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.
11
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, 2021 we had a working capital of $1,834,452 and a net loss of $4,978,358. Our cash flow provided
by operating activities for the year ended December 31, 2021 was $3,508,082. 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 close monitoring of the Company’s projected cash flow and operating expenses for a period of
at least the next twelve months.
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.’ To date,
we have had one lawsuit whereby we have been found to have successor liability. However, we are currently appealing the decision. 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.
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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 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.
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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 and financial systems and controls, invest in development
and 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, Vice President, Finance, Patrick
Smith 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 full-time Chief Financial Officer, it is anticipated that Ms. Boulds will continue to be employed on a part-time
basis for the next twelve months. 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.
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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
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 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 required
to register or 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.
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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 (CF) 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 COVID-19, 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.
16
Our revenues and profits are subject to
fluctuations.
It is difficult to accurately forecast our revenues
and operating results, and these could fluctuate in the future due to a number of factors. These factors may include adverse changes in
the 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.
Historically, substantially all of our revenue
has been generated from our eVance business, though we did begin generating revenue from our OmniSoft and CrowdPay business during the
second half of 2019. In addition, the launch of our Cryptocurrency Business in 2021 has started to generate revenue in 2021 and 2022.
While we expect to continue to build out our OmniSoft software business and to rely more heavily on our PayFac model and our Cryptocurrency
Business to generate revenue and to transition away from such significant reliance on our eVance business, there is no guarantee that
we will be able to do so (particularly, giving effect to the impact of COVID-19). 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, E-commerce 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, E-commerce 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.
17
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:
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 Annual Report, the COVID-19 pandemic, 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:
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● cardholders may decrease spending for value-added services we market and sell;
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.
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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.
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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.
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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 E-commerce, 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, “know-your-customer”
background checks 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.
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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 (including events that are the result of the COVID-19 pandemic). 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;
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.
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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 and quality of services
offered to consumers and businesses. In order to consistently increase and maintain our profitability, consumers and businesses must continue
to use electronic payment methods that we process, including credit and debit cards.
Increases in card network fees and other
changes to fee arrangements may result in the loss of merchants or a reduction in our earnings.
From time to time, card networks, including Visa
and MasterCard, increase the fees that they charge processors. We typically will 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.
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