RISK
FACTORS
Investing
in our securities involves a high degree of risk. You should carefully consider the risks and uncertainties described below, as
well as other information presented in this prospectus or in any other documents incorporated by reference into this prospectus,
in light of your particular investment objectives and financial circumstances. Moreover, the risks so described are not the only
risks we face. Additional risks not presently known to us or that we currently perceive as immaterial may ultimately prove more
significant than expected and impair our business operations. Any of these risks could adversely affect our business, financial
condition, results of operations, and prospects. The trading price of our securities could decline due to any of these risks and
you may lose all or part of your investment.
Risks
Related to Our Business
We
have incurred significant net losses and cannot assure you that we will achieve or maintain profitable operations.
To
date, we have not generated any significant revenues from our operations and have incurred losses since inception. Our net losses
were $5,351,000 for the six months ended June 30, 2019 and $6,723,000 for the six months ended June 30, 2018. As of June 30, 2019,
we had a stockholders’ equity of $18,601,000. We may continue to incur significant losses in the future for a number of
reasons, including unforeseen expenses, difficulties, complications, and delays, and other unknown events.
We
anticipate that our operating expenses will increase substantially in the foreseeable future as we undertake increased technology
and production efforts to support our business and increase our marketing and sales efforts to drive an increase in the number
of customers and clients utilizing our services. These increased expenditures may make it more difficult to achieve and maintain
profitability. In addition, our efforts to grow our business may be more expensive than we expect, and we may not be able to generate
sufficient revenue to offset increased operating expenses. If we are forced to reduce our expenses, our growth strategy could
be compromised. To offset these anticipated increased operating expenses, we will need to generate and sustain significant revenue
levels in future periods in order to become profitable, and, even if we do, we may not be able to maintain or increase our level
of profitability.
Accordingly,
we cannot assure you that we will achieve sustainable operating profits as we continue to expand our infrastructure, restructure
our balance sheet, further develop our marketing efforts, and otherwise implement our growth initiatives. Any failure to achieve
and maintain profitability would have a materially adverse effect on our ability to implement our business plan, our results and
operations, and our financial condition, and could cause the value of our common stock to decline, resulting in a significant
or complete loss of your investment.
Our
independent registered public accounting firm’s reports for the fiscal years ended December 31, 2018 and 2017 have raised
substantial doubt as to our ability to continue as a “going concern.”
Our
independent registered public accounting firm indicated in its reports on our audited consolidated financial statements as of
and for the years ended December 31, 2018 and 2017 that there is substantial doubt about our ability to continue as a going concern.
A “going concern” opinion indicates that the financial statements have been prepared assuming we will continue as
a going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification
of assets, or the amounts and classification of liabilities that may result if we do not continue as a going concern. Therefore,
you should not rely on our consolidated balance sheet as an indication of the amount of proceeds that would be available to satisfy
claims of creditors, and potentially be available for distribution to stockholders, in the event of liquidation. The presence
of the going concern note to our financial statements may have an adverse impact on the relationships we are developing and plan
to develop with third parties as we continue the commercialization of our products and could make it challenging and difficult
for us to raise additional financing, all of which could have a material adverse impact on our business and prospects and result
in a significant or complete loss of your investment.
Our
ability to grow and compete in the future will be adversely affected if adequate capital is not available to us or not available
on terms favorable to us.
We
have limited capital resources. To date, we have financed our operations entirely through equity investments by founders and other
investors and the incurrence of debt, and we expect to continue to do so in the foreseeable future. Our ability to continue our
normal and planned operations, to grow our business, and to compete in our industry will depend on the availability of adequate
capital.
We
cannot assure you that we will be able to obtain additional funding from those or other sources when or in the amounts needed,
on acceptable terms, or at all. If we raise capital through the sale of equity, or securities convertible into equity, it would
result in dilution to our then-existing stockholders, which could be significant depending on the price at which we may be able
to sell our securities. If we raise additional capital through the incurrence of additional indebtedness, we would likely become
subject to further covenants restricting our business activities, and holders of debt instruments may have rights and privileges
senior to those of our then-existing stockholders. In addition, servicing the interest and principal repayment obligations under
debt facilities could divert funds that would otherwise be available to support development of new programs and marketing to current
and potential new clients. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay,
reduce, or eliminate development of new programs or future marketing efforts, or reduce or discontinue our operations. Any of
these events could significantly harm our business, financial condition, and prospects.
Our
business depends on customers increasing their use of our services and/or platform, and we may experience loss of customers or
decline in their use of our services and/or platform.
Our
ability to grow and generate revenue depends, in part, on our ability to maintain and grow our relationships with existing customers
and convince them to increase their usage of our platform. If our customers do not increase their use of our platform, then our
revenue may not grow, and our results of operations may be harmed. It is difficult to predict customers’ usage levels accurately
and the loss of customers or reductions in their usage levels may have a negative impact on our business, results of operations,
and financial condition. If a significant number of customers cease using, or reduce their usage of, our platform, then we may
be required to spend significantly more on sales and marketing than we currently plan to spend in order to maintain or increase
revenue from customers. These additional expenditures could adversely affect our business, results of operations, and financial
condition. Most of our customers do not have long-term contractual financial commitments to us and, therefore, most of our customers
could reduce or cease their use of our platform at any time without penalty or termination charges.
The
market in which we operate is dominated by large, well established competitors.
The
CRM industry is currently dominated by Salesforce.com, Inc., or Salesforce.com, Microsoft Corporation, or Microsoft, Oracle America
Inc., or Oracle, SAP SE, and Adobe Inc., or Adobe, which collectively account for approximately 40% of industry sales. The CRM
applications offered by these companies, as well as by many others, have numerous differences in feature sets and functionality,
but all share certain basic attributes. Most of them were designed before the advent and proliferation of mobile phones, social
media, and the technology behind the current ubiquity of video over the internet and more recently on mobile devices. While many
of our competitors have attempted to incorporate video capabilities into their respective CRM platforms, none of them utilizes
interactive video technology similar to that of ours. In addition, our Tagg interactive videos are viewable on both mobile and
desktop devices regardless of operating system and without the need to download a proprietary player or program.
The
market in which we operate is intensely competitive and, if we do not compete effectively, our operating results could be harmed.
The
market for CRM applications is intensely competitive and rapidly changing, barriers to entry are relatively low, many of our competitors
are larger and have more resources than we do, and, with the introduction of new technologies and market entrants, we expect competition
to intensify in the future. If we fail to compete effectively, our operating results will be harmed.
Notwithstanding
the competitive edge that we believe our Tagg interactive video capability provides our CRM applications, many of our competitors
enjoy other substantial competitive advantages, such as greater name recognition, longer operating histories, and larger marketing
budgets, as well as substantially greater financial, technical, and other resources. In addition, many of our potential competitors
have established marketing relationships and access to larger customer bases, and have major distribution agreements with consultants,
system integrators, and resellers.
As
a result, our competitors may be able to respond more effectively than we can to new or changing opportunities, technologies,
standards, or customer requirements. Furthermore, because of these advantages, even if our products and services are more effective
than the products and services that our competitors offer, potential customers might accept competitive products and services
in lieu of purchasing our products and services. For all of these reasons, we may not be able to compete successfully against
our current and future competitors.
We
may not be able to increase the number of our partners or grow the revenues received from our current partnership relationships.
The
differences between our Tagg interactive video CRM applications and many of the larger, more established providers of CRM software
may serve to highlight the reasons we have chosen not only to develop our own stand-alone SaaS cloud CRM platform, but also to
incorporate and integrate our interactive video technology into the platforms of many of these large, long-term leaders in the
CRM industry. This allows them to offer Tagg interactive video capabilities to their large enterprise clients and customers as
an upgrade feature to their CRM platform subscriptions. The viability of this strategy is evidenced by the partnerships we currently
enjoy with Oracle NetSuite and Marketo, Inc., an Adobe company, as well as new partnerships with Salesforce.com and Microsoft,
among others. There can be no assurance, however, that those relationships will result in material revenues for us or that we
will be able to generate any other meaningful partnerships.
We
may not be able to develop enhancements and new features to our existing service or acceptable new services that keep pace with
technological developments.
Even
though we believe that our Tagg interactive video CRM applications are currently unsurpassed in features and ease of use, technology
invariably advances. If we are unable to develop enhancements to, and new features for, our Tagg interactive video CRM applications
that keep pace with rapid technological developments, our business will be harmed. The success of enhancements, new features,
and services depends on several factors, including the timely completion, introduction, and market acceptance of the feature or
edition. Failure in this regard may significantly impair our revenue growth. We may not be successful in either developing these
modifications and enhancements or in timely bringing them to market at a competitive price or at all. Furthermore, notwithstanding
that our Tagg interactive videos are currently viewable on both mobile and desktop devices regardless of operating system, potential
uncertainties about the timing and nature of new network platforms or technologies, or modifications to existing platforms or
technologies, could increase our research and development expenses. Any failure of our service to operate effectively with future
network platforms and technologies could reduce the demand for our service, result in customer dissatisfaction, and harm our business.
Our
ability to deliver our services is dependent on the maintenance of the infrastructure of the Internet by third parties.
The
Internet’s infrastructure is comprised of many different networks and services that, by design, are highly fragmented and
distributed. This infrastructure is run by a series of independent, third-party organizations that work together to provide the
infrastructure and supporting services of the Internet under the governance of the Internet Corporation for Assigned Numbers and
Names (ICANN) and the Internet Assigned Numbers Authority (IANA), which is now related to ICANN.
The
Internet has experienced, and will continue to experience, a variety of outages and other delays due to damages to portions of
its infrastructure, denial-of-service attacks, or related cyber incidents. These scenarios are not under our control and could
reduce the availability of the Internet to us or our customers for delivery of our services. Any resulting interruptions in our
services or the ability of our customers to access our services could result in a loss of potential or existing customers and
harm our business.
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, and personally identifiable information of our customers and employees. 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. Advanced attacks are multi-staged, unfold over time, and utilize a range of attack vectors with military-grade
cyber weapons and proven techniques, such as spear phishing and social engineering, leaving organizations and users at high risk
of being compromised. The vast majority of data breaches, whether conducted by a cyber attacker from inside or outside of the
organization, involve the misappropriation of digital identities and user credentials. These credentials are used to gain legitimate
access to sensitive systems and high-value personal and corporate data. Many large, well-known organizations have been subject
to cyber-attacks that exploited the identity vector, demonstrating that even organizations with significant resources and security
expertise have challenges securing their identities. 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, regulatory penalties, a disruption
of our operations, damage to our reputation, or a loss of confidence in our business, any of which could adversely affect our
business, revenues, and competitive position.
Organizations
face growing regulatory and compliance requirements.
New
and evolving regulations and compliance standards for cyber security, data protection, privacy, and internal IT controls are often
created in response to the tide of cyber-attacks and will increasingly impact organizations. Existing regulatory standards require
that organizations implement internal controls for user access to applications and data. In addition, data breaches are driving
a new wave of regulation, such as the European Union’s General Data Protection Regulation, with stricter enforcement and
higher penalties. Regulatory and policy-driven obligations require expensive and time-consuming compliance measures. The fear
of non-compliance, failed audits, and material findings has pushed organizations to spend more to ensure they are in compliance,
often resulting in costly, one-off implementations to mitigate potential fines or reputational damage. The high costs associated
with failing to meet regulatory requirements, combined with the risk of fallout from security breaches, has elevated this topic
from the IT organization to the executive and board level.
Our
business is highly competitive and any failure to adapt to changing consumer preferences may adversely affect our business and
financial results.
We
operate in a highly competitive, consumer-driven, and rapidly changing environment. Our success will, to a large extent, be dependent
on our ability to acquire, develop, adopt, upgrade, and exploit new and existing technologies to address consumers’ changing
demands and distinguish our products and services from those of our competitors. We may not be able to accurately predict technological
trends or the success of new products and services. If we choose technologies or equipment that are less effective, cost-efficient,
or attractive to our customers than those chosen by our competitors, or if we offer products or services that fail to appeal to
consumers, are not available at competitive prices, or that do not function as expected, our competitive position could deteriorate,
and our business and financial results could suffer.
The
ability of our competitors to introduce new technologies, products, and services more quickly than we do may adversely affect
our competitive position. Furthermore, advances in technology, decreases in the cost of existing technologies, or changes in competitors’
product and service offerings may require us in the future to increase research and development expenditures or to offer products
and services at no or a reduced additional charge or at a lower price. In addition, the uncertainty of our ability, and the costs,
to obtain intellectual property rights from third parties could impact our ability to respond to technological advances in a timely
and effective manner. If we are unable to compete with existing companies successfully and new entrants to the markets in which
we compete in, our business, results of operations, and financial condition could be adversely affected.
We
expect that the success of our business will be highly correlated to general economic conditions.
We
expect that demand for our products and services will be highly correlated with general economic conditions, as we expect a substantial
portion of our revenue will be derived from discretionary spending by individuals, which typically falls during times of economic
instability. Declines in economic conditions in the United States or in other countries in which we may operate may adversely
impact our financial results. Because such declines in demand are difficult to predict, we or our industry may have increased
excess capacity as a result. An increase in excess capacity may result in declines in prices for our products and services. Our
ability to grow or maintain our business may be adversely affected by sustained economic weakness and uncertainty, including the
effect of wavering consumer confidence, high unemployment, and other factors. The inability to grow or maintain our business would
adversely affect our business, financial conditions, and results of operations, and thereby an investment in our common stock.
We
do not currently have any patents to protect our technologies and thus, we may not gain market share from our competitors and
be unable to operate our business profitably.
Our
success depends significantly on our ability to protect our rights to the technologies used in our products and services. We recently
filed a patent application with the U.S. Patent and Trademark Office, or PTO, with respect to our interactive video technology.
Currently, we do not have any issued patents and we rely on copyright, trade secrets, and nondisclosure, confidentiality and other
contractual arrangements to protect our technology and intellectual property rights. However, these legal means afford only limited
protection and may not adequately protect our rights or permit us to gain or maintain any competitive advantage. In addition,
we cannot be assured that our pending patent application, or any future patent applications, will result in the issuance of a
patent to us in a timely manner, or at all, or that we will have the financial or operational resources successfully to prosecute
any patents that we may undertake. The PTO may deny or require significant narrowing of claims in our currently pending or any
future patent applications, and patents issued as a result thereof, if any, may not provide us with significant commercial protection
or be issued in a form that is advantageous to us. We could also incur substantial costs in proceedings before the PTO. Our pending
patent application, and any future patent applications, may be challenged, which could reduce our ability to stop competitors
from marketing related technologies. There can also be no assurance that competitors will not be able to design around any patents
that may be issued to us in the future. In addition, we rely on unpatented proprietary technology. We cannot assure you that we
can meaningfully protect all our rights in our unpatented proprietary technology or that others will not independently develop
substantially equivalent proprietary products or processes or otherwise gain access to our unpatented proprietary technology.
We
seek to protect our know-how and other unpatented proprietary technology with confidentiality agreements and intellectual property
assignment agreements with our employees, our partners, independent distributors, and consultants. However, such agreements may
not be enforceable or may not provide meaningful protection for our proprietary information in the event of unauthorized use or
disclosure or other breaches of the agreements or in the event that our competitors discover or independently develop similar
or identical designs or other proprietary information. We currently do not utilize any registered or common law trademarks to
protect or brand the name of any of our products.
Although
we believe that we have a proprietary platform for our technologies and products, we cannot determine with certainty whether any
existing third-party patents or the issuance of any third-party patents would require us to alter our technology, obtain licenses,
or cease certain activities. We may become subject to claims by third parties that our technology infringes their intellectual
property rights.
We
do not own any patents relating to our Tagg interactive video CRM platform.
We
do not currently own any domestic or foreign patents relating to our Tagg interactive video CRM applications platform; however,
we recently filed a patent application with the PTO with respect to our interactive video technology. We also do not currently
have any licenses to use any third-party intellectual property. As such, if we are not successful in obtaining intellectual property
rights covering our products or obtaining licenses to use a third-party’s intellectual property on reasonable and acceptable
terms, it could result in lawsuits against us for trademark and/or intellectual property infringement, and we may not be able
to counterclaim with our own infringement allegations. Any such infringement, litigation, or adverse proceeding could result in
substantial costs and diversion of resources and could seriously harm our business operations or results of operations. There
can also be no assurance that competitors will not be able to duplicate our interactive video technology or that our competitors
will not independently develop substantially equivalent proprietary products or processes or otherwise gain access to our unpatented
proprietary technology.
If
we are unable to protect and enforce our intellectual property rights, we may be unable to compete effectively.
We
believe that our intellectual property rights are important to our success and our competitive position, and we rely on a combination
of copyright and trade secret laws and restrictions on disclosure to protect our intellectual property rights. Although we have
devoted substantial resources to the establishment and protection of our intellectual property rights, the actions taken by us
may be inadequate to prevent imitation or improper use of our products and services by others or to prevent others from claiming
violations of their intellectual property rights by us. We also rely on confidentiality procedures and contractual provisions
with our employees, consultants, and corporate partners to protect our proprietary rights, but we cannot assure the compliance
by such parties with their confidentiality obligations, which could be very time consuming and expensive to enforce.
Legal
challenges to our intellectual property rights could adversely affect our financial results and operations.
We
rely on licenses and other agreements in respect of our intellectual property with our partners and other parties and other intellectual
property rights to conduct our operations. Legal challenges to our intellectual property rights and claims of intellectual property
infringement by third parties could require that we enter into royalty or licensing agreements on unfavorable terms, incur substantial
monetary liability, or be enjoined preliminarily or permanently from further use of the intellectual property in question or from
the continuation of our businesses as currently conducted. We may need to change our business practices if any of these events
occur, which may limit our ability to compete effectively and could have an adverse effect on our results of operations. Even
if we believe any such challenges or claims are without merit, they can be time-consuming and costly to defend and divert management’s
attention and resources away from our business.
Our
success depends, in part, on the capacity, reliability, and security of our information technology hardware and software infrastructure,
as well as our ability to adapt and expand our infrastructure.
The
capacity, reliability, and security of our information technology hardware and software infrastructure are important to the operation
of our current business, which would suffer in the event of system failures. Likewise, our ability to expand and update our information
technology infrastructure in response to our growth and changing needs is important to the continued implementation of our new
service offering initiatives. Our inability to expand or upgrade our technology infrastructure could have adverse consequences,
including the delayed provision of services or implementation of new service offerings, and the diversion of development resources.
We rely on third parties for various aspects of our hardware and software infrastructure. Third parties may experience errors
or disruptions that could adversely impact us and over which we may have limited control. Interruption and/or failure of any of
these systems could disrupt our operations and damage our reputation, thus adversely impacting our ability to provide our products
and services, retain our current users, and attract new users. In addition, our information technology hardware and software infrastructure
may be vulnerable to unauthorized access, misuse, computer viruses, or other events that could have a security impact. If one
or more of such events occur, our customer and other information processed and stored in, and transmitted through, our information
technology hardware and software infrastructure, or otherwise, could be compromised, which could result in significant losses
or reputational damage. We may be required to expend significant additional resources to modify our protective measures or to
investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses, any of
which could substantially harm our business and our results of operations.
We
are dependent on third parties to, among other things, maintain our servers, provide the bandwidth necessary to transmit content,
and utilize the content derived therefrom for the potential generation of revenues.
We
depend on third-party service providers, suppliers, and licensors to supply some of the services, hardware, software, and operational
support necessary to provide some of our products and services. Some of these third parties do not have a long operating history
or may not be able to continue to supply the equipment and services we desire in the future. If demand exceeds these vendors’
capacity, or if these vendors experience operating or financial difficulties or are otherwise unable to provide the equipment
or services we need in a timely manner, at our specifications and at reasonable prices, our ability to provide some products and
services might be materially adversely affected, or the need to procure or develop alternative sources of the affected materials
or services might delay our ability to serve our users. These events could materially and adversely affect our ability to retain
and attract users, and have a material negative impact on our operations, business, financial results, and financial condition.
We
may not be able to find suitable software developers at an acceptable cost.
We
currently rely on certain key suppliers and vendors in the coding and maintenance of our software. We will continue to require
such expertise in the future. Due to the current demand for skilled software developers, we run the risk of not being able to
find or retain suitable and qualified personnel at an acceptable price, or at all. Without these developers, we may not be able
to further develop and maintain our software, which is the most important aspect of our business development.
Our
business may be affected by changing consumer preferences or by failure of the public to accept any new product offerings we may
pursue.
The
production and distribution of entertainment content is an inherently risky business because the revenue that may be derived depends
primarily on the content’s acceptance by the public, which is difficult to predict. Consumer and audience tastes change
frequently, and it is a challenge to anticipate what offerings will be successful at a certain point in time. In addition, competing
entertainment content, the availability of alternative forms of entertainment and leisure time activities, general economic conditions,
piracy, and increasing digital and on-demand distribution offerings may also affect the audience for our content. Our expenses
may increase as we invest in new programming ideas, and there is no guarantee that the new programming will be successful or generate
sufficient revenue to recoup the expenditures.
Our
future success depends on our key executive officers and our ability to attract, retain, and motivate qualified personnel.
Our
future success largely depends upon the continued services of our executive officers and management team, especially our Chief
Executive Officer and President, Mr. Rory J. Cutaia. If one or more of our executive officers are unable or unwilling to continue
in their present positions, we may not be able to replace them readily, if at all. Additionally, we may incur additional expenses
to recruit and retain new executive officers. If any of our executive officers joins a competitor or forms a competing company,
we may lose some or all of our customers. Finally, we do not maintain “key person” life insurance on any of our executive
officers. Because of these factors, the loss of the services of any of these key persons could adversely affect our business,
financial condition, and results of operations, and thereby an investment in our common stock.
Our
continuing ability to attract and retain highly qualified personnel will also be critical to our success because we will need
to hire and retain additional personnel as our business grows. There can be no assurance that we will be able to attract or retain
highly qualified personnel. We face significant competition for skilled personnel in our industries. This competition may make
it more difficult and expensive to attract, hire, and retain qualified managers and employees. Because of these factors, we may
not be able to effectively manage or grow our business, which could adversely affect our financial condition or business. As a
result, the value of your investment could be significantly reduced or completely lost.
A
decline in the price of our common stock could affect our ability to raise further working capital, which could adversely impact
our ability to continue our operations.
A
prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction
in our ability to raise capital. We may attempt to acquire a significant portion of the funds we need in order to conduct our
planned operations through the sale of equity securities; thus, a decline in the price of our common stock could be detrimental
to our liquidity and our operations because the decline may adversely affect investors’ desire to invest in our securities.
If we are unable to raise the funds we require for all of our planned operations, we may be forced to reallocate funds from other
planned uses and may suffer a significant negative effect on our business plan and operations, including our ability to develop
new products or services and continue our current operations. As a result, our business may suffer, and we may be forced to reduce
or discontinue operations. We also might not be able to meet our financial obligations if we cannot raise enough funds through
the sale of our common stock and we may be forced to reduce or discontinue operations.
Risks
Related to an Investment in Our Common Stock
Our
board of directors is authorized to issue additional shares of our common stock that would dilute existing stockholders.
We
are authorized to issue up to 200,000,000 shares of common stock and 15,000,000 shares of preferred stock, par value $0.0001 per
share, of which 23,370,939 shares of common stock and 5,030 shares of preferred stock are currently issued and outstanding
as of September 16, 2019. The number of shares of common stock issued and outstanding as of September 16, 2019 exclude
2,809,374 shares of common stock issuable upon exercise of stock options, 168,600 shares of common stock reserved
for issuance under the Plan 3,245,162 shares of common stock issuable upon the conversion of our Series A convertible preferred
stock, and 11,024,764 shares of common stock issuable upon the exercise of all outstanding warrants. We expect to seek
additional financing in order to provide working capital to our business. Our board of directors has the power to issue any or
all of such authorized but unissued shares of our common stock at any price and, in respect of the preferred stock, at any price
and with any attributes, our board of directors considers sufficient, without stockholder approval. The issuance of additional
shares of common stock in the future will reduce the proportionate ownership and voting power of current stockholders and may
negatively impact the market price of our common stock.
Purchasers
in this offering may experience substantial dilution in the book value of their investment.
As
of September 16, 2019, we have 11,024,764 shares of common stock potentially issuable upon the exercise of all outstanding
warrants, 3,245,162 shares of common stock potentially issuable upon the conversion of all outstanding Series A convertible
preferred stock, and 2,977,974 shares of common stock issuable upon the exercise of all outstanding stock options. The
exercise or conversion prices to acquire common stock upon the exercise or conversion of warrants, notes, or options, may be at
prices significantly below the price that you pay for shares of our common stock. To the extent outstanding warrants, options,
or notes are ultimately exercised or converted, there may be further dilution to investors purchasing our common stock from our
selling stockholders. In addition, if we issue additional equity securities, there is a vesting of employee stock grants, or there
are any exercises of future stock options, you may experience additional dilution. Our board of directors has the power to issue
any or all of such authorized but unissued shares at any price they consider sufficient, without stockholder approval. The issuance
of additional shares of common stock in the future will reduce the proportionate ownership and voting power of current stockholders
and may negatively impact the market price of our common stock.
We
may issue additional securities with rights superior to those of our common stock, which could materially limit the ownership
rights of our stockholders.
We
may offer additional debt or equity securities in private and/or public offerings in order to raise working capital or to refinance
our debt. Our board of directors has the right to determine the terms and rights of any debt securities and preferred stock without
obtaining the approval of our stockholders. It is possible that any debt securities or preferred stock that we sell would have
terms and rights superior to those of our common stock and may be convertible into shares of our common stock. Any sale of securities
could adversely affect the interests or voting rights of the holders of our common stock, result in substantial dilution to existing
stockholders, or adversely affect the market price of our common stock.
If
we fail to comply with the applicable continued listing standards of Nasdaq, Nasdaq could delist our common stock or the warrants
or both.
In
order to maintain the listing of our common stock on the Nasdaq Stock Market, we must satisfy minimum financial and other continued
listing standards, including those regarding director independence and independent committee requirements, minimum stockholders’
equity, minimum share price, and certain corporate governance requirements. There can be no assurances that we will be able to
comply with such applicable continued listing standards. If we fail to comply with the continued listing standards, our common
stock could be delisted. A failure to maintain listing on Nasdaq could have a material adverse effect on the liquidity and price
of our common stock.
The
market price of our common stock has been, and may continue to be, subject to substantial volatility.
The
market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control,
including;
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in the trading markets generally and in our particular market segment;
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limited
trading of our common stock;
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actual
or anticipated fluctuations in our results of operations;
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the
financial projections we may provide to the public, any changes in those projections, or our failure to meet those projections;
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announcements
regarding our business or the business of our customers or competitors;
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changes
in accounting standards, policies, guidelines, interpretations, or principles;
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actual
or anticipated developments in our business or our competitors’ businesses or the competitive landscape generally;
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developments
or disputes concerning our intellectual property or our offerings, or third-party proprietary rights;
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announced
or completed acquisitions of businesses or technologies by us or our competitors;
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new
laws or regulations or new interpretations of existing laws or regulations applicable to our business;
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any
major change in our board of directors or management;
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sales
of shares of our common stock by us or by our stockholders;
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lawsuits
threatened or filed against us; and
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other
events or factors, including those resulting from war, incidents of terrorism, or responses to these events.
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Statements
of, or changes in, opinions, ratings, or earnings estimates made by brokerage firms or industry analysts relating to the markets
in which we operate or expect to operate could have an adverse effect on the market price of our common stock. In addition, the
stock market as a whole, as well as our particular market segment, has from time to time experienced extreme price and volume
fluctuations, which may affect the market price for the securities of many companies, and which often have appeared unrelated
to the operating performance of such companies. Any of these factors could negatively affect our stockholders’ ability to
sell their shares of common stock at the time and price they desire.
Because
we do not intend to pay any cash dividends on our shares of common stock in the near future, our stockholders will not be able
to receive a return on their shares unless and until they sell them.
We
intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any
cash dividends on our common stock in the near future. The declaration, payment, and amount of any future dividends will be made
at the discretion of our board of directors, and will depend upon, among other things, the results of operations, cash flows,
and financial condition, operating and capital requirements, and other factors as our board of directors considers relevant. There
is no assurance that future dividends will be paid, and, if dividends are paid, there is no assurance with respect to the amount
of any such dividend. Unless our board of directors determines to pay dividends, our stockholders will be required to look to
appreciation of our common stock to realize a gain on their investment. There can be no assurance that this appreciation will
occur.
If
we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet
our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory
scrutiny and sanction, cause investors to lose confidence in our reported financial information, and have a negative effect on
the market price for shares of our common stock.
Effective
internal controls are necessary for us to provide reliable financial reports and effectively to prevent fraud. We maintain a system
of internal controls over financial reporting, which is defined as a process designed by, or under the supervision of, our principal
executive officer and principal financial officer, or persons performing similar functions, and effected by our board of directors,
management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles.
As
a public company, we have significant requirements for enhanced financial reporting and internal controls. We are required to
document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act
of 2002, which requires annual management assessments of the effectiveness of our internal controls over financial reporting.
The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and
react to changes in our business and economic and regulatory environments, and to expend significant resources to maintain a system
of internal controls that is adequate to satisfy our reporting obligations as a public company.
We
cannot assure you that we will, in the future, identify areas requiring improvement in our internal control over financial reporting.
We cannot assure you that the measures we will take to remediate any areas in need of improvement will be successful or that we
will implement and maintain adequate controls over our financial processes and reporting in the future as we continue to grow.
If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet
our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory
scrutiny and sanction, cause investors to lose confidence in our reported financial information, and have a negative effect on
the market price for shares of our common stock.
We
lack sufficient internal controls over financial reporting and implementing acceptable internal controls will be difficult with
a limited number of directors and management personnel, which will make it difficult to ensure that information required to be
disclosed in our reports filed and submitted under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded,
processed, summarized, and reported as and when required.
As
of the date of this filing, we currently lack certain internal controls over our financial reporting. While we have recently appointed
two independent directors to our board of directors, one of whom was appointed to chair our audit committee, and have hired a
new Chief Technology Officer, we still have a limited number of directors and management personnel, which may make it difficult
to implement such controls at this time. The lack of such controls makes it difficult to ensure that information required to be
disclosed in our reports filed and submitted under the Exchange Act is recorded, processed, summarized, and reported as and when
required.
The
reasons we believe that our disclosure controls and procedures are not fully effective are because:
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there
is a lack of segregation of duties necessary for a good system of internal control due, to insufficient accounting staff due
to our size;
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the
staffing of our accounting department is weak due to the lack of qualifications and training, and the lack of formal review
process;
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our
control environment is weak due to the lack of an effective risk assessment process, the lack of internal audit function,
and insufficient documentation and communication of the accounting policies; and
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failure
in the operating effectiveness over controls related to recording revenue.
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We
cannot assure you that we will be able to develop and implement the necessary internal controls over financial reporting. The
absence of such internal controls may inhibit investors from purchasing our shares and may make it more difficult for us to raise
debt or equity financing.
Because
our directors and executive officers are among our largest stockholders, they can exert significant control over our business
and affairs and have actual or potential interests that may depart from those of investors.
Certain
of our directors and executive officers own a significant percentage of our outstanding capital stock. We estimate that our executive
officers and directors and their respective affiliates beneficially own approximately 18.9% of our outstanding voting stock,
on a fully-diluted basis, as of the date of this prospectus, and, following the completion of this offering, such persons would
beneficially own approximately 14.8% of our outstanding voting stock, on a fully-diluted basis, assuming that the selling
stockholders sell all of the shares of common stock included in this offering. The holdings of our directors and executive officers
may increase further in the future upon vesting or other maturation of exercise rights under any of the options or warrants they
may hold or in the future be granted, or if they otherwise acquire additional shares of our common stock. The interests of such
persons may differ from the interests of our other stockholders. As a result, in addition to their board seats and offices, such
persons will have significant influence and control over all corporate actions requiring stockholder approval, irrespective of
how our other stockholders may vote, including the following actions:
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to
elect or defeat the election of our directors;
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to
amend or prevent an amendment to our Articles of Incorporation or Bylaws;
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to
effect or prevent a merger, sale of assets, or other corporate transaction; and
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to
control the outcome of any other matter submitted to our stockholders for a vote.
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This
concentration of ownership by itself may have the effect of impeding a merger, consolidation, takeover, or other business consolidation,
or discouraging a potential acquirer from making a tender offer for our common stock, which in turn could reduce our stock price
or prevent our stockholders from realizing a premium over our stock price.
The
elimination of monetary liability against our directors, officers, and employees under Nevada law and the existence of indemnification
rights for our obligations to our directors, officers, and employees may result in substantial expenditures by us and may discourage
lawsuits against our directors, officers, and employees.
Our
Articles of Incorporation and Bylaws contain provisions permitting us to eliminate the personal liability of our directors and
officers to us and our stockholders for damages for the breach of a fiduciary duty as a director or officer to the extent provided
by Nevada law. We may also have contractual indemnification obligations under any future employment agreements with our officers.
The foregoing indemnification obligations could result in us incurring substantial expenditures to cover the cost of settlement
or damage awards against directors and officers, which we may be unable to recoup. These provisions and the resulting costs may
also discourage us from bringing a lawsuit against directors and officers for breaches of their fiduciary duties and may similarly
discourage the filing of derivative litigation by our stockholders against our directors and officers even though such actions,
if successful, might otherwise benefit us and our stockholders.
Anti-takeover
effects of certain provisions of Nevada state law hinder a potential takeover of us.
Nevada
has a business combination law that prohibits certain business combinations between Nevada corporations and “interested
stockholders” for three years after an “interested stockholder” first becomes an “interested stockholder,”
unless the corporation’s board of directors approves the combination in advance. For purposes of Nevada law, an “interested
stockholder” is any person who is (i) the beneficial owner, directly or indirectly, of ten percent or more of the voting
power of the outstanding voting shares of the corporation or (ii) an affiliate or associate of the corporation and at any time
within the three previous years was the beneficial owner, directly or indirectly, of ten percent or more of the voting power of
the then-outstanding shares of the corporation. The definition of the term “business combination” is sufficiently
broad to cover virtually any kind of transaction that would allow a potential acquirer to use the corporation’s assets to
finance the acquisition or otherwise to benefit its own interests rather than the interests of the corporation and its other stockholders.
The
potential effect of Nevada’s business combination law is to discourage parties interested in taking control of us from doing
so if these parties cannot obtain the approval of our board of directors. Both of these provisions could limit the price investors
would be willing to pay in the future for shares of our common stock.