Item 1A. Risk Factors
Investing in our Company involves a
high degree of risk. In addition to the risks related to our business set forth in this Quarterly Report on Form 10-Q, you should
carefully consider the risks described below before investing in us. Additional risks, uncertainties and other factors not presently
known to us or that we currently deem immaterial may also impair our business operations.
Risks Related to our Business
Risks Relating to Our Business and
Industry
We have had limited operations to date.
Qpagos’ Corporation’s
subsidiaries were incorporated in November 2013 and began deploying kiosks in Mexico in November 2014. As such, we have a very
limited operating history. We have yet to demonstrate our ability to overcome the risks frequently encountered in the payment
services industry and are still subject to many of the risks common to early stage companies, including the uncertainty as to
our ability to implement our business plan, market acceptance of our proposed business and services, under-capitalization, cash
shortages, limitations with respect to personnel, financing and other resources and uncertainty of our ability to generate revenues.
There is no assurance that our activities will be successful or will result in any revenues or profit, and the likelihood of our
success must be considered in light of the stage of our development. There can be no assurance that we will be able to consummate
our business strategy and plans, or that financial, technological, market, or other limitations may force us to modify, alter,
significantly delay, or significantly impede the implementation of such plans. We have insufficient results for investors to use
to identify historical trends. Investors should consider our prospects in light of the risk, expenses and difficulties we will
encounter as an early stage company. Our revenue and income potential is unproven and our business model is continually evolving.
We are subject to the risks inherent to the operation of a new business enterprise, and cannot assure you that we will be able
to successfully address these risks.
The condensed consolidated financial statements of QPAGOS
have been prepared assuming that it will continue as a going concern.
QPAGOS’ operating
losses, negative cash flows from operations and limited alternative sources of revenue raise substantial doubt about its ability
to continue as a going concern. The condensed consolidated financial statements of QPAGOS for the three months and nine
months ended September 30, 2016 do not include any adjustments that might result from the outcome of this uncertainty. If
we or Qpagos Corporation cannot raise adequate capital on acceptable terms or generate sufficient revenue from operations, we
and Qpagos Corporation will need to revise our business plans.
We may continue to generate operating losses and experience
negative cash flows and it is uncertain whether we will achieve profitability.
For the nine months
ended September 30, 2016 and for the years ended December 31, 2015, we incurred a net loss of $4.0 million and $2.5 million,
respectively. We have an accumulated deficit of $8.0 million through September 30, 2016. We expect to continue to incur operating
losses until such time, if ever, as we are able to achieve sufficient levels of revenue from operations. There can be no assurance
that we will ever generate significant sales or achieve profitability. Accordingly, the extent of future losses and the time required
to achieve profitability, if ever, cannot be predicted at this point.
We also expect to
experience negative cash flows for the foreseeable future as we fund our operating losses. As a result, we will need to generate
significant revenues or raise additional financing in order to achieve and maintain profitability. We may not be able to generate
these revenues or achieve profitability in the future. Our failure to achieve or maintain profitability would likely negatively
impact the value of our securities and financing activities.
The payment services industry is highly competitive,
and we have a number of competitors that are larger and have greater financial and other resources.
The payment services
industry is highly competitive, and our continued growth depends on our ability to compete effectively. Although we do not face
direct competition from any competitor in exactly the same line of business, we face competition from a variety of financial and
non-financial business groups. These competitors include retail banks, non-traditional payment service providers, such as retailers
and mobile network operators, traditional kiosk and terminal operators and electronic payment system operators, as well as other
companies that provide various forms of payment services, including electronic payment and payment processing services. Competitors
in our industry seek to differentiate themselves by features and functionalities such as speed, convenience, network size, accessibility,
hours of operation, reliability and price. A significant number of our competitors have greater financial, technological and marketing
resources than we have, operate robust networks and are highly regarded by consumers.
There is uncertainty as to market
acceptance of our technology and services.
We have conducted
our own research into the markets for our services; however, because we are a new entrant into the market, we cannot guarantee
market acceptance of our services and have somewhat limited information on which to estimate our anticipated level of sales. Our
services require consumers and service providers to adopt our technology. Our industry is susceptible to rapid technological developments
and there can be no assurance that we will be able to match any new technological advances. If we are unable to match the technological
changes in the needs of our customers the demand for our products will be reduced.
The technology upon which our business
is dependent is licensed from a third party under the terms of a ten year license agreement, which if terminated, would result
in the cessation of our business operations
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The license with Janor
Enterprises Ltd. (Janor) is for the rights to use three software programs upon which our business is completely dependent. The
agreement is for a term of ten years, and may be extended for an additional ten years but may be terminated early by Janor if
we fail to comply with its terms and conditions or make certain payments. The rights to the licensed programs terminate upon expiration
or termination of the agreement. We have no guarantee that Janor will renew our agreement upon expiration of the extended term.
If we are not able to maintain this license, we would have to cease operations unless we have developed or secured the rights
to technology that would provide the same functionality and we are able to reconfigure our installed base of kiosks, terminals
and other system infrastructure to work with the new technology. These hurdles would be extremely expensive and time consuming,
and it is unlikely that we would be able stay in business.
Our exclusive right to the technology that we license
is subject to forfeiture if we fail to make certain quarterly payments.
The technology that
we license from Janor is licensed pursuant to the terms of a license agreement. Subject to us making quarterly payments of $5,000
per quarter, Janor has agreed that neither it nor any of its subsidiary or affiliated entity will install a terminal and/or kiosk
that incorporates the Programs or a technology having the same or a similar effect nor will they provide any person or entity
with the right to install a terminal and/or kiosk in Mexico that incorporates the Programs or a technology having the same or
a similar effect; provided; however, If we should fail to make the quarterly payments, there is no prohibition from Janor licensing
the same technology to another entity in Mexico that could compete with us. If Janor were to license the same technology to a
third party our competitive position in Mexico could be substantially harmed.
We rely on one outside vendor for
the supply of key kiosk parts and the partial or complete loss of this supplier could cause customer supply or production delays
and as a result potentially a loss of revenues.
We rely on one outside
vendor based outside Mexico to manufacture substantial portions of critical hardware that are used with or included in our kiosks.
Although there are other suppliers that could supply the hardware required for the kiosks, we do not have a contract with such
other suppliers and therefore, if our present vendor was to delay or terminate its performance, our business would likely be disrupted.
Our reliance on this
vendor is expected to continue and involves other risks, including our limited control over the availability of components, delivery
schedules, pricing and product quality. We may experience delays, additional expenses and lost sales as a result of our dependency
upon this vendor. Although we expect that other existing vendors would be able to supply us with any needed products if this vendor
was to cease or interrupt production or otherwise fail to supply us with an adequate supply of required parts, if these other
existing vendors were unable to supply us in a timely manner, or on comparable terms, our business could be materially adversely
impacted.
Our reliance on outside
suppliers for our kiosk hardware involves several risks, including the following:
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our suppliers of required
parts may cease or interrupt production or otherwise fail to supply us with an adequate supply of required parts for a number
of reasons, including contractual disputes with our supplier or adverse financial developments at or affecting the supplier;
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we have reduced control over the pricing of
third party-supplied materials, and our supplier may be unable or unwilling to supply us with required materials on commercially
acceptable terms, or at all;
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we have reduced control over the timely delivery
of third party-supplied materials; and
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our suppliers may be unable to develop technologically
advanced products to support our growth and development of new systems.
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Disruptions in international
trade and finance or in transportation also may have a material adverse effect on our business, financial condition and results
of operation. Any significant disruption in our operations for any reason, such as regulatory requirements, scheduling
delays, quality control problems, loss of certifications, power interruptions, fires, hurricanes, war or threats of terrorism,
labor strikes, contract disputes, could adversely affect our sales and customer relationships. In addition, in the event of a
breach of law by a vendor based outside of Mexico or a breach of a contractual obligation that has an adverse effect upon our
operations, we may have little or no recourse because all of our vendors’ assets could be located in a foreign country,
such as Russia, Italy, Germany, Canada or the People’s Republic of China where it may not be possible to effect service
of process and uncertainty exists as to whether the courts in such foreign jurisdiction would recognize or enforce a judgment
of a Mexican court obtained against the vendor.
We are subject to the economic risk and business cycles
of our merchants and agents and the overall level of consumer spending.
The payment services
industry depends heavily on the overall level of consumer spending. We are exposed to general economic conditions that affect
consumer confidence, consumer spending, consumer discretionary income or changes in consumer purchasing habits. Economic factors
such as employment levels, business conditions, energy and fuel costs, interest rates, and inflation rate could reduce consumer
spending or change consumer purchasing habits. A reduction in the amount of consumer spending could result in a decrease in our
revenue and profits. If our merchants make fewer sales of their products and services using our services or consumers spend less
money per transaction, we will have fewer transactions to process at lower amounts, resulting in lower revenue. Weakening in the
Mexican economy could have a negative impact on our merchants, as well as consumers who purchase products and services using our
payment processing systems, which could, in turn, negatively impact our business, financial condition and results of operations,
particularly if the recessionary environment disproportionately affects some of the market segments that represent a larger portion
of our payment processing volume. In addition, these factors could force some of our merchants and/or agents to liquidate their
operations or go bankrupt, or could cause our agents to reduce the number of their locations or hours of operation, resulting
in reduced transaction volumes. We also have a certain amount of fixed costs, including salaries and rent, which could limit our
ability to adjust costs and respond quickly to changes affecting the economy and our business.
We do not control the rates of the fees levied by Qpagos
Corporation’s agents on consumers.
Qpagos Corporation’s
agents pay it an agreed fee using a portion of the fees levied by them on consumers. The fee paid to Qpagos Corporation by the
agent is based on a percentage of the value of each transaction that Qpagos Corporation’s processes or a fixed rate per
transaction. However, in most cases the amount of fees levied by an agent on a consumer for each particular transaction is determined
by such agent at its own discretion. Qpagos Corporation usually does not cap the amount of such fees or otherwise control it.
We believe that the fees set by agents are market-driven, and that our interests and Qpagos Corporation’s agents’
interests are aligned with a view to maintaining fees at a level that would simultaneously result in our agents’ profitability
and customer satisfaction. However, we can provide no assurance that agents will not raise fees to a level that will adversely
affect the popularity of our services among consumers. At the same time, if Qpagos Corporation is forced to cap customer fees
to protect the strength of our brand or otherwise, it may lose a significant number of agents, which would reduce the penetration
of our physical distribution network. In limited instances, we have introduced such caps at the request of our merchants. No assurance
can be made that this trend will not increase. Material increases in customer fees by our agents or the imposition of caps on
the rates of such fees by us could have an adverse effect on the business, financial condition and results of operations.
If consumer confidence in our business deteriorates,
our business, financial condition and results of operations could be adversely affected.
Our business is built
on consumers’ confidence in our brands, as well as our ability to provide fast, reliable payment services. As a consumer
business, the strength of our brand and reputation are of paramount importance to us. A number of factors could adversely affect
consumer confidence in our brand, many of which are beyond our control, and could have an adverse impact on our results of operations.
These factors include:
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any regulatory action or investigation against
us;
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any significant interruption to our systems
and operations; and
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any breach of our security system or any compromises
of consumer data.
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In addition, we are
largely dependent on our agents and, in the future, will be dependent, on franchisees to which we license our products to maintain
the reputation of our brand. Despite the measures that we put in place to ensure their compliance with our performance standards,
our lack of control over their operations may result in the low quality of service of a particular agent or franchisee being attributed
to our brand, negatively affecting our overall reputation. Furthermore, negative publicity surrounding any assertion that our
agents and/or merchants are implicated in fraudulent transactions, irrespective of the accuracy of such publicity or its connection
with our current operations or business, could harm our reputation. Any event that hurts our brand and reputation among consumers
as a reliable payment services provider could have a material adverse effect on our business, financial condition and results
of operations.
A decline in the use of cash as
a means of payment may result in a decline in the use of our kiosks and terminals.
Substantially all
of our operations are in Mexico where a substantial part of the population relies on cash payments rather than credit and debit
card payments or electronic banking. We believe that consumers making cash payments are more likely to use our kiosks and terminals
than where alternative payment methods are available. As a result, we believe that our profitability depends on the use of cash
as a means of payment. There can be no assurance that over time, the prevalence of cash payments in Mexico will not decline as
a greater percentage of the population adopts credit and debit card payments and electronic banking. The shift from cash payments
to credit and debit card payments and electronic banking could reduce our market share and payment volumes and may have a material
adverse effect on our business, financial condition and results of operations.
Our business operations are geographically
concentrated and could be significantly affected by any adverse change in the regions in which we operate.
Our business operations
are located substantially in Mexico. While Qpagos Corporation recently invested in a company performing similar services in the
United States and we may expand our business to new geographic regions, we are and will continue to still be highly concentrated
in Mexico. Because to date we derive all of our total revenues from our operations in Mexico and expect to continue to derive
a significant portion of our revenue from operations in Mexico for the near future, our business is exposed to adverse regulatory
and competitive changes, economic downturns and changes in political conditions in Mexico. Moreover, due to the concentration
of our businesses in Mexico, our business is less diversified and, accordingly, is subject to greater regional risks than some
of our competitors.
We are not currently subject to
extensive government regulation; however, we could be subject to extensive government regulation, and there can be no guarantee
that new regulations applicable to our business will not be enacted.
Currently our business
is not impacted by government regulation; however, we may be subject to a variety of regulations aimed at preventing money laundering
and financing criminal activity and terrorism, financial services regulations, payment services regulations, consumer protection
laws, currency control regulations, advertising laws and privacy and data protection laws and therefore experience periodic investigations
by various regulatory authorities in connection with the same, which may sometimes result in monetary or other sanctions being
imposed on us. Many of these laws and regulations are constantly evolving, and are often unclear and inconsistent with other applicable
laws and regulations making compliance challenging and increasing our related operating costs and legal risks. In particular,
there has been increased public attention and heightened legislation and regulations regarding money laundering and terrorist
financing. We may have to make significant judgment calls in applying anti-money laundering legislation and risk being found in
non-compliance with such laws.
If local authorities
in Mexico choose to enforce specific interpretations of the applicable legislation that differ from ours or enact new laws, we
may be found to be in violation and subject to penalties or other liabilities. This could also limit our ability in effecting
such payments going forward and may increase our cost of doing business.
In addition, there
is significant uncertainty regarding future legislation on taxation of electronic payments in Mexico, including the place of taxation.
Subsequent legislation and regulation and interpretations thereof, litigation, court rulings, or other events could expose us
to increased costs, liability and reputational damage that could have a material adverse effect on our business, financial condition
and results of operations.
We may not be able to complete or integrate successfully
any potential future acquisitions, partnerships or joint ventures.
From time-to-time,
we may evaluate possible acquisition transactions, partnerships or joint ventures, some of which may be material. Potential future
acquisitions, partnerships and joint ventures may pose significant risks to our existing operations if they cannot be successfully
integrated. These projects would place additional demands on our managerial, operational, financial and other resources, create
operational complexity requiring additional personnel and other resources and require enhanced control procedures. In addition,
we may not be able to successfully finance or integrate any businesses, services or technologies that we acquire or with which
we form a partnership or joint venture. Furthermore, the integration of any acquisition may divert management’s time and
resources from our core business and disrupt our operations. Moreover, even if we were successful in integrating newly acquired
assets, expected synergies or cost savings may not materialize, resulting in lower than expected benefits to us from such transactions.
We may spend time and money on projects that do not increase our revenue. Additionally, when making acquisitions it may not be
possible for us to conduct a detailed investigation of the nature of the assets being acquired due to, for instance, time constraints
in making the decision and other factors. We may become responsible for additional liabilities or obligations not foreseen at
the time of an acquisition. In addition, in connection with any acquisitions, we must comply with various antitrust requirements.
It is possible that perceived or actual violations of these requirements could give rise to regulatory enforcement action or result
in us not receiving all necessary approvals in order to complete a desired acquisition. To the extent we pay the purchase price
of any acquisition in cash, it would reduce our cash reserves, and to the extent the purchase price is paid with our stock, it
could be dilutive to our stockholders. To the extent we pay the purchase price with proceeds from the incurrence of debt, it would
increase our level of indebtedness and could negatively affect our liquidity and restrict our operations. All of the above risks
could have a material adverse effect on our business, results of operations, financial condition, and prospects.
As our business develops we will need to implement enhanced
compliance processes, procedures and controls with respect to the rules and regulations that apply to our business.
Our success requires
significant public confidence in our ability to handle large and growing payment volumes and amounts of consumer funds, as well
as comply with applicable regulatory requirements. Any failure to manage consumer funds or to comply with applicable regulatory
requirements could result in the imposition of fines, harm our reputation and significantly diminish use of our products. In addition,
if we are not in compliance with anti-corruption laws and other laws governing the conduct of business with government entities
and/or officials (including local laws), we may be subject to criminal and civil penalties and other remedial measures, which
could have an adverse impact on our business, financial condition, results of operations and prospects.
If we cannot keep pace with rapid
developments and change in our industry and provide new services to our clients, the use of our services could decline, reducing
our revenues.
The payment services
industry in which we operate is characterized by rapid technological change, new product and service introductions, evolving industry
standards, changing customer needs and the entrance of more established market players seeking to expand into these businesses.
In order to remain competitive, we continually seek to expand the services we offer and to develop new projects, including, for
example, the electronic wallet. These projects carry risks, such as delays in delivery, performance problems and lack of customer
acceptance. In our industry, these risks are acute. Any delay in the delivery of new services or the failure to differentiate
our services or to accurately predict and address market demand could render our services less desirable, or even obsolete, to
consumers. In addition, if alternative payment mechanisms become widely available, substituting our current products and services,
and we do not develop and offer similar alternative payment mechanisms successfully and on a timely basis, our business and prospects
could be adversely affected. Furthermore, we may be unable to recover the costs we have incurred in developing new services. Our
development efforts could result in increased costs and we could also experience a loss in business that could reduce our earnings
or could cause a loss of revenue if promised new services are not timely delivered to our clients, are not able to compete effectively
with our competitors’ or do not perform as anticipated. If we are unable to develop, adapt to or access technological changes
or evolving industry standards on a timely and cost effective basis, our business, financial condition and results of operations
could be materially adversely affected.
Our systems and our third party
providers’ systems may fail due to factors beyond our control, which could interrupt our service, cause us to lose business
and increase our costs.
We depend on the efficient
and uninterrupted operation of numerous systems, including our computer systems, software and telecommunications networks, as
well as the data centers that we lease from third parties. We only have one data center in central Mexico that controls our operations
and hosts our main equipment. Our systems and operations, or those of our third party providers, could be exposed to damage or
interruption from, among other things, fire, flood, natural disaster, power loss, telecommunications failure, vendor failure,
unauthorized entry, improper operation and computer viruses. Substantial property and equipment loss, and disruption in operations,
as well as any defects in our systems or those of third parties or other difficulties could expose us to liability and materially
adversely impact our business, financial condition and results of operations. In addition, any outage or disruptive efforts to
our data center would result in the failure of our computers and kiosks to operate and would, if for an extensive period of time,
adversely impact our reputation, brand and future prospects.
Unauthorized disclosure of data,
whether through cybersecurity breaches, computer viruses or otherwise, could expose us to liability, protracted and costly litigation
and damage our reputation.
We store and/or transmit
sensitive data, such as mobile phone numbers, and we have ultimate liability to our consumers for our failure to protect this
data. If breaches occur our encryption of data and other protective measures may not prevent unauthorized disclosure of data.
Unauthorized disclosure of data or a cybersecurity breach could harm our reputation and deter clients from using electronic payments
as well as kiosks and terminals generally and our services specifically, increase our operating expenses in order to correct the
breaches or failures, expose us to uninsured liability, increase our risk of regulatory scrutiny, subject us to lawsuits, result
in the imposition of material penalties and fines by state authorities and otherwise materially adversely affect our business,
financial condition and results of operations.
Customer complaints or negative
publicity about our customer service could affect attractiveness of our services adversely and, as a result, could have an adverse
effect on our business, financial condition and results of operations.
Customer complaints
or negative publicity about our customer service could diminish consumer confidence in, and the attractiveness of, our services.
Breaches of our consumers’ privacy and our security systems could have the same effect. We sometimes take measures to combat
risks of fraud and breaches of privacy and security, such as freezing consumer funds, which could damage relations with our consumers.
These measures heighten the need for prompt and attentive customer service to resolve irregularities and disputes. Effective customer
service requires significant personnel expense, and this expense, if not managed properly, could impact our profitability significantly.
Any inability by us to manage or train our customer service representatives properly could compromise our ability to handle customer
complaints effectively. If we do not handle customer complaints effectively, our reputation may suffer, and we may lose our customers’
confidence, which could have a material adverse effect on our business, financial condition and results of operations.
Qpagos Corporation’s agreements
with our agents and our merchants do not include exclusivity clauses and may be terminated unilaterally at any time or upon short
notice.
Qpagos Corporation
normally does not include exclusivity clauses in its agreements with agents or merchants, which is standard in the payment services
industry. Accordingly, merchants and agents do not have any restrictions on dealings with other providers and can switch from
Qpagos Corporation’s payment processing system to another without significant investment. The termination of contracts with
existing agents or merchants or a significant decline in the amount of business we do with them as a result of contracts not having
exclusivity clauses could have a material adverse effect on our business, financial condition and results of operations.
Our payment system might be used
for fraudulent, illegal or improper purposes, which could expose us to additional liability and harm our business.
Despite measures we
have taken and continue to take, our payment system remains susceptible to potentially illegal or improper uses. These may include
use of our payment services in connection with fraudulent sales of goods or services, illicit sales of prescription medications
or controlled substances, software and other intellectual property piracy, money laundering, bank fraud and prohibited sales of
restricted products. In the past there have been news articles on how organized crime groups have used other payment services
to transfer money in the course of illegal transactions.
Criminals are using
increasingly sophisticated methods to engage in illegal activities such as counterfeiting and fraud. It is possible that incidents
of fraud could increase in the future. Our risk management policies and procedures may not be fully effective to identify, monitor
and manage these risks. We are not able to monitor in each case the sources for our counterparties’ funds or the ways in
which they use them. Increases in chargebacks or other liability could have a material adverse effect on our business, financial
condition and results of operations. Furthermore, an increase in fraudulent transactions or publicity regarding chargeback disputes
could harm our reputation and reduce consumer confidence in the use of our kiosks and electronic wallets.
We are subject to fluctuations in
currency exchange rates.
We are exposed to
currency risks. Our financial statements are expressed in U.S. dollars, while its revenues and expenses are in Mexican pesos.
Accordingly, its results of operations and assets and liabilities are exposed to fluctuations in exchange rates between the U.S.
dollar and the Mexican peso. In addition, changes in currency exchange rates also affect the carrying value of assets on the balance
sheet, which may result in a decline in the dollar amount of our total assets on the balance sheet. During the year ended December
31, 2015, we incurred a foreign currency loss of ($ 466,920) attributable to the deterioration of the Mexican Peso against the
US Dollar. However, during the nine months ended September 30, 2016, we had a foreign currency loss of $(216,699).
We may not be able to successfully
protect the intellectual property we license and may be subject to infringement claims.
We rely on a combination
of contractual rights, copyright, trademark and trade secret laws to establish and protect our proprietary technology. We customarily
require our employees and independent contractors to execute confidentiality agreements or otherwise to agree to keep our proprietary
information confidential when their relationship with us begins. Typically, our employment contracts also include clauses requiring
our employees to assign to us all of the inventions and intellectual property rights they develop in the course of their employment
and to agree not to disclose our confidential information. Nevertheless, others, including our competitors, may independently
develop similar technology to that licensed by us, duplicate our services or design around our intellectual property. Further,
contractual arrangements may not prevent unauthorized disclosure of our confidential information or ensure an adequate remedy
in the event of any unauthorized disclosure of our confidential information. Because of the limited protection and enforcement
of intellectual property rights in Mexico, our intellectual property rights may not be as protected as they may be in more developed
markets such as the United States. We may have to litigate to enforce or determine the scope or enforceability of our intellectual
property rights (including trade secrets and know-how), which could be expensive, could cause a diversion of resources and may
not prove successful. The loss of intellectual property protection could harm our business and ability to compete and could result
in costly redesign efforts, discontinuance of certain service offerings or other competitive harm. Additionally, we do not hold
any patents for our business model or our business processes, and we do not currently intend to obtain any such patents in Mexico,
the United States or elsewhere.
We may also be subject
to costly litigation in the event our services or the technology that we license are claimed to infringe, misappropriate or otherwise
violate any third party’s intellectual property or proprietary rights. Such claims could include patent infringement, copyright
infringement, trademark infringement, trade secret misappropriation or breach of licenses. We may not be able to successfully
defend against such claims, which may result in a limitation on our ability to use the intellectual property subject to these
claims and also might require us to redesign affected services, enter into costly settlement or license agreements, pay costly
damage awards, or face a temporary or permanent injunction prohibiting us from marketing or selling certain of our services. In
such circumstances, if we cannot or do not license the infringed technology on reasonable terms or substitute similar technology
from another source, our revenue and earnings could be adversely impacted. Additionally, in recent years, non-practicing entities
have been acquiring patents, making claims of patent infringement and attempting to extract settlements from companies in our
industry. Even if we believe that such claims are without merit and successfully defend these claims, defending against such claims
is time consuming and expensive and could result in the diversion of the time and attention of our management and employees.
We may use open source software in a manner that could
be harmful to our business.
We use open source
software in connection with our technology and services. The original developers of the open source code provide no warranties
on such code. Moreover, some open source software licenses require users who distribute open source software as part of their
software to publicly disclose all or part of the source code to such software and/or make available any derivative works of the
open source code on unfavorable terms or at no cost. The use of such open source code may ultimately require us to replace certain
code used in our products, pay a royalty to use some open source code or discontinue certain products. Any of the above requirements
could be harmful to our business, financial condition and operations.
We do not have and may be unable to obtain sufficient
insurance to protect ourselves from business risks.
The insurance industry
in Mexico is not yet fully developed, and many forms of insurance protection common in more developed countries are not yet fully
available or are not available on comparable or commercially acceptable terms. Accordingly, while we hold certain mandatory types
of insurance policies, we do not currently maintain insurance coverage for business interruption, property damage or loss of key
management personnel, as we have been unable to obtain these on commercially acceptable terms. We do not hold insurance policies
to cover for any losses resulting from counterparty and credit risks or fraudulent transactions. We also do not generally maintain
separate funds or otherwise set aside reserves for most types of business-related risks. Accordingly, our lack of insurance coverage
or reserves with respect to business-related risks may expose us to substantial losses, which could materially adversely affect
our business, financial condition and results of operations.
In a dynamic industry like ours, the ability to attract,
recruit, retain and develop qualified personnel is critical to our success and growth.
Our business functions
at the intersection of rapidly changing technological, social, economic and regulatory developments that require a wide ranging
set of expertise and intellectual capital. In order for us to compete and grow successfully, we must attract, recruit, retain
and develop the necessary personnel who can provide the needed expertise across the entire spectrum of our capital needs. This
is particularly true with respect to qualified and experienced software engineers and IT staff, who are highly sought after and
are not in sufficient supply in Mexico. The market for such personnel is highly competitive, and we may not succeed in recruiting
additional personnel or may fail to replace effectively current personnel who depart with qualified or effective successors. Our
efforts to retain and develop personnel may result in significant additional expenses, which could adversely affect our profitability.
We cannot assure you that we will be able to attract and retain qualified personnel in the future. Failure to retain or attract
key personnel could have a material adverse effect on our business, financial condition and results of operations.
If we cannot establish profitable
operations, we will need to raise additional capital to fully implement our business plan, which may not be available on commercially
reasonable terms, or at all, and which may dilute your investment.
Achieving and sustaining
profitability will require us to increase our revenues and manage our operating and administrative expenses. We cannot guarantee
that we will be successful in achieving profitability. If we are unable to generate sufficient revenues to pay our expenses and
our existing sources of cash and cash flows are otherwise insufficient to fund our activities, we will need to raise additional
funds to continue our operations and in order to fully implement our business plan. To date, we have raised an aggregate of $7,115,187
from the sale of debt and equity securities. We estimate that we will need approximately $3,000,000 to implement our current business
plan and repay our outstanding debt. If we do not generate such revenue from operations, we may be forced to limit our expansion.
Furthermore, if we issue equity or debt securities to raise additional funds, our existing stockholders, may experience dilution,
and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders.
If we are unsuccessful in achieving profitability, and we cannot obtain additional funds on commercially reasonable terms or at
all, we may be required to curtail significantly or cease its operations, which could result in the loss to investors of their
investment in our securities.
The substantial share ownership
position of ten of our largest stockholders may limit your ability to influence corporate matters.
As of the date of
this Quarterly Report, 10 stockholders own 32,080,199 shares of our Common Stock, representing approximately 58% of the voting
power of our issued share capital. As a result of this concentration of share ownership, the 10 stockholders have sole discretion
over certain matters submitted to our stockholders for approval that require a simple majority vote and has significant voting
power on all matters submitted to our stockholders for approval that require a qualified majority vote, including the power to
veto them. This concentration of ownership could delay, deter or prevent a change of control or other business combination, which
could negatively impact the value of our shares. The interests of these 10 stockholders may not always coincide with the interests
of our other stockholders.
Certain of our officers may have a conflict of interest.
Certain of our officers are currently working
for our Company on a part-time basis. One such officer also works at other jobs and has discretion to decide what time he devotes
to our activities, which may result in a lack of availability when needed due to responsibilities at other jobs.
Risks Relating to
Doing Business in
Mexico
Emerging markets, such as Mexico,
are subject to greater risks than more developed markets, including significant legal, economic and political risks.
Investors in emerging
markets, such as Mexico, should be aware that these markets are subject to greater risk than more developed markets, including
in some cases significant legal, economic and political risks. Investors should also note that emerging economies are subject
to rapid change and that the information set out herein may become outdated relatively quickly. Accordingly, investors should
exercise particular care in evaluating the risks involved and must decide for themselves whether, in light of those risks, their
investment is appropriate. Generally, investment in emerging markets is only suitable for sophisticated investors who fully appreciate
the significance of the risks involved, and investors are urged to consult with their own legal and financial advisors before
making an investment in our securities.
Mexican federal governmental policies
or regulations, as well as economic, political and social developments in Mexico, could adversely affect our business, financial
condition, results of operations and prospects.
Substantially all
of our assets and operations are located in Mexico. As a result, we are subject to political, legal and regulatory risks specific
to Mexico, which can have a significant impact on our business, results of operations and financial condition. The Mexican federal
government has exercised, and continues to exercise, significant influence over the Mexican economy. Accordingly, Mexican federal
governmental actions, fiscal and monetary policy could have an impact on Mexican private sector entities, including our Company,
and on market conditions. We cannot predict the impact that political conditions will have on the Mexican economy. Furthermore,
our business, financial condition, results of operations and prospects may be affected by currency fluctuations, price instability,
inflation, interest rates, regulation, taxation, social instability and other political, social and economic developments in or
affecting Mexico, over which we have no control. We cannot assure potential investors that changes in Mexican federal governmental
policies will not adversely affect our business, financial condition, results of operations and prospects. Mexico has recently
experienced periods of violence and crime due to the activities of drug cartels. In response, the Mexican government has implemented
various security measures and has strengthened its police and military forces. Despite these efforts, drug-related crime continues
to exist in Mexico. These activities, their possible escalation and the violence associated with them may have a negative impact
on the Mexican economy or on our operations in the future. The social and political situation in Mexico could adversely affect
the Mexican economy, which in turn could have a material adverse effect on our business, results of operations and financial condition.
We are subject to the risks of doing business internationally.
We currently offer
our services in Mexico and therefore our business is subject to risks associated with doing business internationally, including:
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trade restrictions and changes in tariffs;
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the impact of business
cycles and downturns in economies outside of the United States;
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unexpected changes in regulatory requirements
that may limit its ability to export its products or sell into particular jurisdictions;
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import and export license requirements and restrictions;
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difficulties in maintaining effective communications
with employees and customers due to distance, language and cultural barriers;
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disruptions in international transport or delivery;
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difficulties in protecting our intellectual
property rights, particularly in countries where the laws and practices do not protect proprietary rights to as great an extent
as do the laws and practices of the United States;
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difficulties in enforcing agreements through
non-U.S. legal systems;
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longer payment cycles and difficulties in collecting
receivables; and
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potentially adverse tax consequences.
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If any of these risks
materialize, our operations could suffer.
Risks Relating to our Securities
There is currently a limited public
trading market for our common stock and one may never develop
.
There currently is
a limited public trading market for our securities, and it is not assured that any such public market will develop in the foreseeable
future. While this is true of any small cap company, the fact that one of our services are provided solely in Mexico, may make
the path to a listing on an exchange or actively traded in the over-the-counter market more problematic. Moreover, there can be
no assurance that even if our common stock is approved for listing on an exchange or is quoted in the over-the-counter market
in the future, that an active trading market will develop or be sustained. Therefore, we cannot predict the prices at which our
common stock will trade in the future, if at all. As a result, our investors may have limited or no ability to liquidate their
investments.
Trading in our common
stock is conducted on the OTCQB, as we currently do not meet the initial listing criteria for any registered securities exchange. The
OTCQB and OTC Markets are less recognized markets than the registered securities exchanges and is often characterized by low trading
volume and significant price fluctuations. These and other factors may further impair our stockholders’ ability
to sell their shares when they want to and/or could depress our stock price. As a result, stockholders could find it difficult
to dispose of, or obtain accurate quotations of the price of our securities because smaller quantities of shares could be bought
and sold, transactions could be delayed and security analyst and news coverage of our Company may be limited. If a
public market for our common stock does develop, these factors could
The market price of our common stock
may be highly volatile and such volatility could cause you to lose some or all of your investment.
The market price of
our common stock may fluctuate significantly in response to numerous factors, some of which are beyond our control, such as:
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the announcement of new products or product
enhancements by us or our competitors;
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developments concerning intellectual property
rights;
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changes in legal, regulatory, and enforcement
frameworks impacting our services;
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variations in our and our competitors’
results of operations;
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fluctuations in earnings estimates or recommendations
by securities analysts, if our common stock is covered by analysts;
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the results of intellectual property lawsuits;
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future issuances of common stock or other securities;
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the addition or departure of key personnel;
and
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general market conditions and other factors,
including factors unrelated to our operating performance.
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Further, the stock
market has recently experienced extreme price and volume fluctuations. The volatility of our common stock could be further exacerbated
due to low trading volume. Continued market fluctuations could result in extreme volatility in the price of our common stock,
which could cause a decline in the value of our common stock and the loss of some or all of our investors’ investment.
Some or all of the
“restricted” shares of our common stock held by our stockholders, including, but not limited to, shares issued in
connection with: (i) our incorporation in 2013 and (ii) our 2015 private placements may be offered from time to time in the open
market pursuant to an effective registration statement under the Securities Act, or without registration pursuant to Rule 144
promulgated thereunder, and these sales may have a depressive effect on the market price of our common stock.
Because our common stock may be
a “penny stock,” it may be more difficult for investors to sell shares of our common stock, and the market price of
our common stock may be adversely affected.
Our common stock may
be a “penny stock” if, among other things, the stock price is below $5.00 per share, it is not listed on a national
securities exchange, or it has not met certain net tangible asset or average revenue requirements. Broker-dealers who sell penny
stocks must provide purchasers of these stocks with a standardized risk-disclosure document prepared by the SEC. This risk-disclosure
document provides information about penny stocks and the nature and level of risks involved in investing in the penny-stock market.
A broker must also give a purchaser, orally or in writing, bid and offer quotations and information regarding broker and salesperson
compensation, make a written determination that the penny stock is a suitable investment for the purchaser and obtain the purchaser’s
written agreement to the purchase. Broker-dealers must also provide customers that hold penny stock in their accounts with such
broker-dealer a monthly statement containing price and market information relating to the penny stock. If a penny stock is sold
to an investor in violation of the penny stock rules, the investor may be able to cancel its purchase and get their money back.
If applicable, the
penny stock rules may make it difficult for stockholders to sell their shares of our common stock. Because of the rules and restrictions
applicable to a penny stock, there is less trading in penny stocks and the market price of our common stock may be adversely affected.
Also, many brokers choose not to participate in penny stock transactions. Accordingly, stockholders may not always be able to
resell their shares of our common stock publicly at times and prices that they feel are appropriate.
Because we became public by means
of a reverse Merger, we may not be able to attract the attention of brokerage firms
.
Additional risks may
exist because we became public through a “Reverse Merger.” Securities analysts of brokerage firms may not provide
coverage of our Company since there is little incentive for brokerage firms to recommend the purchase of our common stock. No
assurance can be given that brokerage firms will want to conduct secondary offerings on our behalf in the future.
Compliance with the reporting requirements
of federal securities laws can be expensive.
We are a public reporting
company in the United States, and accordingly, subject to the information and reporting requirements of the Exchange Act and other
federal securities laws, and the compliance obligations of the Sarbanes-Oxley Act of 2002. The costs of preparing and filing
annual and quarterly reports and other information with the SEC and furnishing audited reports to stockholders are substantial. If
we do not provide current information about our Company to market makers, they will not be able to trade our stock. Failure to
comply with the applicable securities laws could result in private or governmental legal action against us or our officers and
directors, which could have a detrimental impact on our business and financials, the value of our stock, and the ability of stockholders
to resell their stock.
Our investors’ ownership may
be diluted in the future.
In the future, we
may issue additional authorized but previously unissued equity securities, resulting in the dilution of ownership interests of
our present stockholders. We expect to need to issue a substantial number of shares of common stock or other securities convertible
into or exercisable for common stock in connection with hiring or retaining employees, future acquisitions, raising additional
capital in the future to fund our operations, and other business purposes. Additional shares of common stock issued by us in the
future, including shares issued upon exercise of the warrants, will dilute an investor’s investment in the Company.
Directors, executive officers, principal
stockholders and affiliated entities own a significant percentage of our capital stock, and they may make decisions that our stockholders
do not consider to be in their best interests
.
As of the date of
this Quarterly Report on Form 10-Q, our directors, executive officers, principal stockholders and affiliated entities beneficially
own, in the aggregate, approximately 71% of our outstanding voting securities as of the date hereof. As a result, if some or all
of them acted together, they would have the ability to exert substantial influence over the election of our board of directors
and the outcome of issues requiring approval by our stockholders. This concentration of ownership may also have the effect of
delaying or preventing a change in control of our Company that may be favored by other stockholders. This could prevent transactions
in which stockholders might otherwise recover a premium for their shares over current market prices. This concentration of ownership
and influence in management and board decision-making could also harm the price of our capital stock by, among other things, discouraging
a potential acquirer from seeking to acquire shares of our capital stock (whether by making a tender offer or otherwise) or otherwise
attempting to obtain control of our Company.
Our board of directors has historically
had significant control over us and we have yet to establish committees comprised of independent directors
.
We only have three
directors. Because of such limited number of directors, each of our board members had significant control over all corporate issues.
In addition, two of our three directors also held officer positions in Qpagos Corporation. The third director is the manager of
an entity that provides consulting services to us. We could not establish board committees comprised of independent members, and
we did not have an audit or compensation committee comprised of independent directors. Our three directors performed these functions,
despite not all being independent directors. Thus, there was potential conflict in that two of our directors were also engaged
in management and participated in decisions concerning management compensation and audit issues that may affect management and
our performance.
We have identified material weaknesses
in our internal controls, and we cannot provide assurances that these weaknesses will be effectively remediated or that additional
material weaknesses will not occur in the future. If our internal control over financial reporting or our disclosure controls
and procedures are not effective, we may not be able to accurately report our financial results, prevent fraud, or file our periodic
reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to
a decline in our stock price.
Our management is
responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f)
under the Exchange Act. We have historically operated as a private company and the number and qualifications of our finance and
accounting staff have not been consistent with those of a public company. We have identified material weaknesses in our internal
controls with respect to our segregation of duties and review and accounting of certain complex transactions.
We have restated out consolidated financial
statements as of December 31, 2015 and December 31, 2014 and March 31, 2016 and June 30, 2016.
We have begun
to take actions that we believe will substantially remediate the material weaknesses identified. In response to the identification
of our material weaknesses, we: (i) have retained a part-time Chief Financial Officer to segregate the duties of Chief Executive
Officer and Chief Financial Officer; (ii) are in the process of establishing a review process for key aspects of our financial
reporting process, including the accounting for complex transactions; (iii) expanding our finance and accounting staff and (iv)
will seek to establish better operating controls and involve our board of directors in our internal controls process, which will
involve establishing formal procedures to communicate deficiencies in internal controls on a timely basis, and encourage our board
of directors to more actively participate in guiding management as it relates to internal controls matters. However, we cannot
assure you that our internal control over financial reporting, as modified, will enable us to identify or avoid material weaknesses
in the future. Regardless, following the completion of this offering we will be required to expend time and resources to further
improve our internal controls over financial reporting, including by expanding our finance and accounting staff.
Investors in our Common Stock may
have limited recourse against us, our directors and executive officers because we conduct our operations outside the United States
and our current directors and executive officers reside outside the United States.
Our presence outside
the United States may limit investors’ legal recourse against us. Our operating subsidiaries are incorporated under the
laws of Mexico and all of our current directors and senior officers reside outside the United States, principally in Mexico. Substantially
all of our assets and the assets of our current directors and executive officers are located outside the United States, principally
in Mexico. As a result, investors may not be able to effect service of process within the United States upon our Company or its
directors and executive officers or to enforce U.S. court judgments obtained against our Company or its directors and executive
officers in Mexico or other jurisdictions outside the United States, including actions under the civil liability provisions of
U.S. securities laws. In addition, it may be difficult for investors to enforce, in original actions brought in courts in jurisdictions
outside the United States, liabilities predicated upon U.S. securities laws.
We do not expect to pay dividends
on our Common Stock in the foreseeable future.
We do not expect to
pay dividends on our Common Stock for the foreseeable future, and we may never pay dividends. Consequently, the only
opportunity for investors to achieve a return on their investment may be if a trading market develops, and investors are able
to sell their shares for a profit or if our business is sold at a price that enables investors to recognize a profit, neither
of which we can guarantee will ever take place. Our payment of any future dividends will be at the discretion of our Board of
Directors after taking into account various factors, including but not limited to our financial condition, operating results,
cash needs, and growth plans.
We do not have an independent compensation
committee, which presents the risk that compensation and benefits paid to those executive officers who are board members and other
officers may not be commensurate with its financial performance.
A compensation committee
consisting of independent directors is a safeguard against self-dealing by company executives. Our board of directors, is comprised
of two executive officers and one other director, and absent an independent compensation committee currently determines the compensation
and benefits of our executive officers, administers our employee stock and benefit plans, and reviews policies relating to the
compensation and benefits of our employees Our lack of an independent compensation committee presents the risk that our executive
officers on the board may have influence over their personal compensation and benefits levels that may not be commensurate with
its financial performance.
Limitations on director and officer liability and indemnification
of our officers and directors by it may discourage stockholders from bringing suit against an officer or director.
Our certificate of
incorporation and by-laws provide, with certain exceptions as permitted by Nevada law, that a director or officer shall not be
personally liable to us or our stockholders for breach of fiduciary duty as a director or officer, unless the director or officer
committed both a breach of fiduciary duty and such breach was accompanied by intentional misconduct, fraud or knowing violation
of law. These provisions may discourage stockholders from bringing suit against a director or officer for breach of fiduciary
duty and may reduce the likelihood of derivative litigation brought by stockholders on behalf of us against a director or officer.
We are responsible for the indemnification
of our officers and directors.
Should our officers
and/or directors require us to contribute to their defense in an action brought against them in their capacity as such, we may
be required to spend significant amounts of our capital. Our certificate of incorporation and by-laws also provide for the indemnification
of our directors, officers, employees, and agents, under certain circumstances, against attorney's fees and other expenses incurred
by them in any litigation to which they become a party arising from their association with or activities on behalf of us. This
indemnification policy could result in substantial expenditures, which we may be unable to recoup. If these expenditures are significant,
or involve issues which result in significant liability for our key personnel, we may be unable to continue operating as a going
concern.