Please
consider the following risk factors carefully. If any one or more of the following risks were to occur, it could have a material
adverse effect on our business, prospects, financial condition and results of operations, and the market price of our securities
could decrease significantly. Statements below to the effect that an event could or would harm our business (or have an adverse
effect on our business or similar statements) mean that the event could or would have a material adverse effect on our business,
prospects, financial condition and results of operations, which in turn could or would have a material adverse effect on the market
price of our securities. Although we have organized the risk factors below under headings to make them easier to read, many of
the risks we face involve more than one type of risk. Consequently, you should read all of the risk factors below carefully before
making any decision to acquire or hold our securities.
Risks
Related to Our Business
We
have a history of operating losses and there are no assurances we will report profitable operations in the foreseeable future.
We
have losses from operations of $8,581,000 and $15,981,000 for the years ended December 31, 2020 and 2019, respectively. Additionally,
for the three months ended March 31, 2021 and 2020, we recorded losses from operations of $1,521,000 and $3,051,000, respectively,
and accumulated deficit of $43,867,000 and $36,571,000, respectively. Our future success depends upon our ability to continue
to grow our revenues, contain our operating expenses and generate profits. We do not have any long-term agreements with our customers.
There are no assurances that we will be able to increase our revenues and cash flow to a level which supports profitable operations.
We may continue to incur losses in future periods until such time, if ever, as we are successful in significantly increasing our revenues
and cash flow beyond what is necessary to fund our ongoing operations and pay our obligations as they become due. If we are not able
to grow, increase revenue and begin generating consistent profits, it is unlikely we will be able to generate sufficient cash from operations
to pay our operating expenses and service our debt obligations, or report profitable operations in future periods.
We
may not be able to continue as a going concern if we do not obtain additional financing.
We
have incurred losses since our inception and have not demonstrated an ability to generate revenues from the sales of our proposed products.
Our ability to continue as a going concern is dependent on raising capital from the sale of our common stock and/or obtaining debt financing.
Our cash, cash equivalents and short-term investment balance as of March 31, 2021 was approximately $4,850,000. On April 12, 2021 we
closed on an additional $85,000 in the private placement of our Series B Preferred Stock. Based on our cash, cash equivalents and short
term investments, as well as the proceeds from the offering, as well as our current expected level of operating expenditures,
we expect to be able to fund our operations through the third quarter of 2021. Our ability to remain a going concern is wholly dependent
upon our ability to continue to obtain sufficient capital to fund our operations. Accordingly, despite our ability to secure capital
in the past, there can be no assurance that additional equity or debt financing will be available to us when needed or that we may be
able to secure funding from any other sources. In the event that we are not able to secure funding, we may be forced to curtail operations,
delay or stop ongoing clinical trials, cease operations altogether or file for bankruptcy.
We
will need to raise additional capital to continue operations.
As
of March 31, 2021, we had $4,850,000 in cash or cash equivalents or short-term investment. Based on our cash, cash equivalents and short
term investments, as well as our current expected level of operating expenditures, we expect to be able to fund our operations through
the third quarter of 2021. We cannot assure you that we will be able to secure additional capital through financing transactions, including
issuance of debt. Our inability to operate profitably, or secure additional financing will materially impact our ability to fund our
current and planned operations.
We
have spent and expect to continue spending substantial cash in the execution of our business plan and the development of the BIG
Token platform. We cannot assure you that financing will be available if needed. If additional financing is not available, we
may not be able to fund our operations, develop or enhance our product offerings, take advantage of business opportunities or
respond to competitive market pressures. If we exhaust our cash reserves and are unable to secure additional financing, we may
be unable to meet our obligations which could result in us initiating bankruptcy proceedings or delaying or eliminating some or
all our research and product development programs.
Our
failure to maintain an effective system of internal control over financial reporting may result in the need for us to restate
previously issued financial statements. As a result, current and potential stockholders may lose confidence in our financial reporting,
which could harm our business and value of our stock.
Or
management has determined that, as of March 31, 2021, we did not maintain effective internal controls over financial reporting
based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated
Framework as a result of identified material weaknesses in our internal control over financial reporting. A material weakness
is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable
possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or
detected on a timely basis.
Our
auditors have expressed substantial doubt about our ability to continue as a going concern.
Our
auditors’ report on our December 31, 2020 consolidated financial statements expresses an opinion that our capital resources
as of the date of their audit report were not sufficient to sustain operations or complete our planned activities for the upcoming
year unless we raised additional funds. Our current cash level raises substantial doubt about our ability to continue as a going
concern past the third quarter of 2021. If we do not obtain additional capital by such time, we may no longer be able to continue
as a going concern and may cease operation or seek bankruptcy protection.
If
we are unable to successfully retain and integrate a new management team, our business could be harmed.
We
have historically operated as a business unit of SRAX. Our success depends largely on the development and execution of our business strategy
by our senior management team. Effective May 15, 2021, Lou Kerner was terminated as Chief Executive Officer and Christopher Miglino
was appointed interim principal executive officer. Our success depends largely on the development and execution of our business strategy
by our senior management team. We currently have a limited executive team which may adversely affect our business. Additionally, the
loss of any members or key personnel would likely harm our ability to implement our business strategy and respond to the rapidly changing
market conditions in which we operate. There may be a limited number of persons with the requisite skills to serve in these positions,
and we cannot assure you that we would be able to identify or employ such qualified personnel on acceptable terms, if at all. We cannot
assure you that management will succeed in working together as a team. In the event we are unsuccessful, our business and prospects could
be harmed.
We
have no operating history as a standalone entity or management team as presently configured which results in a high degree of
uncertainty regarding our ability to effectively operate our business.
Our
limited staff, operating history as well as our recently appointed management team means that there is a high degree of uncertainty
regarding our ability to:
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develop
and commercialize our technologies and proposed products;
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identify,
hire and retain the needed personnel to implement our business plan;
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manage
growth; or
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respond
to competition.
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No
assurances can be given as to exactly when, if at all, we will be able to develop our business or take the necessary steps to
derive net income.
We
may have difficulty in retaining employees given our current stock price, market capitalization, and the terms of our equity compensation
plans.
Subsequent
to the completion of the Share Exchange and the recent conversion of Series B Preferred Stock, as of May 11, 2021 the Company has 225,616,776,660
shares of Common Stock outstanding and a market capitalization of approximately $1 billion. The market capitalization is significantly
higher than that of SRAX, the former parent corporation while it owned BIG Token as a wholly owned subsidiary. Accordingly, the market
capitalization of the Company may not be indicative of its actual value. Furthermore, the Company may have difficulty in hiring
new employees and retaining qualified employees as a result of our 2021 Equity Incentive Plan requirings stock grants to
be issued at market value, which new or current employees may determine to be unattractive given our current valuation.
Additionally, we are only authorized to issue 15,824,493,516 shares under our 2021 Equity Incentive Plan, which may be inadequate to
issue grants needed to retain qualified personnel until January 1, 2022, where the number of shares under such plan will increase. Accordingly,
our inability to attract or retain employees during this time may materially impact our business.
We
may be required to expend significant capital to redeem BIGtoken Points which will negatively impact our ability to fund our core
operations.
Users
of BIGtoken receive points for undertaking certain actions on the platform that may be redeemed directly for cash from us, with
such value as determined by management. Accordingly, we are currently obligated to redeem users’ points which are earned on BIGtoken.
We are currently redeeming each point for up to $0.01, subject to the user meeting certain conditions. As of March 31, 2021, we recorded
a contingent liability for future point redemptions equal to approximately $313,000 and we have redeemed an aggregate amount of approximately
$1,016,000 as of May 27, 2021. As of March 31, 2021, we had approximately 16 million application downloads. There can be no assurance
that we will have enough cash reserves, or if we do have sufficient cash, if we will be able to continue to fund our other business obligations
and operational expenses.
If
our efforts to attract and retain BIGtoken users are not successful, our number of users and the amount of data collected could
fail to reach critical mass, grow or decline and our potential for BIGtoken to earn revenues may be materially affected.
We
will be dependent on advertisers to pay us for access to user data. We must attract users to grow the amount of accessible data
and make it attractive to these third parties. If the public does not perceive our mission or our services to be reliable, valuable
or of high quality, we may not be able to attract or retain users and create a critical mass of data which will impact our ability
to earn revenues which could have a materially adversely affected us.
Natural
disasters, epidemic or pandemic disease outbreaks, trade wars, political unrest or other events could disrupt our business or
operations or those of our development partners, manufacturers, regulators or other third parties with whom we conduct business
now or in the future.
A
wide variety of events beyond our control, including natural disasters, epidemic or pandemic disease outbreaks (such as the recent
novel coronavirus outbreak), trade wars, political unrest or other events could disrupt our business or operations or those of
our manufacturers, regulatory authorities, or other third parties with whom we conduct business. These events may cause businesses
and government agencies to be shut down, supply chains to be interrupted, slowed, or rendered inoperable, and individuals to become
ill, quarantined, or otherwise unable to work and/or travel due to health reasons or governmental restrictions. For example, California
recently ordered most businesses closed, mandating work-from-home arrangements, where feasible, in response to the coronavirus
pandemic. These limitations could negatively affect our business operations and continuity and could negatively impact our ability
to timely perform basic business functions, including making SEC filings and preparing financial reports. If our operations or
those of third parties with whom we have business are impaired or curtailed as a result of these events, the development and commercialization
of our products and product candidates could be impaired or halted, which could have a material adverse impact on our business.
Challenges
in acquiring user data could adversely affect our ability to retain and expand BIGtoken, and therefore could materially affect
our business, financial condition and results of operations.
In
order to expand BIGtoken, we must continue to expend resources to make the submission of user data as user-friendly as possible.
We, and our users, may face legal, logistical, cultural, and commercial challenges in procuring user data. Additionally, once such data
is obtained, if the process for validation and collection of rewards may be perceived as too cumbersome and discourage potential users
from submission. We may need to expend significant resources on user interfaces for evolving platforms, such as mobile devices. Inconveniences
to our users or potential users at any stage of the process may materially challenge our growth.
If
we fail to ensure that the user data derived from BIGtoken is of high quality, our ability to attract customers or monetize the
data may be materially impaired.
The
reliability of our user data depends upon the integrity and the quality of the process of accepting user data into BIGtoken. We
will take certain measures to validate user data submitted by our users and potential users to assure a high quality of data in BIGtoken
and generally confirming that data is submitted in accordance with our terms for such data. We must continue to invest in our quality
control measures relating to BIGtoken in order to provide a high-quality product to potential customers.
If
BIGtoken experiences an excessive rate of user attrition, our ability to attract customers could fail.
Users
may elect to have their data deleted from BIGtoken at any time. We must continually add new users both to replace users who choose
to delete their data and to increase our user base. Users may choose to delete their data for many reasons. If users are concerned about
privacy and security and do not perceive BIGtoken to be reliable, if we fail to keep users engaged and interested in our application,
or if we simply lose our users’ attention, we could fail to gather sufficient user data and our ability to earn revenues may be
materially affected.
If
we are unable to manage our marketing and advertising expenses, it could materially harm our results of operations and growth.
We
plan to rely in part on our marketing and advertising efforts to attract new members. Our future growth and profitability, as
well as the maintenance and enhancement of our brand, will depend in large part on the effectiveness and efficiency of our marketing
and advertising strategies and expenditures. If we are unable to maintain our marketing and advertising channels on cost-effective
terms, our marketing and advertising expenses could increase substantially, and our business, financial condition and results
of operations may suffer. In addition, we may be required to incur significantly higher marketing and advertising expenses than
we currently anticipate if excessive numbers of members withdraw their member data from our database.
Failure
to comply with federal, state and local laws and regulations or our contractual obligations relating to data privacy, protection and
security of BIGtoken user data, and civil liabilities relating to breaches of privacy and security of user data, could damage
our reputation and harm our business.
A
variety of federal, state and local laws and regulations govern the collection, use, retention, sharing and security of user data. We
will collect BIGtoken user data from and about our members when they redeem rewards and maintain that date in our BIGtoken
Application. Claims or allegations that we have violated applicable laws or regulations related to privacy, data protection or data
security could in the future result in negative publicity and a loss of confidence in us by our users and potential new users and may
subject us to fines and penalties by regulatory authorities. In addition, we have privacy policies and practices concerning the collection,
use and disclosure of user data as part of our agreements with our members, including ones posted on our website. Several Internet companies
have incurred penalties for failing to abide by the representations made in their privacy policies and practices. In addition, our use
and retention of user data could lead to civil liability exposure in the event of any disclosure of such information due to hacking,
malware, phishing, inadvertent action or other unauthorized use or disclosure. Several companies have been subject to civil actions,
including class actions, relating to this exposure.
We
have incurred, and will continue to incur, expenses to comply with data privacy, protection and security standards and protocols for
BIGtoken user data imposed by law, regulation, self-regulatory bodies, industry standards and contractual obligations. Such laws,
standards and regulations, however, are evolving and subject to potentially differing interpretations, and federal, state and provincial
legislative and regulatory bodies may expand current or enact new laws or regulations regarding privacy matters. Additionally, we accept
user from foreign countries which subjects us to the personal and other data privacy, protection and security laws of those countries,
we are unable to predict what additional legislation, standards or regulation in the area of privacy and security of personal information
could be enacted or its effect on our operations and business.
If
we are unable to satisfy data privacy, protection, security, and other government- and industry-specific requirements, our growth
could be harmed.
We
need or may in the future need to comply with a number of data protection, security, privacy and other government- and industry-specific
requirements, including those that require companies to notify individuals of data security incidents involving certain types of personal
data. Security compromises could harm our reputation, erode user confidence in the effectiveness of our security measures, negatively
impact our ability to attract new members, or cause existing users to withdraw their data from BIGtoken.
Regulatory,
legislative or self-regulatory developments regarding internet privacy matters could adversely affect our ability to conduct our
business.
The
United States and foreign governments have enacted, considered or are considering legislation or regulations that could significantly
restrict our ability to collect, process, use, transfer and pool data collected from and about consumers and devices. Trade associations
and industry self-regulatory groups have also promulgated best practices and other industry standards relating to targeted advertising.
Various U.S. and foreign governments, self-regulatory bodies and public advocacy groups have called for new regulations specifically
directed at the digital advertising industry, and we expect to see an increase in legislation, regulation and self-regulation
in this area. The legal, regulatory and judicial environment we face around privacy and other matters is constantly evolving and
can be subject to significant change. For example, the General Data Protection Regulation, or GDPR, which was agreed by E.U. institutions
in 2016 and came into effect after a two-year transition period on May 25, 2018, updated and modernized the principles of the
1995 Data Protection Directive and significantly increases the level of sanctions for non-compliance. Data Protection Authorities
will have the power to impose administrative fines of up to a maximum of €20 million or 4% of the data controller’s
or data processor’s total worldwide turnover of the preceding financial year. Similarly, the E-Privacy Regulation, which
was launched by the European Parliament in October 2016, could result in, once enacted, new rules and mechanisms for “cookie”
consent. In addition, the interpretation and application of data protection laws in the U.S., Europe and elsewhere are often uncertain
and in flux. Legislative and regulatory authorities around the world may decide to enact additional legislation or regulations,
which could reduce the amount of data we can collect or process and, as a result, significantly impact our business. Similarly,
clarifications of and changes to these existing and proposed laws, regulations, judicial interpretations and industry standards
can be costly to comply with, and we may be unable to pass along those costs to our clients in the form of increased fees, which
may negatively affect our operating results. Such changes can also delay or impede the development of new solutions, result in
negative publicity and reputational harm, require significant incremental management time and attention, increase our risk of
non-compliance and subject us to claims or other remedies, including fines or demands that we modify or cease existing business
practices, including our ability to charge per click or the scope of clicks for which we charge. Additionally, any perception
of our practices or solutions as an invasion of privacy, whether or not such practices or solutions are consistent with current
or future regulations and industry practices, may subject us to public criticism, private class actions, reputational harm or
claims by regulators, which could disrupt our business and expose us to increased liability. Finally, our legal and financial
exposure often depends in part on our clients’ or other third parties’ adherence to privacy laws and regulations and
their use of our services in ways consistent with visitors’ expectations. We rely on representations made to us by clients
that they will comply with all applicable laws, including all relevant privacy and data protection regulations. We make reasonable
efforts to enforce such representations and contractual requirements, but we do not fully audit our clients’ compliance
with our recommended disclosures or their adherence to privacy laws and regulations. If our clients fail to adhere to our contracts
in this regard, or a court or governmental agency determines that we have not adequately, accurately or completely described our
own solutions, services and data collection, use and sharing practices in our own disclosures to consumers, then we and our clients
may be subject to potentially adverse publicity, damages and related possible investigation or other regulatory activity in connection
with our privacy practices or those of our clients.
Privacy
concerns could damage our reputation and deter current and potential users from contributing additional data through our BIGtoken
Application. If our security measures are breached resulting in the improper use and disclosure of user data, BIGtoken may
be perceived as not being secure, users and customers may curtail or stop using BIGtoken, and we may incur significant legal and
financial exposure.
Concerns
about our practices with regard to the collection, use, disclosure, or security of user data or other privacy related matters, even if
unfounded, could damage our reputation and adversely affect our operating results. Our services will involve the purchase, storage, transmission
and sale of user data, and theft and security breaches expose us to a risk of loss of this information, improper use and disclosure of
such information, litigation, and potential liability. Any systems failure or compromise of our security that results in the release
of user data, or in our or our users’ ability to access such data, could seriously harm our reputation and brand and, therefore,
our business, and impair our ability to attract and retain users. Additionally, if user data is somehow made public or made available
through a security breach, it may be used to identify our users and people related thereto. We may experience cyber attacks of varying
degrees. Our security measures may also be breached due to employee error, malfeasance, system errors or vulnerabilities, including vulnerabilities
of our vendors, suppliers, their products, or otherwise. Such breach or unauthorized access, increased government surveillance, or attempts
by outside parties to fraudulently induce employees, users, or customers to disclose sensitive information in order to gain access to
user data could result in significant legal and financial exposure, damage to our reputation, and a loss of confidence in the security
of BIGtoken that could potentially have an adverse effect on our business. Because the techniques used to obtain unauthorized
access, disable or degrade service, or sabotage systems change frequently, become more sophisticated, and often are not recognized until
launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Additionally,
cyber attacks could also compromise trade secrets and other sensitive information and result in such information being disclosed to others
and becoming less valuable, which could negatively affect our business. If an actual or perceived breach of our security occurs, the
market perception of the effectiveness of our security measures could be harmed and we could lose members and customers.
Our
business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection, content,
competition, consumer protection, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation,
and could result in claims, changes to our business practices, monetary penalties, increased cost of operations, or declines in
user growth or engagement, or otherwise harm our business.
We
are subject to a variety of laws and regulations in the United States and abroad that involve matters central to our business,
such as privacy, data protection and personal information, rights of publicity, content, intellectual property, advertising, marketing,
distribution, data security, data retention and deletion, electronic contracts and other communications, competition, protection
of minors, consumer protection, taxation and securities law compliance. Expansion of our activities in certain jurisdictions,
or other actions that we may take, may subject us to additional laws, regulations, or other government scrutiny. In addition,
foreign data protection, privacy, content, competition, and other laws and regulations can impose different obligations or be
more restrictive than those in the United States.
Additionally,
as we allow European users, we are subject to the European General Data Protection Regulation (GDPR), effective as of May 2018.
The GDPR increases privacy rights for individuals in Europe, extends the scope of responsibilities for data controllers and data
processors and imposes increased requirements and potential penalties on companies offering goods or services to individuals who
are located in Europe or monitoring the behavior of such individuals (including by companies based outside of Europe). Noncompliance
can result in penalties of up to the greater of €20 million, or 4% of global company revenues.
These
U.S. federal and state and foreign laws and regulations, which in some cases can be enforced by private parties in addition to
government authorities, are constantly evolving and can be subject to significant change. As a result, the application, interpretation,
and enforcement of these laws and regulations are often uncertain, particularly in the newer industry in which we operate, and
may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices.
These
laws and regulations, as well as any associated inquiries or investigations or any other government actions, may be costly to
comply with and may delay or impede our international growth, result in negative publicity, increase our operating costs, require
significant management time and attention, and subject us to remedies that may harm our business.
Security
breaches and improper access to or disclosure of our data or user data, or other hacking and phishing attacks on our systems,
could harm our reputation and adversely affect our business.
Our
industry is prone to cyber-attacks by third parties seeking unauthorized access to our data or users’ data or to disrupt our ability
to provide service. Any failure to prevent or mitigate security breaches and improper access to or disclosure of our data or user data,
including personal information, content, or payment information from or to users, or information from marketers, could result in the
loss or misuse of such data, which could harm our business and reputation and diminish our competitive position. In addition, computer
malware, viruses, social engineering (predominantly spear phishing attacks), and general hacking have become more prevalent in our industry.
Our BIGtoken platform has experienced an increase in the occurrence of such attempts, and we cannot be assured that we will be
able to prevent a successful attack on our systems in the future. We also regularly encounter attempts to create false or undesirable
user accounts or take other actions on our BIGtoken platform for purposes such as spreading misinformation, attempting to have
us improperly purchase user data or other objectionable ends. As a result of recent attention and growth of our BIGtoken platform,
the size of our user base, and the types and volume of personal data on our systems, we believe that we are a particularly attractive
target for such breaches and attacks. Our efforts to address undesirable activity may also increase the risk of retaliatory attacks.
Such attacks may cause interruptions to the services we provide, degrade the user experience, cause users or marketers to lose confidence
and trust in our products, impair our internal systems, or result in financial harm to us. Our efforts to protect our company data or
the information we receive may also be unsuccessful due to software bugs or other technical malfunctions; employee, contractor, or vendor
error or malfeasance; government surveillance; or other threats that evolve. In addition, third parties may attempt to fraudulently induce
employees or users to disclose information in order to gain access to our data or our users’ data. Cyber-attacks continue to evolve
in sophistication and volume, and inherently may be difficult to detect for long periods of time. Although we are currently in the process
of developing systems and processes that are designed to protect our data and user data, to prevent data loss, to disable undesirable
accounts and activities on our BIGtoken platform, and to prevent or detect security breaches, we cannot assure you that such measures
will ultimately become operational or provide absolute security, and we may incur significant costs in protecting against or remediating
cyber-attacks.
Affected
users or government authorities could initiate legal or regulatory actions against us in connection with any actual or perceived security
breaches or improper disclosure of data, which could cause us to incur significant expense and liability or result in orders or consent
decrees forcing us to modify our business practices, especially with regard to the BIGtoken platform. Such incidents or our efforts
to remediate such incidents may also result in a decline in our active user base or engagement levels. Any of these events could have
a material and adverse effect on our business, reputation, or financial results.
Certain
user data must be provided on a recurring basis in order to provide full value.
Certain
types of user data will need to be contributed by users recurrently for such data to provide full value to our potential customers.
If users fail to provide us with sufficient recurring data, the value of the user data may substantially decrease and our ability
to earn revenues may be materially affected.
Unfavorable
media coverage could negatively affect our business.
Unfavorable
publicity regarding, for example, our privacy practices, terms of service, regulatory activity, the actions of third parties,
the use of our products or services for illicit, objectionable, or illegal ends or the actions of other companies that provide
similar services to us, could adversely affect our reputation. Such negative publicity also could have an adverse effect on the
size, engagement, and loyalty of our user base and result in user attrition which could adversely affect our business and financial
results.
Weak
economic conditions may reduce consumer demand for products and services.
A
weak economy in the United States could adversely affect demand for advertising products, and services. A substantial portion
of our revenue is derived from businesses that are highly dependent on discretionary spending by individuals, which typically
falls during times of economic instability. Accordingly, the ability of our advertisers to increase or maintain revenue and earnings
could be adversely affected to the extent that relevant economic environments remain weak or decline further. We currently are
unable to predict the extent of any of these potential adverse effects.
Because
we store, process and use data, some of which contain personal information, we are subject to complex and evolving federal, state
and foreign laws and regulations regarding privacy, data protection and other matters, which are subject to change.
We
are subject to a variety of laws and regulations in the United States and other countries that involve matters central to our
business, including with respect to user privacy, rights of publicity, data protection, content, protection of minors and consumer
protection. These laws can be particularly restrictive in countries outside the United States. Both in the United States and abroad,
these laws and regulations constantly evolve and remain subject to significant change. In addition, the application and interpretation
of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which we operate.
Because we store, process and use data, some of which contain personal information, we are subject to complex and evolving federal,
state and foreign laws and regulations regarding privacy, data protection and other matters. Many of these laws and regulations
are subject to change and uncertain interpretation and could result in investigations, claims, changes to our business practices,
increased cost of operations and declines in user growth, retention or engagement, any of which could materially adversely affect
our business, results of operations and financial condition.
Several
proposals are pending before federal, state and foreign legislative and regulatory bodies that could significantly affect our
business. For example, a revision to the 1995 European Union Data Protection Directive is currently being considered by European
legislative bodies that may include more stringent operational requirements for data processors and significant penalties for
non-compliance. In addition, the EU General Data Protection Regulation 2016/679 (“GDPR”), which came into effect on
May 25, 2018, establishes new requirements applicable to the processing of personal data ( i.e. , data which identifies
an individual or from which an individual is identifiable), affords new data protection rights to individuals ( e.g. ,
the right to erasure of personal data) and imposes penalties for serious data breaches. Individuals also have a right to compensation
under GDPR for financial or non-financial losses. GDPR will impose additional responsibility and liability in relation to our
processing of personal data. GDPR may require us to change our policies and procedures and, if we are not compliant, could materially
adversely affect our business, results of operations and financial condition.
If
advertising on the Internet loses its appeal, our revenue could decline.
Our
business model may not continue to be effective in the future for a number of reasons, including:
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a
decline in the rates that we can charge for advertising and promotional activities;
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our
inability to create applications for our customers;
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Internet
advertisements and promotions are, by their nature, limited in content relative to other media;
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companies
may be reluctant or slow to adopt online advertising and promotional activities that replace, limit or compete with their
existing direct marketing efforts;
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companies
may prefer other forms of Internet advertising and promotions that we do not offer;
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the
quality or placement of transactions, including the risk of non-screened, non-human inventory and traffic, could cause a loss
in customers or revenue; and
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regulatory
actions may negatively impact our business practices.
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If
the number of companies who purchase online advertising and promotional services from us does not grow, we may experience difficulty
in attracting publishers, and our revenue could decline.
Our
stock price may be volatile and your investment in our common stock could suffer a decline in value.
There
has been significant volatility in the market price and trading volume of securities of technology and other companies, which
may be unrelated to the financial performance of these companies. These broad market fluctuations may negatively affect the market
price of our common stock.
Some
specific factors that may have a significant effect on the market price of our common stock include:
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actual
or anticipated fluctuations in our results of operations or our competitors’ operating results;
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actual
or anticipated changes in the growth rate of the connected lifestyle market, our growth rates or our competitors’ growth
rates;
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conditions
in the financial markets in general or changes in general economic conditions;
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changes
in governmental regulation, including taxation and tariff policies;
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interest
rate or currency rate fluctuations;
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our
ability to forecast accurate financial results; and
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changes
in stock market analyst recommendations regarding our common stock, other comparable companies or our industry generally
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We
rely upon third parties for technology that is critical to our products, and if we are unable to continue to use this technology
and future technology, our ability to develop, sell, maintain and support technologically innovative products would be limited.
We
rely on third parties to obtain non-exclusive patented hardware and software license rights in technologies that are incorporated
into and necessary for the operation and functionality of most of our products. In these cases, because the intellectual property
we license is available from third parties, barriers to entry into certain markets may be lower for potential or existing competitors
than if we owned exclusive rights to the technology that we license and use. Moreover, if a competitor or potential competitor
enters into an exclusive arrangement with any of our key third-party technology providers, or if any of these providers unilaterally
decides not to do business with us for any reason, our ability to develop and sell products and services containing that technology
would be severely limited.
If
we are offering products or services that contain third-party technology that we subsequently lose the right to license, then
we will not be able to continue to offer or support those products or services. In addition, these licenses may require royalty
payments or other consideration to the third-party licensor. Our success will depend, in part, on our continued ability to access
these technologies, and we do not know whether these third-party technologies will continue to be licensed to us on commercially
acceptable terms, if at all. In addition, if these third-party licensors fail or experience instability, then we may be unable
to continue to sell products and services that incorporate the licensed technologies, in addition to being unable to continue
to maintain and support these products and services. We do require escrow arrangements with respect to certain third-party software
which entitle us to certain limited rights to the source code, in the event of certain failures by the third party, in order to
maintain and support such software. However, there is no guarantee that we would be able to fully understand and use the source
code, as we may not have the expertise to do so. We are increasingly exposed to these risks as we continue to develop and market
more products containing third-party technology and software. If we are unable to license the necessary technology, we may be
forced to acquire or develop alternative technology, which could be of lower quality or performance standards. The acquisition
or development of alternative technology may limit and delay our ability to offer new or competitive products and services and
increase our costs of production. As a result, our business, results of operations and financial condition could be materially
adversely affected.
The
development of our operations and infrastructure in connection with our separation from SRAX, and any future expansion of such
operations and infrastructure, may not be successful, and may strain our operations and increase our operating expenses.
In
connection with our separation from SRAX, we have begun to implement a new information technology infrastructure for our business,
which includes the creation of management information systems and operational and financial controls unique to our business. We
may not be able to put in place adequate controls in an efficient and timely manner in connection with our separation from SRAX
and as our business grows, and our current systems may not be adequate to support our future operations. The difficulties associated
with installing and implementing new systems, procedures and controls may place a significant burden on our management and operational
and financial resources. In addition, as we grow internationally, we will have to expand and enhance our communications infrastructure.
If we fail to continue to improve our management information systems, procedures and financial controls, or encounter unexpected
difficulties during expansion and reorganization, our business could be harmed.
For
example, we plan to invest significant capital and human resources in the design, development and enhancement of our financial
and operational systems. We will depend on these systems in order to timely and accurately process and report key components of
our results of operations, financial condition and cash flows. If the systems fail to operate appropriately or we experience any
disruptions or delays in enhancing their functionality to meet current business requirements, fulfil contractual obligations,
accurately report our financials and otherwise run our business could be adversely affected. Even if we do not encounter these
adverse effects, the development and enhancement of systems may be much more costly than we anticipated. If we are unable to continue
to develop and enhance our information technology systems as planned, our business, results of operations and financial condition
could be materially adversely affected.
As
part of growing our business, we may make acquisitions. If we fail to successfully select, execute or integrate our acquisitions,
then our business, results of operations and financial condition could be materially adversely affected and our stock price could
decline.
From
time to time, we may undertake acquisitions to add new product and service lines and technologies, acquire talent, gain new sales
channels or enter into new sales territories. Acquisitions involve numerous risks and challenges, including relating to the successful
integration of the acquired business, entering into new territories or markets with which we have limited or no prior experience,
establishing or maintaining business relationships with new retailers, distributors or other channel partners, vendors and suppliers
and potential post-closing disputes.
We
cannot ensure that we will be successful in selecting, executing and integrating acquisitions. Failure to manage and successfully
integrate acquisitions could materially harm our business, financial condition and results of operations. In addition, if stock
market analysts or our stockholders do not support or believe in the value of the acquisitions that we choose to undertake, our
stock price may decline.
Risks
Related to Our Separation from SRAX
We
may not be successful as stand-alone entity.
Pursuant
to the completion of the Share Exchange, we became a stand-alone public company, although we will continue to be controlled by
SRAX as long as they own a significant amount of our securities. The process of becoming a stand-alone public company is complex
and may distract our management from focusing on our business and strategic priorities. Further, although we expect to have direct
access to the debt and equity capital, we may not be able to issue debt or equity on terms acceptable to us or at all. Moreover,
even with equity compensation tied to our business, we may not be able to attract and retain employees as desired.
We
also may not fully realize the intended benefits of being a stand-alone public company if any of the risks identified in this
“Risk Factors” section, or other events, were to occur. These intended benefits include improving the strategic
and operational flexibility of our Company, increasing the focus of our management teams on our business operations, allowing
our company to adopt the capital structure, investment policy and dividend policy best suited to its financial profile and business
needs, and providing our Company with its own equity currency to facilitate acquisitions and to better incentivize management.
If we do not realize these intended benefits for any reason, our business may be negatively affected. In addition, the separation
could materially adversely affect our business, results of operations and financial condition.
As
long as SRAX controls us, the ability of our other shareholders to influence matters requiring stockholder approval will be limited.
As
a result of the Share Exchange, SRAX currently owns 149,562,566,584 shares of our common stock and 5,000,000 shares of our Series
A Preferred Stock, representing voting power of approximately 63% of our issued and outstanding capital stock as of May 11, 2021.
For so long as SRAX beneficially owns shares of our outstanding securities representing at least a majority of the votes entitled
to be cast by the holders of our outstanding securities, SRAX will be able to elect all of the members of our board of directors
and influence other voting matters.
SRAX’s
ability to control our board of directors may make it difficult for us to recruit high-quality independent directors.
So
long as SRAX beneficially owns shares of our outstanding securities representing at least a majority of the votes entitled to
be cast by the holders of our outstanding shares, SRAX can effectively control and direct our board of directors. Further, the
interests of SRAX and our other stockholders may diverge. Under these circumstances, persons who might otherwise accept our invitation
to join our board of directors may decline.
SRAX’s
interests may conflict with our interests and the interests of our other stockholders. Conflicts of interest between us and SRAX
could be resolved in a manner unfavorable to us and our other stockholders.
Various
conflicts of interest between us and SRAX could arise. The ownership interest and voting power of SRAX in our capital stock and
ownership interests of our directors and officers in SRAX capital stock, or service by an individual as either a director and/or
officer of both companies, could create or appear to create potential conflicts of interest when such individuals are faced with
decisions relating to us. These decisions could include:
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corporate
opportunities;
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the
impact that operating or capital decisions (including the incurrence of indebtedness) relating to our business may have on
SRAX’s consolidated financial statements and/or current or future indebtedness (including related covenants);
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business
combinations involving us;
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our
dividend and stock repurchase policies;
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compensation
and benefit programs and other human resources policy decisions;
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management
stock ownership;
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the
intercompany agreements and services between us and SRAX, including the agreements relating to our separation from SRAX;
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the
payment of dividends on our common stock; and
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determinations
with respect to our tax returns.
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Potential
conflicts of interest could also arise if we decide to enter into new commercial arrangements with SRAX in the future or in connection
with SRAX’s desire to enter into new commercial arrangements with third parties. Additionally, we may be constrained by
the terms of agreements relating to our indebtedness or equity securities from taking actions, or permitting us to take actions,
that may be in our best interest.
Furthermore,
disputes may arise between us and SRAX relating to our past and ongoing relationships, and these potential conflicts of interest
may make it more difficult for us to favorably resolve such disputes, including those related to:
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tax,
employee benefit, indemnification and other matters arising from the separation;
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the
nature, quality and pricing of services SRAX agrees to provide to us; and
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sales
and other disposals by SRAX of all or a portion of its ownership interest in us.
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We
may not be able to resolve any potential conflicts, and even if we do, the resolution may be less favorable to us than if we were
dealing with an unaffiliated third party. While we are controlled by SRAX, we may not have the leverage to negotiate amendments
to our various agreements with SRAX (if any are required) on terms as favorable to us as those we would negotiate with an unaffiliated
third party.
The
terms of the agreements that we entered into with SRAX in connection with the separation may limit our ability to take certain
actions which may prevent us from pursuing opportunities to raise capital, acquire other businesses or provide equity incentives
to our employees, which could impair our ability to grow.
The
terms of the agreements that we entered into with SRAX in connection with the separation, including the MSA, may limit our ability
to take certain actions, which could impair our ability to grow. The MSA provides that, as long as SRAX beneficially owns at least
50% of the total voting power of our outstanding capital stock entitled to vote in the election of our board of directors, we
will not (without SRAX’s prior written consent) take certain actions, such as incurring additional indebtedness and acquiring
businesses or assets or disposing of assets in excess of certain amounts.
We
have a very limited operating history as a stand-alone public company and our historical and carve-out financial information is
not necessarily representative of the results we would have achieved as a stand-alone public company and may not be a reliable
indicator of our future results.
The
historical financial information we have included in this Quarterly Report does not reflect, what our financial condition, results
of operations or cash flows would have been had we been a stand-alone entity during the historical periods presented, or what
our financial condition, results of operations or cash flows will be in the future as an independent entity.
In
addition, we have not made pro forma adjustments to reflect many significant changes that will occur in our cost structure, funding
and operations as a result of our transition to becoming a public company, including changes in our employee base, potential increased
costs associated with reduced economies of scale and increased costs associated with being a publicly traded, stand-alone company.
If
SRAX experiences a change in control, our current plans and strategies could be subject to change.
As
long as SRAX controls us, it will have significant influence over our plans and strategies, including strategies relating to marketing
and growth. In the event SRAX experiences a change in control, SRAX’s incumbent owner(s) may attempt to cause us to revise
or change our plans and strategies, as well as the agreements between SRAX and us, described in this Quarterly Report.
The
assets and resources that we acquired from SRAX in the separation may not be sufficient for us to operate as a stand-alone company,
and we may experience difficulty in separating our assets and resources from SRAX.
Because
we have not operated as an independent company for a long period of time, we will need to acquire assets in addition to those
contributed by SRAX and its subsidiaries to us and our subsidiaries in connection with our separation from SSRAX. Although certain
assets have been separated and we have been operating as a stand-alone entity since the completion of the Share Exchange, we may
also face difficulty in separating certain assets from SRAX’s assets and integrating newly acquired assets into our business.
Our business, financial condition and results of operations could be harmed if we fail to acquire assets that prove to be important
to our operations or if we incur unexpected costs in separating our assets from SRAX’s assets or integrating newly acquired
assets.
The
services that SRAX provides to us may not be sufficient to meet our needs, which may result in increased costs and otherwise adversely
affect our business.
Pursuant
to the TSA, we expect SRAX to continue to provide us with corporate and shared services for a transitional period related to corporate
functions, such as executive oversight, risk management, information technology, accounting, audit, legal, investor relations, tax, treasury,
shared facilities, operations, customer support, human resources and employee benefits, sales and sales operations and other services
in exchange for the fees specified in the TSA between us and SRAX. SRAX will not be obligated to provide these services in a manner that
differs from the nature of the services provided to the BIGtoken business during the 12-month period prior to the separation,
and thus we may not be able to modify these services in a manner desirable to us as a stand-alone public company. Further, if we no longer
receive these services from SRAX due to the termination of the TSA or otherwise, we may not be able to perform these services ourselves
and/or find appropriate third-party arrangements at a reasonable cost (and any such costs may be higher than those charged by SRAX).
Our
ability to operate our business effectively may suffer if we are unable to cost-effectively establish our own administrative and
other support functions in order to operate as a stand-alone company after the termination of our shared services and other intercompany
agreements with SRAX.
As
an operating segment of SRAX, we relied on administrative and other resources of SRAX, including information technology, accounting,
finance, human resources and legal services, to operate our business. Upon completion of the Share Exchange, we have entered into
various service agreements to retain the ability for specified periods to use these SRAX resources. While certain service shave
been implemented efficiently, there is no guarantee that all services or future services may be provided at the same level as
when we were a business segment within SRAX, and we may not be able to obtain the same benefits that we received prior to becoming
a stand-alone company. These services may not be sufficient to meet our needs, and after our agreements with SRAX terminates,
we may not be able to replace these services at all or obtain these services at prices and on terms as favorable as we currently
have with SRAX. We will need to create our own administrative and other support systems or contract with third parties to replace
SRAX’s systems. In addition, we have received informal support from SRAX, which may not be addressed in the agreements we
have entered into with SRAX, and the level of this informal support may diminish as we become a more independent company. Any
failure or significant downtime in our own administrative systems or in SRAX’S administrative systems during the transitional
period could result in unexpected costs, impact our results and/or prevent us from paying our suppliers or employees and performing
other administrative services on a timely basis.
We
are a smaller company relative to SRAX, which could result in increased costs and decreased revenue due to difficulty maintaining
existing customer relationships and obtaining new customers.
Prior
to the completion of the Share Exchange with SRAX, we were able to take advantage of SRAX’s size, technology and services,
including insurance, employee benefit support and audit and other professional services. We are a smaller company than SRAX and
we cannot assure you that we will have access to financial and other resources comparable to those available to us prior to the
completion of the Share Exchange. As a stand-alone company, we may be unable to obtain office space, goods, technology and services
in general, as well as components and services that are part of our supply chain, at prices or on terms as favorable as those
available to us prior the completion of the Share Exchange, which could increase our costs and reduce our profitability. Our future
success depends on our ability to maintain our current relationships with existing customers, and we may have difficulty attracting
new customers.
SRAX
has agreed to indemnify us for certain liabilities. However, we cannot assure that the indemnity will be sufficient to insure
us against the full amount of such liabilities, or that SRAX’s ability to satisfy its indemnification obligation will not
be impaired in the future.
Pursuant
to the MSA and certain other agreements with SRAX, SRAX has agreed to indemnify us for certain liabilities. The MSA provides for
cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of our business with
us and financial responsibility for the obligations and liabilities of SRAX’s business with SRAX.
However,
third parties could also seek to hold us responsible for any of the liabilities that SRAX has agreed to retain, and we cannot
assure that an indemnity from SRAX will be sufficient to protect us against the full amount of such liabilities, or that SRAX
will be able to fully satisfy its indemnification obligations in the future. Even if we ultimately succeed in recovering from
SRAX any amounts for which we are held liable, we may be temporarily required to bear these losses. Each of these risks could
materially adversely affect our business, results of operations and financial condition.
Some
of our directors and officers own SRAX common stock, restricted shares of SRAX common stock or options to acquire SRAX common
stock and hold positions with SRAX, which could cause conflicts of interest, or the appearance of conflicts of interest, that
result in our not acting on opportunities we otherwise may have.
Some
of our directors and executive officers own SRAX common stock, restricted shares of SRAX stock or options to purchase SRAX common
stock.
Ownership
of SRAX common stock, restricted shares of SRAX common stock and options to purchase SRAX common stock by our directors and executive
officers, and the presence of executive officers or directors of SRAX on our board of directors could create, or appear to create,
conflicts of interest with respect to matters involving both us and SRAX that could have different implications for SRAX than
they do for us. For example, potential conflicts of interest could arise in connection with the resolution of any dispute between
SRAX and us regarding terms of the agreements governing the separation and the relationship between SRAX and us thereafter, including
the MSA or the transition services agreement. Potential conflicts of interest could also arise if we enter into commercial arrangements
with SRAX in the future. As a result of these actual or apparent conflicts of interest, we may be precluded from pursuing certain
growth initiatives.
We
may have received better terms from unaffiliated third parties than the terms we will receive in the agreements that we entered
with SRAX.
The
agreements that we entered into with SRAX in connection with the separation, including the MSA and the TSA were prepared in the
context of the separation while we were still a wholly owned subsidiary of SRAX.
Ownership
of Our Securities
Sales
of a substantial number of shares of our common stock in the public market could cause our stock price to fall.
On
January 27, 2021, we entered into the Debt Exchange Agreement with Red Diamond. Pursuant to the Debt Exchange Agreement, we issued
Red Diamond 7,000,000,000 free trading shares of Common Stock or approximately 837% of the prior public float of 841,184,289. We also
issued Red Diamond 8,313 shares of Series C Preferred Stock, convertible into approximately 12,864,419,313 shares of Common Stock. Although
Red Diamond agreed to a leak out of 20% of average daily volume for the five trading days preceding the sale, this will still result
in a significant number of shares compared to our prior public float and will be difficult to monitor compliance. Sales of a substantial
number of such shares now and upon expiration of the leak-out period or the perception that such sales may occur, could cause our market
price to fall or make it more difficult for you to sell your common stock at a time and price that you deem appropriate.
Our
stock price is extremely volatile, which may result in you losing a significant part of your investment.
The
market price of our common stock is influenced by many factors, some of which are beyond our control, including those described
in this Risk Factors section and include the following:
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the
failure of securities analysts to cover our common stock after this offering or changes in financial estimates by analysts;
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the
inability to meet the financial estimates of securities analysts who follow our common stock or changes in earnings estimates
by analysts;
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strategic
actions by us or our competitors;
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announcements
by us or our competitors of significant contracts, acquisitions, joint marketing relationships, joint ventures or capital
commitments;
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our
quarterly or annual earnings, or those of other companies in our industry;
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actual
or anticipated fluctuations in our operating results and those of our competitors;
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general
economic and stock market conditions;
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the
public reaction to our press releases, our other public announcements and our filings with the SEC;
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risks
related to our business and our industry, including those discussed above;
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changes
in conditions or trends in our industry, markets or customers;
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the
trading volume of our common stock;
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future
sales of our common stock or other securities;
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investor
perceptions of the investment opportunity associated with our common stock relative to other investment alternatives.
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In
particular, the realization of any of the risks described in these “Risk Factors” could have a material adverse
impact on the market price of our common stock in the future and cause the value of your investment to decline. In addition, the
stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular
companies. These broad market and industry factors may materially reduce the market price of our common stock, regardless of our
operating performance. In addition, price volatility may be greater if the public float and trading volume of our common stock
is low.
We
have never paid a cash dividend and do not intend to pay cash dividends on our common stock in the foreseeable future.
We
have never paid a cash dividend, nor do we anticipate paying cash dividends in the foreseeable future. Accordingly, any return
on your investment will be as a result of the appreciation of our common stock if any.
Future
sales, or the perception of future sales, of our common stock, including by SRAX, may depress the price of our common stock.
The
market price of our common stock could decline significantly as a result of sales or other distributions of a large number of shares
of our common stock in the market, including shares that might be offered for sale or distributed by SRAX. The perception that these
sales might occur could depress the market price of our common stock. These sales, or the possibility that these sales may occur, also
might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. As a result
of the Share Exchange, we issued SRAX 149,562,566,584 shares of common stock. We further issued 68,583,866,100 shares of Common
Stock upon conversion of Series B Preferred Stock sold in March and April of 2021. Although we raised approximately $4,800,000 in March
and April of 2021 through the sale of our Series B Preferred Stock, as we are currently not cash flow positive, we will be required to
raise additional significant capital in the future through the sale of our debt and equity securities. Also, in the future, we may issue
our securities in connection acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition
could constitute a material portion of our then-outstanding shares of our common stock. The sale of these shares into the market could
greatly depress the market price of our common stock.
Our
costs will increase significantly as a result of operating as a public company, and our management will be required to devote
substantial time to complying with public company regulations.
We
have historically operated our business as a segment of a public company. As a stand-alone public company, we now have additional
legal, accounting, insurance, compliance and other expenses that we have not incurred historically. Subsequent to the closing
of the Share Exchange, we became obligated to file with the SEC annual and quarterly reports and other reports that are specified
in Section 13 and other sections of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We are also
be required to ensure that we have the ability to prepare financial statements that are fully compliant with all SEC reporting
requirements on a timely basis. In addition, we will become subject to other reporting and corporate governance requirements,
including certain provisions of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and the regulations promulgated
thereunder, which impose significant compliance obligations upon us.
Sarbanes-Oxley,
as well as rules subsequently implemented by the SEC, have imposed increased regulation and disclosure and required enhanced corporate
governance practices of public companies. We are committed to maintaining a high standard of public disclosure, and our efforts
to comply with evolving laws, regulations and standards in this regard are likely to result in increased selling and administrative
expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities.
These changes will require a significant commitment of additional resources. We may not be successful in implementing these requirements
and implementing them could materially adversely affect our business, results of operations and financial condition. In addition,
if we fail to implement the requirements with respect to our internal accounting and audit functions, our ability to report our
operating results on a timely and accurate basis could be impaired. If we do not implement such requirements in a timely manner
or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC. Any
such action could harm our reputation and the confidence of investors and customers in us and could materially adversely affect
our business and cause our share price to fall.
Failure
to achieve and maintain effective internal controls in accordance with Section 404 of Sarbanes-Oxley could materially adversely
affect our business, results of operations, financial condition and stock price.
As
a public company, we are required to document and test our internal control procedures in order to satisfy the requirements of
Section 404 of Sarbanes-Oxley (“Section 404”), which requires management assessments of the effectiveness of our internal
control over financial reporting. Additionally, an annual report by our independent registered public accounting firm that addresses
the effectiveness of internal control over financial reporting is required. During the course of our testing, we may identify
deficiencies which we may not be able to remediate in time to meet our deadline for compliance with Section 404. Testing and maintaining
internal control can divert our management’s attention from other matters that are important to the operation of our business.
We also expect the regulations under Sarbanes-Oxley to increase our legal and financial compliance costs, make it more difficult
to attract and retain qualified officers and members of our board of directors, and make some activities more difficult, time
consuming and costly. We may not be able to conclude on an ongoing basis that we have effective internal control over our financial
reporting in accordance with Section 404 or our independent registered public accounting firm may not be able or willing to issue
an unqualified report on the effectiveness of our internal control over financial reporting. If we conclude that our internal
control over financial reporting is not effective, we cannot be certain as to the timing of completion of our evaluation, testing
and remediation actions or their effect on our operations because there is presently no precedent available by which to measure
compliance adequacy. If either we are unable to conclude that we have effective internal control over our financial reporting
or, if required under SEC rules, our independent auditors are unable to provide us with an unqualified report as required by Section
404, then investors could lose confidence in our reported financial information, which could have a negative effect on the trading
price of our stock.
If
securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations
regarding our stock or if our operating results do not meet their expectations, our stock price could decline.
The
trading market for our common stock can be influenced by the research and reports that industry or securities analysts publish
about us or our business. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we
could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover,
if one or more of the analysts who cover us downgrades our stock or if our operating results do not meet their expectations, our
stock price could decline.
We
could be subject to securities class action litigation.
In
the past, securities class action litigation has often been instituted against companies whose securities have experienced periods
of volatility and decline in market price. Recently, we have seen the price of our Common Stock decline from approximately $0.10
to less than $0.01, a decline of approximately 90%. Securities litigation brought against us following such decline in the price
of our common stock is likely regardless of the merit or ultimate results of such litigation. Such litigation will result in substantial
costs, which would hurt our financial condition and results of operations and divert management’s attention and resources
from our business.
Your
percentage ownership may be diluted in the future.
In
the future, your percentage ownership may be diluted because of our need to raise additional capital, the conversion of outstanding
convertible securities and the granting of equity awards to our directors, officers and employees or otherwise as a result of
equity issuances for acquisitions or capital market transactions. We anticipate granting equity awards to our employees and directors.
In addition, we have outstanding a number of securities that are convertible into shares of our common stock. Upon conversion,
you will experience substantial dilution.
In
addition, our Articles of Incorporation authorize us to issue, without the approval of our stockholders, one or more classes or
series of preferred stock having such designation, powers, preferences and relative, participating, optional and other special
rights, including preferences over our common stock respecting dividends and distributions, as our board of directors generally
may determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value
of our Common Stock. For example, the Company could grant the holders of preferred stock the right to elect some number of our
directors in all events or on the happening of specified events or the right to veto specified transactions.
We
are a smaller reporting company and as a result have certain reduced disclosure requirements.
We
are a “smaller reporting company” as defined in the Securities Act, as such, we are required to comply with certain
reduced disclosure requirements for public company reporting requirements for future filings. As a smaller reporting company,
we are not required to disclose certain executive compensation information only two years of audited financial statements in our
public filings.
Our
board of directors has the ability to issue blank check preferred stock, which may discourage or impede acquisition attempts or
other transactions.
Our
board of directors has the power, subject to applicable law, to issue series of preferred stock that could, depending on the terms
of the series, impede the completion of a merger, tender offer or other takeover attempt. For instance, subject to applicable
law, a series of preferred stock may impede a business combination by including class voting rights, which would enable the holder
or holders of such series to block a proposed transaction. Our board of directors will make any determination to issue shares
of preferred stock on its judgment as to our and our stockholders’ best interests. Our board of directors, in so acting,
could issue shares of preferred stock having terms which could discourage an acquisition attempt or other transaction that some,
or a majority, of the stockholders may believe to be in their best interests or in which stockholders would have received a premium
for their stock over the then prevailing market price of the stock.
Our
common stock may be considered a “penny stock,” and may be subject to additional sale and trading regulations that
may make it more difficult to sell.
Our
common stock may be considered a “penny stock.” The principal result or effect of being designated a penny stock is
that securities broker-dealers participating in sales of our common stock may be subject to the penny stock regulations set forth
in Rules 15g-2 through 15g-9 promulgated under the Exchange Act. For example, Rule 15g-2 requires broker-dealers dealing in penny
stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and
dated written receipt of the document at least two business days before effecting any transaction in a penny stock for the investor’s
account. Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions
in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the
investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably
determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has
sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide
the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above;
and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s
financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult
and time consuming for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in
the market or otherwise.