ITEM 1A. RISK FACTORS
An investment in our Common Stock is subject to many risks. You
should carefully consider the risks described below, together with
all of the other information included in this Annual Report on Form
10-K (this “Annual Report”), including the financial
statements and the related notes, before you decide whether to
invest in our Common Stock. Our business, operating results and
financial condition could be harmed by any of the following
risks. The trading price of our Common Stock could decline due
to any of these risks, and you could lose all or part of your
investment.
Risks Related to the Company
We have incurred losses in the past and there can be no assurance
that we will operate profitably in the future.
Our
marketing strategy emphasizes sales of subscription-based services,
instead of annual licenses, and using Spokes to connect to our
Hubs. This strategy has resulted in the development of a
foundation of retail and wholesale Hubs to which suppliers can
be “connected”, thereby accelerating future
growth. If, however, this marketing strategy fails, revenue and
operations will be negatively affected. We had net income of
$1,593,269 for the year ended
June 30, 2020, compared to a net income of $3,902,406 for the year
ended June 30, 2019. Although we generated net income in the year
ended June 30, 2020, there can be no assurance that we will achieve
profitability in future periods. We cannot provide assurance that
we will continue to generate revenue or have sustainable profits.
If we do not operate profitably in the future, our current cash
resources will be used to fund our operating losses. Continued
losses would have an adverse effect on the long-term value of our
Common Stock and any investment in the Company.
Although our cash resources are currently sufficient, our long-term
liquidity and capital requirements may be difficult to predict,
which may adversely affect our long-term cash
position.
Historically, we
have been successful in raising capital when necessary, including
through private placements, a registered direct offering, and stock
issuances to our officers and directors, including our Chief
Executive Officer, to pay our indebtedness and fund our operations,
in addition to cash flow from operations. If we are required
to seek additional financing in the future in order to fund our
operations, retire our indebtedness and otherwise carry out our
business plan, there can be no assurance that such financing will
be available on acceptable terms, or at all, and there can be no
assurance that any such arrangement, if required or otherwise
sought, would be available on terms deemed to be commercially
acceptable and in our best interests.
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Our business is dependent upon the continued services of our
founder and Chief Executive Officer, Randall K. Fields. Should
we lose the services of Mr. Fields, our operations will be
negatively impacted.
Our
business is dependent upon the expertise and continued service of
our founder and Chief Executive Officer, Randall K. Fields. Mr.
Fields is essential to our operations. Accordingly, an investor
must rely on Mr. Fields’ management decisions that will
continue to control our business affairs. We currently maintain key
man insurance on Mr. Fields’ life in the amount of
$5,000,000; however, that coverage would be inadequate to
compensate for the loss of his services. The loss of the services
of Mr. Fields would have a materially adverse effect upon our
business.
Risk Relating to Business Operations
Quarterly and annual operating results may fluctuate, which makes
it difficult to predict future performance.
Management expects
a significant portion of our revenue stream to come from the sale
of subscriptions, and to a lesser extent, transactions processed
though MarketPlace, license sales, maintenance and professional
services charged to new customers. These amounts will
fluctuate and are uncertain because predicting future sales is
difficult and involves speculation. In addition, we may
potentially experience significant fluctuations in future operating
results caused by a variety of factors, many of which are
outside of our control, including:
●
our
ability to retain and increase sales to existing customers, attract
new customers and satisfy our customers’
requirements;
●
the
renewal rates for our subscriptions and other
services;
●
changes
in our pricing policies, whether initiated by us or as a result of
competition;
●
the
cost, timing and management effort for the introduction of new
services, including new features to our existing
services;
●
the
rate of expansion and productivity of our sales force;
●
new
product and service introductions by our competitors;
●
variations
in the revenue mix of editions or versions of our
service;
●
technical
difficulties or interruptions in our service;
●
general
economic conditions that may adversely affect either our
customers’ ability or willingness to purchase additional
subscriptions or upgrade their services, or delay a prospective
customer’s purchasing decision, or reduce the value of new
subscription contracts or affect renewal rates;
●
timing
of additional expenses and investments in infrastructure to support
growth in our business;
●
regulatory
compliance costs;
●
consolidation
in the food industry;
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●
the
timing of customer payments and payment defaults by
customers;
●
extraordinary
expenses such as litigation or other dispute-related settlement
payments;
●
the
impact of new accounting pronouncements;
●
the
timing of stock awards to employees and the related financial
statement impact; and
●
system
or service failures, security breaches or network
downtime.
Future
operating results may fluctuate because of the foregoing factors,
making it difficult to predict operating
results. Period-to-period comparisons of operating results are
not necessarily meaningful and should not be relied upon as an
indicator of future performance. In addition, a large portion
of our expense will be fixed in the short-term, particularly with
respect to facilities and personnel making future operating results
sensitive to fluctuations in revenue.
We face threats from competing and
emerging technologies that may affect our profitability, as well as
competitors that are larger and have greater financial and
operational resources that may give them an advantage in the
market.
Markets
for our type of software products and that of our competitors are
characterized by development of new software, software solutions or
enhancements that are subject to constant change; rapidly evolving
technological change; and unanticipated changes in customer needs.
Because these markets are subject to such rapid change, the life
cycle of our products is difficult to predict. As a result, we
are subject to the following risks: whether or how we will respond
to technological changes in a timely or cost-effective manner;
whether the products or technologies developed by our competitors
will render our products and services obsolete or shorten the life
cycle of our products and services; and whether our products and
services will achieve market acceptance.
Moreover,
many of our competitors are larger and have greater financial and
operational resources than we do. This may allow them to offer
better pricing terms to customers in the industry, which could
result in a loss of potential or current customers or could force
us to lower prices. Our competitors may have the ability to
devote more financial and operational resources to the development
of new technologies that provide improved operating functionality
and features to their product and service offerings. If
successful, their development efforts could render our product and
service offerings less desirable to customers, again resulting in
the loss of customers or a reduction in the price we can demand for
our offerings. Any of these actions could have a significant effect
on revenue.
We face risks associated with new product
introductions.
Our
future revenue is dependent upon the successful and timely
development of new and enhanced versions of our products and
potential product offerings suitable to the customers’
needs. If we fail to successfully upgrade existing products
and develop new products, and those new products do not achieve
market acceptance, our revenue will be negatively
impacted.
It may
be difficult for us to assess risks associated with potential new
product offerings:
●
It may
be difficult for us to predict the amount of service and
technological resources that will be needed by customers of new
offerings, and if we underestimate the necessary resources, the
quality of our service will be negatively impacted, thereby
undermining the value of the product to the customer;
●
technological
issues between us and our customers may be experienced in capturing
data necessary for new product offerings, and these technological
issues may result in unforeseen conflicts or technological setbacks
when implementing these products, which could result in material
delays and even result in a termination of the
engagement;
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●
a
customer’s experience with new offerings, if negative, may
prevent us from having an opportunity to sell additional products
and services to that customer;
●
if
customers do not use our products as recommends and/or fail to
implement any needed corrective action(s), it is unlikely that
customers will experience the business benefits from these products
and may, therefore, be hesitant to continue the engagement as well
as acquire any other products from us; and
●
delays
in proceeding with the implementation of new products for a new
customer will negatively affect our cash flow and our ability to
predict cash flow.
We cannot accurately predict renewal or upgrade rates and the
impact these rates may have on our future revenue and operating
results.
Our
customers have no obligation to renew their subscriptions for our
service after the expiration of their initial subscription period.
Our renewal rates may decline or fluctuate as a result of factors,
including customer dissatisfaction with our service,
customers’ ability to continue their operations and spending
levels, consolidation, and deteriorating general economic
conditions. If our customers do not renew their subscriptions for
our service or reduce the level of service at the time of renewal,
our revenue will decline, and our business will
suffer.
Our
future success also depends in part on our ability to increase
rates, sell additional features and services, or addition
subscriptions to our current customers. This may also require
increasingly sophisticated and costly sales and marketing efforts
that are targeted at senior management. If these strategies fail,
we will need to refocus our efforts toward other solutions, which
could lead to increased development and marketing costs, delayed
revenue streams, and otherwise negatively affect our
operations.
If our Compliance and Food Safety solutions do not perform as
expected, whether as a result of operator error or otherwise, it
could impair our operating results and reputation.
Our
success depends on the food safety market’s confidence that
we can provide reliable, high-quality reporting for our customers.
We believe that our customers are likely to be particularly
sensitive to product defects and operator errors, including if our
systems fail to accurately report issues that could reduce the
liability of our clients in the event of a product recall. In
addition, our reputation and the reputation of our products can be
adversely affected if our systems fail to perform as expected.
However, if our customers or potential customers fail to implement
and use our systems as suggested by us, they may not be able to
deal with a recall as effectively as they could have. As a result,
the failure or perceived failure of our products to perform as
expected, could have a material adverse effect on our revenue,
results of operations and business.
If a customer is sued because of a recalled product we could be
joined in that suit, the defense of which would impair our
operating results.
We
believe our Compliance and Food Safety solutions would be helpful
in the event of a recall. However, their ultimate usefulness is
dependent on how the customer uses our products, which is in many
ways out of our control. Similarly, a customer which is a defendant
in a product liability case could claim that had our services
performed as represented the extent of potential liability would
have been minimized and therefore, we should have some contributory
liability in the case. Defending such a claim could have a
material adverse effect on our revenue, results of operations and
business.
The deployment of our services, or consultation provided by our
personnel, could result in litigation naming us as a party, which
litigation could result in a material and adverse effect on us, and
our results of operations.
Our
Compliance and Food Safety solutions are marketed to potential
customers based, in part, on our service’s ability to reduce
a company’s potential regulatory, legal, and criminal risk
from its supply chain partners. In the event litigation is
commenced against a customer based on issues caused by a
constituent in the supply chain, or consultation provided by our
personnel, we could be joined or named in such litigation. As a
result, we could face substantial defense costs. In addition, any
adverse determination resulting in such litigation could have a
material and adverse effect on us, and our results of
operations.
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We face risks relating to the sale and delivery of merchandise to
customers.
We
depend on a number of other companies to perform functions critical
to our ability to deliver products to our customers, including
maintaining inventory, preparing merchandise for shipment to our
customers and delivering purchased merchandise on a timely basis.
We also depend on the delivery services that we and they utilize.
We also depend on our partners to ensure proper labelling of
products. Issues or concerns regarding, product safety, labelling,
content or quality could result in consumer or governmental claims.
In limited circumstances, we sell merchandise that we have
purchased. In these instances, we assume the risks related to
inventory.
We face risks associated with proprietary protection of our
software.
Our
success depends on our ability to develop and protect existing and
new proprietary technology and intellectual property
rights. We seek to protect our software, documentation
and other written materials primarily through a combination of
patents, trademarks, and copyright laws, trade secret laws,
confidentiality procedures and contractual provisions. While
we have attempted to safeguard and maintain our proprietary rights,
there are no assurances that we will be successful in doing
so. Our competitors may independently develop or patent
technologies that are substantially equivalent or superior to
ours.
Despite
our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or obtain and use
information that we regard as proprietary. In some types of
situations, we may rely in part on ‘shrink wrap’ or
‘point and click’ licenses that are not signed by the
end user and, therefore, may be unenforceable under the laws of
certain jurisdictions. Policing unauthorized use of our
products is difficult. While we are unable to determine the
extent to which piracy our software exists, software piracy can be
expected to be a persistent problem, particularly in foreign
countries where the laws may not protect proprietary rights as
fully as the United States. We can offer no assurance that our
means of protecting our proprietary rights will be adequate or that
our competitors will not reverse engineer or independently develop
similar technology.
We may discover software errors in our products that may result in
a loss of revenue, injury to our reputation or subject us to
substantial liability.
Non-conformities or
bugs (“errors”)
may be found from time to time in our existing, new or enhanced
products after commencement of commercial shipments, resulting in
loss of revenue or injury to our reputation. In the past, we
have discovered errors in our products and as a result, have
experienced delays in the shipment of products. Errors in our
products may be caused by defects in third-party software
incorporated into our products. If so, we may not be able to
fix these defects without the cooperation of these software
providers. Because these defects may not be as significant to
the software provider as they are to us, we may not receive the
rapid cooperation that may be required. We may not have the
contractual right to access the source code of third-party
software, and even if we do have access to the code, we may not be
able to fix the defect. In addition, our customers may use our
service in unanticipated ways that may cause a disruption in
service for other customers attempting to access their
data. Since our customers use our products for critical
business applications, any errors, defects or other performance
problems could hurt our reputation and may result in damage to our
customers’ business. If that occurs, customers could
elect not to renew, delay or withhold payment to us, we could lose
future sales or customers may make warranty or other claims against
us, which could result in an increase in our provision for doubtful
accounts, an increase in collection cycles for accounts receivable
or the expense and risk of litigation. These potential scenarios,
successful or otherwise, would likely be time consuming and
costly.
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Interruptions or delays in service from our third-party data center
hosting facility could impair the delivery of our service and harm
our business.
We
currently serve our customers from a third-party data center
hosting facility located in the United States. Any damage to, or
failure of, our systems generally could result in interruptions in
our service. As we continue to add capacity, we may move or
transfer our data and our customers’ data. Despite
precautions taken during this process, any unsuccessful data
transfers may impair the delivery of our service. Further, any
damage to, or failure of, our systems generally could result in
interruptions in our service. Interruptions in our service may
reduce our revenue, cause us to issue credits or pay penalties,
cause customers to terminate their subscriptions and adversely
affect our renewal rates and our ability to attract new customers.
Our business will also be harmed if our customers and potential
customers believe our service is unreliable.
As part
of our current disaster recovery arrangements, our production
environment and all of our customers’ data is currently
replicated in near real-time in a separate facility physically
located in a different region of the United States. We do not
control the operation of these facilities, and they are vulnerable
to damage or interruption from earthquakes, floods, fires, power
loss, telecommunications failures and similar events. They may also
be subject to break-ins, sabotage, intentional acts of vandalism
and similar misconduct. Despite precautions taken at these
facilities, the occurrence of a natural disaster or an act of
terrorism, a decision to close the facilities without adequate
notice or other unanticipated problems at these facilities could
result in lengthy interruptions in our service. Even with the
disaster recovery arrangements, our service could be
interrupted.
If our security measures are breached and unauthorized access is
obtained to a customer’s data, our data or our information
technology systems, our service may be perceived as not being
secure, customers may curtail or stop using our service and we may
incur significant legal and financial exposure and
liabilities.
Our
service involves the storage and transmission of customers’
proprietary information, and security breaches could expose us to a
risk of loss of this information, litigation and possible
liability. These security measures may be breached as a result of
third-party action, including intentional misconduct by computer
hackers, employee error, malfeasance or otherwise during transfer
of data to additional data centers or at any time, and result in
someone obtaining unauthorized access to our customers’ data
or our data, including our intellectual property and other
confidential business information, or our information technology
systems. Additionally, third parties may attempt to fraudulently
induce employees or customers into disclosing sensitive
information, such as user names, passwords or other information in
order to gain access to our customers’ data or our data,
including our intellectual property and other confidential business
information, or our information technology systems. Because the
techniques used to obtain unauthorized access, or to sabotage
systems, change frequently and generally are not recognized until
launched against a target, we may be unable to anticipate these
techniques or to implement adequate preventative measures. Any
security breach could result in a loss of confidence in the
security of our service, damage our reputation, disrupt our
business, lead to legal liability and negatively impact our future
sales.
Security breaches and other disruptions could compromise our
information and expose us to liability, which would cause our
business and reputation to suffer.
In the
ordinary course of our business, we collect and store sensitive
data, including intellectual property, our proprietary business
information and that of our customers, suppliers and business
partners, and personally identifiable information of our customers
and employees, in our data centers and on our networks. The secure
processing, maintenance and transmission of this information is
critical to our operations and business strategy. Despite our
security measures, our information technology and infrastructure
may be vulnerable to attacks by hackers or breached due to employee
error, malfeasance or other disruptions. Any such breach could
compromise our networks and the information stored there could be
accessed, publicly disclosed, lost or stolen. Any such access,
disclosure or other loss of information could result in legal
claims or proceedings, liability under laws that protect the
privacy of personal information, and regulatory penalties, disrupt
our operations and the services we provide to customers, and damage
our reputation, and cause a loss of confidence in our products and
services, which could adversely affect our business/operating
margins, revenues and competitive position.
The
secure processing, maintenance and transmission of this information
is critical to our operations and business strategy, and we devote
significant resources to protecting our information. The expenses
associated with protecting our information could reduce our
operating margins.
Weakened global economic conditions may adversely affect our
industry, business and results of operations.
The
rate at which our customers purchase new or enhanced services
depends on several factors, including general economic conditions.
The United States and other key international economies have
experienced in the past a downturn in which economic activity was
impacted by falling demand for a variety of goods and services,
restricted credit, poor liquidity, reduced corporate profitability,
volatility in credit, equity and foreign exchange markets,
bankruptcies and overall uncertainty with respect to the economy.
These conditions affect the rate of information technology spending
and could adversely affect our customers’ ability or
willingness to purchase our enterprise cloud computing services,
delay prospective customers’ purchasing decisions, reduce the
value or duration of their subscription contracts or affect renewal
rates, all of which could adversely affect our operating
results.
COVID-19 could potentially affect our sales and disrupt our
operations and could have a material adverse impact on the
Company.
COVID-19,
which was reported to have surfaced in Wuhan, China in December
2019 and has now spread to other countries, including the U.S.,
could adversely impact our operations or those of our customers.
The extent to which COVID-19 impacts our operations and those of
our customers will depend on future developments, which are highly
uncertain and cannot be predicted with confidence. If the public
continues to avoid public spaces, including retail stores, or if
we, or any of our customers encounter any disruptions to our or
their respective operations, facilities or stores, or if our
customers were to partially or fully shut down due to COVID-19,
then we or they may be prevented or delayed from effectively
operating our or their business, respectively, and the marketing
and sale of our services and our financial results could be
adversely affected.
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Risks Relating to Our Common Stock
Our quarterly results of operations may fluctuate in the future,
which could result in volatility in our stock price.
Our
quarterly revenue and results of operations have varied in the past
and may fluctuate as a result of a variety of factors. If our
quarterly revenue or results of operations fluctuate, the price of
our Common Stock could decline substantially. Fluctuations in our
results of operations may be due to several factors, including, but
not limited to, those listed and identified throughout this
“Risk Factors”
section.
The limited public market for our stock may adversely affect an
investor’s ability to liquidate an investment in
us.
Although our Common
Stock is currently quoted on the NASDAQ Capital Market, there is
limited trading activity. We can give no assurance that an
active market will develop, or if developed, that it will be
sustained. If an investor acquires shares of our Common Stock,
the investor may not be able to liquidate our shares should there
be a need or desire to do so.
Future issuances of our shares may lead to future dilution in the
value of our Common Stock, will lead to a reduction in shareholder
voting power and may prevent a change in control.
The
shares may be substantially diluted due to the
following:
●
issuance
of Common Stock in connection with funding agreements with third
parties and future issuances of Common Stock and the
Company’s Preferred Stock, par value $0.01
(“Preferred
Stock”) by the Board of Directors;
and
●
the
Board of Directors has the power to issue additional shares of
Common Stock and Preferred Stock and the right to determine the
voting, dividend, conversion, liquidation, preferences and other
conditions of the shares without shareholder approval.
Stock
issuances may result in reduction of the book value or market price
of outstanding shares of Common Stock. If we issue any
additional shares of Common Stock or Preferred Stock, proportionate
ownership of Common Stock and voting power will be
reduced. Further, any new issuance of Common Stock or
Preferred Stock may prevent a change in control or
management.
Our officers and directors have significant control over us, which
may lead to conflicts with other stockholders over corporate
governance.
Our
officers and directors, including our Chief Executive Officer,
Randall K. Fields, control approximately 41% of our Common
Stock. Mr. Fields, individually controls 33% of our
Common Stock. Consequently, Mr. Fields individually, and our
officers and directors, as stockholders acting together, can
significantly influence all matters requiring approval by our
stockholders, including the election of directors and significant
corporate transactions, such as mergers or other business
combination transactions.
Our corporate charter contains authorized, unissued “blank
check” Preferred Stock issuable without stockholder approval
with the effect of diluting then current stockholder
interests.
Our
articles of incorporation currently authorize the issuance of up to
30,000,000 shares of ‘blank check’ Preferred Stock with
designations, rights, and preferences as may be determined from
time to time by our Board of Directors, of which 700,000 shares are
currently designated as Series B Convertible Preferred Stock
(“Series B