permit the lenders to accelerate the obligations thereunder, potentially requiring us to repay or refinance the Wells Fargo credit line. There is no assurance that we will be able to obtain sufficient funding from the financing sources detailed above or other sources in a timely manner to allow us to fully or partially repay our debt. In March 2014, we entered into an exchange agreement with certain holders according to which we issued approximately $48 million new unsecured 8% convertible senior notes due December 2018 (the 2014 Notes ) in exchange for approximately $45 million in aggregate principal amount of the notes due June 2015, thereby reducing the aggregate principal amount of the notes due June 2015 outstanding from approximately $94 million to approximately $49 million. In addition, certain participating holders purchased $10 million principal amount of the 2014 Notes. A default by us on any of our debt contract could have a material adverse effect on our operations and the interests of our creditors, and may affect our ability to fulfill our debt obligations and other liabilities. If we are unable to manage fluctuations in cash flow, our business, operating results and financial condition may be adversely affected. Our working capital requirements and cash flows are subject to quarterly and yearly fluctuations, depending on a number of factors. If we are unable to manage fluctuations in cash flow, our business, operating results and financial condition may be materially adversely affected. Factors which could lead us to suffer cash flow fluctuations include: fluctuations in the level of revenues from our operating activities; fluctuations in the collection of receivables; the timing and size of payables; the timing and size of capital expenditures; the repayment schedules of our debt service obligations under our short-term and long-term liabilities; and our ability to fulfill our obligations and meet performance milestones under our debt agreements and foundry agreements. In addition, we may need to devote a significant portion of our operating cash flow to pay principal and interest on our debt. The use of cash to finance our debt could leave us with insufficient funds to adequately finance our operating activities and capital expenditures, which could adversely affect our business. A global recession, unfavorable economic conditions and/or a credit crisis may adversely affect our results and our ability to fulfill our debt obligations and other liabilities. A downturn or a weakness in the semiconductor industry and/or in the global economy and/or in the Company's customer base and/ or customers' products base, may adversely affect the Company s ability to maintain its customers' existing demand for products, attract new customers and new business to its current fab, increase the utilization rates in its manufacturing facility and maintain it at a high level that would suffice to cover its fixed costs, maintain commercial relationships with its customers, suppliers, and creditors, including its lenders, continue its capacity growth, and improve the Company s future financial results and position, including its ability to raise funds in the capital markets, and to fulfill its debt obligations and other liabilities, including to refinance its debt and other liabilities and/ or pay them in a timely manner, comprised mainly of bank loans and debentures. There is no assurance that such downturn will not occur. The effects of such a downturn may include global decreased demand, downward price pressure, excess inventory and unutilized capacity worldwide, which may negatively impact consumer and customer demand for the Company s products and the end products of the Company s customers. Our operating results fluctuate from quarter to quarter which makes it difficult to predict our future performance. Our revenues, expenses and operating results have varied significantly in the past and may fluctuate significantly from quarter to quarter in the future due to a number of factors, many of which are beyond our control. These factors include, among others: The cyclical nature of the semiconductor industry and the volatility of the markets served by our customers; Changes in the economic conditions of geographical regions where our customers and their markets are located; Shifts by integrated device manufacturers and customers between internal and outsourced production; Inventory and supply chain management of our customers; The loss of a key customer, postponement of an order from a key customer or the rescheduling or cancellation of large orders; The occurrence of accounts receivable write-offs, failure of a key customer to pay accounts receivable in a timely manner or the financial condition of our customers; The rescheduling or cancellation of planned capital expenditures; Our ability to satisfy our customers demand for quality and timely production; The timing and volume of orders relative to our available production capacity; Our ability to obtain raw materials and equipment on a timely and cost-effective basis; Price erosion in the industry; Environmental events or industrial accidents such as fire or explosions; Our susceptibility to intellectual property rights disputes; Our ability to maintain existing partners and to enter into new partnerships and technology and supply alliances on mutually beneficial terms; Interest, price index and currency rate fluctuations that were not hedged; Technological changes and short product life cycles; Timing for the design and the qualification of new products; Increase in the fair value of our bank loans and debentures; and Changes in accounting rules affecting our results. Furthermore, integrated device manufacturers continue to design and manufacture integrated circuits in their own fabrication facilities. There is a possibility that in certain periods or under certain circumstances such as low demand, they will choose to manufacture their products in their facilities instead of manufacturing products at external foundries. If our customers will choose to manufacture internally rather than manufacture at our facilities, our business may be negatively impacted. Due to the factors noted above and other risks discussed in this section, many of which are beyond our control, investors should not rely on quarter-to-quarter comparisons to predict our future performance. Unfavorable changes in any of the above factors may seriously harm our Company, including our operating results, financial condition and ability to maintain our operations. The lack of a significant backlog resulting from our customers not placing purchase orders far in advance makes it difficult for us to forecast our revenues in future periods. Our customers generally do not place purchase orders far in advance, partly due to the cyclical nature of the semiconductor industry. As a result, we do not typically operate with any significant backlog. The lack of a significant backlog makes it difficult for us to forecast our revenues in future periods. Moreover, since our expense levels are based in part on our expectations of future revenues, we may be unable to adjust costs in a timely manner to compensate for revenue shortfalls. We expect that in the future, our revenues in any quarter will continue to be substantially dependent upon purchase orders received in that quarter and in the immediately preceding quarter. We cannot assure you that any of our customers will continue to place orders with us in the future at the same levels as in prior periods. If orders received from our customers differ adversely from our expectations with respect to the product, volume, price or other items, our operating results and financial condition may be adversely affected. We occasionally manufacture wafers based on forecasted demand, rather than actual orders from customers. If our forecasted demand exceeds actual demand, we may have obsolete inventory, which could have a negative impact on our results of operations. We generally do not manufacture wafers unless we receive a customer purchase order. On occasion, we may produce wafers in excess of customer orders based on forecasted customer demand, because we may forecast future excess demand or because of future capacity constraints. If we manufacture more wafers than are actually ordered by customers, we may be left with excess inventory that may ultimately become obsolete and must be scrapped when it cannot be sold. Significant amounts of obsolete inventory could have a negative impact on our results of operations. As is common in our industry, a large portion of our total costs is comprised of fixed costs associated mainly with our manufacturing facilities and we have a history of operating losses. Our business may be adversely affected if we are unable to operate our facilities at high enough utilization rates sufficient to reach revenue levels that would cover our fixed costs, reduce our losses and allow us to be profitable. As is common in our industry, a large portion of our total costs is comprised of fixed costs, associated mainly with our manufacturing facility, while our variable costs are relatively small. Therefore, during periods when our fabrication manufactures at high utilization rates, we are able to cover our costs. However, at times when the utilization rate is low, the reduced revenues may not cover all of the costs since a large portion of them are fixed costs and remain constant, irrespective of the fact that less wafers were manufactured. In addition, depreciation costs in our industry are high, which has resulted in our operating at a GAAP loss for the last number of years. If customer demand for our products does not increase, we may not be able to operate our facility consistently at high utilization rates, which may not enable us to fully cover all of our costs, achieve and maintain operating profits or achieve net profits. In addition, we may be unable to generate enough cash from operations that would cover our fixed costs, capital expenditures, liabilities and debt payments as well as reduce our losses. We cannot assure that we will be profitable on a quarterly or annual basis in the future. Our sales cycles are typically long and orders received may not meet our expectations, which may adversely affect our operating results. Our sales cycles, which we measure from first contact with a customer to first shipment of a product ordered by the customer, vary substantially and may last as long as two years or more, particularly for new technologies. In addition, even after we make initial shipments of prototype products, it may take several more months to reach full production of the product. As a result of these long sales cycles, we may be required to invest substantial time and incur significant time and incure significant expenses in advance of the receipt of any product order and related revenue. If orders ultimately received significantly differ from our expectations, we will have excess capacity that we may not be able to fill within a short period of time, resulting in lower utilization of our facility. We may have to reduce prices in order to try to sell more wafers in order to utilize the excess capacity which may adversely affect our operating results, financial condition and ability to maintain our operations. In addition to the revenue loss, we may have difficulty adjusting our costs to align with the lower revenue since a large portion of our cost is fixed costs as common in our industry, which could harm our financial results. Demand for our foundry services is dependent on the demand in our customers end markets. A decrease in demand for, or selling prices of, products that contain semiconductors may decrease the demand for our services and products and reduce our margins. Our customers generally use the semiconductors produced in our fab in a wide variety of applications. We derive a significant percentage of our operating revenues from customers who use our manufacturing services to make semiconductors for communication devices, consumer electronics, PCs and other electronic devices. Any significant decrease in the demand for these devices or products may decrease the demand for our services and products. In addition, if the average selling prices of communication devices, consumer electronics, PCs or other electronic devices decline significantly, we may be pressured to further reduce our selling prices, which may reduce our revenues and may reduce our margins significantly. As demonstrated by downturns in demand for high technology products in the past, market conditions can change rapidly, without apparent warning or advance notice. In such instances, our customers may experience inventory buildup and/or difficulties in selling their products and, in turn, may reduce or cancel orders for wafers from us. The timing, severity and recovery of these downturns cannot be predicted accurately or at all. When they occur, our business and profitability may suffer. In order for demand for our wafer fabrication services to increase, the markets for the end products utilizing the integrated circutes that we manufacture must develop and expand. Because our services may be used in many new applications, it is difficult to forecast demand. If demand is lower than expected, we may have excess capacity, which may adversely affect our financial results. If demand is higher than expected, we may be unable to fill all of the orders we receive, which may result in the loss of customers and revenue. The cyclical nature of the semiconductor industry and any resulting periodic overcapacity may lead to erosion of sale prices, may make our business and operating results particularly vulnerable to economic downturns, and may reduce our revenues, earnings and margins. The semiconductor industry has historically been highly cyclical and subject to significant and often rapid increases and decreases in product demand. Traditionally, companies in the semiconductor industry have expanded aggressively during periods of decreased demand in order to have the capacity needed to meet expected demand in future upturns, including through acquiring additional manufacturing facilities. If actual demand does not increase or declines, or if companies in the industry expand too aggressively, the industry may experience a period in which industry-wide capacity exceeds demand. This could result in overcapacity and excess inventories, leading to rapid erosion of average sale prices, as well as to underutilization of manufacturing facilities that as a result are unable to cover their fixed costs and other liabilities, potentially leading to such facilities to cease their operations. The prices that we can charge our customers for our services are significantly related to the overall worldwide supply of integrated circuits and semiconductor products. The overall supply of semiconductor products is based in part on the capacity of other companies, which is outside of our control. In periods of overcapacity, despite the fact that we utilize niche technologies and manufacture specialty products, we may have to lower the prices we charge our customers for our services which may reduce our margins and weaken our financial condition and results of operations. We cannot give an assurance that an increase in the demand for foundry services in the future will not lead to under-capacity, which could result in the loss of customers and materially adversely affect our revenues, earnings and margins. Analysts believe that such patterns may repeat in the future. The overcapacity, under-utilization and downward price pressure characteristic of a downturn in the semiconductor market and/or in the global economy, such as experienced several times in the past, may negatively impact consumer and customer demand for the Company s products, the end products of the Company s customers and the financial markets, which may affect our ability to raise funds and/or re-structure and/or re-finance our debt and/or service our other liabilities. If we do not maintain our current customers and attract additional customers, our business may be adversely affected. Loss or cancellation of business from, or decreases in the sales volume or sales prices to, our significant customers, or our failure to replace loss business with new customers, could seriously harm our financial results, revenue and business. Because the sales cycle for our services typically exceeds one year, if our customers order significantly fewer wafers than forecasted or if we lose customers, we will have excess capacity that we may not be able to fill within a short period of time, resulting in lower utilization of our facilities. We may have to reduce prices in order to try to sell more wafers and attract additional customers in order to utilize the excess capacity. In addition to the revenue loss that could result from unused capacity or lower sales prices, we might have difficulty adjusting our costs to reflect the lower revenue in a timely manner, which could harm our financial results. Collectively, our top two customers accounted for 40% of our revenues in the three months ended March 31, 2014. We expect to continue to receive a significant portion of our revenue from a limited number of customers for the foreseeable future. The loss of any one of these customers, whether due to insolvency, their unwillingness or inability to perform their obligations under their respective relationships with us, or if we are not able to renew on commercially reasonable terms any of their respective arrangements with us, may materially and negatively impact our overall business and our consolidated financial position and financial results. If we do not maintain and develop our technology processes and services, we will lose customers and may be unable to attract new ones. The semiconductor market is characterized by rapid change, including the following: rapid technological developments; evolving industry standards; changes in customer and product end user requirements; frequent new product introductions and enhancements; and short product life cycles with declining prices as products mature. Our ability to maintain our current customer base and attract new customers is dependent in part on our ability to continuously develop and introduce to production advanced specialized manufacturing process technologies and purchase the appropriate equipment. If we are unable to successfully develop and introduce these processes to production in a timely manner or at all, or if we are unable to purchase the appropriate equipment required for such processes, we may be unable to maintain our current customer base and may be unable to attract new customers. The semiconductor foundry business is highly competitive; our competitors may have competitive advantages over us and our results of operations may be adversely affected if we do not successfully compete in the industry. The semiconductor foundry industry is highly competitive. We compete with more than ten independent dedicated foundries, the majority of which are located in Asia-Pacific, including foundries based in Taiwan, China, Korea and Malaysia, and with over 20 integrated semiconductor and end-product manufacturers that allocate a portion of their manufacturing capacity to foundry operations. The foundries with which we compete benefit from their close proximity to other companies involved in the design and manufacture of integrated circuits. As our competitors continue to increase their manufacturing capacity, there could be an increase in specialty semiconductor capacity. As specialty capacity increases there may be more competition and pricing pressure on our services, which may result in underutilization of our capacity, decrease of our profit margins, reduced earnings or increased losses. In addition, some semiconductor companies have advanced their CMOS designs to 65 nanometer or smaller geometries. These smaller geometries may provide the customer with performance and integration features that may be comparable to, or exceed, features offered by our specialty process technologies. The smaller geometries may also be more cost-effective at higher production volumes for certain applications, such as when a large amount of digital content is required in a mixed-signal semiconductor and less analog content is required. Our specialty processes will therefore compete with these processes and some of our potential and existing customers could elect to design these advanced CMOS processes into their next generation products. We are not currently capable, and do not currently plan to become capable, of providing CMOS processes at these smaller geometries. If our potential or existing customers choose to design their products using these advanced CMOS processes, our business may be negatively impacted. In addition, many of our competitors may have one or more of the following competitive advantages over us: greater manufacturing capacity; geographically diversified and more advanced manufacturing facilities; more advanced technological capabilities; a more diverse and established customer base; greater financial, marketing, distribution and other resources; a better cost structure; and/or better operational performance in cycle time and yields. If we do not compete effectively, our business and results of operations may be adversely affected. If we experience difficulty in achieving acceptable device yields, product performance and delivery times as a result of manufacturing problems, our business could be seriously harmed. The process technology for the manufacture of semiconductor wafers is highly complex, requires advanced and costly equipment and is constantly being modified in an effort to improve device yields, product performance and delivery times. Microscopic impurities such as dust and other contaminants, difficulties in the production process, defects in the key materials and tools used to manufacture a wafer and other factors can cause wafers to be rejected or individual semiconductors on specific wafers to be non-functional. We may experience difficulty achieving acceptable device yields, product performance and product delivery times in the future as a result of manufacturing problems. Although we have been enhancing our manufacturing capabilities and efficiency, from time to time we have experienced production difficulties that have caused delivery delays and quality control problems, as is common in the semiconductor industry. In the past we have encountered the following problems: difficulties in upgrading or expanding existing facilities; unexpected breakdowns in our manufacturing equipment and/or related facility systems; changing or upgrading our process technologies; raw materials shortages and impurities; and delays in delivery and shortages of spare parts and in maintenance of our equipment. Should these problems repeat, we may suffer delays in delivery and/or loss of reputation, business and revenues. Any of these problems could seriously harm our operating results, financial condition and ability to maintain our operations. If we are unable to purchase equipment and raw materials, we may not be able to manufacture our products in a timely fashion, which may result in a loss of existing and potential new customers. To increase the production capability of our facility and to maintain the quality of production in our facility, we must procure additional equipment. In periods of high market demand, the lead times from order to delivery of manufacturing equipment could be as long as 12 to 18 months. In addition, our manufacturing processes use many raw materials, including silicon wafers, chemicals, gases and various metals, and require large amounts of fresh water and electricity. Manufacturing equipment and raw materials generally are available from several suppliers. In several instances, however, we purchase equipment and raw materials from a single source. Shortages in supplies of manufacturing equipment and raw materials could occur due to an interruption of supply or increased industry demand. Any such shortages could result in production delays that could result in a loss of existing and potential new customers which may have a material adverse effect on our business and financial condition. We depend on intellectual property rights of third parties and failure to maintain or acquire licenses could harm our business. We depend on third party intellectual property in order for us to provide certain foundry services and design support to our customers. If problems or delays arise with respect to the timely development, quality and provision of such intellectual property to us, the design and production of our customers products could be delayed, resulting in underutilization of our capacity. If any of our intellectual property vendors goes out of business, liquidates, merges with, or is acquired by, another company that discontinues the vendor s previous line of business, or if we fail to maintain or acquire licenses to such intellectual property for any other reason, our business may be adversely affected. In addition, license fees and royalties payable under these agreements may impact our margins and operating results. Failure to comply with the intellectual property rights of third parties or to defend our intellectual property rights could harm our business. Our ability to compete successfully depends on our ability to operate without infringing on the proprietary rights of others and defending our intellectual property rights. Because of the complexity of the technologies used and the multitude of patents, copyrights and other overlapping intellectual property rights, it is often difficult for semiconductor companies to determine infringement. Therefore, the semiconductor industry is characterized by frequent litigation regarding patents, trade secrets and other intellectual property rights. We have been subject to intellectual property claims from time to time, some of which have been resolved through license agreements, the terms of which have not had a material effect on our business. From time to time, we are a party to litigation matters incidental to the conduct of our business. Because of the nature of the industry, we may continue to be a party to infringement claims in the future. In the event any third party were to assert infringement claims against us or our customers, we may have to consider alternatives including, but not limited to: negotiating cross-license agreements; seeking to acquire licenses to the allegedly infringed patents, which may not be available on commercially reasonable terms, if at all; discontinuing use of certain process technologies, architectures, or designs, which could cause us to stop manufacturing certain integrated circuits if we were unable to design around the allegedly infringed patents; fighting the matter in court and paying substantial monetary damages in the event we lose; or seeking to develop non-infringing technologies, which may not be feasible. Any one or several of these alternatives could place substantial financial and administrative burdens on us and hinder our business. Litigation, which could result in substantial costs to us and diversion of our resources, may also be necessary to enforce our patents or other intellectual property rights or to defend us or our customers against claimed infringement of the rights of others. If we fail to obtain certain licenses or if litigation relating to alleged patent infringement or other intellectual property matters occurs, it could prevent us from manufacturing particular products or applying particular technologies, which could reduce our opportunities to generate revenues. As of March 31, 2014 we had 164 patents in force. We intend to continue to file patent applications when appropriate. The process of seeking patent protection may take a long time and be expensive. We cannot assure you that patents will be issued from pending or future applications or that, if patents are issued, they will not be challenged, invalidated or circumvented or that the rights granted under the patents will provide us with meaningful protection or any commercial advantage. In addition, we cannot assure you that other countries in which we market our services and products will protect our intellectual property rights to the same extent as the United States. Further, we cannot assure you that we will at all times enforce our patents or other intellectual property rights or that courts will uphold our intellectual property rights, or enforce the contractual arrangements that we have entered into to protect our proprietary technology, which could reduce our opportunities to generate revenues. Effective intellectual property enforcement may be unavailable or limited in some foreign countries. It may be difficult for us to protect our intellectual property from misuse or infringement by other companies in these countries. Our inability to enforce our intellectual property rights in some countries may harm our business and results of operations. We could be seriously harmed by failure to comply with environmental regulations. Our business is subject to a variety of federal, state and local laws and governmental regulations relating to the use, discharge and disposal of toxic or otherwise hazardous materials used in our production processes. If we fail to use, discharge or dispose of hazardous materials appropriately, or if applicable environmental laws or regulations change in the future, we could be subject to substantial liability or could be required to suspend or adversely modify our manufacturing operations. We are subject to the risk of loss due to fire because the materials we use in our manufacturing processes are highly flammable. We use highly flammable materials such as silane and hydrogen in our manufacturing processes and are therefore subject to the risk of loss arising from fires. The risk of fire associated with these materials cannot be completely eliminated. Although we maintain insurance policies to reduce potential losses that may be caused by fire, including business interruption insurance, our insurance coverage may not be sufficient to cover all of our potential losses due to a fire. If our fab were to be damaged or cease operations as a result of a fire, and if our insurance proves to be inadequate, it may reduce our manufacturing capacity and revenues. In addition, a power outage, even of very limited duration, caused by a fire may result in a loss of wafers in production, deterioration in our fab yield and substantial downtime to reset equipment before resuming production. Possible product returns could harm our business. Products manufactured by us may be returned within specified periods if they are defective or otherwise fail to meet customers prior agreed upon specifications. Although product returns have historically been less than 1% of revenues, future product returns in excess of established provisions, if any, may have an adverse effect on our business and financial condition. We are subject to risks related to our international operations. We have generated substantial revenue from customers located in Asia-Pacific and in Europe. Because of our international operations, we are vulnerable to the following risks: we price our products primarily in US dollars; if the Euro, Yen or other currencies weaken relative to the US dollar, our products may be relatively more expensive in these regions, which could result in a decrease in our revenue; the burdens and costs of compliance with foreign government regulation, as well as compliance with a variety of foreign laws; general geopolitical risks such as political and economic instability, international terrorism, potential hostilities and changes in diplomatic and trade relationships; natural disasters affecting the countries in which we conduct our business; imposition of regulatory requirements, tariffs, import and export restrictions and other trade barriers and restrictions including the timing and availability of export licenses and permits; adverse tax rules and regulations; weak protection of our intellectual property rights; delays in product shipments due to local customs restrictions; laws and business practices favoring local companies; difficulties in collecting accounts receivable; and difficulties and costs of staffing and managing foreign operations. In addition, the United States and foreign countries may implement quotas, duties, taxes or other charges or restrictions upon the importation or exportation of our products, leading to a reduction in sales and profitability in that country. The geographical distance between the United States, Asia and Europe also creates a number of logistical and communication challenges. We cannot assure you that we will not experience any serious harm in connection with our international operations. Our business could suffer if we are unable to retain and recruit qualified personnel. We depend on the continued services of our executive officers, senior managers and skilled technical and other personnel. Our business could suffer if we lose the services of some of these personnel due to resignation, medical absence, illness or other reasons, and we cannot find and integrate adequate replacement personnel into our senior management, business or operations in a timely manner. We seek to recruit highly qualified personnel and there is intense competition for the services of these personnel in the semiconductor industry. Competition for personnel may increase significantly in the future as new fabless semiconductor companies as well as new semiconductor manufacturing facilities are established. Our ability to retain existing personnel and attract new personnel is in part dependent on the compensation packages we offer. As demand for qualified personnel increases, we may be forced to increase the compensation levels and to adjust the cash, equity and other components of compensation we offer our personnel. Our business plan is premised on the increasing use of outsourced foundry services by both fabless semiconductor companies and integrated device manufacturers for the production of semiconductors using specialty process technologies. Our business may not be successful if this trend does not continue to develop in the manner we expect. We operate as an independent semiconductor foundry focused primarily on specialty process technologies. Our business model assumes that demand for these processes within the semiconductor industry will grow and will follow the broader trend towards outsourcing foundry operations. Although the use of foundries is established and growing for standard CMOS processes, the use of outsourced foundry services for specialty process technologies is less common and may never develop into a significant part of the semiconductor industry. If fabless companies and vertically integrated device manufacturers choose not to access independent specialty foundry capacity, the manufacture of specialty process technologies may not follow the trend of standard CMOS processes. If the broader trend to outsourced foundry services does not prove applicable to the specialty process technologies that we are focused on, our business, results of operations and cash flow may be harmed. If we are unable to continue transitioning our product mix from standard CMOS process technologies to specialty process technologies, our business and results of operations may be harmed. Since Jazz Semiconductor s separation from Conexant, it has focused its research and development and marketing efforts primarily on specialty process technologies and adding new customers in the specialty field. These specialty process technologies include advanced analog, radio frequency, high voltage, bipolar and silicon germanium bipolar CMOS processes and double-diffused metal oxide semiconductor processes. To be competitive, reduce our dependence on standard process technologies and successfully implement our business plan, we will need to continue to derive a significant percentage of our revenues from specialty process technologies. In order to expand and diversify our customer base, we need to identify and attract customers who will use the specialty process technologies we provide. We cannot assure you that demand for our specialty process technologies will increase or that we will be able to attract customers who use them. In addition, because we intend to continue to focus on specialty process technologies, we do not plan to invest in the research and development of more advanced standard CMOS processes. As standard CMOS process technologies continue to advance, we will not remain competitive in these process technologies. If Jazz s current customers switch to another foundry for standard CMOS process technologies and we are unable to increase our revenues from our specialty process technologies, Jazz s business, results of operations and cash flows may be harmed. Our historical financial performance may not be indicative of our future results. Since Jazz Semiconductor s inception, a large percentage of its revenues have primarily been derived from products manufactured using standard CMOS processes that are no longer the focus of its business. As customers design their next generation products for smaller geometry CMOS processes, they may look to other foundries to provide their requisite manufacturing capacity. As a result, we may not continue to generate the same level of revenues from our standard CMOS processes in the future as it shifts our focus and operations to our more specialized processes: advanced analog, radio frequency, high voltage, bipolar and silicon germanium bipolar CMOS processes and double-diffused metal oxide semiconductor processes. If our potential or existing customers design their products using smaller geometry CMOS processes at other foundries, and we are unable to increase the revenues we derive from our specialty process technologies, our business, results of operations and cash flows may be harmed. Failure to comply with existing or future governmental regulations by us, our manufacturing suppliers or our customers could reduce our sales, increase our manufacturing costs or require design modifications. The semiconductors we produce and the export of technologies used in our manufacturing processes may be subject to U.S. export control and other regulations as well as various standards established by authorities in other countries. Failure to comply with existing or evolving U.S. or foreign governmental regulation or to obtain timely domestic or foreign regulatory approvals or certificates could materially harm our business by reducing our sales, requiring modifications to our processes that we license to our foreign third parties, or requiring extensive modifications that may be too expensive to our customers products. Neither we nor our customers may export products using or incorporating controlled technology without obtaining an export license. In addition, when we face excess demand, we may be dependent on our manufacturing suppliers in China for a significant portion of our planned manufacturing capacity, and export licenses may be required in order for us to transfer technology related to our manufacturing processes to our foreign manufacturing suppliers. These restrictions may make foreign competitors facing less stringent controls on their processes and their customers products more competitive in the global market than we or our customers. The U.S. government may not approve any pending or future export license requests. In addition, the list of products and countries for which export approval is required, and the regulatory policies with respect thereto, could be revised from time to time. Governmental restrictions may make foreign competitors facing less stringent controls on their processes and their customers products more competitive in the global market than us or our customers. We could also be adversely impacted by continued instability or negative impact on economic growth resulting from the possibility that U.S. lawmakers may fail to pass legislation to avoid mandatory government spending restrictions and/or raise the federal debt ceiling. A significant portion of our workforce is unionized, and our operations may be adversely affected by work stoppages, strikes or other collective actions which may disrupt our production and adversely affect the yield of our fab. A significant portion of our employees at our Newport Beach, California fab are represented by a union and covered by a collective bargaining agreement that is scheduled to expire in 2015. We cannot predict the effect that continued union representation or future organizational activities will have on our business. We cannot assure you that we will not experience a material work stoppage, strike or other collective action in the future, which may disrupt our production and adversely affect our customer relations and operational results. If we are unable to collaborate successfully with electronic design automation vendors and third-party design service companies to meet our customers design needs, our business could be harmed. We have established relationships with electronic design automation vendors and third-party design service companies. We work together with these vendors to develop complete design kits that our customers can use to meet their design needs using our process technologies. Our ability to meet our customers design needs successfully depends on the availability and quality of the relevant services, tools and technologies provided by electronic design automation vendors and design service providers, and on whether Jazz, together with these providers, is able to meet customers schedule and budget requirements. Difficulties or delays in these areas may adversely affect our ability to meet our customers needs, and thereby harm our business. If the integrated circuits we manufacture are integrated into defective products, we may be subject to product liability or other claims and our reputation could be harmed. Our customers integrate our custom integrated circuits into their products which they then sell to end users. If these products are used in defective or malfunctioning products, we may be subject to product liability claims, as well as possible recalls, safety alerts or advisory notices relating to the product. We cannot assure you that our insurance policies will cover specific product liability issues or that they will be adequate to satisfy claims made against Jazz in the future. Also, we may be unable to obtain insurance in the future at satisfactory rates, in adequate amounts, or at all. Product liability claims or product recalls in the future, regardless of their ultimate outcome, could have a material adverse effect on our business, reputation, financial condition and on our ability to attract and retain customers. Our production yields and business could be significantly harmed by natural disasters, particularly earthquakes. Our Newport Beach, California fab is located in southern California, a region known for seismic activity. Due to the complex and delicate nature of our manufacturing processes, our facilities are particularly sensitive to the effects of vibrations associated with even minor earthquakes. Our business operations depend on our ability to maintain and protect our facilities, computer systems and personnel. We cannot be certain that precautions we have taken to seismically upgrade our fab will be adequate to protect our facilities in the event of a major earthquake, and any resulting damage could seriously disrupt our production and result in reduced revenues. In addition, since we have been able to achieve only a partial and limited insurance coverage from any loss that may be incurred as a result of earthquakes, any such loss exceeding our insurance coverage will have a material adverse effect on our business and financial position. Climate change may negatively affect our business. There is increasing concern that climate change is occurring and may have dramatic effects on human activity if no aggressive remediation steps are taken. Public expectations with respect to reductions in greenhouse gas emissions may result in increased energy, transportation and raw material costs. Scientific examination of, political attention to and rules and regulations on issues surrounding the existence and extent of climate change may result in increased production costs due to increase in the prices of energy and introduction of energy or carbon tax. A variety of regulatory developments have been introduced that focus on restricting or managing emissions of carbon dioxide, methane and other greenhouse gases. Enterprises may need to purchase new equipment at higher costs or raw materials with lower carbon footprints. These developments and further legislation that is likely to be enacted may adversely affect our operations. Changes in environmental regulations, such as those on the use of per fluorinated compounds, may increase our production costs, which may adversely affect our results of operation and financial condition. In addition, more frequent droughts and floods, extreme weather conditions and rising sea levels may occur due to climate change. For example, transportation suspension caused by extreme weather conditions may harm the distribution of our products. We cannot predict the economic impact, if any, of disasters or climate change. Compliance with the US Conflict Minerals Law may affect our ability or the ability of our suppliers to purchase raw materials at an effective cost. Many industries rely on materials which are subject to regulation concerning certain minerals sourced from the Democratic Republic of Congo ("DRC") or adjoining countries, which include Sudan, Uganda, Rwanda, Burundi, United Republic of Tanzania, Zambia, Angola, Congo, and Central African Republic. These minerals are commonly referred to as conflict minerals. Conflict minerals which may be used in our industry or by our suppliers include Columbite-tantalite (derivative of tantalum [Ta]), Cassiterite (derivative of tin [Sn]), gold [Au], Wolframite (derivative of tungsten [W]), and Cobalt [Co]. The SEC adopted annual disclosure and reporting requirements with respect to use of conflict minerals mined from the DRC and adjoining countries in their products. There may also be costs associated with complying with these disclosure requirements, including for diligence to determine the sources of conflict minerals used in our products and other potential changes to products, processes or sources of supply as a consequence of such verification activities. Although we expect that we and our vendors will be able to comply with the requirements, there can be no guarantee that we will be able to gather all the information required from our vendors. In addition, there is increasing public sentiment that companies should avoid using conflict materials from the DRC and adjoining countries. Although we believe our suppliers do not rely on such conflict materials, there can be no guarantee that we will continue to be able to obtain adequate supplies of materials needed in our production from supply chains outside the DRC and adjoining countries. A failure to obtain necessary information or to maintain adequate supplies of materials from supply chains outside the DRC and adjoining countries may delay our production, increasing the risk of losing customers and business. Our production may be interrupted if it cannot maintain sufficient sources of fresh water and electricity. The semiconductor manufacturing process requires extensive amounts of fresh water and a stable source of electricity. Droughts, pipeline interruptions, power interruptions, electricity shortages or government intervention, particularly in the form of rationing, are factors that could restrict our access to these utilities in the area in which our fab is located. In particular, our Newport Beach, California fab is located in an area that is susceptible to water and electricity shortages. If there is an insufficient supply of fresh water or electricity to satisfy our requirements, it may need to limit or delay our production, which could adversely affect our business and operating results. Increases in utility costs would also increase our operating expenses. In addition, a power outage, even of very limited duration, could result in a loss of wafers in production, deterioration in our fab yield and substantial downtime to reset equipment before resuming production. Construction activities could limit or delay our production, which could adversely affect our business and operating results. We lease our fabrication facilities and headquarters under lease contracts that may be extended until 2027, through the exercise of options at our sole discretion to extend the lease periods from 2017 to 2022 and from 2022 to 2027. In 2010, the properties were sold by Conexant to Uptown, a joint venture consisting of a fund controlled by New York-based DRA Advisors LLC and an affiliate of the Shopoff Group, a real estate investment firm based in Irvine, California. In connection with the sale, we negotiated amendments to our operating leases that confirm our ability to remain in the fabrication facilities through 2027 as described above. In the amendments to our leases, we secured various contractual safeguards designed to limit and mitigate any adverse impact of construction activities on our fabrication operations. Although we do not anticipate a material adverse impact to our operations, it is possible that construction activities adjacent to our fabrication facility could result in temporary reductions or interruptions in the supply of utilities to the property and that a portion or all of the fabrication facility may need to be idled temporarily during development. If construction activities limit or interrupt the supply of water, gas or electricity to our fabrication facility or cause significant vibrations or other disruptions, it could limit or delay our production, which could adversely affect our business and operating results. In addition, an unplanned power outage caused by construction activities, even of very limited duration, could result in a loss of wafers in production, deterioration in our fab yield and substantial downtime to reset equipment before resuming production. In relation to the amendment to the lease contract, we may incur substantial costs in order to reach required noise mitigation which may affect our results.

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+RISK FACTORS An investment in our securities involves a high degree of risk. You should carefully consider the following risks and uncertainties in addition to other information in this prospectus before purchasing our securities. Our business, operating results and financial condition could be seriously harmed due to any of the following risks. The risks described below are the risks that we believe are material that are facing our company. Additional risks not currently known to us or that we currently deem immaterial may also impair our business, prospects, financial condition and results of operations. You could lose all or part of your investment due to any of these risks. Risks Related to Our Business We Have a History of Operating Losses and There Can Be No Assurance We Will Be Profitable in the Future. We have a history of operating losses, expect to continue to incur losses, may never be profitable, and must be considered to be in the development stage. Further, we have been dependent on sales of our equity securities and debt financing to meet our cash requirements. We have incurred net losses totaling approximately $15.2 million for our fiscal year ended December 28, 2013 ("Fiscal 2013") and $9.3 million for the year ended December 31, 2012 ("Fiscal 2012"). As of December 28, 2013, we had an accumulated deficit of $35.9 million, and as of our fiscal quarter ended March 29, 2014, we had an accumulated deficit of $38.5 million. As of December 28, 2013, we had cash and cash equivalents of $1.2 million and a working capital deficit of $3.4 million. As of our fiscal quarter ended March 29, 2014, we had cash and cash equivalents of $3.9 million and a working capital deficit of $0.9 million. We Will Need to Raise Capital to Continue Our Operations. Based upon our historical losses from operations, we anticipate we will require additional funding after the offering. If we cannot obtain capital through additional financings or otherwise, our ability to execute our development plans and achieve profitable operational levels will be greatly limited. Historically, we have funded our operations through the issuance of equity and convertible debentures and bank debt financing arrangements. We may not be able to obtain additional financing on favorable terms, on a timely basis, if at all. Our future cash flows and the availability of financing will be subject to a number of variables, including the demand for and market acceptance of CRAiLAR technologies. Further, debt financing could lead to a diversion of cash flow to satisfy debt-servicing obligations and create restrictions on business operations. If we are unable to raise additional funds on acceptable terms on a timely basis, it would have a material adverse effect upon our operations. Our Independent Registered Public Accounting Firm Has Expressed Doubt about Our Ability to Continue as a Going Concern. Our audited financial statements have been prepared under the assumption that we will continue as a going concern. Our independent registered public accounting firm has issued a report that included an explanatory paragraph expressing substantial doubt as to our ability to continue as a going concern in light of our continuing net losses and anticipated future operating losses. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our ability to continue as a going concern is dependent upon our ability to obtain additional financings or other capital, reduce expenditures or attain further operating efficiencies and generate revenue. If adequate funds are not available to us when we need such funds, or if we are unable to generate sufficient revenues, we will be required to curtail our operations, which would, in turn, further raise substantial doubt about our ability to continue as a going concern. We May Have Insufficient Earnings or Liquidity to Meet Our Future Debt Obligations. We currently have outstanding convertible debentures and other debt (including a debt repayment obligation relating to our European production facility and a loan from IKEA) in the aggregate principal amount of $22.5 million. The maturity dates of such debt and convertible debentures range from 2016 to 2018. The interest payments on our outstanding debentures and loans are expected to be $1.8 million for each of fiscal 2014 and fiscal 2015. Our inability to generate cash flow sufficient to satisfy our debt obligations, or to refinance our obligations on commercially reasonable terms, could materially and adversely affect our business. In addition, servicing these debt obligations will reduce the availability of our cash flow to fund working capital and capital expenditures to continue to expand our business and operations. Our Success Is Dependent upon the Acceptance of CRAiLAR Technology. Our success depends upon our achieving significant market acceptance of our CRAiLAR technology and products containing our CRAiLAR fiber. Acceptance of our CRAiLAR technology will depend on the success of our and our customers' promotional and marketing efforts and ability to attract customers. If such efforts fail to develop an awareness of and demand for our CRAiLAR technology and products, we may never be able to generate any significant future revenues. Even if awareness of our CRAiLAR technology increases, we may not be able to timely produce enough of our fibers to meet demand. In addition, the acceptance of our CRAiLAR technology may be adversely affected by decreases in the price of cotton. A decrease in the price of cotton could reduce our customers' desire for natural fiber alternatives, and thereby reduce the demand for and acceptance of our proprietary fibers, which could have a material adverse effect on our financial results. We Are Dependent upon Third Parties to Increase the Awareness of and Demand for Our CRAiLAR Fibers and Technology. We are pursuing a pull-through marketing model, which focuses on working directly with some of the leading consumer brands in a variety of target markets to develop additional products incorporating our CRAiLAR fibers. To date, we have not spent significant funds on marketing and promotional efforts, but we expect our customers to spend a significant amount on promotion, marketing and advertising of the benefits of our fibers and their products containing such fibers in the future, which we believe will increase awareness of our products. However, we do not currently have any customer agreements which require any significant expenditures to be made by the customer specifically to promote our brand or our products. In addition, we have little control over the actions of our customers with respect to the specific products and quality and number of such products that our customers sell or market that include our CRAiLAR fibers, or the relative mix of our fibers in such products, all of which can have an effect on the perception and acceptance of our products. If our customers do not promote and market our products in the future as we expect or their products are not well-accepted in the market or do not effectively demonstrate the benefits of our products and technologies, the acceptance of our brand and products may suffer or we may be required to incur significant additional costs for promotion and marketing, which would adversely affect our financial results and condition. An Early Termination of the NRC License Will Have a Material Adverse Effect on Our Business. Our CRAiLAR technologies are based on patents and other intellectual property licensed to us from the NRC. The license agreement expires upon the expiration of the last patent claim covered by the license, which is currently in December 2029, but may be terminated earlier by the NRC upon our breach of the license agreement or in the event we become bankrupt or insolvent. An early termination of the license agreement would have an immediate and material adverse effect on our business. In addition, due to the substantial dependence of our technologies on the patents held by the NRC, our business and financial results may be adversely affected if such patents are not adequately enforced or protected. Delays or Disruptions in Production of Our Products Could Adversely Affect Our Financial Results. Our business operations consist primarily of, and our revenues are dependent upon, the production and sale of our CRAiLAR fibers. Currently, we have only one wet processing facility located in Europe for the production of our products. Any delays or disruptions in production at our European facility, whether due to mechanical issues, labor disputes or otherwise, could materially and adversely impact our sales and financial results. Such delays or disruptions that result in an inability to timely meet supply requirements could also have a negative effect on our relationships with our customers and the ultimate acceptance of our products. We may also experience unforeseen quality control issues as we adjust production to meet any changes in demand for our products. In addition, although we plan to make improvements to our decortication facility in South Carolina so that we can resume production at such facility, we cannot assure you that such improvements will be made or that we will ever have full processing capabilities at that facility. A Commercial Market Must Be Found for Our By-products. North American markets need to be found and developed for the by-products of our decortication process. Although several opportunities for the sale of our by-products are being explored, no contracts for the off take of our by-products have been signed as of the date of this prospectus, and we cannot assume that we will enter into any such contracts in the future or that such development will lead to usable products. We May Be Unable to Retain Key Employees or Management Personnel. The loss of any of our key officers and management personnel would have an adverse impact on our future development and could impair our ability to succeed. Our performance is substantially dependent upon the expertise of our Chief Executive Officer, Mr. Kenneth Barker, and our Chief Innovation Officer, Mr. Jason Finnis, and other key management personnel and our ability to continue to hire and retain such personnel. It may be difficult to find sufficiently qualified individuals to replace Messrs. Barker and Finnis or other key management personnel, including Mr. Ted Sanders, our Chief Financial Officer and Treasurer, Mr. Jay Nalbach, our Chief Marketing Officer, and Mr. Guy Prevost, our Corporate Controller and Compliance Officer, if we lose any one or more of them. The loss of any such persons could have a material adverse effect on our business, development, financial condition, and operating results. We do not maintain "key person" life insurance on our senior executive officers. Our Officers and Directors May Be Subject to Conflicts of Interest. Certain of our officers and directors may be subject to conflicts of interest. Such conflicts include deciding how much time to devote to our affairs, as well as what business opportunities should be presented to us. Certain of our directors devote part of their working time to other business endeavors, including consulting relationships with other entities, and have responsibilities to other entities. Because of these relationships, such directors may be subject to conflicts of interest. Currently, we have no policy in place to address such conflicts of interest. However, such directors have acknowledged their fiduciary duty to perform their duties in our best interest and those of our shareholders. Government Regulation and Trade Restrictions Could Have a Negative Impact on Our Business. Governments or special interest groups may attempt to protect existing industries through the use of duties, tariffs or public relations campaigns. These efforts may adversely affect interest in and demand for our CRAiLAR technology. Moreover, any negative changes to international treaties and regulations such as NAFTA and international trade agreements, and embargoes imposed by entities such as the World Trade Organization, which could result in a rise in trade quotas, duties, taxes and similar impositions or which could limit the countries from whom we can purchase component materials, or which could limit the countries where we or our customers might market and sell products created using CRAiLAR technology, could have an adverse effect on our business. The laws, regulations, policies or current administrative practices of any government body, organization or regulatory agency in the United States or any other jurisdiction may be changed, applied or interpreted in a manner which will fundamentally alter our ability to carry on business. The actions, policies or regulations, or changes thereto, of any government body or regulatory agency, or other special interest groups, may have a detrimental effect on us. Any or all of these situations may have a negative impact on our ability to operate and/or our profitability. If Our Competitors Misappropriate Unpatented Proprietary Know-How and Our Trade Secrets, It May Have a Material Adverse Effect on Our Business. The loss of or inability to enforce our CRAiLAR trademark and our proprietary know-how and trade secrets could adversely affect our business. We depend heavily on trade secrets and the design expertise of our employees. If any of our competitors copy or otherwise gains access to our trade secrets or develops similar technologies or processes independently, we would not be able to compete as effectively. The measures we take to protect our trade secrets and design expertise may not be adequate to prevent their unauthorized use. Further, the laws of foreign countries may provide inadequate protection of such intellectual property rights. We may need to bring legal claims to enforce or protect such intellectual property rights. Any litigation, whether successful or unsuccessful, could result in substantial costs and diversion of resources. In addition, notwithstanding the rights we have secured in our intellectual property, other persons may bring claims against us that we have infringed on their intellectual property rights or claims that our intellectual property right interests are not valid. Any claims against us, with or without merit, could be time consuming and costly to defend or litigate and therefore could have an adverse effect on our business and financial condition. Currency Fluctuations May Cause Translation Gains and Losses. A significant portion of our expenses are incurred in Canadian dollars and Euros. As a result, appreciation in the value of these currencies relative to the United States dollar could adversely affect our operating results. Foreign currency translation gains and losses arising from normal business operations are credited to or charged against other income for the period incurred. Fluctuations in the value of Canadian dollars and Euros relative to United States dollars may cause currency translation gains and losses. We May Not Successfully Identify or Complete Future Acquisitions, Which Could Have a Material Adverse Effect on Our Business, Financial Condition, Results of Operations and Cash Flow. We may seek to expand our business partly through acquisitions. However, if any reasonable acquisition candidates were to be identified, we cannot assure you that we will succeed in: completing acquisitions; integrating acquired operations into our existing operations; or expanding into new markets. We also cannot assure you that any current or future acquisitions will not have an adverse effect on our operating results, particularly in the fiscal quarters immediately following their completion while we integrate the operations of the acquired business. The integration of newly acquired businesses or operations may prove to be more challenging, take more time than originally anticipated and result in significant additional costs and/or operational issues, all of which could adversely affect our financial condition and result of operations. Once integrated, acquired operations may not achieve levels of revenues, profitability or productivity comparable with those achieved by our existing operations, or otherwise perform as expected. Risks Related to Our Common Stock Sales of a Substantial Number of Shares of Our Common Stock May Result in Significant Downward Pressure on the Price of Our Common Stock and Could Affect Your Ability to Realize the Current Trading Price of Our Common Stock. As of July 30, 2014, there were 51,428,003 shares of our common stock issued and outstanding. Further, as of that date there were outstanding options exercisable for 8,089,295 shares of common stock at a weighted average exercise price of $1.70 per share and warrants exercisable for 8,516,260 shares of common stock at a weighted average exercise price of $1.24 per share. We also completed three offerings of convertible debentures of $10.1 million (CAD$10.0 million), $4.9 million (CAD$5.0 million) and $3.4 million (CAD$3.5 million) on September 20, 2012, February 25, 2013 and July 26, 2013, respectively. Holders of the convertible debentures issued in September 2012 and February 2013 have the option to convert such notes at a price of $2.85 (CAD$2.90) per share of common stock at any time prior to September 30, 2017. Holders of the convertible debentures issued in July 2013 have the option to convert such notes at a price of $1.21 (CAD$1.25) per share of common stock at any time prior to July 26, 2016. Any sales in the public market of the common shares issuable upon exercise or conversion of the outstanding options, warrants and convertible debentures may dilute our stockholders' ownership percentages and could result in a decrease in the market value of our equity securities. We note that holders of options to purchase 6,774,877 shares have agreed to waive their right to exercise their options on a pro rata basis based on the number of shares we require to have sufficient authorized capital to issue the securities purchased in this offering, including the Shares issued as part of the Units and the Warrant Shares issuable upon exercise of the Warrants issued as part of the Units, until such time as we have increased our authorized share capital or otherwise have sufficient authorized share capital to issue shares upon exercise of such options as well as all other outstanding convertible or exercisable securities. In addition, any significant downward pressure on the price of our common stock as certain stockholders sell their shares of our common stock may encourage short sales. Any such short sales could place further downward pressure on the price of our common stock. The Trading Price of Our Common Stock on the OTCQB Has Been and May Continue to Fluctuate Significantly and Stockholders May Have Difficulty Reselling Their Shares. During Fiscal 2013, our common stock has traded as low as $0.36 and as high as $2.63. In addition to volatility associated with OTCQB securities in general, the value of your investment could decline due to the impact of any of the following factors upon the market price of our common stock: changes in the demand for flax and other eco-friendly products; market acceptance of our products and the products that incorporate our CRAiLAR fiber; disappointing results from our or our customers' marketing and sales efforts; failure to meet our revenue or profit goals or operating budget; decline in demand for our common stock; downward revisions in securities analysts' estimates or changes in general market conditions; lack of funding generated for our operations and existing debt obligations; investor perception of our industry or our business prospects; and general economic trends. In addition, stock markets have experienced extreme price and volume fluctuations and the market prices of securities have been highly volatile. These fluctuations are often unrelated to operating performance and may adversely affect the market price of our common stock. As a result, investors may be unable to sell their shares at a fair price and you may lose all or part of your investment. Additional Issuances of Equity Securities May Result in Dilution to Our Existing Stockholders. Our Articles of Incorporation authorize the issuance of 100,000,000 shares of common stock. The Board of Directors has the authority to issue additional shares of our capital stock to provide additional financing in the future and the issuance of any such shares may result in a reduction of the book value or market price of the outstanding shares of our common stock. If we do issue any such additional shares, such issuance also will cause a reduction in the proportionate ownership and voting power of all other stockholders. As a result of such dilution, if you acquire shares of our common stock, your proportionate ownership interest and voting power could be decreased. Further, any such issuances could result in a change of control. We are not authorized to issue shares of preferred stock. However, there are provisions of British Columbia law that permit a company's board of directors, without shareholder approval, to issue shares of preferred stock with rights superior to the rights of the holders of shares of common stock. As a result, shares of preferred stock could be issued quickly and easily, adversely affecting the rights of holders of shares of common stock and could be issued with terms calculated to delay or prevent a change in control or make removal of management more difficult. Although we currently do not have any authorized preferred stock, have no plans to create authorized preferred stock, and have no present plans to issue any shares of preferred stock, any creation and issuance of preferred stock in the future could adversely affect the rights of the holders of common stock and reduce the value of the common stock. Our Common Stock is Classified as a "Penny Stock" Under SEC Rules Which Limits the Market for Our Common Stock. Because our stock is not traded on any national securities exchange in the U.S. and because the market price of the common stock is less than $5 per share, the common stock is classified as a "penny stock." Our stock has never traded above $5 per share. SEC Rule 15g-9 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), imposes additional sales practice requirements on broker-dealers that recommend the purchase or sale of penny stocks to persons other than those who qualify as an "established customer" or an "accredited investor." This includes the requirement that a broker-dealer must make a determination that investments in penny stocks are suitable for the customer and must make special disclosures to the customers concerning the risk of penny stocks. Many broker-dealers decline to participate in penny stock transactions because of the extra requirements imposed on penny stock transactions. Application of the penny stock rules to our common stock reduces the market liquidity of our shares, which in turn affects the ability of holders of our common stock to resell the shares they purchase, and they may not be able to resell at prices at or above the prices they paid. We Are a Canadian Company and a Majority of Our Directors and Many of Our Officers Are Canadian Citizens and/or Residents, Which Could Make It Difficult for Investors to Enforce Judgments Against Us in the United States. We are a company incorporated under the laws of the Province of British Columbia, Canada and a majority of our directors and many of our officers reside in Canada. Therefore, it may be difficult for investors to enforce within the United States any judgments obtained against us or any of our directors or officers. All or a substantial portion of such persons' assets may be located outside the United States. As a result, it may be difficult for investors to effect service of process on our directors or officers, or enforce within the United States or Canada any judgments obtained against us or our officers or directors, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state thereof. Consequently, you may be effectively prevented from pursuing remedies under U.S. federal securities laws against them. In addition, investors may not be able to commence an action in a Canadian court predicated upon the civil liability provisions of the securities laws of the United States. We have been advised by our Canadian counsel that there is doubt as to the enforceability, in original actions in Canadian courts, of liability based upon the U.S. federal securities laws and as to the enforceability in Canadian courts of judgments of U.S. courts obtained in actions based upon the civil liability provisions of the U.S. federal securities laws. Therefore, it may not be possible to enforce those actions against us or any of our directors or officers. A Decline in the Price of Our Common Stock Could Affect Our Ability to Raise Further Working Capital and Adversely Impact Our Operations. A decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise additional capital for our operations. Because our operations to date have been principally financed through the sale of equity securities, a decline in the price of our common stock could have an adverse effect upon our liquidity and our continued operations. A reduction in our ability to raise equity capital in the future would have a material adverse effect upon our business plan and operations, including our ability to continue our current operations. If our stock price declines, we may not be able to raise additional capital or generate funds from operations sufficient to meet our obligations.

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+RISK FACTORS Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in our other filings with the SEC, before deciding whether to invest in shares of our common stock. Additional risks and uncertainties not presently known to us may also affect our business. If any of these known or unknown risks or uncertainties actually occurs, our business, financial condition, and results of operations could be seriously harmed. In that event, the market price for our common stock will likely decline and you may lose all or part of your investment. Risks Related to an Investment in Us We have a history of losses, and future losses or the inability to raise additional capital may adversely impact our ability to continue as a going concern. Our consolidated financial statements have been prepared on a going concern basis that assumes we will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future. The report of our independent registered public accounting firm for the year ended December 29, 2013, included in our Annual Report on Form 10-K, filed with the SEC on February 28, 2014, contains an explanatory paragraph indicating that there is substantial doubt as to our ability to continue as a going concern as a result of recurring losses from operations. Since our inception, we have never been profitable on an annual basis and we have incurred significant net losses leading to an accumulated deficit of $359.0 million as of September 28, 2014. If we are unsuccessful in negotiating a collaboration agreement with Alcatel-Lucent, we will not enjoy the benefits of the Proposed Collaboration and will lose any revenue that would have been generated under such agreement. We completed the Private Placement and have implemented the Rights Offering based, in part, on the anticipated benefits of the Proposed Collaboration. However, we currently have a term sheet with Alcatel-Lucent, most of which is binding, and we need to negotiate a collaboration agreement. If we fail to enter into a collaboration agreement, we will not realize revenue from the potential sale of products resulting from the collaboration, which would harm our results of operations and our reputation. If we do not enter into a collaboration agreement with Alcatel-Lucent, we cannot draw down on the ALU Loan. We have entered into the ALU Loan Agreement under which we can borrow up to $10.0 million. Our ability to draw on the ALU Loan is subject to the satisfaction of certain conditions precedent, including entering into a collaboration agreement with Alcatel-Lucent for the development of ultra-broadband products. Our inability to access the proceeds of the ALU Loan could have a negative effect on our liquidity, which could result in a failure to comply with certain covenants under our SVB Loan Agreement (as described below). We utilize a revolving credit facility to fund our operations. Should we no longer have access to the revolving line of credit, it would materially impact our business, financial condition, and liquidity. On October 7, 2014, we entered into a First Amended and Restated Loan and Security Agreement, or the SVB Loan Agreement, with Silicon Valley Bank, or SVB. Under the SVB Loan Agreement we may borrow up to $20 million, subject to certain limitations. The SVB Loan Agreement is collateralized by a first priority lien on all of our present and future property and assets, other than our intellectual property, which is subject to a second lien on our intellectual property and a first priority lien in favor of Alcatel-Lucent. The SVB Loan Agreement also requires that we maintain a minimum monthly Adjusted Quick Ratio requirement of 1.2 to 1.0, as defined in the agreement. From time-to-time we draw advances under the SVB Loan Agreement and repay the advances as our receivables are collected. As of September 28, 2014, the balance under the SVB Loan Agreement was Table of Contents approximately $4.9 million. We were not in compliance with the covenants contained in the original SVB loan agreement as of September 28, 2014. Those covenants were replaced when the agreement was amended, and we are currently in compliance with all of the covenants in the SVB Loan Agreement. There can be no assurance that we will remain in compliance with the terms of the agreement in the future nor, should a default occur, that we would be successful in obtaining a further amendment to the agreement to avoid SVB declaring a default. Should we be in default of the terms of the SVB Loan Agreement and fail to obtain an amendment prior to SVB declaring us to be in default, SVB could require that any advances under the SVB Loan Agreement be repayable immediately, which immediate repayment would have a material adverse effect on our business, liquidity, and financial condition. Our SVB Loan Agreement is subject to contractual and borrowing base limitations, which could adversely affect our liquidity and business. The maximum amount we can borrow under our SVB Loan Agreement is subject to contractual and borrowing base limitations, which could significantly and negatively impact our future access to capital required to operate our business. Borrowing base limitations are based upon eligible accounts receivable. If our accounts receivable are deemed ineligible, because, for example, they are resident outside certain geographical regions or a receivable is older than 90 days, the amount we can borrow under the revolving credit facility would be reduced. These limitations could have a material adverse impact on our liquidity and business. Our Loan Agreements contain financial covenants that may limit our operating and strategic flexibility. Our SVB Loan Agreement and ALU Loan Agreement, or collectively, our Loan Agreements, contain financial covenants and other restrictions that limit our ability to engage in certain types of transactions. For example, these restrictions limit our ability to, or do not permit us to, incur additional debt, pay cash dividends, make other distributions or repurchase stock, engage in certain merger and acquisition activity, and make certain capital expenditures. There can be no assurance that we will be in compliance with all covenants in the future or that SVB or Alcatel-Lucent, or collectively, our Lenders, will agree to modify the SVB Loan Agreement or the ALU Loan Agreement, respectively, should that become necessary. Events beyond our control could affect our ability to comply with the covenants. Failure to comply with the covenants or restrictions could result in a default under our Loan Agreements. If we do not cure an event of default or obtain necessary waivers within the required time periods, our Lenders would be permitted to accelerate the maturity of the debt under our Loan Agreements, foreclose upon our assets securing the debt, and terminate any further commitments to lend. Under these circumstances, we may not have sufficient funds or other resources to satisfy our other obligations. In addition, the limitations imposed by our Loan Agreements may significantly impair our ability to obtain other debt or equity financing. There can be no assurance that any waivers we request will be received on a timely basis, if at all, or that any waivers obtained will extend for a sufficient period of time to avoid an acceleration event, an event of default, or other restrictions on our business. The failure to obtain any necessary waivers could have a material adverse effect on our business, liquidity, and financial condition. Our history of losses as well as future losses or inability to raise additional capital, may adversely impact our relationships with customers and potential customers. Since our inception, we have never been profitable on an annual basis and we have incurred significant net losses leading to an accumulated deficit of $359.0 million as of September 28, 2014. To achieve profitability, we will need to generate and sustain higher revenue and improve our gross margins, while maintaining expense levels that are appropriate and necessary for our business. We may not be able to achieve profitability and, even if we were able to attain profitability, we may not be able to sustain profitability on an on-going quarterly or annual basis. Since we compete with companies that have greater financial stability, our customers or potential Table of Contents customers may be reluctant to enter into arrangements with us due to the perceived risks to our long term viability and this, in turn, may adversely affect our financial results. Risks Related to Investing in the Rights Offering The Subscription Price for the Rights Offering is not necessarily an indication of the price at which our common stock will trade. The special committee, Alcatel-Lucent and the Tallwood Group agreed upon a formula to determine the price per share for the sale of shares of our common stock in the Private Placement, which represents a 17% premium to the market price per share of our common stock on the trading day immediately prior to the closing date of the Private Placement. We cannot assure you that the market price for our common stock at the time of the Rights Offering will be equal to or above the Subscription Price or that stockholders will be able to sell the common stock purchased in the Rights Offering at a price equal to or greater than the Subscription Price. Our common stock is traded on NASDAQ under the symbol IKAN. The Subscription Price is $0.41 per share. The closing price of our common stock on NASDAQ on the Record Date and on November 20, 2014 was $0.37 and $0.3310 per share, respectively. You are urged to obtain a current price quote for our common stock before exercising your Subscription Rights. You may not revoke your subscription exercise and you could be committed to buying shares above the prevailing market price. Once you exercise your Subscription Rights, you may not revoke the exercise of such rights. As of November 20, 2014, the closing price of our common stock was lower than the Subscription Price and may decline further before the Subscription Rights expire. If you exercise your Subscription Rights and, afterwards, the public trading market price of our common stock does not increase to the Subscription Price, you will have committed to buy common stock at a price above the prevailing market price. We cannot assure you that, following the exercise of your Subscription Rights, you will be able to sell your common stock at a price equal to or greater than the Subscription Price, and you may lose all or part of your investment in our common stock. Until the shares are delivered to you, you will not be able to sell the common stock that you purchase in the Rights Offering. We may use the proceeds of the Rights Offering in ways with which you may disagree. We intend to use the net proceeds of this Rights Offering for working capital and general corporate purposes. We will have significant discretion in the use of the net proceeds of this Rights Offering, and it is possible that we may allocate the proceeds differently than investors in the Rights Offering desire, or that we will fail to maximize our return on these proceeds. You will be relying on the judgment of our management with regard to the use of the proceeds from the Rights Offering, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. For more information, see the section entitled Use of Proceeds. Significant sales of our common stock, or the perception that significant sales may occur in the future, could adversely affect the market price for our common stock. Sales of substantial amounts of our common stock in the public market, and the availability of shares for future sale could adversely affect the price of our common stock, including the 39,634,144 shares sold in the Private Placement, up to 144,925,083 shares to be issued in the Rights Offering and the Standby Purchase, and the shares which would be issued upon the exercise of outstanding options to acquire shares of our common stock under our stock incentive plans, any or all of which could adversely affect the prevailing market price of our common stock and could cause the market price of our common stock to remain low for a substantial amount of time. We cannot foresee the impact of such potential sales on the market, but it is possible that if a significant Table of Contents percentage of such available shares were attempted to be sold within a short period of time, the market for our shares would be adversely affected. It is also unclear whether or not the market for our common stock could absorb a large number of attempted sales in a short period of time, regardless of the price at which they might be offered. Even if the sale of a substantial number of shares does not occur within a short period of time, the mere existence of this market overhang could have a negative impact on the market for our common stock and our ability to raise additional capital. In addition, because the public float of our common stock is relatively small, our common stock has limited trading volume, the market price is likely to be highly volatile and it could be subject to extreme fluctuations. Risks Related to Not Investing in the Rights Offering Your ownership interest will be further diluted if you do not exercise your Basic Subscription Rights. As a result of the Private Placement, the proportionate ownership interest of our existing stockholders other than the Tallwood Group was reduced by approximately 19.5%. To the extent that existing stockholders other than the Tallwood Group do not exercise their Basic Subscription Rights in full, their proportionate ownership interest will be further reduced, and the percentage of their original ownership interest after the Rights Offering will be further diluted by an additional approximately 8.0%. The Tallwood Group will significantly increase its proportional ownership interest in our company if you and our other Recordholders do not exercise their Subscription Rights. Prior to the Private Placement, the Tallwood Group s percentage ownership was 31.8% and immediately following the Private Placement it was 42.5%. The Tallwood Group has agreed to purchase up to an aggregate of 27,439,023 shares of our common stock in the Standby Purchase, less any shares it purchases in the Rights Offering. If no other Recordholder exercises its Basic Subscription Rights, the Tallwood Group will beneficially own 86,494,521 shares, or approximately 52.0%, of our then total outstanding shares of common stock following the Rights Offering (based on 166,356,829 shares outstanding and after giving effect to the Private Placement). If the Rights Offering is not successful, we may need to raise additional capital in the future. The sale of additional shares of common stock or other securities would result in dilution to our stockholders and incurring indebtedness would result in restrictions on our operations. We believe that funding received through the Private Placement, the Standby Purchase and under our Loan Agreements will be sufficient to meet our capital needs in the near term, however if the Rights Offering is not successful, we may need to seek financing in the future. These financings could include the sale of equity securities (which would result in dilution to our stockholders) or we may incur additional indebtedness (which would result in increased debt service obligations and could result in additional operating and financial covenants that would restrict our operations). There can be no assurance that any such equity or debt financing will be available in amounts or on terms acceptable to us, if at all. The failure to obtain additional equity or debt financing, if needed, could have a material adverse effect on our business, liquidity, and financial condition. Risks Related to Our Common Stock Our common stock is currently trading below $1.00. If our common stock continues to trade below $1.00, our stock could be delisted from NASDAQ, which action could adversely affect the market liquidity of our common stock and harm our business. Beginning on January 31, 2014, our common stock began to trade below $1.00 per share on NASDAQ. On March 18, 2014, we received notification from NASDAQ indicating that we were not in compliance with Nasdaq Marketplace Rule 5550(a)(2), which Rule provides that securities listed by NASDAQ must maintain a minimum closing bid price of $1.00 per share and that based upon the closing bid price for our securities for the previous Table of Contents 30 consecutive business days, we no longer meet this requirement. NASDAQ further notified the us that, in accordance with Nasdaq Marketplace Rule 5810(c)(3)(A), we will be provided 180 calendar days, or until September 15, 2014, to regain compliance by achieving a closing bid price of our securities of at least $1.00 per share for a minimum of ten consecutive business days at any time during the 180 calendar day period. As we did not anticipate regaining compliance by September 15, 2014, on September 2, 2014, we requested that NASDAQ grant to us a second 180 day compliance period. On September 16, 2014, NASDAQ notified us that we were eligible for a second 180 calendar day compliance period, or until March 16, 2015, to regain compliance, based on having met the continued listing requirements for market value of publicly held shares and all other applicable requirements for initial listing on NASDAQ, with the exception of the bid price requirement, and our written notice of our intention to cure the bid price deficiency during the second compliance period by effecting a reverse stock split, if necessary. However, there are risks associated with reverse stock splits, including the negative perceptions of the reverse stock splits, stock price may not remain above $1 and may decline lower than pre-reverse split levels, resulting stock price may not attract institutional investors or investment funds, and costs associated with implementing a reverse stock split. There can be no guarantee that we will be able to regain compliance with the continued listing requirement of Nasdaq Marketplace Rule 5550(a)(2) within this second 180 calendar day compliance period. If we are again subject to delisting for any reason, including the failure to maintain the minimum closing bid price, such action would adversely affect the market price and liquidity of the trading market for our common stock and our ability to obtain financing for the continuation of our operations and could result in the loss of confidence by our investors, suppliers, and employees. The market price of our common stock has been and may continue to be volatile, and holders of our common stock may not be able to resell shares at or above the price paid, or at all. The market price of our common stock has fluctuated substantially since our initial public offering and is likely to continue to be highly volatile and subject to wide fluctuations. Fluctuations have occurred and may continue to occur in response to various factors, many of which we cannot control, including: quarter-to-quarter variations in our operating results; failure to comply with NASDAQ minimum bid price, as discussed above; changes in our senior management; the success or failure of our new products; the gain or loss of one or more significant customers or suppliers; announcements of technological innovations or new products by our competitors, customers, or us; the gain or loss of market share in any of our markets; general economic and political conditions; specific conditions in the semiconductor industry and broadband technology markets, including seasonality in sales of consumer products into which our products are incorporated; continuing international conflicts and acts of terrorism; changes in earnings estimates or investment recommendations by analysts; changes in investor perceptions; changes in product mix; or changes in expectations relating to our products, plans, and strategic position or those of our competitors or customers. The closing price of our common stock for the period of January 1, 2012 to November 20, 2014 ranged from a low of $0.31 to a high of $2.02. In addition, the market prices of securities of semiconductor and other Table of Contents technology companies have been volatile, particularly for companies like us, with relatively low trading volumes. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to the operating performance of the specific companies. Accordingly, holders of our common stock may not be able to resell their shares at or above the price paid. If the securities analysts who currently publish reports on us do not continue to publish research or reports about our business, or if they issue an adverse opinion regarding our common stock, the market price of our common stock and trading volume could decline. The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us and our business. Currently, two analysts periodically publish reports about our company. If either of these two analysts issue an adverse opinion regarding our common stock, the stock price would likely decline. If the analysts cease coverage of us or fail to regularly publish reports on us, we could lose further visibility to the financial markets, which in turn could cause the market price of our common stock or trading volume to decline. Takeover attempts that stockholders may consider favorable may be delayed or discouraged due to our corporate charter and bylaws which contain anti-takeover provisions, Delaware law in general, or the Tallwood Group s significant ownership of our common stock. Provisions in our certificate of incorporation may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following: the right of our board of directors to expand the size of our Board and to elect directors to fill any such vacancies; the establishment of a classified board of directors, which provides that not all members of the Board are elected at one time; the prohibition of cumulative voting in the election of directors which would otherwise allow less than a majority of stockholders to elect director candidates; the requirement for advance notice for nominations for election to the board of directors or for proposing matters that can be acted upon at a stockholders meeting; the ability of our board of directors to alter our bylaws without obtaining stockholder approval; the ability of our board of directors to issue, without stockholder approval, up to 1,000,000 shares of preferred stock with terms set by the board of directors, which rights could be senior to those of common stock; the required approval of holders of at least two-thirds of the shares entitled to vote at an election of directors to adopt, amend, or repeal our bylaws or amend or repeal the provisions of our certificate of incorporation regarding the election and removal of directors, and the ability of stockholders to take action; the required approval of holders of a majority of the shares entitled to vote at an election of directors to remove directors for cause; and no right of stockholders to call a special meeting of stockholders or to take action by written consent. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us. These provisions in our certificate of incorporation, bylaws, and under Delaware law could discourage potential takeover attempts Table of Contents and could reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower than it would be without these provisions. Due to the significant number of shares of our common stock that the Tallwood Group hold, as discussed below, the Tallwood Group may have the ability to significantly influence the outcome of any matter submitted for the vote of our stockholders, including a takeover attempt, and may have interests that diverge from, or even conflict with, our interests and those of our other stockholders. Risks Related to Our Commercial Business We are in a product transition phase impacting revenue in the short term and we may not be able to adequately develop, market, or sell new products necessary to increase our quarterly revenue run rate. Revenues from our more mature products are decreasing as these products near end-of-life and this decrease in revenues is likely to keep our quarterly revenue relatively flat to declining in the near term. Increases in revenue will be derived from new products, however, revenue from these new products may not offset the declines in revenue from our mature products in the short-term, long-term, or at all. Beginning in the third quarter of 2012, we began selling our next generation Gateway product Fusiv Vx185, Vx183, Vx175, and Vx173 chipsets. Further, we are currently developing a new broadband DSL Access platform that incorporates vectoring technology. The successful customer migration to our new products is critical to our business, takes substantial time and effort, and there is no assurance that we are or will be able to market and or sell new products and services in a timely manner. Our newer products and services, including our Vx585 family, Velocity-3, and Velocity-Uni products, may be delayed, and new products may not be accepted by the market, may be accepted later than anticipated, or may be replaced by newer products more quickly than anticipated. Our sales and operating results may be adversely affected if we are unable to bring new products to market, if customers delay purchases, or if acceptance of new products is slower than expected or to a smaller degree than expected, if at all. Failure of future offerings to be accepted by the market could have a material adverse effect on our business, operations, financial condition, and reputation. Because we depend on a relatively small number of significant customers for a substantial portion of our revenue, the loss of any of our key customers, our inability to continue to sell existing and new products to our key customers in significant quantities, or our failure to attract significant new customers, could adversely impact our revenue and harm our business. We have in the past, and expect in the future, to derive a substantial portion of our revenue from sales to a relatively small number of significant customers. Our four largest customers accounted for approximately 74% of our revenue in the third quarter of 2014 and 71% for the first nine months of 2014. For the three months ended September 28, 2014, Sagemcom SAS, Amod Technology Inc., Ltd. (a distributor selling exclusively to Sagemcom s OEM), Amicko Technology, Inc., and Paltek Corporation represented 28%, 22%, 12% and 12% of our revenue, respectively. For the three months ended September 28, 2013, Sagemcom, AVM Computersysteme Vertriebs GmbH, Paltek Corporation and NEC Asia Pacific Pte. Ltd. represented 32%, 11%, 11%, and 10% of our revenue, respectively. The composition and concentration of these customers has varied in the past, and we expect that it will continue to vary in the future. Accordingly, the loss of any significant customer or a decline in business with any significant customer would materially and adversely affect our financial condition and results of operations. In addition, we may experience pressure from significant customers to agree to customer-favorable sales terms and price reductions. Our lack of long-term agreements with our customers could have a material adverse effect on our business. We typically do not have contracts with our major customers that obligate them to purchase any minimum amount of products from us. Sales to these customers are made pursuant to purchase orders, which typically can be canceled or modified up to a specified point in time, which may be after we have incurred significant costs related to the sale. If any of our key customers significantly reduced or canceled its orders, our business and Table of Contents operating results could be adversely affected. Because many of our semiconductor products have long product design and development cycles, it would be difficult for us to replace revenues from key customers that reduce or cancel their existing orders for these products, which may happen if they experience lower than anticipated demand for their products or cancel a program. Any of these events could have a material adverse effect on our business. We face intense competition in the semiconductor industry and the broadband communications markets, which could reduce our market share and negatively affect our revenue. The semiconductor industry and the broadband communications markets are intensely competitive. In the VDSL or VDSL-like technology and communications processing markets, we currently compete or expect to compete with, among others, Broadcom Corporation, Cavium, Inc., Freescale Semiconductor, Inc., Lantiq Deutschland GmbH, Marvell Technology Group Ltd., MediaTek Inc., PMC-Sierra, Inc., and Realtek Semiconductor Corp. Many of our competitors have stronger manufacturing subcontractor relationships than we have as well as longer operating histories, greater name recognition, larger customer bases, and significantly greater financial, sales and marketing, manufacturing, distribution, technical, and other resources. In addition, many of our competitors have extensive technology libraries that could enable them to incorporate broadband or communications processing technologies into a system on a chip, creating a more attractive product line than ours. These competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements than we are able to. In addition, current and potential competitors have established or may establish financial or strategic relationships among themselves or with existing or potential customers, resellers, or other third parties. Accordingly, new competitors or alliances among competitors could emerge and rapidly acquire significant market share. Existing or new competitors may also develop alternative technologies that more effectively address our markets with products that offer enhanced features and functionality, lower power requirements, greater levels of semiconductor integration, or lower cost. We cannot assure you that we will be able to compete successfully against current or new competitors, in which case we may lose market share and our revenue may fail to increase or may decline. Our success is dependent upon achieving new design wins into commercially successful systems sold by our OEM and ODM customers. Our products are generally incorporated into our OEM and ODM customers systems at the design stage. As a result, we rely on OEMs and ODMs to select our products to be designed into their systems, which we refer to as a design win. At any given time, we are competing for one or more design wins. We often incur significant expenditures over multiple quarters without any assurance that we will achieve a design win. Furthermore, even if we achieve a design win, we cannot be assured that the OEM or ODM equipment that we are designed into will be marketed, sold, or commercially successful and, accordingly, we may not generate any revenue from the design win. In addition, our OEM and ODM customers can choose at any time to discontinue their systems that include our products or delay deployment, which has occurred in the past from time-to-time. If we are unable to achieve design wins or if our OEM customers systems incorporating our products are not commercially successful or deployed, our operating results would suffer. Our operating results have fluctuated significantly over time and are likely to continue to do so, and as a result, we may fail to meet or exceed our revenue forecasts or the expectations of securities analysts or investors, which could cause the market price of our common stock to decline. Our industry is highly cyclical and is characterized by constant and rapid technological change, product obsolescence, price erosion, evolving standards, uncertain product life cycles, and wide fluctuations in product supply and demand. The industry has, from time-to-time, experienced significant and sometimes prolonged downturns, often connected with or in anticipation of maturing product cycles and declines in general economic Table of Contents conditions. To respond to these downturns, some service providers have decreased their capital expenditures, changed their purchasing practices to use refurbished equipment rather than purchasing new equipment, canceled or delayed new deployments, and taken a cautious approach to acquiring new equipment and technologies from OEMs, usually with very little notice. This, in turn, has reduced the demand for new semiconductors by our direct customers which could result in significant fluctuations of revenue as the economy changes. Any future downturns may reduce our revenue and could result in our accumulating excess inventory. By contrast, any upturn in the semiconductor industry could result in increased demand and competition for limited production capacity, which may affect our ability to ship products and prevent us from benefiting from such an upturn. Accordingly, our operating results may vary significantly as a result of the general conditions in the semiconductor or broadband communications industry, which could cause the market price of our common stock to decline. Fluctuations in our expenses could affect our operating results. Our expenses are subject to fluctuations resulting from various factors, including, but not limited to, higher expenses associated with new product releases, addressing technical issues arising from development efforts, unanticipated tapeout costs, additional or unanticipated costs for manufacturing or components because we do not have formal pricing arrangements with our subcontractors, costs of design tools, and large up-front license fees to third parties for intellectual property integrated into our products, as well as other factors identified throughout these risk factors. Because many of our expenses are relatively fixed in the short term, or are incurred in advance of anticipated sales, we may not be able to reduce our expenses sufficiently to mitigate any reductions in revenue. Therefore, it may be necessary to take other measures to align expenses with revenue, including, implementation of a corporate restructuring plan. We last implemented a restructuring plan in 2012. Restructuring charges included expenses related to the severance for terminated employees and other exit-related costs arising from contractual and other obligations. General macroeconomic conditions could reduce demand for services based upon our products. Our business is susceptible to macroeconomic and other world market conditions. As an example, we believe that consumer-targeted broadband services, which are deployed using our technology, are part of most households discretionary spending. We believe the global financial economic downturn that began in 2008 and continues into 2014, particularly in Europe, negatively affected consumer confidence and spending. These outcomes and behaviors may adversely affect our business and financial condition. If individual consumers decide not to install or discontinue purchasing broadband services in their homes, whether to save money in an uncertain economic climate or otherwise, the resulting drop in demand could cause telecommunications service providers to reduce or stop placing orders for OEM equipment containing our products. Accordingly, the OEMs demand for our products could drop further, potentially having a materially negative effect on our revenue. Industry consolidation may lead to increased competition and may harm our operating results. There has been a trend toward consolidation in our industry. We expect this trend to continue as companies attempt to strengthen or hold their market positions in an evolving industry and as companies are acquired or are unable to continue operations. We believe that industry consolidation may result in stronger competitors that are better able to compete for customers. This could have a material adverse effect on our business, financial condition, and results of operations. Furthermore, rapid consolidation could result in a decrease in the number of customers we serve. Loss of a major customer could have a material adverse effect on our business, financial condition, and results of operations. Table of Contents If we are unable to develop, introduce, or achieve market acceptance of our new semiconductor products, our operating results would be adversely affected. Our industry is characterized by rapid technological innovation and intense competition. Our future success will depend on our ability to continue to predict what new products are needed to meet the demand of the broadband, communications processor, or other markets addressable by our products and then introduce, develop, and distribute such products in a timely and cost-effective manner. The development of new semiconductor products is complex, and from time-to-time we have experienced delays in completing the development and introduction of new products. In the past we have invested substantial resources in developing and purchasing emerging technologies that did not achieve the market acceptance that we had expected. Our ability to develop and deliver new semiconductor products successfully will depend on various factors, including our ability to: successfully integrate our products with our OEM customers products; gain market acceptance of our products and our OEM customers products; accurately predict market requirements and evolving industry standards; accurately define new semiconductor products; timely complete and introduce new product designs or features; timely qualify and obtain industry interoperability certification of our products and the equipment into which our products will be incorporated; ensure that our subcontractors have sufficient foundry capacity and packaging materials and achieve acceptable manufacturing yields; and shift our products to smaller geometry process technologies to achieve lower cost and higher levels of design integration. If we are unable to develop and introduce new semiconductor products successfully and in a cost-effective and timely manner, we will not be able to attract new customers or retain our existing customers, which would harm our business. If we do not successfully manage our inventory in the transition process to next generation semiconductor products, our operating results may be harmed. If we are successful in developing new semiconductor products ahead of competitors but do not cost-effectively manage our inventory levels of existing products when making the transition to the new semiconductor products, our financial results could be negatively affected by high levels of obsolete inventory and our operating results would be harmed. The average selling prices and gross margins of our products are subject to declines, which may harm our revenue and profitability. Our products are subject to rapid declines in average selling prices due to pressure from customers. We have lowered our prices significantly at times to gain or maintain market share, and we expect to do so again in the future. In addition, we may not be able to reduce our costs of goods sold as rapidly as our prices decline. Our financial results, in particular, but not limited to, our gross margins, will suffer if we are unable to maintain or increase pricing, or are unable to offset any future reductions in our average selling prices by increasing our sales volumes, reducing our manufacturing costs, or developing new or enhanced products that command higher prices or better gross margins on a timely basis. Table of Contents Our product sales mix is subject to frequent changes, which may impact our revenue and margin. Our product margins vary widely by product and customer. As a result, a change in the sales mix of our products could have an impact on forecasted revenue and margins. For example, our Access product family generally has higher margins as compared to our Gateway product family. Furthermore, the product margins within our product families can vary based on the performance and type of deployment, as the market typically commands higher prices for higher performance. While we forecast a future product mix and make purchase decisions based on that forecast, actual results can be materially different which could negatively impact our revenue and margins. Any defects in our products could harm our reputation, customer relationships, and results of operations. Our products may contain undetected defects, errors, or failures, which may not become apparent until the products are in the hands of our customers or our customers customers. The occurrence of any defects, errors, or failures discovered after we have sold the product could result in: cancellation of orders; product returns, repairs, or replacements; monetary or other accommodations to our customers; diversion of our resources; legal actions by customers or customers end users; increased insurance and warranty costs; and other losses to us or to customers or end users. Any of these occurrences could also result in the loss of or delay in market acceptance of these or other products and loss of sales, which could negatively affect our business and results of operations. As our products become even more complex in the future, this risk may intensify over time and may result in increased expenses. The semiconductor industry is highly cyclical, which may cause our operating results to fluctuate. We operate in the highly cyclical semiconductor industry. This industry is characterized by wide fluctuations in product supply and demand. In the past, the semiconductor industry has experienced significant downturns, often in connection with, or in anticipation of, excess manufacturing capacity worldwide, maturing product cycles, and declines in general economic conditions. Even if demand for our products remains constant, a lower level of available foundry capacity could increase our costs, which would likely have an adverse impact on our results of operations. Changes in our senior management could negatively affect our operations and relationships with our customers and employees. We have in the past and may in the future experience significant changes in our senior management team. In the past three years, we have accepted the resignations of our Vice President of Program Management and our Vice President of Sales. In addition, we appointed a new President and Chief Executive Officer, a new Vice President of Operations, a new Vice President of Marketing, and a new Vice President of Sales. Changes in our senior management or technical personnel could affect our customer relationships, employee morale, and our ability to operate in compliance with existing internal controls and regulations and harm our business. If we are unable to maintain a consistent senior management team or successfully integrate our current and future members of senior management, our business could be negatively affected. Table of Contents Because competition for qualified personnel is intense in our industry, we may not be able to recruit and retain necessary personnel, which could impact our product development and sales. Our future success depends on our ability to continue to attract, retain, and motivate our senior management team as well as qualified technical personnel, particularly software engineers, digital circuit designers, mixed-signal circuit designers, and systems and algorithms engineers. Competition for these employees is intense and many of our competitors may have greater name recognition and significantly greater financial resources to better compete for these employees. If we are unable to retain our existing personnel, or attract and train additional qualified personnel, our growth may be limited due to our lack of capacity to develop and market our products. All of our key employees are employed on an at will basis. The loss of any of these key employees could slow our product development processes and sales efforts or harm the perception of our business. We may also incur increased operating expenses and be required to divert the attention of our senior management to recruit replacements for key employees. Also, our depressed common stock price may result in difficulty attracting and retaining personnel as stock options and other forms of incentive equity grants generally comprise a significant portion of our compensation packages for all employees, which could harm our ability to provide technologically competitive products. Further, the changes in senior management as well as the multiple restructurings and reductions in force that we have recently experienced, have had, and may continue to have, a negative effect on employee morale and the ability to attract and retain qualified personnel. Risks Related to Our Operations and Technology We rely on third-party technologies for the development of our products, and our inability to use such technologies in the future or the failure of such technology would harm our ability to remain competitive. We rely on third parties for technologies that are integrated into some of our products, including memory cells, input/output cells, hardware interfaces, and core processor logic. If we are unable to continue to use or license these technologies on reasonable terms, or if these technologies fail to operate properly, we may not be able to secure alternatives in a timely manner and our ability to remain competitive would be harmed. Further, if we were to seek such a license and such license were available, we could be required to make significant payments with respect to past and/or future sales of our products, and such payments may adversely affect our financial condition and operating results. If a party determines to pursue claims against us for patent infringement, we might not be able to successfully defend against such claims. In addition, the third party intellectual property could also expose us to liability and, while we have not experienced material warranty costs in any period as a result of third party intellectual property, there can be no assurance that we will not experience such costs in the future. Our service agreement with eSilicon Corporation, or eSilicon, limits our ownership and control of raw materials and work-in-process. Should eSilicon default on its contractual commitments to us or fail to timely deliver furnished goods, it would negatively impact our revenue and reputation. In 2012, we entered into an agreement with eSilicon, or the Service Agreement, under which eSilicon handles a majority of our day-to-day supply chain management, production test engineering, and production quality engineering functions. Pursuant to the Service Agreement, we place orders for our finished goods with eSilicon, who, in turn, contracts with wafer foundries and assembly and test subcontractors, and manages these operational functions for us on a day-to-day basis. eSilicon owns the raw materials and work-in-process until such time as the products are delivered to us as finished goods. Should eSilicon default on its contractual obligation to deliver finished goods to us in a timely manner, or at all, we may be required to restart the wafer production process with a total cycle time of approximately one calendar quarter. As a result, we may be required to incur additional costs and we would experience delays in delivering products to our customers, which would result in decreased revenue, have a negative effect on operating results, and harm our reputation. Table of Contents We are a fabless semiconductor company and failure to secure and maintain sufficient capacity with eSilicon and its subcontractors could significantly disrupt shipment of our products, impair our relationships with customers, and decrease sales, which would negatively impact our market share and operating results. We are a fabless semiconductor company and are therefore dependent on and currently use multiple third-party wafer foundries and other subcontractors, located primarily in Israel, Malaysia, the Philippines, and Taiwan, to manufacture, assemble, and test all of our semiconductor devices. While we work with multiple suppliers, generally each individual product is made by one foundry and processed at a single assembly and test subcontractor. Accordingly, we have been and will continue to be greatly dependent on a limited number of suppliers to deliver quality products in a timely manner. In past periods of high demand in the semiconductor market, we have experienced delays in obtaining sufficient capacity to meet our demand and as a result were unable to deliver all of the products to our customers on a timely basis. In addition, we have experienced similar delays due to technical and quality control problems. We are dependent on eSilicon and, in turn, its suppliers to deliver our products on time. If we and/or eSilicon were to need to qualify a new facility to meet a need for additional capacity, or if a foundry or subcontractor ceased working with eSilicon, as has happened in the past, or if production is disrupted (including an event where eSilicon ceases its business operations), we may be unable to meet our customer demand on a timely basis, or at all. We may be required to incur additional costs and may need to successfully qualify an alternative facility in order to not disrupt our business. In the event that we seek to use new wafer foundries to manufacture a portion of our semiconductor products, we may not be able to bring the new foundries on-line rapidly enough and may not achieve anticipated cost reductions. As indicated above, we have used and will continue to use a limited number of independent wafer foundries to manufacture all of our semiconductor products, which could expose us to risks of delay, increased costs, and customer dissatisfaction in the event that any of these foundries are unable to meet our requirements. Additional wafer foundries may be sought to meet our future requirements but the qualification process typically requires several months or more. By the time a new foundry is qualified, the need for additional capacity may have passed or we may have lost the potential opportunity to a competitor. If qualification cannot be met in a timely manner, we would experience a significant interruption in supply of the affected products, which could in turn cause our costs of revenue to increase and our overall revenue to decrease. This would harm our customer relationships and our market share, as well as our operating results would suffer. When demand for manufacturing capacity is high, we may take various actions to try to secure sufficient capacity, which could be costly and negatively impact our operating results. Although we have purchase order commitments to supply specified levels of products to our OEM customers, neither we nor eSilicon have a guaranteed level of production capacity from any of our foundries or subcontractors facilities that we depend upon to produce our semiconductors. Facility capacity may not be available when we need it or at reasonable prices. We place our orders on the basis of our OEM customers purchase orders or our forecast of customer demand, and eSilicon or its foundries and subcontractors may not be able to meet our requirements in a timely manner, or at all. In order to secure sufficient manufacturing facility capacity when demand is high and mitigate the risks described in the foregoing paragraphs, we may enter into various arrangements with eSilicon, or directly with foundries or other subcontractors, that could be costly and negatively affect our operating results, including minimum order quantities over extended periods, and payment of premiums to secure necessary lead-times. We may not be able to make such arrangements in a timely fashion or at all, and any arrangements may be costly, reduce our financial flexibility, not be on terms favorable to us, and may contain financial penalties if we Table of Contents do not use all of our allocated facility capacity. These penalties and obligations may be expensive and could harm our business. Defects and poor performance in our products could result in a loss of customers, decreased revenue, unexpected expenses, and loss of market share, and we may face warranty and product liability claims arising from defective products. We have experienced in the past, and may experience in the future, defects (commonly referred to as bugs ) in our products which may not always be detected by testing processes. Defects can result from a variety of causes, including, but not limited to, manufacturing problems or third party intellectual property that we have incorporated into our products. If defects are discovered after our products have shipped, we have experienced, and could continue to experience, warranty and consequential damage claims from our customers. If we are unable to deliver quality products, our reputation would be harmed, which could result in the loss of future orders from our customers. Further, we may experience difficulties in achieving acceptable yields on some of our products, which may result in higher per unit cost, shipment delays, and increased expenses associated with resolving yield problems. If any of these adverse risks are realized and we are not able to offset the lost opportunities, our revenue, margins, and operating results would decline. If our forecasts of our OEM customers demand are inaccurate, our financial condition and liquidity would suffer. We place some orders with our suppliers based on the forecasts of our OEM customers demand. Our forecasts are based on multiple assumptions, each of which may introduce errors into our estimates. If we do not accurately forecast customer demand, we may allocate resources to manufacturing products that we may not be able to sell. As a result, as we experienced in the past, we could have excess or obsolete inventory, resulting in a decline in the value of our inventory, which would increase our cost of revenue, negatively affect gross margins, and reduce our liquidity. Similarly, if our forecast underestimates customer demand, we may forego revenue opportunities, lose market share, and damage customer relationships. Our failure to accurately manage inventory against demand would adversely affect our financial results. To remain competitive, we may need to migrate to smaller geometrical processes and our failure to do so may harm our business. We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometrical processes, which are measured in microns or nanometers. We have in the past, and may in the future, experience some difficulties in shifting to smaller geometry process technologies or new manufacturing processes, which has resulted in reduced manufacturing yields, delays in product deliveries, and increased product costs and expenses. Additionally, upfront expenses associated with smaller geometrical process technologies such as for masks and tooling can be significantly higher than those for the processes that we currently use, and our migration to these newer process technologies can result in significantly higher research and development expenses. Third-party claims of infringement or other claims against us could adversely affect our ability to market our products, require us to redesign our products, or seek licenses from third parties, and harm our business. In addition, any litigation that we are required to defend regarding such claims could result in significant expenses and diversion of our resources. Other companies in the semiconductor industry and intellectual property holding companies often aggressively protect and pursue their intellectual property rights. From time-to-time, we receive, and we are likely to continue to receive in the future, notices that claim our products infringe upon other parties intellectual property rights. We may in the future be engaged in litigation with parties who claim that we have infringed their intellectual property rights or who may seek to invalidate one or more of our patents, and it is possible that we Table of Contents would not prevail in any such lawsuit. An adverse determination in any of these types of claims could prevent us from manufacturing or selling some of our products, could increase our costs of products and could expose us to significant liability. In addition, a court could issue a preliminary or permanent injunction that could require us to stop selling certain products in that market or redesign certain products offered for sale or that are under development. In addition, we may be liable for damages for past infringement and royalties for future use of the technology and we may be liable for treble damages if infringement is found to have been willful. Even if claims against us are not valid or successfully asserted, these claims could nevertheless result in significant costs and a diversion of management and personnel resources to defend. Many companies in the semiconductor industry have significant patent portfolios. These companies and other parties may claim that our products infringe their proprietary rights. We may become involved in litigation as a result of allegations that we infringe the intellectual property rights of others. Any party asserting that our products infringe their proprietary rights could force us to defend ourselves, and possibly our customers, against the alleged infringement. These claims and any resulting lawsuit, if successful, could subject us to significant liability for damages and invalidation of our proprietary rights. We could also be forced to do one or more of the following: stop selling, incorporating, or using our products that utilize the challenged intellectual property; obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at all, or we could be required us to make significant payments with respect to past or future sales of our products; redesign those products that use any allegedly infringing technology, which may be costly and time-consuming; or refund to our customers amounts received for allegedly infringing technology or products. Any potential dispute involving our patents or other intellectual property could also include our customers which could trigger our indemnification obligations to one or more of them and result in substantial expense to us. In any potential dispute or claim involving a third party s patents or other intellectual property, our customers could also become the target of litigation. We are aware of certain instances in which third parties have recently notified our customers that their products (incorporating our technology) may infringe on the third parties technology. We expect that our customers may receive similar notices in the future. Because we have entered into agreements whereby we have agreed to indemnify our customers for intellectual property claims made against them for products incorporating our technology, any litigation could trigger indemnification obligations. Any indemnity claim could adversely affect our relationships with our customers and result in substantial expense to us. Other data transmission technologies and communications processing technologies may compete effectively with the services enabled by our products, which could adversely affect our revenue and business. Our revenue currently is dependent upon the increase in demand for services that use broadband technology and integrated residential gateways. Besides xDSL and other discrete multi-tone, or DMT,-based technologies, service providers can decide to deploy passive optical network or fiber and there would be reduced need for our products. If more service providers decide to extend fiber all the way to the home, commonly referred to as fiber to the home, or FTTH, deployment, it could harm our xDSL business. Furthermore, residential gateways compete against a variety of different data distribution technologies, including Ethernet routers, set-top boxes provided by cable and satellite providers, wireless, or WiFi and WiMax, and emerging power line and multimedia over coax alliance technologies. If any of these competing technologies proves to be more reliable, faster, less expensive, or has any other advantages over the broadband technologies we provide, the demand for our products may decrease and our business would be harmed. Table of Contents Rapidly changing standards and regulations could make our products obsolete, which would cause our revenue and operating results to suffer. We design our products to conform to regulations established by governments and to standards set by industry standards bodies worldwide, such as the Alliance for Telecommunications Industry Solutions, or ATIS, and the International Telecommunication Union Telecommunication Standard, or ITU-T. Because our products are designed to conform to current specific industry standards, if competing standards emerge that are preferred by our customers, we would have to make significant expenditures to develop new products. If our customers adopt new or competing industry standards with which our products are not compatible, industry groups adopt new standards, or governments issue new regulations with which our products are not compatible, our existing products would become less desirable to our customers, and our revenue and operating results would suffer. If we fail to secure or protect our intellectual property rights, competitors may be able to use our technologies, which could weaken our competitive position, reduce our revenue, or increase our cost. Our success will depend, in part, on our ability to protect our intellectual property. We rely on a combination of patent, copyright, trademark, and trade secret laws, confidentiality agreements, and licensing arrangements to establish and protect our proprietary rights. From time-to-time we file new patent applications. These pending patent applications may not result in issued patents, and our existing and future patents may not be sufficiently broad to protect our proprietary technologies or may be determined to be invalid or unenforceable. While we are not currently aware of any misappropriation of our existing technology, policing unauthorized use of our technology is difficult and we cannot be certain that the steps we have taken will prevent the misappropriation or unauthorized use of our technologies, particularly unauthorized use in foreign countries where we have not applied for patent protection and, even if such protection was available, the laws may not protect our proprietary rights as fully as United States law. The patents we have obtained or licensed, or may obtain or license in the future, may not be adequate to protect our proprietary rights. Our competitors may independently develop or may have already developed technology similar to us, duplicate our products, or design around any patents issued to us or our other intellectual property. In addition, we have been, and may be, required to license our patents as a result of our participation in various standards organizations. If competitors appropriate our technology and it is not adequately protected, our competitive position would be harmed, our legal costs would increase, and our revenue would decrease. Changes in current or future laws or regulations or the imposition of new laws or regulations by federal or state agencies or foreign governments could impede the sale of our products or otherwise harm our business. The effects of regulation on our customers and the industries in which they operate may materially and adversely impact our business. For example, various governments around the world have considered, and it is anticipated that others may consider, regulations that would limit or prohibit sales of certain telecommunications products manufactured in China. If these rules apply to equipment containing our semiconductor products, such regulation could reduce sales of our products and have a negative effect on our operating results. In addition, the Ministry of Internal Affairs and Communications in Japan, the Ministry of Communications and Information in Korea, various national regulatory agencies in Europe, the European Commission in the European Union, and the U.S. Federal Communications Commission have broad jurisdiction over our target markets. Although the laws and regulations of these and other government agencies may not be directly applicable to our products, they do apply to much of the equipment into which our products are incorporated. Governmental regulatory agencies worldwide may affect the ability of telephone companies to offer certain services to their customers or other aspects of their business, which may in turn impede sales of our products. In addition to the laws and regulations specific to telecommunications equipment, other laws and regulations affect our business. For instance, changes in tax, employment, and import/export laws and regulations, and their enforcement, commonly occur in the countries in which we operate. If changes in those Table of Contents laws and regulations, or in the enforcement of those laws and regulations, occur in a manner that we did not anticipate, those changes could cause us to have increased operating costs or to pay higher taxes, and thus have a negative effect on our operating results. Failure to maintain adequate internal controls as required by Section 404 of the Sarbanes-Oxley Act, or SOX, could harm our operating results, our ability to operate our business, and our investors view of us. If we do not maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of SOX. Effective internal controls, particularly those related to revenue recognition, valuation of inventory, and warranty provisions, are necessary for us to produce reliable financial reports and are important in helping to prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock could drop significantly. We are exposed to legal, business, political, and economic risks associated with our international operations. We currently obtain substantially all of our manufacturing, assembly, and testing services from suppliers and subcontractors located outside of the United States, and have a significant portion of our research and development team located in India. In addition, 97%, 99%, 99%, and 99% of our revenue for the years ended 2013 and 2012 and for the nine months ended September 28, 2014 and September 29, 2013, respectively, were derived from sales to customers outside the United States. We have expanded our international business activities and may open other design and operational centers abroad. International operations are subject to many other inherent risks, including, but not limited to: political, social, and economic instability, including war and terrorist acts; exposure to different legal standards, particularly with respect to intellectual property; trade and travel restrictions; the imposition of governmental controls and restrictions or unexpected changes in regulatory requirements; burdens of complying with a variety of foreign laws; import and export license requirements and restrictions of the United States and each other country in which we operate; foreign technical standards; changes in tariffs; difficulties in staffing and managing international operations; foreign currency exposure and fluctuations in currency exchange rates; difficulties in collecting receivables from foreign entities or delayed revenue recognition; and potentially adverse tax consequences. Because we are currently almost wholly dependent on our foreign sales, as well as our research and development facilities located off-shore and operations in foreign jurisdictions, any of the factors described above could significantly harm our ability to produce quality products in a timely and cost effective manner, as well as our ability to increase or maintain our foreign sales. Table of Contents Fluctuations in exchange rates among the U.S. dollar and other currencies in which we do business may adversely affect our operating results. We maintain extensive operations internationally. We have offices or facilities in China, France, Germany, India, Japan, Korea, and Taiwan. We incur a portion of our expenses in currencies other than the U.S. dollar, including, predominantly, the Indian rupee and the Chinese yuan. A large portion of our cash is held by our international affiliates both in U.S. dollar and local currency denominations. As a result, we may experience foreign exchange gains or losses due to the volatility of these currencies compared to the U.S. dollar. Because we report our results in U.S. dollars, the difference in exchange rates in one period compared to another directly impacts period to period comparisons of our operating results. In addition, our sales have been historically denominated in U.S. dollars. Currency exchange rates have been especially volatile in the recent past and these currency fluctuations may make it difficult for us to predict and/or provide guidance on our results. Currently, we have not implemented any strategies to mitigate risks related to the impact of fluctuations in currency exchange rates and we cannot predict future currency exchange rate changes. Several of the facilities that manufacture our products, most of our OEM customers and the service providers they serve, and our California headquarters are located in regions that are subject to earthquakes and other natural disasters. Several of our subcontractors facilities that manufacture, assemble, and test our products, and most of our wafer foundries, are located in Malaysia, the Philippines, and Taiwan. Several of our large customers are located in Japan and Korea. The Asia-Pacific region has experienced significant earthquakes and other natural disasters in the past and will be subject to seismic activities in the future. Any earthquake or other natural disaster in these areas could significantly disrupt these manufacturing facilities production capabilities and could result in our experiencing a significant delay in delivery, or substantial shortage of wafers, in particular, and possibly in higher wafer prices, and increased production costs in general. Natural disasters could also adversely affect our customers and their demand for our products. Our headquarters in California is also located near major earthquake fault lines. If there is a major earthquake or any other natural disaster in a region where one of our facilities is located, it could significantly disrupt our operations. Changes in our tax rates could affect our future results. Our future effective tax rates could be favorably or unfavorably affected by the absolute amount and future geographic distribution of our pre-tax income, our ability to successfully shift our operating activities to foreign jurisdictions, and the amount and timing of intercompany payments from our foreign operations that are subject to U.S. income taxes. In addition, our subsidiary in India is currently being audited by the tax authorities in that country. Should the audit or any subsequent appeals result in a decision adverse to us, such decision could not only result in assessments for prior periods, but also an increased tax rate in future periods. New regulations related to conflict minerals may force us to incur additional expenses, may make our supply chain more complex, and may result in damage to our reputation with customers. On August 22, 2012, under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC adopted new requirements for companies that use certain minerals and metals, known as conflict minerals, in their products, whether or not these products are manufactured by third parties. These requirements require companies to diligence, disclose, and report whether or not such minerals originate from the Democratic Republic of the Congo, or DRC, and adjoining countries. There were and continue to be costs associated with complying with these rules, includes costs related to determining the source of any of the relevant minerals and metals used in our products. In addition, the implementation of these new requirements could adversely affect the sourcing, availability, and pricing of such minerals. For example, there may only be a limited number of suppliers offering conflict free materials, we cannot be sure that we will be able to obtain necessary conflict free materials from such suppliers in sufficient quantities or at reasonable prices. Since our supply chain is Table of Contents complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation, could increase our costs, and could adversely affect our manufacturing operations. In such event, we may also face difficulties in satisfying customers who require that all of the components of our products be certified as conflict mineral free. Risks Related to Tallwood The Tallwood Group may exercise significant influence over us as a significant stockholder and holder of a right to elect the proportionate number of directors equal to its ownership interest in us. As of September 26, 2014, the Tallwood Group beneficially owned 31.8% of our outstanding common stock. On September 29, 2014, the Tallwood Group purchased 27,439,023 shares of our common stock in the Private Placement, which increased its beneficial ownership interest to 42.5%, based on 99,283,662 shares of common stock outstanding as of September 26, 2014 and after giving effect to the Private Placement. Depending on whether or not stockholders exercise their Basic Subscription Rights in full, the Tallwood Group would beneficially own 86,494,521 shares, or approximately 30.5% to 52.0%, respectively, of our then total issued and outstanding common stock, based on 99,283,662 shares of common stock outstanding as of September 26, 2014 and after giving effect to the Private Placement and the Rights Offering. We are also party to the Stockholder Agreement with the Tallwood Group, which, among other things, contains certain governance arrangements and various provisions relating to board composition, stock ownership, transfers by the Tallwood Group, voting, registration rights and other matters. Subject to certain exceptions, the Tallwood Group is permitted under the terms of the Stockholder Agreement to maintain their ownership interest in us in subsequent equity offerings. Given their ownership interest in us, the Tallwood Group may have the ability to control or significantly influence the outcome of any matter submitted for the vote of our stockholders. The Tallwood Group may also have interests that diverge from, or even conflict with, our interests and those of our other stockholders. In addition, the Certificate of Designation of our Series A Preferred Stock provides that, so long as the holder of the Series A Preferred Stock beneficially owns at least 35% of our outstanding common stock, the Tallwood Group has the right to nominate and elect three directors. Certain voting restrictions in the Stockholder Agreement that require the Tallwood Group to vote all shares owned by it in excess of 37.5% of the outstanding voting shares in the same proportion as the votes of all stockholders that are not affiliated with the Tallwood Group will expire five years after the Rights Offering. At that time, the Tallwood Group may own a majority of the outstanding voting shares, which will give the Tallwood Group the ability to control our board and votes of stockholders or make changes in the business or governance of our company, which could have a material adverse effect on the other stockholders. Even if the Tallwood Group does not own a majority of the outstanding voting shares, its substantial holdings may give it effective control of the affairs of our company because it may own a majority of the voting shares that actually vote at any meeting or consent of the stockholders. The market price of our common stock may decline as a result of future sales of our common stock by the Tallwood Group. We are unable to predict the potential effects of the Tallwood Group s ownership of our outstanding common stock on the trading activity in and market price of our common stock. Pursuant to the Stockholder Agreement, we have granted the Tallwood Group and their permitted transferees registration rights for the resale of all shares of our common stock the Tallwood Group holds now or purchases in the Rights Offering or the Standby Purchase. Any such resale would increase the number of shares of our common stock available for public trading. Sales by the Tallwood Group or their permitted transferees of a substantial number of shares of our common stock in the public market, or the perception that such sales might occur, could have a material adverse effect on the price of our common stock. Table of Contents Stockholders may not want to invest in our company given the significant ownership of our common stock by the Tallwood Group. The Tallwood Group s ownership of our common stock may delay, deter or prevent acts that would be favored by our other stockholders and its interests may not always coincide with our interests or the interests of our other stockholders. In addition, the Tallwood Group may seek to cause us to take courses of action that, in its judgment, could enhance its investments in us, but which might involve risks to our other stockholders or adversely affect us or our other stockholders. As a result, this concentration of stock ownership may adversely affect the trading price of our common stock because investors may perceive disadvantages in owning shares in a company with a significant stockholder. Table of Contents

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+RISK FACTORS Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with the other information contained in this prospectus, including our financial statements and the related notes appearing at the end of this prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations," before making your decision to invest in shares of our common stock. We cannot assure you that any of the events or developments discussed in the risk factors below will not occur. The occurrence of any of the events or developments discussed in the risk factors below could have a material and adverse impact on our business, results of operations, financial condition and cash flows and in such case, our future prospects would likely be materially and adversely affected. If any of such events or developments were to happen, the trading price of our common stock could decline, and you could lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. Risks Related to Our Financial Position and Capital Needs We have a limited operating history, have incurred significant losses since our inception and anticipate that we will continue to incur losses in the future. We commenced operations in 2003, and we have only a limited operating history upon which you can evaluate our business and prospects. Our operations to date have been limited to conducting product development activities for ganaxolone and performing research and development with respect to our clinical and preclinical programs. In addition, as a clinical stage biopharmaceutical company, we have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the biopharmaceutical area. Nor have we demonstrated an ability to obtain regulatory approval for or to commercialize any of our product candidates. Consequently, any predictions about our future performance may not be as accurate as they would be if we had a history of successfully developing and commercializing biopharmaceutical products. We have incurred significant operating losses since our inception, including net losses of $1.4 million and $5.3 million for the years ended December 31, 2012 and 2013, respectively, and $2.2 million for the three months ended March 31, 2014. As of March 31, 2014, we had an accumulated deficit of $63.7 million. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders' equity and working capital. Our losses have resulted principally from costs incurred in our research and development activities. We anticipate that our operating losses will substantially increase over the next several years as we execute our plan to expand our research, development and commercialization activities, including the clinical development and planned commercialization of our product candidate, ganaxolone, and incur the additional costs of operating as a public company. In addition, if we obtain regulatory approval of ganaxolone, we may incur significant sales and marketing expenses. Because of the numerous risks and uncertainties associated with developing biopharmaceutical products, we are unable to predict the extent of any future losses or whether or when we will become profitable, if ever. We have not generated any revenue to date from product sales. We may never achieve or sustain profitability, which could depress the market price of our common stock, and could cause you to lose all or a part of your investment. To date, we have no products approved for commercial sale and have not generated any revenue from sales of any of our product candidates, and we do not know when, or if, we will generate revenues in the future. Our ability to generate revenue from product sales and achieve profitability will depend upon our ability to successfully gain regulatory approval and commercialize ganaxolone or other product candidates that we may develop, in-license or acquire in the future. Even if we are able to successfully achieve regulatory approval for ganaxolone, we do not know when we will generate revenue from product sales, if Investing in our common stock involves a high degree of risk. See "Risk Factors" beginning on page 11. Table of Contents at all. Our ability to generate revenue from product sales from ganaxolone or any other future product candidates also depends on a number of additional factors, including our ability to: successfully complete development activities, including enrollment of study participants and completion of the necessary clinical trials; complete and submit new drug applications, or NDAs, to the United States Food and Drug Administration, or FDA, and obtain regulatory approval for indications for which there is a commercial market; complete and submit applications to, and obtain regulatory approval from, foreign regulatory authorities; make or have made commercial quantities of our products at acceptable cost levels; develop a commercial organization capable of manufacturing, selling, marketing and distributing any products we intend to sell ourselves in the markets in which we choose to commercialize on our own; find suitable partners to help us market, sell and distribute our approved products in other markets; and obtain adequate pricing, coverage and reimbursement from third parties, including government and private payors. In addition, because of the numerous risks and uncertainties associated with product development, including that ganaxolone may not advance through development or achieve the endpoints of applicable clinical trials, we are unable to predict the timing or amount of increased expenses, or if or when we will be able to achieve or maintain profitability. Even if we are able to complete the development and regulatory process for ganaxolone, we anticipate incurring significant costs associated with commercializing ganaxolone. Even if we are able to generate revenue from the sale of ganaxolone or any future commercial products, we may not become profitable and will need to obtain additional funding to continue operations. If we fail to become profitable or are unable to sustain profitability on a continuing basis, and we are not successful in obtaining additional funding, then we may be unable to continue our operations at planned levels, which would depress the market price of our common stock. We will require additional capital to fund our operations and if we fail to obtain necessary financing, we may be unable to complete the development and commercialization of ganaxolone. Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts to advance the clinical development of ganaxolone and launch and commercialize ganaxolone, if we receive regulatory approval. We will require additional capital for the further development and potential commercialization of ganaxolone and may also need to raise additional funds sooner to pursue a more accelerated development of ganaxolone. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts. We believe that the net proceeds from this offering together with our existing cash and cash equivalents as of March 31, 2014, will enable us to fund our operating expenses and capital expenditure requirements for at least the next 24 months. We have based this estimate on assumptions that may prove to be wrong, and we could deploy our available capital resources sooner than we currently expect. Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to the: initiation, progress, timing, costs and results of preclinical studies and clinical trials, including patient enrollment in such trials, for ganaxolone or any other future product candidates; clinical development plans we establish for ganaxolone and any other future product candidates; Per Share Total Initial public offering price $ $ Underwriting discounts and commissions(1) $ $ Proceeds, before expenses, to us $ $ Table of Contents obligation to make royalty and non-royalty sublicense receipt payments to third-party licensors, if any, under our licensing agreements; number and characteristics of product candidates that we discover or in-license and develop; outcome, timing and cost of regulatory review by the FDA and comparable foreign regulatory authorities, including the potential for the FDA or comparable foreign regulatory authorities to require that we perform more studies than those that we currently expect; costs of filing, prosecuting, defending and enforcing any patent claims and maintaining and enforcing other intellectual property rights; effects of competing technological and market developments; costs and timing of the implementation of commercial-scale manufacturing activities; and costs and timing of establishing sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval. If we are unable to expand our operations or otherwise capitalize on our business opportunities due to a lack of capital, our ability to become profitable will be compromised. Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to ganaxolone or any other future product candidates. Until we can generate substantial revenue from product sales, if ever, we expect to seek additional capital through a combination of private and public equity offerings, debt financings, strategic collaborations and alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of stockholders. Debt financing, if available, may involve agreements that include liens or other restrictive covenants limiting our ability to take important actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through strategic collaborations and alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to ganaxolone or any other future product candidates in particular countries, or grant licenses on terms that are not favorable to us. If we are unable to raise additional funds through equity or debt financing when needed, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts or grant rights to develop and market ganaxolone or any other future product candidates that we would otherwise prefer to develop and market ourselves. We intend to expend our limited resources to pursue our sole clinical stage product candidate, ganaxolone, for focal onset seizures and may fail to capitalize on other indications, technologies or product candidates that may be more profitable or for which there may be a greater likelihood of success. Because we have limited financial and managerial resources, we are focusing on research programs relating to ganaxolone for focal onset seizures, which concentrates the risk of product failure in the event ganaxolone proves to be ineffective or inadequate for clinical development or commercialization in this indication. As a result, we may forego or delay pursuit of opportunities for other indications or with other technologies or product candidates that later could prove to have greater commercial potential. We may be unable to capitalize on viable commercial products or profitable market opportunities as a result of our resource allocation decisions. Our spending on proprietary research and development programs relating to ganaxolone may not yield any commercially viable products. If we do not accurately evaluate the commercial potential or target market for ganaxolone, we may relinquish valuable rights to ganaxolone through collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to ganaxolone. Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited. Under Section 382 of the Internal Revenue Code of 1986, as amended, or Code, if a corporation undergoes an "ownership change" (generally defined as a greater than 50% change (by value) in its equity (1)See "Underwriting" beginning on page 137 for additional information regarding underwriting compensation. We have granted the underwriters a 30-day option to purchase up to 600,000 additional shares of common stock on the same terms and conditions set forth above. Certain of our stockholders have indicated an interest in purchasing an aggregate of approximately $10.4 million of shares of our common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, less or no shares in this offering to any of these stockholders, and any of these stockholders may determine to purchase more, less or no shares in this offering. The underwriters will receive the same underwriting discount on any shares purchased by these stockholders as they will on any other shares sold to the public in this offering. The underwriters expect to deliver the shares to purchasers on , 2014. Table of Contents ownership over a three-year period), the corporation's ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. As a result of our most recent private placements and other transactions that have occurred over the past three years, we may have experienced, and, upon completion of this offering, may experience, an "ownership change." We may also experience ownership changes in the future as a result of subsequent shifts in our stock ownership. As of December 31, 2013, we had federal and state net operating loss carryforwards of approximately $59.0 million that will begin expiring in 2023, and federal and state research and development credits of $2.2 million and $0.5 million, respectively, that will begin expiring in 2019, which could be limited if we experience an "ownership change." Risks Related to Our Business and Development of Our Product Our future success is dependent on the successful clinical development, regulatory approval and commercialization of ganaxolone, which is currently undergoing two clinical trials and will require significant capital resources and years of additional clinical development effort. We do not have any products that have gained regulatory approval. Currently, our only clinical stage product candidate is ganaxolone. As a result, our business is dependent on our ability to successfully complete clinical development of, obtain regulatory approval for, and, if approved, successfully commercialize ganaxolone in a timely manner. We cannot commercialize ganaxolone in the United States without first obtaining regulatory approval from the FDA; similarly, we cannot commercialize ganaxolone outside of the United States without obtaining regulatory approval from comparable foreign regulatory authorities. Before obtaining regulatory approvals for the commercial sale of ganaxolone for a target indication, we must demonstrate with substantial evidence gathered in preclinical studies and clinical trials, generally including two adequate and well-controlled clinical trials, and, with respect to approval in the United States, to the satisfaction of the FDA, that ganaxolone is safe and effective for use for that target indication and that the manufacturing facilities, processes and controls are adequate. We intend to use the proceeds of this offering to expand our ongoing Phase 2b clinical trial so that it may serve as one of our adequate and well-controlled clinical trials for ganaxolone in epilepsy; however, we cannot be certain that the FDA will accept the trial as such. Even if ganaxolone were to successfully obtain approval from the FDA and comparable foreign regulatory authorities, any approval might contain significant limitations related to use restrictions for specified age groups, warnings, precautions or contraindications, or may be subject to burdensome post-approval study or risk management requirements. If we are unable to obtain regulatory approval for ganaxolone in one or more jurisdictions, or any approval contains significant limitations, we may not be able to obtain sufficient funding or generate sufficient revenue to continue the development of any other product candidate that we may in-license, develop or acquire in the future. Furthermore, even if we obtain regulatory approval for ganaxolone, we will still need to develop a commercial organization, establish commercially viable pricing and obtain approval for adequate reimbursement from third-party and government payors. If we are unable to successfully commercialize ganaxolone, we may not be able to earn sufficient revenue to continue our business. Because the results of preclinical studies or earlier clinical trials are not necessarily predictive of future results, ganaxolone may not have favorable results in later preclinical studies or clinical trials or receive regulatory approval. Success in preclinical studies and early clinical trials does not ensure that later trials will generate adequate data to demonstrate the efficacy and safety of ganaxolone. A number of companies in the pharmaceutical and biotechnology industries, including those with greater resources and experience, have suffered significant setbacks in preclinical studies and clinical trials, even after seeing promising results in earlier studies and trials. Despite the results reported in earlier clinical trials for ganaxolone, we do not know whether the clinical trials we may conduct will demonstrate adequate efficacy and safety to result in regulatory approval to market ganaxolone in any particular jurisdiction. If later stage clinical trials do not produce favorable results, our ability to achieve regulatory approval for ganaxolone may be adversely impacted. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Table of Contents The therapeutic efficacy and safety of ganaxolone are unproven, and we may not be able to successfully develop and commercialize ganaxolone in the future. Ganaxolone is a novel compound and its potential benefit as a therapeutic for focal onset seizures and Fragile X Syndrome, or FXS, is unproven. Our ability to generate revenue from ganaxolone, which we do not expect will occur for at least the next several years, if ever, will depend heavily on our successful development and commercialization after regulatory approval, which is subject to many potential risks and may not occur. Ganaxolone may interact with human biological systems in unforeseen, ineffective or harmful ways. If ganaxolone is associated with undesirable side effects or has characteristics that are unexpected, we may need to abandon its development or limit development to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. Many compounds that initially showed promise in early stage testing for treating the target indications for ganaxolone have later been found to cause side effects that prevented further development of the compound. As a result of these and other risks described herein that are inherent in the development of novel therapeutic agents, we may never successfully develop, enter into or maintain third-party licensing or collaboration transactions with respect to, or successfully commercialize, ganaxolone, in which case we will not achieve profitability and the value of our stock may decline. Clinical development of product candidates involves a lengthy and expensive process with an uncertain outcome. Clinical testing is expensive, can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. We may experience delays in our ongoing or future clinical trials and we do not know whether planned clinical trials will begin or enroll subjects on time, need to be redesigned or be completed on schedule, if at all. There can be no assurance that the FDA or other foreign regulatory authorities will not put clinical trials of ganaxolone on clinical hold now or in the future. Clinical trials may be delayed, suspended or prematurely terminated for a variety of reasons, such as: delay or failure in reaching agreement with the FDA or a comparable foreign regulatory authority on a trial design that we are able to execute; delay or failure in obtaining authorization to commence a trial or inability to comply with conditions imposed by a regulatory authority regarding the scope or design of a clinical trial; delay or failure in reaching agreement on acceptable terms with prospective clinical research organizations, or CROs, and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites; delay or failure in obtaining institutional review board, or IRB, approval or the approval of other reviewing entities, including comparable foreign regulatory authorities, to conduct a clinical trial at each site; withdrawal of clinical trial sites from our clinical trials as a result of changing standards of care or the ineligibility of a site to participate in our clinical trials; delay or failure in recruiting and enrolling suitable study subjects to participate in a trial; delay or failure in study subjects completing a trial or returning for post-treatment follow-up; clinical sites and investigators deviating from a trial protocol, failing to conduct the trial in accordance with regulatory requirements, or dropping out of a trial; inability to identify and maintain a sufficient number of trial sites, many of which may already be engaged in other clinical trial programs, including some that may be for competing product candidates with the same indication; Stifel JMP Securities Table of Contents failure of our third-party clinical trial managers to satisfy their contractual duties or meet expected deadlines; delay or failure in adding new clinical trial sites; ambiguous or negative interim results or results that are inconsistent with earlier results; feedback from the FDA, the IRB, data safety monitoring boards, or a comparable foreign regulatory authority, or results from earlier stage or concurrent preclinical studies and clinical trials, that might require modification to the protocol for the trial; decision by the FDA, the IRB, a comparable foreign regulatory authority, or us, or recommendation by a data safety monitoring board or comparable foreign regulatory authority, to suspend or terminate clinical trials at any time for safety issues or for any other reason; unacceptable risk-benefit profile, unforeseen safety issues or adverse side effects or adverse events; failure of a product candidate to demonstrate any benefit; difficulties in manufacturing or obtaining from third parties sufficient quantities of a product candidate for use in clinical trials; lack of adequate funding to continue the clinical trial, including the incurrence of unforeseen costs due to enrollment delays, requirements to conduct additional clinical trials or increased expenses associated with the services of our CROs and other third parties; political developments that affect our ability to develop and obtain approval for ganaxolone, or license rights to develop and obtain approval for ganaxolone, in a foreign country; or changes in governmental regulations or administrative actions. Study subject enrollment, a significant factor in the timing of clinical trials, is affected by many factors including the size and nature of the subject population, the proximity of subjects to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, ability to obtain and maintain subject consents, risk that enrolled subjects will drop out before completion, competing clinical trials and clinicians' and subjects' perceptions as to the potential advantages of the product candidate being studied in relation to other available therapies, including any new drugs that may be approved or product candidates that may be studied in competing clinical trials for the indications we are investigating. We rely on CROs and clinical trial sites to ensure the proper and timely conduct of our clinical trials, and while we have agreements governing their committed activities, we have limited influence over their actual performance. If we experience delays in the completion of any clinical trial of ganaxolone, the commercial prospects of ganaxolone may be harmed, and our ability to generate product revenue from ganaxolone, if approved, will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our development and approval process for ganaxolone and jeopardize our ability to commence product sales and generate revenues. In addition, many of the factors that could cause a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of ganaxolone. Ganaxolone may cause undesirable side effects or have other properties that could delay or prevent its regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following any marketing approval. Undesirable side effects caused by ganaxolone could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a restrictive label or the delay or denial of regulatory approval by the FDA or other comparable foreign regulatory authority. Although ganaxolone has generally Oppenheimer & Co. Table of Contents been well tolerated by subjects in our earlier-stage clinical trials, in some cases there were side effects, and some of the side effects were severe. Specifically, in our most recently completed clinical trial, where ganaxolone was administered as an adjunctive to standard therapy in adult subjects with focal onset seizures, the most frequent side effects (those reported in greater than 5% of ganaxolone subjects) were dizziness, fatigue and somnolence (or drowsiness). Side effects of the Central Nervous System, or CNS, were categorized as severe as compared to side effects of other body systems, though no specific CNS side effect was reported as severe by more than one subject. If these side effects are reported in future clinical trials, or if other safety or toxicity issues are reported in our future clinical trials, we may not receive approval to market ganaxolone, which could prevent us from ever generating revenue or achieving profitability. Furthermore, although we are currently developing ganaxolone for three indications, negative safety findings in any one indication could force us to delay or discontinue development in other indications. Results of our clinical trials could reveal an unacceptably high severity and prevalence of side effects. In such an event, our clinical trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order us to cease further development, or deny approval, of ganaxolone for any or all targeted indications. Drug-related side effects could affect study subject recruitment or the ability of enrolled subjects to complete our future clinical trials and may result in potential product liability claims. Additionally, if ganaxolone receives marketing approval, and we or others later identify undesirable side effects caused by ganaxolone, a number of potentially significant negative consequences could result, including: we may be forced to suspend marketing of ganaxolone; regulatory authorities may withdraw their approvals of ganaxolone; regulatory authorities may require additional warnings on the label that could diminish the usage or otherwise limit the commercial success of ganaxolone; we may be required to conduct post-market studies; we could be sued and held liable for harm caused to subjects or patients; and our reputation may suffer. Any of these events could prevent us from achieving or maintaining market acceptance of ganaxolone, if approved. Even if ganaxolone receives regulatory approval, we may still face future development and regulatory difficulties. Even if we obtain regulatory approval for ganaxolone, it would be subject to ongoing requirements by the FDA and comparable foreign regulatory authorities governing the manufacture, quality control, further development, labeling, packaging, storage, distribution, safety surveillance, import, export, advertising, promotion, recordkeeping and reporting of safety and other post-market information. The safety profile of ganaxolone will continue to be closely monitored by the FDA and comparable foreign regulatory authorities after approval. If new safety information becomes available after approval of ganaxolone, the FDA or comparable foreign regulatory authorities may require labeling changes or establishment of a Risk Evaluation and Mitigation Strategy, or REMS, or similar strategy, impose significant restrictions on ganaxolone's indicated uses or marketing, or impose ongoing requirements for potentially costly post-approval studies or post-market surveillance. For example, the label ultimately approved for ganaxolone, if it achieves marketing approval, may include restrictions on use. In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with current good manufacturing practices, or cGMP, and other regulations. If we or a regulatory authority discover previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory authority may Janney Montgomery Scott The date of this prospectus is , 2014. Table of Contents impose restrictions on that product, the manufacturing facility or us, including requiring recall or withdrawal of the product from the market or suspension of manufacturing. If we, ganaxolone or the manufacturing facilities for ganaxolone fail to comply with applicable regulatory requirements, a regulatory authority may: issue warning letters or untitled letters; mandate modifications to promotional materials or require us to provide corrective information to healthcare practitioners; require us to enter into a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance; seek an injunction or impose civil or criminal penalties or monetary fines; suspend or withdraw regulatory approval; suspend any ongoing clinical trials; refuse to approve pending applications or supplements to applications filed by us; suspend or impose restrictions on operations, including costly new manufacturing requirements; or seize or detain products, refuse to permit the import or export of products, or require us to initiate a product recall. The occurrence of any event or penalty described above may inhibit or preclude our ability to commercialize ganaxolone and generate revenue. The FDA's and other regulatory authorities' policies may change, and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of ganaxolone. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained, and we may not achieve or sustain profitability, which would adversely affect our business, prospects, financial condition and results of operations. Advertising and promotion of any product candidate that obtains approval in the United States will be heavily scrutinized by, among others, the FDA, the Department of Justice, or the DOJ, the Office of Inspector General of the Department of Health and Human Services, or HHS, state attorneys general, members of Congress and the public. Violations, including promotion of our products for unapproved or off-label uses, are subject to enforcement letters, inquiries and investigations, and civil and criminal sanctions by the FDA or other government agencies. Additionally, advertising and promotion of any product candidate that obtains approval outside of the United States will be heavily scrutinized by comparable foreign regulatory authorities. In the United States, engaging in impermissible promotion of ganaxolone for off-label uses can also subject us to false claims litigation under federal and state statutes, and other litigation and/or investigation, which can lead to civil and criminal penalties and fines and agreements that materially restrict the manner in which we promote or distribute our drug products. These false claims statutes include the federal False Claims Act, which allows any individual to bring a lawsuit against a pharmaceutical company on behalf of the federal government alleging submission of false or fraudulent claims, or causing to present such false or fraudulent claims, for payment by a federal program such as Medicare or Medicaid. If the government prevails in the lawsuit, the individual will share in any fines or settlement funds. Since 2004, these False Claims Act lawsuits against pharmaceutical companies have increased significantly in volume and breadth, leading to several substantial civil and criminal settlements Table of Contents based on certain sales practices promoting off-label drug uses. This increasing focus and scrutiny has increased the risk that a pharmaceutical company will have to defend a false claim action, pay settlement fines or restitution, agree to comply with burdensome reporting and compliance obligations, and be excluded from the Medicare, Medicaid and other federal and state healthcare programs. If we do not lawfully promote our approved products, we may become subject to such litigation and/or investigation and, if we are not successful in defending against such actions, those actions could compromise our ability to become profitable. Failure to obtain regulatory approval in international jurisdictions would prevent ganaxolone from being marketed in these jurisdictions. In order to market and sell our products in the European Union and many other jurisdictions, we must obtain separate marketing approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ substantially from that required to obtain FDA approval. The regulatory approval process outside the United States generally includes all of the risks associated with obtaining FDA approval. In addition, in many countries outside the United States, it is required that the product be approved for reimbursement before the product can be approved for sale in that country. We may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. We may not be able to file for marketing approvals and may not receive necessary approvals to commercialize our products in any market. If we are unable to obtain approval of ganaxolone by regulatory authorities in the European Union or another country or jurisdiction, the commercial prospects of ganaxolone may be significantly diminished and our business prospects could decline. We may not be able to obtain orphan drug exclusivity for ganaxolone or any other product candidates for which we seek it, which could limit the potential profitability of ganaxolone or such other product candidates. Regulatory authorities in some jurisdictions, including the United States and Europe, may designate drugs for relatively small patient populations as orphan drugs. Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is a drug intended to treat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000 individuals in the United States. Generally, if a product with an orphan drug designation subsequently receives the first marketing approval for an indication for which it receives the designation, then the product is entitled to a period of marketing exclusivity that precludes the applicable regulatory authority from approving another marketing application for the same drug for the same indication for the exclusivity period except in limited situations. For purposes of small molecule drugs, the FDA defines "same drug" as a drug that contains the same active moiety and is intended for the same use as the drug in question. A designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. We expect that we may in the future pursue orphan drug designations for ganaxolone for one or more indications, including behaviors in FXS and the treatment of PCDH19 female pediatric epilepsy, as well as certain of our future product candidates. However, obtaining an orphan drug designation can be difficult and we may not be successful in doing so for ganaxolone or any of our future product candidates. Even if we were to obtain orphan drug exclusivity for a product candidate, that exclusivity may not effectively protect the product from the competition of different drugs for the same condition, which could be approved during the exclusivity period. Additionally, after an orphan drug is approved, the FDA could subsequently approve another application for the same drug for the same indication if the FDA concludes that the later drug is shown to be safer, more effective or makes a major contribution to patient care. Orphan drug exclusive marketing rights in the United States also may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure Until and including , 2014 (25 days after the commencement of this offering), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. Table of Contents sufficient quantity of the drug to meet the needs of patients with the rare disease or condition. The failure to obtain an orphan drug designation for any product candidates we may develop, the inability to maintain that designation for the duration of the applicable period, or the inability to obtain or maintain orphan drug exclusivity could reduce our ability to make sufficient sales of the applicable product candidate to balance our expenses incurred to develop it, which would have a negative impact on our operational results and financial condition. Our business and operations would suffer in the event of computer system failures. Despite the implementation of security measures, our internal computer systems, and those of our CROs and other third parties on which we rely, are vulnerable to damage from computer viruses, unauthorized access, natural disasters, fire, terrorism, war and telecommunication and electrical failures. In addition, our systems safeguard important confidential personal data regarding subjects enrolled in our clinical trials. If a disruption event were to occur and cause interruptions in our operations, it could result in a material disruption of our drug development programs. For example, the loss of clinical trial data from completed, ongoing or planned clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach results in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development of ganaxolone could be delayed. Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses. Our operations could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or man-made disasters or business interruptions, for which we are predominantly self-insured. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses. We rely on third-party manufacturers to produce ganaxolone. Our ability to obtain clinical supplies of ganaxolone could be disrupted if the operations of these suppliers are affected by a man-made or natural disaster or other business interruption. The ultimate impact on us, our significant suppliers and our general infrastructure of being in certain geographical areas is unknown, but our operations and financial condition could suffer in the event of a major earthquake, fire or other natural disaster. Risks Related to the Commercialization of Our Product Our commercial success depends upon attaining significant market acceptance of ganaxolone, if approved, among physicians, patients, government and private payors and others in the medical community. Even if ganaxolone receives regulatory approval, it may not gain market acceptance among physicians, patients, government and private payors, or others in the medical community. Market acceptance of ganaxolone, if we receive approval, depends on a number of factors, including the: efficacy and safety of ganaxolone, or ganaxolone administered with other drugs, each as demonstrated in clinical trials and post-marketing experience; clinical indications for which ganaxolone is approved; acceptance by physicians and patients of ganaxolone as a safe and effective treatment; potential and perceived advantages of ganaxolone over alternative treatments; safety of ganaxolone seen in a broader patient group, including its use outside the approved indications should physicians choose to prescribe for such uses; prevalence and severity of any side effects; We are responsible for the information contained in this prospectus. We have not authorized anyone to provide you with different information, and we take no responsibility for any other information others may give you. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any state or other jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock. Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations, market opportunity and market share, is based on information from our own management estimates and research, as well as from industry and general publications and research, surveys and studies conducted by third parties. Management estimates are derived from publicly available information, our knowledge of our industry and assumptions based on such information and knowledge, which we believe to be reasonable. Our management estimates have not been verified by any independent source, and we have not independently verified any third-party information. In addition, assumptions and estimates of our and our industry's future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in "Risk Factors." These and other factors could

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+RISK FACTORS Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all of the other information contained in this prospectus, including our financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in our common stock. If any of the following risks actually occurs, our business, prospects, operating results and financial condition could suffer materially, the trading price of our common stock could decline and you could lose all or part of your investment. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business. Risks related to our financial position and need for additional capital We have incurred net operating losses since our inception and anticipate that we will continue to incur substantial operating losses for the foreseeable future. We may never achieve or sustain profitability. We have incurred net losses during most fiscal periods since our inception. As of September 30, 2013, we had an accumulated deficit of $174.2 million. We do not know whether or when we will become profitable. To date, we have not commercialized any products or generated any revenues from the sale of products, and we do not expect to generate any product revenues in the foreseeable future. Our losses have resulted principally from costs incurred in our discovery and development activities. We anticipate that our expenses will increase in the future as we expand our discovery, research, development, manufacturing and commercialization activities. However, we also anticipate that these increased expenses will be partially offset by milestone payments we expect to receive under our agreements with Celgene and potentially by payments we may receive under new collaboration arrangements we may enter into with third parties for dalantercept or other protein therapeutic candidates. If we do not receive the anticipated milestone payments or do not enter into partnerships for dalantercept or other protein therapeutic candidates on acceptable terms, our operating losses will substantially increase over the next several years as we execute our plan to expand our discovery, research, development, manufacturing and commercialization activities. There can be no assurance that we will enter into a new collaboration or achieve milestones and, therefore, no assurance our losses will not increase prohibitively in the future. To become and remain profitable, we or our partners must succeed in developing our protein therapeutic candidates, obtaining regulatory approval for them, and manufacturing, marketing and selling those products for which we or our partners may obtain regulatory approval. We or they may not succeed in these activities, and we may never generate revenue from product sales that is significant enough to achieve profitability. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Our failure to become or remain profitable would depress our market value and could impair our ability to raise capital, expand our business, discover or develop other protein therapeutic candidates or continue our operations. A decline in the value of our company could cause you to lose all or part of your investment. We will require substantial additional financing to achieve our goals, and a failure to obtain this necessary capital when needed could force us to delay, limit, reduce or terminate our product development or commercialization efforts. As of September 30, 2013, our cash and cash equivalents were $116.5 million. We believe that we will continue to expend substantial resources for the foreseeable future developing dalantercept and new protein therapeutic candidates. These expenditures will include costs associated with research and development, potentially acquiring new technologies, conducting preclinical studies and clinical trials, potentially obtaining regulatory approvals and manufacturing products, as well as marketing and selling products approved for sale, if any. In addition, other unanticipated costs may arise. Because the (1)We refer you to "Underwriting" beginning on page 154 for additional information regarding underwriting compensation. The underwriters expect to deliver the shares of common stock to investors on or about January , 2014 through the book-entry facilities of The Depositary Trust Company. Table of Contents outcome of our planned and anticipated clinical trials is highly uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of our protein therapeutic candidates. Celgene pays development, manufacturing and commercialization and certain patent costs for sotatercept and ACE-536. Other than those costs, our future capital requirements depend on many factors, including: the scope, progress, results and costs of researching and developing our other protein therapeutic candidates, and conducting preclinical studies and clinical trials; the timing of, and the costs involved in, obtaining regulatory approvals for our other protein therapeutic candidates if clinical trials are successful; the cost of commercialization activities for our other protein therapeutics, if any of these protein therapeutics is approved for sale, including marketing, sales and distribution costs; the cost of manufacturing our other protein therapeutic candidates for clinical trials in preparation for regulatory approval and in preparation for commercialization; our ability to establish and maintain strategic partnerships, licensing or other arrangements and the financial terms of such agreements; the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and the outcome of such litigation; and the timing, receipt, and amount of sales of, or royalties on, our future products, if any. Based on our current operating plan, we believe that the net proceeds we receive from this offering, together with receipt of anticipated milestone payments and our existing cash and cash equivalents will be sufficient to fund our projected operating requirements into the first quarter of 2017. However, our operating plan may change as a result of many factors currently unknown to us, and we may need additional funds sooner than planned. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to delay, limit, reduce or terminate preclinical studies, clinical trials or other development activities for one or more of our protein therapeutic candidates or delay, limit, reduce or terminate our establishment of sales and marketing capabilities or other activities that may be necessary to commercialize our protein therapeutic candidates. Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies or protein therapeutics on unfavorable terms to us. We may seek additional capital through a variety of means, including through private and public equity offerings and debt financings. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take certain actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through strategic partnerships with third parties, we may have to relinquish valuable rights to our technologies or protein therapeutics, or grant licenses on terms that are not favorable to us. If we are unable to raise additional funds through equity or debt financing when needed, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts for dalantercept or any protein therapeutics other than sotatercept or Citigroup Leerink Partners Table of Contents ACE-536, or grant rights to develop and market protein therapeutics that we would otherwise prefer to develop and market ourselves. Risks Related to Regulatory Review and Approval of Our Protein Therapeutic Candidates If we or our partners do not obtain regulatory approval for our current and future protein therapeutics, our business will be adversely affected. Our protein therapeutic candidates will be subject to extensive governmental regulations relating to, among other things, development, clinical trials, manufacturing and commercialization. In order to obtain regulatory approval for the commercial sale of any protein therapeutic candidates, we or our partners must demonstrate through extensive preclinical studies and clinical trials that the protein therapeutic candidate is safe and effective for use in each target indication. Clinical testing is expensive, time-consuming and uncertain as to outcome. We or our partners may gain regulatory approval for sotatercept, ACE-536, dalantercept, or any other protein therapeutic candidate in some but not all of the territories available or some but not all of the target indications, resulting in limited commercial opportunity for the approved protein therapeutics, or we or they may never obtain regulatory approval for these protein therapeutic candidates. Delays in the commencement, enrollment or completion of clinical trials of our protein therapeutic candidates could result in increased costs to us as well as a delay or failure in obtaining regulatory approval, or prevent us from commercializing our protein therapeutic candidates on a timely basis, or at all. We cannot guarantee that clinical trials will be conducted as planned or completed on schedule, if at all. A failure of one or more clinical trials can occur at any stage of testing. Events that may prevent successful or timely commencement, enrollment or completion of clinical development include: delays by us or our partners in reaching a consensus with regulatory agencies on trial design; delays in reaching agreement on acceptable terms with prospective clinical research organizations, or CROs, and clinical trial sites; delays in obtaining required Institutional Review Board, or IRB, approval at each clinical trial site; delays in recruiting suitable patients to participate in clinical trials; imposition of a clinical hold by regulatory agencies for any reason, including safety concerns or after an inspection of clinical operations or trial sites; failure by CROs, other third parties or us or our partners to adhere to clinical trial requirements; failure to perform in accordance with the FDA's good clinical practices, or GCP, or applicable regulatory guidelines in other countries; delays in the testing, validation, manufacturing and delivery of the protein therapeutic candidates to the clinical sites; delays caused by patients not completing participation in a trial or not returning for post-treatment follow-up; clinical trial sites or patients dropping out of a trial; occurrence of serious adverse events in clinical trials that are associated with the protein therapeutic candidates that are viewed to outweigh its potential benefits; or Piper Jaffray Table of Contents changes in regulatory requirements and guidance that require amending or submitting new clinical protocols. Delays, including delays caused by the above factors, can be costly and could negatively affect our or Celgene's ability to complete a clinical trial. If we or Celgene are not able to successfully complete clinical trials, we will not be able to obtain regulatory approval and will not be able to commercialize our protein therapeutic candidates. Clinical failure may occur at any stage of clinical development, and because our protein therapeutic candidates are in an early stage of development, there is a high risk of failure, and we may never succeed in developing marketable products or generating product revenue. Our early encouraging preclinical and clinical results for sotatercept, ACE-536 and dalantercept are not necessarily predictive of the results of our ongoing or future clinical trials. Promising results in preclinical studies of a drug candidate may not be predictive of similar results in humans during clinical trials, and successful results from early clinical trials of a drug candidate may not be replicated in later and larger clinical trials or in clinical trials for different indications. If the results of our or our partners' ongoing or future clinical trials are inconclusive with respect to the efficacy of our protein therapeutic candidates or if we or they do not meet the clinical endpoints with statistical significance or if there are safety concerns or adverse events associated with our protein therapeutic candidates, we or our partner may be prevented or delayed in obtaining marketing approval for our protein therapeutic candidates. In addition, data obtained from trials and studies are susceptible to varying interpretations, and regulators may not interpret our data as favorably as we do, which may delay or prevent regulatory approval. Alternatively, even if we or our partners obtain regulatory approval, that approval may be for indications or patient populations that are not as broad as intended or desired or may require labeling that includes significant use or distribution restrictions or safety warnings. We or our partners may also be required to perform additional or unanticipated clinical trials to obtain approval or be subject to additional post-marketing testing requirements to maintain regulatory approval. In addition, regulatory authorities may withdraw their approval of a product or impose restrictions on its distribution, such as in the form of a modified risk evaluation and mitigation strategy. If we or any of our partners violate the guidelines pertaining to promotion and advertising of any of our protein therapeutics, if approved, we or they may be subject to disciplinary action by the FDA's Office of Prescription Drug Promotion (OPDP) or other regulatory authorities. The FDA's Office of Prescription Drug Promotion, or OPDP, is responsible for reviewing prescription drug advertising and promotional labeling to ensure that the information contained in these materials is not false or misleading. There are specific disclosure requirements, and the applicable regulations mandate that advertisements cannot be false or misleading or omit material facts about the product. Prescription drug promotional materials must present a fair balance between the drug's effectiveness and the risks associated with its use. Most warning letters from OPDP cite inadequate disclosure of risk information. OPDP prioritizes its actions based on the degree of risk to the public health, and often focuses on newly introduced drugs and those associated with significant health risks. There are two types of letters that OPDP typically sends to companies that violate its drug advertising and promotional guidelines: notice of violation letters, or untitled letters, and warning letters. In the case of an untitled letter, OPDP typically alerts the drug company of the violation and issues a directive to refrain from future violations, but does not typically demand other corrective action. A warning letter is typically issued in cases that are more serious or where the company is a repeat offender. Although we have not received any such letters from OPDP, we or any partner may inadvertently violate OPDP's guidelines in the future and be subject to a OPDP untitled letter or warning letter, which may have a negative impact on our business. JMP Securities , 2014 Table of Contents If we or our partners fail to obtain regulatory approval in jurisdictions outside the United States, we and they will not be able to market our products in those jurisdictions. We and our partners intend to market our protein therapeutic candidates, if approved, in international markets. Such marketing will require separate regulatory approvals in each market and compliance with numerous and varying regulatory requirements. The approval procedures vary from country-to-country and may require additional testing. Moreover, the time required to obtain approval may differ from that required to obtain FDA approval. In addition, in many countries outside the United States, a protein therapeutic must be approved for reimbursement before it can be approved for sale in that country. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. We or our partners may not obtain foreign regulatory approvals on a timely basis, if at all. We or our partners may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market. Even if we or our partners receive regulatory approval for our protein therapeutic candidates, such products will be subject to ongoing regulatory review, which may result in significant additional expense. Additionally, our protein therapeutic candidates, if approved, could be subject to labeling and other restrictions, and we or our partners may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our products. Any regulatory approvals that we or our partners receive for our protein therapeutic candidates may also be subject to limitations on the approved indicated uses for which the product may be marketed or to conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials, and surveillance to monitor safety and efficacy. In addition, if the FDA approves any of our protein therapeutic candidates, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion and recordkeeping for the product will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with current good manufacturing practice, or cGMP, and GCP, for any clinical trials that we or our partners conduct post-approval. Later discovery of previously unknown problems with an approved protein therapeutic, including adverse events of unanticipated severity or frequency, or with manufacturing operations or processes, or failure to comply with regulatory requirements, may result in, among other things: restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market, or voluntary or mandatory product recalls; fines, warning letters, or holds on clinical trials; refusal by the FDA to approve pending applications or supplements to approved applications filed by us or our partners, or suspension or revocation of product license approvals; product seizure or detention, or refusal to permit the import or export of products; and injunctions or the imposition of civil or criminal penalties. The FDA's policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our protein therapeutic candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we or our partners are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or not able Table of Contents TABLE OF CONTENTS Page Summary 1 The Offering 8 Summary Financial Data 9 Risk Factors 11

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+RISK FACTORS Risks Related to Our Business and Solution If we are unable to attract new customers or our existing customers do not renew their subscriptions, the growth of our business and cash flows will be adversely affected. To increase our revenue and cash flows, we must regularly add new customers. If we are unable to hire or retain effective sales personnel, generate sufficient sales leads through our marketing programs, or if our existing or new customers do not perceive our solution to be of sufficiently high value and quality, we may not be able to increase sales and our operating results would be adversely affected. In addition, our existing customers have no obligation to renew their subscriptions, and renewal rates may decline or fluctuate due to a number of factors, including customers satisfaction with our solution, our professional services, our customer support, our prices and the prices of competing solutions, as well as mergers and acquisitions affecting our customer base, global economic conditions and customers spending budgets. The average term of our current customers initial agreement with us is approximately 4.0 and 3.5 years for our enterprise and mid-market customers, respectively, and the average remaining contract term for our enterprise and mid-market customers is approximately 2.1 and 1.9 years, respectively. If we fail to sell our solution and services to new customers or if our existing customers do not renew their subscriptions, our operating results will suffer, and our revenue growth, cash flows and profitability may be materially and adversely affected. The market for cloud-based GTM solutions is at an early stage of development. If this market does not develop or develops more slowly than we expect, our revenue may decline or fail to grow and we may incur additional operating losses. We derive, and expect to continue to derive, substantially all of our revenue from providing a cloud-based GTM solution and related services. The market for cloud-based GTM solutions is in an early stage of development, and it is uncertain whether these solutions will achieve and sustain high levels of demand and market acceptance. Our success will depend on the willingness of companies to accept our cloud-based GTM solution as an alternative to manual processes, traditional enterprise resource planning software and internally-developed GTM solutions. Some customers may be reluctant or unwilling to use our cloud-based GTM solution for a number of reasons, including existing investments in GTM technology. Traditional approaches to GTM automation have required, among other things, purchasing hardware and licensing software. Because these traditional approaches often require significant initial investments to purchase the necessary technology and to establish systems that comply with customers unique requirements, companies may be unwilling to abandon their current solutions for our cloud-based GTM solution. Other factors that may limit market acceptance of our solution include: our ability to maintain high levels of customer satisfaction; our ability to maintain continuity of service for all users of our solution; the price, performance and availability of competing solutions; and our ability to address companies confidentiality concerns about information stored outside of their premises. If companies do not perceive the benefits of our cloud-based GTM solution, or if companies are unwilling to accept our solution as an alternative to traditional approaches, the market for our solution might not continue to develop or might develop more slowly than we expect, either of which would significantly adversely affect our revenues and growth prospects. The information we source from third parties for inclusion in our Global Knowledge library may not be accurate and complete, our trade experts may make errors in interpreting legal and other requirements when processing this information, and our trade content may not be updated on a timely basis, which can expose our customers to fines and other substantial claims and penalties. Our customers often use our solution as a system of record and many of our customers are subject to regulation of their products, services and activities. Our Global Knowledge library includes trade content Table of Contents sourced from government agencies and transportation carriers in numerous countries. It is often sourced from text documents and includes import and export regulations, shipping documents, preferential duties and taxes, specifications for free trade agreements, transportation rates, sailing schedules, embargoed country and restricted party lists, and harmonized tariff codes. The information in these text documents may not be accurate and complete. Our team of trade experts transforms these documents into a normalized and propriety knowledgebase, interpretable by software, and in so doing has to interpret the legal and other requirements contained in the source documents. We can provide no assurances that our trade experts do not make errors in the interpretation of these requirements. Furthermore, rules and regulations and other trade content used in our solution change constantly, and we must continuously update our Global Knowledge library. Maintaining a complete and accurate library is time-consuming and costly and we can provide no assurances that our specialists will always make appropriate updates to the library on a timely basis. Errors or defects in updating the trade content we provide to our customers and any defects or errors in, or failure of, our software, hardware, or systems, can result in an inability to process transactions or lead to violations that could expose our customers to fines and other substantial claims and penalties and involve criminal activity. In addition, these errors and delays may damage our reputation with both existing and new customers and result in lost customers and decreased revenue, which could materially and adversely affect our business, revenue and results of operations. Any of these problems may enable our customers to terminate our agreements or we may be required to issue credits or refunds, and may be subject to product liability, breach of warranty or other contractual claims. We also may be required to indemnify our customers or third parties as a result of any of these problems. Any provisions in our customer agreements intended to limit liability may not be sufficient to protect us against any such claims. Insurance may not be available on acceptable terms, or at all. In addition, any insurance we do have may not cover claims related to specific defects, errors, failures or delays, may not cover indirect or consequential damages, and otherwise may be inadequate, and defending a suit, regardless of its merit, could be costly and divert management s attention. In general, losses from customers terminating their agreements with us and our cost of defending claims resulting from defects, errors, failures or delays might be substantial, and could have a material adverse effect on our business, financial position, results of operations and cash flows. Our sales cycle can be long and unpredictable and requires considerable time and expense, which may cause our operating results to fluctuate. The sales cycle for our solution, from initial contact with a potential lead to contract execution and implementation, varies widely by customer, and can be lengthy. Some of our customers undertake a significant evaluation process that frequently involves not only our solution, but also solutions of our competitors, which may result in extended sales cycles. Our sales efforts involve educating our customers about the use, technical capabilities and benefits of our solution. We have no assurance that the substantial time and money spent on our sales efforts will produce any sales. Furthermore, our sales and marketing efforts in a given period may only result in sales in subsequent periods, or not at all. If we do not realize sales from a customer in the time period expected or at all, our business, operating results and financial condition could be adversely affected. The complexity of our sales and implementation cycles exposes us to operational risks that we must manage carefully. The complexity of our sales and implementation cycles makes predicting the time to close a sale and implement our solution difficult, thereby exposing us to operational risks. The length of these cycles depends on our customers motivation and the resources they devote to the process. If our sales or implementation cycles are longer than we anticipate, we may face staffing shortages or cost overruns. If our customers are not satisfied with our solution implementation, we could incur additional costs to address these issues, reducing our professional services revenue and the opportunity to sell additional solution modules to these customers. In addition, any negative publicity related to our customer relationships, regardless of its accuracy, may damage our business by affecting our ability to compete for new business with current and prospective customers. Table of Contents We face intense competition, and our failure to compete successfully would make it difficult for us to add and retain customers and would impede the growth of our business. The GTM solutions market is fragmented, competitive and rapidly evolving. We compete with GTM vendors, traditional enterprise resource planning vendors such SAP and Oracle, and other service providers, as well as with solutions developed internally by enterprises seeking to manage their global trade. Some of our actual and potential competitors may enjoy competitive advantages over us, such as greater name recognition, more varied offerings and larger marketing budgets, as well as greater financial, technical and other resources. Furthermore, some competitors may have best-of-breed solutions to problems created by the unique trading requirements of particular countries. As a result, our competitors may be able to respond more quickly than we can to new or changing opportunities, technologies, standards or customer requirements or devote greater resources to the promotion and sale of their products and services than we can. The intensity of competition in the GTM market has resulted in pricing pressure as the market has developed and our competitors very frequently offer substantial price discounts for their products. We expect the intensity of competition to increase in the future as existing competitors develop their capabilities and as new companies, which could include one or more large software or trade content providers, enter our market. Increased competition could result in additional pricing pressure, reduced sales, shorter term lengths for customer contracts, lower margins or the failure of our solution to achieve or maintain broad market acceptance. If we are unable to compete effectively, it will be difficult for us to maintain our pricing rates and add and retain customers, and our business, financial condition and results of operations will be harmed. We may expand by acquiring or investing in other companies, which may divert our management s attention, result in additional dilution to our stockholders and consume resources that are necessary to sustain our business. Although we have no current agreements or commitments for any acquisitions, our business strategy includes acquiring complementary services, technologies or businesses to augment our solution capabilities and sales platform, particularly in foreign markets. We also may enter into relationships with, or invest in, other businesses to expand our service offerings or our ability to provide service in foreign jurisdictions. Negotiating these transactions can be time-consuming, difficult and expensive, and our ability to close these transactions may often be subject to approvals that are beyond our control. Consequently, these transactions, even if undertaken and announced, may not close. An acquisition, investment or business relationship may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, solutions, personnel or operations of the acquired companies, particularly if the key personnel of the acquired company choose not to work for us, the company s technology is not easily adapted to work with ours or we have difficulty retaining the customers of any acquired business due to changes in management or otherwise. Acquisitions may also disrupt our business, divert our resources and require significant management attention that would otherwise be available for development of our business. Moreover, the anticipated benefits of any acquisition, investment or business relationship may not be realized or we may be exposed to unknown liabilities. Our acquisitions may not be successfully integrated or any such acquisitions may not otherwise be successful. If our acquisitions are unsuccessful for any reason, our business may be harmed and the value of your investment may decline. Our success depends in part on our ability to develop and market new and enhanced solution modules, and we may not be able to do so, or do so quickly enough to respond to changes in demand. Even if we anticipate changes in demand, it may be difficult for us to transition existing customers to new versions of our solution. Our success depends in part on our ability to develop and market new and enhanced solution modules, and to do so on a timely basis. Successful module development and marketing depends on numerous factors, including anticipating customer requirements, changes in technology requirements, our ability to differentiate our solution from those of our competitors, and market acceptance of our solutions. Enterprises are requiring their software application vendors to provide ever increasing levels of functionality and broader offerings. Moreover, our Table of Contents industry is characterized by rapid evolution, and shifts in technology and customer needs. We may not be able to develop and market new or enhanced modules in a timely or cost-effective manner or at all. Our solution also may not achieve market acceptance or correctly anticipate technological changes or the changing needs of our customers or potential customers. In addition, even if we correctly anticipate changes in technology or demand, it might be difficult for us to transition existing customers to new versions of our solution. Such transitions or upgrades may require considerable professional services effort and expense and customers may choose to discontinue using our solution rather than proceed with a lengthy and expensive upgrade. If customers fail to accept new versions of our solution, if our newest solution contains errors, or if we expend too many resources supporting multiple versions of our solution, we may suffer a material adverse effect on our business, financial position, results of operations and cash flows. Our cost structure is relatively fixed in the short term, which makes it difficult to reduce our expenses quickly in response to declines in revenue or revenue growth. Most of our expenses, such as those associated with headcount and facilities, as well as those involved with maintaining our extensive Global Knowledge database, are relatively fixed and can be difficult to reduce in the short term. Our expense levels are based in part on our expectations regarding future revenue levels. As a result, if revenue for a particular quarter is below our expectations, our expenses for that quarter may constitute a larger percentage of our operating budget than we planned, causing a disproportionately negative effect on our expected results of operations and profitability for that quarter. Our solution is complex and customers may experience difficulty in implementing, upgrading or otherwise achieving the benefits attributable to it. Due to the scope and complexity of the solution that we provide, our implementation cycle can be lengthy and unpredictable. Our solution requires configuration and must integrate with many existing computer systems and applications of our customers and their trading partners. This can be time-consuming and expensive for our customers and can result in delays in the implementation of our solution. As a result, some customers have had, and may in the future have, difficulty implementing our solution successfully or otherwise achieving the expected benefits of our solution. Delayed or ineffective implementation or upgrades of our solution may limit our future sales opportunities, negatively affect revenue, result in customer dissatisfaction and harm our reputation. We have different revenue recognition policies for professional services depending on our solution deployment model, and, as a result, our revenue, gross profit and operating results may fluctuate substantially from quarter to quarter and be adversely affected depending on the model our customers choose. We generally employ two different deployment models for our solution and our revenue and operating results may fluctuate substantially from quarter to quarter depending on the model that our customers choose. Customers access our solution using either our cloud-based infrastructure or by deploying our solution on their own premises. Regardless of the delivery model, we sell our solution through subscription agreements that entitle our customers to access our solution and receive support, and we generally charge for professional services to implement the solution on a time and materials basis. For customers who select our cloud-based solution deployment model, we recognize all revenue for our related professional services as we perform them. For customers who deploy our solution on their own premises, we recognize professional services revenue ratably over the remaining term of the subscription period. However, we recognize the costs of providing professional services as we incur them under either deployment model, and as a result, in any given period where we deliver professional services to on-premises customers, our revenue, gross profit and operating results may fluctuate substantially and will be adversely affected by this different revenue recognition treatment, especially in comparison to professional services delivered to our cloud-based customers. Table of Contents If unauthorized persons breach our security measures, or those of third parties that provide infrastructure for, or components of, our GTM solution, they could access client data, leading clients to curtail or stop their use of our solution, which could harm our business, financial condition and results of operations. Our GTM solution involves the storage and transmission of confidential information of customers, including certain financial data. We may also in the course of our service engagements have access to confidential customer information. If unauthorized persons breach our security measures, or those of third parties that provide infrastructure for, or components of, our solution as a result of employee error, malfeasance or otherwise, and, as a result, an unauthorized party obtains access to this confidential data, our reputation and business would suffer, and we could incur significant liability. Techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not discovered until launched against a target. As a result, we and our third-party providers may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our solutions occurs, the market perception of our solution could be harmed and we could lose sales and customers. Selling our solution and services internationally subjects us to various risks. Expanding our GTM software solution internationally is important to our growth and profitability. In the fiscal year ended December 31, 2013, 11.0% of our revenue was attributable to sales in international markets, primarily Europe. We intend to expand our sales efforts to other continents, which will require financial resources and management attention and may subject us to new or increased levels of risk. We cannot be assured that we will be successful in creating new international demand for our solution and services. By doing business in international markets, we are exposed to risks separate and distinct from those we face in our domestic operations, and if we are unable to manage these risks effectively, it may harm the growth and profitability of our business. Engaging in international business inherently involves a number of other difficulties and risks, including: changes in foreign currency exchange rates; changes in a specific country s or region s political or economic conditions, particularly in emerging markets; burdens of complying with a wide variety of foreign customs, laws and regulations, and with U.S. laws such as the Foreign Corrupt Practices Act; increased financial accounting and reporting burdens and complexities; changes in diplomatic and trade relationships; international terrorism and anti-American sentiment; possible future limitations on the ownership of foreign businesses; difficulties in enforcing agreements and collecting receivables through certain foreign legal systems or difficulty collecting international accounts receivable or longer accounts receivable payment cycles; and less effective protection of intellectual property. Our exposure to each of these risks may increase our costs, impair our ability to market and sell our solution and services, and require significant management attention. Our business, financial position, results of operations and cash flows may be materially adversely affected by the realization of any of these risks. Our software is complex and may contain material undetected errors, which could enable or otherwise cause our customers to terminate or not renew their subscriptions, damage our reputation and adversely affect our business, revenue and results of operations. Our software is inherently complex and, despite extensive testing and quality control, may contain material undetected errors or failures especially when first introduced or as new versions are released. Failures or errors Table of Contents in our software could result in data loss or corruption. We may not find errors in new or enhanced solution modules before we release them and such errors may not be discovered by us or our customers until after we have implemented these modules. These errors in our modules could enable or otherwise cause our customers to terminate or not renew their subscriptions. In addition, they may damage our reputation with both existing and new customers and result in lost customers and decreased revenue, which could materially and adversely affect our business, revenue and results of operations. Industry consolidation may result in increased competition. The GTM market is highly fragmented, and we believe that it is likely that some of our existing competitors will consolidate or will be acquired. Some of our competitors have made or may make acquisitions or may enter into partnerships or other strategic relationships to offer a more comprehensive solution than they individually had offered. We expect consolidation in the industry as companies attempt to strengthen or maintain their market positions. This could result in competitors with greater financial, technical, sales, marketing, service and other resources than us. The companies resulting from such combinations may eliminate gaps in their solutions, including a lack of integrated or comprehensive trade content, and these combinations may create more intense competition. Any such consolidation, acquisition, alliance or cooperative relationship could lead to pricing pressure, erosion of our margins, and loss of market share, all of which could have a material adverse effect on our business, results of operations and financial condition. We have a history of losses and we may not achieve or sustain profitability in the future. We have incurred significant losses since our formation, including net losses of $4.6 million in 2011, $2.1 million in 2012, and $14.4 million in 2013. As of December 31, 2013, we had an accumulated deficit of $78.0 million. As part of our strategy to develop and expand our business, we expect to significantly increase sales and marketing expenses to attract additional customers, as well as research and development expenses to further develop our solution and services. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses. Any failure to increase our revenue or generate revenue from developing new modules and expanding our services could prevent us from attaining or increasing profitability. In addition, as a public company, we will incur significant accounting, legal and other expenses that we did not incur as a private company. Furthermore, we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may result in continuing or greater losses in future periods. You should not consider our historical revenue growth rates to be indicative of our future performance. We do not expect to be profitable in the foreseeable future and we cannot be certain that we will be able to attain profitability on a quarterly or annual basis, or if we do, that we will sustain profitability. Uncertainty in global economic conditions may adversely affect our business, operating results or financial condition. Our operations and performance depend on global economic conditions. Challenging or uncertain economic conditions make it difficult for our customers and potential customers to accurately forecast and plan future business activities, and may cause our customers and potential customers to slow, reduce or fail to commence spending on our solution. Furthermore, during challenging or uncertain economic times, our customers may face difficulties gaining timely access to sufficient credit and experience decreasing cash flow, which could affect their willingness to make purchases and their ability to make timely payments to us. Global economic conditions have in the past, and could continue to, have an adverse effect on demand for our solution, on our ability to predict future operating results and on our financial condition and operating results. If global economic conditions remain uncertain or deteriorate, it may materially affect our business, operating results and financial condition. Table of Contents Our quarterly results of operations may fluctuate in the future, which could result in volatility in our stock price. Our quarterly revenue and results of operations have varied in the past and may fluctuate as a result of a variety of factors. If our quarterly revenue or results of operations fluctuate, the price of our common stock could decline substantially. Fluctuations in our results of operations may be due to a number of factors, including, but not limited to: the volume and mix of solution modules sold, which can be influenced by enterprise customer demand for more professional services than our mid-market customers; our ability to retain and increase sales to existing customers and attract new customers, particularly as we obtain more revenue from new customers than old customers who add modules to their subscriptions; the timing and success of introductions of new modules or upgrades by us or our competitors; the strength of the global economy; competition, including entry into the industry by new competitors and new offerings by existing competitors; the amount and timing of expenditures related to expanding our operations, research and development, or introducing new modules, including challenges related to expanding our significant research and development presence in Bangalore, India given the competitive market for labor in that region; and changes in the payment terms for our solution or changes in our revenue recognition policies. Due to the foregoing factors, and the other risks discussed in this prospectus, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance. Declines in new subscriptions or in the rate of renewal of our subscriptions may not be fully reflected in our current period operating results and could lead to future revenue shortfalls that could affect our results of operations. In 2013, we derived 74% of our total revenue from subscription agreements. We recognize revenue from these subscriptions over the term of the agreement, and accordingly downturns or upturns in new or renewal subscriptions may not be fully reflected in our current period operating results. If our new and renewal subscriptions in any period decline or fail to grow at a rate consistent with our historical trends, our revenue in future periods could fall short of analysts expectations which, in turn, could adversely affect the price of our common stock. We rely entirely on our own employees to sell and implement our solution and may be at a disadvantage compared to competitors that utilize external channels. Many enterprise software companies, including some of our competitors, utilize partner networks to sell and deploy their solutions. These partners can include consulting companies of national reputation who may have established relationships with our potential customers. The dedication of a national consulting company to a particular GTM offering enhances the reputation of that offering in the marketplace. To date, we have relied entirely on our own sales and professional services employees to sell and implement our solution, which may put us at a competitive disadvantage. To increase our revenue and cash flows, we must regularly add new customers and maintain the ability to provide them with timely professional services. If we are unable to do so on our own, the market perception of our solution could be harmed and we could suffer a material adverse effect on our business, results of operations and financial condition. If we lose the services of our Chief Executive Officer or President and Chief Operating Officer, or other members of our senior management team, it could impair our ability to execute our business strategy and our sales and profitability could suffer. Our success and future growth depend on the skills, working relationships and continued services of our senior management team and in particular, our Chief Executive Officer, James W. Preuninger, and our President and Chief Operating Officer, John W. Preuninger. In the event that we are unable to retain the Table of Contents services of any of these key contributors, we may be unable to execute our business strategy in a timely manner, if at all, which would adversely affect our business, operating results and financial condition. Our business could be adversely affected if we are unable to attract, integrate and retain key personnel. Our success in the highly competitive GTM solutions market depends largely on our ability to attract, integrate and retain highly skilled managerial, solution, engineering, trade content and sales and marketing personnel. Competition for these personnel in our industry is intense. We may not be able to attract and retain the appropriately qualified, highly skilled employees necessary for the development of our solution and services and the growth of our business, or to replace personnel who leave our employ in the future. The loss of services of any of our key personnel, the inability to retain and attract qualified personnel in the future, or delays in hiring required personnel, particularly global trade subject matter experts, information technology professionals and project managers, could make it difficult to meet key objectives, such as timely and effective upgrades and introductions, penetration and expansion into existing accounts and growth in the GTM solutions market. Our growth is dependent upon the continued development and retention of our direct sales force and any failure to hire and/or retain these personnel may impede our growth. We have recently begun investing extensively in our direct sales force. We believe that our future growth will depend on the continued development of this sales force and their ability to obtain new customers, particularly enterprise customers, and to manage our existing customer base. Our ability to achieve significant growth in revenue in the future will depend, in large part, on our success in recruiting, training and retaining a sufficient number of direct sales personnel. New sales personnel require significant training and may, in some cases, take more than a year before becoming productive, if at all. If we are unable to hire and develop sufficient numbers of productive direct sales personnel, sales of our GTM solution and related services will suffer and our growth will be impeded. We are exposed to exchange rate risks on foreign currencies that may adversely affect our business and results of operations. Because most of our international sales are denominated in the currency of the country where the purchaser is located, as we continue to expand our direct sales presence in international regions, the portion of our accounts receivable and payment obligations denominated in foreign currencies continues to increase. In addition, we incur significant costs related to our operations in India in Rupees, and we also incur costs related to our operations in China in Renminbi which will increase in 2014. As a result, increases or decreases in the value of the U.S. dollar relative to foreign currencies may affect our financial position, results of operations and cash flow. Our largest exposures to foreign exchange rates exist with respect to the Euro, the Rupee and Renminbi, which together represented approximately 9% of revenue and approximately 7% of our cost of revenue in 2013. We do not currently hedge our exposure to fluctuations in foreign exchange rates. Any hedging policies we may implement in the future may not be successful, and the cost of those hedging techniques may have a significant negative effect on our operating results. Interruptions or delays in the delivery of our GTM solution could impair the availability or use of our solution, resulting in customer dissatisfaction, damage to our reputation, loss of customers, limited growth and reduction in revenue. We host our GTM software solution from co-location facilities located in Jacksonville, Florida and Carlstadt, New Jersey. We host our CTM solution from a single co-location facility located in Shanghai, China. Design or mechanical errors, power losses, spikes in usage volume, hardware failures, systems failures, communications failures, failure to follow system protocols and procedures, intentional bad acts, natural disasters, war, terrorist attacks or security breaches, including cyber attacks, could cause our systems to fail, resulting in interruptions in our service. Other interruptions or delays in delivering our GTM and CTM solutions can result from changes to or termination of our arrangements with the owners of the facilities. The owners of our facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to Table of Contents renew these agreements on commercially reasonable terms, we may be required to transfer to one or more new data center facilities, and we may incur significant costs and possible service interruption in doing so. In addition, our Jacksonville data center s location may make it relatively susceptible to tropical storms and hurricanes, which, depending on severity, could also cause interruptions or delays in the delivery of our solution. All of our GTM solutions are hosted primarily from our Jacksonville facility, and our Carlstadt facility acts as a disaster recovery site that can host our solution following a catastrophic event at our Jacksonville co-location facility. For customers who do not have real time replication of their data to our Carlstadt facility, it can take us a substantial amount of time to migrate them to Carlstadt and restore functionality for them. Many of our customers may consider our GTM solution to be mission critical, and any delay in restoring our solution may be unacceptable to customers. Any equipment failures and delays in restoring our solution could enable or otherwise cause our customers to terminate or not renew their subscriptions. In addition, they may damage our reputation with both existing and new customers and result in lost customers and decreased revenue, which could materially and adversely affect our business, revenue and results of operations. If we fail to manage our international operations effectively, our business, financial condition and results of operations could be adversely affected. We have offices in the United States, Germany, India and China, and plan to continue our international expansion. Managing a geographically dispersed workforce in multiple time zones in compliance with diverse local laws and customs is challenging. If we fail to manage our international workforce effectively, our business, financial condition and results of operations could be adversely affected. Political, economic, social and other factors in India and China may adversely affect our operations and our ability to achieve our business objectives. We have offices in Bangalore, India, in which the majority of our engineers are situated. Since the early 1990s, the Indian government has been implementing an economic structural reform program with the objective of liberalizing India s exchange and trade policies, reducing the fiscal deficit, controlling inflation, promoting a sound monetary policy, reforming the financial sector, and placing greater reliance on market mechanisms to direct economic activity. While economic liberalization efforts in India continue, there can be no assurance that these economic reforms will persist, and that any newly elected government will continue the program of economic liberalization of previous governments. In addition, despite the economic reforms, India continues to have relatively poor business conditions. India has also experienced terrorist attacks in the past decade. Religious and border disputes persist and remain pressing problems. Military hostilities and civil unrest in Afghanistan, Iraq and other Asian countries persist. These events could adversely influence the Indian economy and, as a result, materially and adversely affect our operations and our ability to achieve our business objectives. We conduct our business in China through our EasyCargo Chinese subsidiary. The results of operations and future prospects of our Chinese subsidiary are subject to evolving economic, political and social developments in China. In particular, these results may be adversely affected by changes in China s political, economic and social conditions, changes in policies of the Chinese government, changes in laws and regulations or in the interpretation of existing laws and regulations, changes in foreign exchange regulations, measures that may be introduced to control inflation, and changes in the rates or methods of taxation. Also, Chinese commercial laws, regulations and interpretations applicable to non-Chinese owned market participants such as us are continually changing. These laws, regulations and interpretations could impose restrictions on our ownership or operations of our interests in China and could have a material adverse effect on our business. Uncertainties with respect to the Chinese legal system may adversely affect the operations of our Chinese subsidiary. Our Chinese subsidiary is subject to laws and regulations applicable to foreign investment in China. There are uncertainties regarding the interpretation and enforcement of laws, rules and policies in China. The Chinese legal system is based on written statutes, and prior court decisions have limited precedential value. Because many laws and regulations are relatively new and the Chinese legal system is still evolving, the interpretations of many laws, Table of Contents regulations and rules are not always uniform. Moreover, the relative inexperience of China s judiciary in many cases creates additional uncertainty as to the outcome of any litigation, and the interpretation of statutes and regulations may be subject to government policies reflecting domestic political agendas. Finally, enforcement of existing laws or contracts based on existing law may be uncertain and sporadic. As a result of the forgoing, it may be difficult for us to obtain swift or equitable enforcement of laws ostensibly designed to protect companies like ours, which could have a material adverse effect on our business and results of operations. We may be exposed to liabilities under the FCPA and anti-corruption laws, including those under Chinese law, and any determination that we violated these laws could have a material adverse effect on our business. We are subject to the U.S. Foreign Corrupt Practice Act of 1977, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business. Through our EasyCargo Chinese subsidiary, we have agreements with more than 35 customers that are subject to Chinese law. China also strictly prohibits bribery of government officials. Our activities in China create the risk of unauthorized payments or offers of payments by our employees, consultants or sales agents, even though they may not always be subject to our control. It is our policy to implement safeguards to discourage these practices by our employees. However, our existing safeguards and any future improvements may prove to be ineffective, and our employees, consultants or sales agents may engage in conduct for which we might be held responsible. Violations of the FCPA or anti-corruption laws, including such anti-corruption laws in China, may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the U.S. government may seek to hold us liable for successor liability FCPA violations committed by EasyCargo or any other company in which we invest or that we acquire. We may need substantial additional funding and we may be unable to raise capital when needed, which could force us to delay, reduce or eliminate our solution development programs. 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 enhance existing and develop new modules, 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 further 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 secured by us 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. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when required, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired. In that case, we may not be able to, among other things, develop or enhance our solution, continue to expand our sales and marketing, acquire complementary technologies, solutions or businesses, expand operations in the United States or internationally, hire, train and retain employees, or respond to competitive pressures or unanticipated working capital requirements. Our failure to do any of these things could have a material adverse effect on our business, financial condition, and operating results. Our effective tax rate may fluctuate, and we may incur obligations in tax jurisdictions in excess of amounts that have been accrued. We are subject to income taxes in both the United States and various foreign jurisdictions, and we may take certain income tax positions on our tax returns with which tax authorities may disagree. When necessary, we provide reserves for potential payments of tax to various tax authorities related to uncertain tax positions. However, the calculation of our tax liabilities involves the application of complex tax regulations to our global operations in many jurisdictions. Therefore, any dispute with any tax authority may result in a payment that is materially different from our current estimate of the tax liabilities associated with our returns. Table of Contents Changes in tax laws or tax rulings could materially affect our effective tax rate. There are several proposals to reform United States tax rules being considered by law makers, including proposals that may reduce or eliminate the deferral of United States income tax on our unrepatriated earnings, potentially requiring those earnings to be taxed at the U.S. federal income tax rate, reduce or eliminate our ability to claim foreign tax credits, and eliminate various tax deductions until foreign earnings are repatriated to the United States. At December 31, 2013, we had net operating loss carryforwards for federal income tax purposes of approximately $55.0 million. Our future reported financial results may be adversely affected by tax rule changes which restrict or eliminate our ability to utilize net operating loss carry-forwards, claim foreign tax credits or deduct expenses attributable to foreign earnings, or otherwise affect the treatment of our unrepatriated earnings. Our ability to use our net operating loss carryforwards may be subject to limitation. Under Section 382 of the Internal Revenue Code of 1986, as amended, substantial changes in our ownership may limit the amount of net operating loss carryforwards that could be utilized annually in the future to offset our taxable income. Specifically, this limitation may arise in the event of a cumulative change in ownership of our company of more than 50% within a three-year period. Any such annual limitation may significantly reduce the utilization of our net operating loss carryforwards before they expire. Our prior business acquisitions, and closing of this offering, alone or together with transactions that may occur in the future, could limit the amount of net operating loss carryforwards that could be utilized annually in the future to offset our taxable income, if any. Any such limitation, whether as the result of our prior business acquisitions, of this offering, sales of common stock by our existing stockholders or additional sales of common stock by us after this offering, could have a material adverse effect on our results of operations in future years. We have not completed a study to assess whether an ownership change will occur as a result of this offering, or whether there have been one or more ownership changes since our inception, due to the costs and complexities associated with such study. Accordingly, our ability to use our net operating loss carryforwards to reduce future tax payments may be currently limited or may be limited as a result of this offering or any future issuance of shares of our stock. If we are unable to manage our expected growth, our performance may suffer. Our business has grown rapidly, and if we are successful in executing our business strategy, this growth will continue as we leverage our existing customer relationships, expand internationally, increase our solution offerings and execute strategic acquisitions. We will need to continue to expand our managerial, operational, financial and other systems and resources to manage our operations, continue our research and development activities, increase our sales force and expand our professional services team. It is possible that our management, finance, development personnel, systems and facilities currently in place may not be adequate to support this future growth. Our need to effectively manage our operations and growth requires that we continue to develop more robust business processes and improve our systems and procedures in each of these areas and attract and retain sufficient numbers of talented employees. We may be unable to successfully implement these tasks on a larger scale and, accordingly, may not achieve our research, development and growth goals. Our loan and security agreement with our lender contains operating and financial covenants that may restrict our business and financing activities. We are party to a loan and security agreement in connection with our revolving line of credit. As of December 31, 2013, the outstanding balance under this line of credit was $7.0 million. Borrowings under the loan and security agreement are secured by substantially all of our assets, excluding intellectual property. Our loan and security agreement contains customary restrictions and requires us to maintain a minimum cash balance in an account we maintain with our lender and availability on the line of credit, as well as minimum EBITDA. The operating and financial restrictions and covenants in the loan and security agreement, as well as any future financing agreements that we may enter into, restrict our ability to finance our operations, engage in business activities or expand or fully pursue our business strategies. Our ability to comply with these covenants may be affected by events beyond our control, and we may not be able to meet those covenants. From time to time we may be required to seek waivers, a forbearance or an amendment to the loan and security agreement in order to maintain compliance with these covenants, and there can be no certainty that any such waiver, Table of Contents amendment or forbearance will be available, or what the cost of such waiver, amendment or forbearance, if obtained, would be. A breach of any of these covenants could result in a default under the loan and security agreement, which could cause all of the outstanding indebtedness under our line of credit to become immediately due and payable, terminate all commitments to extend further credit and permit our lender to take possession of and sell our assets pledged as collateral. If we are unable to generate sufficient cash available to repay our debt obligations when they become due and payable, either when they mature or in the event of a default, we may not be able to obtain additional debt or equity financing on favorable terms, if at all, which may negatively affect our ability to continue as a going concern. Risks Related to Our Intellectual Property We may not be able to adequately protect our intellectual property rights in internally developed software and other materials and efforts to protect them may be costly. Our ability to compete effectively depends in part upon our ability to protect our intellectual property rights in our software and other materials that we have developed internally. We hold no issued or pending patents and have relied largely on copyright, trade secret and, to a lesser extent, trademark laws, as well as confidentiality procedures and agreements with our employees, consultants, customers and vendors, to control access to, and distribution of technology, software, documentation and other confidential information. Despite these precautions, it may be possible for a third party to copy, reverse engineer or otherwise obtain, use or distribute our technology, software and/or documentation without authorization. If this were to occur, we could lose revenue as a result of competition from products infringing or misappropriating our technology and intellectual property and we may be required to initiate litigation to protect our proprietary rights and market position. United States copyright and trade secret laws offer us only limited protection and the laws of some foreign countries protect proprietary rights to an even lesser extent. Accordingly, defense of our proprietary technology may become an increasingly important issue as we continue to expand our operations and technology development into countries that provide a lower level of intellectual property protection than the United States. Policing unauthorized use of our technology is difficult and the steps we take may not prevent misappropriation of the technology we rely on. If competitors are able to use our technology without recourse, our ability to compete would be harmed and our business would be materially and adversely affected. We may elect to initiate litigation in the future to enforce or protect our proprietary rights or to determine the validity and scope of our rights or the rights of others. That litigation may not be ultimately successful and could result in substantial costs to us, the reduction or loss in intellectual property protection for our technology, the diversion of our management attention and harm to our reputation, any of which could materially and adversely affect our business and results of operations. Assertions by any other third party that we infringe its intellectual property, whether successful or not, could subject us to costly and time-consuming litigation and expensive licenses. The software and technology industries are characterized by frequent litigation based on allegations of infringement or other violations of patents, copyrights, trademarks, trade secrets or other intellectual property rights. For example, in 2011 a non-practicing entity claimed that our solution infringed one of its patents. Although we successfully defended this claim, we cannot be certain that our solution and services do not infringe the intellectual property rights of other third parties. Additionally, because our software is integrated with our customers business processes and other software applications, third parties may bring claims of infringement or misappropriation against us, as well as our customers and other software suppliers. Claims of alleged infringement of intellectual property rights of third parties could be asserted against us in the future. We cannot be sure that we would prevail against any such asserted claim. In addition to possible claims with respect to our proprietary information, some of our solution modules contain technology developed by and licensed from third parties and we may likewise be susceptible to infringement or misappropriation claims with respect to these third party technologies. Claims of alleged infringement of third party intellectual property rights may have a material adverse effect on our business. Any intellectual property rights claim made against us or our customers, with or without merit, Table of Contents could be time-consuming, expensive to litigate or settle, and could divert management attention and financial resources. An adverse determination could prevent us from offering our modules or services to our customers and may require that we procure or develop substitute modules or services that do not infringe. Claims of intellectual property infringement also might require us to enter into costly royalty or license agreements. We may be unable to obtain royalty or license agreements on terms acceptable to us or at all. Furthermore, many of our license agreements require us to indemnify and defend our customers for certain third-party intellectual property infringement claims, which could increase our costs as a result of defending such claims and may require that we pay damages if there were an adverse ruling related to any such claims. Even if we are not a party to any litigation between a customer and a third party, an adverse outcome in any such litigation could make it more difficult for us to defend our services and solution in any subsequent litigation in which we are a named party. Moreover, such infringement claims may harm our relationships with our existing customers and may deter future customers from purchasing our solution on acceptable terms, if at all. We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of employees former employers. We could in the future be subject to claims that we or our employees have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of our employees former employers. Litigation may be necessary to defend against these claims. If we fail in defending against such claims, a court could order us to pay substantial damages and prohibit us from using technologies or features that are essential to our solution if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of the former employers. In addition, we may lose valuable intellectual property rights or personnel. A loss of key personnel or their work product could hamper or prevent our ability to develop, market and support new solution modules or enhancements to existing modules, which could severely harm our business. Even if we are successful in defending against these claims, such litigation could result in substantial costs and distract management. Evolving regulation of the Internet may increase our expenditures related to compliance efforts, which may adversely affect our financial condition. As Internet commerce continues to evolve, increasing regulation by federal, state or foreign agencies becomes more likely. We are particularly sensitive to these risks because the Internet and cloud computing are critical components of our business model. For example, we believe that increased regulation is likely in the area of data privacy on the Internet, and laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information could affect our customers ability to use and share data, potentially reducing demand for solutions accessed via the Internet and restricting our ability to store, process and share certain data with our clients via the Internet. In addition, taxation of services provided over the Internet or other charges imposed by government agencies or by private organizations for accessing the Internet may be imposed. Any regulation imposing greater fees for Internet use or restricting information exchange over the Internet could result in a decline in the use of the Internet and the viability of Internet-based services, which could have a material adverse effect on our business. Risks Related to this Offering and Ownership of Our Common Stock The concentration of our capital stock ownership with insiders upon the completion of this offering will limit your ability to influence corporate matters. We anticipate that our executive officers, employees, directors, current 5% or greater stockholders, and their respective affiliates will together beneficially own or control, in aggregate, approximately 77.6% of the shares of our common stock outstanding, after giving effect to the conversion of all outstanding preferred stock, the issuance of 914,094 shares at the assumed offering price (which is the midpoint of the estimated offering price range on the cover of this prospectus) in satisfaction of $10,512,222 of accrued but unpaid dividends to our preferred stockholders, and assuming no exercise of outstanding options or warrants following the closing of this offering. As a result, these executive officers, directors and principal stockholders, were they to act together, would be able to significantly influence most matters that require approval by our stockholders, including the election of directors, any merger, consolidation or sale of all or substantially all or of our assets or Table of Contents any other significant corporate transaction. Corporate action might be taken even if other stockholders, including those who purchase shares in this offering, oppose such action. Those stockholders may delay or prevent a change of control or otherwise discourage a potential acquirer from attempting to obtain control of our company, even if such change of control would benefit our other stockholders. This concentration of stock ownership may adversely affect investors perception of our corporate governance or delay, prevent or cause a change in control of our company, any of which could have material adverse effect on the market price of our common stock. There has been no public market for our common stock prior to this offering, and you may not be able to resell our shares at or above the price you paid, or at all. Prior to this offering, there has been no public market for our common stock. We expect to apply to list our common stock on the New York Stock Exchange. However, we can give no assurances that the New York Stock Exchange will grant our application for listing. If an active trading market for our common stock does not develop after this offering, the market price and liquidity of our common stock will be materially and adversely affected. The offering price for our common stock was determined by negotiations between us and the underwriters and may bear no relationship to the market price for our common stock after this offering. The market price of our common stock may decline below the offering price. The market price for our common stock may be volatile, which could contribute to the loss of your investment. Fluctuations in the price of our common stock could contribute to the loss of all or part of your investment. Prior to this offering, there has not been a public market for our common stock. Accordingly, the initial public offering price for the shares of our common stock may not be indicative of the price that will prevail in the trading market, if any, that develops following this offering. If an active market for our common stock develops and continues, the trading price of our common stock following this offering is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. Any of the factors listed below could have a material adverse effect on your investment in our common stock and our common stock may trade at prices significantly below the initial public offering price. In such circumstances, the trading price of our common stock may not recover and may experience a further decline. Factors affecting the trading price of our common stock may include: actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us; changes in the market s expectations about our operating results; the effects of seasonality on our business cycle; success of competitive solutions and services; our operating results failing to meet the expectation of securities analysts or investors in a particular period or failure of securities analysts to publish reports about us or our business; changes in financial estimates and recommendations by securities analysts concerning our company, the GTM market, or the software industry in general; operating and stock price performance of other companies that investors deem comparable to us; news reports relating to trends in global trade, including changes in estimates of the future size and growth rate of our markets; announcements by us or our competitors of acquisitions, new offerings or improvements, significant contracts, commercial relationships or capital commitments; our ability to market new and enhanced solution modules on a timely basis; changes in laws and regulations affecting our business; commencement of, or involvement in, litigation involving our company, our general industry, or both; Table of Contents changes in our capital structure, such as future issuances of securities or the incurrence of additional debt; the volume of shares of our common stock available for public sale; any major change in our board or management; sales of substantial amounts of common stock by our directors, executive officers or principal stockholders or the perception that such sales could occur; and general economic and political conditions such as recessions, interest rates, fuel prices, international currency fluctuations and acts of war or terrorism. Broad market and industry factors may materially harm the market price of our common stock irrespective of our operating performance. The stock market in general and the market for technology companies and software companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of ours, may not be predictable. A loss of investor confidence in the market for technology or software stocks or the stocks of other companies which investors perceive to be similar to us, the opportunities in the GTM market or the stock market in general, could depress our stock price regardless of our business, prospects, financial conditions or results of operations. In addition, in the past, following periods of volatility in the overall market and the market price of a company s securities, securities class action litigation has often been instituted against the affected company. This type of litigation, even if unsuccessful, could be costly to defend and distract our management. The recently enacted JOBS Act allows us to postpone the date by which we must comply with certain laws and regulations intended to protect investors and to reduce the amount of information we provide in our reports filed with the SEC, which could undermine investor confidence in our company and adversely affect the market price of our common stock. The recently enacted JOBS Act is intended to reduce the regulatory burden on emerging growth companies. As defined in the JOBS Act, a public company whose initial public offering of common equity securities occurred after December 8, 2011 and whose annual gross revenues are less than $1.0 billion will, in general, qualify as an emerging growth company until the earliest of: the last day of its fiscal year following the fifth anniversary of the date of its initial public offering of common equity securities; the last day of its fiscal year in which it has annual gross revenue of $1.0 billion or more; the date on which it has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; and the date on which it is deemed to be a large accelerated filer, which will occur at such time as we (a) have an aggregate worldwide market value of common equity securities held by non-affiliates of $700 million or more as of the last business day of its most recently completed second fiscal quarter, (b) have been required to file annual and quarterly reports under the Securities Exchange Act of 1934 for a period of at least 12 months, and (c) have filed at least one annual report pursuant to the Securities Act of 1934. Under this definition, we will be an emerging growth company upon completion of this offering and could remain an emerging growth company until as late as December 31, 2019. The JOBS Act provides that, so long as we qualify as an emerging growth company, we will, among other things: be exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting; be exempt from the say on pay provisions (requiring a non-binding stockholder vote to approve compensation of certain executive officers) and the say on golden parachute provisions (requiring a non-binding stockholder vote to approve golden parachute arrangements for certain executive officers in Table of Contents connection with mergers and certain other business combinations) of the Dodd-Frank Act and certain disclosure requirements of the Dodd-Frank Act relating to compensation of our chief executive officer; be permitted to omit the detailed compensation discussion and analysis from proxy statements and reports filed under the Securities Exchange Act of 1934 and instead provide a reduced level of disclosure concerning executive compensation; and be exempt from any rules that may be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor s report on the financial statements. Although we are still evaluating the JOBS Act, we currently intend to take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us so long as we qualify as an emerging growth company, except that we have irrevocably elected not to take advantage of the extension of time to comply with new or revised financial accounting standards available under Section 102(b) of the JOBS Act. Among other things, this means that our independent registered public accounting firm will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting so long as we qualify as an emerging growth company, which may increase the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected. Likewise, so long as we qualify as an emerging growth company, we may elect not to provide you with certain information, including certain financial information and certain information regarding compensation of our executive officers, that we would otherwise have been required to provide in filings we make with the SEC, which may make it more difficult for investors and securities analysts to evaluate our company. As a result, investor confidence in our company and the market price of our common stock may be materially and adversely affected. We will become subject to additional financial and other reporting and corporate governance requirements that may be difficult for us to satisfy. Evolving regulation of corporate governance and public disclosure may result in additional expenses and continuing uncertainty. We have historically operated our business as a private company. In connection with this offering, we will become obligated to file with the Securities and Exchange Commission annual and quarterly information and other reports that are specified in Sections 13 and 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and we will also become subject to other new financial and other reporting and corporate governance requirements, including the requirements of the New York Stock Exchange and certain provisions of the Sarbanes-Oxley Act of 2002 and the regulations promulgated thereunder, which will impose significant compliance obligations upon us, particularly after we are no longer an emerging growth company. These obligations will require a commitment of additional resources and divert our senior management s time and attention from our day-to-day operations. In particular, we may be required to: create or expand the roles and duties of our board of directors, our board committees and management; institute a more comprehensive financial reporting and disclosure compliance function; hire additional financial and accounting personnel and other experienced accounting and finance staff with the expertise to address the complex accounting matters applicable to public companies; establish an internal audit function; prepare and distribute periodic public reports in compliance with our obligations under the federal securities laws; establish an investor relations function; and establish new internal policies, such as those relating to disclosure controls and procedures and insider trading. We may not be successful in complying with these obligations, and compliance with these obligations will be time-consuming and expensive. Table of Contents If we are unable to achieve and maintain effective internal control over financial reporting, investors could lose confidence in our financial statements and our company, which could have an adverse effect on our business and stock price. In order to provide reliable financial reports, mitigate the risk of fraud and operate successfully as a publicly traded company, we must maintain effective control over our financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002. Commencing with our fiscal year ended December 31, 2015, we will be required to assess the effectiveness of our internal control over financial reporting as of the end of that fiscal year. This assessment must include disclosure of any material weakness in our internal control over financial reporting that is identified by management. Once we are no longer an emerging growth company, our independent registered public accounting firm will also be required to consider our internal controls over financial reporting and express an opinion as to their effectiveness. If our management or our independent registered public accounting firm identifies one or more material weaknesses in our internal control over financial reporting, we will be unable to conclude that such internal control is effective. We are in the very early stages of the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404. If we are unable to conclude that our internal control over financial reporting is effective, or, when we are no longer an emerging growth company, if our independent registered public accounting firm is unable to express an opinion that our internal control over financial reporting is effective, investors could lose confidence in the accuracy and completeness of our financial reports, which could have a materially adverse effect on our stock price. If securities analysts do not publish research or reports about our business or if they downgrade our stock, the price of our common stock could decline. The trading market for our common stock will rely in part on the research and reports that industry or financial analysts publish about us, our business, our markets and our competitors. We do not control these analysts. If securities analysts do not cover our common stock after the closing of this offering, the lack of research coverage may adversely affect the market price of our common stock. Furthermore, if one or more of the analysts who do cover us downgrade our stock or if those analysts issue other unfavorable commentary about us or our business, our stock price would likely decline. If one or more of these analysts cease coverage of us or fails to regularly publish reports on us, we could lose visibility in the market and interest in our stock could decrease, which in turn could cause our stock price or trading volume to decline. We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on the appreciation in the price of our common stock. We have never declared or paid any cash dividends on our common stock and covenants in our loan and security agreement also prevent us from paying cash dividends. We currently intend to retain any future earnings to fund our future growth and do not expect to declare or pay any dividend on shares of our common stock in the foreseeable future. As a result, you may only realize a gain on your investment in our common stock if the market price of our common stock appreciates and you sell your shares at a price above your cost after accounting for any taxes. The price of our common stock may not appreciate in value or ever exceed the price that you paid for shares of our common stock in this offering. Our board of directors and management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment. Our board of directors and management will have broad discretion to use the net proceeds from this offering, and you will be relying on the judgment of our board of directors and management regarding the application of these proceeds. You will not have the opportunity to influence our decisions on how to use the proceeds, and we may not apply the net proceeds of this offering in ways that increase the value of your investment. We have not allocated the estimated net proceeds for any specific purpose, and we expect to use the net proceeds from this offering for general corporate and working capital purposes, which may include hiring additional personnel, investing in sales and marketing, research and development and infrastructure. We may also use a portion of the Table of Contents proceeds to acquire businesses, products and technologies that are complementary to our business. Although we have from time to time evaluated possible acquisitions, we currently have no commitments or agreements to make any material acquisition, and we may not make any acquisitions in the future. We may not be able to achieve a significant return, if any, on any investment of the net proceeds of this offering. You will experience immediate and substantial dilution in the net tangible book value of the shares you purchase in this offering. If you purchase shares of our common stock in this offering, you will experience immediate and substantial dilution, as the initial public offering price of our common stock will be substantially greater than the net tangible book value per share of our common stock. Based on the assumed offering price of $11.50 per share, if you purchase our common stock in this offering, you will suffer immediate and substantial dilution of approximately $10.08 per share. For a further description of the dilution that you will experience immediately after this offering, see the section entitled Dilution. Anti-takeover provisions in our certificate of incorporation and bylaws, as well as provisions in Delaware law, might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock. Our certificate of incorporation, bylaws and Delaware law contain provisions that could have the effect of rendering more difficult or discouraging an acquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions: (i) dividing our board of directors into three classes with staggered three-year terms; (ii) denying cumulative voting rights to stockholders; (iii) specifying that directors may be removed by our stockholders only for cause upon the vote of two thirds or more of our outstanding common stock; (iv) specifying that the authorized number of directors may be changed only by resolution of the board of directors; (v) eliminating the right of stockholders to act by written consent without a meeting; (vi) specifying that only our chairman of the board, Chief Executive Officer or the board of directors may call a special meeting of stockholders; (vii) limiting stockholder proposals to nominate director candidates to those for which timely advance notice was provided; and (viii) limiting stockholder amendments of the foregoing provisions to a vote of at least two thirds of our outstanding common stock. These provisions, alone or together, could delay hostile takeovers and changes in control or changes in our management. As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns, or within the last three years has owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition. Future sales, or the availability for sale, of our common stock may cause our stock price to decline. Sales of our common stock in the public market after this offering, or the perception that these sales may occur, could cause the market price of our common stock to decline. Assuming the sale of 4,782,870 shares by us in this offering, upon completion of this offering, we will have 24,894,355 shares of common stock outstanding. All shares of our common stock sold in this offering will be freely transferable without restriction or additional registration under the Securities Act of 1933. The remaining shares outstanding after this offering will be available for sale, upon the expiration of the 180-day lock-up period beginning from the date of this prospectus, if applicable, subject to volume and other restrictions as applicable under Rule 144 under the Securities Act of 1933. Any or all of these shares may be released prior to expiration of the lock-up period at the discretion of the lead underwriter for this offering. To the extent these shares are sold into the market, the market price of our common stock could decline. See Shares Eligible for Future Sale for a more detailed description of the restrictions applicable to the sale of shares of our common stock after this offering. Table of Contents

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+RISK FACTORS An investment in our common stock involves various risks. Before making an investment decision, you should carefully read and consider the risk factors described below as well as the other information included in this prospectus. Any of these risks, if they are realized, could materially and adversely affect our business, financial condition, and results of operations. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect us. In any such case, you could lose all or a portion of your original investment. Risks Relating to Our Business We are dependent upon the services of key executives and we could be harmed by the loss of their services. Our performance depends largely on the experience and client relationships of our management team and bankers. Most of these individuals have been involved in venture banking for much of their professional careers, primarily in providing lending or other financing services to emerging growth technology companies, life sciences companies and venture firms and have strong relationships with individuals and institutions in the markets we serve. The implementation of our business and growth strategies also depends upon our ability to continue to attract and retain additional qualified management and banking personnel. Our bankers may terminate their employment with us at any time, and we could have difficulty replacing such officers with persons who are experienced in the specialized aspects of our business or who have ties to the communities within our market areas. If we are unable to retain any of these key employees, our growth and results of operations could be adversely affected. See Management. Because of the credit profile of our loan portfolio, our levels of nonperforming assets and charge-offs can be volatile. We may need to make material provisions for loan losses in any period, which could reduce net income and/or increase net losses in that period. Our loan portfolio has a credit profile different from that of most other banking companies. The credit profile of our clients varies across our loan portfolio, based on the nature of the lending we do for different market segments. In our portfolios for early, expansion and late stage companies, many of our loans are made to companies with modest or negative cash flows and no established record of profitable operations. Repayment of these loans may be dependent upon receipt by borrowers of additional equity financing from venture firms or others, or in some cases, a successful sale to a third party, public offering or other form of liquidity event. Due to the overall weakening of the economic environment in 2008, venture capital financing activity, as well as mergers and acquisitions and initial public offerings activities on which venture firms rely to exit investments to realize returns slowed in a meaningful manner. While there has been some improvement in overall economic conditions since then, particularly during the past few years, if economic conditions worsen or do not continue to improve, such activities may slow down further, which may impact the financial health of our client companies. Venture firms may continue to provide financing in a more selective manner, at lower levels, and/or on less favorable terms, any of which may have an adverse effect on our borrowers that are otherwise dependent on such financing to repay their loans to us. Moreover, collateral for many of our loans often includes intellectual property, which is difficult to value and may not be readily salable in the case of default. Because of the intense competition and rapid technological change that characterizes the companies in the technology and life science industry sectors, a borrower s financial position can deteriorate rapidly. We continue to increase our efforts to lend to larger clients, as well as to make larger loans. Our ability to make larger loans will increase with the additional capital resulting from this offering. These larger loans include loans equal to or greater than $7.5 million to individual clients, which have over time represented an increasingly larger proportion of our total loan portfolio. Increasing our loan commitments, especially for larger loans, could increase the impact on us of any single borrower default. We may enter into financing arrangements with our clients, the repayment of which may be dependent on third parties financial condition or ability to meet their payment obligations. We make loans secured by letters of credit issued by other third party banks, the repayment of which may be dependent on the reimbursement by third party banks. These third parties may not meet their financial obligations to our clients or to us, which could have an adverse impact on us. We also intend to maintain an emphasis on asset-based lending by providing our clients with lines of credit secured by accounts receivable and inventory. These types of loans generally expose us to additional risks since they are made on the basis of the borrower s ability to make payments from the cash flows of the borrower s business and are secured by collateral that may depreciate over time. Table of Contents In our portfolio of venture capital clients, many of our clients have lines of credit, the repayment of which is dependent on the payment of capital calls or management fees by the underlying limited partner investors in the funds managed by these firms. These limited partner investors may face liquidity issues or have difficulties meeting their financial commitments, especially during unstable economic times, which may lead to our clients inability to meet their repayment obligations to us. Based on the credit profile of our overall loan portfolio, our level of nonperforming loans, loan charge-offs and allowance for loan losses can be volatile and can vary materially from period to period. Although our average nonperforming loans and loan charge-offs have been relatively low historically, due to the credit profile of our loan portfolio and the nature of our borrowers, we may have quarterly or interim periods where nonperforming loans and charge-offs significantly exceed our historical averages. Increases in our level of nonperforming loans or loan charge-offs may require us to increase our provision for loan losses in any period, which could reduce our net income or cause net losses in that period. Additionally, such increases in our level of nonperforming loans or loan charge-offs may also have an adverse effect on our capital ratios and market perceptions of us. If we conclude that the decline in value of any of our investment securities is other than temporary, we are required to write down the value of that security through a charge to earnings. We review our investment securities portfolio at each quarter-end reporting period to determine whether securities need to be impaired due to changes in value associated with credit quality. When our other than temporary impairment ( OTTI ) methodology shows that an investment security has declined below its carrying value, we are required to assess whether the decline is other than temporary. If we conclude through our impairment methodology that the decline is other than temporary, we are required to write down the value of that security through a charge to earnings. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. For example, fixed-rate securities are generally subject to decreases in market value when market interest rates rise. Additional factors include, but are not limited to, rating agency downgrades of the securities, defaults by the issuer or individual borrowers with respect to the underlying securities, and continued instability in the credit markets. The process for determining whether impairment is other than temporary usually requires difficult, subjective judgments about the future financial performance of the issue and any collateral underlying the security in order to assess the probability of receiving all contractual principal on the security. Changes in the expected cash flows of these securities may result in our concluding in future periods that the impairment of these securities is other than temporary, which would require a charge to earnings to write down these securities. The valuation risk associated with our investment portfolio could have a material adverse impact on our book equity. As part of managing our overall inherent risk position, our investment portfolio is typically weighted towards fixed-rate securities. If interest rates increase (decrease) the fair value of our investment portfolio will conversely decrease (increase). The decline in value is an unrealized loss that will decrease the fair value of our securities and the Other Comprehensive Income component of our shareholders equity. Due to the relatively large size of the investment portfolio, this can have a material adverse impact to our shareholders equity. The potential loss in book value could be quite large depending on how quickly and how materially market interest rates change. While the loss is not permanent, it could have a material impact on our book value for any particular reporting period. In addition to regular interest rate risk analysis, we also conduct ongoing analysis to test Square 1 Bank s exposure to various rising rate scenarios in order to better manage this risk. Public equity offerings and mergers and acquisitions involving our clients or a slowdown in venture capital investment levels may reduce the market for venture capital investment and the borrowing needs of our current and potential clients, which could adversely affect our ability to grow and our financial performance. Our core strategy is focused on providing banking products and services to companies, including in particular early- and expansion-stage companies that receive financial support from sophisticated investors, including venture capital or private equity firms, angels, and corporate investors. We derive a meaningful share of our deposits from these companies and provide them with loans as well as other banking products and services. In many cases, our credit decisions are based on our analysis of the likelihood that our venture capital-backed client will receive additional rounds of equity capital from investors. If the amount of capital available to such companies decreases, it is likely that the number of new clients and investor financial support to our existing borrowers could decrease, which could have an adverse effect on our business, profitability and growth prospects. Table of Contents While an active market for public equity offerings and mergers and acquisitions generally has positive implications for our business, one negative consequence is that our clients may pay off or reduce their loans with us if they complete a public equity offering, are acquired by or merge with another entity or otherwise receive a significant equity investment. Moreover, our capital call lines of credit are typically utilized by our venture capital fund clients to make investments prior to receipt of capital called from their respective limited partners. A slowdown in overall venture capital investment levels may reduce the need for our clients to borrow from our capital call lines of credit. Any significant reduction in the outstanding amounts of our loans or under our lines of credit could have a material adverse effect on our business, results of operations and financial condition. The borrowing needs of our clients may be unpredictable, especially during a challenging economic environment. We may not be able to meet our unfunded credit commitments, or adequately reserve for losses associated with our unfunded credit commitments, which could have a material effect on our business, financial condition, results of operations and reputation. A commitment to extend credit is a formal agreement to lend funds to a client as long as there is no violation of any condition established under the agreement. The actual borrowing needs of our clients under these credit commitments have historically been lower than the contractual amount of the commitments. A significant portion of these commitments expire without being drawn upon. Because of the credit profile of our clients, we typically have a substantial amount of total unfunded credit commitments, which is reflected off our balance sheet. Actual borrowing needs of our clients may exceed our expected funding requirements, especially during a challenging economic environment when our client companies may be more dependent on our credit commitments due to the lack of available credit elsewhere, the increasing costs of credit, or the limited availability of financings from venture firms. In addition, limited partner investors of our venture capital clients may fail to meet their underlying investment commitments due to liquidity or other financing issues, which may increase our clients borrowing needs. Any failure to meet our unfunded credit commitments in accordance with the actual borrowing needs of our clients may have a material adverse effect on our business, financial condition, results of operations and reputation. Additionally, we establish a reserve for losses associated with our unfunded credit commitments. The level of the reserve for unfunded credit commitments is determined by following a methodology similar to that used to establish our allowance for loan losses in our funded loan portfolio. The reserve is based on credit commitments outstanding, credit quality of the loan commitments, and management s estimates and judgment, and is susceptible to significant changes. There can be no assurance that our reserve for unfunded credit commitments will be adequate to provide for actual losses associated with our unfunded credit commitments. An increase in the reserve for unfunded credit commitments in any period may result in a charge to our earnings, which could reduce our net income or increase net losses in that period. Concentration of risk increases the potential for significant losses. Concentration of risk increases the potential for significant losses in our business. While there may exist a great deal of diversity within each industry, our clients are concentrated by these general industry niches: technology, life science and venture capital. Many of our client companies are concentrated by certain stages within their life cycles, such as early-stage or expansion-stage, and many of these companies are venture capital-backed. Our loan concentrations are derived from our borrowers engaging in similar activities or types of loans extended to a diverse group of borrowers that could cause those borrowers to be similarly impacted by economic or other conditions. In addition, we are continuing to increase our efforts to lend to larger clients and/or to make larger loans, which may increase our concentration risk. Any adverse effect on any of our areas of concentration could have a material impact on our business, results of operations and financial condition. Due to our concentrations, we may suffer losses even when economic and market conditions are generally favorable for our competitors. We face competitive pressures that could adversely affect our business, results of operations, financial condition and future growth. We compete with other banks and specialty and diversified financial services companies and venture debt funds, many of which are larger than us. While there are a limited number of direct competitors in the venture banking market. Some of our competitors have long-standing relationships with venture firms and the companies that are funded by such firms. As such, the market we target is extremely competitive and several of our competitors have significantly greater resources, established customer bases, more locations and longer operating histories. Our competitors sometimes undercut the pricing Table of Contents and/or credit terms we are able to offer in order to increase their market share. Our pricing and credit terms could deteriorate if we act to meet these competitive challenges, which could adversely affect our business, results of operations and financial condition and future growth. If we are not able to successfully compete for customers and grow our business, our earnings could be adversely affected. A return of recessionary conditions could result in increases in our level of nonperforming loans and/or reduce demand for our products and services, which could have an adverse effect on our results of operations. Although the U.S. economy has emerged from the severe recession that occurred in 2008 and 2009, economic growth has been slow and uneven, and unemployment levels remain high. Recovery by many businesses has been impaired by lower consumer spending. A return to prolonged deteriorating economic conditions and/or continued negative developments in the domestic and international credit markets could significantly affect the ability of our client companies to operate, the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. These events may cause us to incur losses and may adversely affect our financial condition and results of operations. Our allowance for loan losses is determined based upon both objective and subjective factors, and may be inadequate or subject to increase by our regulators, which could hurt our earnings. When borrowers default and do not repay the loans that we make to them, we may lose money. The allowance for loan losses is the amount estimated by management as necessary to cover probable losses in the loan portfolio at the statement of financial condition date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are loss exposure at default, the amount and timing of future cash flows on impacted loans, value of collateral, and determination of the loss factors to be applied to the various elements of the portfolio. If our estimates and judgments regarding such matters prove to be incorrect, our allowance for loan losses might not be sufficient, and additional loan loss provisions might need to be made. Depending on the amount of such loan loss provisions, the adverse impact on our earnings could be material. In addition, we may increase the allowance because of changing economic conditions or other qualitative factors. There may be a significant increase in the number of borrowers who are unable or unwilling to repay their loans, resulting in our charging off more loans and increasing our allowance. In addition, bank regulators may require us to make a provision for loan losses or otherwise recognize further loan charge-offs following their periodic review of our loan portfolio, our underwriting procedures, and our loan loss allowance. Any increase in our allowance for loan losses or loan charge-offs as required by such regulatory authorities could have a material adverse effect on our financial condition and results of operations. Please see Management s Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies and Estimates Allowance for Loan Losses for a discussion of the procedures we follow in establishing our loan loss allowance. Our current level of interest rate spread may decline in the future. Any material reduction in our interest rate spread, or a continuation of the sustained period of low market interest rates, could have a material effect on our business, results of operations or financial condition. A major portion of our net income comes from our interest rate spread, which is the difference between the interest rates paid by us on amounts used to fund assets and the interest rates and fees we receive on our interest-earning assets. We fund assets using deposits and other borrowings. While we offer interest-bearing deposit products, a majority of our deposit balances consist of noninterest-bearing products. Our interest-earning assets include outstanding loans extended to our clients and securities held in our investment portfolio. Overall, the interest rates we pay on our interest-bearing liabilities and receive on our interest-earning assets, and our level of interest rate spread, could be affected by a variety of factors, including changes in market interest rates, competition, regulatory requirements (such as the repeal of the interest payment restrictions under Federal Reserve Regulation Q), and a change over time in the mix of the types of loans, investment securities, deposits and other liabilities on our balance sheet. Changes in market interest rates, such as the Federal Funds rate, generally impact our interest rate spread. While changes in interest rates do not produce equivalent changes in the revenues earned from our interest-earning assets and the expenses associated with our interest-bearing liabilities, increases in market interest rates will nevertheless likely cause our interest rate spread to increase. Conversely, if interest rates decline, our interest rate spread will likely decline. Sustained low levels of market interest rates could continue to place downward pressure on our net income levels. Unexpected or further Table of Contents interest rate changes may adversely affect our business forecasts and expectations. Interest rates are highly sensitive to many factors beyond our control, such as inflation, recession, global economic disruptions, unemployment and the fiscal and monetary policies of the federal government and its agencies. Any material reduction in our interest rate spread or the continuation of sustained low levels of market interest rates could have a material adverse effect on our business, results of operations and financial condition. See Management s Discussion and Analysis of Financial Condition and Results of Operations Interest Rate Risk Interest Rate Risk Management. We anticipate that we will have increased operating expenses in 2014 which could adversely impact our earnings. As we continue to grow our business and add employees to support our growth, we will incur additional personnel and benefits expenses related to this growth. In addition, our occupancy expenses will increase in 2014 due to our assumption of the leases for the Sand Hill Finance LLC offices, our anticipated addition of new loan production offices in San Francisco and Chicago and an increase in our lease expenses for one of our existing loan production offices. Square 1 Bank is also in the process of updating its online banking system and its platform for lending and credit operations and such updates will result in increased expenses in 2014. We anticipate that the aggregate of these increased expenses will result in approximately a 20% increase in our operating expenses for 2014 compared to 2013. Such increased operating expenses could adversely impact our net income for fiscal year 2014. Liquidity risk could impair our ability to fund operations and jeopardize our financial condition. Liquidity is essential to our business. We require sufficient liquidity to meet our expected, as well as unexpected, financial obligations and requirements. Primary liquidity resources for Square 1 Financial are dividends from the Bank and periodic capital raising transactions. Client deposits are the primary source of liquidity for Square 1 Bank. We tend to have volatility in our deposit portfolio due to, among other things, venture capital funding and disbursement patterns and portfolio company cash burn rates. We have tools in place to manage this volatility, including varying the pricing of various deposit products and using off-balance sheet products for managing deposit growth. When needed, wholesale borrowing capacity supplements our liquidity in the form of short- and long-term borrowings secured by our portfolio of investment securities, loans outstanding and, finally, through unsecured overnight funding channels available to us in the Fed Funds market. An inability to maintain or raise funds through these sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities, or on terms attractive to us, could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources include an increase in costs of capital in financial capital markets, a decrease in the level of our business activity due to a market downturn or adverse regulatory action against us, or a decrease in depositor or investor confidence in us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a severe volatility or disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole. Any failure to manage our liquidity effectively could have a material adverse effect on our financial condition. Our business reputation is important and any damage to it could have a material adverse effect on our business. Our reputation, including the intellectual property associated with our reputation, is very important to sustain our business, as we rely on our relationships with our current, former and potential clients and shareholders, the venture capital and private equity communities, and the industries that we serve. On November 22, 2013, we filed a complaint in the U.S. District Court in the Middle District of North Carolina, demanding injunctive relief to block CommunityOne Bancorp from further use of its logo. Our complaint alleges that CommunityOne Bancorp s newly-adopted logo is nearly identical to our mark and amounts to trademark infringement, as we currently own multiple U.S. registrations for our logo. Any damage to our reputation, whether arising from alleged trademark infringement or other legal, regulatory, supervisory or enforcement actions, matters affecting our financial reporting or compliance with Securities and Exchange Commission (the SEC ) and exchange listing requirements, negative publicity, the conduct of our business or otherwise could have a material adverse effect on our business. See Business Legal Proceedings. Regulation of the financial services industry is undergoing major changes, and future legislation could increase our cost of doing business or harm our competitive position. We are subject to extensive regulation, supervision and examination by the Board of Governors of the Federal Reserve System (the Federal Reserve ) and the North Carolina Commissioner of Banks (the NCCOB ), our primary regulators, and Table of Contents by the Federal Deposit Insurance Corporation (the FDIC ), as insurer of our deposits. Such regulation and supervision governs the activities in which an institution and its holding company may engage and are intended primarily for the protection of the insurance fund and the depositors and borrowers of Square 1 Bank rather than for holders of our common stock. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations. In 2010 and 2011, in response to the financial crisis and recession that began in 2008, significant regulatory and legislative changes resulted in broad reform and increased regulation impacting financial institutions. The Dodd-Frank Act has created a significant shift in the way financial institutions operate. The Dodd-Frank Act also created the Consumer Financial Protection Bureau to administer consumer protection and fair lending laws, a function that was formerly performed by the depository institution regulators. The Dodd-Frank Act contains various other provisions designed to enhance the regulation of depository institutions and prevent the recurrence of a financial crisis such as occurred in 2008-2009. The full impact of the Dodd-Frank Act on our business and operations will not be known for years until all of the regulations fully implementing the statute are written and adopted. The Dodd-Frank Act may have a material impact on our operations, particularly through increased regulatory burden and compliance costs. Any future legislative changes could have a material impact on our profitability. Future legislative changes could require changes to business practices or force us to discontinue businesses and potentially expose us to additional costs, liabilities, enforcement action and reputational risk. Additionally, in early July 2013, the Federal Reserve approved revisions to their capital adequacy guidelines and prompt corrective action rules that implement the revised standards of the Basel Committee on Banking Supervision, commonly called Basel III, and address relevant provisions of the Dodd-Frank Act. Basel III and the regulations of the federal banking agencies require bank holding companies and banks to undertake significant activities to demonstrate compliance with the new and higher capital standards. Compliance with these rules will impose additional costs on us. We are periodically subject to examination and scrutiny by a number of banking agencies and, depending upon the findings and determinations of these agencies, we may be required to make adjustments to our business that could adversely affect us. Federal and state banking agencies periodically conduct examinations of our business, including compliance with applicable laws and regulations. If, as a result of an examination, a federal banking agency was to determine that the financial condition, capital resources, asset quality, asset concentration, earnings prospects, management, liquidity, sensitivity to market risk or other aspects of any of our operations has become unsatisfactory, or that we or our management is in violation of any law or regulation, it could take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin unsafe or unsound practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to change the asset composition of our portfolio or balance sheet, to assess civil monetary penalties against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance. If we become subject to such regulatory actions, our business, results of operations and reputation may be negatively impacted. We may need to raise additional capital in the future, and if we fail to maintain sufficient capital, whether due to losses, an inability to raise additional capital or otherwise, our financial condition, liquidity and results of operations, as well as our ability to maintain regulatory compliance, would be adversely affected. We face significant capital and other regulatory requirements as a financial institution. We may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business needs, which could include the possibility of financing acquisitions. In addition, Square 1 Financial, on a consolidated basis, and the Bank, on a stand-alone basis, must meet certain regulatory capital requirements and maintain sufficient liquidity. Our ability to raise additional capital depends on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry, market conditions and governmental activities, and on our financial condition and performance. Accordingly, we cannot assure you that we will be able to raise additional capital if needed or on terms acceptable to us. If we fail to maintain capital to meet regulatory requirements, our financial condition, liquidity and results of operations would be materially and adversely affected. Table of Contents We are dependent upon Square 1 Bank for cash flow, and Square 1 Bank s ability to make cash distributions is restricted. Our primary tangible asset is Square 1 Bank. As such, we depend upon Square 1 Bank for cash distributions (through dividends on Square 1 Bank s stock) that we use to pay our operating expenses and satisfy our obligations. Such distributions would be a source of funds to pay dividends, should we elect to pay any in the future, on our common stock. There are numerous laws and banking regulations that limit Square 1 Bank s ability to pay dividends to Square 1 Financial. If Square 1 Bank is unable to pay dividends to Square 1 Financial, we may not be able to satisfy our obligations or pay dividends on our common stock. Federal and state statutes and regulations restrict Square 1 Bank s ability to make cash distributions to Square 1 Financial. These statutes and regulations require, among other things, that Square 1 Bank maintain certain levels of capital in order to pay a dividend. Further, state and federal banking authorities have the ability to restrict the payment of dividends by supervisory action. We rely on other companies to provide key components of our business infrastructure. Third party vendors provide key components of our business infrastructure such as core loan and deposit data processing systems, internet connections, network access and funds distribution. While we have selected these third party vendors carefully, we cannot control their actions. Any problems caused by these third parties, including those which result from their failure to provide services for any reason or their poor performance of services, could adversely affect our ability to deliver products and services to our customers and otherwise to conduct its business. Replacing these third party vendors could also entail significant delay and expense. We are dependent on our information technology and telecommunications systems and third-party servicers, and systems failures, interruptions or breaches of security could have a material adverse effect on us. Our business is dependent on the successful and uninterrupted functioning of our information technology and telecommunications systems and third-party servicers. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If significant, sustained or repeated, a system failure or service denial could compromise our ability to operate effectively, damage our reputation, result in a loss of customer business, and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on us. In addition, we provide our customers with the ability to bank remotely, including over the Internet and the telephone. The secure transmission of confidential information over the Internet and other remote channels is a critical element of remote banking. Our network could be vulnerable to unauthorized access, computer viruses, phishing schemes and other security breaches. We may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses. To the extent that our activities or the activities of our customers involve the storage and transmission of confidential information, security breaches and viruses could expose us to claims, regulatory scrutiny, litigation and other possible liabilities. Any inability to prevent security breaches or computer viruses could also cause existing customers to lose confidence in our systems and could materially and adversely affect us. Additionally, financial products and services have become increasingly technology-driven. Our ability to meet the needs of our customers competitively, and in a cost-efficient manner, is dependent on the ability to keep pace with technological advances and to invest in new technology as it becomes available. Many of our competitors have greater resources to invest in technology than we do and may be better equipped to market new technology-driven products and services. The ability to keep pace with technological change is important, and the failure to do so could have a material adverse impact on our business and therefore on our financial condition and results of operations. Our risk management framework may not be effective in mitigating risks and/or losses to us. We have implemented a risk management framework to manage our risk exposure. This framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject, including, among others, credit, market, liquidity, interest rate and compliance. Our framework also includes financial or other modeling methodologies which involve management assumptions and judgment. There is no assurance that our risk Table of Contents management framework will be effective under all circumstances or that it will adequately mitigate any risk or loss to us. If our framework is not effective, we could suffer unexpected losses and our business, financial condition, results of operations or prospects could be materially and adversely affected. We may also be subject to potentially adverse regulatory consequences. We depend on the accuracy and completeness of information about customers and counterparties. In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information furnished to us by or on behalf of customers and counterparties, including financial statements and other financial information. We also may rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, under our accounts receivable financing arrangements, we rely on information, such as invoices, contracts and other supporting documentation, provided by our clients and their account debtors to determine the amount of credit to extend. Similarly, in deciding whether to extend credit, we may rely upon our customers representations that their financial statements conform to GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. We also may rely on customer representations and certifications, or other audit or accountants reports, with respect to the business and financial condition of our clients. Our financial condition, results of operations, financial reporting and reputation could be negatively affected if we rely on materially misleading, false, inaccurate or fraudulent information. Changes in accounting standards could materially impact our financial statements. From time to time, the Financial Accounting Standards Board or the SEC may change the financial accounting and reporting standards that govern the preparation of our financial statements. Such changes may result in Square 1 Financial being subject to new or changing accounting and reporting standards. In addition, the bodies that interpret the accounting standards (such as banking regulators or outside auditors) may change their interpretations or positions on how these standards should be applied. These changes may be beyond our control, can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retrospectively, or apply an existing standard differently, also retrospectively, in each case resulting in our needing to revise or restate prior period financial statements. If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results. As a result, current and potential shareholders could lose confidence in our financial reporting which would harm our business and the trading price of our securities. If we identify material weaknesses in our internal control over financial reporting or are otherwise required to restate our financial statements, we could be required to implement expensive and time-consuming remedial measures and could lose investor confidence in the accuracy and completeness of our financial reports. We may also face regulatory enforcement or other actions, including the potential delisting of our securities from Nasdaq Stock Market. This could have an adverse effect on our business, financial condition and results of operations, including our stock price, and could potentially subject us to litigation. Business disruptions and interruptions due to natural disasters and other external events beyond our control can adversely affect our business, financial condition and results of operations. Our operations can be subject to natural disasters and other external events beyond our control, such as earthquakes, fires, severe weather, public health issues, power failures, telecommunication loss, major accidents, terrorist attacks, acts of war, and other natural and man-made events. Such events of disaster, whether natural or attributable to human beings, could cause severe destruction, disruption or interruption to our operations or property. Financial institutions, such as us, generally must resume operations promptly following any interruption. If we were to suffer a disruption or interruption and were not able to resume normal operations within a period consistent with industry standards, our business could suffer serious harm. In addition, depending on the nature and duration of the disruption or interruption, we might be vulnerable to fraud, additional expense or other losses, or to a loss of business and/or clients. We have implemented a business continuity and disaster recovery program which is reviewed and updated no less than annually. There is no assurance that our business continuity and disaster recovery program can adequately mitigate the risks of such business disruptions and interruptions. Additionally, natural disasters and external events could affect the business and operations of our clients, which could impair their ability to pay their loans or fees when due, impair the value of collateral securing their loans, cause our clients to Table of Contents reduce their deposits with us, or otherwise adversely affect their business dealings with us, any of which could have a material adverse effect on our business, financial condition and results of operations. Insiders have substantial control over us, and this control may limit our shareholders ability to influence corporate matters and may delay or prevent a third party from acquiring control over us. Our directors and executive officers and their affiliates currently beneficially own, in the aggregate, 49.2% of our outstanding Class A common stock and all of our Class B common stock. Further, we anticipate that our executive officers and members of our Board of Directors will hold an aggregate of 2.4% of our Class A common stock following the offering, and that entities related to members of our Board of Directors will hold an aggregate of 35.7% of our outstanding Class A common stock and all of our Class B common stock following the offering (without giving effect in each case to the exercise of the purchase option granted to the underwriters but giving effect to the sales of secondary shares by the selling shareholders). The significant concentration of stock ownership may adversely affect the trading price of our Class A common stock due to investors perception that conflicts of interest may exist or arise. In addition, these shareholders will be able to exercise influence over all matters requiring shareholder approval, including the election of directors and approval of corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit your ability to influence corporate matters and may have the effect of delaying or preventing a change in control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if that change in control would benefit our other shareholders. For information regarding the ownership of our outstanding stock by our executive officers and directors and their affiliates, please see the section titled Principal and Selling Shareholders. Risks Relating to the Offering An active, liquid market for our common stock may not develop or be sustained following the offering, which may impair your ability to sell your shares and our ability to raise capital and expand our business. Before this offering, there has been no established public market for our common stock. Although we have applied to have our common stock listed on the Nasdaq Global Market, an active, liquid trading market for our common stock may not develop or be sustained following the offering. A public trading market having the desired characteristics of depth, liquidity and orderliness depends upon the presence in the marketplace and independent decisions of willing buyers and sellers of our common stock, over which we have no control. Without an active, liquid trading market for our common stock, shareholders may not be able to sell their shares at the volume, prices and times desired. Moreover, the lack of an established market could materially and adversely affect the value of our common stock. The initial public offering price for our common stock will be determined by negotiations between us and the representative of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell your common stock at or above the initial public offering price or at any other price or at the time that you would like to sell. An inactive market may also impair our ability to raise capital by selling our common stock and may impair our ability to expand our business by using our common stock as consideration. Actual or anticipated issuances or sales of substantial amounts of our common stock following this offering could cause the market price of our common stock to decline significantly and make it more difficult for us to sell equity or equity-related securities in the future at a time and on terms that we deem appropriate. The issuance of any shares of our common stock in the future also would, and equity-related securities could, dilute the percentage ownership interest held by shareholders prior to such issuance. All 5,881,126 of the shares of common stock sold in this offering (or 6,763,293 shares if the underwriters exercise in full their purchase option) will be freely tradable, except that any shares purchased by affiliates (as that term is defined in Rule 144 under the Securities Act of 1933, as amended (the Securities Act ) may be sold publicly only in compliance with the limitations described under Shares Eligible For Future Sale. The remaining 21,319,210 outstanding shares of our common stock, or 78.4% of our outstanding shares, will be deemed to be restricted securities as that term is defined in Rule 144, and may be sold in the market over time in private transactions or future public offerings. We also intend to file a registration statement on Form S-8 under the Securities Act to register an aggregate of 2.5 million shares of common stock issued or reserved for future issuance under our equity incentive plan. We may issue all of these shares without any action or approval by our shareholders, and these shares, once issued (including upon exercise of outstanding options), will be available for sale into the public market, subject to the restrictions described above, if applicable, for affiliate holders. Table of Contents Additional expenses following the offering from operating as a public company will adversely affect our profitability. Following the offering, our noninterest expenses will increase as a result of the additional financial accounting, legal and various other additional expenses usually associated with operating as a public company and complying with public company disclosure obligations, particularly those obligations imposed by the Sarbanes-Oxley Act of 2002 and the Dodd Frank Act. We are an emerging growth company, and the reduced reporting requirements applicable to emerging growth companies may make our common stock less attractive to investors. We are an emerging growth company, as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although we could lose that status sooner if our gross revenues exceed $1.0 billion, if we issue more than $1.0 billion in non-convertible debt in a three-year period, or if the market value of our common stock held by non-affiliates exceeds $700 million as of any June 30 before that time, in which case we would no longer be an emerging growth company as of the following December 31. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions, or if we choose to rely on additional exemptions in the future. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. Securities analysts may not initiate or continue coverage on our common stock, which could adversely affect the market for our common stock. The trading market for our common stock will depend in part on the research and reports that securities analysts publish about us and our business. We do not have any control over these securities analysts, and they may not cover our common stock. If securities analysts do not cover our common stock, the lack of research coverage may adversely affect its market price. If we are covered by securities analysts, and our common stock is the subject of an unfavorable report, the price of our common stock may decline. If one or more of these analysts cease to cover us or fail to publish regular reports on us, we could lose visibility in the financial markets, which could cause the price or trading volume of our common stock to decline. Investors in this offering will experience immediate and substantial dilution. The initial public offering price is substantially higher than the net tangible book value per share of our common stock immediately following this offering. Therefore, if you purchase shares in the offering, you will experience immediate and substantial dilution in net tangible book value per share in relation to the price that you paid for your shares. The dilution as a result of the offering will be $7.43 per share, based on the assumed initial offering price of $16.00 per share, and our pro forma net tangible book value of $8.57 per share as of December 31, 2013. In addition, we expect the conversion to common stock of a substantial portion of our convertible securities, which include our Series A preferred stock and trust preferred securities, to occur following the offering, which would result in dilution of $7.23 per share assuming every convertible security is converted. Additional dilution may occur upon the exercise of warrants and stock options. Accordingly, if we were liquidated at our pro forma net tangible book value, you would not receive the full amount of your investment. We have broad discretion in the use of the net proceeds from this offering, and our use of those proceeds may not yield a favorable return on your investment. We expect to use the net proceeds of this offering to support our long-term growth by enhancing our capital ratios to permit growth initiatives and for general working capital and other corporate purposes, which may include, among other things, funding loans and purchasing investment securities through our bank subsidiary. We intend, as a secondary purpose of the offering, to use the net proceeds to redeem, at the first quarterly redemption date following the offering, any Series A preferred stock and to retire any indebtedness relating to Square 1 Financial s trust preferred securities that remain outstanding following the completion of this offering. As our preferred stock and our trust preferred securities are currently convertible into common stock at a conversion price of $10.00 per share, we expect that a significant portion of the $7.4 million in outstanding trust preferred securities and the $5.0 million in outstanding Series A preferred stock will be converted into common stock following completion of this offering. Table of Contents Our management has broad discretion over how these proceeds are used and could spend the proceeds in ways with which you may not agree. In addition, we may not use the proceeds of this offering effectively or in a manner that increases our market value or enhances our profitability. We have not established a timetable for the effective deployment of the proceeds, and we cannot predict how long it will take to deploy the proceeds. Investing the offering proceeds in securities until we are able to deploy the proceeds will provide lower margins that we generally earn on loans, potentially adversely affecting shareholder returns, including earnings per share, return on assets and return on equity. We do not intend to pay dividends in the foreseeable future. Our Board of Directors intends to retain all of our earnings to promote growth and build capital. Accordingly, we do not expect to pay dividends in the foreseeable future. In addition, we are subject to certain restrictions on the payment of cash dividends as a result of banking laws, regulations and policies. Finally, because Square 1 Bank is our only material asset, our ability to pay dividends to our shareholders depends on our receipt of dividends from the Bank, which is also subject to restrictions on dividends as a result of banking laws, regulations and policies. Accordingly, if the receipt of dividends over the near term is important to you, you should not invest in our common stock. For additional information, see Dividend Policy. Our corporate governance documents, and certain corporate and banking laws applicable to us, could make a takeover more difficult. Certain provisions of our certificate of incorporation and bylaws, and corporate and federal banking laws, could make it more difficult for a third party to acquire control of our organization or conduct a proxy contest, even if those events were perceived by many of our shareholders as beneficial to their interests. These provisions, and the corporate and banking laws and regulations applicable to us: enable our Board of Directors to issue additional shares of authorized, but unissued capital stock; enable our Board of Directors to issue blank check preferred stock with such designations, rights and preferences as may be determined from time to time by the Board; enable our Board of Directors to increase the size of the Board and fill the vacancies created by the increase; enable our Board of Directors to amend our bylaws without shareholder approval; require advance notice for director nominations and other shareholder proposals; the election of directors to staggered terms of three years; the absence of cumulative voting by shareholders in the election of directors; and provisions restricting the calling of special meetings of shareholders. These provisions may discourage potential acquisition proposals and could delay or prevent a change in control, including under circumstances in which our shareholders might otherwise receive a premium over the market price of our shares. An investment in our common stock is not an insured deposit and is subject to risk of loss. Your investment in our common stock will not be a bank deposit and will not be insured or guaranteed by the FDIC or any other government agency. Your investment will be subject to investment risk, and you must be capable of affording the loss of your entire investment. Table of Contents

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+RISK FACTORS You should carefully consider the risks described below and in the other sections of, and the documents we have incorporated by reference into, this prospectus, when deciding whether to purchase our common shares. The risks and uncertainties described below and in the documents we have incorporated by reference into this prospectus are not the only ones we face. Additional risks and uncertainties that we are not aware of or that we currently believe are immaterial may also adversely affect our business, financial condition, results of operations, and our liquidity. Our business, financial condition, or results of operations could be materially adversely affected by any of these risks. The trading price of our common shares could decline due to any of these risks, and you may lose all or part of your investment. This prospectus contains forward–looking statements that involve risks and uncertainties. See "Important Information and Cautionary Statement Regarding Forward–Looking Statements." Our actual results could differ materially and adversely from those anticipated in these forward–looking statements. Risks Relating to Jaguar s Business Jaguar s operations involve exploration and development and there is no guarantee that any such activity will result in commercial production of mineral deposits. The proposed programs on the exploration properties in which Jaguar holds an interest are exploratory in nature and such properties do not host known bodies of commercial ore. Development of these mineral properties is contingent upon, among other things, obtaining satisfactory exploration results. Mineral exploration and development involves substantial expenses related to locating and establishing mineral reserves, developing metallurgical processes and constructing mining and processing facilities at a particular site. It also involves a high degree of risk, which even a combination of experience, knowledge and careful evaluation may not be able to adequately mitigate. Few properties which are explored are ultimately developed into producing mines, and there is no assurance that commercial quantities of ore will be discovered on any of Jaguar s exploration properties. There is also no assurance that, even if commercial quantities of ore are discovered, a mineral property will be brought into commercial production, or if brought into production, that it will be profitable. The discovery of mineral deposits is dependent upon a number of factors including the technical skill of the exploration personnel involved. The commercial viability of a mineral deposit is also dependent upon, among a number of other factors, its size, grade and proximity to infrastructure, current metal prices, and government regulations, including regulations relating to required permits, royalties, allowable production, importing and exporting of minerals and environmental protection. The exact effect of these factors cannot be accurately predicted, but any one of these factors or the combination of any of these factors may prevent Jaguar from receiving an adequate return on invested capital. In addition, depending on the type of mining operation involved, several years can elapse from the initial phase of drilling until commercial operations are commenced. Some ore reserves may become unprofitable to develop if there are unfavorable long–term market price fluctuations in gold, or if there are significant increases in operating or capital costs. Most of the above factors are beyond Jaguar s control, and it is difficult to ensure that the exploration or development programs proposed by Jaguar will result in a profitable commercial mining operation. The results of Jaguar s Gurupi feasibility study remain subject to many risks relating both to that project and mining operations generally. Jaguar s decision to develop a mineral property is typically based on the results of a feasibility study. Jaguar has completed feasibility study work which outlines Mineral Reserves for the Gurupi Project in accordance with NI 43–101. Feasibility studies estimate the anticipated project economic returns. These estimates are based on assumptions regarding, among other things: future gold prices; future foreign currency exchange rates; anticipated tonnages, grades and metallurgical characteristics of ore to be mined and processed; anticipated recovery rates of gold extracted from the ore; and anticipated capital expenditure and cash operating costs. Actual cash operating costs, production and economic returns may differ significantly from those estimated by such studies. Operating costs and capital expenditure are driven to a significant extent by the costs of the commodity inputs, including the cost of fuel and chemical reagents, consumed in mining activities. In addition, there are a number of uncertainties inherent in the development and construction of any new mine, including the timing and cost of the construction of mining and processing facilities (which can be considerable), the availability and cost of skilled labor, power, water and transportation facilities, and the availability and cost of appropriate smelting and refining arrangements, the ability to obtain necessary environmental and other governmental permits and the time to obtain such permits, and the availability of funds to finance construction and development activities. These estimates used in Jaguar s feasibility studies depend upon the data available and the assumptions made at the time the relevant estimate is made. Ore reserve estimates are not precise calculations and depend on the interpretation of limited information on the location, shape and continuity of the occurrence and on the available sampling results. Further exploration and feasibility studies can result in new data becoming available that may change previous ore reserve estimates which will impact upon both the technical and economic viability of production from the relevant mining project. Changes in the forecast prices of commodities, exchange rates, production costs or recovery rates may change the economic status of mineral reserves resulting in revisions to previous ore reserve estimates. These revisions could impact depreciation and amortization rates, asset–carrying values provisions for closedown, restoration and environmental clean–up costs. Fluctuations in currency exchange rates may adversely affect Jaguar s financial position and results of operations. Fluctuations in currency exchange rates, particularly operating costs denominated in currencies other than U.S. dollars, may significantly impact Jaguar s financial position and results of operations. Jaguar generally sells its gold based on a U.S. dollar price, but a major portion of Jaguar s operating expenses are incurred in non–U.S. dollar currencies. In addition, the appreciation of the Brazilian Real against the U.S. dollar has and could further increase the dollar costs of gold production at Jaguar s mining operations in Brazil, which could materially and adversely affect Jaguar s earnings and financial condition. Competition for new mining properties may prevent Jaguar from acquiring interests in additional properties or mining operations. The gold mining industry is intensely competitive. Significant and increasing competition exists for gold and other mineral acquisition opportunities throughout the world. Some of the competitors are large, more established mining companies with substantial capabilities and greater financial resources, operational experience and technical capabilities than Jaguar. As a result of this competition, Jaguar may be unable to acquire rights to additional attractive mining properties on terms it considers acceptable. Increased competition could adversely affect Jaguar s ability to attract necessary capital funding or acquire an interest in additional operations that would yield reserves or result in commercial mining operations. Jaguar relies on its new management team and key personnel, and there is no assurance that such persons will fully transition into their respective new positions, remain at Jaguar, or that it will be able to recruit skilled individuals. In connection with the implementation of the CCAA Plan on April 22, 2014, Jaguar has reconstituted its board of directors (the "Board" or the "Board of Directors") with three new directors and appointed a new chief executive officer and chief financial officer. Jaguar will be relying heavily on its new management team. If these new management members are unable to successfully transition into their respective positions, our operations will be adversely affected. Jaguar does not maintain "key man" insurance. Recruiting and retaining qualified personnel is critical to Jaguar s success. The number of persons skilled in the acquisition, exploration and development of mining properties is limited and competition for the services of such persons is intense. In addition, as Jaguar s business activity grows, it may require additional key financial, administrative, technical and mining personnel. The failure to attract and/or retain such personnel to manage growth effectively could have a material adverse effect on Jaguar s business, prospects, financial condition and results of operations. Actual capital costs, operating costs, production and economic returns may differ significantly from those estimated by Jaguar and there can be no assurance that any future development activities will result in profitable mining operations. Capital and operating costs, production and economic returns, and other estimates contained in the feasibility studies for Jaguar s projects may differ significantly from those anticipated by Jaguar s current studies and estimates, and there can be no assurance that Jaguar s actual capital and operating costs will not be higher than currently anticipated. In addition, delays to construction schedules may negatively impact the net present value and internal rates of return of Jaguar s mineral properties as set forth in the applicable feasibility studies. Increases in energy costs or the interruption of Jaguar s energy supply may adversely affect Jaguar s results of operations. Jaguar s operations are energy intensive and rely upon third parties for the supply of the energy resources consumed in its operations. The prices for and availability of energy resources may be subject to change or curtailment, respectively, due to, among other things, new laws or regulations, imposition of new taxes or tariffs, interruptions in production by suppliers, worldwide price levels and market conditions. In addition, in recent years, the price of oil has risen dramatically due to a variety of factors. Disruptions in supply or increases in costs of energy resources could have a material adverse impact on Jaguar s financial condition and the results of operations. There can be no assurance that the interests held by Jaguar in its properties are free from defects. Jaguar s properties may be subject to prior recorded and unrecorded agreements, transfers or claims, and title may be affected by, among other things, undetected defects. Title insurance is generally not available for mineral properties, and Jaguar s ability to ensure that it has obtained a secure claim to individual mining properties or mining concessions may be severely constrained. Jaguar has not conducted surveys of all of the claims in which it holds direct or indirect interests. A successful challenge to the precise area and location of these claims could result in Jaguar being unable to operate on its properties as permitted or being unable to enforce its rights with respect to its properties. No assurance can be given that Jaguar s rights will not be revoked or significantly altered to its detriment. There can also be no assurance that its rights will not be challenged or impugned by third parties. Jaguar is exposed to risks of changing political stability and government regulation in the country in which it operates. Jaguar holds mineral interests in Brazil that may be affected in varying degrees by political instability, government regulations relating to the mining industry and foreign investment therein, and the policies of other nations in respect of Brazil. Any changes in regulations or shifts in political conditions are beyond Jaguar s control and may adversely affect its business. Jaguar s operations may be affected in varying degrees by government regulations, including those with respect to restrictions on production, price controls, export controls, various taxes (including income, mining, withholding, and indirect taxes), expropriation of property, employment, land use, water use, environmental legislation and mine safety. The regulatory environment is in a state of continuing change, and new laws, regulations and requirements may be retroactive in their effect and implementation. Jaguar s operations may also be adversely affected in varying degrees by political and economic instability, economic or other sanctions imposed by other nations, terrorism, military repression, crime, extreme fluctuations in currency exchange rates and high inflation. Jaguar is subject to significant governmental regulations. Jaguar s mining and exploration activities are subject to extensive local laws and regulations. Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities, who may require operations to cease or be curtailed, or corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. Parties engaged in mining operations may be required to compensate those suffering loss or damage by reason of the mining activities and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations. Amendments to current laws, regulations and permits governing operations and activities of mining companies, or more stringent implementation of such requirements, could have a material adverse impact on Jaguar and cause increases in capital expenditures or production costs or reductions in levels of production at producing properties or require abandonment or delays in development of new mining properties. Jaguar s operations are subject to numerous governmental permits, which are difficult to obtain, and it may not be able to obtain or renew all of the permits it requires, or such permits may not be timely obtained or renewed. Government approvals and permits are sometimes required in connection with Jaguar s operations. Although Jaguar believes it has all of the material approvals and permits to carry on its operations, Jaguar may require additional approvals or permits or may be required to renew existing approvals or permits from time to time. Obtaining or renewing approvals or permits can be a complex and time–consuming process. There can be no assurance that Jaguar will be able to obtain or renew the necessary approvals and permits on acceptable terms, in a timely manner, or at all. To the extent such approvals are required and not obtained, Jaguar may be delayed or prohibited from proceeding with planned exploration, development or mining of mineral properties. Under current regulations, all exploration activities that the Company undertakes through its subsidiaries must be carried out on valid exploration licenses or prospecting permits issued by the DNPM, a department of the Brazilian federal government. The DNPM is responsible for the administration of all mining and exploration licenses, and prospecting permits. According to local regulations, Jaguar must submit a final exploration report before the expiry date of any license or permit, which is usually three years from the date of grant. However, Brazilian mining laws and regulations are currently undergoing a restructuring, and draft legislation to this effect has been submitted to the federal legislature for review and approval. The effects of this restructuring will, if adopted, be far–reaching in the ways that mining rights can be acquired and maintained in the country. Current proposals include an auction process for new licenses, minimum expenditures designed to eliminate the "warehousing" of mining permits and licenses as well as new fee schedules. They also provide for land owner participation where applicable. It is the Company s understanding, based on consultations with local counsel, that licenses currently held in good standing will be grandfathered and not subject to certain requirements of the proposed new regime. Production from the Company s mines results in a 1% royalty fee payment to the Brazilian government (the "CFEM"), on the value of the ore produced, in the amount of US$1.3 million for the financial year ended December 31, 2013. However, and as mentioned above, the Brazilian government is currently considering the adoption of new mining legislation which would include increases in the CFEM royalties. Environmental permits are granted for one to two year periods and all local agencies have the right to monitor and evaluate compliance with the issued permits. Any changes to the exploration activities that result in a greater environmental impact require approval. The work the Company carries out on its exploration licenses is largely restricted to drilling and ancillary activities associated with the drilling programs (i.e., low impact road construction, drilling stations). As such, the reclamation costs in respect of drilling activities are not material to the Company and are factored into the budget for exploration programs. Jaguar is subject to substantial environmental laws and regulations that may increase its costs and restrict its operations. All phases of Jaguar s operations are subject to environmental regulations in the jurisdictions in which it operates. These laws address emissions into the air, discharges into water, management of waste and hazardous substances, protection of natural resources and reclamation of lands disturbed by mining operations. Environmental legislation is evolving in a manner that will require stricter standards and enforcement, increased fines and penalties for non– compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors and employees. Compliance with environmental laws and regulations may require significant capital outlays and may cause material changes or delays in, or the cancellation of, Jaguar s intended activities. There can be no assurance that future changes in environmental regulation, if any, will not be materially adverse to Jaguar s operations. The properties in which Jaguar holds interests may contain environmental hazards, which are presently unknown to it and which have been caused by previous or existing owners or operators of the properties. If Jaguar s properties do contain such hazards, this could lead to Jaguar being unable to use the properties or may cause Jaguar to incur costs to clean up such hazards. In addition, Jaguar could become subject to litigation should such hazards result in injury to any persons. Land reclamation requirements for Jaguar s mining and exploration properties may be burdensome. Land reclamation requirements are generally imposed on companies engaged in mining operations and mineral exploration activities in order to minimize long–term effects of land disturbance. Reclamation may include requirements to control dispersion of potentially deleterious effluents and reasonably re–establish pre–disturbance land forms and vegetation. In order to carry out reclamation obligations imposed on Jaguar in connection with its mining and exploration activities, Jaguar must allocate financial resources that might otherwise be spent on further exploration and development programs. If Jaguar is required to carry out unanticipated reclamation work, its financial position could be adversely affected. Jaguar may need additional capital to accomplish its exploration and development plans or to cover its expenses, and there can be no assurance that financing will be available on terms acceptable to Jaguar, or at all. Depending on gold prices and Jaguar s ability to achieve its plans and generate sufficient operating cash flow from its existing operations, Jaguar may require substantial additional financing to accomplish its exploration and development plans as outlined or to fund any non–operating expenses that may arise or become due such as interest, tax (in Canada or Brazil) or other expenses. Failure to obtain sufficient financing, or financing on terms acceptable to Jaguar, may result in a delay or indefinite postponement of exploration, development or production on any or all of Jaguar s properties or even a loss of an interest in a property, or even a loss of an interest in a property, or an inability to pay any of Jaguar s non–operating expenses which could also lead to late fees or penalties, depending on the nature of the expense. The only source of funds now available to Jaguar is through production at Turmalina, Paci ncia and Caet , the sale of debt or equity capital, properties, royalty interests or the entering into of joint ventures or other strategic alliances in which the funding sources could become entitled to an interest in Jaguar s properties or projects. Additional financing may not be available when needed, especially in light of the current slowdown in lending resulting from global financial conditions. If funding is available, the terms of such financing might not be favorable to Jaguar and might involve substantial dilution to existing shareholders. If financing involves the issuance of debt, the terms of the agreement governing such debt could impose restrictions on Jaguar s operation of its business. Failure to raise capital when needed could have a material adverse effect on Jaguar s business, financial condition and results of operations. Jaguar is exposed to risks of labor disruptions and changing labor and employment regulations. Employees of Jaguar s principal projects are unionized, and the collective bargaining agreements between Jaguar and the unions which represent these employees must be renegotiated on an annual basis. Although Jaguar believes it has good relations with its employees and with their unions, production at Jaguar s mining operations is dependent upon the continuous efforts of Jaguar s employees. In addition, relations between Jaguar and its employees may be affected by changes in the scheme of labor relations that may be introduced by the relevant governmental authorities in whose jurisdictions Jaguar carries on business. Labor disruptions or any changes in labor or employment legislation or in the relationship between Jaguar and its employees may have a material adverse effect on Jaguar s business, results of operations and financial condition. Substantially all of Jaguar s assets are held by foreign subsidiaries that are subject to the laws of the Republic of Brazil. Jaguar conducts operations through its wholly–owned foreign subsidiaries, MSOL, MTL and MCT and substantially all of Jaguar s assets are held through such entities. Accordingly, any governmental limitation on the transfer of cash or other assets between Jaguar, MSOL, MTL and MCT could restrict Jaguar s ability to fund its operations efficiently. Any such limitations or the perception that such limitations may exist now or in the future could have an adverse impact on Jaguar s prospects, financial condition and results of operations. Jaguar may be subject to litigation. All industries, including the mining industry, are subject to legal claims, with and without merit. The Company may become involved in legal disputes in the future. Defense and settlement costs can be substantial, even with respect to claims that have no merit. Due to the inherent uncertainty of the litigation process, there can be no assurance that the resolution of any particular legal proceeding will not have a material effect on the Company s financial position or results of operations. Investors may not be able to enforce civil liabilities in the United States. Jaguar is incorporated under the laws of the Province of Ontario, Canada. Some of its directors and officers are residents of Canada. Also, almost all of Jaguar s assets and the assets of these persons are located outside of the United States. As a result, it may be difficult for shareholders to initiate a lawsuit within the United States against these non–United States residents, or to enforce judgments in the United States against Jaguar or these persons which are obtained in a United States court and that are predicated upon civil liabilities under United States federal securities laws or the securities or "blue sky" laws of any state within the United States. Global financial conditions may negatively impact its operations and share pricing. Current global financial conditions have been characterized by increased volatility (particularly the markets for commodities, including gold) and several financial institutions have either gone into bankruptcy or have had to be rescued by governmental authorities. Access to public financing has been negatively impacted by several factors including efforts by financial institutions to de–lever their balance sheets in the face of current economic conditions. These factors may impact the ability of Jaguar to obtain equity or debt financing in the future on terms favorable to Jaguar. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. For example, as a result of uncertainty in the global financial condition in general and the retraction of gold prices and corresponding decrease in equity values in the gold sector, on November 6, 2008, Jaguar announced that the Caet Project had been delayed until market conditions improve. While Jaguar was able to complete an equity offering to raise the capital needed to restart development at Caet , if it had to idle any of its producing properties or delay development of any project, there is no assurance that it would be able to restart production or development without undue delay, if at all. If such increased levels of volatility and market turmoil continue, Jaguar s operations could be adversely impacted and the trading price of its common shares may be adversely affected. Risks Relating to the Gold Industry Gold prices are volatile and there can be no assurance that a profitable market for gold will exist. Gold prices are volatile and subject to changes resulting from a variety of factors including international economic and political trends, expectations of inflation, global and regional supply and demand and consumption patterns, stock levels maintained by producers and others, currency exchange fluctuations, inflation rates, interest rates, hedging activities and increased production due to improved mining and production methods. While the price of gold has recently been strong, there can be no assurance that gold prices will remain at such levels or be such that Jaguar s properties can be mined at a profit. Mining is inherently risky and subject to conditions and events beyond Jaguar s control. Mining involves various types of risks and hazards, including: environmental hazards; unusual or unexpected geological operating conditions, such as rock bursts, structural cave–ins or slides; flooding, earthquakes and fires; labor disruptions; industrial accidents; unexpected mining dilution such as occurred at Turmalina in 2010; metallurgical and other processing problems; and metal losses and periodic interruptions due to inclement or hazardous weather conditions. These risks could result in damage to, or destruction of, mineral properties, production facilities or other properties, personal injury or death, environmental damage, delays in mining, increased production costs, monetary losses and possible legal liability. Jaguar may not be able to obtain insurance to cover these risks at affordable premiums or at all. Insurance against certain environmental risks, including potential liability for pollution or other hazards as a result of the disposal of waste products occurring from production, is not generally available to Jaguar or to other companies within the mining industry. Jaguar may suffer a material adverse effect on its business if it incurs losses related to any significant events that are not covered by its insurance policies. Calculation of Mineral Reserves and Mineral Resources and metal recovery is only an estimate, and there can be no assurance about the quantity and grade of minerals until mineral resources are actually mined. The calculation of mineral reserves, mineral resources and corresponding grades being mined or dedicated to future production are imprecise and depend on geological interpretation and statistical inferences or assumptions drawn from drilling and sampling analysis, which might prove to be unpredictable. Mineral Resources that are not Mineral Reserves do not have demonstrated economic viability. Until mineral reserves or mineral resources are actually mined and processed, the quantity of mineral reserves or mineral resources and grades must be considered as estimates. Any material change in mineral reserves, mineral resources, grade or stripping ratio at Jaguar s properties may affect the economic viability of Jaguar s properties. In addition, there can be no assurance that metal recoveries in small–scale laboratory tests will be duplicated in larger scale tests under on–site conditions or during production. The mineral reserve estimates set forth in this prospectus are based upon estimates or reports published by Jaguar s personnel and independent geologists and mining engineers, who use assumed future prices, cut–off grades and operating costs that may prove to be inaccurate. Such estimation is a subjective process, and the accuracy of any mineral reserve or mineral resource estimate depends on the quantity and quality of available data and on the assumptions made and judgments used in interpreting geological data. There are numerous uncertainties inherent in estimating mineral reserves and mineral resources and metal recovery, many of which are beyond Jaguar s control, and as a result, no assurance can be given as to the accuracy of such estimates or reports. Extended declines in the market price for gold may render portions of Jaguar s mineralization uneconomic and result in reduced reported mineral reserves. A material reduction in Jaguar s estimates of mineral reserves, or of Jaguar s ability to extract this mineralization, could have a material adverse effect on Jaguar s financial condition and results of operations. Definitional standards for reporting mineralized material differ between U.S. reporting standards and the Canadian standards used in this prospectus. We use the terms "measured mineral resources," "indicated mineral resources" and "inferred mineral resources" in this Prospectus and in the documents incorporated by reference herein to comply with reporting standards in Canada. We advise U.S. investors that while those terms are recognized and required by Canadian regulations, the SEC does not recognize them. While we have converted a portion of these resources to proven and probable reserves under SEC Industry Guide 7 reserves, U.S. investors are cautioned not to assume that any part or all of the additional mineral deposits in these Mineral Resource categories will ever be converted into mineral reserves. These terms have a great amount of uncertainty as to their existence, and great uncertainty as to their economic and legal feasibility. It cannot be assumed that all or any part of measured mineral resources, indicated mineral resources, or inferred mineral resource will ever be upgraded to a higher Mineral Resource and Reserve category. In accordance with Canadian rules, estimates of inferred mineral resources cannot form the basis of a feasibility study or other economic evaluations. Investors are cautioned not to assume that any part of the reported measured mineral resource, indicated mineral resource, or inferred mineral resource in this Prospectus or in the documents incorporated by reference herein is economically or legally mineable. See "Cautionary Note to U.S. Investors Regarding Mineral Resource and Mineral Reserve Estimates" above. Risks Related to Investing in Jaguar s Common Shares The trading price for Jaguar s common shares is volatile and has been, and may continue to be, greatly affected by the ongoing market volatility. Securities of mineral exploration and early stage base metal production companies have experienced substantial volatility in the past, often based on factors unrelated to the financial performance or prospects of the companies involved. These factors include macroeconomic developments in North America and globally and market perceptions of the attractiveness of particular industries. Jaguar s common share price is also likely to be significantly affected by short–term changes in gold prices or in its financial condition or results of operations as reflected in its quarterly earnings reports. Other factors unrelated to Jaguar s performance that may have an effect on the price of its common shares include the following: the extent of analytical coverage available to investors concerning Jaguar s business may be limited if investment banks with research capabilities do not continue to follow Jaguar s securities; the lessening in trading volume and general market interest in Jaguar s securities may affect an investor s ability to trade significant numbers of Jaguar s common shares; and the size of Jaguar s public float may limit the ability of some institutions to invest in Jaguar s securities. As a result of any of these factors, the market price of Jaguar s common shares at any given point in time may not accurately reflect Jaguar s long–term value. Sales of substantial amounts of our common shares in the public market, or the perception that these sales may occur, could cause the market price of our common shares to decline. Sales of substantial amounts of our common shares in the public market, or the perception that these sales may occur, could cause the market price of our common shares to decline. This could also impair our ability to raise additional capital through the sale of our equity securities. In addition, the sale of our common shares by our officers and directors in the public market, or the perception that such sales may occur, could cause the market price of our common shares to decline. We may issue common shares or other securities from time to time as consideration for, or to finance, future acquisitions and investments or for other capital needs. We cannot predict the size of future issuances of our shares or the effect, if any, that future sales and issuances of shares would have on the market price of our common shares. If any such acquisition or investment is significant, the number of common shares or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be substantial and may result in additional dilution to our shareholders. We may also grant registration rights covering common shares or other securities that we may issue in connection with any such acquisitions and investments. Jaguar has no record of paying dividends. Jaguar has paid no dividends on its common shares since incorporation and does not anticipate doing so in the foreseeable future. Payment of any future dividends will be at the discretion of the Board after taking into account many factors, including operating results, financial condition, capital requirements, business opportunities and restrictions contained in any financing agreements. Jaguar s shares are no longer listed in the US, with the result that shareholders may face reduced liquidity. The common shares of the Company were delisted from the New York Stock Exchange ("NYSE") on June 27, 2013 and were delisted from the Toronto Stock Exchange ("TSX") on April 30, 2014. On May 1, 2014, the common shares of the Company commenced trading on the TSXV. As a result of these changes, shares of the Company are no longer traded on any exchange in the US and the Company may face difficulty accessing additional capital via the capital markets. Furthermore, US shareholders of the Company may face limited liquidity as a result of the delisting. Jaguar s reporting status in the United States has changed and it may lose its foreign private issuer status in the future, which could result in significant additional costs and expenses. In 2013, Jaguar s reporting status changed from a Canadian foreign private issuer eligible to use the MJDS to a foreign private issuer. In order to maintain Jaguar s current status as a foreign private issuer, a majority of its common shares must be either directly or indirectly owned by non–residents of the United States, unless Jaguar also satisfies one of the additional requirements necessary to preserve this status. Jaguar may in the future lose its foreign private issuer status if a majority of its common shares are held in the United States and it fails to meet the additional requirements necessary to avoid loss of foreign private issuer status. The regulatory and compliance costs under U.S. federal securities laws as a U.S. domestic issuer may be significantly more than the costs incurred as a foreign private issuer. We expect our change to a foreign private issuer status and any future change to U.S. domestic issuer status to increase our legal compliance and financial reporting costs. This could also make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur higher costs to obtain coverage. In addition, this could make it more difficult for us to attract and retain qualified members of our Board, or qualified executive officers. Even though Jaguar has implemented the CCAA Plan, it will continue to face risks. The CCAA Plan was designed to reduce the amount of our indebtedness and cash interest expense and improve our liquidity as well as our financial and operational flexibility in order to generate long–term growth. Even though the CCAA Plan was consummated, Jaguar continues to face a number of risks, including certain risks that are beyond its control, such as the price of gold, changes in economic conditions, changes in our industry and regulatory changes. As a result of these risks and others, there is no guarantee that the CCAA Plan will achieve Jaguar stated goals. Jaguar believes that the consummation of the CCAA Plan enhanced Jaguar s liquidity and provides it with improved financial and operating flexibility. Such belief is based on certain assumptions, including, without limitation, that Jaguar s relationships with suppliers, customers and competitors will not be materially adversely affected by the CCAA Plan, that general economic conditions and the markets for Jaguar s products or for the products of its partners will remain stable or improve, as well as Jaguar s continued ability to manage costs. Should any of those assumptions prove false, the financial position of Jaguar may be materially adversely affected. As a foreign private issuer, the Company s shareholders may have less complete and timely data. The Company is a "foreign private issuer" as defined in Rule 3b–4 under the Exchange Act. Equity securities of the Company are accordingly exempt from Sections 14(a), 14(b), 14(c), 14(f) and 16 of the Exchange Act pursuant to Rule 3a12–3 of the Exchange Act. Therefore, the Company is not required to file a Schedule 14A proxy statement in relation to the annual meeting of shareholders. The submission of proxy and annual meeting of shareholder information on Form 6–K may result in shareholders having less complete and timely information in connection with shareholder actions. The exemption from Section 16 rules regarding reports of beneficial ownership and purchases and sales of common shares by insiders and restrictions on insider trading in the Company s securities may result in shareholders having less data and there being fewer restrictions on insiders activities in its securities. The Company does, and its insiders do, make all necessary filings in Canada to provide timely, factual and transparent disclosure. We indemnify our directors and officers against liability, and this indemnification could negatively affect our operating results. In accordance with our governing corporate law, we indemnify our officers and our directors for liability arising while they are carrying out their respective duties. Our governing corporate law so allows for reimbursement of certain legal defenses. In addition to this, we insure our directors and officers against certain liabilities. The costs related to such indemnification and insurance coverage, if either one of them or both were to increase, could materially adversely affect our operating results and financial condition. If securities or industry analysts do not publish research or reports or publish unfavorable research about our business, our stock price and trading volume could decline. The trading market for our common shares depends in part on the research and reports that securities or industry analysts publish about us, our business or our industry. We may have limited, and may never obtain significant, research coverage by securities and industry analysts. If no additional securities or industry analysts commence coverage of our company, the trading price for our shares could be negatively affected. In the event we obtain additional securities or industry analyst coverage, if one or more of the analysts who covers us downgrades our stock, our share price will likely decline. If one or more of these analysts, or those who currently cover us, ceases to cover us or fails to publish regular reports on us, interest in the purchase of our shares could decrease, which could cause our stock price or trading volume to decline. We may be classified as a passive foreign investment company for U.S. federal income tax purposes, which could subject U.S. investors in our common shares to significant adverse U.S. federal income tax consequences. A foreign corporation will be treated as a passive foreign investment company ("PFIC") for U.S. federal income taxation purposes, if in any taxable year either: (a) 75% or more of its gross income consists of passive income; or (b) 50% or more of the average value of the company s assets is attributable to assets that produce, or are held for the production of, passive income. U.S. stockholders of a PFIC are subject to a disadvantageous U.S. income tax regime with respect to the income derived by the PFIC, the distributions they receive from the PFIC, and the gain, if any, they derive from the sale or other disposition of their shares in the PFIC (for additional details, please see the section titled "Material Tax Consequences" elsewhere in this prospectus). Because PFIC status is a fact–intensive determination made on an annual basis, no assurance can be given that we are not or will not become classified as a PFIC. The PFIC rules are extremely complex. A U.S. person is encouraged to consult his or her U.S. tax advisor before making an investment in our shares. IMPORTANT INFORMATION AND CAUTIONARY STATEMENT REGARDING FORWARD–LOOKING STATEMENTS This prospectus contains "forward–looking statements" with respect to our business, results of operations and financial condition, and our expectations or beliefs concerning future events and conditions. You can identify certain forward–looking statements because they contain words such as, but not limited to, "believes," "expects," "may," "should," "approximately," "anticipates," "estimates," "intends," "plans," "targets," "likely," "will," "would," "could" and similar expressions (or the negative of these terminologies or expressions). All forward–looking statements involve risks and uncertainties. Many risks and uncertainties are inherent in our industry and markets. Others are more specific to our business and operations. The occurrence of the events described and the achievement of the expected results depend on many events, some or all of which are not predictable or within our control. Actual results may differ materially from the forward–looking statements contained in this prospectus. Important factors that could cause actual results to differ materially from those expressed or implied by the forward–looking statements are disclosed under the heading "Risk Factors" and elsewhere in this prospectus, including, without limitation, in conjunction with the forward–looking statements included in this prospectus and including with respect to our estimated and projected earnings, income, equity, assets, ratios and other estimated financial results. All forward–looking statements in this prospectus and subsequent written and oral forward–looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements. Some of the factors that we believe could materially affect our results include: our ability to profitably explore, develop and produce gold from our properties and mineral deposits; our susceptibility to fluctuations in the gold industry, our end–markets and our customers industries and changes in general economic conditions; our susceptibility to fluctuations in currency exchange rates, notably between the US Dollar and the Brazilian Real; competition for new mining properties; increases in our energy costs or interruption of our energy supply; political instability or changes in government regulation in Brazil or other countries we may subsequently develop operations in; our potential inability to obtain necessary permits from the Brazilian government; costs associated with environmental compliance; our ability to obtain financing to accomplish our exploration and development plans; risk associated with our global operations, including natural disasters; changes in our effective income tax rate or accounting standards; and the other factors presented under the heading "Risk Factors." We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. In addition, in light of these risks and uncertainties, the matters referred to in the forward–looking statements contained in this prospectus may not in fact occur. We undertake no obligation to publicly update or revise any forward–looking statement as a result of new information, future events or otherwise, except as required by law. USE OF PROCEEDS The selling shareholders will receive all of the net proceeds from the sales of our common shares offered by them pursuant to this prospectus. We will not receive any proceeds from the sale of these common shares, but we will bear the costs associated with this registration in accordance with the registration rights agreement between Jaguar and certain noteholders, dated April 22, 2014, as described in more detail in the section titled "Plan of Distribution." Any commissions, discounts or fees payable to brokers in connection with any sale will be borne by the selling shareholders, the purchasers or both. DIVIDEND POLICY Jaguar has not paid any dividends and does not intend to pay dividends in the foreseeable future. Any future payment of dividends will be dependent upon the financial requirements of Jaguar to fund future projects, the financial condition of Jaguar and other factors that the Board, in its discretion, may consider appropriate under the circumstances. DILUTION The shares to be sold by the selling shareholders are shares that are currently issued and outstanding. Accordingly, there will be no dilution to our existing shareholders. PRICE RANGE OF ORDINARY SHARES On December 3, 2012, Jaguar announced that the NYSE had notified the Company that the closing price of its common shares on the NYSE over the past 30 days was less than $1.00. As of November 30, 2012, the date of the NYSE notice, the 30 trading–day average closing price of Jaguar s common stock was $0.94 per share. The NYSE s continued listing standards require that the average closing price of a listed company s common shares be above $1.00 per share over a consecutive 30 trading–day period. Under the NYSE s rules, Jaguar had a period of six months to bring its share price and 30 trading–day average share price back above $1.00. On June 3, 2013, NYSE Regulations, Inc. ("NYSE Regulation") commenced proceedings to delist the common shares of the Company from the NYSE and trading in the common shares was suspended prior to the opening on Friday, June 7, 2013 and delisted on June 27, 2013. The Company did not appeal the NYSE Regulation staff s decision and continued to focus on its turnaround and restructuring plan for a long–term financial solution. Trading in the common shares of Jaguar on the TSX was suspended on December 23, 2013 as a result of the commencement of the CCAA Proceedings. Jaguar s common shares were delisted from the TSX on April 30, 2014. Following the implementation of the CCAA Plan, the common shares of Jaguar began trading on the TSXV on May 1, 2014 under the symbol "JAG." See the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations – Significant Changes – CCAA Proceedings." With respect to each of TSX, TSXV and NYSE, the following tables set forth information relating to the trading of Jaguar s common shares for the periods indicated: Jaguar Mining Inc. Stock Trading Activity NYSE MKT (expressed in US$) Year Ended High Low 12/31/2013(1) $1.01 $0.37 12/31/2012 $7.35 $0.58 12/31/2011 $8.18 $4.03 12/31/2010 $14.01 $5.67 12/31/2009 $12.76 $3.84 (1)FY 2013 covers NYSE trading activity prior to suspension on June 7, 2013. Jaguar Mining Inc. Stock Trading Activity The Toronto Stock Exchange (expressed in C$) Year Ended High Low 12/31/2013 $0.99 $0.045 12/31/2012 $7.41 $0.61 12/31/2011 $8.36 $4.07 12/31/2010 $14.18 $6.02 12/31/2009 $13.30 $4.76 The table below lists the quarterly high and low prices for shares of Jaguar common stock on NYSE MKT for the two most recent full financial years. Jaguar s common shares were suspended from trading on the NYSE on June 7, 2013. Jaguar Mining Inc. Stock Trading Activity NYSE MKT (expressed in US$) Quarter Ended High Low 06/30/2013 $0.63 $0.37 03/31/2013 $1.01 $0.45 12/31/2012 $1.30 $0.58 09/30/2012 $1.45 $0.60 06/30/2012 $4.94 $1.11 03/31/2012 $7.35 $4.59 The table below lists the quarterly high and low prices for shares of Jaguar common stock on TSX for the two most recent full financial years. Jaguar did not trade on the TSX after December 23, 2013. Jaguar Mining Inc. Stock Trading Activity The Toronto Stock Exchange (expressed in C$) Quarter Ended High Low 12/31/2013 $0.210 $0.045 09/30/2013 $0.380 $0.180 06/30/2013 $0.640 $0.355 03/31/2013 $0.990 $0.460 12/31/2012 $1.29 $0.61 09/30/2012 $1.40 $0.61 06/30/2012 $4.95 $1.14 03/31/2012 $7.41 $4.59 The table below lists the quarterly high and low prices for shares of Jaguar common stock on TSXV for the two most recent full financial years and subsequent periods. Jaguar s common shares began trading on the TSXV on May 1, 2014. Jaguar Mining Inc. Stock Trading Activity The TSX Venture Exchange (expressed in C$) Quarter Ended High Low 06/30/2014 $1.25 $0.50 The table below lists the high and low prices for shares of Jaguar Mining Inc. common stock on TSXV for the most recent two months. Jaguar s common shares began trading on the TSXV on May 1, 2014. Jaguar did not trade on the TSX after December 23, 2013 and did not trade on the NYSE during this period. Jaguar Mining Inc. Stock Trading Activity The TSX Venture Exchange (expressed in C$) Month Ended High Low 06/30/2014 $0.97 $0.63 05/31/2014 $1.25 $0.50 On July 28, 2014, the closing price on the TSXV for our common shares was C$0.82 per share. CAPITALIZATION The following table sets forth our cash and cash equivalents and our capitalization as of May 31, 2014 on an actual basis. This table should be read in conjunction with "Use of Proceeds," "Selected Financial Information," "Management s Discussion and Analysis of Financial Condition and Results of Operations," and the consolidated financial statements and the related Notes thereto. May 31, 2014 1 (Dollars in thousands) Cash and cash equivalents $33,932 Total debt (including current portion): Bank indebtedness $15,861 Vale Note 7,947 Renvest credit facility 20,400 Total debt, including current portion 44,208 Shareholders equity: Common shares 434,465 Total capitalization $390,257 1 Financial amounts as of May 31, 2014 are preliminary and may be subject to change. OUR HISTORY AND CORPORATE STRUCTURE Our History The legal name of the Company is Jaguar Mining Inc. The commercial names of the Company are "Jaguar Mining" and "Jaguar." Jaguar was incorporated on March 1, 2002 pursuant to the Business Corporations Act (New Brunswick). On March 30, 2002, Jaguar issued initial common shares to Brazilian Resources, Inc. ("Brazilian") and IMS Empreendimentos Ltda ("IMS") in exchange for property. In that transaction, Brazilian contributed to Jaguar all of the issued and outstanding shares in MSOL, a Brazilian mining company that controlled the mineral rights, concessions and licenses to certain property located near the community of Sabar , east of Belo Horizonte in the state of Minas Gerais, Brazil, and IMS contributed to Jaguar a 1,000–tonne per day production facility also located east of Belo Horizonte near the community of Caet and the mineral rights to a nearby property related to National Department of Mineral Production ("DNPM") Mineral Exploration Request no. 831.264/87 and DNPM Mineral Exploration Request nos. 830.590/83 and 830.592/83. Jaguar was continued into Ontario in October 2003 pursuant to the OBCA and currently is a corporation existing under the laws of Ontario. On October 9, 2003, pursuant to an amalgamation agreement dated July 16, 2003, Jaguar amalgamated with Rainbow Gold Ltd. ("Rainbow"), a New Brunswick corporation and a then inactive reporting issuer listed on the TSXV, through a reverse take–over. The amalgamated entity adopted the name "Jaguar Mining Inc." Jaguar was approved for listing on the TSXV on October 14, 2003 and began trading on October 16, 2003. Jaguar subsequently graduated from the TSXV to the TSX and began trading on the TSX on February 17, 2004 under the symbol "JAG." On July 23, 2007, trading of Jaguar s common shares commenced on the NYSE Arca Exchange ("NYSE Arca") under the symbol "JAG." In July 2009, Jaguar received approval from the NYSE to transfer the trading of its common shares from the NYSE Arca to the NYSE. Trading on the NYSE began on July 6, 2009, also under the symbol "JAG." The common shares of the Company were delisted from the NYSE on June 27, 2013 and were delisted from the TSX on April 30, 2014. On May 1, 2014, the common shares of the Company commenced trading on the TSXV. Jaguar s principal administrative office is located at Rua Levindo Lopes 323, Funcion rios, Belo Horizonte, Minas Gerais, CEP 30140–170, Brazil and its telephone number is 55 31 3232–7100. Jaguar s registered office is located at 67 Yonge Street, Suite 1203, Toronto, Ontario M5E 1J8, Canada, and its telephone number is 647–494–5524. Jaguar also had an administrative office located at 122 North Main Street, 2nd Floor, Concord, New Hampshire, 03301, USA, which it closed at the end of March 2013. On November 13, 2013, the Company and its subsidiaries entered into a support agreement (as amended, the "Support Agreement") with holders (the "Noteholders") of approximately 81% of its $165.0 million 4.5% Senior Unsecured Convertible Notes due November 1, 2014 ("4.5% Convertible Notes") and 82% of its $103.5 million 5.5% Senior Unsecured Convertible Notes due March 31, 2016 (the 5.5% Senior Convertible Notes together with the 4.5% Convertible Notes, the "Notes") to effect a recapitalization and financing transaction that would eliminate approximately $268.5 million of the Company s outstanding indebtedness by exchanging the Notes for common shares of Jaguar and inject approximately $50 million into the Company by way of a backstopped share offering (the "Share Offering") by Noteholders pursuant to a backstop agreement dated November 13, 2013 (as amended, the "Backstop Agreement") between the Company, its subsidiaries and certain Noteholders. Additional Noteholders signed consent agreements to the Support Agreement such that as of November 26, 2013, holders of approximately 93% of the Notes had signed the Support Agreement or a consent agreement thereto. On December 23, 2013, the Company filed for creditor protection under the CCAA in the Ontario Superior Court of Justice (Commercial List). The CCAA Proceedings were commenced in order to implement a recapitalization transaction as contemplated in the Support Agreement through a plan of compromise and arrangement. On April 23, 2014, the Company announced that it had successfully implemented the CCAA Plan with an effective date of April 22, 2014. For a full description of the CCAA Proceedings, please see the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations – Significant Changes – CCAA Proceedings." Corporate Structure Jaguar has three wholly–owned direct subsidiaries, MSOL, MTL and MCT, all incorporated under the laws of the Republic of Brazil. The registered and head office of each of MSOL, MTL and MCT is located at Rua Levindo Lopes 323, Funcion rios, Belo Horizonte, Minas Gerais, CEP 30140–170, Brazil. The following chart summarizes our corporate structure as of the date of this prospectus: SELECTED FINANCIAL INFORMATION Financial information provided throughout this prospectus are referenced in United States dollars unless stated otherwise. The following selected financial data of the Company for the fiscal years ended December 31, 2013, 2012 and 2011, and the three month period ending March 31, 2013 and the three month period ending March 31, 2014 are derived from the Company s audited consolidated financial statements and the unaudited interim consolidated financial statements, respectively, included elsewhere in this prospectus. The selected financial data set forth for the fiscal year ended December 31, 2010 are derived from the Company s audited consolidated financial statements prepared in accordance with IFRS, not included herein. The selected financial data should be read in conjunction with the consolidated financial statements and other information included in the text of this prospectus. We have not included financial information for the year ended December 31, 2009, as such information is not available on a basis that is consistent with the financial information for the years ended December 31, 2013, 2012, 2011 and 2010, and cannot be provided in accordance with IFRS without unreasonable effort or expense. The audited, consolidated financial statements included elsewhere in this prospectus have been prepared in accordance with IFRS as issued by the IASB and the unaudited interim condensed financial statements included elsewhere in this prospectus have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting. The basis of preparation is described in Notes 1 and 3 to our unaudited interim condensed consolidated financial statements and audited consolidated financial statements, respectively. Three months ended March 31, (unaudited) Year ended December 31, Year ended December 31, Year ended December 31, Year ended December 31, 2014 2013 2013 2012 2011 2010 ( $ in , ' ': 000 s other than per share data) Gold sales 31,100 41,170 134,140 172,430 243,137 170,788 Gross profit 1,087 10,382 12,786 6,143 43,352 12,605 Net income (loss) (15,755) (6,926) (249,307) (84,537) (65,623) 22,177 Weighted average shares 86,396,356 84,906,423 85,715,349 84,409,569 84,386,569 84,152,914 Basic income (loss) per share (0.18) (0.08) (2.91) (1.00) (0.78) 0.26 Diluted income (loss) per share (0.18) (0.08) (2.91) (1.00) (0.78) 0.26 Net assets (109,582) 147,547 (93,559) 153,803 237,809 300,470 Total assets 285,372 504,564 294,788 503,875 660,666 569,378 Capital stock 371,077 370,603 371,077 370,043 370,043 369,747 Dividends declared per share – – – – – – MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis, or MD&A, is based principally on our audited consolidated financial statements for the fiscal years ended December 31, 2013, 2012 and 2011 and the unaudited interim condensed consolidated financial statements as of and for the three months ended March 31, 2014, which appear elsewhere in this prospectus. The following discussion is to be read in conjunction with "Selected Financial Information," "Business" and our audited consolidated financial statements, our unaudited interim condensed consolidated financial statements and the Notes thereto, which appear elsewhere in this prospectus. The following discussion and analysis includes forward–looking statements. These forward–looking statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from those expressed or implied by our forward–looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere