Item
1. Business.
Forward-Looking
Statements
Unless
the context indicates otherwise, as used in this prospectus, the terms “OLB,” “we,” “us,”
“our,” “our company” and “our business” refer, to The OLB Group, Inc., including its subsidiaries
named herein. Certain statements, other than purely historical information, including estimates, projections, statements relating
to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based,
are “forward-looking statements.” These forward-looking statements generally are identified by the words “believes,”
“project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,”
“plan,” “may,” “will,” “would,” “will be,” “will continue,”
“will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions
that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements.
Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could
have a material adverse effect on our operations and future prospects include, but are not limited to: changes in economic conditions,
legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles.
These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not
be placed on such statements.
On
November 12, 2019, the Company effected a one-for-thirty reverse stock split of its common stock (the “Reverse Split”).
All shares, options and warrants throughout this Annual Report on Form 10-K have been retroactively restated to reflect the Reverse
Split.
Overview
We
are a FinTech company and payment facilitator (“PayFac”) that focuses on a suite of products in the merchant services
and payment facilitator verticals and seeks to provide integrated business solutions to merchants throughout the United States.
We seek to provide merchants with a wide range of products and services through our various online platforms, including financial
and transaction processing services. We also have products that provide support for crowdfunding and other capital raising initiatives.
We supplement our online platforms with certain hardware solutions that are integrated with our online platforms. In 2018, we
were ranked 62nd among merchant acquirers in the United States ranked by Visa/MasterCard volume. Our business functions primarily
through three wholly-owned subsidiaries, eVance, Inc., a Delaware corporation (“eVance”), OmniSoft.io, Inc., a Delaware
corporation (“OmniSoft”), and CrowdPay.Us, Inc., a New York corporation (“CrowdPay”).
In
April 2018, we completed an acquisition of substantially all of the assets of Excel Corporation (“Excel”) and its
subsidiaries Payprotec Oregon, LLC, Excel Business Solutions, Inc. and eVance Processing, Inc. (such assets are the foundation
of our eVance business) (the “Asset Acquisition”). In connection with the Asset Acquisition, in May 2018, we entered
into share exchange agreements with CrowdPay and OmniSoft, affiliate companies owned by Mr. Yakov and John Herzog, an affiliate
of our company, pursuant to which each of CrowdPay and OmniSoft became wholly owned subsidiaries of our company (the “Share
Exchange”).
OmniSoft
operates a cloud-based business management platform that provides turnkey solutions for merchants to enable them to build and
manage their retail businesses, whether online or at a “brick and mortar” location. The OmniSoft platform, which can
be accessed by merchants through any mobile and computing device, allows merchants to, among other features, manage and track
inventory, track sales and process customer transactions and can provide interactive data analysis concerning sales of products
and need for additional inventory. Merchants generally utilize the platform by uploading to the platform information about their
inventory (description of units, number of units, price per unit, and related information). Once such information has been uploaded,
merchants, either with their own device or with hardware that we sell directly to them, are able to utilize the platform to monitor
inventory and process and track sales of their products (including coordinating shipping of their products with third party logistics
companies). We manage and maintain the OmniSoft platform through a variety of domain names or a merchant can integrate our platform
with their own domain name. Using the OmniSoft platform, merchants can “check-out” their customers at their “brick
and mortar” stores or can sell products to customers online, in both cases accepting payment via a simple credit card or
debit card transaction (either swiping the credit card or entering the credit card number), a cash payment, or by use of a QR
code or loyalty and reward points, and then print or email receipts to the customer. For more information regarding our OmniSoft
platform, see “Business — Description of our OmniSoft Business.”
eVance
provides competitive payment processing solutions to merchants which enable merchants to process credit and debit card-based internet
payments for sales of their products at competitive prices (whether such sales occur online or at a “brick and mortar”
location). eVance is an independent sales organization (an “ISO”) that signs up new merchants on behalf of acquiring
banks and processors that provides financial and transaction processing solutions to merchants throughout the United States. eVance
differentiates itself from other ISOs by focusing on both obtaining and maintaining new merchant contracts for its own account
(including, but not limited to, merchants that utilize the OmniSoft platform) and also obtaining and maintaining merchant contracts
obtained by third-party ISOs (for which we negotiate a shared fee arrangement) and utilizing our own software and technology to
provide merchants and other ISOs differentiating products and software. In particular, we (i) own our own payments gateway, (ii)
have proprietary omni-commerce software platform, (iii) have in-house underwriting and customer service, (iv) have in-house sub-ISO
management system which offers sub-ISOs and agents tools for online boarding, account management, residual reports among other
tools, (v) utilize a Payment Facilitator model and (vi) offer a suite of products in the financial markets (through CrowdPay).
Leveraging our relationship with three of the top five merchant processors in the United States (representing a majority of the
merchant processing market) and with the use of our proprietary software, our payment gateway (which we call “SecurePay”)
enables merchants to reduce the cost of transacting with their customers by removing the need for a third-party payment gateway
solution. eVance operates as both a wholesale ISO and a retail ISO depending on the risk profile of the merchant and the applicable
merchant processor and acquiring bank. As a wholesale ISO, eVance underwrites the processing transactions for merchants, establishing
a direct relationship with the merchant and generating individual merchant processing contracts in exchange for future residual
payments. As a retail ISO, eVance primarily gathers the documents and information that our partners (acquiring banks and acquiring
processors) need to underwrite merchants’ transactions and as a result receives only residual income as commission for merchants
it places with our partners. For more information regarding the electronic payment industry, see “Business — Description
of our eVance Business — Our Industry.”
Substantially
all of our revenue has been generated from our eVance business (see our financial statements and related notes included in this
report and Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information),
but began generating revenue from our OmniSoft and CrowdPay business during the second half of 2019. We expect to build out our
OmniSoft software business and to rely more on our PayFac model to transition away from our reliance on our eVance business but
there is no guarantee that we will be able to do so. See the section entitled “Risk Factors” in this report.
SecurePay
is a payment gateway and virtual terminal with proprietary business management tools that is in compliance with the Payment Card
Industry (PCI).
SecurePay
has been certified by Visa and MasterCard (certified Level II and Level III) and finalized implementation of “3D Secure”
in 2019 (a feature that is unique to what we offer in order to provide for more secure environment for ecommerce and mobile payments
in-store and online).
CrowdPay.us™
operates a white label capital raising platform that targets small and midsized businesses seeking to raise capital and registered
broker-dealers seeking to host capital raising campaigns for such businesses by integrating the platform onto such company’s
or broker-dealer’s website. Our CrowdPay platform is tailored for companies seeking to raise money through a crowdfunding
offering of between $1 million and $50 million pursuant to Regulation CF under Title III of the Jumpstart Our Business Startups
(the “JOBS Act”), offerings pursuant to Rule 506(b) and Rule 506(c) under Regulation D of the Securities Act of 1933,
as amended (the “Securities Act”), and offerings pursuant to Regulation A+ of the Securities Act. Our platform, which
can be used for multiple offerings at once, provides companies and broker-dealers with an easy-to-use, turnkey solution to support
company offerings, allowing companies and broker-dealers to easily present online to potential investors relevant marketing and
offering materials and by aiding in the accreditation and background check processes to ensure investors meets the applicable
requirements under the rules and regulations of the Securities Exchange Commission (the “SEC”). CrowdPay charges a
fee to each company and broker-dealer for the use of its platform under a fee structure that is agreed to between CrowdPay and
the Company and/or broker-dealer prior to the initiation of the offering. CrowdPay also generates revenues by providing ancillary
services to the companies and broker-dealers utilizing our platform, including running background checks and providing anti-money
laundering and know-your-customer compliance. CrowdPay is not a registered funding portal or a registered broker-dealer.
Payment
Facilitator Generally
A
payment facilitator (“PayFac”) is a company that is sponsored by a bank or other financial institution and creates
a sub-merchant account in order to provide payment processing services to merchant clients. As a payment facilitator, we are able
to offer merchant services on a sub-merchant platform which allows us to on-board sub-merchants under our unique merchant ID account
(an “MID”). Said differently, PayFacs operate in the same way as an independent sales organization that signs up new
merchants on behalf of acquiring banks and processors in terms of payment process but the on-boarding and accounting for merchants
are different. With an ISO, merchants are identified with individual MID and the settlement to the merchant is handled by the
settlement/acquiring bank. A PayFac has its own MID with a settlement bank and each of the merchants on-boarded by the PayFac
are given sub-MID’s under the PayFac’s MID. This allows the PayFac to board a merchant very quickly and also enables
the PayFac to accept responsible for settling the payment of funds to the merchant which increases the PayFac’s fees. We
operate under a TSYS/ProPay (the processor in the ecosystem) and the sponsoring bank that approved us was Wells Fargo.
Description
of our OmniSoft Business
General
OmniSoft
operates a cloud-based business management platform that provides turnkey solutions for merchants to enable them to build and
manage their retail businesses, whether online or at a “brick and mortar” location. The OmniSoft platform, which can
be accessed by merchants through any mobile and computing device, allows merchants to, among other features, manage and track
inventory, track sales and process customer transactions and can provide interactive data analysis concerning sales of products
and need for additional inventory. Merchants generally utilize the platform by uploading to the platform information about their
inventory (description of units, number of units, price per unit, and related information). Once such information has been uploaded,
merchants, either with their own device or with hardware that we sell directly to them, are able to utilize the platform to monitor
inventory and process and track sales of their products (including coordinating shipping of their products with third party logistics
companies). We manage and maintain the OmniSoft platform through a variety of domain names or a merchant can integrate our platform
with their own domain name. Using the OmniSoft platform, merchants can “check-out” their customers at their “brick
and mortar” stores or can sell products to customers online, in both cases accepting payment via a simple credit card or
debit card transaction (either swiping the credit card or entering the credit card number), a cash payment, or by use of a QR
code or loyalty and reward points, and then print or email receipts to the customer. OmniSoft has recognized an immaterial amount
of the Company’s revenue, if any, historically (including during the periods presented in the financial statements included
herein).
Our
Operations
OmniSoft
is a SaaS business that offers OMNI Commerce Solutions as a white label service. OmniSoft provides customized solutions to ISOs
and banks or financial institutions that process credit or debit card payments on behalf of a merchant that operate in the payments
processing market and have the need for e-commerce and mobile commerce. We provide software that enable companies to offer similar
services as competitors such as PayPal, Intuit QuickBooks, Square, Google, Apple Pay and Amazon. Our cloud-based software has
comparable features to Shopify under ShopFast. We also provide white labeled services for large ISOs. Our solutions are cloud-based
so there is no need to install any software, backup or update applications by our clients, including large Merchant Acquiring
Banks. The OmniSoft software works on web-based computers & tablets, Apple IOS, Android, and Windows. Our target clients are
merchant acquiring banks, and ISOs (wholesale price) Direct to retailers. Our business model provides a sign-up integration fee,
custom features development fees, and ongoing monthly fees, per merchant per month. The pricing for a single merchant includes
an initial setup fee of $49 and approximately $100-$200 per month for use of the software as SaaS fees. Hardware costs range from
$300 to $1,000. Large white label projects have a one-time fee of $50,000.
OmniSoft
allows mobile shopping and self-checkout with credit or debit cards, reward points and Apple Pay. OmniSoft features include: a
product catalog, marketing and promotions, shipping features, payment gateways to Point-of-Sale (POS) terminals, customer service,
secure HTTPS & SSL and Payment Card Industry (PCI) Compliance.
Our
service features include: maintenance, hosting, monitoring, updates, custom solutions, software support, and service level agreement.
Retailers and merchants have access to website development tools, marketing functions and curation capabilities, mobile commerce
and social media engagement. Key back-office management functions, including statistical analysis reports and inventory management,
are available through OmniSoft’s advanced API and pre-built integrations with leading accounting applications.
ShopFast
We
utilize OmniSoft software to be able to provide companies with branded web sites. We partner with clients such as traditional
marketing companies which include cataloguers, retailers, wholesalers and manufacturers, seeking to develop their Internet sales
through their own websites which we help develop, operate, host and market on the ShopFast platform.
Many
of our clients need to establish an Internet presence in order to effectively compete in the e-commerce marketplace, but do not
either have the resources or the expertise to effectively operate and market an e-commerce retail website. By working with the
Company, we expect that these companies will be able to establish, maintain and market up-to-date, customized, commerce-enabled
websites, while avoiding high set up costs and fees such as software maintenance and upgrades.
Our
ShopFast solution is equipped with, what we believe is, the most advanced Internet commerce technology available to help our clients
provide superior service to their customers. We provide such clients with a 24/7 global marketplace for the sale of their products,
while at the same time allowing for instant price changes, evaluation of marketing campaigns, measurement of consumer product
acceptance, and handling of customer service. Each ShopFast website is custom tailored to meet the needs of our clients. We have
cultivated relationships with our clients to be able to provide the market with turnkey online private label stores. In addition,
we provide product content from our clients to our Direct Shopping Database (DSD) of partners, which is a multi-inventory shopping
services that matches suppliers with customer traffic. While our clients are responsible for driving traffic to their own website
through their own marketing efforts, the ShopFast DSD creates an additional sales channel for the client at no additional cost.
Through
ShopFast, consumers can purchase products and services from websites of clients across variety of business sectors including:
Cafes & Delis, Retail Stores, Salons & SPAS, Restaurants, Street Vendors, and Car & Limousine.
Hardware
Products
To
help expand the market for our suite of OmniSoft business solutions, we also purchase hardware products from wholesalers, which
after installation of our OmniSoft proprietary software, we resell through our ShopFast website. Hardware products we sell are
merchant focused including credit card swipers, barcode scanners, cash drawers and printers. Other popular products include Apple
iPads, and payment processing hardware such as the Poynt smart terminal that facilitates payments and customer receipts for merchants
and customers.
Competition
We
compete against companies such as Shopify, Square, ShopKeep and Revel.
Description
of our eVance Business
General
eVance
is an independent sales organization that signs up new merchants on behalf of acquiring banks and processors that provides financial
and transaction processing solutions to merchants throughout the United States. eVance differentiates itself from other ISOs by
focusing on both obtaining and maintaining new merchant contracts for its own account (including, but not limited to, merchants
that utilize the OmniSoft platform) and also obtaining and maintaining merchant contracts obtained by third-party ISOs (for which
we negotiate a shared fee arrangement) and utilizing our own software and technology to provide merchants and other ISO’s
differentiating products and software. In particular, we (i) own our own payments gateway, (ii) have proprietary omni-commerce
software platform, (iii) have in-house underwriting and customer service, (iv) have in-house sub-ISO management system which offers
sub-ISO’s and agents tools for online boarding, account management, residual reports among other tools, (v) utilize a PayFac
model and (vi) offer a suite of products in the financial markets (through CrowdPay). Leveraging our relationship with three of
the top five merchant processors in the United States (representing a majority of the merchant processing market) and with use
of our proprietary software, eVance provides competitive payment processing solutions to merchants which enable merchants to process
credit and debit card-based internet payments for sales of their products at competitive prices (whether such sales occur online
or at a “brick and mortar” location). Our payment gateway (which we call “SecurePay”) also enables merchants
to reduce the cost of transacting with their customers by removing the need for a third-party payment gateway solution.
Our
ISO Operations
As
described in more detail in the section entitled “Our Industry” below, an ISO is an organization that signs up new
merchants on behalf of acquiring banks and processors. As an ISO, we identify merchants that are interested in our financial and
transaction processing solutions and generate individual merchant processing contracts for such merchants. We operate as both
a wholesale ISO and a retail ISO depending on the risk profile of the merchant and the applicable merchant processor and acquiring
bank. As a wholesale ISO, we underwrite the processing transactions for merchants, establishing a direct relationship with the
merchant and generating individual merchant processing contracts in exchange for future residual payments. As a retail ISO, we
primarily gather the documents and information that our partners (acquiring banks and acquiring processors) need to underwrite
merchants’ transactions and as a result receive only residual income as commission for merchants we place with our partners.
When we onboard a new merchant, such merchant is identified with an individual merchant ID account (an “MID”) and
the settlement to the merchant is handled by the acquiring bank.
Our
Industry
The
payment processing industry allows merchants to process credit, debit and gift and loyalty card payments along with providing
other payment processing and related information services. The electronic payments industry continues to benefit from the migration
from cash and checks to credit and debit cards and other electronic payments, as well as intrinsic, aggregate growth in the Gross
Domestic Product (“GDP”) in the markets we serve. This migration is being driven by consumer convenience and engagement,
the increased use by consumers of online shopping, card issuer rewards, e-commerce, regulations and innovative payment and commerce
solutions being introduced in these markets. In addition, broader merchant acceptance in industries that did not historically
accept electronic payments helps to drive this migration. Merchants are taking advantage of new hardware options, such as mobile
phone dongles and tablet solutions, to integrate payment processing solutions into general business applications, which reduce
the cost and complexities of doing business and serving consumers. The payment processing industry is served by a variety of providers
including:
|
●
|
Card
issuers — Financial institutions that issue payment account products, such as credit and debit cards, to consumers backed
by a credit line or a demand deposit account, such as a checking account and pay merchants on behalf of cardholders.
|
|
|
|
|
●
|
Acquiring
banks — Financial institutions that accept payments from the card issuer on behalf of a merchant (any organization that
accepts card-based payments in exchange for the goods and services they provide) such that the merchant does not need to have
an account with the card issuer in order to accept a payment from a customer.
|
|
|
|
|
●
|
Credit
card associations — Credit card brand companies (for example, Visa and MasterCard) that issue cards to consumers and
set rules and route transactions among participants in their networks (card issuers and acquiring banks, for example).
|
|
|
|
|
●
|
Merchant
acquirers — Providers that enable merchants to accept, process and settle electronic payments. There are various types
of merchant acquirers as described below. We operate as a type of merchant acquirer.
|
|
|
|
|
●
|
Third-party
providers — Other service, software and hardware companies that provide products and services designed to improve the
payments experience for issuers, merchants, merchant acquirers and consumers, including mobile payment enablers, terminal manufacturers,
payment gateway providers, independent software vendors, integrated point of sale systems, dealers and risk management service
providers.
|
A
typical card transaction requires close coordination among the various industry participants described above that provide the
services and infrastructure required to enable such transactions. As a merchant acquirer, our role in this ecosystem is to act
as a conduit between acquiring banks and credit card associations, on the one hand, and merchants, on the other hand, to enable
merchants to accept, process and settle payments from customers. There are various types of merchant acquirers:
|
●
|
Non-bank
merchant acquirers — These independent providers offer merchant acquiring solutions using their own proprietary and
third-party platforms, and are capable of facilitating all elements of the payment transaction cycle, including the acceptance
(i.e., authorization or rejection), processing and settling of merchant transactions.
|
|
|
|
|
●
|
Banks
— Historically, banks have been the merchant acquirers, as they marketed merchant acquiring services in combination
with other commercial banking products to their customers. In the United States, however, most banks divested these services to
non-bank merchant acquirers. While some banks elected to retain in-house merchant acquiring capabilities, the vast majority of
U.S. banks chose to form joint ventures or referral relationships with independent merchant acquirers.
|
|
|
|
|
●
|
IPOS
providers — These companies offer software and hardware solutions that enable merchants to manage various aspects of
their business, including payment acceptance through separate relationships between the IPOS providers and merchant acquirers.
|
|
|
|
|
●
|
ISOs
— ISOs typically specialize in managing a sales force that targets merchants in a specific market segment or geographic
region. ISOs typically outsource most merchant acquiring back-office functions, including the processing and settling of transactions,
to non-bank merchant acquirers. ISOs are contracted by a credit card member bank to procure new merchant relationships. ISOs also
process online credit card processing transactions for small businesses for a fee or percentage of sales. Being a wholesale ISO,
eVance assumes underwriting liability which increases its responsibility to monitor and manage merchants, thereby increasing its
value to banks as well as the fees which it charges for each transaction.
|
A
typical card transaction requires a complex process involving various participants in a series of electronic messages, decisions
and flow of funds as seen below:
A
typical card transaction begins when a cardholder presents a card for payment at a merchant location and the cardholder swipes
the card’s magnetic strip through, or in the case of an EMV chip inserts the card into, a point of sale (or “POS”)
terminal card reader. Some merchants may also have card readers that can receive cardholder information through a contactless
connection with an enabled card or mobile phone. The card reader can be integrated either into a standalone POS terminal or a
software application the merchant uses to manage its business. For e-commerce transactions, the cardholder types in the card number
and related information into the merchant’s website where it is collected by the website’s payment processing software.
The POS terminal or software application electronically records sales draft information, such as the card identification number,
transaction date and value of the goods or services purchased. After the card and transaction information is captured by the POS
terminal or software, the merchant acquirer routes the authorization request through the applicable card network to the card issuer,
whose systems determine whether a transaction is “approved” or “declined” based on a variety of factors,
including a determination of whether the particular card is authentic and whether the impending transaction value will cause the
cardholder to exceed defined limits for spending or balances. This response is then returned to the merchant’s POS terminal
or software application. This entire authorization and response process is referred to as the “frontend” of a purchase
transaction and typically occurs within seconds from the time the cardholder initiates the transaction.
Following
the purchase transaction approval, an electronic draft capture process transfers sales draft data into an electronic format. Once
in an electronic format, sales draft data is sent through the card networks for clearing and settlement, allowing the merchant
to receive payment for the goods or services sold. Card networks use a system known as “interchange” to transfer the
information and funds between the card issuer and the merchant acquirer to complete the link between the merchant and card issuer.
This portion of the payment processing cycle is referred to as the “backend settlement” and typically occurs within
48 hours following a completed purchase transaction.
The
services provided directly to merchants and associated fees to the merchant vary depending on the type of card (e.g., corporate,
consumer, debit, rewards), manner in which it is used (e.g., credit/debit, e-commerce, face-to-face), merchant category,
the provider’s in-house technology capabilities and the services that are outsourced to other providers. Only a few providers
have the capability to provide all of these services, and even fewer can provide all of their services from an integrated platform.
We are one of these providers. Below is an example of a sample transaction:
Sales
and Marketing
We
primarily use independent agents and other smaller ISOs to market our services. We intend to increase the number of independent
agents and ISO’s that sell on our behalf. We may also gain additional agents through the acquisition of merchant portfolios
or companies. We may also add to our direct sales channel for certain industry segments or customer profiles.
Growth
Strategy
Our
growth strategy consists of the following: (1) we plan to begin offering the OmniSoft suite of products and applications to our
existing eVance customers, (2) we expect to bring in-house a sales team to generate organic revenues from the suite of products
that we have and (3) we expect to make additional acquisitions of merchant portfolios that we can integrate into our applications.
Competition
The
payment processing industry is highly competitive. We compete with other ISOs for the acquisition of merchant agreements. Several
sponsor banks and processors including First National Bank of Omaha, Chase Paymentech, L.P., Bank of America Merchant Services,
First Data Corporation, Global Payments, Elavon Inc., as well as Wells Fargo, U.S. Bank and others, frequently solicit merchants
directly or through their own network of ISOs. Competition is based upon a number of factors including price, service and product
offerings. Many of these competitors are larger and have substantially greater resources than us. We believe we remain competitive
to these processors and competitive ISOs through a combination of beneficial pricing and services to our merchant customers.
Cash
Advance Business
In
addition to our business as an ISO, we may, through eVance Capital, a subsidiary of eVance, begin to provide cash advances and
loans to our merchant customers. In this capacity, we would act as a retail ISO providing alternative financing and working capital
solutions to small and medium sized businesses using a variety of third party funding sources. eVance Capital would not provide
capital directly or take credit risk, instead seeking to earn commissions from independent third parties by placing their financial
products with our merchant customers. No cash advances and/or loans were provided to our merchant customers for the years ended
December 31, 2019 and 2018.
Description
of our CrowdPay Business
General
CrowdPay
operates a white label capital raising platform that is used mainly by small and midsized businesses seeking to raise capital
and by registered broker-dealers seeking to host capital raising campaigns for such businesses by integrating the platform onto
such company’s or broker-dealer’s website. Our CrowdPay platform is tailored for companies seeking to raise money
through a crowdfunding offering of between $1 million and $50 million pursuant to Regulation CF under the JOBS Act, offerings
pursuant to Rule 506(b) and Rule 506(c) under Regulation D of the Securities Act, and offerings pursuant to Regulation A+ of the
Securities Act. Our platform, which can be used for multiple offerings at once, provides companies and broker-dealers with an
easy-to-use, turnkey solution to support company offerings, allowing companies and broker-dealers to easily present online to
potential investors relevant marketing and offering materials and by aiding in the accreditation and background check processes
to ensure investors meets the applicable requirements under the rules and regulations of the SEC. CrowdPay charges a fee to each
company and broker-dealer for the use of its platform under a fee structure that is agreed to between CrowdPay and the Company
and/or broker-dealer prior to the initiation of the offering. CrowdPay also generates revenues by providing ancillary services
to the companies and broker-dealers utilizing our platform, including running background checks and providing anti-money laundering
and know-your-customer compliance. CrowdPay is not a registered funding portal or a registered broker-dealer. CrowdPay has recognized
an immaterial amount of the Company’s revenue, if any, historically (including during the periods presented in the financial
statements included herein).
Our
Operations
As
a SaaS company, CrowdPay offers white label Omni Channel e-commerce and content solutions for crowdfunding, while offering custom
solutions to broker dealers, merchant banks and securities law firms that have the need for platforms to market and collect offerings.
We install all software, backup, and update applications for all issuers that are customers of our platform. CrowdPay works on
web-based computers, iOS and Android devices. The platform can be up and running in approximately four to six weeks after the
initial onboarding process and configurations for hardware.
Maintenance,
hosting, billing transactions and compliance are all provided for on the platform. Our pricing model for these services ranges
from $25,000 to $100,000 per month, which includes transaction fees, set up fees and platform fees. In lieu of cash fees, we may
also accept, on a case by case basis, equity shares from companies that use our platform (currently, we do not hold any equity
in companies that use our platforms).
Any
special feature requiring development will be developed as custom work, and will be quoted prior to starting development. Per
our business model, there is a onetime upfront fee that provides for implementation and integration specified ACH and processing
credit cards for payments on the platform. ACH and wire processing are required to be processed using our other subsidiaries,
eVance and OmniSoft. Per corporate design, the portal provides processes for compliance with certain regulations, e-signatures,
accreditation and Bad Actor checks with integrated third party software. CrowdPay is also connected to reputable service bureaus
that provide us with background checks. The dashboard provides management and offering information on identity validation, custom
forms, know your customer (KYC), anti-money laundering (AML) checks, residency requirements and cool-off periods.
Our
Crowdfunding platform monitors compliance with AML and KYC laws and regulations. Our SaaP key feature integrations include: standard
delivery mechanisms, accounting management, search engine tools and cloud based tools through Microsoft Azure.
Examples
of Platform Offerings
The
Growth eREIT can be offered on a platform to focus primarily on opportunistic equity ownership of commercial real estate
assets that have greater potential to appreciate in value over time.
The
Income eREIT can be offered on a platform to focus primarily on debt investments in commercial real estate assets, which
typically generate steady cash flow throughout the life of the investment.
We
have clients in various industries including automotive, biotech and educational products that are currently utilizing the platform
to offer securities under Rule 506(c), Regulation A+ and Regulation CF.
Significantly,
we are one of the few crowdfunding platforms that can accept investments using credit cards, which we process through our eVance
business.
INVESTOR
LIMITS
|
|
title II –
rule 506(b)
|
|
title II –
rule 506(c)
|
|
title III
|
|
Regulation
A+ Tier 1
|
|
Regulation
A+ Tier 2
|
Maximum Dollar Amounts
|
|
No Maximum
|
|
No Maximum
|
|
$1 Million
|
|
$20 Million
|
|
$50 Million
|
Types of Investors Permitted
|
|
Accredited – up to 35 Non-Accredited
|
|
Only Accredited
|
|
Accredited and
Non-Accredited
|
|
Accredited and
Non-Accredited
|
|
Accredited and
Non-Accredited
|
Investment Limits
|
|
None
|
|
None
|
|
Yes
(the lesser of 5% or 10% of income or net worth)
|
|
Yes – for non-accredited investors (10% of income, net worth)
|
|
Yes – for non-accredited investors (10% of income, net worth)
|
Typical Number of Investors
|
|
<100
|
|
<100
|
|
<1000
|
|
~1500 to ~5500
|
|
~2500 to ~7500
|
Stockholder Limits
|
|
2,000 accredited investors, 35 Non-Accredited friends and family investors.
|
|
2,000 accredited investors
|
|
None
|
|
None
|
|
None
|
Investor Liquidity
|
|
12-month hold
|
|
12-month hold
|
|
12-month hold
|
|
Yes – Transfer Agency to OTC or NASDAQ
|
|
Yes – Transfer Agency to OTC or NASDAQ
|
OFFERING
LIMITS
|
|
TITLE II –
RULE 506(B)
|
|
TITLE II –
RULE 506(C)
|
|
TITLE III
|
|
Regulation
A+ Tier 1
|
|
Regulation
A+ Tier 2
|
General Solicitation (Advertising) Allowed
|
|
No
|
|
Yes
|
|
Yes, but only through the portal.
|
|
Yes
|
|
Yes
|
Requires Integrated Escrow and Payment Processor
|
|
No
|
|
No
|
|
Yes
|
|
No
|
|
No
|
Allows ‘Test The Waters’
|
|
Yes
|
|
Yes
|
|
No
|
|
Yes
|
|
Yes
|
Requires a Funding Portal
|
|
No
|
|
No
|
|
Yes (register with FINRA)
|
|
No
|
|
No
|
Simultaneous Other Offerings Allowed For The Same Company
|
|
Yes
|
|
Yes
|
|
No
|
|
Yes
|
|
Yes
|
Average Time Before Launch
|
|
<2 weeks
|
|
<2 weeks
|
|
<4 weeks
|
|
16-20 weeks
|
|
16-20 weeks
|
Filing Required
|
|
Post Sale
|
|
Post Sale
|
|
Pre Sale
|
|
Pre Sale
|
|
Pre Sale
|
Regulatory Approval Required Prior to Launch
|
|
No
|
|
No
|
|
CF Portal = Yes Individual
Deal = No
|
|
Yes
|
|
Yes
|
Approximate Legal and Accounting Fees
|
|
$5,000 to $20,000
|
|
$5,000 to $20,000
|
|
$5,000 to $15,000
|
|
$40,000 to $150,000
|
|
$50,000 to $200,000
|
Ongoing Reporting Requirements
|
|
None
|
|
None
|
|
Yes
|
|
None
|
|
Yes
|
Audited Financials
|
|
No
|
|
No
|
|
No
|
|
No
|
|
Yes
|
Social Sharing Allowed
|
|
No
|
|
Yes
|
|
Yes
|
|
Yes
|
|
Yes
|
Partnering
Our
partners are proven experts in their own fields. CrowdPay integrates into software or may be available as third-party enhancements
or extensions. CrowdPay constantly seeks to work with reputable partners as we continue to enhance our software and platform.
We currently partner with companies well known in the e-commerce and technology sectors, such as Profit Stars, DocuSign, Verify
Investors, Salesforce, Hub Spot, CFIRA, CFPA, Block Score, and LexisNexis.
We
are connected with our partners over APIs and have direct access to their products and services. For example, our connection to
ProfitStars allows us to offer services directly to their clients, which includes credit unions and small banks under management.
eVance and OmniSoft are integrated into the back end system to process ACH and credit card transactions.
Features
The
CrowdPay website builder enables a client to create a responsive website without coding that can be customized using desktops,
tablets, iPhones and Android mobile devices. All CrowdPay websites follow Google’s SEO best practices and come with many
designs and widgets that enhance the user’s overall experience and exposure. Our website builder offers an intuitive drag
and drop editor that creates efficiencies by significantly cutting down on development time. Widgets make site building faster
where a client can copy and paste any element within a site.
Almost
every element in CrowdPay’s content management system, or CMS, can be customized on each device. Alternatively, CrowdPay
offers pre-arranged templates. A client can simply pick one and use our user-friendly, responsive website builder to bring the
client’s vision to life. A client can pull from a library of free stock images, upload or import images from any URL to
easily express their unique concept and corporate culture. Our clients can improve their website’s search engine ranking
by setting up page titles and descriptions and approximately 300 redirects. Images uploaded to CrowdPay’s CMS are automatically
resized and compressed so they load seamlessly across desktop, tablet and mobile devices. Our website builder displays blogs seamlessly
across desktop, tablet, and mobile devices. ATOM and RSS feeds are automatically generated. Automatic backups are created every
time you make changes and publish them. In addition, clients can revert back to any version at any time.
Competition
Our
crowdfunding platform competes with companies such as Start Engine, Crowd Engine and SeedInvest.
Our
Synergies
Generally
The
success of our business model is dependent on the synergies between the business segments operated by our subsidiaries. We have
created and developed products which, we believe, form an ecosystem of e-commerce to provide a variety of clients, from online
equity financing companies or merchants selling online or in brick and mortar stores, with multiple product offerings and ancillary
services from underwriting with the banks and merchant billing from the cloud software. We expect that these synergies will create
additional revenue by charging transaction fees on each service provided to clients by our partnerships with Merchant Acquiring
Banks and PCI Compliance.
We
believe that our wholly-owned subsidiaries combine to create an ecosystem where each subsidiary benefits the other. Starting with
the services provided by eVance, we enable each of our products and platforms to communicate with each other and create an ecosystem
among our products and, potentially, third-party products.
The
product environment created with a new registered merchant or issuer enables all merchant information to be stored in a single,
centralized location but utilized by all subsidiaries. For example, merchant services utilizing eVance provide electronic payment
processing services that can be utilized for payments on the Crowdfunding platform. The platform is used by merchant services
to allow mobile and online processing to merchants.
The
Omni commerce platform will be offered to all of the merchant services clients. The offered Merchant Services products we provide
will enable all processing needs for the Omnicommerce system. The gateway will allow merchants that are using the platform to
accept online ecommerce transactions.
Competitive
Advantages
The
OLB platform of services provides the following key advantages.
|
●
|
Time to
Market — we can create a customized website for retailers within days and have it fully operational in less than 2 weeks.
|
|
|
|
|
●
|
Cost —
we believe that we are the only content service provider that does not charge a setup fee (note that our OmniSoft and Crowdpay
services do have initialization fees)
|
|
|
|
|
●
|
Flexibility
— our platform has the flexibility to provide customized solutions for partners.
|
|
|
|
|
●
|
Pricing
— we provide partners with a price comparison feature which they can utilize if they wish to set prices for products or
run promotions.
|
|
|
|
|
●
|
Payment
processing — we can provide financial service companies with the ability to have their customers’ accounts directly
debited for payment.
|
Customers
As
a result of our various business platforms, we service a wide array of customers, including:
|
●
|
Content
sites, portals, Internet Service Providers (ISPs) and Fortune 1,000 companies with high traffic but no e-commerce functionality
searching for a fully outsourced solution, or with some e-commerce in place but are seeking either an additional channel or a
more effective market approach.
|
|
|
|
|
●
|
System integrators
and web developers who can provide added value to their customers or generate additional revenue by including e-commerce functionality
in their offerings.
|
|
|
|
|
●
|
Existing
“brick & mortar” businesses that have inventory and fulfillment capability but do not wish to create and maintain
an e-commerce website and infrastructure.
|
|
|
|
|
●
|
Startups
to early-stage companies looking for an effective and less costly way to raise capital.
|
Impact
of COVID-19
On
January 30, 2020, the World Health Organization declared the COVID-19 (coronavirus) outbreak a "Public Health Emergency of
International Concern" and on March 10, 2020, declared it to be a pandemic. The virus and actions taken to mitigate its spread
have had and are expected to continue to have a broad adverse impact on the economies and financial markets of many countries,
including the geographical areas in which the Company operates. In response to the pandemic, the Company is working with merchants
to address potential changes to the purchase patterns of consumers. In addition, it is focusing on servicing merchants that sell
products with an extended delivery time frame, that have products that are paid for in advance, and that work in the catering,
ticketing, limo and travel related businesses which have been directly impacted by the social distancing requirement of the pandemic.
Further, for those of the Company’s employees that are able to perform their job remotely, the Company has implemented a
“remote work” policy and provided employees with the technology necessary to do continue to do their jobs from home
and for those employees that are unable to perform their job from a remote location, the Company has taken steps to ensure appropriate
distancing and added sanitizing stations along with requiring frequent hand washing and work station cleaning.
While
it is unknown how long these conditions will last and what the complete financial impact it will have on the Company, 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 resulting in less consumer, business and government
spending may adversely affect our financial performance by reducing the number or average purchase amount of transactions we process.
If our customers make fewer sales of products and services using electronic payments, or consumers spend less money through electronic
payments, whether due to the outbreak of the COVID-19 virus, change of consumer behavior or otherwise, we will have fewer transactions
to process at lower dollar amounts, resulting in lower revenue making it reasonably possible that we are financially vulnerable
to the effects of the pandemic.
Regulations
Various
aspects of our service areas are subject to U.S. federal, state, and local regulation. Certain of our services also are subject
to rules promulgated by various card networks and banking and other authorities as more fully described below.
The
Dodd-Frank Act
In
July 2010, the Dodd-Frank Act was signed into law in the United States. The Dodd-Frank Act has resulted in significant structural
and other changes to the regulation of the financial services industry. Among other things, Title X of the Dodd-Frank Act established
a new, independent regulatory agency known as the Consumer Financial Protection Bureau (the “CFPB”) to regulate consumer
financial products and services (including some offered by our customers). The CFPB may also have authority over us as a provider
of services to regulated financial institutions in connection with consumer financial products. 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 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 issuer’s fraud losses plus, for
qualifying issuers, an additional $0.01 per transaction in debit interchange for fraud prevention costs. In addition, the new
regulations contain non-exclusivity provisions that ban debit card networks from prohibiting an issuer from contracting with any
other card network that may process an electronic debit transaction involving an issuer’s debit cards and prohibit card
issuers and card networks from inhibiting the ability of merchants to direct the routing of debit card transactions over any network
that can process the transaction. Beginning April 1, 2012, all debit card issuers in the United States were required to participate
in at least two unaffiliated debit card networks. On April 1, 2013, the ban on network exclusivity arrangements became effective
for prepaid card and healthcare debit card issuers, with certain exceptions for prepaid cards issued before that date.
Effective
July 22, 2010, merchants were allowed to set minimum dollar amounts (not to exceed $10) for the acceptance of a credit card (while
federal governmental entities and institutions of higher education may set maximum amounts for the acceptance of credit cards).
They were also allowed to provide discounts or incentives to entice consumers to pay with an alternative payment method, such
as cash, checks or debit cards.
Association
and network rules
We
are subject to the rules of credit card associations and other credit and debit networks. In order to provide processing services,
a number of our subsidiaries are registered with Visa or Mastercard as service providers for member institutions. Various subsidiaries
of ours are also processor level members of numerous debit and electronic benefits transaction networks or are otherwise subject
to various network rules in connection with processing services and other services we provide. As such, we are subject to applicable
network rules. Card networks and their member financial institutions regularly update and generally expand security expectations
and requirements related to the security of cardholder data and environments. We are also subject to network operating rules promulgated
by the National Automated Clearing House Association relating to payment transactions processed by us using the Automated Clearing
House Network and to various state federal and foreign laws regarding such operations, including laws pertaining to electronic
benefits transactions.
Privacy
and information security regulations
We
provide services that may be subject to various state, federal, and foreign privacy laws and regulations, including, among others,
the Financial Services Modernization Act of 1999 (the “Gramm-Leach-Bliley Act”). These laws and their implementing
regulations restrict certain collection, processing, storage, use, and disclosure of personal information, require notice to individuals
of privacy practices, and provide individuals with certain rights to prevent use and disclosure of protected information. These
laws also impose requirements for the safeguarding and proper destruction of personal information through the issuance of data
security standards or guidelines. Certain federal, state and foreign laws and regulations impose similar privacy obligations and,
in certain circumstances, obligations to notify affected individuals, state officers or other governmental authorities, the media,
and consumer reporting agencies, as well as businesses and governmental agencies, of security breaches affecting personal information.
In addition, there are state and foreign laws restricting the ability to collect and utilize certain types of information such
as Social Security and driver’s license numbers.
Unfair
trade practice regulations
We
and our clients are subject to various federal and state laws prohibiting unfair or deceptive trade practices, such as Section
5 of the Federal Trade Commission Act. Various regulatory agencies, including the Federal Trade Commission, the Consumer Financial
Protection Bureau, and state attorneys general, have authority to take action against parties that engage in unfair or deceptive
trade practices or violate other laws, rules, and regulations, and to the extent we are processing payments for a client that
may be in violation of laws, rules, and regulations, we may be subject to enforcement actions and incur losses and liabilities
that may impact our business.
Anti-money
laundering, anti-bribery, sanctions, and counter-terrorist regulations
We
are subject to anti-money laundering laws and regulations, including certain sections of the USA PATRIOT Act of 2001. We are also
subject to anti-corruption laws and regulations, including the U.S. Foreign Corrupt Practices Act (the “FCPA”) and
other laws, that prohibit the making or offering of improper payments to foreign government officials and political figures and
includes anti-bribery provisions enforced by the Department of Justice and accounting provisions enforced by the SEC. The FCPA
has a broad reach and requires maintenance of appropriate records and adequate internal controls to prevent and detect possible
FCPA violations. Many other jurisdictions where we conduct business also have similar anticorruption laws and regulations. We
have policies, procedures, systems, and controls designed to identify and address potentially impermissible transactions under
such laws and regulations.
We
are also subject to certain economic and trade sanctions programs that are administered by the Office of Foreign Assets Control
(“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
local sanctions requirements in other relevant jurisdictions.
Securities
Act
Since
the JOBS Act was passed, Crowdfunding, Regulation D offerings and Regulation A and A+ offerings rapidly became a familiar concept
among investment firms, venture capitalists, real estate developers and small to medium sized businesses as a way to facilitate
and democratize financing. We believe it has created, and continues to create, a profound shift in the world of investments. Below
is a brief overview of the rules that permit the offer and sale of securities through such platforms. This overview is in no way
intended to be a comprehensive review of all the rules and regulations associated with the above mentioned offerings and should
not be relied upon by anyone.
Regulation
D under the Securities Act is the most common regulatory exemption used small businesses to raise capital through equity financing.
It exempts private placement offerings under Rule 506(b) and 506(c) when sold to accredited investors, as defined under Rule 501
of Regulation D. Companies relying on the Rule 506 exemptions can raise an unlimited amount of money, so long as they comply with
the rule’s requirements. Regulation A and Regulation A+ are more similar to a public offerings, and require filing
Form 1-A with the SEC. Regulation A and Regulation A+ offer two tiers of offerings; the first tier is for offerings of up to $20
million within any 12 month period and the second tier is for offerings of up to $50 million, within any 12 month period. Regulation
CF allows a company to raise up to $1.07 million from non-accredited investors.
Intellectual
property
Our
products and services utilize a combination of proprietary software and hardware that we own and license from third parties. Over
the last few years, we have developed a payment gateway, merchant boarding system, ecommerce platform, recurring billings and
a crowdfunding platform. We generally control access to and use of our proprietary software and other confidential information
through the use of internal and external controls, including entering into non-disclosure and confidentiality agreements with
both our employees and third parties. As of the date of this report, we have a patent pending on transferable QR codes on Omni
Commerce devices.
Employees
As
of December 31, 2019, we had six key employees as part of our overall staff of 24 full-time employees. Our risk, compliance, underwriting
and analyst’s accounting and customer service functions are located in Atlanta, Georgia. In addition, we have operations
in India where we retain 15 to 35 developers at any given time depending on our requirements and scope of projects. None of our
employees are represented by a labor union or covered by a collective bargaining agreement. We consider our relationship with
our employees to be good.
Corporate
Information
We
were incorporated in the State of Delaware on November 18, 2004 for the purpose of merging with OLB.com, Inc., a New York corporation
incorporated in 1993 (“OLB.com”). The merger was done for the purpose of changing our state of incorporation from
New York to Delaware. In April 2018, we completed an acquisition of substantially all of the assets of Excel Corporation and its
subsidiaries Payprotec Oregon, LLC, Excel Business Solutions, Inc. and eVance Processing, Inc. (such assets are the foundation
of our eVance business). In connection with the Asset Acquisition, in May 2018, we entered into share exchange agreements with
CrowdPay and OmniSoft, affiliate companies owned by Mr. Yakov and John Herzog, an affiliate of our company, pursuant to which
each of CrowdPay and OmniSoft became wholly owned subsidiaries of our company.
Our
Company’s headquarters is located at 200 Park Avenue, Suite 1700, New York, NY 10166. Our telephone number is (212) 278-0900.
Implications
of Being an Emerging Growth Company
We
qualify as an “emerging growth company” as defined under the Securities Act. As a result, we are permitted to, and
intend to, rely on exemptions from certain disclosure requirements that are otherwise applicable to public companies. These provisions
include, but are not limited to:
|
●
|
not being
required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (or
the Sarbanes-Oxley Act);
|
|
|
|
|
●
|
reduced
disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements;
and
|
|
|
|
|
●
|
exemptions
from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute
payments not previously approved.
|
In
addition, an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting
standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards
would otherwise apply to private companies. We have elected to avail ourselves of this extended transition period. We will remain
an emerging growth company until the earliest to occur of: (i) our reporting $1.07 billion or more in annual gross revenues; (ii)
the end of fiscal year 2024; (iii) our issuance, in a three year period, of more than $1 billion in non-convertible debt; and
(iv) the end of the fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million on
the last business day of our second fiscal quarter.
Item
1A. Risk Factors
Investing
in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below,
together with all of the other information contained in this annual report, before deciding to invest in our common stock. If
any of the following risks materialize, our business, financial condition, results of operation and prospects will likely be materially
and adversely affected. In that event, the market price of our common stock could decline and you could lose all or part of your
investment.
Risks
Related to Our Company
Our
acquisition of assets of Excel and its subsidiaries Payprotec Oregon, LLC, Excel Business Solutions, Inc. and eVance Processing,
Inc. and share exchange with OmniSoft and CrowdPay 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 and its subsidiaries Payprotec Oregon, LLC, Excel Business
Solutions, Inc. and eVance Processing, Inc. for $12.5 million through a foreclosure sale conducted under the Uniform Commercial
Code of the State of New York. Since closing the Asset Acquisition, we have been in the process of integrating our operations
with the acquired assets.
On
May 9, 2018, we entered into separate share exchange agreements with the stockholders of OmniSoft and CrowdPay, affiliate
companies of our company’s majority stockholder. Pursuant to the share exchange agreement with OmniSoft, the stockholders
of OmniSoft transferred to us all of the issued and outstanding shares of OmniSoft common stock in exchange for an aggregate of
1,833,333 shares of our common stock. Pursuant to the share exchange agreement with CrowdPay, the stockholders of CrowdPay
transferred to us all of the issued and outstanding shares of CrowdPay common stock in exchange for an aggregate of 2,916,667 shares
of our common stock. The share exchange transactions closed on May 9, 2018, on which date OmniSoft and CrowdPay became wholly
owned subsidiaries of the Company.
Since
the consummation of the Asset 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 any 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 Asset Acquisition, we entered into a Loan and Security Agreement (as amended by Amendment No. 1 to Loan and
Security Agreement dated July 30, 2018, Amendment No. 3 to Loan and Security Agreement dated February 5, 2019 and Amendment
No. 4 to Loan and Security Agreement dated April 24, 2020, 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” or the “Excel Loan”) to us, which obligations are guaranteed by our Company. Collectively, the Company
and the Purchasers are referred to as the “Loan Parties”.
The
Term Loan matures in full on April 9, 2022. 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. To date, we have made principal payments of $1,000,000 in July 2018 and $2,000,000 in November 2018 pursuant to
the terms of the Credit Agreement (though the payments were made with the proceeds of a subordinated promissory note in the principal
amount of $3,000,000 with a maturity date of September 30, 2020, to be extended to September 30, 2022 simultaneous to
the completion of our proposed public offering), issued to a significant stockholder of our company, which bears interest at a
rate of 12% per annum and is subordinated to the Term Loan). On April 24, 2020, We entered into Amendment No. 4 to extend the
Maturity Date of the indebtedness to April 9, 2022 and to waive any outstanding events of default. In consideration for the foregoing,
the Credit Agreement was amended to include a new principal repayment schedule under the Term Loan whereby the Company paid an
amount equal to $125,000 upon execution of Amendment No. 4 and the Company agreed to make a monthly payment of $25,000 per month,
commencing May 1, 2020, and on the first business day of each calendar month thereafter until the Maturity Date.
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, our ownership interests
in OmniSoft, CrowdPay and the Purchasers are pledged in favor of GACP pursuant to the Term Loan.
If,
by the time our principal payments become due in 2022, 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, we
may not be able to refinance or repay all of our 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:
|
●
|
create certain
liens;
|
|
|
|
|
●
|
incur debt
and/or guarantees;
|
|
|
|
|
●
|
enter into
transactions other than on arm’s-length basis;
|
|
|
|
|
●
|
pay dividends
or make certain distributions or payments;
|
|
|
|
|
●
|
sell certain
kinds of assets;
|
|
|
|
|
●
|
enter into
any sale and leaseback transactions;
|
|
|
|
|
●
|
make certain
investments or other types of restricted payments;
|
|
|
|
|
●
|
substantially
change the nature of our business; and
|
|
|
|
|
●
|
effect mergers,
consolidations or sale of assets.
|
In
addition, our Credit Agreement also requires us to comply with a consolidated fixed charge coverage ratio and to maintain minimum
revenue for the trailing twelve month period. Although we are currently in compliance, we have not complied with these obligations
at certain times since the Credit Agreement was entered into and were obligated to obtain certain waivers and modifications of
these provisions to avoid an acceleration event under the Credit Agreement. Our ongoing ability to comply with these covenants
may be affected by events beyond our control and 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.
We have limited cash resources
and operating losses throughout our history. As of December 31, 2019, we had a working capital deficiency of $1,382,325, and a
net loss of $1,343,412 for the year ended December 31, 2019. Our cash flow provided by operating activities for the year through
December 31, 2019 was $244,868, management has concluded that it has sufficient liquidity to continue operations for a period of
at least twelve months from the date our financial statements were prepared, this conclusion would not have been possible without
the amendments to the Credit Agreement, cash on hand from the proceeds of a litigation settlement and close monitoring of the
Company’s projected cash flow and operating expenses.
Further, in connection
with the response to the COVID-19 pandemic in the United States, the Company has experienced certain disruptions to its business
and has observed disruptions for the Company’s customers and merchants which has resulted in a decline in transaction volume.
While the volume of processing transactions by merchants in March was relatively in-line with the Company’s expectations,
it is expected that the number of transactions and resulting revenue could be as much as 40% lower than March during the month
of April. We estimate that the number of transactions will continue to decline, along with revenues, until the response to the
COVID-19 pandemic allows customers to make more point of purchase transactions for merchants and more merchants provide for additional
contactless and online purchase options. Based on this, the Company expects an overall decrease in revenue and cash flows from
operations during 2020 as compared to 2019. As a result of these factors, the Company determined it was necessary to do a reforecast
of its cash flow for 2020 and an overall analysis of market trends to determine whether or not his has sufficient liquidity to
continue as a going concern for a period of at least twelve months from the date its financial statements were issued. In considering
the anticipated impact of the COVID-19 pandemic response’s impact on the Company’s business, the Company believes it
will be able fund future liquidity and capital requirements through cash flows generated from its operating activities for a period
of at least twelve months from the date its financial statements are issued (see summary of Liquidity and Capital Resources in
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation).
If our projected results
from operations for 2020 are adversely effected beyond what we anticipate, we may be required to obtain additional financing to
fund operations. We may not be able to attract financing as needed, or if available, on reasonable terms as required and therefore
may not be able to accomplish our business goals or repay certain of our debts. 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 and there will be substantial doubt as to our ability
to continue as a going concern.
We
have historically relied on related parties and affiliates to finance our operations, but there is no guarantee that these parties
will continue to finance our operations in the future.
To
date, we have financed our operations from short-term loans from Ronny Yakov, our Chief Executive Officer and John Herzog,
a significant shareholder of the Company. Additionally, Mr. Herzog has provided us with an assurance that he will provide
financial support, if needed, to assist with our ongoing working capital needs through the earlier of our proposed public offering
or November 2020 (other than our obligations to pay principal and interest with respect to the Excel Loan and Credit Agreement).
In addition Messrs. Yakov and Herzog have indicated that, in the event that the Company does not make a required monthly payment
under the Credit Agreement, Messrs. Yakov and Herzog may make an equity contribution to the Company for the sole purpose of allowing
the Company to pay the monthly payment obligation of the Company under the Credit Agreement However, we cannot guarantee that
Mr. Yakov or Mr. Herzog will continue to fund our operations in this manner or that they will fund any requirement monthly
payments under the Credit Agreement which, if we cannot obtain additional financing or do not generate sufficient cash flow from
operations, will adversely affect our operating results and financial condition.
We
may be subject to liabilities arising prior to the Asset Acquisition under certain “successor liability” theories.
We
acquired our business by means of a foreclosure of the relevant secured lender’s security interest in the assets in the
Asset Acquisition through an auction under Article 9 of the Uniform Commercial Code. Although the general rule in the context
of transactions such as the Asset Acquisition is that a purchaser of assets does not assume the seller’s liabilities, various
courts have established exceptions to this general rule, including where the purchaser is a ‘mere continuation’ of
the seller and there is a ‘continuity of enterprise.’ This is a highly fact specific inquiry, and there can be no
assurance that any interested creditor, the United States (through the Internal Revenue Service) or state or local taxing agencies
will not seek to hold us responsible for any existing liabilities at the time of the Asset Acquisition under one or more of these
successor liability theories, for which we have no indemnification protection under the agreements relating to the Asset Acquisition.
In
connection with our preparation of our financial statements, we identified material weaknesses in our internal control over financial
reporting and concluded that our internal controls over financial reporting were not effective at December 31, 2019. Failure
to establish and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have
a material adverse effect on our business and stock price. If we cannot remediate our current internal control finding or if we
cannot maintain effective internal controls over financial reporting in the future, it could harm us.
Our management is responsible
for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”). During the preparation
of our financial statements for both 2018 and 2019, we identified material weaknesses in our internal control over financial reporting
and concluded that our internal controls over financial reporting were not effective. Under the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework,
a deficiency in internal control over financial reporting exists when the design or operation of a control does not allow management
or personnel, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.
A material weakness as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there
is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented, or detected
and corrected, on a timely basis.
We
carried out an evaluation, under the supervision and with the participation of our management, including our principal executive
officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, our principal executive officer and principal financial officer
concluded that, as of the end of the period covered in our latest quarterly and annual report, our disclosure controls and procedures
were ineffective to ensure that information required to be disclosed in reports filed under the Exchange Act is recorded, processed,
summarized and reported within the required time periods specified in the Commission’s rules and forms and is accumulated
and communicated to our management, including our principal executive officer and principal financial officer, as appropriate
to allow timely decisions regarding required disclosure.
Our independent registered
public accounting firm is not required to, and did not, issue an attestation report regarding the effectiveness of our internal
control over financial reporting as of December 31, 2019, in accordance with the provisions of Section 404 of the Sarbanes-Oxley Act.
Our principal executive
officer and principal financial officer, do not expect that our disclosure controls and procedures or our internal controls will
prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that
there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud,
if any, have been detected.
If we are unable to comply
with the requirements of Section 404 in a timely manner or to assert that our internal control over financial reporting is effective,
or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal
control over financial reporting (if required), investors may lose confidence in the accuracy and completeness of our financial
reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by
NASDAQ, the SEC or other regulatory authorities, which could require additional financial and management resources.
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:
|
●
|
our territory
can have significant weather events which physically damage access lines;
|
|
|
|
|
●
|
power surges
and outages, computer viruses or hacking, earthquakes, terrorism attacks, vandalism and software or hardware defects which are
beyond our control; and
|
|
|
|
|
●
|
Unusual
spikes in demand or capacity limitations in our or our suppliers’ networks.
|
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 fulfilment, 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 integrate our acquired assets and to grow will be particularly dependent on our ability to hire, 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
Chief Financial Officer is currently employed on a part-time basis.
Given
the size of the Company and our operational needs, we initially hired our Chief Financial Officer, Rachel Boulds, on a part-time basis.
While we have discussed with Ms. Boulds the possibility of becoming our fulltime Chief Financial Officer, Ms. Boulds is currently
employed on a part-time basis. In addition to her role as Chief Financial Officer, Ms. Boulds is also operating her solo
accounting practice providing services for clients unrelated to the Company. While we believe that Ms. Boulds currently devotes
adequate time to the Company to perform the role and duties of our Chief Financial Officer, we cannot guarantee that she will
be able to continue to do so until she is with the Company on a fulltime basis. If Ms. Boulds cannot devote adequate time to our
Company to fulfil her role and duties as Chief Financial Officer or if any conflicts of interest arise during this time, it could
have a material adverse impact on our Company.
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 the companies and broker-dealers that
utilize our platform and the investors that find investment opportunities on our platform have been in existence for a very few
years. Further, there are constant discussions among legislators and regulators with respect to changing this 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 platform, including our ability to communicate and work with investors, broker-dealers 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 platform), or could increase our regulatory burden, including requiring us to register as a broker-dealer or funding
portal before we choose to do so. Any such changes would have a negative impact on our business.
In
the event we are required or decide to register as a broker-dealer or funding portal, our current business model could be
affected.
Under
our current structure, we believe we are not required to register as a broker-dealer or funding portal 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 or a funding portal, 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 or
a funding portal, 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 or to register as a funding portal,
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 platform.
Under
the Securities Act and the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), issuers making offerings
through our platform 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. Even though
we are not a registered funding portal, 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.
The
types of offerings that we expect to be posted on our platform are relatively new in an industry that is still quickly evolving.
The
principal types of offerings that are posted on our platform are pursuant to Regulation A and Regulation Crowdfunding which have
only been in effect in their current form since 2015 and 2016, respectively. Our ability to penetrate the market to host these
types of offerings 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 cyber-attacks.
As
an internet-based business, we may be vulnerable to hackers who may access the data of the investors and the issuer companies
that utilize our platform. Further, any significant disruption in service on our platform or in our 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 cyber-attacks 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, including as a result of epidemics and pandemics, 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 us, 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 we have 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, if any, 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 that utilize
our platform to make investments, 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. Our 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.
We
are substantially dependent on our eVance business for revenue. If we are unable to maintain our eVance business for any reason
(including the various reasons described in the risk factors herein) or for no reason it will have a material adverse effect on
our company.
Substantially
all of our revenue has been generated from our eVance business (see our financial statements and related notes included in this
report for more information), though we did begin generating revenue from our OmniSoft and CrowdPay business during the second
half of 2019. While we expect to continue to build out our OmniSoft software business over the next 12 to 18 months, continue
to rely more heavily on our PayFac model to generate revenue and to transition away from our reliance on our eVance business,
there is no guarantee that we will be able to do so. Accordingly, if we are unable to maintain our eVance business it will have
a material adverse effect on our company.
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:
|
●
|
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;
|
|
|
|
|
●
|
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;
|
|
|
|
|
●
|
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
|
|
|
|
|
●
|
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.
|
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, public health crises, and additional government intervention), particularly in the United
States, 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. For example, as of the date of this report, the recent
COVID-19 coronavirus outbreak, has impacted and may continue to impact the global economy or negatively affect various aspects
of our business, including reductions in the amount of consumer spending and lending which could result in a decrease in our revenue
and profits. If our customers make fewer sales of products and services using electronic payments, or consumers spend less money
through electronic payments, whether due to the outbreak of COVID-19 or otherwise, we will have fewer transactions to process
at lower dollar amounts, resulting in lower revenue.
Adverse
economic trends whether a result of the global COVID-19 outbreak or otherwise, will and may continue to accelerate the timing,
or increase the impact of, risks to our financial performance. These trends could include:
|
●
|
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;
|
|
|
|
|
●
|
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;
|
|
|
|
|
●
|
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;
|
|
|
|
|
●
|
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;
|
|
|
|
|
●
|
financial
institutions may restrict credit lines to cardholders or limit the issuance of new cards to mitigate cardholder credit concerns;
|
|
|
|
|
●
|
uncertainty
and volatility in the performance of our merchants’ businesses may make estimates of our revenues and financial performance
less predictable;
|
|
|
|
|
●
|
cardholders
may decrease spending for value-added services we market and sell;
|
|
|
|
|
●
|
a weakening
in the economy, either do to the global COVID-19 outbreak or otherwise, has forced, and could continue to force merchants to close
at higher than historical rates in part because many of them are not as well capitalized as larger organizations, which could
expose us to potential credit losses and future transaction declines; and
|
|
|
|
|
●
|
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.
|
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 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:
|
●
|
loss of
revenues;
|
|
|
|
|
●
|
loss of
merchants and partners;
|
|
|
|
|
●
|
loss of
merchant and cardholder data;
|
|
|
|
|
●
|
fines imposed
by card networks;
|
|
|
|
|
●
|
harm to
our business or reputation resulting from negative publicity;
|
|
|
|
|
●
|
exposure
to fraud losses or other liabilities;
|
|
|
|
|
●
|
additional
operating and development costs; or
|
|
|
|
|
●
|
diversion
of management, technical and other resources.
|
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:
|
●
|
often have
higher rates of business failures and more limited resources;
|
|
|
|
|
●
|
are typically
less sophisticated in their ability to make technology-related decisions based on factors other than price;
|
|
|
|
|
●
|
may have
decisions related to the choice of payment processor dictated by their affiliated parent entity; and
|
|
|
|
|
●
|
are more
able to change their payment processors than larger organizations dependent on our services.
|
SMBs
are typically more susceptible to the adverse effects of economic fluctuations (including as a result of epidemics and pandemics).
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
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 or newly emerging alternatives such as Apple Pay, Google Pay and
cryptocurrency, 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. Additionally, if market conditions lead to consumers spending less generally, for example, during an epidemic
or pandemic, there will be a decline in the use of credit or debit cards. 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, quality of services offered to consumers and businesses
and general market conditions. 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.
Our
OmniSoft subsidiary principally generates 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, including as a result of epidemics and pandemics, 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.
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 as a result of epidemics and pandemics, and 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, which may be impacted by, among other things, epidemics and pandemics,
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, including as a result of epidemics and pandemics, 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
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.
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.
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.
Risks
Related to our Intellectual Property
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.
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.
Risks
Related to our Business Generally
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:
|
●
|
diversion
of management time and focus from operating our business;
|
|
|
|
|
●
|
use of resources
that are needed in other areas of our business;
|
|
|
|
|
●
|
in the case
of an acquisition, implementation or remediation of controls, procedures and policies of the acquired company;
|
|
|
|
|
●
|
in the case
of an acquisition, difficulty integrating the accounting systems and operations of the acquired company, including potential risks
to our corporate culture;
|
|
|
|
|
●
|
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;
|
|
|
|
|
●
|
in the case
of an acquisition, retention and integration of employees from the acquired company;
|
|
|
|
|
●
|
unforeseen
costs or liabilities;
|
|
|
|
|
●
|
adverse
effects to our existing business relationships with partners and merchants as a result of the acquisition or investment;
|
|
|
|
|
●
|
the possibility
of adverse tax consequences; and
|
|
|
|
|
●
|
litigation
or other claims arising in connection with the acquired company or investment.
|
In
addition, we may agree to grant to a lender under a credit facility warrants. Furthermore, 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.
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
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 only in the United States. 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.
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.
On
December 22, 2017, President Trump signed into law H.R. 1, originally known as “The Tax Cuts and Jobs Act,”
which significantly revised the Internal Revenue Code of 1986, as amended. The new 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.
On
March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”),
which, among other things, is intended to provide emergency assistance to qualifying businesses and individuals. There can be
no assurance that these interventions by the government will be successful, and the financial markets may experience significant
contractions in available liquidity. While the Company may receive financial, tax or other relief and other benefits under and
as a result of the CARES Act, it is not possible to estimate at this time the availability, extent or impact of any such relief.
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. 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
There
is a very limited existing market for our common stock and we do not know if a more liquid market for our common stock will develop
to provide you with adequate liquidity.
There
has been a very limited public market for our common stock. We cannot assure you that an active trading market for our common
stock will develop, or if it does develop, that will be maintained. You may not be able to sell your securities quickly or at
the market price if trading in our securities is not active. In the absence of a public trading market:
|
●
|
you may
not be able to liquidate your investment in our securities;
|
|
|
|
|
●
|
you may
not be able to resell your securities at or above the public offering price;
|
|
|
|
|
●
|
the market
price of our common stock may experience more price volatility; and
|
|
|
|
|
●
|
there may
be less efficiency in carrying out your purchase and sale orders.
|
The
market price of our common stock may be highly volatile, and you could lose all or part of your investment.
The
trading price of our common stock is likely to be volatile. This volatility may prevent you from being able to sell your shares
at or above the price you paid for your shares. Our stock price could be subject to wide fluctuations in response to a variety
of factors, which include:
|
●
|
whether
we achieve our anticipated corporate objectives;
|
|
|
|
|
●
|
actual or
anticipated fluctuations in our quarterly or annual operating results;
|
|
|
|
|
●
|
changes
in financial or operational estimates or projections;
|
|
|
|
|
●
|
termination
of the lock-up agreement or other restrictions on the ability of our stockholders and other security holders to sell shares
after this offering;
|
|
|
|
|
●
|
changes
in the economic performance or market valuations of companies similar to ours; and
|
|
|
|
|
●
|
general
economic or political conditions in the United States or elsewhere.
|
In
addition, the stock market in general, and the stock of companies that are competitive to us in particular, have experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies.
Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating
performance.
If
our shares become subject to the penny stock rules, it would become more difficult to trade our shares.
The
SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks
are generally equity securities with a price of less than $5.00, other than securities registered on certain national securities
exchanges or authorized for quotation on certain automated quotation systems, provided that current price and volume information
with respect to transactions in such securities is provided by the exchange or system. If we do not obtain or retain a listing
on a national securities exchange and if the price of our common stock is less than $5.00, our common stock will be deemed a penny
stock. The penny stock rules require a broker-dealer, before a transaction in a penny stock not otherwise exempt from those rules,
to deliver a standardized risk disclosure document containing specified information. In addition, the penny stock rules require
that before effecting any transaction in a penny stock not otherwise exempt from those rules, a broker-dealer must make a
special written determination that the penny stock is a suitable investment for the purchaser and receive (i) the purchaser’s
written acknowledgment of the receipt of a risk disclosure statement; (ii) a written agreement to transactions involving penny
stocks; and (iii) a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect
of reducing the trading activity in the secondary market for our common stock, and therefore stockholders may have difficulty
selling their shares.
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.
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 or warrants, 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.
Shares
eligible for future sale may adversely affect the market for our common stock.
As
of April 24, 2020, there are 40,000 warrants to purchase shares of our common stock outstanding and options to purchase 278,506 shares
of our common stock outstanding. The warrants are exercisable at an exercise price of $7.50 per share and are entitled to piggy-back registration
rights generally obligating us to include the shares underlying the warrants in any registration statements we file with the SEC.
The stock options have a weighted average exercise price of $0.0001 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, all of our current stockholders are 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 April 24, 2020, Ronny Yakov, our chief executive officer, owned or controlled approximately 64.4% of our outstanding common
stock. Accordingly, Mr. Yakov has 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 Mr. Yakov 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.
As
an “emerging growth company” under applicable law, we will be subject to lessened disclosure requirements, which could
leave our stockholders without information or rights available to stockholders of more mature companies.
For
as long as we remain an “emerging growth company”, we have elected to take advantage of certain exemptions from various
reporting requirements that are applicable to other public companies that are not “emerging growth companies” including,
but not limited to:
|
●
|
not being
required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act;
|
|
|
|
|
●
|
taking advantage
of an extension of time to comply with new or revised financial accounting standards;
|
|
|
|
|
●
|
reduced
disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and
|
|
|
|
|
●
|
exemptions
from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute
payments not previously approved.
|
We
expect to take advantage of these reporting exemptions until we are no longer an “emerging growth company.” Because
of these lessened regulatory requirements, our stockholders would be left without information or rights available to stockholders
of more mature companies.
Because
we have elected to use the extended transition period for complying with new or revised accounting standards for an “emerging
growth company” our financial statements may not be comparable to companies that comply with public company effective dates.
We
have elected to use the extended transition period for complying with new or revised accounting standards for an emerging growth
company. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates
for public and private companies until those standards apply to private companies. As a result of this election, our financial
statements may not be comparable to companies that comply with public company effective dates, and thus investors may have difficulty
evaluating or comparing our business, performance or prospects in comparison to other public companies, which may have a negative
impact on the value and liquidity of our common stock.
Anti-takeover provisions
in our charter documents and Delaware law could discourage, delay or prevent a change in control of our company and may affect
the trading price of our common stock.
The
anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change in control by
prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person
becomes an interested stockholder, even if a change in control would be beneficial to our existing stockholders. In addition,
our certificate of incorporation, as amended (which we refer to as the certificate of incorporation), and bylaws, as amended (which
we refer to as the bylaws), may discourage, delay or prevent a change in our management or control over us that stockholders may
consider favorable. Our certificate of incorporation and bylaws:
|
●
|
provide
that vacancies on our board of directors, including newly created directorships, may be filled only by a majority vote of directors
then in office;
|
|
|
|
|
●
|
provide
that special meetings of stockholders may be called by a majority vote of our board of directors or at least 25% of shares held
by our stockholders;
|
|
|
|
|
●
|
not provide
stockholders with the ability to cumulate their votes; and
|
|
|
|
|
●
|
provide
that a majority of our stockholders (over 50%) and a vote by the majority of our board may amend our bylaws.
|
We
do not expect to pay dividends for the foreseeable future.
We
do not expect to pay dividends on our common stock offered in this transaction for the foreseeable future. Accordingly, any potential
investor who anticipates the need for current dividends should not purchase our securities.