Item 1A. Risk Factors
ITEM
1A. RISK FACTORS
Risks Related to Our Business
We could be adversely affected by information
security breaches or cyber security attacks.
Our web and cloud services involve the storage
and transmission of our customers’ and employees’ proprietary information. Our business relies on our digital technologies,
computer and email systems, software and networks to conduct our operations. Our technologies, systems and networks may become the target
of criminal cyber-attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse,
loss or destruction of confidential, proprietary and other information of us or third parties with whom we deal, or otherwise disrupt
our or our customers’ or other third parties’ business operations. It is critical to our business strategy that our facilities
and infrastructure remain secure and are perceived by the marketplace to be secure. Although we believe we employ appropriate security
technologies, we cannot guarantee that the security technologies (including data encryption processes, intrusion detection systems) we
employ, the comprehensive risk assessments we conduct, or our other internal control procedures will ensure the security of our customers’
data. If our security measures are breached due to third-party action, employee error or otherwise, and as a result, our customers’
data becomes available to unauthorized parties, we could incur liability and our reputation would be damaged, which could lead to the
loss of current and potential customers.
Furthermore, we maintain a work-from-home policy
for our employees. Remote work and remote access increase our vulnerability to cybersecurity attacks. We may see an increase in cyberattack
volume, frequency and sophistication driven by the global enablement of remote workforces. We seek to detect and investigate unauthorized
attempts and attacks against our network, products and services and to prevent their recurrence where practicable through changes to our
internal processes and tools and changes or updates to our products and services; however, we remain potentially vulnerable to additional
known or unknown threats. In some instances, we and our customers can be unaware of an incident or its magnitude and effects. Additionally,
the rapid evolution and increasing prevalence of AI technologies may also increase our cybersecurity risks. Moreover, globally there has
been an increase in cybersecurity attacks since Russia invaded Ukraine. The risk of state-supported and geopolitical-related cyber-attacks
may increase in connection with the war in Ukraine and any related political or economic responses and counter-responses. We may not discover
all such incidents or activity or be able to respond or otherwise address them promptly, in sufficient respects or at all.
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In addition, we have in the past and may in the
future be required to expend significant capital and other resources to detect, remedy, protect against or alleviate breaches of our network
and security, and we may not be able to remedy these problems in a timely manner, or at all. Because techniques used by outsiders to obtain
unauthorized network access or to sabotage systems change frequently and generally are not recognized until launched against a target,
we may be unable to anticipate these techniques or implement adequate preventative measures.
For example, in early 2018, following an unauthorized
third party misappropriating three of NTS’s domain names, NTS’s management and forensic investigators determined that attackers
compromised a portion of its shared webhosting system, and may have acquired certain customer information limited to its shared webhosting
customers and/or gained access to certain of its shared webhosting servers. In response, NTS took a range of steps designed to further
secure its systems, enhance its security protections, enhance access controls and prevent future unauthorized activity.
Further, any breaches to our security measures
in the future as a result of third-party action, employee error or otherwise could increase the cost of cybersecurity insurance, which,
in turn, could adversely affect our financial condition and results of operations. Our existing general liability insurance coverage and
the coverage we carry for cyber-related liabilities may not continue to be available on acceptable terms or be available in sufficient
amounts to cover one or more large claims or that the insurer will not deny coverage as to any future claim. The successful assertion
of one or more large claims against us that are not covered or exceed available insurance coverage, or the occurrence of changes in our
insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could harm our business.
We rely on third-party license agreements
with the owners of the Data Centers to operate our secure private cloud which, if terminated, could have an adverse material effect on
our business.
We operate a secure private cloud from private
suites in completely isolated areas that are leased within two Tier 3 data center facilities located in Phoenix, Arizona, and Edison,
New Jersey. We are party to license agreements with Aligned Data Centers (Phoenix) PropCo, LLC and Iron Mountain Data Centers LLC with
respect the Data Centers located in Phoenix, Arizona, and Edison, New Jersey, respectively, through which we offer our secure private
cloud hosting services. The Data Centers host our critical infrastructure and are designed to conform to the global standards for such
centers. Although the terms of the license agreements for the Data Centers located in Arizona and New Jersey currently extend through
2027 and 2026, respectively, such license agreements may not continue to be available on commercially reasonable terms, or at all. Additionally,
termination of such license agreements would require us to identify replacement facilities for our secure private cloud hosting services,
which may not be available at all. Any delay or interruption in our ability to meet demand for our secure private cloud hosting services
and other IT-related services will result in the loss of potential revenues and could have a material adverse effect on our business,
results of operations, and financial condition.
We operate in a highly competitive industry
in which technological change can be rapid.
The information technology industry involves a
broad range of rapidly changing technologies, including AI. Our equipment and the technologies on which it is based may not remain competitive
over time, and others may develop superior technologies that render our products non-competitive, without significant additional capital
expenditures. Some of our competitors are significantly larger and have substantially greater market presence, as well as greater financial,
technical, operational, marketing and other resources and experience than we do. In the event that such a competitor expends significant
sales and marketing resources in one or several markets in which we operate, we may not be able to compete successfully in such market(s).
We believe that competition will continue to increase, placing downward pressure on prices. Such pressure could adversely affect our gross
margins if we are not able to reduce our costs commensurate with such price reductions.
We rely on a limited number of customers
for a material portion of our revenues and income.
Prior to the consummation of the Transactions,
during the 2023 and 2024 fiscal years, NTS relied on a limited number of customers for a material portion of its revenues. Additionally,
during 2024, NTS’s second largest customer informed NTS it would cease utilizing its services due to a consolidation of its vendors.
Following the completion to the Transactions, this customer has since resumed utilizing our services, but we cannot be certain at what
level, or for what period, the customer relationship will continue. A loss of one or more of our customers, if not replaced, could adversely
impact our financial condition and prospects.
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Our technology solutions business depends
on the efficient and uninterrupted operation of our Data Centers and computer and communications hardware systems and infrastructure.
Despite precautions we implement against possible
failure of our systems, interruptions could result from natural disasters, power loss, the inability to acquire fuel for our backup generators,
telecommunications failure, terrorist attacks and similar events. We also lease telecommunications lines from local, regional and national
carriers whose service may be interrupted. Our business, financial condition and results of operations could be harmed by any damage or
failure that interrupts or delays our operations. Our insurance may not cover all of the losses or compensate us for the possible loss
of clients occurring during any period that we are unable to provide service.
Additionally, since the Data Centers through which
we operate rely on third parties to provide power sufficient to meet operational needs, the Data Centers could have a limited or inadequate
amount of electrical resources necessary to meet our customer requirements. The operators for the Data Centers attempt to limit exposure
to system downtime due to power outages by using backup generators and power supplies. However, these protections may not limit our exposure
to power shortages or outages entirely. Any system downtime resulting from insufficient power resources or power outages could cause physical
damage to equipment, increase our susceptibility to security breaches, damage our reputation and lead us to lose current and potential
customers, which would harm our business, financial condition and results of operations.
Failure to have reliable Internet, telecommunications
and fiber optic network connectivity and capacity from third-party providers may adversely affect our results of operations.
Our success depends in part upon the capacity,
reliability and performance of our network infrastructure, including our Internet, telecommunications and fiber optic network connectivity
providers. We depend on these companies to provide uninterrupted and error-free service through their telecommunications networks. Some
of these providers are also our competitors. We exercise little control over these providers, which increases our vulnerability to problems
with the services they provide. We have experienced, and expect to continue to experience, interruptions or delays in network service.
Any failure on our part or the part of our third-party suppliers to achieve or maintain high data transmission capacity, reliability or
performance could significantly reduce customer demand for our services and have a material and adverse effect on our business, financial
condition and results of operations.
As our customers’ usage of telecommunications
capacity increases, we will be required to make additional investments in our capacity to maintain adequate data transmission speeds,
the availability of which may be limited or the cost of which may be on terms unacceptable to us. If adequate capacity is not available
to us as our customers’ usage increases, our network may be unable to achieve or maintain sufficiently high data transmission capacity,
reliability or performance. In addition, our business and results of operations would suffer if our network suppliers increased the prices
for their services and we were unable to successfully pass along the increased costs to our customers.
Real or perceived errors, failures or bugs
in our customer solutions, software or technology could adversely affect our business, financial condition and results of operations.
Undetected real or perceived errors, failures,
bugs or defects may be present or occur in the future in our customer solutions, software or technology or the technology or software
we license from third parties, including open source software. Despite testing by us, real or perceived errors, failures, bugs or defects
may not be found until our customers use our services. Real or perceived errors, failures, bugs or defects in our customer solutions could
result in negative publicity, loss of or delay in market acceptance of our services and harm to our brand, weakening of our competitive
position, claims by customers for losses sustained by them or failure to meet the stated service level commitments in our customer agreements.
In such an event, we may be required, or may choose, for customer relations or other reasons, to expend significant additional resources
to help correct the problem. Any real or perceived errors, failures, bugs or defects in our customer solutions could also impair our ability
to attract new customers, retain existing customers or expand their use of our services, which could adversely affect our business, financial
condition and results of operations.
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If we are unable to attract new customers,
retain existing customers and sell additional services at comparable gross margins to customers, our revenue and results of operations
could be adversely affected.
Our ability to maintain or increase our revenues
and make a profit may be impacted by a number of factors, including our ability to attract new customers, retain existing customers and
sell additional services at comparable gross margins to our customers. In addition, as we seek to grow our customer base, we expect to
incur higher customer acquisition costs and, to the extent we are unable to retain and sell additional services to existing customers,
our revenue and results of operations may decrease.
Growth in the demand for our services may be
inhibited, and we may be unable to profitably maintain or grow our customer base for a nu mber
of reasons, such as:
● our
inability to provide compelling services or effectively market them to new and existing customers;
● customer
migration to platforms that we do not have expertise in managing;
● the
inability of customers to differentiate our services from those of our competitors or our
inability to effectively communicate such distinctions;
● the
decision of customers to host internally, in third-party cloud infrastructure, or in third-party
colocation facilities as an alternative to the use of our services;
● the
decision of customers to use internal or other third-party resources to manage their platforms
and applications;
● reductions
in IT spending by customers or potential customers;
● a
reduction in the demand for our services due to macroeconomic factors in the markets in which
we operate;
● our
inability to strengthen awareness of our brand;
● past
or future cybersecurity-related incidents; and
● reliability,
quali ty or compatibility problems with our services.
Moreover, we may face difficulty retaining existing
customers over the long term. Certain customer contracts, frequently have initial terms (typically from 24 to 36 months) and, unless terminated,
may be renewed or automatically extended for shorter, rolling periods after the initial term. Our customers have no obligation to renew
their services after their initial contract periods expire and any termination fees associated with an early termination may not be sufficient
to recover our costs associated with such contracts. In addition, most of our services can be canceled at any time without penalty. As
a result, we may face high rates of customer churn if we are unable to meet our customer needs, requirements and preferences.
Our costs associated with generating revenue from
existing customers are generally lower than costs associated with generating revenue from new customers, and depending on the customer
and the service offering, there may be substantial variation in the gross margins associated with existing and new customers. Any failure
by us in continuing to attract new customers or grow our revenue from existing customers could have a material and adverse effect on our
business, financial condition and results of operations.
Our business depends on Microsoft Corporation
and others for the licenses to use software and other intellectual property in the managed technology solutions business.
Our managed technology business is built on technological
platforms that rely on the Microsoft Windows products and other intellectual property that we currently license. As a result, if we are
unable to continue to have the benefit of those licensing arrangements, or if the products upon which our platform is built become obsolete,
our business could be materially and adversely affected.
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If we fail to hire and retain qualified
employees and management personnel, our strategies and our business could be harmed.
Our ability to be successful and to execute on
our strategies depends on our ability to identify, hire, train and retain qualified executives, IT professionals, technical engineers,
software developers, operations employees and sales and senior management personnel who maintain relationships with our customers and
who can provide the technical, strategic and marketing skills required for our company to grow. Our ability to execute on our sales strategy
is also dependent on our ability to identify, hire, train and retain a sufficient number of qualified sales personnel. There is a shortage
of qualified personnel in these fields, and like many other companies we have recently encountered additional challenges in hiring and
retaining qualified personnel. We compete with other companies for this limited pool of potential employees. Furthermore, the implementation
of our strategies may result in changes throughout our business, which may create uncertainty for our employees. Such uncertainties may
impair our ability to attract, retain and motivate key personnel and could cause customers, suppliers and others who deal with us to seek
to change existing business relationships. In addition, the industry in which we operate is generally characterized by significant competition
for skilled personnel, and as our industry becomes more competitive, it could become especially difficult to retain personnel with unique
in-demand skills and knowledge, whom we would expect to become recruiting targets for our competitors. We may not be able to recruit or
retain qualified personnel or successfully transition knowledge from departing employees, and any failure to do so could cause a dilution
of our service-oriented culture and weaken our ability to develop and deliver existing or new operations and services, either of which
could cause our business to be negatively impacted.
Our future success is dependent, in part,
on the performance and continued service of our executive officers. Without their continued service, we may be forced to interrupt or
eventually cease our operations.
We are dependent to a great extent upon the experience,
abilities and continued service of Jason Katz, our Chief Executive Officer and Chairman of the Board of Directors (the “Board”),
Kara B. Jenny, our Chief Financial Officer and director, Jared Mills, our President, and Adam Zalko, our Chief Operating Officer. The
loss of the services of these individuals would substantially affect our business or operations and could have a material adverse effect
on our business, results of operations or financial condition.
Because we recognize revenue from subscriptions
over the term of the subscription, the full impact of downturns or upturns in subscription sales may not be immediately reflected in our
results of operations or financial condition.
We recognize subscription revenue from ManyCam
customers monthly over the term of the subscription, which are offered in twelve- and twenty-four-month terms. As a result, much of the
subscription revenue we report in each period is deferred revenue from subscription agreements entered into during previous periods. Consequently,
a decline in new or renewed subscriptions in any one quarter will negatively affect our revenue in future quarters. In addition, we might
not be able to immediately adjust our costs and expenses to reflect these reduced revenues. Accordingly, the effect of significant downturns
in user acceptance of ManyCam may not be fully reflected in our results of operations until future periods. Our subscription model for
ManyCam also makes it difficult for us to quickly increase revenue generated from ManyCam through additional sales in any period, as revenue
from new subscribers must be recognized over the term of the subscription. As a result, you should not rely on the amount of subscription
revenue generated in prior quarters as an indication of future results.
Our business is affected by general economic
conditions, including inflation, and uncertainties affecting markets in which we operate, and economic volatility could adversely impact
our business.
Our overall performance depends in part on worldwide
economic and geopolitical conditions. The United States has experienced cyclical downturns from time to time in which economic activity
was impacted by rising inflation, falling demand for a variety of goods and services, restricted credit, poor liquidity, reduced corporate
profitability, volatility in credit and fluctuating interest rates, equity and foreign exchange markets, bankruptcies and overall uncertainty
with respect to the economy. These economic conditions can arise suddenly, and the full impact of such conditions can remain uncertain.
In addition, geopolitical developments, such as existing and potential wars, trade wars or other conflicts, changes in foreign policy
and other events are beyond our control. Any form of civil unrest or other conflict can increase levels of political and economic unpredictability
regionally or globally and has the potential to increase the volatility of global financial markets. Any of these effects could have a
material and adverse impact on our business, financial condition and results of operations. Sustained levels of high inflation could cause
the U.S. Federal Reserve and other central banks to continue to increase interest rates, which could have the effects of raising the cost
of capital and depressing economic growth, either of which, or the combination thereof, could hurt the financial and operating results
of our business and impact our ability to raise capital.
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We may need additional capital to execute
our business plan. If we are not able to obtain additional financing, it could have a material adverse effect on our business, results
of operations or financial condition.
We might need to raise additional capital or financing
through debt or equity offerings to support our expansion, marketing efforts and application development programs in the future. For instance,
we might require additional capital or financing to:
● hire and retain talented employees,
including technical employees, executives, and marketing experts;
● effectuate our long-term growth
strategy and expand our application development programs; and
● market and advertise our products
and solutions to acquire additional customers.
We may be unable to obtain future capital or financing
on favorable terms or at all. If we cannot obtain additional capital or financing, we may need to reduce, defer or cancel planned initiatives,
marketing or advertising expenses or costs and expenses. The failure to obtain necessary additional capital or financing on favorable
terms, if at all, could have a material adverse effect on our business, results of operations or financial condition.
We may make or attempt to make acquisitions
in the future, which could require significant management attention, disrupt our business, dilute our stockholders and significantly harm
our business.
As part of our business strategy, we have made
in the past, and intend to make in the future, acquisitions to add specialized employees and complementary companies, products and technologies.
In the future, we may not be able to find suitable acquisition candidates, and we may not be able to complete acquisitions on favorable
terms, if at all. Our previous and future acquisitions may not achieve our goals, and any future acquisitions we complete could be viewed
negatively by customers, advertisers or investors. In addition, if we fail to successfully close transactions or integrate new teams,
or integrate the products and technologies associated with these acquisitions into our company, our business could be seriously harmed.
Any integration process may require significant time and resources, and we may not be able to manage the process successfully. We may
not successfully evaluate or use the acquired products, technology and personnel, or accurately forecast the financial impact of an acquisition
transaction, including accounting charges. We may also incur unanticipated liabilities that we assume as a result of acquiring companies.
We may have to pay cash, incur debt or issue equity securities to pay for any acquisition, any of which could negatively impact our business
and financial condition. Issuing equity to finance any such acquisitions would also dilute our existing stockholders. Incurring debt would
increase our fixed obligations and could also include covenants or other restrictions that would impede our ability to manage our operations.
Risks Related to the Transactions
Shares issuable upon conversion of the Series
A Preferred Stock, could depress our stock price.
As partial consideration for the Acquisition,
we issued Newtek 4,000,000 shares of the Company’s Series A Non-Voting Common Equivalent Stock, par value $0.001 per share (the
“Series A Preferred Stock”). As of March 14, 2025, Newtek owns approximately 30.2% of our issued and outstanding common stock
or common-equivalent equity (on an as-converted and fully-diluted basis), calculated based on the number of shares of our common stock
outstanding as of March 14, 2025. As a holder of our Series A Preferred Stock, Newtek does not have voting rights, except with respect
to certain protective matters, such as amendments to the Charter or Series A Preferred Stock Certificate of Designations (the “Certificate
of Designations”) that significantly and adversely affect the preferences, rights, privileges or powers of the Series A Preferred
Stock.
The Series A Preferred Stock is convertible into
common stock only upon certain qualifying transfers to third parties. In addition, we entered into a Registration Rights Agreement with
Newtek at the closing of the Acquisition (the “Registration Rights Agreement”), pursuant to which, among other things, we
are obligated to use our reasonable best efforts to prepare and file a registration statement registering the resale the shares of our
common stock issuable upon conversion of the Series A Preferred Stock. Once registered, the shares of common stock issuable upon conversion
of the Series A Preferred Stock held by Newtek generally will not require further registration under the Securities Act, provided ,
however, that to the extent that Newtek is deemed to be our affiliate for purposes of the Securities Act, its sales of common stock issuable
upon conversion of the Series A Preferred Stock will be subject to the resale restrictions of Rule 144 under the Securities Act.
Pursuant to the Registration Rights Agreement,
Newtek is subject to certain lockup and transfer restrictions with respect to the Series A Preferred Stock for one year following the
closing of the Acquisition. Following this lockup period, Newtek may wish to dispose of some or all of its Series A Preferred Stock, and
as a result, may seek to sell its shares of Series A Preferred Stock, which would automatically convert into shares of our common stock
upon the occurrence of certain qualifying transfers. Any such sale (or the perception that any such a sale may occur), coupled with the
increase in the outstanding number of shares of our common stock following the conversion of the Series A Preferred Stock upon transfer,
could have a dilutive effect to our existing stockholders and may affect the market for, and the market price of, shares of common stock
in an adverse manner.
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We may not be able to effectively integrate
the businesses of NTS or realize the anticipated benefits and synergies expected from the Acquisition .
The success of the Acquisition and the transactions
contemplated thereby will depend, in part, on our ability to realize the anticipated benefits from acquiring NTS and its business. The
anticipated benefits and estimates of future growth, synergies and optimizations of the Acquisition may not be realized fully or at all,
may take longer to realize than expected or could have other adverse effects that we do not currently foresee. The failure to realize
the anticipated benefits and synergies expected from the Acquisition could adversely affect our business, financial condition and operating
results.
In addition, we have devoted, and continue to
devote, significant management attention and resources to integrate the respective business practices and operations of NTS. Potential
difficulties that we may encounter as part of the integration process incl ude
the following:
● our
inability to successfully combine our ManyCam product with the business of NTS in a manner that permits us to achieve, on a timely basis
or at all, the enhanced revenue opportunities, cost savings and other benefits anticipated to result from the Acquisition;
● complexities
associated with managing our existing business and NTS, including difficulty addressing possible differences in operational philosophies
and the challenge of integrating complex systems, technology, networks and other assets of NTS in a seamless manner that minimizes any
adverse impact on customers, suppliers, employees and other constituencies;
● the
assumption of contractual obligations with less favorable or more restrictive terms; and
● potential
unknown liabilities and unforeseen increased expenses or delays associated with the transactions.
Any
of these issues could adversely affect our ability to maintain relationships with customers, suppliers, employees and other constituencies
or achieve the anticipated benefits of the Acquisition or could negatively impact our earnings or otherwise adversely affect our business
and financial results.
Through the Acquisition, we are entering
a new line of business which is highly competitive.
Through the Acquisition, we acquired NTS’s
existing operations. Entering a new line of business has many risks, including the ability to generate sufficient revenue to fund operations
in the future. While we believe we have sufficient capital to cover integration expenses, we may have to fund NTS’s operations from
cash on hand until sales are sufficient to fund ongoing operations. A new business line may never generate significant revenues or have
enough sales to be profitable. These risks may be further exacerbated by the sale of the Transferred Assets, which have historically been
our main source of revenue. With respect to any new line of business, we may have competitors that are better established in the market,
have greater experience with such line of business or have greater resources than we do. Furthermore, certain of our current employees
may have limited experience with dedicated server hosting, cloud hosting, data storage, managed security, backup and disaster recovery
and other related services and may have limited experience with respect to any other line of business we may enter into as we seek to
expand our operations.
Newtek previously identified material weaknesses
in NTS’s internal controls over financial reporting. If the material weaknesses are not remediated, it may adversely affect our
ability to report our financial condition and results of operations in a timely and accurate manner or lower investor confidence in our
Company and, as a result, negatively affect the value of our common stock.
As disclosed in Newtek’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on April 1, 2024, Newtek’s management concluded that NTS
did not maintain effective internal controls over financial reporting as of December 31, 2023, as a result of the material weaknesses
related to deficiencies in the conversion of NTS’s system of record for webhosting revenue and ineffective control design and implementation
over revenue recognition. As we continue to integrate NTS’s operations into our business, we are evaluating our internal controls
over financial reporting, including internal controls related to NTS, following the Acquisition. As a result of these integration activities,
certain internal controls may be changed. We are permitted to exclude NTS from our assessment of internal controls over financial reporting
during the first year following the Acquisition. If we fail to maintain adequate internal controls over financial reporting, we may be
subject to litigation or regulatory scrutiny and investors could lose confidence in our reported financial information, which could have
a negative effect on the trading price of our common stock.
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We may record goodwill and other intangible
assets that could become impaired and result in material non-cash charges to our results of operations in the future .
We accounted for the Acquisition using the acquisition
method of accounting in accordance with the accounting principles generally accepted in the United States (“GAAP”). Under
the acquisition method of accounting, the assets and liabilities of NTS were recorded, as of completion, at their respective fair values
and added to those of the Company. The reported financial condition and results of operations of the Company for periods after completion
of the Acquisition will reflect NTS’s balances and results after completion of the Acquisition but will not be restated retroactively
to reflect the historical financial position or results of operations of NTS for periods prior to the Acquisition.
Under the acquisition method of accounting, the
total purchase price is allocated to NTS’s tangible assets and liabilities and identifiable intangible assets based on their fair
values as of the Closing Date. The excess of the purchase price over those fair values is recorded as goodwill. We expect that the Acquisition
may result in the creation of goodwill based upon the application of the acquisition method of accounting. To the extent goodwill or intangibles
are recorded and the values become impaired, we may be required to recognize material non-cash charges relating to such impairment. Our
operating results may be significantly impacted from both the impairment and the underlying trends in the business that triggered the
impairment.
NTS historically relied on Newtek for managerial,
financial and accounting support and benefitted from Newtek’s referral network, and we expect to rely on Newtek’s referral
network in the future .
NTS historically relied on Newtek for managerial,
financial and accounting support to manage NTS’s business. We may not be able to effectively manage our operations without the managerial
assistance of Newtek, and the Acquisition may result in the disruption of, or the loss of momentum in, our ongoing businesses or inconsistencies
in standards, controls, procedures and policies, either of which could negatively impact our ability to generate revenue and income at
the levels NTS historically performed.
In addition, NTS materially benefited from Newtek’s
referral network, including Newtek’s patented NewTracker software, to assist NTS in generating new customers and revenues. For example,
historically approximately 40% of new NTS webhosting customers have resulted from internal and external referrals from Newtek without
material expenditures by NTS for marketing or advertising. In connection with the Acquisition, we entered into a referral arrangement
with Newtek pursuant to which Newtek will continue to refer potential clients to us for a fee. Our referral arrangement with Newtek is
terminable by either us or Newtek at any time. If Newtek does not provide customer referrals to us at the same level it provided NTS,
or if Newtek terminates our referral arrangement, our ability to gain new customers would be materially adversely affected.
Newtek historically accounted for a material
portion of NTS’s revenue and income.
Newtek historically was NTS’s largest customer
in terms of revenue and income. For example, during the fiscal year ended December 31, 2023 and the nine months ended September 30, 2024,
Newtek accounted for 16% and 27% of NTS’s revenue, respectively. In connection with the Acquisition, we entered into master services
agreements with Newtek and Newtek Bank, National Association (“Newtek Bank”), pursuant to which we provide Newtek and Newtek
Bank with the same level of managed IT services at the same or similar billing rates as NTS provided. If we are unable to deliver the
contracted services or a party terminates or breaches the agreements, or if Newtek or Newtek Bank fail to renew the agreements at the
end their term, the loss of revenues would materially impact our financial condition.
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Legal and Regulatory Risks
Customers could potentially expose us to
lawsuits for their lost profits or damages, which could impair our results of operations.
Because our services are critical to many of our
customers’ businesses, any significant disruption in our services could result in lost profits or other indirect or consequential
damages to our customers. Although we generally require our customers to sign agreements that contain provisions attempting to limit our
liability for service outages, a court may not enforce any contractual limitations on our liability in the event that one of our customers
brings a lawsuit against us as the result of a service interruption or other Internet site or application problems that they may ascribe
to us. The outcome of any such lawsuit would depend on the specific facts of the case and any legal and policy considerations that we
may not be able to mitigate. In such cases, we could be liable for substantial damage awards that may exceed our insurance coverage by
unknown but significant amounts, which could materially and adversely impair our business, financial condition and results of operations.
As a technology service provider to U.S.
financial institutions, we are subject to regulation, supervision, and enforcement authority of numerous governmental and regulatory bodies
in the jurisdictions in which we operate, which includes banking regulators.
Because we are a technology service provider to
U.S. financial institutions and host, secure and manage banking software, we are subject to regular oversight and examination by the FFIEC,
which is an inter-agency body of federal banking regulators. The FFIEC has broad discretion in the implementation, interpretation and
enforcement of banking and consumer protection laws. Our failure to comply with these laws, or our failure to meet the supervisory expectations
of the banking regulators, could result in adverse action against us. The regulators have the power to, among other things, enjoin “unsafe
or unsound” practices, require affirmative actions to correct any violation or practice, issue administrative orders that can be
judicially enforced, direct the sale of subsidiaries or other assets, and assess civil money penalties. Our failure to comply with these
laws, or our failure to meet the supervisory expectations of the banking regulators, could result in adverse action against us, which
could have a material adverse impact on our business and results of operations.
Government regulation is continuously evolving
and, depending on its evolution, may adversely affect our business, financial condition and results of operations.
We are subject to varying degrees of regulation
in each of the jurisdictions in which we provide services. Local laws and regulations, and their interpretation and enforcement, differ
significantly among those jurisdictions. These regulations and laws may cover taxation, privacy, data protection, pricing, content, intellectual
property and proprietary rights, distribution, mobile communications, electronic device certification, electronic waste, electronic contracts
and other communications, consumer protection, web services, the provision of online payment services, unencumbered Internet access to
our services, the design and operation of websites and the characteristics and quality of services. These laws can be costly to comply
with, can be a significant diversion to management’s time and effort and can subject us to claims or other remedies, as well as
negative publicity. Many of these laws were adopted prior to the advent of the Internet and related technologies and, as a result, do
not contemplate or address the unique issues that the Internet and related technologies currently produce. Some of the laws that do reference
the Internet and related technologies have been and continue to be interpreted by the courts, but their applicability and scope remain
largely uncertain.
Additionally,
the increasing focus on the risks and strategic importance of AI technologies has already resulted in regulatory restrictions that target
products and services capable of enabling or facilitating AI and may in the future result in additional restrictions impacting some or
all of our product and service offerings. Concerns regarding third-party use of AI for purposes contrary to local governmental interests,
including concerns relating to the misuse of AI applications, models, and solutions, could result in unilateral or multilateral restrictions
on products that can be used for training, refining, and deploying large language models. Such restrictions could limit the ability of
downstream customers and users worldwide to acquire, deploy, and use systems that include our products, software, and services, and negatively
impact our business and financial results.
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Risks Related to Our Intellectual Property
If we are unable to protect our intellectual
property rights, we may be unable to compete with competitors developing similar technologies.
Historically, our defense of our intellectual
property rights has been a significant aspect of our business and has meaningfully contributed to our results of operations. We aim to
protect our confidential proprietary information, in part, by entering into confidentiality agreements and invention assignment agreements
with all our employees, consultants, advisors and any third parties who access or contribute to our proprietary know-how, information,
or technology. We also rely on trademark, copyright, patent, trade secret, and domain-name-protection laws to protect our proprietary
rights. We have filed various applications to protect aspects of our intellectual property, and we currently hold eight patents. In the
future we may acquire additional patents or patent portfolios, which could require significant cash expenditures. However, third parties
may knowingly or unknowingly infringe our proprietary rights, third parties may challenge proprietary rights held by us, and pending and
future trademark and patent applications may not be approved. In addition, effective intellectual property protection may not be available
in every country in which we operate or intend to operate our business.
In any of these cases, we may be required to expend
significant time and expense to prevent infringement or to enforce our rights. Although we have taken measures to protect our proprietary
rights, others may offer products or concepts that are substantially similar to ours and compete with our business. If we are unable to
protect our proprietary rights or prevent unauthorized use or appropriation by third parties, the value of our brand and other intangible
assets may be diminished, and competitors may be able to more effectively mimic our service and methods of operations. Any of these events
could seriously harm our business.
Intellectual property infringement claims
against us could cause us to incur significant expenses, pay substantial damages or royalties and prevent us from offering our products
and solutions.
Third parties have in the past, and may in the future, claim that our
products and solutions infringe or violate their intellectual property rights. For instance, on March 7, 2025, Cisco Systems, Inc. and
Cisco Technology, Inc. filed a complaint against the Company in the U.S. District Court for the District of Delaware, alleging that the
Company’s ManyCam software has infringed certain patents and seeking damages and injunctive relief. Such claim, and any future claims
of infringement, could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial
damages and prevent us from using licensed technology that may be fundamental to our products and solutions. Even if we were to prevail,
any litigation regarding intellectual property could be costly and time-consuming and divert the attention of our management and key personnel
from our business operations. We maintain insurance to protect against intellectual property infringement claims and resulting litigation,
but such insurance may not cover or may not be sufficient to cover all potential claims, liability or expenses. We may also be obligated
to indemnify our business partners in any such litigation, which could further exhaust our resources. Furthermore, as a result of an intellectual
property challenge, we may be prevented from offering our products and solutions unless we enter into royalty, license or other agreements.
We may not be able to obtain such agreements at all or on terms acceptable to us, and as a result, we may be precluded from offering our
products and solutions.
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Risks Related to Ownership of Our Common
Stock
Our common stock is historically thinly
traded, stockholders may be unable to sell at or near ask prices or at all and the price of our common stock may be volatile.
Historically, shares of our common stock have
been thinly traded The Nasdaq Capital Market (“Nasdaq”), meaning that the number of persons interested in purchasing our common
stock at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors,
including the fact that we are a small company that is relatively unknown to stock analysts, stockbrokers, institutional investors and
others in the investment community that generate or influence sales volume. As a consequence, there may be periods of several days or
more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer that has a large and steady volume
of trading activity that will generally support continuous sales without an adverse effect on stock price.
However, during certain periods, we have received,
and may continue to receive, a high degree of media coverage that is published or otherwise disseminated by third parties, including blogs,
articles, message boards and social and other media. This may include coverage that is not attributable to statements made by the Company
or our Board. Information provided by third parties may not be reliable or accurate and could materially impact the trading price of our
common stock, which could cause stockholders to lose their investments.
The market prices and trading volume of our common
stock have in the past experienced, and may continue to experience in the future, extreme volatility, which could cause purchasers of
our common stock to incur substantial losses. We believe that the historical volatility and our historical market prices during such periods
reflected market and trading dynamics unrelated to our underlying business, or macro or industry fundamentals, and we do not know if these
dynamics will continue in the future.
Although our common stock is listed for trading
on Nasdaq, a broader or more active public trading market for our common stock may not develop or be sustained, and the current trading
level of our common stock may not be sustained. Due to these conditions, stockholders may be unable to sell their common stock at or near
ask prices or at all if they desire to sell shares of common stock.
The stock markets in general have experienced
substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations
may also adversely affect the trading price of our common stock, especially in light of the macro-economic factors including rising inflation
rates, increased interest rates, bank-specific and broader financial institution liquidity challenges, the Russia-Ukraine conflict and
the Israel-Hamas conflict. In the past, following periods of volatility in the market price of a company’s securities, stockholders
have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial
costs and diversion of management attention and resources, which could significantly harm our profitability and reputation.
Because of the limited trading market for our
common stock, and because of the possible price volatility, stockholders may not be able to sell their shares of common stock when you
desire to do so. The inability to sell shares in a rapidly declining market may substantially increase the risk of loss because of such
illiquidity and because the price for our common stock may suffer greater declines because of its price volatility.
The ownership of
our common stock is significantly concentrated in a small number of investors, some of whom are affiliated with our Board and management,
which could prevent stockholders from having input on the course of our operations or otherwise lead to actual or potential conflicts
of interest.
As of March 14, 2025, Jason Katz, our Chairman of the Board, and our
Chief Executive Officer, and our largest stockholder, The J. Crew Delaware Trust B, beneficially owned an aggregate of approximately 25.9%
of our outstanding common stock. The J. Crew Delaware Trust B is a trust formed by Mr. Katz for the benefit of certain of his family members.
Mr. Katz is not a beneficiary of the trust and does not hold voting or dispositive power over the shares held by the trust.
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Mr. Katz, The J. Crew
Delaware Trust B and others that have significant beneficial ownership of our common stock have substantial influence regarding matters
submitted for stockholder approval, including proposals regarding:
● any merger, consolidation or
sale of all or substantially all of our assets;
● the election of members of
our Board; and
● any amendment to our Certificate
of Incorporation, as amended (the “Certificate of Incorporation”).
The current or increased
ownership position of any of these stockholders and/or their respective affiliates could delay, deter or prevent a change of control or
adversely affect the price that investors might be willing to pay in the future for our common stock. In addition, the interests of these
stockholders and/or their respective affiliates may significantly differ from the interests of our other stockholders and they may vote
the common stock they beneficially own in ways with which our other stockholders disagree.
Our results of operations are volatile and
difficult to predict, and our stock price may decline if we fail to meet the expectations of stockholders.
Our revenue and results of operations could vary
significantly from period-to-period and year-to-year and may fail to match our past performance because of a variety of factors, many
of which are outside of our control. Any of these events could cause the market price of our common stock to fluctuate. Factors that may
contribute to the variability of our results of operations include:
● changes in expectations as
to our future financial performance;
● announcements by us or our
competitors of significant contracts, acquisitions, strategic partnerships or capital commitments;
● market acceptance of our new
products and solutions;
● the amount of advertising and
marketing that is available and spent on customer campaigns;
● disruptions in the availability
of our applications on third party platforms;
● actual or perceived violations
of privacy obligations and compromises of customer data;
● the entrance of new competitors
in our market whether by established companies or the entrance of new companies;
● additions or departures of
key personnel and the cost of attracting and retaining application developers and other software engineers;
● general market conditions,
including market volatility and the impact of inflation; and
● developments in connection
with our current patent litigation or future patent litigation.
Given the rapidly evolving industry in which we
operate, our historical results of operations may not be useful in predicting our future results of operations. In addition, metrics available
from third parties regarding our industry and the performance of our products and solutions may not be indicative of our future financial
performance.
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Investor relations activities, nominal “float”
and supply and demand factors may affect the price of our common stock.
We have engaged an investor relations firm to
create investor awareness for our Company. These campaigns may include non-deal road shows and personal, video and telephone conferences
with investors and prospective investors in which our business and business practices are described. We provide compensation to our investor
relations firm and may in the future provide compensation to additional investor relations firms or financial advisory firms, for these
services, and pay for newsletters, websites, mailings and email campaigns that are produced by third parties based upon publicly available
information concerning us. We do not intend to review or approve of the content of such analyst reports or other writings and communications
that are based upon analysts’ own research or methods. Investor relations firms are generally required to disclose when they are
compensated for their efforts and the source of such compensation, but whether such disclosure is made or in compliance with applicable
laws is not under our control. In addition, our investors may, from time to time, take steps to encourage investor awareness through similar
activities that may be undertaken at the expense of such investors. Investor awareness activities may also be suspended or discontinued,
which may impact the trading market of our common stock.
The SEC and the Financial Industry Regulatory
Authority enforce various statutes and regulations intended to prevent manipulative or deceptive devices in connection with the purchase
or sale of any security and carefully scrutinize trading patterns and company news and other communications for false or misleading information,
particularly in cases where the hallmarks of “pump and dump” activities may exist, such as rapid share price increases or
decreases. We and our stockholders may be subjected to enhanced regulatory scrutiny due to the fact that our affiliates hold a majority
of our outstanding common stock and we have a limited number of shares of common stock that are publicly available for resale.
The Supreme Court of the United States has stated
that manipulative action is a term of art connoting intentional or willful conduct designed to deceive or defraud investors by controlling
or artificially affecting the price of securities. Often times, manipulation is associated by regulators with forces that upset the supply
and demand factors that would normally determine trading prices. Securities regulators have often cited thinly-traded markets, small numbers
of holders and awareness campaigns as components of their claims of price manipulation and other violations of law when combined with
manipulative trading, such as wash sales, matched orders or other manipulative trading timed to coincide with false or touting press releases.
Our activities or the activities of third parties, or the small number of potential sellers or small percentage of stock in our public
float, or determinations by purchasers or holders as to when or under what circumstances or at what prices they may be willing to buy
or sell stock, could artificially impact (or could be claimed by regulators to have affected) the normal supply and demand factors that
determine the price of our common stock.
If we are not able to comply with the applicable
continued listing requirements or standards of Nasdaq, Nasdaq could delist our securities.
Our common stock began trading on Nasdaq on August
3, 2021. However, our common stock may not continue to be listed on Nasdaq in the future. In order to maintain our listing on Nasdaq,
we must satisfy minimum financial and other continued listing requirements and standards, including those regarding director independence
and independent committee requirements, minimum stockholders’ equity, minimum share price, and certain corporate governance requirements.
We may not be able to comply with the applicable listing standards, and Nasdaq could delist our common stock as a result.
If our common stock is delisted from Nasdaq, we
may be unable to list our common stock on another national securities exchange. If our common stock is delisted by Nasdaq, our common
stock would likely trade on the OTCQB where an investor may find it more difficult to sell our shares or obtain accurate quotations as
to the market value of our common stock.
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