ITEM 1. BUSINESS
NetPay International, Inc. (the “Company” or "NetPay") was incorporated under the laws of the State of Nevada on March 31, 2016. The Company issued 5,500,000 shares of its common stock to its founder in exchange for organizational services incurred upon incorporation. Upon incorporation, the Company acquired the hair-care formula that its business had been based upon. The Company had been engaged in the business of developing, manufacturing, marketing and selling of an all-natural organic products collection. The Company sold the rights to certain intellectual property that was the main ingredient in the Company’s hair care collection to a vendor.
Recent Developments
On August 29, 2018, the Company experienced a change in control (“Change in Control”). With the Change in Control certain liabilities of the Company were forgiven and/or paid for on behalf of the Company by its founder and former president and chief executive officer. Total liabilities at the time approximated $225,000. The board of directors nominated Mr. Alon Elbaz to the board on August 29, 2018.
On
August 29, 2018, Mr. Elbaz was appointed as Chief Executive Officer, and Ms. Limor Mamon was appointed as Chief Financial Officer. Both Mr. Elbaz and Ms. Mamon serve in the same capacity for the Company’s majority shareholder,
Compunet Holdings AA Ltd. It is the intent of Compunet Holdings to expand its operations to the United States and the North American continent with the Company as its primary operational entity.
On September 17, 2018, the board of directors and a majority of the shareholders of record approved the name change from Allegro Beauty Products, Inc. to NetPay International, Inc. On or about October 16, 2018, the Company mailed an Information Statement to its shareholders. The holders of a majority of the outstanding shares of the Company’s common stock executed a written consent in lieu of a special meeting approving the amendment to the Articles of Incorporation to change the name to NetPay International, Inc. The effective date of the name change was November 7, 2018. The Company is rebranding itself as NetPay.
On December 5, 2018, the Company launched its Delaware subsidiary, NetPay (USA), Inc., to act as an independent sales organization (ISO) to seek opportunities related to the provision to merchants of merchant's credit card acquiring clearing, and other value-added services. The services provided by NetPay (USA), Inc. will be different than the payment facilitation business, which will be the core business of the Company. The Company owns ninety percent (90%) of NetPay (USA), with the remaining ten percent (10%) owned by two experienced executives in the credit card services arena.
Plan of Operations
As of May 10, 2019, we have two employees, our President and Chief Executive Officer, Mr. Alon Elbaz, and our Chief Financial Officer, Ms. Limor Mamon. NetPay is a development stage company and has little to no financial resources besides shareholder loans. We have not established or attempted to establish a source of equity or debt financing. Our independent registered public accounting firm has included an explanatory paragraph in their report emphasizing the uncertainty of our ability to remain as a going concern.
As of March 31, 2019, we had limited assets which consist of cash ($13,898) and prepaid expenses ($1,751). We expect to increase our overall assets over the next few months as we further develop our payment processing business with significant capital investment as well as fixed assets such as computers and sophisticated management information systems to improve and secure our services. In order to fund our business activities over the next 12 months, we will attempt to secure sufficient and satisfactory funding from our
majority shareholder,
Compunet Holdings AA Ltd., an international Israeli-based company, from Mr. Elbaz, and from others. There can be no assurance that we will be able to obtain any funds or that such funds will be offered on terms acceptable to us.
Netpay EUR Limited (“Netpay Europe”) is a payment service provider owned by Compunet Holdings AA Ltd. and managed by Mr. Elbaz. Founded in 1998, Netpay Europe has built a successful credit card clearing service based on state-of-the-art technologies. Netpay Europe has evolved over the years to better satisfy and understand the needs of e-commerce and the payment services industry. Netpay Europe acts as a one-stop-shop for e-commerce merchant’s payments needs by providing secure and innovative payment solutions and enhanced payment services. Netpay Europe’s goal is to support and protect the interests of its customers by providing industry leading technology combined with premier-quality service. Netpay Europe has been providing secure and safe credit card clearing (payment) services for years. These services are easy to use and include innovative and strategic payment solutions. Based on Netpay Europe’s technology, transactions are completed speedily and simply, with stringent data-security standards. Netpay Europe’s tech-team has been working for more than twenty years to improve systems for merchant payment and servicing needs, with a key focus on risk management. Netpay Europe offers businesses a complete turn-key solution, and acts as a one-stop-shop for all merchants’ payment servicing needs.
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In order to achieve Netpay Europe’s global business goals, Compunet Holdings AA Ltd., a company controlled by Mr. Alon Elbaz (Netpay Europe’s founder and Chief Executive Officer), acquired the Company, a public traded and reporting company in the United States of America. Under the guidance of Mr. Elbaz and Netpay Europe, the Company believes that it will be able to establish and acquire a payment facilitator license (or PayFac). This will allow the Company to become a sub-merchant account for a merchant service provider in order to provide payment processing services to merchant clients, particularly in the e-commerce marketplace. A payment facilitator license will allow the Company to offer merchant services on a sub-merchant platform. Allowing sub-merchants to be on-boarded under the master of the Company, which will be sponsored by a bank or financial institution.
Put simply, the Company has set out to build a payment facilitator model for streamlining merchant services within the U.S. as well as partnering with Netpay Europe’s well-established international business. As a payment facilitator, the Company will eliminate the need for individual merchants to establish a traditional merchant account. In the payment facilitator model, a software provider registers with an acquirer to provide payment services to sub-merchants that utilize its software. By registering as a payment facilitator with an acquirer, the software provider acts as a “master” merchant account provider, including the onboarding of sub-merchants under its own account in order to facilitate payment transactions for the sub-merchants.
In this model there are three main parties involved: The acquirer, the payment facilitator (the Company), and the sub-merchant. The acquirer provides overall structure for operations while the Company acts as the go-between with the acquirer and the sub-merchants. The sub-merchants will operate underneath the Company. The acquirer
works with the Company to get these sub-merchants running and servicing their payment needs. This includes application administration and the underwriting process, working out pricing agreements and facilitating payment technology integration. The acquirer is responsible for monitoring the Company’s compliance with operating regulations and ensuring due diligence when the Company on-boards (signs-on) sub-merchants. The Company will undergo a comprehensive process in order to register with an acquirer, including integrating the payment technology and infrastructure needed. The Company will assume all risk and liability for its sub-merchants. Industry standards are that sub-merchants sign up with payment facilitators in order to be able to accept payments from their customers.
The greatest benefit of the Company’s payment facilitator model will be the ability to simplify and streamline the merchant account enrollment and onboarding process by offering a complete, white-label payment processing solution. This is expected to lead to more control over the processing experience, higher merchant conversion rates, and the opportunity to earn more revenue from credit card processing for the sub-merchant. This process has been implemented by Netpay Europe and its management in Europe, and Netpay Europe intends on providing that knowledge and service to the US market through the Company.
The greatest challenge to the Company’s payment facilitator model will be the level of responsibility the Company as a payment facilitator will be required to assume with the acquirer. This includes greater liability for fraud, chargebacks, and data breaches; the resources to build or purchase payments technology; and the ability to meet compliance mandates and ever-changing regulatory rules.
On December 5, 2018, we launched a new Delaware subsidiary, NetPay (USA), Inc., to act as an independent sales organization (ISO) to seek opportunities related to the provision of merchant's credit card acquiring clearing service, and other value-added services. These services to be provided by NetPay (USA), Inc. will be different than the payment facilitation business, which is our core business. To date, Netpay (USA), Inc. has entered into a binding agreement with eData Financial Group LLC, located in Florida, for the resale of merchant's credit card acquiring and processing services, and a memorandum of understanding with Blue Parasol Group LLC for the provision of similar services to that of eData Financial Group and NetPay (USA). We currently own ninety percent (90%) of NetPay (USA), with the remaining ten percent (10%) owned by two highly qualified experienced executives in the credit card payment services industry. We believe that with their expertise and guidance NetPay (USA) will be well-positioned to become an industry leader within the North American market and worldwide. A brief description of the services to be provided by NetPay (USA) is set forth below:
NetPay (USA) will act as an independent sales organization (ISO).
NetPay (USA) will seek merchants that will obtain services primarily from us, such as - clearing, providing credit, and other value-added services.
Merchant underwriting.
Managing and monitoring merchant activity, and irregularity resolution.
Margin sharing between the Company and NetPay (USA).
Onboard interface with merchants, e-commerce support, and high-risk merchant assessment.
We anticipate that our new business will begin to generate sales of core services during 2019, although no assurances can be given that we will achieve this goal. The launch of our new business will depend on our ability to obtain sufficient financing.
In order to further our plan of operations, we will need to secure additional financing of approximately $3,000,000. If we are not successful in securing this capital, we will not be able to proceed with our business plan as contemplated. Our plan of operations will require us to establish additional sources of capital to fulfill our operational requirements if we do not obtain sufficient financing from our majority shareholder. These funds will go towards building out the US operations to ultimately generate sales.
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Alongside the development of our business activities, we will continue to pursue additional sources of financing and attempt to establish a public market for our common stock, which may then allow us to seek financing from sources that would not be available to us if we were private. Accordingly, we believe that we may be able to negotiate from increased strength in pursuing financing or agreements with vendors, manufacturers, and capital sources. We cannot predict the likelihood or timing of any success from our intended actions.
Our goal as stated above is for us to become a leading payment/service facilitator in the United States. We believe that our key alliance with Netpay Europe will assist us in achieving that goal. We currently have no other sources of or commitment for financing beyond a verbal commitment from our majority shareholder and its management personnel. There are no assurances we will obtain sufficient financing or resources from others or enter into beneficial agreements with others in our industry. We believe that we must raise additional capital or debt financing in order to fully execute and implement our business strategy and develop our proposed services.
Necessity of Additional Financing
Management believes that if it is successful in raising the necessary funds, of which there can be no assurances, we may generate revenue within the next 12 months. While we hope that we will be successful in these efforts, additional equity or debt financing may not be available to us on acceptable terms or at all, and thus we would fail to satisfy our future cash requirements. We currently received $39,400 in loans from our majority shareholder. We expect that that amount will increase substantially over the next few months as our plan of operations is rolled out.
Securing additional financing is critical to implementation of our timeline. If and when we obtain the required additional financing, we should be able to take our business plan through the necessary steps. In the event we are unable to raise any additional funds we will not be able to pursue our business plan, and we may fail entirely. We currently have no committed sources of financing besides the verbal commitment from our majority shareholder to provide us with financing in the short term until we are able to obtain reliable sources of financing.
Intellectual Property
We have no patent or trademark applications pending.
Government Regulation and Industry Standards
Government regulation may affect key aspects of our business, in the U.S. as well as internationally. In addition, we plan to register with Visa, Mastercard, American Express and the Discover Network as a service provider, and we believe the Company will be subject to their respective rules which will subject us to a variety of fines or penalties that may be levied by the card networks for certain acts or omissions. Set forth below is a brief summary of some of the significant laws and regulations that we believe will apply to us. These descriptions are not exhaustive and are qualified in their entirety by reference to the particular statutory or regulatory provision, which provisions are subject to change.
Banking Laws and Regulations.
Because we intend to provide electronic payment processing services to banks and other financial institutions, we will be subject to examination by the Federal Financial Institutions Examination Council (“FFIEC”), an interagency body comprised primarily of federal banking regulators, and also subject to examination by the various state financial regulatory agencies which supervise and regulate the financial institutions for which we provide electronic payment processing and other payment related services. The FFIEC examines large data processors in order to identify and mitigate risks associated with systemically significant service providers, including specifically the risks they may pose to the banking industry.
Money Transmission, Sale of Checks and Payment Instrument Laws and Regulations.
Our business will be subject to money transfer and payment instrument licensing regulations. We plan to obtain licenses to operate as a money transmitter, seller of checks and/or provider of payment instruments in at least 48 states and the District of Columbia. Te remaining U.S. jurisdictions do not currently regulate money transmission.
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In those states where we will be licensed as a money transmitter, seller of checks and/or provider of payment instruments, our Consumer Solutions business will be subject to direct supervision and regulation by the relevant state banking departments or similar agencies charged with enforcement of the relevant statutes and we will be required to comply with various requirements, such as those related to the maintenance of a certain level of net worth, surety bonding, selection and oversight of our authorized agents, maintaining permissible investments in an amount equal to or in excess of our outstanding payment obligations, recordkeeping and reporting and disclosures to consumers. Our Consumer Solutions business will also be subject to periodic examinations by the relevant licensing authorities, which may include reviews of our compliance practices, policies and procedures, financial position and related records, various agreements that we will with our issuing banks, distributors and other third parties, privacy and data security policies and procedures and other matters related to our business.
Privacy, Information Security, and Other Business Practices Regulation.
Aspects of our business will also be subject, directly or indirectly, to business and trade practices regulation in the United States, the European Union and elsewhere. For example, in the United States, we and our financial institution clients will be , respectively, subject to the Federal Trade Commission’s and the federal banking regulators’ privacy and information safeguarding requirements under the Gramm-Leach-Bliley Act. These requirements limit the manner in which personal information may be collected, stored, used and disclosed. The Federal Trade Commission’s information safeguarding rules require us to develop, implement and maintain a written, comprehensive information security program containing safeguards that are appropriate for our size and complexity, the nature and scope of our activities and the sensitivity of any customer information at issue. Our financial institution clients in the United States are subject to similar requirements under the guidelines issued by the federal banking regulators. As part of their compliance with these requirements, each of our U.S. financial institution clients is expected to have a program in place for responding to unauthorized access to, or use of, customer information that could result in substantial harm or inconvenience to customers and they are also responsible for our compliance efforts as a major service provider. In many jurisdictions, including every U.S. State, consumers must be notified in the event of a data breach, and such notification requirements continue to increase in scope and cost. The changing privacy laws in the United States, Europe and elsewhere, including the adoption by the European Union of the General Data Protection Regulation, which became effective in May 2018, and the California Consumer Privacy Act, which is scheduled to become effective in January 2020, create new individual privacy rights and impose increased obligations on companies handling personal data. In addition, multiple states, Congress and regulators outside the United States are considering similar laws or regulations which could create new individual privacy rights and impose increased obligations on companies handling personal data. Information concerning our cybersecurity risks and how a cybersecurity incident could materially affect our business are discussed under “Risk Factors” in Part I, Item IA of this annual report under the caption “Security breaches of our systems, including as a result of cyber-attacks, may damage client relations, our reputation and expose us to financial liability.”
Anti-money Laundering and Counter Terrorist Regulation.
The Financial Crimes Enforcement Network of the U.S. Department of the Treasury (“FinCEN”) has issued a rule regarding the applicability of the Bank Secrecy Act's anti-money laundering provisions to “prepaid access programs.” This rulemaking clarifies the anti-money laundering obligations for entities, such as our Consumer Solutions business and its distributors, engaged in the provision and sale of prepaid access devices like our GPR prepaid cards. We plan to register with FinCEN as a money services business. This registration will result in our having direct responsibility to maintain and implement an anti-money laundering compliance program.
We will be subject to anti-corruption laws and regulations, including the U.S. Foreign Corrupt Practices Act, the UK Bribery Act and other laws that generally prohibit the making or offering of improper payments to foreign government officials and political figures for the purpose of obtaining or retaining business or to gain an unfair business advantage. In addition, as are all U.S. persons, we will be also subject to regulations imposed by the U.S. Department of the Treasury Office of Foreign Assets Control (“OFAC”) which prohibit or restrict financial and other transactions with specified countries and designated individuals and entities such as terrorists and narcotics traffickers. We plan to implemenet procedures and controls designed to protect against having direct business dealings with such prohibited countries, individuals or entities. We also plan to implement procedures and controls designed to ensure that our processing clients will not have direct business dealings with such prohibited countries, individuals or entities.
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The Dodd-Frank Act.
We and the rest of the financial services industry continue to experience increased legislative and regulatory scrutiny, including the enactment of additional legislative and regulatory initiatives such as the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Reform Act”) in 2010. The Reform Act has resulted in significant structural and other changes to the regulation of the financial services industry. The Reform Act, among other things, provides for the regulation and oversight by the Board of Governors of the Federal Reserve System (“Board”) of debit interchange fees that are typically paid by acquirers and charged or received by a payment card network for the purpose of compensating an issuer for its involvement in an electronic debit transaction. In accordance with the Reform Act, the Board capped the maximum U.S. debit interchange fee assessed for debit cards issued by large financial institutions at twenty-one cents per transaction plus five basis points, before applying a fraud prevention adjustment of up to an additional one cent. The cap on debit interchange fees has not had a significant negative impact on our business.
The Reform Act also created the Consumer Financial Protection Bureau (“CFPB”) with responsibility for regulating consumer financial products and services and enforcing most federal consumer protection laws in the area of financial services, including consumer credit and the prepaid card industry. For example, the CFPB has promulgated a new rule regarding prepaid financial products, which, among other things, will establish new disclosure requirements specific to prepaid accounts, eliminate certain fees that may currently be imposed on prepaid accounts, and make it more difficult for a prepaid card provider such as our Consumer Solutions segment to offer courtesy overdraft protection on prepaid accounts. The rule is scheduled to become effective April 1, 2019. Similarly, other future actions of the CFPB may make payment card or product transactions generally less attractive to card issuers, acquirers, consumers and merchants, and thus negatively impact our business. In addition, the Reform Act created a Financial Stability Oversight Council that has the authority to determine whether nonbank financial companies such as ours would be supervised by the Board because they are systemically important to the U.S. financial system. To date, the Financial Stability Oversight Council does not appear to be focused on regulating entities such as ours. However, any such future designation would result in increased regulatory burdens on our business.
State Wage Payment Laws and Regulations.
The use of payroll card programs as a means for an employer to remit wages or other compensation to its employees or independent contractors is governed by state labor laws related to wage payments, which laws are subject to change. Part of our future solutions segment may include payroll cards and convenience checks designed to allow employers to comply with applicable state wage and hour laws. Most states permit the use of payroll cards as a method of paying wages to employees, either through statutory provisions allowing such use or, in the absence of specific statutory guidance, the adoption by state labor departments of formal or informal policies allowing for their use. Nearly every state allowing payroll cards places certain requirements and/or restrictions on their use as a wage payment method, the most common of which involve obtaining the prior written consent of the employee, limitations on fees and disclosure requirements.
Telephone Consumer Protection Act.
We will be subject to the Federal Telephone Consumer Protection Act and various state laws to the extent we place telephone calls and short message service (“SMS”) messages to clients and consumers. The Telephone Consumer Protection Act regulates certain telephone calls and SMS messages placed using automatic telephone dialing systems or artificial or prerecorded voices.
Escheat Laws.
We will be subject to unclaimed or abandoned property laws in the United States and in foreign countries that require us to transfer to certain government authorities the unclaimed property of others that we hold when that property has been unclaimed for a certain period of time. Moreover, we will be subject to audit by state regulatory authorities with regard to our escheatment practices.
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United Kingdom's Exit from the European Union
The United Kingdom is scheduled to exit the European Union on March 29, 2019 (currently delayed until May 22, 2019_ (commonly referred to as "Brexit"). There remains significant uncertainty about the effects of Brexit. Although we currently do not plan to extend our business activities to the European Union, companies operating in or selling into Europe and the United Kingdom would have to consider the potential risks and effects of Brexit, including with respect to:
the imposition of UK/EU trade barriers and costs;
changes in manufacturing and operating capacity;
employee retention and movement; and
currency fluctuations; and effects on derivative agreements.
Management believes that Brexit-related issues will not affect our financial statement recognition, measurement or disclosure items, such as inventory write-downs, long-lived asset impairments, collectability of receivables, assumptions underlying fair value measurements, foreign currency matters, hedge accounting or income taxes for the Company and its consolidated financial statements.
Employees
There is no written employment contract or employment agreement with either Mr. Elbaz, our CEO, or Ms. Mamon, our CFO. We are not actively seeking employees, additional independent contractors or consultants through formal contracts or agreements. This may change in the event that we are able to secure adequate financing through equity or loans. We believe that Mr. Elbaz and Ms. Mamon will continue to provide their services at no cost to the Company. We have no current plans to compensate Mr. Elbaz or Ms. Mamon for their efforts. We intend to use independent contractors and other professional organizations to assist Mr. Elbaz and Ms. Mamon in our business growth, development and roll-out on an as needed basis pending our financial resources. Even then, we may continue to principally rely upon Mr. Elbaz and Ms. Mamon as much as we can.
Property
Our office and mailing address is 2 Hamanofim Street, Herzliya Pituach 46722562 Israel. The space is provided to us by our majority shareholder Compunet Holdings AA Ltd. at no cost. The space is located in Netpay Europe’s business location. Netpay Europe incurs no incremental costs as a result of our using this space. There is currently no written or oral agreement between Compunet Holdings AA Ltd. and the Company for utilizing this space. In addition, on February 27, 2019, we enterd into an agreement with WeWork for the lease of non-exclusive access to office space in New York, NY on a month-to-month basis, commencing on March 1, 2019, for a fee of $700 per month.
Litigation
We are not party to any pending, or to our knowledge, threatened litigation of any type.
WHERE YOU CAN GET ADDITIONAL INFORMATION
We are required to file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). You may read and copy our reports or other filings made with the SEC at the SEC’s Public Reference Room, located at 100 F Street, N.E., Washington, DC 20549. You can obtain information on the operations of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You can also access these reports and other filings electronically on the SEC’s web site, www.sec.gov.
We are not currently required to deliver an annual report to our security holders and do not expect to do so for the foreseeable future.
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ITEM 1A. RISK FACTORS
The following risk factors should be considered in connection with an evaluation of our business as described in Plan of Operations:
In addition to other information in this Report, the following risk factors should be carefully considered in evaluating our business because such factors may have a significant impact on our business, operating results, liquidity and financial condition. As a result of the risk factors set forth below, actual results could differ materially from those projected in any forward-looking statements. Additional risks and uncertainties not presently known to us, or that we currently consider to be immaterial, may also impact our business, result of operations, liquidity and financial condition. If any such risks occur, our business, operating results, liquidity and financial condition could be materially affected in an adverse manner. Under such circumstances, if and when a trading market for our securities is established, the trading price of our securities could decline, and you may lose all or part of your investment.
THE SECURITIES ISSUED BY THE COMPANY INVOLVE A HIGH DEGREE OF RISK AND, THEREFORE, SHOULD BE CONSIDERED EXTREMELY SPECULATIVE. THEY SHOULD NOT BE PURCHASED BY PERSONS WHO CANNOT AFFORD THE POSSIBILITY OF THE LOSS OF THE ENTIRE INVESTMENT. PROSPECTIVE INVESTORS SHOULD READ ALL OF THE COMPANY’S FILINGS, INCLUDING ALL EXHIBITS, AND CAREFULLY CONSIDER, AMONG OTHER FACTORS THE FOLLOWING RISK FACTORS.
Risks Related to the Business
1.
NetPay has virtually no financial resources. Our independent registered auditors’ report includes an explanatory paragraph stating that there is substantial doubt about our ability to continue as a going concern
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NetPay is an early stage company and has virtually no financial resources. As of March 31, 2019 and March 31, 2018, we had a negative working capital balance of $14,185 and $204,724, respectively, and stockholders’ deficit of $14,185 and $204,437, respectively. Our independent registered auditors included an explanatory paragraph in their opinion on our financial statements as of and for the year ended March 31, 2019; the Company losses from operations raise substantial doubt about our ability to continue as a going concern. No assurances can be given that we will generate sufficient revenue or obtain necessary financing to continue as a going concern.
2.
NetPay is and will continue to be completely dependent on the services of our executive officers, Mr. Elbaz and Ms. Mamon; the loss of their services may cause our business operations to cease.
Our operations and business strategy are completely dependent upon the knowledge and business connections of Mr. Elbaz and Ms. Mamon. They are under no contractual obligation to remain employed by us. If they should choose to leave us for any reason or if they become ill and are unable to work for an extended period of time before we have hired additional personnel or a replacement, our operations may likely fail. Even if we are able to find additional personnel or a replacement, it is uncertain whether that person(s) could continue to develop our business along the lines described in this report. The interruption of services of Mr. Elbaz and Ms. Mamon will have a material adverse effect on the Company's future operations, potential profits and development, if suitable replacements are not promptly obtained. We most likely will fail without the services of Mr. Elbaz and Ms. Mamon or an appropriate replacement(s).
3 .
No assurance can be given that NetPay will be able to attract and retain qualified employees and consultants.
The Company's success depends, in part, upon its ability to attract and retain talented personnel to work with Mr. Elbaz and Ms. Mamon and grow the business. No assurance can be given that the Company will be able to 1) retain our employees that we currently have; and 2) attract and retain such personnel necessary for the development and success of the Company’s business. Correspondingly, no assurance can be given that any key personnel would accept compensation other than cash for their services in the future.
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4.
Security breaches of our systems, including as a result of cyber-attacks, may damage client relations, our reputation as well as expose NetPay to financial liability.
In order to provide our intended services, we will process, store and transmit sensitive business information and personal consumer information which may include credit and debit card numbers, names and addresses, social security numbers, driver’s license numbers, bank account numbers and other types of personal information or sensitive business information. Under the card network rules, various federal, state and international laws, and client contracts, we are responsible for information provided to us by financial institutions, merchants, ISOs and others and for our failure to protect this information. Some of this information is also processed and stored by financial institutions, merchants and other entities, as well as third-party service providers to whom we outsource certain functions and other agents, which we refer to collectively as our associated third parties. The confidentiality of the sensitive business information and personal consumer information that resides on our systems and our associated third parties’ systems is critical to our business. While we maintain controls and procedures designed to protect the sensitive data we collect, we cannot be certain that these measures will be successful or sufficient to counter all current and emerging information security threats that we face on a daily basis.
Certain of our computer systems and certain of our associated third parties’ computer systems have been, and could be in the future, breached, and our data protection measures have not and may not in the future prevent unauthorized access. Information security risks for us and our competitors have substantially increased in recent years in part due to the proliferation of new technologies and the increased sophistication, resources and activities of hackers, terrorists, activists, organized crime, and other external parties, including hostile nation-state actors. The techniques used by these bad actors to breach and otherwise obtain unauthorized access, disable or degrade service, sabotage systems or utilize payment systems in an effort to perpetrate financial fraud change frequently and are often difficult to detect. Although we are not aware of any material breach of our computer systems or of our associated third parties’ computer systems that have had a material impact on us or caused us to incur material losses relating to cyber-attacks or other information security breaches to date, we and others in our industry are regularly the subject of sophisticated and numerous attempts by bad actors to gain unauthorized access to these computer systems and data or to obtain, change or destroy confidential data (including personal consumer information of individuals) through a variety of means, including, but not limited to, computer viruses, malware and phishing. In the future, these attacks may result in unauthorized individuals obtaining access to our confidential information or confidential information provided to us by financial institutions, merchants, ISOs and others, or otherwise accessing, damaging, or disrupting our computer systems or infrastructure. In addition, we expect bad actors to utilize increasingly sophisticated technology and techniques in the future to exploit vulnerabilities that may, or may not, be generally known. As a result, we must continuously develop and enhance our controls, processes, and practices designed to protect our computer systems, software, data and networks from attack, damage, or unauthorized access. This continuous development and enhancement will require us to expend additional resources, including to investigate and remediate significant information security vulnerabilities detected. Despite our investments in security measures, we are unable to assure that any security measures will be effective and will not be subject to breach, or system or human error. In addition, insider or employee cyber and security threats also pose a risk to all large companies, including ours. If one or more of the events described above were to occur, our computer systems or our associated third parties’ computer systems could be breached and the information stored there could be accessed, publicly disclosed, lost, changed, controlled or stolen. While we maintain insurance coverage that may cover certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses.
We could also be subject to liability for claims relating to misuse of personal consumer information, such as unauthorized marketing purposes and violation of data privacy laws. We cannot provide assurance that the contractual requirements related to security and privacy that we impose on our associated third parties’ who have access to customer data and personal consumer information will be followed or will be adequate to prevent the unauthorized use or disclosure of data. In addition, we have obligations under certain agreements to take certain protective measures to ensure the confidentiality of personal consumer information.
A breach of our systems processing or storing sensitive business information or personal consumer information may cause those systems to be unavailable; cause our clients and consumers to lose confidence in our services or deter the use of electronic payments generally; significantly harm our reputation; distract our management; delay future product rollouts; expose us to financial liability (as a result of uninsured liabilities, potential breaches of contract, litigation and penalties and fines from regulators and the card networks); result in the loss of our financial institution sponsorships; increase our risk of regulatory scrutiny; adversely affect our continued card network registration; cause us to modify our protective measures which would increase our expenses; and increase our expenses from containment and remediation costs, all of which could have a material adverse and long-term effect on our revenues, profitability, financial condition and future growth. Further, if we were to be removed from networks’ lists of PCI DSS compliant service providers, our existing clients may cease utilizing our services, and prospective clients may delay or choose not to consider us for their processing needs. In addition, card networks could refuse to allow us to process through their networks.
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5.
We operate in a highly competitive market and therefore face a high risk of business failure or at the very least a competitive disadvantage.
We are aware of many competitors to our planned business operations. Our success in this industry will be largely dependent on our ability to distinguish and establish a need for our services. Our ability to compete effectively in this industry also depends on our ability to be competitive in pricing, customer service, and results.
6.
Because we will be dependent on advertising and marketing firms, we will be at a competitive disadvantage to companies having greater resources to pay larger fees or to companies with dedicated in-house departments for these purposes.
We will need to be strategic in placing quality advertisements that will reach the maximum number of target customers, all while staying within our limited budget. We do not know if we will be able to obtain optimal advertising placement within our projected budget, which will likely be limited, or even find advertising placement for that matter. We may be pushed out of advertising opportunities typically reserved for companies with larger budgets and greater financial resources.
There is no guarantee that we will have adequate financial resources to retain advertising or marketing firms. As a result, we may be left with attempting to market our services ourselves or using advertising and marketing firms with less experience but who charge less than those firms with more valuable connections and resources. Even if we are able to retain advertising or marketing firms, the ability to obtain advertising slots in various forms of media (online, print, radio, television, etc.) will be entirely reliant upon the expertise and capabilities of the advertising and/or marketing firms that we hire, as well as our available budget to initiate such marketing campaigns, which again may be limited.
7.
We have had no sales to date and can give no assurance that there will ever be any sales in the future.
The Company has yet to launch its new business, and accordingly we have not generated any revenues. There is no guarantee that we will ever develop commercially viable products and services. To become profitable, we will have to successfully develop, market and sell our products and services. There can be no assurance that our business development efforts will be completed or successful, that we will be able to market and sell our products and services at an acceptable cost and acceptable quality, that our products and services can be successfully marketed, or that there will be a market with customers willing to purchases our products and services. We currently do not expect to receive revenues from the sale of products and services until sometime in 2019, if ever.
8.
There is no guarantee that we will obtain a payment facilitator license or that our services will gain sufficient acceptance by customers and users in the e-commerce marketplace.
We have not yet obtained a license to operate in the United States as a payment facilitator and have not yet commercially launched the offering of our services. There can be no assurance that we will obtain a payment facilitator license or that our services will gain broad acceptance among prospective customers or users.
Unless we can achieve a sufficient following of customers and merchants who will purchase and use our services, we will not operate profitably and may have to cease our operations. No assurance can be given that our services will achieve sufficient acceptance in the e-commerce marketplace.
9.
Regulatory and legal uncertainties could harm our business.
We believe that our business is subject to material regulation under the laws of the United States and the states in which we plan to market our services. Laws and regulations often differ materially between states, and within individual states, and such laws and regulations are subject to amendment and reinterpretation by the agencies charged with their enforcement. If we become subject to any licensing or regulatory requirements, the failure to comply with any such requirements could lead to a revocation, suspension or loss of licensing status, termination of contracts and legal and administrative enforcement actions. We cannot be sure that a review of our current and proposed operations will not result in a determination that could materially and adversely affect our business, results of operations and financial condition. Moreover, regulatory requirements are subject to change from time to time and may in the future become more restrictive, thereby making compliance more difficult or expensive or otherwise affecting or restricting our ability to conduct our business as now conducted or proposed to be conducted.
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10.
We became subject to the periodic reporting requirements of the Exchange Act. This requires us to incur audit fees and legal fees in connection with the preparation of such periodic reports. These additional costs could reduce or eliminate our ability to earn a profit.
We are required to file periodic reports with the SEC pursuant to the Exchange Act and the rules and regulations promulgated thereunder. In order to comply with these requirements, our independent registered public accounting firm will perform a review of our quarterly (or interim) financial statements and perform an audit of our annual financial statements. Our legal counsel will need to review and assist our management in the preparation of these periodic reports. The costs charged by professionals for such services cannot be accurately predicted because factors such as the number and types of financial transactions that we engage in and the complexity of our financial reports cannot be determined at this time. These factors will determine the amount of time to be spent by our auditors and attorney performing these functions. We currently estimate annual maintenance and compliance costs of the periodic reporting to be upwards of $50,000 per year. Such costs will obviously be an additional expense to our operations and thus will have a negative effect on our ability to meet overhead requirements and ultimately earn a profit.
We may be exposed to increased costs and potential risks resulting from new requirements related to the periodic reporting. If we fail to provide reliable financial reports or prevent the occurrence of fraud, our business and operating results could be significantly harmed, investors would lose confidence in our reported financial information, and certainly the trading price of our common stock, if a market ever develops, could drop significantly. However, for as long as we remain an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act, we may be able to take advantage of certain exemptions from some reporting requirements that are applicable to other public companies that are not “emerging growth companies”. These included, but are not limited to, not being required to comply with auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure regarding executive compensation in periodic reports and proxy statements, and exemption from the requirement of holding annual nonbinding advisory votes on executive compensation and the seeking of nonbinding stockholder approval of any golden parachute payments not previously approved. We may take advantage of these reporting exemptions under the JOBS Act until we are no longer an “emerging growth company.”
We intend to remain an “emerging growth company” for up to five years (the maximum amount of time in which we can be an “emerging growth company”), although we may lose our status as an “emerging growth company” if: (a) we have more than $1.0 billion in annual revenue; (b) more than $700 million in market value of our common stock is held by non-affiliates; or (c) we issue more than $1.0 billion of non-convertible debt during a three-year period.
11.
Our internal controls may become inadequate as we grow, which could cause our financial reporting to be unreliable and lead to misinformation being disseminated to the public.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, the principal executive and principal financial officers and put into effect by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
With growth or an unmanageable increase in our business objectives, our internal control over financial reporting may become inadequate or ineffective, which could cause our financial reports to be unreliable and lead to financial misinformation being disseminated to the public. Investors relying on this misinformation may make an uninformed investment decisions with regards to an investment in our common stock. As a result, if investors are harmed from relying on the misleading financial information, we may be subject to significant legal liability. Failure to achieve and maintain an effective internal control environment could cause us to face regulatory action and also cause investors to lose confidence in our reported financial information, either of which could have a material adverse effect on the Company’s business, financial condition, results of operations and future business prospects.
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In order to mitigate the risks associated with maintaining internal controls, if and when the Company grows, we will rely on the use of outside professionals to assist us in maintaining these internal controls. We will seek to engage qualified professionals on an independent contractor basis to assist in reviewing and recording transactions. When and if finances permit, we will hire an experienced financial professional to oversee our reporting and control functions.
12.
The costs of being a public company could result in the inability to continue as a going concern.
As a public company, we will have to comply with numerous financial reporting and legal requirements, including those pertaining to audits and internal control system over our financial reporting. The costs of complying with being a public company could be significant and may preclude us from seeking financing or equity investment on acceptable terms. We estimate these costs to be $50,000 per year and may be even higher if our business volume and financial activity increases. Our estimate of costs does not include the necessary compliance, documentation and reporting requirements for Section 404 of the Sarbanes-Oxley Act of 2002 as we will not be subject to the full reporting requirements of Section 404 until we exceed $75 million in market capitalization. Our costs also stand to increase once we lose our “emerging growth company” status as defined in the JOBS Act, which allows us to take advantage of exemptions that should result in decreased compliance costs. If revenues are insufficient or non-existent, and/or we cannot support the additional costs associated with being a public company, we may be unable to satisfy these costs in the normal course of business which would result in our inability to continue as a going concern.
13.
Having only one director limits our ability to establish effective independent corporate governance procedures and gives our CEO unbridled control.
We have only one director who also serves as our Chief Executive Officer. Accordingly, we cannot establish board committees comprised of independent members to oversee functions like compensation or audit issues. In addition, a vote of the board members is decided in favor of our chairman (our sole director), which gives her significant control over all corporate issues and business decisions.
Until we have a larger board of directors that would include independent members, if ever, there will be limited oversight of our CEO’s decisions and activities and little ability for minority shareholders to challenge or reverse those activities and decisions, even if they are not in the best interests of our minority shareholders.
Risks Related to Our Common Stock
14.
We are an “emerging growth company” and we cannot be certain whether the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding an annual non-binding advisory vote on executive compensation and nonbinding stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we are able to rely on these exemptions. If some investors find our common stock less attractive because of this, there may be a less active trading market for our common stock causing our stock price to be more volatile.
Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we chose to “opt out” of such extended transition period, and as a result, we comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
15.
We may not be able to raise sufficient financing or resources to develop, manufacture and market our services.
We currently have no firm commitments for any funds. If we are unable to raise sufficient additional financing or other financial resources to develop, and market our services, our business will fail and investors will lose their entire investment.
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16.
A small number of persons purchased our shares in our initial public offering, and they may risk losing their investment without a market to develop for our shares.
The sale of a small number of shares in our initial public offering (2,750,000 shares) increases the likelihood of no market ever developing for our shares. Since there was a limited number of shareholders that purchased our shares (30) we may be unable to create a public market for our shares. Without a public market for our shares, the limited number of shares sold and their investors may find the market highly illiquid or unable to be sold. In such an event, it is likely that our shareholder’s entire investment in our common stock may be lost.
17.
Shareholders may be diluted significantly through our efforts to obtain financing and satisfy obligations through the issuance of additional shares of our common stock.
We have no committed source of financing. Wherever possible, our board of directors will attempt to use non-cash consideration to satisfy obligations. In many instances, we believe that the non-cash consideration will consist of restricted shares of our common stock. Our board of directors has authority, without action or vote of the shareholders, to issue all or part of the authorized (100,000,000) but unissued (91,750,000) shares. In addition, if a significant and active trading market develops for our common stock, we may attempt to raise capital by selling shares of our common stock, possibly at a discount to market and again without action or vote of the shareholders. These actions will certainly result in dilution of the ownership interests of existing shareholders and further dilute common stock book value; this dilution may be material.
18.
Shareholder interests may be undercut because we can issue shares of our common stock to individuals or entities that support existing management thereby enhancing existing management’s ability to maintain control of NetPay.
Our board of directors, has authority, without action or vote of the shareholders, to issue all or part of the authorized but unissued common shares. Such issuances may be issued to parties or entities committed to supporting existing management and the interests of existing management may not be the same as the interests of other shareholders. Our ability to issue shares without shareholder approval serves to enhance existing management’s ability to maintain control of the Company.
19.
Our Articles of Incorporation provide for indemnification of officers and directors at our expense and limit their liability, which may result in a major cost to us and hurt shareholder interests because corporate resources may be expended for the benefit of officers and/or directors.
Our Articles of Incorporation in Article XI provide for indemnification as follows: “No director or officer of the Corporation shall be personally liable to the Corporation or any of its stockholders for damages for breach of fiduciary duty as a director or officer; provided, however, that the foregoing provision shall not eliminate or limit the liability of a director or officer: (i) for acts or omissions which involve intentional misconduct, fraud or knowing violation of law; or (ii) the payment of dividends in violation of Section 78.300 of the Nevada Revised Statutes. Any repeal or modification of an Article by the stockholders of the Corporation shall be prospective only, and shall not adversely affect any limitation of the personal liability of a director or officer of the Corporation for acts or omissions prior to such repeal or modification.”
We have been advised that, in the opinion of the SEC, indemnification for liabilities arising under federal securities laws is against public policy as expressed in the Securities Act of 1933 and is therefore unenforceable. In the event that a claim for indemnification for liabilities arising under federal securities laws, other than the payment by us of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, suit or proceeding, is asserted by a director, officer or controlling person in connection with our activities, we will (unless in the opinion of our counsel, the matter has been settled by controlling precedent) submit to a court of appropriate jurisdiction, the question of whether indemnification by us is against public policy as expressed in the Securities Act and we will abide by the final adjudication of such issue. The legal process relating to this issue if it were to occur is likely to be very costly and may result in us receiving negative publicity, either
of which factors is likely to materially reduce the market and price for our shares, if such a market ever develops.
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20.
Currently, there is no established public market for our securities, and there can be no assurances that any established public market will ever develop or that our common stock will be quoted for trading and, even if quoted, it is likely to be subject to significant price fluctuations.
Prior to the date of this report, there has not been any established trading market for our common stock, and there is currently no established public market whatsoever for our securities. A market maker filed an application with FINRA on our behalf and was approved to quote the shares of our common stock on the OTC market. While the market maker’s application has been accepted by FINRA there can be no assurance as to whether:
(i)
any market for our shares will develop;
(ii)
the prices at which our common stock will trade; or
(iii)
the extent to which investor interest in us will lead to the development of an active, liquid trading market. Active trading markets generally result in lower price volatility and more efficient execution of buy and sell orders for investors.
While we are able to have our shares quoted on the OTC-Pink market, we plan to attempt to have our shares quoted on the OTCQB (the share price quotation service owned by OTC Markets, Inc., the former Pink Sheets). Recently, through a broker-dealer and its clearing firm, we applied to become eligible with the Depository Trust Company (“DTC”) to permit our shares to trade electronically. It is commonly believed if an issuer is not “DTC-eligible,” then its shares cannot be electronically transferred between brokerage accounts, which, based on the realities of the marketplace as it exists today (especially the OTC market and the OTCQB), means that shares of a company will not be traded (technically the shares can be traded manually between accounts, but this takes days and is not a realistic option for companies relying on broker dealers for stock transactions - like all companies on the OTC market and the OTCQB). While we have achieved DTC-eligibility this is not a requirement panacea in order to trade on the OTC market or the OTCQB. We firmly believe that it is a necessity to process trades on the OTC market and the OTCQB if we are going to trade with any volume.
In addition to the foregoing, our common stock is unlikely to be followed by market analysts, and there may be few institutions acting as market makers for our common stock. Either of these factors could adversely affect the liquidity and trading price of our common stock. Until our common stock is fully distributed, and an orderly market develops in our common stock, if ever, the price at which it trades is likely to fluctuate significantly. Prices for our common stock will be determined in the marketplace and may be influenced by many factors, including the depth and liquidity of the market for shares of our common stock, developments affecting our business, including the impact of the factors referred to elsewhere, investor perception of the Company’s common stock and operations as well as general economic and market conditions. No assurances can be given that an orderly or liquid market will ever develop.
Because of the anticipated low price of the securities, many brokerage firms may not be willing to effect transactions in these securities. Purchasers of our securities should be aware that any market that develops in our stock will be subject to the penny stock restrictions.
21.
Any market that develops in shares of our common stock will be subject to the penny stock regulations and restrictions pertaining to low priced stocks that will create a lack of liquidity and make trading difficult or impossible.
The trading of our securities, if any, will be in the over-the-counter market which is commonly referred to as the OTC market or the OTCQB as maintained by FINRA and OTC Market Groups, respectively. As a result, an investor may find it difficult to dispose of, or to obtain accurate quotations as to the price of, our securities.
Rule 3a51-1 of the Exchange Act establishes the definition of a “penny stock,” for purposes relevant to us, as any equity security that has a minimum bid price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to a limited number of exceptions which are not available to us. It is likely that our shares will be considered to be penny stocks for the immediately foreseeable future. This classification severely and adversely affects any market liquidity for our common stock.
For any transaction involving a penny stock, unless exempt, the penny stock rules require that a broker or dealer approve a person's account for transactions in penny stocks and the broker or dealer receive from the investor a written agreement to the transaction setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person's account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience and objectives of the person and make a reasonable determination that the transactions in penny stocks are suitable for that person and that that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
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The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the SEC relating to the penny stock market, which, in highlight form:
the basis on which the broker or dealer made the suitability determination, and
that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Disclosure also has to be made about the risks of investing in penny stock in both public offerings and in secondary trading and the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Additionally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
Because of these regulations, broker-dealers may not wish to engage in the above-referenced necessary paperwork and disclosures and/or may encounter difficulties in their attempt to sell shares of our common stock, which may affect the ability of selling shareholders or other holders to sell their shares in any secondary market and have the effect of reducing the level of trading activity in any secondary market. These additional sales practice and disclosure requirements could impede the sale of our securities, if and when our securities become publicly traded. In addition, the liquidity for our securities may decrease, with a corresponding decrease in the price of our securities. Our shares, in all probability, will be subject to such penny stock rules for the foreseeable future and our shareholders will, in all likelihood, find it difficult to sell their securities.
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The market for penny stocks has experienced numerous frauds and abuses that could adversely impact our investors.
Our management believes that the market for penny stocks has suffered from patterns of fraud and abuse. Such patterns include:
Control of the market for a security by one or a few broker-dealers that are often related to the promoter or issuer;
Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
“Boiler room” practices involving high pressure sales tactics and unrealistic price projections by sales persons;
Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
Wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.
23.
Any trading market that may develop may be restricted by virtue of state securities “Blue Sky” laws that prohibit trading absent compliance with individual state laws. These restrictions may make it difficult or impossible to sell shares in those states.
There is currently no established market for our common stock, and there can be no assurance that any established market will develop. Transfer of our common stock may be restricted under the securities or securities regulations laws promulgated by various states and foreign jurisdictions, commonly referred to as “Blue Sky” laws. Absent compliance with such individual state laws, our common stock may not be traded in such jurisdictions. Because the securities registered hereunder have not been registered for resale under the blue sky laws of any state, such shareholders and persons who desire to purchase them in any trading market that might develop in the future, should be aware that there may be significant state blue sky law restrictions on the ability of investors to sell the securities and of purchasers to purchase the securities. These restrictions prohibit the secondary trading of our common stock. We currently do not intend to and may not be able to qualify securities for resale in at least 17 states which do not offer manual exemptions (or may offer manual exemptions but may not offer one to us if we are considered to be a shell company at the time of application) and require shares to be qualified before they can be resold by our shareholders. Accordingly, investors should consider the secondary market for our securities to be a limited one.
24.
Our board of directors (consisting of one person, who is our President and Chief Executive Officer) has the authority, without stockholder approval, to issue preferred stock with terms that may not be beneficial to common stockholders and with the ability to affect adversely stockholder voting power and perpetuate their control over us.
Our Articles of Incorporation allows the board of directors to issue shares of preferred stock without any vote or further action by other stockholders. Our board of directors has the authority: (a) to fix and determine the relative rights and preferences of preferred stock; and (b) to issue preferred stock without further stockholder approval, including large blocks of preferred stock. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to common stockholders and the right to redeem the shares, together with a premium, before the redemption of any common stock.
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25.
The ability of our CEO to control our business may limit or eliminate minority shareholders’ ability to influence corporate affairs.
Our CEO, Mr. Elbaz, beneficially owns approximately 75% of our outstanding common stock. Because of his beneficial stock ownership, our CEO continues in the position to elect our board of directors, decide all matters requiring stockholder approval and determine our policies. The interests of our CEO may differ from the interests of other shareholders with respect to the issuance of shares, business transactions with or sales to other companies, selection of officers and directors and other business decisions. Minority shareholders would have no way of overriding decisions made by our CEO. This level of control may also have an adverse impact on the market value of our shares because our CEO may institute or undertake transactions, policies or programs that may result in losses, may not take any steps to increase our visibility in the financial community and
/
or may sell sufficient numbers of shares to significantly decrease our price per share.
26.
Most of our presently issued and outstanding common shares are restricted under Rule 144 of the Securities Act, as amended. When the restriction on any or all of these shares is lifted, and the shares are sold in the open market, the price of our common stock could be adversely affected.
All of the shares of common stock (5,577,082 shares) owned by our majority shareholder are “restricted securities” as defined under Rule 144 promulgated under the Securities Act and may only be sold pursuant to an effective registration statement or an exemption from registration, if available. Rule 144 provides in essence that a person who is not an affiliate and has held restricted securities for a prescribed period of at least six (6) months if purchased from a reporting issuer or twelve (12) months if purchased from a non-reporting company, may, under certain conditions, sell all or any of their shares without volume limitation, in brokerage transactions. Affiliates, however, may not sell shares in excess of 1% of the Company’s outstanding common stock each three months. There is no limit on the amount of restricted securities that may be sold by a non-affiliate (i.e., a stockholder who has not been an officer, director or control person for at least 90 consecutive days) after the restricted securities have been held by the owner for the aforementioned prescribed period of time. A sale under amended Rule 144 or under any other exemption from the Act, if available, or pursuant to registration of common stock shares of present stockholders, may have a depressive effect on the price of the common stock in any market that may develop.
27.
We do not expect to pay cash dividends in the foreseeable future.
We have never paid cash dividends on our common stock. We do not expect to pay cash dividends on our common stock at any time in the foreseeable future. The future payment of dividends directly depends upon our future earnings, capital requirements, financial requirements and other factors that our board of directors will consider. Since we do not anticipate paying cash dividends on our common stock, return on your investment, if any, will depend solely on an increase, if any, in the market value of our common stock.
28.
Because we are not subject to rules requiring the adoption of certain corporate governance measures, our stockholders have limited protection against interested director transactions, conflicts of interest and similar matters.
The Sarbanes-Oxley Act of 2002, as well as amendments proposed and enacted by the SEC, the New York and American Stock Exchanges and the Nasdaq Stock Market, require the implementation of various measures relating to corporate governance. These measures are designed to enhance the integrity of corporate management and the securities markets and apply to securities that are listed on those exchanges or the Nasdaq Stock Market. Because we are not presently required to comply with many of the corporate governance provisions and because we chose to avoid incurring substantial additional costs associated with such compliance any sooner than legally required, we have not yet adopted these measures.
None of our directors (currently one person) are independent directors and therefore we do not currently have independent audit or compensation committees. As a result, these directors have the ability, among other things, to determine their own level of compensation. Until we comply with prescribed corporate governance measures, regardless of whether such compliance is required, the absence of corporate governance standards may leave our stockholders without protection against interested director transactions, conflicts of interest, if any, and similar matters. As such, investors may be reluctant to provide us with the funds necessary to expand our operations.
We intend to comply with all corporate governance measures relating to director independence as and when required. However, we may find it very difficult or be unable to attract and retain qualified officers, directors and members of board committees required to provide for our effective management. The enactment of the Sarbanes-Oxley Act of 2002 resulted in a series of rules and regulations by the SEC that increase responsibilities and liabilities of directors and executive officers. The perceived increased personal risk may make it more costly or deter qualified individuals from accepting these roles. Some of these corporate governance measures have been metered by the JOBS Act of 2012.
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29.
You may have limited access to information regarding our business because our obligations to file periodic reports with the SEC has been automatically suspended.
As of the effective date of our registration statement, we became subject to certain informational requirements of the Exchange Act, as amended, and were required to file periodic reports (i.e., annual, quarterly and material events) with the SEC which will be immediately available to the public for inspection and copying. However, since the Company has not filed a Form 8-A, our reporting obligations were automatically suspended under Section 15(d) of the Exchange Act. Therefore, we are no longer obligated to file periodic reports with the SEC and your access to our business information may be restricted. In addition, since we are not a reporting issuer, we are not required to furnish proxy statements to security holders, and our directors, officers and principal beneficial owners will not be required to report their beneficial ownership of securities to the SEC pursuant to Section 16 of the Exchange Act.
For all of the foregoing reasons and others set forth herein, an investment in our securities in any market that may develop in the future involves a high degree of risk.
