10-K
1
f10k2020_olbgroup.htm
ANNUAL REPORT
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2020
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from ____________ to ____________
Commission
file number 000-52994
THE
OLB GROUP, INC.
(Exact
Name of Registrant as Specified in its Charter)
200
Park Avenue, Suite 1700, New York, NY 10166
(Address
of Principal Executive Offices with Zip Code)
Registrant’s
telephone number, including area code (212) 278-0900
Securities
registered pursuant to Section 12(b) of the Act: None.
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $.0001 par value
Title
of Class
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☒
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
☐ No ☒
State
the aggregate market value of the voting and non-voting common equity held by non-affiliates: $13,248,008 based on 1,261,715
non affiliate shares outstanding at $10.50 per share, which is the price at which the common shares were last sold on the last
business day of the registrant’s most recently completed second fiscal quarter.
As
of March 22, 2021, there were 7,114,774 shares of the issuer’s common stock outstanding.
THE
OLB GROUP, INC.
TABLE
OF CONTENTS
Page
PART I
Item 1. Business 1
Item 1A. Risk Factors 12
Item 1B. Unresolved Staff Comments 44
Item 2. Property 44
Item 3. Legal Proceedings 44
Item 4. Mine Safety Disclosures 44
PART II
Item 6. Selected Financial Data 45
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 49
Item 8. Financial Statements and Supplementary Data F-1
Item 9A. Controls and Procedures 50
Item 9B. Other Information 51
PART III
Item 10. Directors, Executive Officers and Corporate Governance 52
Item 11. Executive Compensation 57
Item 14. Principal Accountant Fees and Services 63
PART IV
Item 15. Exhibits, and Financial Statement Schedules 64
Signatures 66
i
PART
I
Item
1. Business.
Forward-Looking
Statements
Unless
the context indicates otherwise, as used in this Annual Report, 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. 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”).
1
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.”
2
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
Annual 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 Annual Report.
3
SecurePay
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 E-commerce and mobile payments
in-store and online).
4
CrowdPay.usTM
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.
5
Synergies
between the subsidiaries
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 Omni-commerce system. The gateway will allow merchants that are using the platform to
accept online E-commerce transactions.
6
Competitive
Advantages
We
believe that our platform of services will provide the following key advantages.
Risks
Associated with our Business
Our
business and ability to execute our business strategy are subject to a number of risks of which you should be aware before you
decide to buy our securities. In particular, you should consider the following risks, which are discussed more fully in the section
entitled “Risk Factors” in this Annual Report:
7
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 11, 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, the Company 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.
The
Company has experienced 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 2020
was relatively in-line with the Company’s expectations that the number of transactions during March would be below the prior
year because states in the United States began to implement stay-at-home orders, the number of transactions and resulting
revenue was approximately 15% lower in March than in February and 30% lower in April than in March. In May, the number of transactions
increased whereby they were 5% higher than in April, and in June, when some states began to reopen businesses, transactions were
7% higher than May. The Company’s revenue during the period of time decreased and then increased in the amount of similar
to the percentage of month-to-month transaction volume. The following is a summary of a comparison of the number of transactions
and transaction revenue for the second quarter, third quarter and fourth quarter of 2020.
Second Quarter 2020 Third Quarter 2020 Change Change
Third Quarter 2020 Fourth Quarter 2020 Change Change
We
do estimate that the number of transactions will continue to stay at a depressed level or further decline from the prior year,
along with revenues, until the response to the COVID-19 pandemic relaxes and allows customers to make more point of purchase transactions
for merchants and/or more merchants provide for additional contactless and online purchase options. The anticipated amount of
anticipated decline from prior year is unknown, but it will be impacted by when consumers return to the level of purchasing that
occurred in the prior year and before the pandemic. The Company does not anticipate that the pandemic will have a material impact
on the Company’s business or liquidity. However, additional closings and reopenings of businesses in the future will likely
result in a month over month volatility similar to what occurred in 2020.
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.
8
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.
9
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, E-commerce 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.
10
Employees
As
of December 31, 2020, 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:
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.
11
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 which we are continuing to
integrate into our overall operations, and 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 (“Asset Acquisition”). 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 (the “Share Exchange”).
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.
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, 2020 and, we had a working capital
of $3,205,807 and a net loss of $1,776,727. Our cash flow used by operating activities for the year ended December 31, 2020 was
$327,267. Notwithstanding the foregoing, management has concluded that it has sufficient liquidity to continue operations for
a period of at least twelve months from the date of this Annual Report, which 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 for a period of at least the next twelve months.
12
Further,
in connection with the response to the COVID-19 pandemic in the United States, the Company has experienced disruptions to its
business and has observed disruptions for the Company’s customers and merchants which has resulted in a decline in transaction
volume. The Company estimates that the number of transactions will continue to stay at a depressed level or further decline from
the prior year, along with revenues, if the response to the COVID-19 pandemic reinstates stay-at-home restrictions and restricts
customers to make more point of purchase transactions for merchants and/or more merchants provide for additional contactless and
online purchase options. The anticipated amount of decline in revenue is unknown, but the Company would be negatively impacted
until consumers return to the level of purchasing that occurred
As
a result of these factors, the Company determined it was necessary to do a reforecast of its cash flow for 2021 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 of filing this Annual Report. The Company also determined it was necessary to continue
to implement certain corporate actions, such as reducing discretionary expenses, in connection with its overall analysis to determine
whether or not it has sufficient liquidity to continue as a going concern for a period of at least twelve months from the date
its condensed consolidated financial statements were issued.
In
considering the anticipated impact of the COVID-19 pandemic on the Company’s business, the Company does not anticipate that
the pandemic will have a material impact on the Company’s business or liquidity and believes that 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 of this Annual Report (see “Management’s Discussion and Analysis of Financial Condition and Results
of Operations). However, any additional closings and reopenings of businesses in the future will likely result in a month over
month decline and then increase similar to what occurred in March through June 2020.
If
there are unanticipated expenses, insufficient cash from operations or the impact of the COVID-19 pandemic, including but not
limited to losses arising from a second wave of businesses closing in response to the ongoing pandemic, which results in a larger
than anticipated decline in transactions, 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.
While
we will be able to fund future liquidity and capital requirements through cash flows generated from our operating activities alone
for a period of twelve months, we previously have financed our operations from short-term loans from Ronny Yakov, our Chief Executive
Officer and John Herzog, a significant shareholder of the Company. It is not assured that Mr. Yakov or Mr. Herzog would continue
to provide such assistance if the Company were to require it in the future.
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.
13
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, 2020. 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 2019 and 2020, 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, 2020, 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 the stock exchange on which our securities are listed, 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.
14
We
may not be able to integrate new technologies and provide new services in a cost-efficient manner.
The
online E-commerce 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:
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