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.
Any
investment in our securities involves a high degree of risk. Investors should consider carefully the risks and uncertainties described
in our Annual Report on Form 10-K that we filed with the SEC on May 1, 2020, as well as the risk factors described below,
and all other information in this Form 10-Q and in any reports we file with the SEC before deciding whether to purchase or hold
our securities. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also become
important factors that may harm our business. The occurrence of any of the risks described in this Form 10-Q could harm our business.
The trading price of our securities could decline due to any of these risks and uncertainties, and investors may lose part or
all of their investment.
Risks
Related to our Business and BIGToken
We
have a history of operating losses and there are no assurances we will report profitable operations in the foreseeable future.
For
the year-ended December 31, 2019 we reported losses from operations and an accumulated deficit of $17,857,000 and $35,637,000,
respectively. For the three months ended March 31, 2020 we reported losses from operations and an accumulated deficit of $3,873,000
and $38,665,000, 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. In addition, our operating expenses
increased 7.1% in 2019 from 2018. 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 able to significantly increase our revenues in future periods, the rapid growth which we are pursuing
will strain our organization and we may encounter difficulties in maintaining the quality of our operations. If we are not able
to grow successfully, 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.
A
pandemic, epidemic or outbreak of an infectious disease in the markets in which we operate or that otherwise impacts our facilities
or advisors could adversely impact our business.
If
a pandemic, epidemic, or outbreak of an infectious disease including the recent outbreak of respiratory illness caused by a novel
coronavirus (COVID-19) or other public health crisis were to affect the our operations, facilities or those of our customers or
suppliers, our business could be adversely affected. A pandemic typically results in social
distancing, travel bans and quarantine, and this may limit access to our facilities, customers, management, support staff and
professional advisors. These factors, in turn, may not only materially impact our operations, financial condition and demand for
our services but our overall ability to react timely to mitigate the impact of this event. Also, it may hamper our efforts to
comply with our filing obligations with the Securities and Exchange Commission.
Our
auditors have expressed substantial doubt about our ability to continue as a going concern.
Our
auditors’ report on our December 31, 2019 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. Based upon our cash position on March 31, 2020, as well the anticipated proceeds from
the Small Business Association (SBA) Pay Roll Protection loan that we were recently approved for, there is substantial doubt about
our ability to continue as a going concern past June 30, 2020. 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.
Our
failure to maintain an effective system of internal control over financial reporting, has resulted 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.
Our
management has determined that, as of December 31, 2019 and March 31, 2020, 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.
We
believe our failure to maintain effective systems of internal controls over financial reporting resulted in our need to restate
the following previously issued quarterly and year-to-date unaudited consolidated financial statements for March 31, 2017, June
30, 2017, September 30, 2017, December 31, 2017, March 31, 2018, June 30, 2018 and September 30, 2018 and our audited consolidated
financial statements for the year ending December 31, 2017.
Our
management and audit committee determined we needed to restate certain of our consolidated financial statements for the year ending
December 31, 2017 and quarters ending March 31, 2017, June 30, 2017, September 30, 2017, December 31, 2017, March 31, 2018, June
30, 2018 and September 30, 2018 as a result of the improper accounting treatment of certain warrants.
On
April 7, 2019, management and the audit committee of our board of directors determined that our previously issued quarterly and
year-to-date unaudited consolidated financial statements for March 31, 2017, June 30, 2017, September 30, 2017, December 31, 2017,
March 31, 2018, June 30, 2018 and September 30, 2018 and our audited consolidated financial statements for the year ending December
31, 2017 should no longer be relied upon. In addition, we determined that related press releases, earnings releases, and investor
communications describing our financial statements for these periods should no longer be relied upon. The errors identified are
all non-cash and primarily related to our classification of certain outstanding warrants with provisions that allow the warrant
holder to force cash redemption under certain circumstances. Accordingly, although we previously disclosed that we had ineffective
controls, investors in our securities may lose confidence in our financial statements and management, which could result in a
decrease in our stock price and negative sentiment in the investment community.
The
restatement of certain of our financial statements may subject us to additional risks and uncertainties, including the increased
possibility of legal proceedings and shareholder litigation.
As
a result of our restatements of previously issued quarterly and year-to-date unaudited consolidated financial statements for March
31, 2017, June 30, 2017, September 30, 2017, December 31, 2017, March 31, 2018, June 30, 2018 and September 30, 2018 and our audited
consolidated financial statements for the year ending December 31, 2017, we may become subject to additional risks and uncertainties,
including, among others, the increased possibility of legal proceedings, shareholder lawsuits or a review by the SEC and other
regulatory bodies, which could cause investors to lose confidence in our reported financial information and could subject us to
civil or criminal penalties, shareholder class actions or derivative actions. We could face monetary judgments, penalties or other
sanctions that could have a material adverse effect on our business, financial condition and results of operations and could cause
our stock price to decline.
We
will need to raise additional capital to pay our indebtedness as it comes due.
In
February of 2020 we entered into a term loan and security agreement with BRF Finance Co., LLC, an affiliate of B. Riley Financial,
Inc. Pursuant to the loan agreement, we can borrow up to $5,000,000, subject to certain terms and conditions. As of March 31,
2020. we have only been able to borrow $2,500,000. There is no assurance that we will be able to borrow any additional funds.
The loan is secured by substantially all the assets and the intellectual property of the Company. Beginning on August 1, 2020
and continuing on the first day of each month thereafter until March 22, 2022, we will be required to make monthly payments of
principal and interest. Based upon our current financial results, we will need to raise additional capital through the sale of
debt or equity or the sale of assets, in order to make the required loan payments. If we are unable to make the required payments,
or if we fail to comply with the various requirements and covenants of our indebtedness, we would be in default, which would permit
the holders of our indebtedness to accelerate the maturity and require immediate repayment and lead to potential foreclosure on
the assets securing the debt. If we are unable to refinance or repay our indebtedness as it becomes due, including upon an event
of default, we may become insolvent and be unable to continue operations.
We
may be required to spend 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 $0.01, subject to the user meeting certain conditions. As of March 31,
2020, we recorded a contingent liability for future point redemptions equal to $446,000] and we have redeemed an aggregate amount
of approximately $600,000. As of March 31, 2020, we had approximately 16.5 million users. Notwithstanding the foregoing, if our
users continue to increase, we will be required to have enough cash reserves to redeem points held by our qualified users for
cash. 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 on SRAX.
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 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 materially 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.
We
are remediating certain internal controls and procedures, which, if not successful, could result in additional misstatements in
our financial statements negatively affecting our results of operations.
We
are in the process of implementing certain remediation actions. See Part I Item 4. “Controls and Procedures” of this
Form 10-Q for a description of these remediation measures. To the extent these steps are not successful, not sufficient to correct
our material weakness in internal control over financial reporting or are not completed in a timely manner, future financial statements
may contain material misstatements and we could be required to restate our financial results. Any of these matters could adversely
affect our business, reputation, revenues, results of operations, financial condition and stock price and limit our ability to
access the capital markets through equity or debt issuances.
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.
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.
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.
We
are delinquent in pays to various third-party vendors on which we rely.
We
rely on third party vendors to provide us with media inventory to facilitate sales of advertising, the majority of which are engaged
on a per order basis. Due to our lack of working capital, we are delinquent on payments to several of these media suppliers. While
we will attempt to negotiate payment terms and forbearance agreements with these vendors on a case by case basis, many of these
vendors may cease providing services to our company and may seek legal remedies against us. Any loss of these vendors or ligation
arising out of our failure to satisfy our obligations to any of these vendors could disrupt our business and have a material negative
effect on our operations.
Our
success is dependent upon our ability to effectively expand and manage our relationships with our publishers. We do not have any
long-term contracts with our publishing partners.
We
do not generate our own media inventory. Accordingly, we are dependent upon our publishing partners to provide the media which
we sell. We depend on these publishers to make their respective media inventories available to us to use in connection with our
campaigns that we manage, create or market. We are not a party to any long-term agreements with any of our publishing partners
and there are no assurances we will have continued access to the media. Our growth depends, in part, on our ability to expand
and maintain our publisher relationships within our network and to have access to new sources of media inventory such as new partner
websites and Facebook pages that offer attractive demographics, innovative and quality content and growing Web user traffic volume.
Our ability to attract new publishers to our networks and to retain Web publishers currently in our networks will depend on various
factors, some of which are beyond our control. These factors include, but are not limited to, our ability to introduce new and
innovative products and services, our pricing policies, and the cost-efficiency to Web publishers of outsourcing their advertising
sales. In addition, the number of competing intermediaries that purchase media inventory from Web publishers continues to increase.
In the event we are not able to maintain effective relationships with our publishers, our ability to distribute our advertising
campaigns will be greatly hindered which will reduce the value of our services and adversely impact our results of operations
in future periods.
If
we were to lose or have limited access to certain platforms or data sources, we will lose our existing revenue from these platform
and sources.
The
loss of access to any platforms or data sources could limit our ability to effectively grow a portion of our operations. Our business
would be harmed if these platforms:
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discontinues
or limits access to its platform by us and other application developers;
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modify
terms of service or other policies, including fees charged to, or other restrictions on, us or other application developers,
or changes how the personal information of its users is made available to application developers;
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establishes
more favorable relationships with one or more of our competitors; or
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develops
its own competitive offerings.
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We
have benefited from Facebook’s strong brand recognition and large user base. Facebook has broad discretion to change its
terms of service and other policies with respect to us and other developers, and any changes to those terms of service may be
unfavorable to us. Facebook may also change its fee structure, add fees associated with access to and use of the Facebook platform,
change how the personal information of its users is made available to application developers on the Facebook platform or restrict
how Facebook users can share information with friends on their platform. In the event Facebook makes any changes in the future,
we may have to modify the structure of our campaigns which could impact the effectiveness of our campaigns and adversely impact
our results of operations in future periods.
If
we lose access to RTB inventory buyers our business may suffer.
In
an effort to reduce our dependency on any one provider of advertising demand, we created a platform that utilizes feeds from a
number of demand sources for our inventory. We believe that our proprietary technology assists us in aggregating this demand,
as well as providing the tools needed by our publishing partners to evaluate and track the effectiveness of the demand that we
are aggregating for them. In the event that we lose access to a majority of this demand, however, our revenues would be impacted
and our results of operations would be materially adversely impacted until such time, if ever, as we could secure alternative
sources of demand for our inventory.
We
depend on the services of our executive officers and the loss of any of their services could harm our ability to operate our business
in future periods.
Our
success largely depends on the efforts and abilities of our executive officers, including Christopher Miglino, Kristoffer Nelson
and Michael Malone. We are a party to an employment agreement with each of Mr. Miglino, and Mr. Malone, and an “at will”
agreement with Mr. Nelson. Although we do not expect to lose their services in the foreseeable future, the loss of any of them
could materially harm our business and operations in future periods until such time as we were able to engage a suitable replacement.
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.
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.
Certain
of our subsidiaries and business affiliates have operations outside of the United States that are subject to numerous operational
risks.
Certain
of our subsidiaries and business affiliates have operations in countries other than the United States. In many foreign countries,
it is not uncommon to encounter business practices that are prohibited by certain regulations, such as the Foreign Corrupt Practices
Act and similar laws. Although certain of our subsidiaries and business affiliates have undertaken compliance efforts with respect
to these laws, their respective employees, contractors and agents, as well as those companies to which they outsource certain
of their business operations, may take actions in violation of their policies and procedures. Any such violation, even if prohibited
by the policies and procedures of these subsidiaries and business affiliates or the law, could have certain adverse effects on
the financial condition of these subsidiaries and business affiliates. Any failure by these subsidiaries and business affiliates
to effectively manage the challenges associated with the international operation of their businesses could materially adversely
affect their, and hence our, financial condition.
Our
success is dependent upon our ability to effectively expand and manage our relationships with our publishers. We do not have any
long-term contracts with our publishing partners.
We
do not generate our own media inventory. Accordingly, we are dependent upon our publishing partners to provide the media which
we sell. We depend on these publishers to make their respective media inventories available to us to use in connection with our
campaigns that we manage, create or market. We are not a party to any long-term agreements with any of our publishing partners
and there are no assurances we will have continued access to the media. Our growth depends, in part, on our ability to expand
and maintain our publisher relationships within our network and to have access to new sources of media inventory such as new partner
websites and Facebook pages that offer attractive demographics, innovative and quality content and growing Web user traffic volume.
Our ability to attract new publishers to our networks and to retain Web publishers currently in our networks will depend on various
factors, some of which are beyond our control. These factors include, but are not limited to, our ability to introduce new and
innovative products and services, our pricing policies, and the cost-efficiency to Web publishers of outsourcing their advertising
sales. In addition, the number of competing intermediaries that purchase media inventory from Web publishers continues to increase.
In the event we are not able to maintain effective relationships with our publishers, our ability to distribute our advertising
campaigns will be greatly hindered which will reduce the value of our services and adversely impact our results of operations
in future periods.
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.
Certain
of our subsidiaries and business affiliates have operations outside of the United States that are subject to numerous operational
risks.
Certain
of our subsidiaries and business affiliates have operations in countries other than the United States. In many foreign countries,
it is not uncommon to encounter business practices that are prohibited by certain regulations, such as the Foreign Corrupt Practices
Act and similar laws. Although certain of our subsidiaries and business affiliates have undertaken compliance efforts with respect
to these laws, their respective employees, contractors and agents, as well as those companies to which they outsource certain
of their business operations, may take actions in violation of their policies and procedures. Any such violation, even if prohibited
by the policies and procedures of these subsidiaries and business affiliates or the law, could have certain adverse effects on
the financial condition of these subsidiaries and business affiliates. Any failure by these subsidiaries and business affiliates
to effectively manage the challenges associated with the international operation of their businesses could materially adversely
affect their, and hence our, financial condition.
Risks
Related to Ownership of our Securities
The
market price of our common stock may be adversely affected by sales of substantial amounts of our common stock pursuant to our
at the market sales agreement.
In
February of 2020 we entered into a term loan and security agreement with BRF Finance Co., LLC, an affiliate of B. Riley Financial,
Inc. Pursuant to the loan agreement, we are required to enter into an at-the-market sales agreement pursuant to which we will
sell our common shares directly into the market in order to payback the loans. If we are required to sell a substantial number
of shares, or the public perceives that these sales may occur, it could cause the market price of our common stock to decline.
In addition, the sale of these shares in the public market, or the possibility of such sales, could impair our ability to raise
capital through the sale of additional equity securities.
We
do not know whether an active and liquid trading market will develop for our Class A common stock.
The
trading of our Class A common stock may be viewed as relatively sporadic and with limited liquidity. The lack of an active and
liquid market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable.
The lack of an active market may also reduce the fair market value of your shares. Further, an inactive market may also impair
our ability to raise capital by selling shares of our Class A common stock and may impair our ability to enter into collaborations
or acquire companies or products by using our shares of Class A common stock as consideration. The market price of our offered
securities may be volatile, and you could lose all or part of your investment.
The
market price of our Class A common stock may be volatile.
The
market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect
that our share price will continue to be more volatile than those of a seasoned issuer. The volatility in our share price is attributable
to a number of factors. Mainly however, we are a speculative or “risky” investment due to our limited operating history,
lack of significant revenues to date, our continued operating losses and missed guidance. As a consequence of this enhanced risk,
more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack
of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case
with the stock of a seasoned issuer. Additionally, in the past, plaintiffs have often initiated securities class action litigation
against a company following periods of volatility in the market price of its securities. We may in the future be the target of
similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s
attention and resources.
The
trading price of the shares of our Class A common stock is likely to be highly volatile and could be subject to wide fluctuations
in response to various factors, some of which are beyond our control. In addition to the factors discussed in this “Risk
Factors” section and elsewhere in this quarterly report, these factors include:
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the
success of competitive products;
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actual
or anticipated changes in our growth rate relative to our competitors;
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announcements
by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations or capital commitments;
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regulatory
or legal developments in the United States and other countries;
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the
recruitment or departure of key personnel;
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the
level of expenses;
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actual
or anticipated changes in estimates to financial results, development timelines or recommendations by securities analysts;
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variations
in our financial results or those of companies that are perceived to be similar to us;
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fluctuations
in the valuation of companies perceived by investors to be comparable to us;
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inconsistent
trading volume levels of our shares;
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announcement
or expectation of additional financing efforts;
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sales
of our Class A common stock by us, our insiders or our other stockholders;
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additional
issuances of securities upon the exercise of outstanding options and warrants;
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market
conditions in the technology sectors; and
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general
economic, industry and market conditions.
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addition, the stock market in general, and advertising technology companies in particular, have experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad
market and industry factors may negatively affect the market price of our Class A common stock, regardless of our actual operating
performance. The realization of any of these risks could have a dramatic and material adverse impact on the market price of the
shares of our Class A common stock.
We
may be subject to securities litigation, which is expensive and could divert management attention.
The
market price of the shares of our Class A common stock may be volatile, and in the past companies that have experienced volatility
in the market price of their securities have been subject to securities class action litigation. We may be the target of this
type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s
attention from other business concerns, which could seriously harm our business. To the extent that any claims or suits are brought
against us and successfully concluded, we could be materially adversely affected, jeopardizing our ability to operate successfully.
Furthermore, our human and capital resources could be adversely affected by the need to defend any such actions, even if we are
ultimately successful in our defense.
Failure
to meet the financial performance guidance or other forward-looking statements we have provided to the public could result in
a decline in our stock price.
We
have previously provided, and may provide in the future, public guidance on our expected financial results for future periods.
Although we believe that this guidance provides investors with a better understanding of management’s expectations for the
future and is useful to our stockholders and potential stockholders, such guidance is comprised of forward-looking statements
subject to the risks and uncertainties. Our actual results may not always be in line with or exceed the guidance we have provided.
For example, in the past, we have missed guidance a number of times. If our financial results for a particular period do not meet
our guidance or if we reduce our guidance for future periods, the market price of our Class A common stock may decline.
Delaware
law contains anti-takeover provisions that could deter takeover attempts that could be beneficial to our stockholders.
Provisions
of Delaware law could make it more difficult for a third-party to acquire us, even if doing so would be beneficial to our stockholders.
Section 203 of the Delaware General Corporation Law may make the acquisition of our company and the removal of incumbent officers
and directors more difficult by prohibiting stockholders holding 15% or more of our outstanding voting stock from acquiring us,
without our board of directors’ consent, for at least three years from the date they first hold 15% or more of the voting
stock.
If
securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the
trading price of our Class A common stock and trading volume could decline.
The
trading market for our shares of our Class A common stock will depend in part on the research and reports that securities or industry
analysts publish about us or our business. A small number of securities and industry analysts currently publish research regarding
our Company on a limited basis. In the event that one or more of the securities or industry analysts who have initiated coverage
downgrade our securities or publish inaccurate or unfavorable research about our business, the price of our shares of Class A
common stock would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on
us regularly, demand for our securities could decrease, which might cause the trading price of our shares of Class A common stock
and trading volume to decline.
The
elimination of monetary liability against our directors and officers under Delaware law and the existence of indemnification rights
held by our directors and officers may result in substantial expenditures by us and may discourage lawsuits against our directors
and officers.
Our
certificate of incorporation eliminates the personal liability of our directors and officers to our company and our stockholders
for damages for breach of fiduciary duty as a director or officer to the extent permissible under Delaware law. Further, our bylaws
provide that we are obligated to indemnify any of our directors or officers to the fullest extent authorized by Delaware law.
We are also parties to separate indemnification agreements with certain of our directors and our officers which, subject to certain
conditions, require us to advance the expenses incurred by any director or officer in defending any action, suit or proceeding
prior to its final disposition. Those indemnification obligations could result in our company incurring substantial expenditures
to cover the cost of settlement or damage awards against our directors or officers, which we may be unable to recoup. These provisions
and resultant costs may also discourage us from bringing a lawsuit against any of our current or former directors or 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 if such actions, if successful, might otherwise benefit us or our stockholders.