ITEM 1A. RISK FACTORS
Our business, financial condition or results of operations could be materially adversely affected by a number of risks if any of them actually occur, including those described below. This Report also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks we face as described below and elsewhere in this Report. These risks are not the only ones faced by us. Additional risks not known or that are deemed immaterial could also materially and adversely affect our financial condition, results of operations, business and prospects.
RISKS RELATED TO OUR COMPANY AND OUR BUSINESS
We have a limited operating history, a history of operating losses and expect to incur significant additional operating losses in the foreseeable future.
We have a limited operating history, Have incurred operating losses since inception, generate negative cash flow from operations, and expect to continue to incur losses in the foreseeable future. Exworth Union (“lending business line”), which is the Company’s sole revenue generating entity, was incorporated in March 2022, and acquired on December 22, 2022 and has a limited history of generating revenues in its industry. This financial condition of the consolidated entity also has persisted since the acquisition date of the lending business line. We expect to continue to incur operating losses as we develop and expand our business. The extent of future losses and the timing of achieving profitability and profit positive cash flow from operations remain uncertain.
. We continue to incur operating losses and have not generated positive cash flow from operations. The amounts of future losses and when, if ever, we will achieve profitability and positive cash flow from operations are uncertain.
Our former registered public accounting firm, Micheal T. Studer CPA, PCAOB registration has been revoked, and you cannot rely on his past financials.
On June 24, 2025, Michael Studer, CPA, our former auditor had his PCAOB registration permanently revoked after the accountant was found to be a repeat violator of U.S. auditing rules and standards. Michael Studer was permanently barred from being an associated person of a registered public accounting firm and his practice was stripped of its PCAOB registration. Therefore, you cannot rely on the financials prepared by Michael Studer, CPA as presented in our past filings.
Our registered public accounting firm has expressed substantial doubt about our Company ’ s ability to continue as a going concern in their audit report.
Our commercial operations have not generated sufficient revenues to enable profitability or positive cash flow. As a result, our registered public accounting firm in its audit report has expressed substantial doubt about our ability to continue as a going concern. Continued operations is dependent on our ability to achieve profitable operations and prior to such time, to raise sufficient funds to finance our activities. Our financial statements do not include any adjustments that might result from the uncertainty about our ability to continue its business.
We will need to secure financing in the future and our ability to secure future financing is uncertain.
We anticipate that we will continue to incur operating losses and will need to secure additional financing. We may seek additional funding through public or private financings, collaborative arrangements, debt or other arrangements with third parties. If adequate funds are not available, we may be required to delay, scale back or eliminate one or more segments of our business operations or curtail our business operations in their entirety. If we obtain funds by entering into arrangements with collaborative partners or others, we may be required to relinquish rights to certain of our products, services, or technologies that we would not otherwise relinquish. See “ Management ’ s Discussion and Analysis of Financial Condition and Results of Operations .”
We expect our Company ’ s business model to continue to evolve and our future business may different from our current business.
Our industry is characterized by experimentation, changing customer needs, and frequent introductions of new products and services. As FinTech industry and digital asset and blockchain technologies become more widely available, we expect the services and products associated with them to continue to rapidly evolve, and our future business may be different from our current business as the result of adopting of new information technology. Thus, in order to stay current with the industry, our business model may need to evolve as well. From time to time, we may materially modify aspects of our business model relating to our product and service offerings. The company plans to stay in the FINTECH business and is open to acquiring an operating company in the FINTECH space. However, we cannot offer any assurance that these or any other modifications will be successful or will not harm our business. If changes to our business model are not successful, or if we fail to make appropriate changes, it would have a material adverse effect on our business, prospects or operations and potentially on our ability to continue as a going concern.
Our Company is in an early stage of development and it may not be able to develop its business as anticipated.
We have generated minimal revenue from our lending business line and have a limited customer base. Our business prospects are difficult to predict because of our limited operating history, early stage of development, and unproven business strategy. In addition, demand for our loans is very difficult to predict and may vary widely based on many factors that are outside of our control. Although our management believes that our current business plan has potential, our Company may never attain profitable operations and our management may not succeed in realizing our business objectives due to a lack of technical, marketing, financial, and other resources or dependence on the success of one product or service, a unique distribution channel, or the effectiveness of a manager or management team or other reasons. If we are not able to execute our business plan as anticipated or modify our business model or products and services to accommodate changes in the market, we may not be able to achieve .
We are subject to the risks frequently experienced by early- stage companies .
The likelihood of our success must be considered in light of the risks frequently encountered by early-stage companies, especially those formed to develop and market new technologies in an uncertain and evolving regulatory landscape. These risks include our potential inability to:
establish and maintain markets for our services and products;
expand the number of loans we extend and the markets in which we are able to lend, which may limit the potential market for our products and increase concentration risk;
identify, attract, retain and motivate qualified personnel;
continue to develop and upgrade our technologies to keep pace with changes in technology and regulations and with the growth of markets using digital assets and blockchain technologies;
develop strategic relationships and partnerships;
maintain our reputation and build trust with customers;
scale up to larger operations on a consistent basis;
contract for or develop the internal skills needed to master larger operational scales; and
sufficiently fund the capital expenditures required to scale up from small initial operations to larger operations.
Our business activity is very limited and highly concentrated as an early-stage company. If we could not expand our borrower base or obtain sufficient funding, our business, operating results, and financial conditions could be adversely affected.
As an early-stage company, our business activity is very limited, and as of December 31, 2025 and 2024, we have zero outstanding loan as the only loan was fully repaid in July of 2024, if we cannot expand our borrower base or obtain sufficient funding, our revenue and business model may be adversely affected.
Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our product candidates.
Until such time, if ever, as we can generate substantial revenue, we will need to finance our cash needs through public or private equity or debt financings, third-party funding, marketing and distribution arrangements, as well as other collaborations, strategic alliances and licensing arrangements, or any combination of these approaches. We do not have any committed external source of funds. To the extent that we raise additional capital, if available, through the sale of equity or convertible debt securities, your ownership interest in our company may be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a stockholder. Debt and equity financings, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as redeeming our shares, making investments, incurring additional debt, making capital expenditures, declaring dividends or placing limitations on our ability to acquire, sell or license intellectual property rights.
If we raise additional capital through future collaborations, strategic alliances or third-party licensing arrangements, we may have to relinquish valuable rights to our intellectual property, future revenue streams, research programs or product candidates, or grant licenses on terms that may not be favorable to us, if at all. If we are unable to raise additional capital when needed, we may be required to delay, limit, reduce or explore other strategic options for our product candidate development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise develop and market ourselves.
If we fail to effectively manage our growth our business could suffer .
A period of significant expansion will be required to achieve the objectives set forth in our current business plan. This expansion will place a significant strain on our management, operational and financial resources. To manage the expected growth of our operations and personnel, we must establish appropriate and scalable operational and financial systems, procedures and controls, and we must continue to establish qualified finance, administrative and operations staff. As a reporting company, we and our management will have to implement internal controls to comply with our reporting requirements as well as government-mandated regulations. Our management may be unable to hire, train, retain, motivate and manage the necessary personnel or to identify, manage and exploit potential strategic relationships and market opportunities. Our failure to manage growth effectively could have a material and adverse effect on our business, results of operations and financial condition.
Our quarter-to-quarter performance may vary substantially.
We cannot accurately estimate future quarterly revenue and operating expenses based on historical, as the loans we extend are collateralized by digital assets and because we may use those digital assets as collateral for debt that funds our business, our quarterly results are significantly impacted by and can vary widely based on the underlying value of those digital assets. Our quarterly operating results may also vary significantly based on many other factors, including:
fluctuating demand for our products and services;
announcements or implementation by our competitors of new products;
amount and timing of our costs related to our marketing efforts or other initiatives;
timing and amounts relating to the expansion of our operations;
our ability to enter into, renegotiate or renew key agreements;
developing regulations relating to digital assets and blockchain technology; or
economic conditions specific to our industry, as well as general economic conditions.
If we cannot keep pace with rapid technological developments to provide new and innovative products and services and address the rapidly evolving market for the use of our products and services, our business may fail.
Our industry has been characterized by many rapid, significant, and disruptive products and services in recent years. We cannot predict the effects of technological changes on our business. We expect that new services and technologies applicable to our industry and new market entrants, such as decentralized finance, or DeFi, will continue to emerge and may be superior to, or render obsolete, the technologies we currently use or are developing in our products and services. Developing and incorporating new technologies into our products and services may require substantial expenditures, take considerable time, and ultimately may not be successful. In addition, our ability to adopt new products and services and develop new technologies may be inhibited by industry-wide standards, payment networks, changes to laws and regulations, resistance to change from consumers or merchants, third-party intellectual property rights, or other factors beyond our control. Our success will depend on our ability to develop and incorporate new technologies, address the challenges posed by the rapidly evolving market for block-chain based lending transactions through our platforms and adapt to technological changes and evolving industry standards. If we are to do so in a timely or cost- manner, we may not operations and our business could be .
Substantial and increasingly intense competition within our industry may harm our business.
The lending and payments industry is rapidly changing, highly innovative and subject to substantial regulatory oversight. We expect competition within our industry will continue to be intense as existing and new competitors introduce new products or enhance existing products. We compete against a number of companies operating both within the United States and abroad, and both those that focus on traditional financial services and those that focus on crypto-based services. Alternative lending platforms utilizing digital assets, such as decentralized finance, or DeFi, may be established that compete with or are more widely used than our Platform. It is possible that alternative platforms could be established that utilize the same or similar proprietary code and protocol underlying our planned Platform and attempt to facilitate services that are materially similar to our Platform.
A significant source of competition to date has been from companies, including those located outside the United States, subject to significantly less stringent regulatory and compliance requirements in their local jurisdictions. Their business models rely on being unregulated or only regulated in a small number of lower compliance jurisdictions, while also offering their products in highly regulated jurisdictions, including the United States, without necessarily complying with the relevant regulatory requirements in such jurisdictions. In addition, potential customers may seek to interact with these companies by claiming to be in a jurisdiction or establishing an entity outside the jurisdiction in which they actually reside.
To date, due to limited enforcement by U.S. and foreign regulators, many of these competitors have been able to operate while offering products and services to consumers, including in the United States and other highly regulated jurisdictions, without complying with the relevant licensing and other requirements in these jurisdictions, and seemingly without penalty. Due to our commitment to legal and regulatory compliance, we may not be able to effectively compete against unregulated or less regulated competitors, which may adversely impact our business, financial condition, and results of operations. We will have to expend significant managerial, operational, and compliance costs to meet the legal and regulatory requirements applicable to us in the United States and other jurisdictions in which we operate, and expect to continue to incur significant costs to comply with these requirements, which these unregulated or less regulated competitors have not had to incur.
Further, as digital assets become more widely adopted, more traditional financial institutions may begin to directly provide loans backed by digital assets. Such traditional institutions would have better access to capital, a larger client base, and greater industry connections and resources. In addition, some exchanges have begun offering potentially competing products, including Coinbase, one of the largest crypto exchanges, which in 2020 began offering short term Bitcoin-backed loans.
These companies have greater financial resources and substantially larger customer bases than we do, which may provide them with significant competitive advantages. These companies may devote greater resources than we do to the development, promotion and sale of products and services, and they may be more effective in introducing innovative, less expensive products and services that hinder our growth. Competing services that have partnered with or are tied to established banks and other financial institutions, may offer greater liquidity and create greater consumer confidence in the safety and efficiency of their services than we do. We expect that there will be continued mergers and acquisitions by or among these companies, which will lead to even larger competitors with more resources.
Our ability to further develop our business depends on our ability to build a strong and trusted brand.
We cannot assure you that we will be able to successfully build our reputation or brand. Building, maintaining, protecting and enhancing our reputation are critical to expanding our customer base. Harm to our brand can arise from many sources, including failure by us or our partners to satisfy expectations of service and quality; inadequate protection of sensitive information; compliance failures and claims; litigation and other claims; employee misconduct; and misconduct by our partners, service providers or other counterparties. If we do not successfully maintain a strong and trusted brand, our business could be , which could affect our financial condition.
Failure to attract customers could adversely affect our revenues.
As we expand our services, we will need consumer and commercial borrowers to join our Platform and to continue to use our Platform. The attractiveness of our loans and the products we may offer through our Platform increases as the number of consumer and commercial borrowers grows because of the resulting reduced risk and lower cost. An increased participant pool generates competitive interest rate dynamics and data, which is used to improve the effectiveness of our lending risk models. We may not be able to get consumer and commercial borrowers to join, or if we do, we may experience attrition resulting from several factors, including transfers of customer accounts to our competitors, and account closures that we may initiate due to fraud or AML concerns. We cannot predict the level of acceptance or attrition in the future.
We have no recourse under the loans to any specific assets of borrowers other than the digital assets of the borrowers designated as collateral for the loans.
The loans we make are secured solely by designated digital assets of the borrowers. We have no security interest in any other assets of the borrowers. If a borrower breaches its payment obligations under a loan, the value of the collateral may be insufficient to satisfy the full amount of the borrower’s outstanding payment obligations under the loan. At one time we were one of the few public companies offering this service, now it is commonplace and offered by companies with much larger resources. In addition, digital assets are subject to loss or theft due to cyber-attacks, and if collateral is stolen, we would have no recourse against a borrower for its payment obligations under its loan.
Digital assets of borrowers securing the loans we make may be rehypothecated or pledged as collateral in third party transactions, which may adversely impact our liquidity and results of financial operations.
Digital assets of borrowers securing the loans we hold may be rehypothecated, repledged, sold, or otherwise transferred or used at our risk (the “Repledged Collateral”) in transactions, including credit facilities or derivatives contracts, we enter into with third parties (each, a “Counterparty”) or at the risk of our Counterparties in transactions whereby they obtain capital. In the event we breach our contractual obligations or one of our Counterparties were to breach its obligation in respect of such transactions or the occurrence of certain conditions, the Counterparty may foreclose on the Repledged Collateral or otherwise require us to liquidate or transfer it or the Counterparty may forfeit to its lender its right to the Repledged Collateral. Additionally, to the extent that any Repledged Collateral is required to be transferred or made accessible to a third party in connection with the pledge, such collateral may be vulnerable to loss or theft due to cyber-attacks affecting such third parties or other forms of malfeasance.
Upon the occurrence of any of the foregoing, we may be required to purchase digital assets to replace the Repledged Collateral in order to comply with our obligations to those borrowers whose digital assets constituted the Repledged Collateral. As the price and availability of digital assets are subject to fluctuations, such purchases may subject us to substantial and unpredictable expenses.
We may attempt to mitigate the risks described above relating to the Repledged Collateral through various means, including continuous monitoring and testing of market conditions, the implementation of technology security protocols, and the maintenance of specified capital ratios to ensure its continued solvency. However, there is no assurance that our attempts to mitigate the risks described above will be successful. If we are not successful in 14 mitigating the risks relating to the Repledged Collateral, we may be unable to remit or be delayed in remitting amounts due to the Platform Counterparty.
We use third-party services in connection with our business, and any disruption to these services could result in disruption to our business, negative publicity and a slowdown in the growth of our users, materially and adversely affecting our business, financial condition and results of operations.
Our business depends on services provided by, and relationships with, various third parties, including digital assets custody providers, exchanges, banks, cloud hosting, server operators, broadband providers, and customer service vendors among others. The failure of any of these parties to perform in compliance with our agreements may negatively impact our business. Additionally, if such third parties increase their prices, or discontinue their relationships with us, we could suffer service interruptions, reduced revenues or increased costs, any of which may have a material adverse effect on our business, financial condition and results of operations.
Any acquisitions, strategic partnerships or joint ventures that we make or enter into could disrupt our business and harm our financial condition.
Acquisitions, strategic partnerships and joint ventures are part of our growth strategy. We may not be successful in identifying acquisition, strategic partnership, and joint venture targets. In addition, we may not be able to successfully finance or integrate, or realize expected benefits from, any businesses, services, or technologies that we acquire or with which we form a strategic partnership or joint venture, and we may lose merchants and customers as a result of any acquisition, strategic partnership, or joint venture. Furthermore, the integration of any acquisition, strategic partnership, or joint venture may divert management’s time and resources from our core business and disrupt our operations.
Our failure to manage our customer funds properly could harm our business.
We expect to hold digital assets belonging to our customers or deposit them with third party custody providers or repledge and rehypothecate them pursuant to a third party facility or transaction. Our ability to manage and account accurately for the assets underlying our customer funds and comply with applicable regulatory requirements requires a high level of internal controls. In addition, we are dependent on the operations, liquidity, and financial condition of third-party custody providers for the proper maintenance, use, and safekeeping of our customers’ assets. As our business continues to grow and we expand our product offerings, we must continue to strengthen our associated internal controls. Any failure to maintain the necessary controls or to manage our customer funds and the assets underlying our customer funds accurately and in compliance with applicable regulatory requirements could result in reputational harm, lead customers to discontinue or reduce their use of our products and result in significant penalties and fines, which could materially harm our business.
The costs and effects of future litigation, investigations or similar matters, or adverse facts and developments related thereto, could materially affect our business, financial position and results of operations.
We may be subject to legal, arbitration and administrative investigations, inspections and proceedings arising in the ordinary course of our business or from extraordinary corporate, tax or regulatory events, involving our clients, suppliers, customers, as well as competition, government agencies, tax and environmental authorities, particularly with respect to civil, tax and labor claims. Tax investigations could include investigations into potential tax violations committed by our customers through the use of digital assets. Lawsuits and other legal proceedings can involve substantial costs, including the costs associated with investigation, litigation and possible settlement, judgment, penalty or fine, and could harm our reputation regardless of merit or eventual outcome. Our insurance may not cover all claims that may be asserted against us, and any claims asserted against us. As a smaller company, the collective costs of proceedings or can be significant and could include judgments or settlements that exceed our insurance policies or indemnity rights or reimbursement of attorneys’ fees, costs and expenses if we do not prevail, all of which would represent a drain on our cash resources, as well as require an amount of management’s time and attention. Moreover, an ruling in respect of certain or could have a material effect on our results of operation and financial condition.
Changes in tax laws and unanticipated tax liabilities could adversely affect our effective income tax rate and profitability.
We are subject to income taxes in the United States and other foreign jurisdictions. Due to the new and evolving nature of crypto assets and the absence of comprehensive legal guidance with respect to crypto asset products and transactions, many significant aspects of U.S. federal income and foreign tax treatment of transactions involving crypto assets are uncertain Our effective income tax rate could be adversely affected in the future by a number of other factors, including changes in the mix of earnings in countries with differing statutory tax rates or changes in the valuation of deferred tax assets and liabilities. Any alteration of existing IRS and foreign tax authority positions or additional guidance regarding crypto asset products and transactions could result in adverse tax consequences for holders of crypto assets and could have an adverse effect on the value of crypto assets and of our business. The uncertainty regarding tax treatment of crypto asset transactions impacts our customers, and could impact our business, both domestically and abroad.
Changes in applicable tax regulations or unanticipated tax-related liabilities and costs could have a material adverse effect on our ability to implement our business plans.
We may be subject to obligations to collect and remit sales tax and other taxes, and we may be subject to tax liability for past sales, which could harm our business.
State, local and foreign jurisdictions have differing rules and regulations governing sales, use, value added and other taxes, and these rules and regulations are subject to varying interpretations that change over time. In particular, the applicability of such taxes to digital assets in various jurisdictions is unclear. Further, these jurisdictions’ rules regarding tax nexus vary significantly and are complex. As such, we could face possible tax assessments and audits, or increased costs associated with compliance. A successful assertion, by any taxing authority, that we should be collecting sales, use, value added or other taxes in jurisdictions where we have not historically done so and do not accrue for such taxes could result in tax liabilities and related penalties for past sales, discourage customers from purchasing our products or otherwise harm our business.
Our principal stockholders owns a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.
Our principal stockholders beneficially owns approximately 86% of our common stock assuming no exercise of outstanding options. This stockholder is able to control matters requiring stockholder approval. For example, it is able to control elections of directors, amendments of our organizational documents or approval of any merger, sale of assets or other major corporate transactions. This concentration of ownership control may delay, discourage or prevent a change of control, including unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders, entrench our management and board of directors or delay or prevent a merger, consolidation, takeover or other business combination involving us that other stockholders may desire. The interests of this stockholder may not always coincide with your interests, or the interests of other stockholders and it may act in a manner that advances its best interests and not necessarily those of other stockholders.
Our management team has limited experience managing a reporting company and regulatory compliance may divert its attention from the day-to-day management of our business.
The individuals who now constitute our management team have limited experience managing a publicly traded company and limited experience complying with the increasingly complex laws pertaining to reporting companies. Our management team may not successfully or efficiently manage a reporting company that is subject to significant regulatory oversight and reporting obligations under the federal securities laws. In particular, these new obligations will require substantial attention from our senior management and could divert their attention away from the day-to-day management of our business.
Members of our Board of Directors do not have significant experience as directors of a growing internet-based financial services platform.
Members of our Board of Directors have limited experience as directors overseeing the operation of an internet-based financial services platform that is subject to complex regulations and laws. Our Board of Directors may not successfully oversee the management of our operations and growth, risks applicable to our business or our compliance with the complex regulatory environment in which we operate, which could adversely affect our ability to successfully operate and grow our business or increase the risk of our noncompliance with laws and regulations applicable to our business.
The liability of our board of directors is limited.
The corporate law of the State of Nevada limits the liability of our directors and generally provides that directors shall have no personal liability to the Company or its stockholders for monetary damages for breaches of their fiduciary duties as directors, subject to certain limited exceptions.
We will incur increased costs as a result of operating as a reporting company, and our management will be required to devote substantial time to new compliance initiatives.
We will incur certain costs of compliance with applicable SEC reporting rules and regulations including, but not limited to attorneys’ fees, accounting and auditing fees, other professional fees and Sarbanes-Oxley Act of 2002 (“SOX”) compliance costs.
RISKS RELATED TO OUR INFORMATION TECHNOLOGY
Interruption or failure of our information technology and communications systems could impair our operations, which could damage our reputation and harm our results of operations.
Our success and ability to process transactions and provide high quality customer service depend on the efficient and uninterrupted operation of our computer server and information technology systems. The failure of our computer systems and information technology to operate effectively or to integrate with other systems, performance inadequacy, or breach in security may cause interruptions in our operations as well as reputational harm. Any failures, problems, or security breaches may mean that fewer customers are willing to borrow money from us. Factors that could occur and significantly disrupt our operations include system failures and outages caused by fire, floods, earthquakes, power loss, telecommunications failure , terrorist attacks and similar events, software , computer viruses, physical or electronic -ins, and of our customers’ personal information such as passwords or other personal information.
Unauthorized disclosure, destruction or modification of data, including personal information, through cybersecurity breaches, computer viruses or otherwise or disruption of our services could expose us to liability, protracted and costly litigation and damage our reputation.
Our business involves the collection, storage, processing, and transmission of customers’ personal data, including names, addresses, identification numbers and/or bank account numbers. An increasing number of organizations, including large merchants and businesses, other large technology companies, financial institutions and government institutions, have disclosed breaches of their information technology systems, some of which involved sophisticated and highly targeted attacks, including on portions of their websites or infrastructure. We could be subject to breaches of security by hackers. Breaches may occur by human error, fraud, or malice on the part of employees or third parties or may result from accidental technological failure. Concerns about security are increased when we transmit information. Electronic transmissions can be subject to attack, interception or loss. Also, computer viruses and malware can be distributed and spread rapidly over the internet and could infiltrate our systems or those of our associated participants, which can impact the confidentiality, and availability of information and the and availability of our products, services and systems, among other effects. of service, ransomware or other attacks could be launched us for a variety of purposes, including with our services or creating a for other activities. These types of actions and attacks could our delivery of products and services or make them , which could our reputation, us to incur significant expenses in remediating the resulting impacts, us to liability, subject us to lawsuits, or sanctions, our management, or increase our costs of doing business.
As part of our business operations, we share information with third parties, including commercial partners, third-party service providers and other agents, who collect, process, store, and transmit sensitive data. Given the rules established by the applicable regulations, we may be held responsible for any failure or cybersecurity breaches attributed to these third parties insofar as they relate to information we share with them. The loss, destruction, or unauthorized modification of data of users of our services by us or our third-party service providers and other agents or through systems we provide could result in significant fines, sanctions, and proceedings or actions against us by governmental bodies or third parties, which could have a material adverse effect on our business, financial condition, and results of operations. Any such proceeding or action, and any related indemnification obligation, could damage our reputation, force us to incur significant expenses in defense of these proceedings, our management, increase our costs of doing business, or result in the imposition of financial liability.
Our protective measures may not prevent unauthorized access or use of sensitive data. A breach of our system or that of one of our associated participants may subject us to material losses or liability, including payment scheme fines, assessments and claims for unauthorized purchases with misappropriated credit, debit or card information, impersonation, or other similar fraud claims. A misuse of such data or a cybersecurity breach could harm our reputation and deter merchants from using electronic payments generally and our products and services specifically, thus reducing our revenue. In addition, any such misuse or breach could cause us to incur costs to correct the or , us to liability, increase our risk of regulatory , subject us to lawsuits, result in the imposition of material and under state and federal laws or regulations or by the payment systems. While we maintain insurance policies specifically for cyber-attacks, a significant cybersecurity of our systems or communications could result in payment systems prohibiting us from processing transactions on their systems, which could materially our ability to conduct business.
Cybersecurity incidents are increasing in frequency and evolving in nature and include, but are not limited to, installation of malicious software, unauthorized access to data and other electronic security breaches that lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and the corruption of data. Given the unpredictability of the timing, nature and scope of information technology disruptions, there can be no assurance that the procedures and controls we employ will be sufficient to prevent security breaches from occurring and we could be subject to manipulation or improper use of our systems and networks or financial losses from remedial actions, any of which could have a material adverse effect on our business, financial condition and results of operations.
We have only a limited ability to protect our intellectual property rights, which are important to our success.
The protection of our intellectual property, including our trademarks, any future patents, copyrights, domain names, trade dress, software licensed by us for use in our Platform and trade secrets, is critical to our success. We seek to protect our intellectual property rights by relying on applicable laws and regulations, as well as a variety of administrative procedures. We also rely on contractual restrictions to protect our proprietary rights when offering or procuring products and services, including confidentiality agreements with parties with whom we conduct business.
The contractual provisions we enter into with employees, consultants, vendors, and customers may not prevent unauthorized use or disclosure of our proprietary technology or intellectual property rights and may not provide an adequate remedy in the event of unauthorized use or disclosure of our proprietary technology or intellectual property rights. Moreover, policing unauthorized use of our technologies, services and intellectual property is difficult, expensive and time consuming, particularly in foreign countries where the laws may not be as protective of intellectual property rights as those in the United States, and where mechanisms for enforcement of intellectual property rights may be weak. Any failure to protect or enforce our intellectual property rights adequately, or significant costs incurred in doing so, could materially harm our business.
As the number of products in the software industry increases and the functionalities of these products further overlap, and as we acquire technology through acquisitions or licenses, we may become increasingly subject to infringement claims, including patent, copyright, and trademark infringement claims. We may be required to enter into litigation to determine the validity and scope of the patents or other intellectual property rights of others. The ultimate outcome of any allegation is uncertain and, regardless of the outcome, any such claim, with or without merit, may be time-consuming, result in costly litigation, divert management’s time and attention from our business, require us to stop selling, or redesign our products, or require us to pay substantial amounts to satisfy judgments or settle claims or lawsuits or to pay substantial royalty or licensing fees, or to satisfy indemnification obligations that we have with some of our customers. Our to obtain necessary license or other rights, or or arising out of intellectual property matters, may materially our business.
Our ability to obtain insurance to protect against losses affecting our business, including fraud or theft involving digital assets used as collateral for loans we extend, is limited and may not cover losses we experience.
We have very limited insurance coverage available to protect against losses that we may incur, including losses resulting from fraud or theft or loss of digital assets used as collateral for loans. When we hold digital assets with third-party custody service providers we may participate in their insurance coverage, such as cyber and technology errors and omissions. Such insurance coverage may be insufficient to compensate us for losses we incur in connection with our operations. If we are unable to obtain insurance to cover such losses, we would be liable for the full cost associated with them. Further, even if insurance coverage is or becomes available to us, the coverage may not be sufficient to cover the full amount of losses we incur, which could materially harm our business and financial results.
RISKS RELATED TO REGULATION OF OUR INDUSTRY
Our business is subject to extensive government regulation and oversight as well as complex and overlapping rules that frequently change.
Our business and the products we intend to offer are subject to laws, regulations, policies and legal interpretations in the United States and the markets in which we operate, including, but not limited to, those governing credit and lending transactions, collections, securities and commodities transactions, cross-border and domestic money transmission, foreign exchange, privacy, data protection, cybersecurity, consumer protection, digital assets, economic and trade sanctions, anti-money laundering, and counter-terrorist financing. The legal and regulatory requirements which we are subject to involve extensive, complex and frequently changing. These laws and regulations affect our business in many ways, and include regulations relating to:
the amount we may charge in interest rates and fees;
the terms of our loans (such as maximum and minimum durations), repayment requirements and limitations, maximum loan amounts, refinances and extensions and reporting;
underwriting requirements;
collection and servicing activity, including initiation of payments from consumer accounts;
licensing, reporting and document retention;
unfair, deceptive and abusive acts and practices;
non-discrimination requirements;
disclosures, notices, advertising and marketing;
loans to members of the military and their dependents;
requirements governing electronic payments, transactions, signatures and disclosures;
privacy and use of personally identifiable information and consumer credit reports;
anti-money laundering and counter-terrorist financing requirements, including currency and suspicious transaction recording and reporting; and
posting of fees and charges.
As we expand into new markets, we must comply with the laws of countries or markets in which we operate. There can be no assurance that our employees, contractors, or agents will not violate such laws and regulations. Any such violation could have a material adverse effect on our Company.
We may extend loans to borrowers located outside of the United States, including in emerging markets, which would subject us to risks and additional laws and regulations.
We currently are lending to borrowers located outside the United States including countries in emerging markets. Developing countries are subject to economic, political and other uncertainties, including changes in monetary, exchange control, trade policies and environmental conditions which may affect their respective overall business environments and, in turn, our ability to originate loans and the ability of borrowers to repay loans. The lending industry in many countries is highly competitive and susceptible to changing individual and entity preferences. Additionally, in emerging markets, the repayment of loans will be subject to certain risks not typically associated with investment in developed economies or markets, such as greater political, legal, regulatory, and economic risk.
If we fail to adhere to applicable laws and regulations, we could be subject to fines, civil penalties and other relief that could adversely affect our business and results of operations.
The governmental entities that regulate our business have the ability to sanction us and obtain redress for violations of these regulations, either directly or through civil actions, in a variety of different ways, including:
ordering remedial or corrective actions, including changes to compliance systems, product terms, and other business operations;
imposing fines or other monetary penalties, including for substantial amounts;
ordering the payment of restitution, damages or other amounts to customers, including multiples of the amounts charged;
disgorgement of revenue or profit from certain activities;
imposing cease and desist orders, including orders requiring affirmative relief, targeting specific business activities;
subjecting our operations to additional regulatory examinations during a remediation period;
revocation of licenses to operate in a particular jurisdiction; and
other consequences.
Many of the government entities that regulate us have the authority to examine us on a regular basis to determine whether we are complying with applicable laws and regulations and to identify and sanction non-compliance. These examinations and audits increase the likelihood that any failure to comply (or perceived failure to comply) with applicable laws and regulations will be identified and sanctioned, which may include suspension, imposition of fines or revocation of required licenses.
The regulations to which we are subject change from time to time, and future changes, including some that have been proposed and those that subject us to regulation as a bank or other financial institution in non-U.S. jurisdictions, could restrict us in ways that adversely affect our business and results of operations.
The laws and regulations to which we are subject change from time to time, and there has been a general increase in the volume and burden of laws and regulations that apply to us in the jurisdictions in which we operate at all levels of government. We also may be subject to licensing requirements and related compliance obligations under the money transmitter laws of the states in which we operate. For example, in June 2015, the New York State Department of Financial Services (“DFS”) issued its virtual currency regulation, 23 NYCRR Part 200, under the New York Financial Services Law. Under the regulation, businesses are not permitted, in New York or with a New York resident, to receive digital assets as payment, custody digital assets, buy or sell digital assets, or issue digital assets, among other things, without a license issued by the DFS. In addition, money transmission laws vary from state to state, with some states applying money transmission laws to digital assets, in potentially different ways, and others not applying such laws to digital assets. Failure to comply with any such applicable requirements could result in administrative, civil or criminal penalties or other enforcement actions, as well as reputational harm. In addition, we may decide not to, or may not be able to, operate in certain jurisdictions as a result of regulatory or licensing requirements.
Financial services and banking laws and regulations are subject to ongoing review and revision, including changes in response to global regulatory trends. State, federal and foreign governments have been actively considering new banking laws and regulations, and revising existing laws and regulations, particularly in relation to the regulation of non-bank financial institutions, interest rate regulations, capital adequacy and accounting standards. We expect that the interest in increasing the regulation of our industry will continue and that we will be subject to varying rules depending on the state or the country. It is possible that future laws and regulations will be enacted and will adversely affect our pricing, product mix, compliance costs or other business activities in a way that is detrimental to our results of operations. Further, we believe increasingly strict legal and regulatory requirements and additional regulatory investigations and enforcement, any of which could occur or intensify, may result in changes to our business, as well as increased costs, and supervision and examination for ourselves and our agents and service providers. Moreover, new laws, regulations, or interpretations may result in additional litigation, regulatory investigations, and enforcement or other actions, including preventing or us from offering certain products or services offered by our competitors or could impact how we offer such products and services.
Any legislative or regulatory action, including the initiation of a proceeding relating to one or more allegations or findings of any violations of laws, and any required changes in our operations resulting from such legislation and regulations could result in significant loss of revenue, limit our ability to pursue certain business opportunities, increase the level of reserves we are required to maintain or capital adequacy requirements, affect the value of assets that we hold, require us to increase interest rates or other fees and, therefore, reduce demand for our products, impose additional costs or otherwise adversely affect our business. Such actions and proceedings may also impair our ability to collect payments on loans, originate additional loans or result in the requirement that we pay damages and/or cancel the balance or other amounts owing under loans associated with such actions and proceedings.
Judicial decisions could potentially render our arbitration agreements unenforceable.
We include pre-dispute arbitration provisions in our loan agreements. These provisions are designed to allow us to resolve most customer disputes through individual arbitration rather than in court. Our arbitration provisions explicitly provide that all arbitrations will be conducted on an individual and not on a class basis. Thus, our arbitration agreements, if enforced, have the effect of shielding us from class action liability. There is always a risk, however, that a court would deny arbitration based upon facts presented by one or more consumers opposing the arbitration or that laws could change that might limit or restrict our ability to enforce the arbitration provisions in our loan agreements, in which case we would be forced to litigate disputes and may be subject to class action liability. In addition, we may be subject to public injunctive relief claims by borrowers in California, which have the potential to broadly affect a company’s business operations, much like a class-wide injunction.
Our use of pre-dispute arbitration provisions will remain dependent on whether courts continue to enforce these provisions. If our arbitration agreements were to become unenforceable for some reason, we could experience an increase in our costs to litigate and settle customer disputes and our exposure to potentially damaging class action lawsuits, with a potential material adverse effect on our business and results of operations.
Class action and administrative proceedings directed towards our industry or us may have a material adverse impact on our results of operations, cash flows and financial condition.
We may be involved in proceedings, lawsuits or other claims. Other companies in our industry have been subject to regulatory proceedings, class action lawsuits and other litigation regarding the offering of consumer loans. We could be adversely affected by interpretations of state, federal, foreign and provincial laws in those legal and regulatory proceedings, even if we are not a party to those proceedings. We anticipate that lawsuits and enforcement proceedings involving our industry, and potentially involving us, will continue to be brought in the future.
We may incur significant expenses associated with the defense or settlement of lawsuits, the potential exposure for which is uncertain. The resolution of legal or regulatory proceedings, whether by judgment or settlement, could force us to refund fees and interest collected, refund the principal amount of advances, pay damages or other monetary penalties or modify or terminate our operations in particular local, state, provincial or federal jurisdictions. The defense of such legal proceedings, even if successful, requires significant time and attention from our senior officers and other management personnel that would otherwise be spent on other aspects of our business, and requires the expenditure of substantial amounts for legal fees and other related costs. Additionally, an adverse judgment or settlement in a lawsuit or regulatory proceeding could in certain circumstances provide a basis for the termination, non-renewal, suspension or denial of a license required for us to do business in a particular jurisdiction (or multiple jurisdictions). A sufficiently of law in one jurisdiction or with respect to one product could have licensing consequences in other jurisdictions and/or with respect to other products. Thus, legal and enforcement proceedings could have a material effect on our business, future results of operations, financial condition and ability to service our debt obligations.
We are subject to anti-corruption, anti-bribery and anti-money laundering laws and regulations.
We are subject to various anti-corruption, anti-bribery and anti-money laundering laws and regulations that prohibit, among other things, our involvement in improper payments to public officials for the purpose of obtaining advantages or in transferring the proceeds of criminal activities. We continue to review and update programs designed to comply with legal and regulatory requirements. However, any errors, failures, or delays in complying with anti-corruption, anti-bribery and anti-money laundering laws and regulations could result in significant criminal and civil lawsuits, penalties, forfeiture of significant assets, or other enforcement actions, as well as reputational .
The main laws in the U.S. regarding anti-money laundering are the Bank Secrecy Act and the USA Patriot Act of 2001. These laws require financial institutions to maintain an anti-money laundering compliance program covering certain of our business activities. The program must include: (1) the development of internal policies, procedures and controls; (2) designation of a compliance officer; (3) an ongoing employee training program; and (4) an independent audit function to test the program. If we are not in compliance with U.S. or other anti-money laundering laws, we may be subject to criminal and civil penalties and other remedial measures, which could have an adverse effect on our business, results of operations, financial condition and cash flows. Any investigation of any potential violations of anti-money laundering laws by U.S. or international authorities could harm our reputation and could have a material effect on our business, prospects, results of operations, financial condition and cash flows.
Regulators may increase enforcement of these obligations, which may require us to further revise or expand our compliance program, including the procedures we use to verify the identity of our customers and to monitor our transactions. Regulators regularly reexamine the transaction volume thresholds at which we must obtain and keep applicable records or verify identities of customers and any change in such thresholds could result in greater costs for compliance. Costs associated with fines or enforcement actions, changes in compliance requirements, or limitations on our ability to grow could harm our business.
GENERAL RISKS RELATED TO DIGITAL ASSETS
The prices of digital assets are extremely volatile.
Fluctuations in the price of digital assets could significantly affect the value of the digital assets that we hold, including treasury assets and collateral securing loans. The price of digital assets is affected by many factors beyond our control. In addition, a decrease in the price of one digital asset may cause volatility in the entire digital asset industry.
The regulatory regime governing digital assets is still developing, and regulatory changes or actions may alter the nature of an investment in digital assets or restrict the use of digital assets in a manner that adversely affects our business plans.
The regulation of digital assets and digital asset exchanges are currently under-developed and likely to rapidly evolve and vary significantly among U.S. and non-U.S. jurisdictions and are subject to significant uncertainty. As digital assets have grown in both popularity and market size, governments around the world have reacted differently to digital assets, with certain governments deeming them illegal while others have allowed their use and trade. Various legislative and executive bodies in the United States, and other countries, are, or are considering, enacting laws, regulations, guidance, or other actions, which could adversely impact our Company and the value of the digital assets we hold as collateral. Our failure to comply with any laws, rules and regulations, some of which may not exist yet or are subject to interpretation and may be subject to change, could result in a variety of adverse consequences, including criminal and civil penalties and fines against our Company.
The development and acceptance of transactions in digital assets are subject to a variety of factors that are difficult to evaluate.
The use of digital assets to buy and sell goods and services and complete transactions is part of a new and rapidly evolving industry, and the continued growth of this industry and the continued and growing use of digital assets is highly uncertain. If the development or acceptance of digital assets were to slow or stop, it could have a material adverse effect on our business. Factors that could affect the expansion or contraction of the use of digital assets and our related business plans, include, but are not limited to:
continued worldwide growth in the adoption and use of digital assets;
governmental and quasi-governmental regulation of digital assets and their use, or restrictions on or regulation of access to and operation of digital asset systems;
the maintenance and development of software and technology on which many digital assets are dependent;
the availability and popularity of other forms or methods of buying and selling goods and services, including new means of using fiat currencies;
general economic conditions and the regulatory environment relating to digital assets (whether in the U.S. or elsewhere); and
negative consumer sentiment and perception of digital assets in general.
We cannot predict with certainty any outcome regarding use of digital assets, and any of the above factors may have a material adverse effect on our business.
Digital assets, might be used for illegal or improper purposes, which could expose our Company to liability and harm its business.
Digital assets, including the digital assets we hold as treasury assets and as collateral for our loans, may be susceptible to potentially illegal or improper uses as criminals are using increasingly sophisticated methods to engage in illegal activities involving internet services, such as money laundering, terrorist financing, drug trafficking, and other online misconduct. Borrowers may also try to access a loan for illegal or improper purposes or try to provide stolen digital assets as collateral for a loan. To the extent any of these illegal or improper activities occur outside the United States, our remedies may be significantly limited or nonexistent. Despite measures we intend to take to detect and lessen the risk of this kind of conduct, we cannot assure you that these measures will stop all or uses of digital assets we hold. The value of our business could be if borrowers use funds obtained from us for or purposes. It may also our ability to on digital assets we hold as collateral in the event of a loan or margin call under a loan.
Incorrect or fraudulent digital asset transactions may be irreversible.
Digital asset transactions are not, from an administrative perspective, reversible without the consent and active participation of the recipient of the transaction. Once a transaction has been verified and recorded in a block that is added to the blockchain, an incorrect transfer of a digital assets generally will not be reversible, and we may not be capable of seeking compensation for any such transfer or theft. Such events on a large enough scale would have a material adverse effect on our operations.
Digital assets are subject to risks of uninsured losses.
Unlike bank accounts or accounts at some other financial institutions, digital assets are uninsured unless you obtain private insurance. Thus, in the event of loss or loss of utility value, there is no public insurer, such as the Federal Deposit Insurance Corporation or SIPC and we have not arranged private insurance, to offer recourse to holders with respect to digital assets we hold as collateral. Therefore, any lending transactions are made at the risk of the borrower.
The use of digital asset derivatives can introduce additional market and regulatory risk.
We may use instruments referred to as derivatives, which are financial instruments that derive their value from one or more assets, in our case cryptocurrencies including Bitcoin. We may use derivatives for speculative purposes to seek to enhance returns. The use of a derivative is speculative if we are primarily seeking to achieve gains, rather than offset the risk of other positions. To the extent we invest in a derivative for speculative purposes, we will be fully exposed to the risks of loss of that derivative, which may sometimes be greater than the derivative’s cost, and the potential for loss in certain cases may be unlimited.
Digital asset derivatives are a developing market and may be traded on unregulated or offshore exchanges. Regulatory changes or actions may alter the nature of an investment in digital asset derivatives or restrict the use of digital asset derivatives or the operations of the exchanges on which digital asset derivatives trade in a manner that adversely affects the price of digital asset derivatives, which could adversely impact the Company.
The theft, loss, or destruction of private keys required to access any crypto assets held in our custody for our customers may be irreversible. If our custodian or our own lender is unable to access the private keys or if we experience a hack or other data loss relating to our ability to access any collateral assets or repledged collateral assets, it could cause regulatory scrutiny, reputational harm, and other losses.
Crypto assets are generally controllable only by the possessor of the unique private key relating to the digital wallet in which the crypto assets are held. While blockchain protocols typically require public addresses to be published when used in a transaction, private keys must be safeguarded and kept private to prevent a third party from accessing the crypto assets held in such a wallet. To the extent that any of the private keys relating to our custodian containing crypto assets held for our customers is lost, destroyed, or otherwise compromised or unavailable, and no backup of the private key is accessible, we will be unable to access the crypto assets held in such custody.
Crypto assets and blockchain technologies have been, and may in the future be, subject to security breaches, hacking, or other malicious activities. Any loss of private keys relating to, or hack or other compromise of, digital wallets used to store our customers’ crypto assets could adversely affect our customers’ ability to access their crypto assets, require us to reimburse our customers for their losses, and subject us to significant financial losses in addition to losing customer trust in us and our products. As such, any loss of private keys due to a hack, employee or service provider misconduct or error, or other compromise by third parties could hurt our brand and reputation, result in significant losses, and adversely impact our business.
