In
connection with the recent acquisition by The OLB Group, Inc. (“
we
,” “
us
,” “
our
,”
or the “
Company
”), through its subsidiaries, of substantially all of the assets of Excel Corporation and its
subsidiaries, Payprotec Oregon, LLC, Excel Business Solutions, Inc. and eVance Processing, Inc. (collectively, “
Excel
”),
the Company has determined to disclose various risk factors relating to an investment in the Company’s securities.
Investing
in our common stock involves a high degree of risk. Before purchasing our common stock, you should carefully consider the
following risk factors as well as all other information contained in this Current Report and in our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, including our consolidated
financial statements and the related notes. The risks and uncertainties described below are not the only ones facing us.
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 our common stock could decline, and you may lose
some or all of your investment.
Risks
Related to Our Company
Our
recent acquisition of assets of Excel and share exchange with Omnisoft, Inc. and CrowdPay.us, Inc. has collectively
formed a new business platform that needs to be integrated, which may create certain risks and may adversely affect our business,
financial condition or results of operations.
On
April 9, 2018, we acquired substantially all of the assets of Excel through a foreclosure sale conducted under the Uniform Commercial
Code of the State of New York (“
Excel Acquisition
”). Since closing the acquisition, we have been in the process
of integrating our operation with Excel, which includes continuing due diligence on risks to the prospects of the combined business,
including undisclosed or unknown liabilities or restrictions assumed in the transaction.
On
May 9, 2018, we entered into separate share exchange agreements with the shareholders of Omnisoft, Inc. (“
Omnisoft
”)
and CrowdPay.us, Inc. (“
CrowdPay
”), affiliate companies of the Company’s majority stockholder. Pursuant
to the share exchange agreement with Omnisoft, the shareholders of Omnisoft transferred to the Company all of the issued and outstanding
shares of Omnisoft common stock in exchange for an aggregate of 55,000,000 shares of the Company’s common stock. Pursuant
to the share exchange agreement with CrowdPay, the shareholders of CrowdPay transferred to the Company all of the issued and outstanding
shares of CrowdPay common stock in exchange for an aggregate of 87,500,000 shares of the Company’s common stock. The share
exchange transactions closed on May 9, 2018, on which date Omnisoft and CrowdPay became wholly owned subsidiaries of the Company
(the “
Share Exchange
”).
Since
the consummation of the Excel Acquisition and the Share Exchange, we have a limited history upon which an evaluation of our performance
and future prospects can be made. Our current and proposed operations are subject to all the business risks associated with new
enterprises. These include likely fluctuations in operating results as we manage our growth and react to competitors and developments
in the markets in which we compete. As we can be considered an early stage company and have not yet generated significant profits,
there is no assurance that we will be profitable in the near term or generate sufficient revenues to meet our capital requirements.
As
a result, we may experience interruptions of, or loss of momentum in, the activities of one or more of our combined businesses
and the possible loss of key personnel. The diversion of our management’s attention and any delays or difficulties encountered
in connection with the integration of Excel could adversely affect our business, financial condition or results of operations.
Our
failure to raise sufficient funds may result in a default under our loan agreement
with GACP and result in a substantial loss of our assets.
In
order to finance the Excel Acquisition, we entered into a Loan and Security Agreement (the “
Credit Agreement
”),
dated as of April 9, 2018, by and among our subsidiaries Securus365, Inc., eVance Capital, Inc., and eVance Inc., (the “
Purchasers
”)
and GACP Finance Co., LLC, a Delaware limited liability company (“
GACP
”), as administrative agent and collateral
agent (“
Agent
”), and as the initial sole lender thereunder. Under the Credit Agreement, GACP provided a term
loan of $12,500,000 (the “
Term Loan
”) to us, which obligations are guaranteed by the Company.
The
Term Loan matures in full on April 9, 2021, the third anniversary of the closing of the Excel Acquisition. The Company missed the initial payment of
$1,000,000 (“
Initial Payment
”) of the principal amount under the Term Loan that was due on July 15, 2018.
An additional $2,000,000 in principal under the Term Loan is due on or prior to October 31, 2018 (subject to earlier
repayment under certain circumstances, including if we consummate an equity financing), with the remaining principal due upon
maturity. The Term Loan can be prepaid without penalty in part with ten (10) days’ prior written notice to the Agent,
and in full with thirty (30) days’ prior written notice. The Term Loan is subject to an interest rate of 9.0% per
annum, payable monthly in arrears. Omnisoft and CrowdPay were also each liable as a loan party under the Term Loan. GACP
waived the Company’s default due to the missed payment pursuant to Amendment No. 1 to the Credit Agreement dated July
30, 2018 (“
Amendment No. 1
”). In connection with Amendment No. 1, the Initial Payment was paid by a
significant stockholder of the Company through a subordinated promissory note issued by the Company to such stockholder in
the principal amount of $1,000,000 with a maturity date of March 31, 2019. Effective as of August 23, 2018, the Company and
GACP entered into Amendment No. 2 to the Credit Agreement to extend the delivery date of the Company’s annual financial
statements to September 14, 2018.
The
obligations of the loan parties under the Credit Agreement are secured by all of their respective assets and the loan parties
pledged all of their assets as collateral for their obligations under the Credit Agreement. Additionally, the Company’s
ownership interests in Omnisoft, CrowdPay and the Purchasers are pledged in favor of GACP pursuant to the Term Loan.
If
we are unable to obtain sufficient financing to meet our payment obligations
under the Term Loan, we will be in default under the Credit Agreement. If not cured or waived, such default under the Credit Agreement
could enable GACP to declare all outstanding amounts under the Term Loan, together with accrued and unpaid interest and fees,
to be due and payable. In addition, GACP could also elect to foreclose on our assets securing the Term Loan. In such event, the
Company may not be able to refinance or repay all of its indebtedness or have sufficient liquidity to meet operating and capital
expenditure requirements. Any such acceleration of the Term Loan could cause us to lose a substantial portion of our assets and
will substantially adversely affect our ability to continue our operations.
We
are subject to significant restrictive debt covenants, which limit our operating flexibility.
We
are subject to restrictive debt covenants which impose significant restrictions on the manner we and our subsidiaries operate,
including (but not limited to) restrictions on the ability to:
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incur
debt and/or guarantees;
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enter
into transactions other than on arm’s-length basis;
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pay
dividends or make certain distributions or payments;
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sell
certain kinds of assets;
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enter
into any sale and leaseback transactions;
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make
certain investments or other types of restricted payments;
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substantially
change the nature of the Company’s business; and
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effect
mergers, consolidations or sale of assets.
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These
covenants could limit our ability to finance our future operations and our ability to pursue acquisitions and other business activities.
The
substantial and continuing losses, and significant operating expenses incurred in the past few years may cause us to be unable
to pursue all of our operational objectives if sufficient financing and/or additional cash from revenues is not realized. This
raises doubt as to our ability to continue as a going concern.
We
have limited cash resources, recurring cash used in operations and operating losses history. As of December 31, 2017, we
had a working capital deficiency of $92,541 and a net loss of $398,738 for the year ended December 31, 2017. Our cash flow used
in operating activities was $54,080, while $53,500 was provided by financing from a related party. Even with the Excel Acquisition
and Share Exchange, these factors among others, raise substantial doubt about our ability to continue as a going concern.
We
may not be able to attract financing as needed, or if available, on reasonable terms as required. Further, the terms of any such
financing may be dilutive to existing stockholders or otherwise on terms not favorable to us or existing stockholders. If we are
unable to secure financing, as circumstances require, or do not succeed in meeting our sales objectives, we may be required to
change, significantly reduce our operations or ultimately may not be able to continue our operations. As a result of our historical
net losses and cash flow deficits, and net capital deficiency, these conditions raise substantial doubt as to the Company’s
ability to continue as a going concern.
The
financial and operational projections that we may make from time to time are subject to inherent risks.
The
projections that we provide herein or our management may provide from time to time (including, but not limited to, those relating
to our expansion and other financial or operational matters) reflect numerous assumptions made by management, including assumptions
with respect to our specific as well as general business, regulatory, economic, market and financial conditions and other matters,
all of which are difficult to predict and many of which are beyond our control. Accordingly, there is a risk that the assumptions
made in preparing the projections, or the projections themselves, will prove inaccurate. There may be differences between actual
and projected results, and actual results may be materially different from than those contained in the projections. The inclusion
of the projections in this subscription booklet should not be regarded as an indication that we, our management, the placement
agent, our auditors or their respective representatives considered or consider the projections to be a guaranteed prediction of
future events, and the projections should not be relied upon as such.
We
operate in a complex regulatory environment, and failure to comply with applicable laws and regulations could adversely affect
our business.
Our
operations are subject to a broad range of complex and evolving laws and regulations. As a result, we must perform our services
in compliance with the legal and regulatory requirements of multiple jurisdictions. Some of these laws and regulations may be
difficult to ascertain or interpret and may change from time to time. Violation of such laws and regulations could subject us
to fines and penalties, damage our reputation, constitute a breach of our client agreements, impair our ability to obtain and
renew required licenses, and decrease our profitability or competitiveness. If any of these effects were to occur, our operating
results and financial condition could be adversely affected.
We
may not be able to integrate new technologies and provide new services in a cost-efficient manner.
The
online ecommerce industry is subject to rapid and significant changes in technology, frequent new service introductions and evolving
industry standards. We cannot predict the effect of these changes on our competitive position, our profitability or the industry
generally. Technological developments may reduce the competitiveness of our networks and our software solutions and require additional
capital expenditures or the procurement of additional products that could be expensive and time consuming. In addition, new products
and services arising out of technological developments may reduce the attractiveness of our services. If we fail to adapt successfully
to technological advances or fail to obtain access to new technologies, we could lose customers and be limited in our ability
to attract new customers and/or sell new services to our existing customers. In addition, delivery of new services in a cost-efficient
manner depends upon many factors, and we may not generate anticipated revenue from such services.
Disruptions
in our networks and infrastructure may result in customer dissatisfaction, customer loss or both, which could materially and adversely
affect our reputation and business.
Our
systems are an integral part of our customers’ business operations. It is critical for our customers, that our systems provide
a continued and uninterrupted performance. Customers may be dissatisfied by any system failure that interrupts our ability to
provide services to them. Sustained or repeated system failures would reduce the attractiveness of our services significantly
and could result in decreased demand for our services.
We
face the following risks to our networks, infrastructure and software applications:
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our
territory can have significant weather events which physically damage access lines;
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power
surges and outages, computer viruses or hacking, earthquakes, terrorism attacks, vandalism
and software or hardware defects which are beyond our control; and
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Unusual
spikes in demand or capacity limitations in our or our suppliers’ networks.
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Disruptions
may cause interruptions in service or reduced capacity for customers, either of which could cause us to lose customers and/or
incur expenses, and thereby adversely affect our business, revenue and cash flow.
Our
positioning in the marketplace as a smaller provider places a significant strain on our resources, and if not managed effectively,
could result in operational inefficiencies and other difficulties.
Our
positioning in the marketplace may place a significant strain on our management, operational and financial resources, and increase
demand on our systems and controls. To manage this position effectively, we must continue to implement and improve our operational
and financial systems and controls, invest in development & engineering, critical systems and network infrastructure to maintain
or improve our service quality levels, purchase and utilize other systems and solutions, and train and manage our employee base.
As we proceed with our development, operational difficulties could arise from additional demand placed on customer provisioning
and support, billing and management information systems, product delivery and fulfillment, sales and marketing and administrative
resources.
For
instance, we may encounter delays or cost overruns or suffer other adverse consequences in implementing new systems when required.
In addition, our operating and financial control systems and infrastructure could be inadequate to ensure timely and accurate
financial reporting.
We
must attract and retain skilled personnel. If we are unable to hire and retain technical, technical sales and operational employees,
our business could be harmed.
Our
ability to manage our reorganization and growth will be particularly dependent on our ability to develop and retain an effective
sales force and qualified technical and managerial personnel. We need software development specialists with in-depth knowledge
of a blend of IT and telecommunications or with a blend of security and telecom. We intend to hire additional necessary employees,
including software engineers, communication engineers, project managers, sales consultants, employees and operational employees,
on a permanent basis. The competition for qualified technical sales, technical, and managerial personnel in the communications
and software industry is intense in the markets where we operate, and we may not be able to hire and retain sufficient qualified
personnel. In addition, we may not be able to maintain the quality of our operations, control our costs, maintain compliance with
all applicable regulations, and expand our internal management, technical, information and accounting systems in order to support
our desired growth, which could have an adverse impact on our operations. Volatility in the stock market and other factors could
diminish our use, and the value, of our equity awards as incentives to employees, putting us at a competitive disadvantage or
forcing us to use more cash compensation.
We
are dependent on the continued services and performance of our senior management and other key employees, the loss of any of whom
could adversely affect our business, operating results and financial condition.
Our
future performance depends on the continued services and contributions of our senior management, including our Chief Executive
Officer, Ronny Yakov and other key employees to execute on our business plan and to identify and pursue new opportunities and
product innovations. The loss of services of senior management or other key employees could significantly delay or prevent the
achievement of our strategic objectives. In addition, some of the members of our current senior management team have only been
working together for a short period of time, which could adversely impact our ability to achieve our goals. From time to time,
there may be changes in our senior management team resulting from the hiring or departure of executives, which could disrupt our
business. We do not maintain key person life insurance policies on any of our employees other than a policy providing limited
coverage on the life of our Chief Executive Officer. The loss of the services of one or more of our senior management or other
key employees for any reason could adversely affect our business, financial condition and operating results and require significant
amounts of time, training and resources to find suitable replacements and integrate them within our business, and could affect
our corporate culture.
Our
success depends on our continued investment in research and development, the level and effectiveness of which could reduce our
profitability.
We
intend to continue to make investments in research and development and product development in seeking to sustain and improve our
competitive position and meet our customers’ needs. These investments currently include streamlining our suite of software
functionalities, including modularization and improving scalability of our integrated solutions. To maintain our competitive position,
we may need to increase our research and development investment, which could reduce our profitability and cash flows. In addition,
we cannot assure you that we will achieve a return on these investments, nor can we assure you that these investments will improve
our competitive position or meet our customers’ needs.
Risks
Related to Our Business
CROWDPAY.US,
INC.
We
operate in a regulatory environment that is evolving and uncertain.
The
regulatory framework for online capital formation or crowdfunding is very new. The regulations that govern our operations have
been in existence for a very few years. Further, there are constant discussions among legislators and regulators with respect
to changing the regulatory environment. New laws and regulations could be adopted in the United States and abroad. Further, existing
laws and regulations may be interpreted in ways that would impact our operations, including how we communicate and work with investors
and the companies that use our platforms’ services. For instance over the past year, there have been several attempts to
modify the current regulatory regime. Some of those suggested reforms could make it easier for anyone to sell securities (without
using our services), or could increase our regulatory burden, including requiring us to register as a broker-dealer before we
choose to do so. Any such changes would have a negative impact on our business.
We
operate in a highly regulated industry.
We
are subject to extensive regulation and failure to comply with such regulation could have an adverse effect on our business. Our
subsidiary, CrowdPay is currently not registered as a funding portal. Certain restrictions and rules applicable to us, including
potential FINRA fines, could adversely affect and limit some of our business plans.
In
the event we are required or decide to register as a broker-dealer, our current business model could be affected.
Under
our current structure, we believe we are not required to register as a broker-dealer under federal and state laws. Further, none
of our officers or our chairman has previous experience in securities markets or regulations or has passed any related examinations
or holds any accreditations. We comply with the rules surrounding funding portals and restrict our activities and services so
as to not be deemed a broker-dealer under state and federal regulations. However, if we were deemed by a relevant authority to
be acting as a broker-dealer, we could be subject to a variety of penalties, including fines and rescission offers. Further, we
may decide for business reasons or we may be required to register as a broker-dealer, which would increase our costs, especially
our compliance costs. If we are required but decide not to register as a broker-dealer or act in association with a broker-dealer
in our transactions, we may not be able to continue to operate under our current business model.
We
may be liable for misstatements made by issuers on our funding portal.
Under
the Securities Act and the Exchange Act, issuers making offerings through our funding portal may be liable for including untrue
statements of material facts or for omitting information that could make the statements made misleading. This liability may also
extend in Regulation Crowdfunding offerings to funding portals, such as our subsidiary CrowdPay. There may also be circumstances
in which we are liable for making misleading statements in connection with Regulation A and Regulation D offerings. Even though
due diligence defenses may be available; there can be no assurance that if we were sued we would prevail. Further, even if we
do succeed, lawsuits are time consuming and expensive, and being a party to such actions may cause us reputational harm that would
negatively impact our business.
Our
compliance is focused on U.S. laws and we have not analyzed foreign laws regarding the participation of non-U.S. residents.
Some
of the investment opportunities posted on our platform are open to non-U.S. residents. We have not researched all the applicable
foreign laws and regulations, and therefore we have not set up our structure to be compliant with all those laws. It is possible
that we may be deemed in violation of those laws, which could result in fines or penalties as well as reputational harm. This
may limit our ability in the future to assist companies in accessing money from those investors, and compliance with those laws
and regulation may limit our business operations and plans for future expansion.
CrowdPay’s
product offerings are relatively new in an industry that is still quickly evolving
.
The
principal securities regulations that we work with, Regulation A and Regulation Crowdfunding, have only been in effect in their
current form since 2015 and 2016, respectively. Our ability to continue to penetrate the market remains uncertain as potential
issuer companies may choose to use different platforms or providers (including, in the case of Regulation A, using their own online
platform), or determine alternative methods of financing. Investors may decide to invest their money elsewhere. Further, our potential
market may not be as large, or our industry may not grow as rapidly, as anticipated. With a smaller market than expected, we may
have fewer customers. Success will likely be a factor of investing in the development and implementation of marketing campaigns,
subsequent adoption by issuer companies as well as investors, and favorable changes in the regulatory environment.
CrowdPay
and its providers are vulnerable to hackers and cyberattacks.
As
an internet-based business, we may be vulnerable to hackers who may access the data of our investors and the issuer companies
that utilize our platform. Further, any significant disruption in service on our platform or in its computer systems could reduce
the attractiveness of the platform and result in a loss of investors and companies interested in using our platform. Further,
we rely on a third-party technology provider to provide some of our back-up technology as well as act as our escrow agent. Any
disruptions of services or cyberattacks either on our technology provider or on our Company could harm our reputation and materially
negatively impact our financial condition and business.
CrowdPay
currently relies on one escrow agent and technology service provider.
We
currently rely on Microsoft Azure to serve as our technology provider and all escrow accounts are held at MVB Bank, Inc. Any change
in these relationships will require us to find another technology service provider, escrow agent and escrow bank. This may cause
us delays as well as additional costs in transitioning our technology.
We
are dependent on general economic conditions.
Our
business model is dependent on investors investing in the companies presented on our platform. Investment dollars are disposable
income. Our business model is thus dependent on national and international economic conditions. Adverse national and international
economic conditions may reduce the future availability of investment dollars, which would negatively impact revenues generated
by CrowdPay and possibly our ability to continue operations at CrowdPay. It is not possible to accurately predict the potential
adverse impacts on the Company, if any, of current economic conditions on its financial condition, operating results and cash
flow.
We
face significant market competition.
We
facilitate online capital formation. Though this is a new market, we compete against a variety of entrants in the market as well
likely new entrants into the market. Some of these follow a regulatory model that is different from ours and might provide them
competitive advantages. New entrants could include those that may already have a foothold in the securities industry, including
some established broker-dealers. Further, online capital formation is not the only way to address helping start-ups raise capital,
and the Company has to compete with a number of other approaches, including traditional venture capital investments, loans and
other traditional methods of raising funds and companies conducting crowdfunding raises on their own websites. Additionally, some
competitors and future competitors may be better capitalized than us, which would give them a significant advantage in marketing
and operations.
Our
revenues and profits are subject to fluctuations.
It
is difficult to accurately forecast our revenues and operating results, and these could fluctuate in the future due to a number
of factors. These factors may include adverse changes in: number of investors and amount of investors’ dollars, the success
of world securities markets, general economic conditions, our ability to market our platform to companies and investors, headcount
and other operating costs, and general industry and regulatory conditions and requirements. The Company’s operating results may
fluctuate from year to year due to the factors listed above and others not listed. At times, these fluctuations may be significant
and could impact our ability to operate our business.
EVANCE,
INC.
Our
ability to anticipate and respond to changing industry trends and the needs and preferences of our merchants and consumers may
adversely affect our competitiveness or the demand for our products and services.
The
financial services and payments technology industries are subject to rapid technological advancements, resulting in new products
and services, including mobile payment applications and customized integrated software payment solutions, and an evolving competitive
landscape, as well as changing industry standards and merchant and consumer needs and preferences. We expect that new services
and technologies applicable to the financial services and payment technology industries will continue to emerge. These changes
may limit the competitiveness of and demand for our services. Also, our merchants and consumers continue to adopt new technology
for business and personal uses. We must anticipate and respond to these changes in order to remain competitive within our relative
markets. In addition, failure to develop value-added services that meet the needs and preferences of our merchants could adversely
affect our ability to compete effectively in our industry. Furthermore, merchants’ or consumers’ potential negative
reaction to our products and services can spread quickly through social media and damage our reputation before we have the opportunity
to respond. If we are unable to anticipate or respond to technological or industry standard changes on a timely basis, our ability
to remain competitive could be adversely affected.
Substantial
and increasingly intense competition worldwide in the financial services and payment technology industries may adversely affect
our overall business and operations.
The
financial services and payment technology industries are highly competitive, and our payment services and solutions compete against
all forms of financial services and payment systems, including cash and checks, and electronic, mobile, ecommerce and integrated
payment platforms. If we are unable to differentiate ourselves from our competitors and drive value for our merchants, we may
not be able to compete effectively. Our competitors may introduce their own value-added or other innovative services or solutions
more effectively than we do, which could adversely impact our current competitive position and prospects for growth. They also
may be able to offer and provide services that we do not offer. In addition, in certain of our markets in which we operate, we
process “on-us” transactions whereby we receive fees as a merchant acquirer and for processing services for the issuing
bank. As competition in these markets grows, the number of transactions in which we receive fees for both of these roles may decrease,
which could reduce our revenue and margins in these jurisdictions. We also compete against new entrants that have developed alternative
payment systems, ecommerce payment systems, payment systems for mobile devices and customized integrated software payment solutions.
Failure to compete effectively against any of these competitive threats could adversely affect our business, financial condition
or results of operations. In addition, some of our competitors are larger and have greater financial resources than us, enabling
them to maintain a wider range of product offerings, mount extensive promotional campaigns and be more aggressive in offering
products and services at lower rates, which may adversely affect our business, financial condition or results of operations.
Potential
changes in the competitive landscape, including disintermediation from other participants in the payments chain, could harm our
business.
We
expect that the competitive landscape will continue to change, including:
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rapid
and significant changes in technology, resulting in new and innovative payment methods and programs, that could place us at
a competitive disadvantage and reduce the use of our products and services;
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competitors,
merchants, governments and other industry participants may develop products and services that compete with or replace our
value-added products and services, including products and services that enable card networks and banks to transact with consumers
directly;
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participants
in the financial services and payment technology industries may merge, create joint ventures, or form other business combinations
that may strengthen their existing business services or create new payment services that compete with our services; and
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new
services and technologies that we develop may be impacted by industry-wide solutions and standards, including chip technology,
tokenization, Blockchain and other safety and security technologies.
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Failure
to compete effectively against any of these or other competitive threats could adversely affect our business, financial condition
or results of operations.
Global
economic, political and other conditions may adversely affect trends in consumer, business and government spending, which may
adversely impact the demand for our services and our revenue and profitability.
The
financial services and payment technology industries in which we operate depend heavily upon the overall level of consumer, business
and government spending. A sustained deterioration in general economic conditions (including distress in financial markets, turmoil
in specific economies around the world and additional government intervention), particularly in North America or Europe, or increases
in interest rates in key countries in which we operate, may adversely affect our financial performance by reducing the number
or average purchase amount of transactions we process. A reduction in the amount of consumer spending could result in a decrease
of our revenue and profits.
Adverse
economic trends may accelerate the timing, or increase the impact of, risks to our financial performance. These trends could include:
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declining
economies, foreign currency fluctuations and the pace of economic recovery can change consumer spending behaviors, such as
cross-border travel patterns, on which the majority of our revenue is dependent;
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low
levels of consumer and business confidence typically associated with recessionary environments, and those markets experiencing
relatively high unemployment, may result in decreased spending by cardholders;
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budgetary
concerns in the United States and other countries around the world could affect the United States and other specific sovereign
credit ratings, impact consumer confidence and spending, and increase the risks of operating in those countries;
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emerging
market economies tend to be more volatile than the more established markets we serve in North America and Europe, and adverse
economic trends may be more pronounced in those emerging markets where we conduct business;
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financial
institutions may restrict credit lines to cardholders or limit the issuance of new cards to mitigate cardholder credit concerns;
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uncertainty
and volatility in the performance of our merchants’ businesses may make estimates of our revenues and financial performance
less predictable;
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cardholders
may decrease spending for value-added services we market and sell; and
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government
intervention, including the effect of laws, regulations and government investments in our merchants, may have potential negative
effects on our business and our relationships with our merchants or otherwise alter their strategic direction away from our
products and services.
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We
are subject to U.S. governmental regulation and other legal obligations, particularly related to privacy, data protection and
information security, and consumer protection laws across different markets where we conduct our business. Our actual or perceived
failure to comply with such obligations could harm our business.
In
the United States, we are subject to various consumer protection laws (including laws on disputed transactions) and related regulations.
If we are found to have breached any consumer protection laws or regulations in any such market, we may be subject to enforcement
actions that require us to change our business practices in a manner which may negatively impact revenue, as well as litigation,
fines, penalties and adverse publicity that could cause our customers to lose trust in us, which could have an adverse effect
on our reputation and business in a manner that harms our financial position.
We
collect personally identifiable information and other data from our consumers and merchants. Laws and regulations in several countries
restrict certain collection, processing, storage, use, disclosure and security of personal information, require notice to individuals
of privacy practices, and provide individuals with certain rights to prevent use and disclosure of protected information.
Future
restrictions on the collection, use, sharing or disclosure of personally identifiable information or additional requirements and
liability for security and data integrity could require us to modify our solutions and features, possibly in a material manner,
and could limit our ability to develop new services and features. If our privacy or data security measures fail to comply with
applicable current or future laws and regulations, we may be subject to litigation, regulatory investigations, enforcement notices
requiring us to change the way we use personal data or our marketing practices, fines or other liabilities, as well as negative
publicity and a potential loss of business.
Our
inability to protect our systems and data from continually evolving cybersecurity risks or other technological risks could affect
our reputation among our merchants and consumers and may expose us to liability.
In
conducting our business, we process, transmit and store sensitive business information and personal information about our merchants,
consumers, sales and financial institution partners, vendors, and other parties. This information may include account access credentials,
credit and debit card numbers, bank account numbers, social security numbers, driver’s license numbers, names and addresses
and other types of sensitive business or personal information. Some of this information is also processed and stored by our merchants,
sales and financial institution partners, third-party service providers to whom we outsource certain functions and other agents,
which we refer to collectively as our associated third parties. We have certain responsibilities to card networks and their member
financial institutions for any failure, including the failure of our associated third parties, to protect this information.
We
are a regular target of malicious third-party attempts to identify and exploit system vulnerabilities, and/or penetrate or bypass
our security measures, in order to gain unauthorized access to our networks and systems or those of our associated third parties.
Such access could lead to the compromise of sensitive, business, personal or confidential information. As a result, we proactively
employ multiple methods at different layers of our systems to defend our systems against intrusion and attack and to protect the
data we collect. However, we cannot be certain that these measures will be successful and will be sufficient to counter all current
and emerging technology threats that are designed to breach our systems in order to gain access to confidential information.
Our
computer systems and our associated third parties’ computer systems have been, and could be in the future, subject to breach,
and our data protection measures may not prevent unauthorized access. The techniques used to obtain unauthorized access, disable
or degrade service, or sabotage systems change frequently and are often difficult to detect. Threats to our systems and our associated
third parties’ systems can derive from human error, fraud or malice on the part of employees or third parties, or may result
from accidental technological failure. Computer viruses and other malware can be distributed and could infiltrate our systems
or those of our associated third parties. In addition, denial of service or other attacks could be launched against us for a variety
of purposes, including to interfere with our services or create a diversion for other malicious activities. Our defensive measures
may not prevent downtime, unauthorized access or use of sensitive data. While we maintain cyber errors and omissions insurance
coverage that may cover certain aspects of cyber risks, our insurance coverage may be insufficient to cover all losses. Further,
while we select our associated third parties carefully, we do not control their actions. Any problems experienced by these third
parties, including those resulting from breakdowns or other disruptions in the services provided by such parties or cyber-attacks
and security breaches, could adversely affect our ability to service our merchant customers or otherwise conduct our business.
We
could also be subject to liability for claims relating to misuse of personal information, such as unauthorized marketing purposes
and violation of data privacy laws. We cannot provide assurance that the contractual requirements related to security and privacy
that we impose on our service providers who have access to customer and consumer data will be followed or will be adequate to
prevent the unauthorized use or disclosure of data. In addition, we have agreed in certain agreements to take certain protective
measures to ensure the confidentiality of merchant and consumer data. The costs of systems and procedures associated with such
protective measures may increase and could adversely affect our ability to compete effectively. Any failure to adequately enforce
or provide these protective measures could result in liability, protracted and costly litigation, governmental and card network
intervention and fines and, with respect to misuse of personal information of our merchants and consumers, lost revenue and reputational
harm.
Any
type of security breach, attack or misuse of data described above or otherwise, whether experienced by us or an associated third
party, could harm our reputation and deter existing and prospective merchants from using our services or from making electronic
payments generally, increase our operating expenses in order to contain and remediate the incident, expose us to unbudgeted or
uninsured liability, disrupt our operations (including potential service interruptions), distract our management, increase our
risk of regulatory scrutiny, result in the imposition of penalties and fines under state, federal and foreign laws or by card
networks and adversely affect our continued card network registration and financial institution sponsorship. If we were to be
removed from networks’ lists of PCI DSS compliant service providers, our existing merchants, sales and financial institution
partners or other third parties may cease using or referring our services. Also, prospective merchants, sales partners, financial
institution partners or other third parties may choose to terminate their relationship with us, or delay or choose not to consider
us for their processing needs. In addition, card networks could refuse to allow us to process through their networks.
We
may experience failures in our processing systems due to software defects, computer viruses and development delays, which could
damage customer relations and expose us to liability.
Our
core business depends heavily on the reliability of our processing systems. A system outage or other failure could adversely affect
our business, financial condition or results of operations, including by damaging our reputation or exposing us to third-party
liability. Card network rules and certain governmental regulations allow for possible penalties if our systems do not meet certain
operating standards. To successfully operate our business, we must be able to protect our processing and other systems from interruption,
including from events that may be beyond our control. Events that could cause system interruptions include fire, natural disaster,
unauthorized entry, power loss, telecommunications failure, computer viruses, terrorist acts and war. Although we have taken steps
to protect against data loss and system failures, there is still risk that we may lose critical data or experience system failures.
To help protect against these events, we perform a significant portion of disaster recovery operations ourselves, as well as utilize
select third parties for certain operations, particularly outside of the United States. To the extent we outsource any disaster
recovery functions, we are at risk of the vendor’s unresponsiveness or other failures in the event of breakdowns in our
systems. In addition, our property and business interruption insurance may not be adequate to compensate us for all losses or
failures that may occur.
Our
products and services are based on sophisticated software and computing systems that are constantly evolving. We often encounter
delays and cost overruns in developing changes implemented to our systems. In addition, the underlying software may contain undetected
errors, viruses or defects. Defects in our software products and errors or delays in our processing of electronic transactions
could result in additional development costs, diversion of technical and other resources from our other development efforts, loss
of credibility with current or potential merchants, harm to our reputation or exposure to liability claims. In addition, we rely
on technologies supplied to us by third parties that may also contain undetected errors, viruses or defects that could adversely
affect our business, financial condition or results of operations. Although we attempt to limit our potential liability for warranty
claims through disclaimers in our software documentation and limitation of liability provisions in our licenses and other agreements
with our merchants and partners, we cannot assure that these measures will be successful in limiting our liability. Additionally,
we and our merchants and partners are subject to card network rules. If we do not comply with card network requirements or standards,
we may be subject fines or sanctions, including suspension or termination of our registrations and licenses necessary to conduct
business.
Degradation
of the quality of the products and services we offer, including support services, could adversely impact our ability to attract
and retain merchants and partners.
Our
merchants and partners expect a consistent level of quality in the provision of our products and services. The support services
we provide are a key element of the value proposition to our merchants and partners. If the reliability or functionality of our
products and services is compromised or the quality of those products or services is otherwise degraded, or if we fail to continue
to provide a high level of support, we could lose existing merchants and partners and find it harder to attract new merchants
and partners. If we are unable to scale our support functions to address the growth of our merchant and partner network, the quality
of our support may decrease, which could adversely affect our ability to attract and retain merchants and partners.
Acquisitions
create certain risks and may adversely affect our business, financial condition or results of operations.
We
may make acquisitions of businesses or assets in the future. The acquisition and integration of businesses or assets involve a
number of risks. These risks include valuation (determining a fair price for the business or assets), integration (managing the
process of integrating the acquired business’ people, products, technology and other assets to extract the value and synergies
projected to be realized in connection with the acquisition), regulation (obtaining regulatory or other government approvals that
may be necessary to complete the acquisition) and due diligence (including identifying risks to the prospects of the business,
including undisclosed or unknown liabilities or restrictions to be assumed in the acquisition).
The
process of integrating operations could cause an interruption of, or loss of momentum in, the activities of one or more of our
combined businesses and the possible loss of key personnel. The diversion of management’s attention and any delays or difficulties
encountered in connection with acquisitions and their integration could adversely affect our business, financial condition or
results of operations.
Continued
consolidation in the banking industry could adversely affect our growth.
The
banking industry remains subject to consolidation regardless of overall economic conditions. In addition, in times of economic
distress, various regulators in the markets we serve have acquired and in the future may acquire financial institutions, including
banks with which we partner. If a current financial institution referral partner of ours is acquired by another bank, the acquiring
bank may seek to terminate our agreement and impose its own merchant services program on the acquired bank. If a financial institution
referral partner acquires another bank, our financial institution referral partner may take the opportunity to conduct a competitive
bidding process to determine whether to maintain our merchant acquiring services or switch to another provider. In either situation,
we may be unable to retain the relationship post-acquisition, or may have to offer financial concessions to do so, which could
adversely affect our results of operations or growth. If a current financial institution referral partner of ours is acquired
by a regulator, the regulator may seek to alter the terms or terminate our existing agreement with the acquired financial institution.
Increased
customer, referral partner or sales partner attrition could cause our financial results to decline.
We
experience attrition in merchant credit and debit card processing volume resulting from several factors, including business closures,
transfers of merchants’ accounts to our competitors, unsuccessful contract renewal negotiations and account closures that
we initiate for various reasons, such as heightened credit risks or contract breaches by merchants. In addition, if an existing
sales partner switches to another payment processor, terminates our services, internalizes payment processing functions that we
perform, merges with or is acquired by one of our competitors, or shuts down or becomes insolvent, we may no longer receive new
customer referrals from the sales partner, and we risk losing existing merchants that were originally enrolled by the sales partner.
We cannot predict the level of attrition in the future and it could increase. Our referral partners are a significant source of
new business. Higher than expected attrition could adversely affect our business, financial condition or results of operations.
In addition, in certain of the markets in which we conduct business, a substantial portion of our revenue is derived from long-term
contracts. If we are unable to renew our referral partner and our merchant contracts on favorable terms, or at all, our business,
financial condition or results of operations could be adversely affected.
We
incur chargeback liability when our merchants refuse to or cannot reimburse chargebacks resolved in favor of their customers.
Any increase in chargebacks not paid by our merchants may adversely affect our business, financial condition or results of operations.
In
the event a dispute between a cardholder and a merchant is not resolved in favor of the merchant, the transaction is normally
charged back to the merchant and the purchase price is credited or otherwise refunded to the cardholder. If we are unable to collect
such amounts from the merchant’s account or reserve account (if applicable), or if the merchant refuses or is unable, due
to closure, bankruptcy or other reasons, to reimburse us for a chargeback, we are responsible for the amount of the refund paid
to the cardholder. The risk of chargebacks is typically greater with those merchants that promise future delivery of goods and
services rather than delivering goods or rendering services at the time of payment, as well as “card not present”
transactions in which consumers do not physically present cards to merchants in connection with the purchase of goods and services,
such as ecommerce, telephonic and mobile transactions. We may experience significant losses from chargebacks in the future. Any
increase in chargebacks not paid by our merchants could have a material adverse effect on our business, financial condition or
results of operations. We have policies and procedures to monitor and manage merchant-related credit risks and often mitigate
such risks by requiring collateral (such as cash reserves) and monitoring transaction activity. Notwithstanding our policies and
procedures for managing credit risk, it is possible that a default on such obligations by one or more of our merchants could adversely
affect our business, financial condition or results of operations.
Failure
to maintain or collect reimbursements from our financial institution referral partners could adversely affect our business.
Certain
of our long-term referral arrangements with our financial institution partners permit our bank partners to offer their merchant
customers lower rates for processing services than we typically provide to the general market. If a bank partner elects to offer
these lower rates, under our contract the partner is required to reimburse us for the full amount of the discount provided to
its merchant customers. Notwithstanding such contractual commitments, there can be no assurance that these contractual provisions
will fully protect us from potential losses should a bank partner default on its obligations to reimburse us or seek to discontinue
such reimbursement obligations in the future. If we are unable to collect the full amount of any such reimbursements for any reason,
we may incur losses. In addition, any discount provided by our financial institution partner may cause merchants in these markets
to demand lower rates for our services in the future, which could further reduce our margins or cause us to lose merchants, either
of which could adversely affect our business, financial condition or results of operations.
Fraud
by merchants or others could adversely affect our business, financial condition or results of operations.
We
may be liable for certain fraudulent transactions and credits initiated by merchants or others. Examples of merchant fraud include
merchants or other parties knowingly using a stolen or counterfeit credit or debit card, card number, or other credentials to
record a false sales or credit transaction, processing an invalid card or intentionally failing to deliver the merchandise or
services sold in an otherwise valid transaction. Criminals are using increasingly sophisticated methods to engage in illegal activities
such as counterfeiting and fraud. Failure to effectively manage risk and prevent fraud could increase our chargeback liability
or cause us to incur other liabilities. It is possible that incidents of fraud could increase in the future. Increases in chargebacks
or other liabilities could adversely affect our business, financial condition or results of operations.
Because
we rely on third-party vendors to provide products and services, we could be adversely impacted if they fail to fulfill their
obligations.
We
depend on third-party vendors and partners to provide us with certain products and services, including components of our computer
systems, software, data centers and telecommunications networks, to conduct our business. For example, we rely on third parties
for services such as organizing and accumulating certain daily transaction data on a merchant-by-merchant and card issuer-by-card
issuer basis and forwarding the accumulated data to the relevant card network. We also rely on third parties for specific software
and hardware used in providing our products and services. Some of these organizations and service providers are our competitors
or provide similar services and technology to our competitors, and we do not have long-term or exclusive contracts with them.
Our
systems and operations or those of our third-party vendors and partners could be exposed to damage or interruption from, among
other things, fire, natural disaster, power loss, telecommunications failure, unauthorized entry, computer viruses, denial-of-service
attacks, acts of terrorism, human error, vandalism or sabotage, financial insolvency, bankruptcy and similar events. In addition,
we may be unable to renew our existing contracts with our most significant vendors and partners or our vendors and partners may
stop providing or otherwise supporting the products and services we obtain from them, and we may not be able to obtain these or
similar products or services on the same or similar terms as our existing arrangements, if at all. The failure of our vendors
and partners to perform their obligations and provide the products and services we obtain from them in a timely manner for any
reason could adversely affect our operations and profitability due to, among other consequences:
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loss
of revenues;
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loss
of merchants and partners;
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loss
of merchant and cardholder data;
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fines
imposed by card networks;
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harm
to our business or reputation resulting from negative publicity;
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exposure
to fraud losses or other liabilities;
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additional
operating and development costs; or
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diversion
of management, technical and other resources.
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We
depend, in part, on our merchant and sales agent relationships and strategic partnerships with various financial institutions
to grow our business. If we are unable to maintain these relationships and partnerships, our business may be adversely affected.
We
depend, in part, on our merchant and sales and distribution agent relationships and partnerships with various financial institutions,
including our partnerships with independent sales organizations, or ISOs, to grow our business. These relationships take on different
forms, including consolidated subsidiaries, equity method investments, joint ventures and revenue sharing arrangements. For our
financial institution partners, we typically enter into long-term, exclusive referral arrangements with our partner banks, either
contractually or through a separate legal entity. Our bank partners act as referral sources for the bank’s merchant customers
and, in some cases, also provide card association sponsorship. We typically provide transaction processing and related functions.
Both we and our partners may also provide management, sales, marketing and other administrative services. These arrangements allow
us to be the processor for multiple financial institutions, any one of which may be selected by the merchant as its bank partner.
We rely on the growth of our merchant and other strategic relationships, and our ability to maintain these relationships and other
distribution channels, to support and grow our business. If we fail to maintain these relationships, or if these partners fail
to maintain their brands or decrease the size of their branded networks, our business may be adversely affected. In addition,
our contractual arrangements with our merchants and other strategic partners vary in length, and may also allow for early termination
upon the occurrence of certain events. There can be no assurance that we will be able to renew these contractual arrangements
on similar terms or at all. The loss of merchant relationships or other strategic partners could adversely affect our business
and result in a reduction of our revenue and profit.
We
rely on various financial institutions to provide clearing services in connection with our settlement activities. If these financial
institutions stop providing clearing services, we must find other financial institutions to provide those services. If we are
unable to find a replacement financial institution we may no longer be able to provide processing services to certain merchants,
which could adversely affect our business, financial condition or results of operations. In addition, certain financial institutions
that provide clearing services to us require us to prefund settlement payments. In the event of a chargeback, merchant bankruptcy
or other failure to fund, or other intervening failure in the banking card network system, we may be unable to recoup these prepayments,
which could adversely affect our business, financial condition or results of operations.
We
also maintain intraday and overnight credit facilities with various financial institutions to fund our daily settlement obligations.
These facilities are generally short term in nature. If these sources of financing become unavailable, we would have to seek alternative
credit arrangements. Any alternative arrangements we obtain may contain higher interest rates or other terms less favorable to
us than our current facilities, which in turn could adversely affect our business, financial condition or results of operations.
Our
risk management policies and procedures may not be fully effective in mitigating our risk exposure in all market environments
or against all types of risk.
We
operate in a rapidly changing industry. Accordingly, our risk management policies and procedures may not be fully effective to
identify, monitor and manage all risks our business encounters. If our policies and procedures are not fully effective or we are
not successful in identifying and mitigating all risks to which we are or may be exposed, we may suffer uninsured liability, harm
to our reputation or be subject to litigation or regulatory actions that could adversely affect our business, financial condition
or results of operations.
A
significant number of our merchants are small- and medium-sized businesses and small affiliates of large companies, which can
be more difficult and costly to retain than larger enterprises and may increase the impact of economic fluctuations on us.
We
market and sell our products and services to, among others, small and midsized businesses (“SMBs”) and small affiliates
of large companies. To continue to grow our revenue, we must add merchants, sell additional services to existing merchants and
encourage existing merchants to continue doing business with us. However, retaining SMBs can be more difficult than retaining
large enterprises as SMB merchants:
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often
have higher rates of business failures and more limited resources;
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are
typically less sophisticated in their ability to make technology-related decisions based on factors other than price;
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may
have decisions related to the choice of payment processor dictated by their affiliated parent entity; and
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are
more able to change their payment processors than larger organizations dependent on our services.
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SMBs
are typically more susceptible to the adverse effects of economic fluctuations. Adverse changes in the economic environment or
business failures of our SMB merchants may have a greater impact on us than on our competitors who do not focus on SMBs to the
extent that we do. As a result, we may need to attract and retain new merchants at an accelerated rate or decrease our expenses
to reduce negative impacts on our business, financial condition and results of operations.
Our
business depends on a strong and trusted brand, and damage to our reputation, or the reputation of our partners, could adversely
affect our business, financial condition or results of operations.
We
market our products and services under our brand or the brand of our partners, or both, and we must protect and grow the value
of our brand to continue to be successful in the future. If an incident were to occur that damages our reputation, or the reputation
of our partners, in any of our major markets, the value of our brand could be adversely affected and our business could be damaged.
Our
operating results and operating metrics are subject to seasonality and volatility, which could result in fluctuations in our quarterly
revenues and operating results or in perceptions of our business prospects.
We
have experienced in the past, and expect to continue to experience, seasonal fluctuations in our revenue, which can vary by region.
In North America, our revenue has been strongest in our fourth quarter and weakest in our first quarter. In Europe, our revenue
has been strongest in our third quarter and weakest in our first quarter. Some variability results from seasonal retail events
and the number of business days in a month or quarter. We also experience volatility in certain other metrics, such as number
of transactions processed and payment processing volumes. Volatility in our key operating metrics or their rates of growth could
result in fluctuations in financial condition or results of operations and may lead to adverse inferences about our prospects,
which could result in declines in our stock price.
Our
ability to recruit, retain and develop qualified personnel is critical to our success and growth.
All
of our businesses function at the intersection of rapidly changing technological, social, economic and regulatory environments
that require a wide range of expertise and intellectual capital. For us to successfully compete and grow, we must recruit, retain
and develop personnel who can provide the necessary expertise across a broad spectrum of intellectual capital needs. In addition,
we must develop, maintain and, as necessary, implement appropriate succession plans to assure we have the necessary human resources
capable of maintaining continuity in our business. The market for qualified personnel is competitive and we may not succeed in
recruiting additional personnel or may fail to effectively replace current personnel who depart with qualified or effective successors.
Our effort to retain and develop personnel may also result in significant additional expenses, which could adversely affect our
profitability. We cannot assure that key personnel, including our executive officers, will continue to be employed or that we
will be able to attract and retain qualified personnel in the future. Failure to recruit, retain or develop qualified personnel
could adversely affect our business, financial condition or results of operations.
There
may be a decline in the use of cards as a payment mechanism for consumers or adverse developments with respect to the card industry
in general.
If
consumers do not continue to use credit or debit cards as a payment mechanism for their transactions or if there is a change in
the mix of payments between cash, credit cards and debit cards our business could be adversely affected. Consumer credit risk
may make it more difficult or expensive for consumers to gain access to credit facilities such as credit cards. Regulatory changes
may result in financial institutions seeking to charge their customers additional fees for use of credit or debit cards. Such
fees may result in decreased use of credit or debit cards by cardholders. We believe future growth in the use of credit and debit
cards and other electronic payments will be driven by the cost, ease-of-use and quality of services offered to consumers and businesses.
In order to consistently increase and maintain our profitability, consumers and businesses must continue to use electronic payment
methods that we process, including credit and debit cards.
Increases
in card network fees and other changes to fee arrangements may result in the loss of merchants or a reduction in our earnings.
From
time to time, card networks, including Visa and Mastercard, increase the fees that they charge processors. We could attempt to
pass these increases along to our merchants, but this strategy might result in the loss of merchants to our competitors who do
not pass along the increases. If competitive practices prevent us from passing along the higher fees to our merchants in the future,
we may have to absorb all or a portion of such increases, which may increase our operating costs and reduce our earnings.
In
addition, in certain of our markets, card issuers pay merchant acquirers such as us fees based on debit card usage in an effort
to encourage debit card use. If these card issuers discontinue this practice, our revenue and margins in these jurisdictions could
be adversely affected.
If
we fail to comply with the applicable requirements of card networks, they could seek to fine us, suspend us or terminate our registrations.
If our merchants or sales partners incur fines or penalties that we cannot collect from them, we may have to bear the cost of
such fines or penalties.
In
order to provide our transaction processing services, several of our subsidiaries are registered with Visa and Mastercard and
other card networks as members or service providers for member institutions. Visa, Mastercard, and other card networks, set the
rules and standards with which we must comply. The termination of our member registration or our status as a certified service
provider, or any changes in network rules or standards, including interpretation and implementation of the rules or standards,
that increase the cost of doing business or limit our ability to provide transaction processing services to or through our merchants
or partners, could adversely affect our business, financial condition or results of operations.
As
such, we and our merchants are subject to card network rules that could subject us or our merchants to a variety of fines or penalties
that may be levied by card networks for certain acts or omissions by us. The rules of card networks are set by their boards, which
may be influenced by card issuers, and some of those issuers are our competitors with respect to these processing services. Many
banks directly or indirectly sell processing services to merchants in direct competition with us. These banks could attempt, by
virtue of their influence on the networks, to alter the networks’ rules or policies to the detriment of non-members including
certain of our businesses. The termination of our registrations or our status as a service provider or a merchant processor, or
any changes in network rules or standards, including interpretation and implementation of the rules or standards, that increase
the cost of doing business or limit our ability to provide transaction processing services to our merchants, could adversely affect
our business, financial condition or results of operations. If a merchant or sales partner fails to comply with the applicable
requirements of card networks, it could be subject to a variety of fines or penalties that may be levied by card networks. If
we cannot collect the amounts from the applicable merchant or sales partner, we may have to bear the cost of the fines or penalties,
resulting in lower earnings for us. The termination of our registration, or any changes in card network rules that would impair
our registration, could require us to stop providing payment processing services relating to the affected card network, which
would adversely affect our ability to conduct our business.
OMNISOFT.IO,
INC.
Our
growth may not be sustainable and depends on our ability to attract new merchants, retain existing merchants and increase sales
to both new and existing merchants.
We
principally generate revenues through the sale of subscriptions to our platform and the sale of additional solutions to our merchants.
Our subscription plans typically have a one-month term, although a small percentage of our merchants have annual or multi-year
subscription terms. Our merchants have no obligation to renew their subscriptions after their subscription term expires. As a
result, even though the number of merchants using our platform has grown rapidly in recent years, there can be no assurance that
we will be able to retain these merchants. We have historically experienced merchant turnover as a result of many of our merchants
being small- and medium-sized businesses, or SMBs, that are more susceptible than larger businesses to general economic conditions
and other risks affecting their businesses. Many of these SMBs are in the entrepreneurial stage of their development and there
is no guarantee that their businesses will succeed. Our costs associated with subscription renewals are substantially lower than
costs associated with generating revenue from new merchants or costs associated with generating sales of additional solutions
to existing merchants. Therefore, if we are unable to retain merchants or if we are unable to increase revenues from existing
merchants, even if such losses are offset by an increase in new merchants or an increase in other revenues, our operating results
could be adversely impacted.
We
may also fail to attract new merchants, retain existing merchants or increase sales to both new and existing merchants as a result
of a number of other factors, including: reductions in our current or potential merchants’ spending levels; competitive
factors affecting the software as a service, or SaaS, business software applications market, including the introduction of competing
platforms, discount pricing and other strategies that may be implemented by our competitors; our ability to execute on our growth
strategy and operating plans; a decline in our merchants’ level of satisfaction with our platform and merchants’ usage
of our platform; the difficulty and cost to switch to a competitor may not be significant for many of our merchants; changes in
our relationships with third parties, including our partners, app developers, theme designers, referral sources and payment processors;
the timeliness and success of new products and services we may offer in the future; the frequency and severity of any system outages;
technological change; and our focus on long-term value over short-term results, meaning that we may make strategic decisions that
may not maximize our short-term revenue or profitability if we believe that the decisions are consistent with our mission and
will improve our financial performance over the long-term.
Additionally,
we anticipate that our growth rate will decline over time to the extent that the number of merchants using our platform increases
and we achieve higher market penetration rates. To the extent our growth rate slows, our business performance will become increasingly
dependent on our ability to retain existing merchants and increase sales to existing merchants.
If
we fail to improve and enhance the functionality, performance, reliability, design, security and scalability of our platform in
a manner that responds to our merchants’ evolving needs, our business may be adversely affected.
The
markets in which we compete are characterized by constant change and innovation and we expect them to continue to evolve rapidly.
Our success has been based on our ability to identify and anticipate the needs of our merchants and design a platform that provides
them with the tools they need to operate their businesses. Our ability to attract new merchants, retain existing merchants and
increase sales to both new and existing merchants will depend in large part on our ability to continue to improve and enhance
the functionality, performance, reliability, design, security and scalability of our platform.
We
may experience difficulties with software development that could delay or prevent the development, introduction or implementation
of new solutions and enhancements. Software development involves a significant amount of time for our research and development
team, as it can take our developers months to update, code and test new and upgraded solutions and integrate them into our platform.
We must also continually update, test and enhance our software platform. For example, our design team spends a significant amount
of time and resources incorporating various design enhancements, such as customized colors, fonts, content and other features,
into our platform. The continual improvement and enhancement of our platform requires significant investment and we may not have
the resources to make such investment. Our improvements and enhancements may not result in our ability to recoup our investments
in a timely manner, or at all. To the extent we are not able to improve and enhance the functionality, performance, reliability,
design, security and scalability of our platform in a manner that responds to our merchants’ evolving needs, our business,
operating results and financial condition will be adversely affected.
We
store personally identifiable information of our merchants and their customers. If the security of this information is compromised
or otherwise subjected to unauthorized access, our reputation may be harmed and we may be exposed to liability.
We
store personally identifiable information, credit card information and other confidential information of our merchants and their
customers. The third-party apps sold on our platform may also store personally identifiable information, credit card information
and other confidential information of our merchants and their customers. We do not regularly monitor or review the content that
our merchants upload and store and, therefore, do not control the substance of the content on our servers, which may include personal
information. We may experience successful attempts by third parties to obtain unauthorized access to the personally identifiable
information of our merchants and their customers. This information could also be otherwise exposed through human error, malfeasance
or otherwise. The unauthorized access or compromise of this personally identifiable information could have a material adverse
effect on our business, financial condition and results of operations. Even if such a data breach were to affect one or more of
our competitors, the resulting consumer concern could negatively affect our merchants and our business.
We
are also subject to federal, state, provincial and foreign laws regarding privacy and protection of data. Some jurisdictions have
enacted laws requiring companies to notify individuals of data security breaches involving certain types of personal data and
our agreements with certain merchants require us to notify them in the event of a security incident. We post on our website our
privacy policy and terms of service, which describe our practices concerning the use, transmission and disclosure of merchant
data and data relating to their customers. In addition, the interpretation of data protection laws in the United States, and elsewhere,
and their application to the internet, is unclear and in a state of flux. There is a risk that these laws may be interpreted and
applied in conflicting ways from jurisdiction to jurisdiction, and in a manner that is not consistent with our current data protection
practices. Changes to such data protection laws may impose more stringent requirements for compliance and impose significant penalties
for non-compliance. Any such new laws or regulations, or changing interpretations of existing laws and regulations, may cause
us to incur significant costs and expend significant effort to ensure compliance. Because our services are accessible worldwide,
certain foreign jurisdictions may claim that we are required to comply with their laws, including in jurisdictions where we have
no local entity, employees or infrastructure.
Our
failure to comply with federal, state, provincial and foreign laws regarding privacy and protection of data could lead to significant
fines and penalties imposed by regulators, as well as claims by our merchants or their customers. These proceedings or violations
could force us to spend money in defense or settlement of these proceedings, result in the imposition of monetary liability, diversion
of management’s time and attention, increase our costs of doing business, and materially adversely affect our reputation
and the demand for our solutions. In addition, if our security measures fail to protect credit card information adequately, we
could be liable to both our merchants and their customers for their losses, as well as our payments processing partners under
our agreements with them. As a result, we could be subject to fines and higher transaction fees, we could face regulatory action,
and our merchants could end their relationships with us. There can be no assurance that the limitations of liability in our contracts
would be enforceable or adequate or would otherwise protect us from any such liabilities or damages with respect to any particular
claim. We also cannot be sure that our existing insurance coverage and coverage for errors and omissions will continue to be available
on acceptable terms or will be available in sufficient amounts to cover one or more large claims, or that our insurers will not
deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceeds our available
insurance coverage, or changes in our insurance policies, including premium increases or the imposition of large deductible or
co-insurance requirements, could have an adverse effect on our business, financial condition and results of operations.
If
our software contains serious errors or defects, we may lose revenue and market acceptance and may incur costs to defend or settle
claims with our merchants.
Software
such as ours often contains errors, defects, security vulnerabilities or software bugs that are difficult to detect and correct,
particularly when first introduced or when new versions or enhancements are released. Despite internal testing, our platform
may contain serious errors or defects, security vulnerabilities or software bugs that we may be unable to successfully correct
in a timely manner or at all, which could result in lost revenue, significant expenditures of capital, a delay or loss in market
acceptance and damage to our reputation and brand, any of which could have an adverse effect on our business, financial condition
and results of operations. Furthermore, our platform is a multi-tenant cloud based system that allows us to deploy new versions
and enhancements to all of our merchants simultaneously. To the extent we deploy new versions or enhancements that contain errors,
defects, security vulnerabilities or software bugs to all of our merchants simultaneously, the consequences would be more severe
than if such versions or enhancements were only deployed to a smaller number of our merchants.
Since
our merchants use our services for processes that are critical to their businesses, errors, defects, security vulnerabilities,
service interruptions or software bugs in our platform could result in losses to our merchants. Our merchants may seek significant
compensation from us for any losses they suffer or cease conducting business with us altogether. Further, a merchant could share
information about bad experiences on social media, which could result in damage to our reputation and loss of future sales. There
can be no assurance that provisions typically included in our agreements with our merchants that attempt to limit our exposure
to claims would be enforceable or adequate or would otherwise protect us from liabilities or damages with respect to any particular
claim. Even if not successful, a claim brought against us by any of our merchants would likely be time-consuming and costly to
defend and could seriously damage our reputation and brand, making it harder for us to sell our solutions.
We
may be unable to achieve or maintain data transmission capacity.
Our
merchants often draw significant numbers of consumers to their shops over short periods of time, including from events such as
new product releases, holiday shopping seasons and flash sales, which significantly increases the traffic on our servers and the
volume of transactions processed on our platform. Our servers may be unable to achieve or maintain data transmission capacity
high enough to handle increased traffic or process orders in a timely manner. Our failure to achieve or maintain high data transmission
capacity could significantly reduce demand for our solutions. In the future, we may be required to allocate resources, including
spending substantial amounts of money, to build, purchase or lease additional data centers and equipment and upgrade our technology
and network infrastructure in order to handle the increased load. Our ability to deliver our solutions also depends on the development
and maintenance of internet infrastructure by third-parties, including the maintenance of reliable networks with the necessary
speed, data capacity and bandwidth. If one of these third-parties suffers from capacity constraints, our business may be adversely
affected. In addition, because we and our merchants generate a disproportionate amount of revenue in the fourth quarter, any disruption
in our merchants’ ability to process and fulfill customer orders in the fourth quarter could have a disproportionately negative
effect on our operating results.
Our
growth depends in part on the success of our strategic relationships with third parties.
We
anticipate that the growth of our business will continue to depend on third-party relationships, including relationships with
our app developers, theme designers, referral sources, resellers, payment processors and other partners. In addition to growing
our third-party partner ecosystem, we intend to pursue additional relationships with other third-parties, such as technology and
content providers and implementation consultants. Identifying, negotiating and documenting relationships with third parties requires
significant time and resources as does integrating third-party content and technology. Some of the third parties that sell our
services have the direct contractual relationships with the merchants, and therefore we risk the loss of such merchants if the
third parties fail to perform their obligations. Our agreements with providers of cloud hosting, technology, content and consulting
services are typically non-exclusive and do not prohibit such service providers from working with our competitors or from offering
competing services. These third-party providers may choose to terminate their relationship with us or to make material changes
to their businesses, products or services. Our competitors may be effective in providing incentives to third parties to favor
their products or services or to prevent or reduce subscriptions to our platform. In addition, these providers may not perform
as expected under our agreements or under their agreements with our merchants, and we or our merchants may in the future have
disagreements or disputes with such providers. If we lose access to products or services from a particular supplier, or experience
a significant disruption in the supply of products or services from a current supplier, especially a single-source supplier, it
could have an adverse effect on our business and operating results.
If
we fail to maintain a consistently high level of customer service, our brand, business and financial results may be harmed.
We
believe our focus on customer service and support is critical to onboarding new merchants and retaining our existing merchants
and growing our business. As a result, we have invested heavily in the quality and training of our support team along with the
tools they use to provide this service. If we are unable to maintain a consistently high level of customer service, we may lose
existing merchants. In addition, our ability to attract new merchants is highly dependent on our reputation and on positive recommendations
from our existing merchants. Any failure to maintain a consistently high level of customer service, or a market perception that
we do not maintain high-quality customer service, could adversely affect our reputation and the number of positive merchant referrals
that we receive.
We
use a limited number of data centers to deliver our services. Any disruption of service at these facilities could harm our business.
We
currently manage our services and serve all of our merchants from two third-party data center facilities. While we own the hardware
on which our platform runs and deploy this hardware to the data center facilities, we do not control the operation of these facilities.
We have experienced, and may in the future experience, failures at the third-party data centers where our hardware is deployed
from time to time. Data centers are vulnerable to damage or interruption from human error, intentional bad acts, earthquakes,
hurricanes, floods, fires, war, terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures
and similar events. Any of these events could result in lengthy interruptions in our services. Changes in law or regulations applicable
to data centers in various jurisdictions could also cause a disruption in service. Interruptions in our services would reduce
our revenue, subject us to potential liability and adversely affect our ability to retain our merchants or attract new merchants.
The performance, reliability and availability of our platform is critical to our reputation and our ability to attract and retain
merchants. Merchants could share information about bad experiences on social media, which could result in damage to our reputation
and loss of future sales. The property and business interruption insurance coverage we carry may not be adequate to compensate
us fully for losses that may occur.
Our
agreements with our third-party data facility providers are on a month-to-month basis. The agreements do not provide for early
termination without cause, as defined therein. Upon expiration of the initial term, both agreements will automatically renew for
successive 12-month periods unless appropriate notice is provided. However, when our agreements with the third-party data facilities
terminate, the owners of the data facilities have no obligation to renew their agreements with us on commercially reasonable terms,
or at all. If we are unable to renew these agreements on commercially reasonable terms, or if the owners of the data facilities
decide to close such facilities, we may be required to transfer to new data center facilities and we may incur costs and possible
service interruption in connection with doing so.
Mobile
devices are increasingly being used to conduct commerce, and if our solutions do not operate as effectively when accessed through
these devices, our merchants and their customers may not be satisfied with our services, which could harm our business.
We
are dependent on the interoperability of our platform with third-party mobile devices and mobile operating systems as well as
web browsers that we do not control. Any changes in such devices, systems or web browsers that degrade the functionality of our
platform or give preferential treatment to competitive services could adversely affect usage of our platform. Effective mobile
functionality is integral to our long-term development and growth strategy. In the event that our merchants and their customers
have difficulty accessing and using our platform on mobile devices, our business and operating results could be adversely affected.
Our
business and prospects would be harmed if changes to technologies used in our platform or new versions or upgrades of operating
systems and internet browsers adversely impact the process by which merchants and consumers interface with our platform.
We
believe the simple and straightforward interface for our platform has helped us to expand and offer our solutions to merchants
with limited technical expertise. In the future, providers of internet browsers could introduce new features that would make it
difficult for merchants to use our platform. In addition, internet browsers for desktop or mobile devices could introduce new
features, change existing browser specifications such that they would be incompatible with our platform, or prevent consumers
from accessing our merchants’ shops. Any changes to technologies used in our platform, to existing features that we rely
on, or to operating systems or internet browsers that make it difficult for merchants to access our platform or consumers to access
our merchants’ shops, may make it more difficult for us to maintain or increase our revenues and could adversely impact
our business and prospects.
The
impact of worldwide economic conditions, including the resulting effect on spending by SMBs, may adversely affect our business,
operating results and financial condition.
A
majority of the merchants that use our platform are SMBs and many of our merchants are in the entrepreneurial stage of their development.
Our performance is subject to worldwide economic conditions and their impact on levels of spending by SMBs and their customers.
SMBs and entrepreneurs may be disproportionately affected by economic downturns. SMBs and entrepreneurs frequently have limited
budgets and may choose to allocate their spending to items other than our platform, especially in times of economic uncertainty
or recessions.
Economic
downturns may also adversely impact retail sales, which could result in merchants who use our platform going out of business or
deciding to stop using our services in order to conserve cash. Weakening economic conditions may also adversely affect third-parties
with whom we have entered into relationships and upon which we depend in order to grow our business. Uncertain and adverse economic
conditions may also lead to increased refunds and chargebacks, any of which could adversely affect our business.
We
may be subject to claims by third-parties of intellectual property infringement.
The
software industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding
patents and other intellectual property rights. Third parties have in the past asserted, and may in the future assert, that our
platform, solutions, technology, methods or practices infringe, misappropriate or otherwise violate their intellectual property
or other proprietary rights. Such claims may be made by our competitors seeking to obtain a competitive advantage or by other
parties. Additionally, in recent years, non-practicing entities have begun purchasing intellectual property assets for the purpose
of making claims of infringement and attempting to extract settlements from companies like ours. The risk of claims may increase
as the number of solutions that we offer and competitors in our market increases and overlaps occur. In addition, to the extent
that we gain greater visibility and market exposure, we face a higher risk of being the subject of intellectual property infringement
claims.
Any
such claims, regardless of merit, that result in litigation could result in substantial expenses, divert the attention of management,
cause significant delays in introducing new or enhanced services or technology, materially disrupt the conduct of our business
and have a material and adverse effect on our brand, business, financial condition and results of operations. Although we do not
believe that our proprietary technology, processes and methods have been patented by any third party, it is possible that patents
have been issued to third parties that cover all or a portion of our business. As a consequence of any patent or other intellectual
property claims, we could be required to pay substantial damages, develop non-infringing technology, enter into royalty-bearing
licensing agreements, stop selling or marketing some or all of our solutions or re-brand our solutions. We may also be obligated
to indemnify our merchants or partners or pay substantial settlement costs, including royalty payments, in connection with any
such claim or litigation and to obtain licenses, modify applications or refund fees, which could be costly. If it appears necessary,
we may seek to secure license rights to intellectual property that we are alleged to infringe at a significant cost, potentially
even if we believe such claims to be without merit. If required licenses cannot be obtained, or if existing licenses are not renewed,
litigation could result. Litigation is inherently uncertain and can cause us to expend significant money, time and attention to
it, even if we are ultimately successful. Any adverse decision could result in a loss of our proprietary rights, subject us to
significant liabilities, require us to seek licenses for alternative technologies from third-parties, prevent us from offering
all or a portion of our solutions and otherwise negatively affect our business and operating results.
We
may be unable to obtain, maintain and protect our intellectual property rights and proprietary information or prevent third-parties
from making unauthorized use of our technology.
Our
trade secrets, trademarks, trade dress, domain names, copyrights, trade secrets and other intellectual property rights are important
to our business. We rely on a combination of confidentiality clauses, assignment agreements and license agreements with employees
and third parties, trade secrets, copyrights and trademarks to protect our intellectual property and competitive advantage, all
of which offer only limited protection. The steps we take to protect our intellectual property require significant resources and
may be inadequate. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do
not detect unauthorized use of our intellectual property. We may be required to use significant resources to monitor and protect
these rights. Despite our precautions, it may be possible for unauthorized third parties to copy our platform and use information
that we regard as proprietary to create services that compete with ours. Some license provisions protecting against unauthorized
use, copying, transfer and disclosure of our proprietary information may be unenforceable under the laws of certain jurisdictions
and foreign countries. Further, we hold no issued patents and thus would not be entitled to exclude or prevent our competitors
from using our proprietary technology, methods and processes to the extent independently developed by our competitors.
We
enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality
agreements with the parties with whom we have strategic relationships and business alliances. No assurance can be given that these
agreements will be effective in controlling access to our proprietary information and trade secrets. The confidentiality agreements
on which we rely to protect certain technologies may be breached, may not be adequate to protect our confidential information,
trade secrets and proprietary technologies and may not provide an adequate remedy in the event of unauthorized use or disclosure
of our confidential information, trade secrets or proprietary technology. Further, these agreements do not prevent our competitors
or others from independently developing software that is substantially equivalent or superior to our software. In addition, others
may independently discover our trade secrets and confidential information, and in such cases, we likely would not be able to assert
any trade secret rights against such parties. Additionally, we may from time to time be subject to opposition or similar proceedings
with respect to applications for registrations of our intellectual property, including our trademarks. While we aim to acquire
adequate protection of our brand through trademark registrations in key markets, occasionally third parties may have already registered
or otherwise acquired rights to identical or similar marks for services that also address our market. We rely on our brand and
trademarks to identify our platform and to differentiate our platform and services from those of our competitors, and if we are
unable to adequately protect our trademarks third parties may use our brand names or trademarks similar to ours in a manner that
may cause confusion in the market, which could decrease the value of our brand and adversely affect our business and competitive
advantages.
Policing
unauthorized use of our intellectual property and misappropriation of our technology and trade secrets is difficult and we may
not always be aware of such unauthorized use or misappropriation. Despite our efforts to protect our intellectual property rights,
unauthorized third-parties may attempt to use, copy or otherwise obtain and market or distribute our intellectual property rights
or technology or otherwise develop services with the same or similar functionality as our platform. If our competitors infringe,
misappropriate or otherwise misuse our intellectual property rights and we are not adequately protected, or if our competitors
are able to develop a platform with the same or similar functionality as ours without infringing our intellectual property, our
competitive advantage and results of operations could be harmed. Litigation brought to protect and enforce our intellectual property
rights could be costly, time consuming and distracting to management and could result in the impairment or loss of portions of
our intellectual property. As a result, we may be aware of infringement by our competitors but may choose not to bring litigation
to enforce our intellectual property rights due to the cost, time and distraction of bringing such litigation. Furthermore, if
we do decide to bring litigation, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims
and countersuits challenging or opposing our right to use and otherwise exploit particular intellectual property, services and
technology or the enforceability of our intellectual property rights. Our inability to protect our proprietary technology against
unauthorized copying or use, as well as any costly litigation or diversion of our management’s attention and resources,
could delay further sales or the implementation of our solutions, impair the functionality of our platform, prevent or delay
introductions of new or enhanced solutions, result in our substituting inferior or more costly technologies into our platform
or injure our reputation. Furthermore, many of our current and potential competitors have the ability to dedicate substantially
greater resources to developing and protecting their technology or intellectual property rights than we do.
Our
use of “open source” software could negatively affect our ability to sell our solutions and subject us to possible
litigation.
Our
solutions incorporate and are dependent to a significant extent on the use and development of “open source” software
and we intend to continue our use and development of open source software in the future. Such open source software is generally
licensed by its authors or other third-parties under open source licenses and is typically freely accessible, usable and modifiable.
Pursuant to such open source licenses, we may be subject to certain conditions, including requirements that we offer our proprietary
software that incorporates the open source software for no cost, that we make available source code for modifications or derivative
works we create based upon, incorporating or using the open source software and that we license such modifications or derivative
works under the terms of the particular open source license. If an author or other third party that uses or distributes such open
source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required
to incur significant legal expenses defending against such allegations and could be subject to significant damages, enjoined
from the sale of our solutions that contained or are dependent upon the open source software and required to comply with the foregoing
conditions, which could disrupt the distribution and sale of some of our solutions. Litigation could be costly for us to defend,
have a negative effect on our operating results and financial condition or require us to devote additional research and development
resources to change our platform. The terms of many open source licenses to which we are subject have not been interpreted by
U.S. or foreign courts. As there is little or no legal precedent governing the interpretation of many of the terms of certain
of these licenses, the potential impact of these terms on our business is uncertain and may result in unanticipated obligations
regarding our solutions and technologies. It is our view that we do not distribute our software, since no installation of our
software is necessary and our platform is accessible solely through the “cloud.” Nevertheless, this position could
be challenged. Any requirement to disclose our proprietary source code, termination of open source license rights or payments
of damages for breach of contract could be harmful to our business, results of operations or financial condition, and could help
our competitors develop products and services that are similar to or better than ours.
In
addition to risks related to license requirements, usage of open source software can lead to greater risks than the use of third-party
commercial software, as open source licensors generally do not provide warranties, controls on the origin or development of the
software, or remedies against the licensors. Many of the risks associated with usage of open source software cannot be eliminated
and could adversely affect our business.
Although
we believe that we have complied with our obligations under the various applicable licenses for open source software, it is possible
that we may not be aware of all instances where open source software has been incorporated into our proprietary software or used
in connection with our solutions or our corresponding obligations under open source licenses. We do not have robust open source
software usage policies or monitoring procedures in place. We rely on multiple software programmers to design our proprietary
software and we cannot be certain that our programmers have not incorporated open source software into our proprietary software
that we intend to maintain as confidential or that they will not do so in the future. To the extent that we are required to disclose
the source code of certain of our proprietary software developments to third-parties, including our competitors, in order to comply
with applicable open source license terms, such disclosure could harm our intellectual property position, competitive advantage,
results of operations and financial condition. In addition, to the extent that we have failed to comply with our obligations under
particular licenses for open source software, we may lose the right to continue to use and exploit such open source software in
connection with our operations and solutions, which could disrupt and adversely affect our business.
We
rely on search engines and social networking sites to attract a meaningful portion of our merchants. If we are not able to generate
traffic to our website through search engines and social networking sites, our ability to attract new merchants may be impaired.
In addition, if our merchants are not able to generate traffic to their shops through search engines and social networking sites,
their ability to attract consumers may be impaired.
Many
of our merchants locate our website through internet search engines, such as Google, and advertisements on social networking sites,
such as Facebook. The prominence of our website in response to internet searches is a critical factor in attracting potential
merchants to our platform. If we are listed less prominently or fail to appear in search results for any reason, visits to our
website could decline significantly, and we may not be able to replace this traffic.
Similarly,
many consumers locate our merchants’ shops through internet search engines and advertisements on social networking sites.
If our merchants’ shops are listed less prominently or fail to appear in search results for any reason, visits to our merchants’
shops could decline significantly. As a result, our merchants’ businesses may suffer, which would affect the ability of
such merchants to pay for our solutions.
Search
engines revise their algorithms from time to time in an attempt to optimize their search results. If search engines modify their
algorithms, our website and our merchants’ shops may appear less prominently or not at all in search results, which could
result in reduced traffic to our website and to our merchants’ shops.
Additionally,
if the price of marketing our solutions over search engines or social networking sites increases, we may incur additional marketing
expenses or may be required to allocate a larger portion of our marketing spend to search engine marketing and our business and
operating results could be adversely affected. Furthermore, competitors may in the future bid on the search terms that we use
to drive traffic to our website. Such actions could increase our marketing costs and result in decreased traffic to our website.
In addition, search engines or social networking sites may change their advertising policies from time to time. If any change
to these policies delays or prevents us from advertising through these channels, it could result in reduced traffic to our website
and sales of our solutions. As well, new search engines or social networking sites may develop, particularly in specific jurisdictions
that reduce traffic on existing search engines and social networking sites. And if we are not able to achieve awareness through
advertising or otherwise, we may not achieve significant traffic to our website through these new platforms. If we are unable
to continue to successfully promote and maintain our websites, or if we incur excessive expenses to do so, our business and operating
results could be adversely affected.
Activities
of merchants or the content of their shops could damage our brand, subject us to liability and harm our business and financial
results.
Our
terms of service prohibit our merchants from using our platform to engage in illegal activities and our terms of service permit
us to take down a merchant’s shop if we become aware of such illegal use. Merchants may nonetheless engage in prohibited
or illegal activities or upload store content in violation of applicable laws, which could subject us to liability. Furthermore,
our brand may be negatively impacted by the actions of merchants that are deemed to be hostile, offensive, inappropriate or illegal.
We do not proactively monitor or review the appropriateness of the content of our merchants’ shops and we do not have control
over merchant activities. The safeguards we have in place may not be sufficient for us to avoid liability or avoid harm to our
brand, especially if such hostile, offensive, inappropriate or illegal use is high profile, which could adversely affect our business
and financial results.
If
third-party apps and themes change such that we do not or cannot maintain the compatibility of our platform with these apps and
themes, or if we fail to provide third-party apps and themes that our merchants desire to add to their shops, demand for our platform
could decline.
The
success of our platform depends, in part, on our ability to integrate third-party apps, themes and other offerings into our third-party
ecosystem. Third-party developers may change the features of their offerings or alter the terms governing the use of their offerings
in a manner that is adverse to us. If we are unable to maintain technical interoperation, our merchants may not be able to effectively
integrate our platform with other systems and services they use. We may also be unable to maintain our relationships with certain
third-party vendors if we are unable to integrate our platform with their offerings. Further, third-party developers may refuse
to partner with us or limit or restrict our access to their offerings. Such changes could functionally limit or terminate our
ability to use these third-party offerings with our platform, which could negatively impact our solution offerings and harm our
business. If we fail to integrate our platform with new third-party offerings that our merchants need for their shops, or to adapt
to the data transfer requirements of such third-party offerings, we may not be able to offer the functionality that our merchants
and their customers expect, which would negatively impact our offerings and, as a result, harm our business.
We
rely on computer hardware, purchased or leased, and software licensed from and services rendered by third parties in order to
provide our solutions and run our business, sometimes by a single-source supplier.
We
rely on computer hardware, purchased or leased, and software licensed from and services rendered by third-parties in order to
provide our solutions and run our business, sometimes by a single-source supplier. Third-party hardware, software and services
may not continue to be available on commercially reasonable terms, or at all. Any loss of the right to use or any failures of
third-party hardware, software or services could result in delays in our ability to provide our solutions or run our business
until equivalent hardware, software or services are developed by us or, if available, identified, obtained and integrated, which
could be costly and time-consuming and may not result in an equivalent solution, any of which could cause an adverse effect on
our business and operating results. Further, merchants could assert claims against us in connection with such service disruption
or cease conducting business with us altogether. Even if not successful, a claim brought against us by any of our merchants would
likely be time-consuming and costly to defend and could seriously damage our reputation and brand, making it harder for us to
sell our solutions.
We
may not be able to compete successfully against current and future competitors.
We
face competition in various aspects of our business and we expect such competition to intensify in the future, as existing and
new competitors introduce new services or enhance existing services. We have competitors with longer operating histories, larger
customer bases, greater brand recognition, greater experience and more extensive commercial relationships in certain jurisdictions,
and greater financial, technical, marketing and other resources than we do. As a result, our potential competitors may be able
to develop products and services better received by merchants or may be able to respond more quickly and effectively than we can
to new or changing opportunities, technologies, regulations or merchant requirements. In addition, some of our larger competitors
may be able to leverage a larger installed customer base and distribution network to adopt more aggressive pricing policies and
offer more attractive sales terms, which could cause us to lose potential sales or to sell our solutions at lower prices.
Competition
may intensify as our competitors enter into business combinations or alliances or raise additional capital, or as established
companies in other market segments or geographic markets expand into our market segments or geographic markets. For instance,
certain competitors could use strong or dominant positions in one or more markets to gain a competitive advantage against us in
areas where we operate including: by integrating competing platforms or features into products they control such as search engines,
web browsers, mobile device operating systems or social networks; by making acquisitions; or by making access to our platform
more difficult. Further, current and future competitors could choose to offer a different pricing model or to undercut prices
in an effort to increase their market share. We also expect new entrants to offer competitive services. If we cannot compete successfully
against current and future competitors, our business, results of operations and financial condition could be negatively impacted.
We
plan to make future acquisitions and investments, which could divert management’s attention, result in operating difficulties
and dilution to our stockholders and otherwise disrupt our operations and adversely affect our business, operating results or
financial position.
From
time to time, we evaluate potential strategic acquisition or investment opportunities. Any transactions that we enter into could
be material to our financial condition and results of operations. The process of acquiring and integrating another company or
technology could create unforeseen operating difficulties and expenditures. Acquisitions and investments involve a number of risks,
such as:
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diversion
of management time and focus from operating our business;
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use
of resources that are needed in other areas of our business;
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in
the case of an acquisition, implementation or remediation of controls, procedures and policies of the acquired company;
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in
the case of an acquisition, difficulty integrating the accounting systems and operations of the acquired company, including
potential risks to our corporate culture;
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in
the case of an acquisition, coordination of product, engineering and selling and marketing functions, including difficulties
and additional expenses associated with supporting legacy services and products and hosting infrastructure of the acquired
company and difficulty converting the customers of the acquired company onto our platform and contract terms, including disparities
in the revenues, licensing, support or professional services model of the acquired company;
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in
the case of an acquisition, retention and integration of employees from the acquired company;
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unforeseen
costs or liabilities;
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adverse
effects to our existing business relationships with partners and merchants as a result of the acquisition or investment;
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the
possibility of adverse tax consequences;
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litigation
or other claims arising in connection with the acquired company or investment; and
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In
addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and other
intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected
returns, we may be required to take charges to our operating results based on this impairment assessment process, which could
adversely affect our results of operations.
Acquisitions
and investments may also result in dilutive issuances of equity securities, which could adversely affect our share price, or result
in the incurrence of debt with restrictive covenants that limit our future uses of capital in pursuit of business opportunities.
We
may not be able to identify acquisition or investment opportunities that meet our strategic objectives, or to the extent such
opportunities are identified, we may not be able to negotiate terms with respect to the acquisition or investment that are acceptable
to us. At this time we have made no commitments or agreements with respect to any such transaction.
New
tax laws could be enacted or existing laws could be applied to us or our merchants, which could increase the costs of our solutions
and adversely impact our business.
The
application of federal, state, provincial, local and foreign tax laws to solutions provided over the internet is evolving. New
income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, possibly with retroactive
effect, and could be applied solely or disproportionately to solutions provided over the internet. These enactments could adversely
affect our sales activity due to the inherent cost increase the taxes would represent, and could ultimately result in a negative
impact on our results of operations and cash flows.
State
tax authorities may seek to assess state and local business taxes and sales and use taxes. If we are required to collect sales
and use taxes in additional jurisdictions, we might be subject to tax liability for past sales.
There
is a risk that U.S. states could assert that we are liable for U.S. state and local business activity taxes, which are levied
upon income or gross receipts, or for the collection of U.S. local sales and use taxes. This risk exists regardless of whether
we are subject to U.S. federal income tax. States are becoming increasingly active in asserting nexus for business activity tax
purposes and imposing sales and use taxes on products and services provided over the internet. We may be subject to U.S. state
and local business activity taxes if a state tax authority asserts that our activities or the activities of our non-U.S. subsidiaries
are sufficient to establish nexus. We could also be liable for the collection of U.S. state and local sales and use taxes if a
state tax authority asserts that distribution of our solutions over the internet is subject to sales and use taxes. Each state
has different rules and regulations governing sales and use taxes, and these rules and regulations are subject to varying interpretations
that change over time. We review these rules and regulations periodically and, when we believe we are subject to sales and use
taxes in a particular state, voluntarily engage state tax authorities in order to determine how to comply with their rules and
regulations. If a state tax authority asserts that distribution of our solutions is subject to such sales and use taxes, the additional
cost may decrease the likelihood that such merchants would purchase our solutions or continue to renew their subscriptions.
A
successful assertion by one or more states requiring us to collect sales or other taxes on subscription service revenue could
result in substantial tax liabilities for past transactions and otherwise harm our business. We cannot assure you that we will
not be subject to sales and use taxes or related penalties for past sales in states where we currently believe no such taxes are
required. New obligations to collect or pay taxes of any kind could increase our cost of doing business.
We
are dependent upon consumers’ and merchants’ willingness to use the internet for commerce.
Our
success depends upon the general public’s continued willingness to use the internet as a means to pay for purchases, communicate,
access social media, research and conduct commercial transactions, including through mobile devices. If consumers or merchants
become unwilling or less willing to use the internet for commerce for any reason, including lack of access to high-speed communications
equipment, congestion of traffic on the internet, internet outages or delays, disruptions or other damage to merchants’
and consumers’ computers, increases in the cost of accessing the internet and security and privacy risks or the perception
of such risks, our business could be adversely affected.
We
may face challenges in expanding into new geographic regions.
Our
future success will depend in part upon our ability to expand into new geographic regions, and we will face risks entering markets
in which we have limited or no experience and in which we do not have any brand recognition. Expanding into new geographic regions
where the main language is not English will require substantial expenditures and take considerable time and attention, and we
may not be successful enough in these new markets to recoup our investments in a timely manner, or at all. Our efforts to expand
into new geographic regions may not be successful, which could limit our ability to grow our business.
Risks
Related to Laws and Regulations
Failure
to comply with the U.S. Foreign Corrupt Practices Act, or the FCPA, anti-money laundering, economic and trade sanctions regulations,
and similar laws could subject us to penalties and other adverse consequences.
We
currently operate our business in the U.S. and Canada. We are subject to anti-corruption laws and regulations, including the FCPA,
and other laws that prohibit the making or offering of improper payments to foreign government officials and political figures,
including anti-bribery provisions enforced by the Department of Justice and accounting provisions enforced by the SEC. These laws
prohibit improper payments or offers of payments to foreign governments and their officials and political parties by the U.S.
and other business entities for the purpose of obtaining or retaining business. We have implemented policies, procedures, systems,
and controls designed to identify and address potentially impermissible transactions under such laws and regulations; however,
there can be no assurance that all of our employees, consultants and agents, including those that may be based in or from countries
where practices that violate U.S. or other laws may be customary, will not take actions in violation of our policies, for which
we may be ultimately responsible.
In
addition, we are subject to anti-money laundering laws and regulations, including the Bank Secrecy Act, as amended by the USA
PATRIOT Act of 2001, or the BSA. Among other things, the BSA requires money services businesses (such as money transmitters and
providers of prepaid access) to develop and implement risk-based anti-money laundering programs, report large cash transactions
and suspicious activity, and maintain transaction records.
We
are also subject to certain economic and trade sanctions programs that are administered by the Department of Treasury’s
Office of Foreign Assets Control, or OFAC, which prohibit or restrict transactions to or from or dealings with specified countries,
their governments, and in certain circumstances, their nationals, and with individuals and entities that are specially-designated
nationals of those countries, narcotics traffickers, and terrorists or terrorist organizations. Other group entities may be subject
to additional foreign or local sanctions requirements in other relevant jurisdictions.
Similar
anti-money laundering and counter terrorist financing and proceeds of crime laws apply to movements of currency and payments through
electronic transactions and to dealings with persons specified in lists maintained by the country equivalents to OFAC lists in
several other countries and require specific data retention obligations to be observed by intermediaries in the payment process.
Our businesses in those jurisdictions are subject to those data retention obligations.
Failure
to comply with any of these laws and regulations or changes in this regulatory environment, including changing interpretations
and the implementation of new or varying regulatory requirements by the government, may result in significant financial penalties,
reputational harm or change the manner in which we currently conduct some aspects of our business, which could adversely affect
our business, financial condition or results of operations.
Failure
to enforce and defend our intellectual property rights may diminish our competitive advantages or interfere with our ability to
market and promote our products and services.
Our
trademarks, trade names, trade secrets, know-how, proprietary technology and other intellectual property are important to our
future success. We have a pending trademark application for “CrowdPay.us Crowdfunding & Compliance Platform”.
We believe our trademarks and trade names are widely recognized and associated with quality and reliable service. While it is
our policy to protect and defend vigorously our rights to our intellectual property, we cannot predict whether steps taken by
us to protect our intellectual property will be adequate to prevent infringement, misappropriation or other violation of our rights.
We also cannot guarantee that others will not independently develop technology with the same or similar functions to any proprietary
technology we rely on to conduct our business and differentiate ourselves from our competitors. Furthermore, we may face claims
of infringement of third-party intellectual property that could interfere with our ability to market and promote our brands. Any
litigation to enforce our intellectual property rights or defend ourselves against claims of infringement of third-party intellectual
property rights could be costly, divert attention of management and may not ultimately be resolved in our favor. Moreover, if
we are unable to successfully defend against claims that we have infringed the intellectual property rights of others, we may
be prevented from using certain intellectual property and may be liable for damages, which in turn could materially adversely
affect our business, financial condition or results of operations. In addition, the laws of certain non-U.S. countries where we
do business or may do business in the future may not recognize intellectual property rights or protect them to the same extent
as do the laws of the United States.
New
or revised tax regulations or their interpretations, or becoming subject to additional foreign or U.S. federal, state or local
taxes that cannot be passed through to our merchants or partners, could reduce our net income.
We
are subject to tax laws in each jurisdiction where we do business. Changes in tax laws or their interpretations could decrease
the amount of revenues we receive, the value of any tax loss carry-forwards and tax credits recorded on our balance sheet and
the amount of our cash flow, and adversely affect our business, financial condition or results of operations.
Recently
enacted U.S. tax legislation has significantly changed the U.S. federal income taxation of U.S. corporations, including by reducing
the U.S. corporate income tax rate, limiting interest deductions, permitting immediate expensing of certain capital expenditures,
adopting elements of a territorial tax system, imposing a one-time transition tax, or repatriation tax, on all undistributed earnings
and profits of certain U.S.-owned foreign corporations, revising the rules governing net operating losses and the rules governing
foreign tax credits, and introducing new anti-base erosion provisions. Many of these changes are effective immediately, without
any transition periods or grandfathering for existing transactions. The legislation is unclear in many respects and could be subject
to potential amendments and technical corrections, as well as interpretations and implementing regulations by the Internal Revenue
Service, or the IRS, any of which could lessen or increase certain adverse impacts of the legislation. In addition, it is unclear
how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting
point for computing state and local tax liabilities.
While
some of the changes made by the tax legislation may adversely affect us in one or more reporting periods and prospectively, other
changes may be beneficial on a going forward basis. We continue to work with our tax advisors to determine the full impact that
the recent tax legislation as a whole will have on us.
Additionally,
companies in the electronic payments industry, including us, may become subject to incremental taxation in various tax jurisdictions.
Taxing jurisdictions have not yet adopted uniform positions on this topic. If we are required to pay additional taxes and are
unable to pass the tax expense through to our merchants, our costs would increase and our net income would be reduced.
Failure
to comply with, or changes in, laws, regulations and enforcement activities may adversely affect the products, services and markets
in which we operate.
We
and our merchants are subject to laws and regulations that affect the electronic payments industry in the many countries in which
our services are used. In particular, our merchants are subject to numerous laws and regulations applicable to banks, financial
institutions, and card issuers in the United States and abroad, and, consequently, we are at times affected by these foreign,
federal, state, and local laws and regulations. The U.S. government has increased its scrutiny of a number of credit card practices,
from which some of our merchants derive significant revenue. Regulation of the payments industry, including regulations applicable
to us and our merchants, has increased significantly in recent years. Failure to comply with laws and regulations applicable to
our business may result in the suspension or revocation of licenses or registrations, the limitation, suspension or termination
of services or the imposition of consent orders or civil and criminal penalties, including fines which could adversely affect
our business, financial condition or results of operations.
We
are also subject to U.S. and international financial services regulations, a myriad of consumer protection laws, including economic
sanctions, laws and regulations, anticorruption laws, escheat regulations and privacy and information security regulations. Changes
to legal rules and regulations, or interpretation or enforcement of them, could have a negative financial effect on us. Any lack
of legal certainty exposes our operations to increased risks, including increased difficulty in enforcing our agreements in those
jurisdictions and increased risks of adverse actions by local government authorities, such as expropriations. In addition, certain
of our alliance partners are subject to regulation by federal and state authority and, as a result, could pass through some of
those compliance obligations to us, which could adversely affect our business, financial condition or results of operations.
In
particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), recently
significantly changed the U.S. financial regulatory system. Among other things, Title X of the Dodd-Frank Act established a new,
independent regulatory agency known as the Consumer Financial Protection Bureau, or CFPB, to regulate consumer financial products
and services (including some offered by our merchants). The CFPB rules, examinations and enforcement actions may require us to
adjust our activities and may increase our compliance costs.
Separately,
under the Dodd-Frank Act, debit interchange transaction fees that a card issuer receives and are established by a payment card
network for an electronic debit transaction are now regulated by the Board of Governors of the Federal Reserve System, or the
Federal Reserve, and must be “reasonable and proportional” to the cost incurred by the card issuer in authorizing,
clearing, and settling the transaction. Effective October 1, 2011, the Federal Reserve capped debit interchange rates for
card issuers operating in the United States with assets of $10 billion or more at the sum of $0.21 per transaction and an
ad valorem
component of 5 basis points to reflect a portion of the card issuer’s fraud losses plus, for qualifying
card issuers, an additional $0.01 per transaction in debit interchange for fraud prevention costs. Regulations such as these could
result in the need for us to make capital investments to modify our services to facilitate our existing merchants’ and potential
merchants’ compliance and reduce the fees we are able to charge our merchants. These regulations also could result in greater
pricing transparency and increased price-based competition leading to lower margins and higher rates of merchant attrition. Furthermore,
the requirements of the regulations and the timing of their effective dates could result in changes in our merchants’ business
practices, which could change the demand for our services and alter the type or volume of transactions that we process on behalf
of our merchants.
Risks
Related to Our Capital Stock
We
could issue additional common stock, which might dilute the book value of our capital stock.
The
Company may issue all or a part of its authorized but unissued shares of common stock. Any such stock issuance could be made at
a price that reflects a discount or a premium to the then-current trading price of our common stock. In addition, in order to
raise future capital, we may need to issue securities that are convertible into or exchangeable for a significant amount of our
common stock. These issuances, if any, would dilute your percentage ownership interest in the Company, thereby having the effect
of reducing your influence on matters on which stockholders vote. You may incur additional dilution if holders of stock options,
whether currently outstanding or subsequently granted, exercise their options, or if warrant holders exercise their warrants to
purchase shares of our common stock. As a result, any such issuances or exercises would dilute your interest in the Company and
the per share book value of the common stock that you owned, either of which could negatively affect the trading price of our
common stock and the value of your investment.
As
a “thinly-traded” stock, large sales can place downward pressure on our stock price.
Our
stock experiences periods when it could be considered “thinly traded”. Financing transactions resulting in a large
number of newly issued shares that become readily tradable, or other events that cause current stockholders to sell shares, could
place further downward pressure on the trading price of our stock. In addition, the lack of a robust resale market may require
a stockholder who desires to sell a large number of shares to sell the shares in increments over time to mitigate any adverse
impact of the sales on the market price of our stock.
Shares
eligible for future sale may adversely affect the market for our common stock.
As
of September 1, 2018 there are 1,200,000 warrants to purchase shares of our common stock outstanding. The warrants are exercisable
at an exercise price of $0.25 per share. If and when these securities are exercised into shares of our common stock, the number
of our shares of common stock outstanding will increase. Such increase in our outstanding shares, and any sales of such shares,
could have a material adverse effect on the market for our common stock and the market price of our common stock.
In
addition, from time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by
means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act, subject
to certain limitations. In general, pursuant to Rule 144, after satisfying a six month holding period: (i) affiliated stockholders
(or stockholders whose shares are aggregated) may, under certain circumstances, sell within any three month period a number of
securities which does not exceed the greater of 1% of the then outstanding shares of common stock or the average weekly trading
volume of the class during the four calendar weeks prior to such sale and (ii) non-affiliated stockholders may sell without such
limitations, provided that we are current in our public reporting obligations. Rule 144 also permits the sale of securities by
non-affiliates that have satisfied a one year holding period without any limitation or restriction. Any substantial sale of our
common stock pursuant to Rule 144 or pursuant to any resale prospectus may have a material adverse effect on the market price
of our securities.
Because
certain principal stockholders own a large percentage of our voting stock, other stockholders’ voting power may be limited.
As
of September 1, 2018 two large stockholders, Ronny Yakov and John Herzog, owned or controlled approximately 98.0% of our outstanding
common stock. If those stockholders act together, they will have the ability to have a substantial influence on matters submitted
to our stockholders for approval, including the election and removal of directors and the approval of any merger, consolidation
or sale of all or substantially all of our assets. As a result, our other stockholders may have little or no influence over matters
submitted for stockholder approval. In addition, the ownership of such stockholders could preclude any unsolicited acquisition
of us, and consequently, adversely affect the price of our common stock. These stockholders may make decisions that are adverse
to your interests.
We
are subject to penny stock regulations and restrictions and you 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 rule.” 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 SEC
generally defines a penny stock to be any equity security that has a market price less than $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 persons with assets in excess of $1,000,000 (excluding the value
of such person’s primary residence) or annual income exceeding $200,000 or $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, prepared by the SEC, 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 the
Company’s 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 Rule. In any event, even if
our common stock was exempt from the Penny Stock Rule, 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.