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Item 1A. Risk Factors

2023-03-09 compared with 2022-03-01 · 349 added, 226 removed, 601 unchanged (49% of the section changed)

Summary of Risk Factors

Our business is subject to a number of risks and uncertainties that are summarized below.

The below summary of risk factors should be read together with the more detailed discussion of risks set forth following this section.

Risks Relating to Our Business

• our proprietary brand offerings expose us to various risks;

• our ability to keep pace with technological advances;

• competitive industry pressures;

• long-lived assets and inventories represent a significant portion of our total assets and we may be required to record impairments or write-downs in future periods;

• if we fail to manage our inventory effectively, our results of operations, financial condition and liquidity may be materially and adversely affected;

• the risk of damage to, loss of, or theft of our inventory;

• the risk that adverse weather may impact our peat harvest;

• the risk of product defects;

• general economic and/or industry and financial conditions, specifically in the United States and Canada;

• increased prices and inflation could negatively impact our margin performance and our financial results.

• acquisitions, other strategic alliances and investments could result in operating difficulties, dilution and other harmful consequences that may adversely impact our business and results of operations;

• our commitments to long-term leases and our ability to renew or exit our leases;

• the costs and risks of operating internationally;

• manufacturing risks as a result of recent acquisitions;

• our ability to comply with environmental regulations;

• interruptions in our supply chain;

• increasing scrutiny regarding environmental, social and governance practices;

• the impact of climate change on our facilities and operations;

• risks related to corporate and social responsibility and reputation;

• the costs of being a public company;

• limitations and possible failures of our internal control systems;

• our ability to maintain effective internal control over financial reporting;

• the adverse effects of public health epidemics, including the COVID-19 pandemic, on our business, results of operations and financial operations;

• damage to our reputation could have an adverse effect on our business;

• our marketing activities may not be successful;

• a disruption or breach of our information technology systems;

• potential inaccuracies in our estimates and assumptions relied upon in preparing consolidated financial statements;

• the costs of potential tariffs or a global trade war;

• possible difficulties in raising sufficient capital to fund our operations;

• the potential for product liability lawsuits.

Risks Relating to Our Indebtedness

• significant risks associated with our outstanding and future indebtedness of certain of our subsidiaries;

• our ability to make our debt service payments pursuant to the JPMorgan Credit Facilities;

• restrictions imposed by our JPMorgan Credit Facilities, including on our ability to sell products directly to the cannabis industry;

• the impact of the transition from the London Interbank Offered Rate ("LIBOR") to the Secured Overnight Funding Rate ("SOFR") as a reference rate.

Risks Relating to Third Parties

• we rely on a limited base of suppliers for certain products, which may result in disruptions to our business;

• if our suppliers are unable to source raw materials or the prices of raw materials increase, this may adversely affect our results of operations;

• if our suppliers decide to sell directly into the retail market that we conduct our current or future business in, we may face increased competition.

Risks Relating to the Cannabis Industry

• federal and state regulations pertaining to the use and cultivation of cannabis may adversely affect our business;

• new California regulations have caused licensing shortages and future regulations may create other limitations that decrease demand for our products;

• our products are subject to varying, inconsistent and rapidly changing laws;

• we are subject to a number of risks, directly and indirectly, because cannabis is illegal under federal law;

• our indirect involvement in the cannabis industry could adversely affect our public reputation;

• businesses involved in the cannabis industry are subject to a variety of laws and regulations related to money laundering, financial recordkeeping and proceeds of crimes.

Risks Relating to Other Regulations

• we may be restricted by certain state and other regulations pertaining to the use of certain ingredients in growing media and plant nutrients, including the use of pesticides;

• we may be restricted by certain U.S., state and foreign laws regarding how we collect, store and process personal information.

Risks Relating to Our Intellectual Property

• recent changes in laws make it difficult to predict how patents will be issued or enforced in our industry;

• we may not be able to adequately obtain, maintain, protect our enforce our intellectual property and other proprietary rights;

• we may need to rely on licenses to proprietary technologies, which could be difficult or expensive to obtain;

• we may be subject to infringement claims or claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers;

• we may become subject to costly intellectual property disputes that require us to divert resources from our usual operations.

Risks Relating to Our Capital Stock

• we may incur indebtedness or issue capital stock that ranks senior or equally to our common stock with certain liquidation preference and other rights, which may dilute our stockholders’ ownership interest;

• certain provisions in the JPMorgan Credit Facility, our corporate charter documents and in our current loan agreement and credit facility and under Delaware law could make an acquisition of our company more difficult and may prevent attempts by our stockholders to replace or remove current management or to obtain a favorable judicial forum for disputes with directors, officers or employees;

• risks related to us being a holding company;

• our ability to meet the continued listing standards of The Nasdaq Capital Market;

• our largest stockholders will exercise significant influence over our company for the foreseeable future, including the outcome of matters requiring stockholder approval;

• our common stock has only recently become publicly-traded and the market price of our common stock may be volatile.

Our operations and financial results are subject to various risks and uncertainties including those described below.

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state and Canadian regulators.

The need to obtain such approval or registration could delay the launch of new products or product innovations that contain ingredients or otherwise prevent us from developing and manufacturing certain products and product innovations.

The need to obtain such approval or registration could delay the launch of new products or product innovations that contain such ingredients or otherwise prevent us

from developing and manufacturing certain products and product innovations.

Failure to properly register and maintain these registrations for these products could result in significant penalties, additional costs, product stop-sales or recalls.

Long-lived assets and inventories represent a significant portion of our total assets and we may be required to record impairments or write-downs in future periods.

Our consolidated balance sheet as of December 31, 2022, includes $300.4 million of intangible assets, net, $111.4 million of inventories, $51.1 million of property, plant, and equipment, net, and $65.3 million of operating lease right-of-use assets.

As of June 30, 2022, we recorded a $189.6 million goodwill impairment charge due to a decline in the estimated fair value of our reporting units, which reduced the carrying value of our goodwill to zero.

During the year ended December 31, 2022, we recorded allowances for inventory obsolescence of $18.5 million, primarily due to certain durable lighting products.

Long-lived assets, such as intangible assets, property, plant and equipment and operating lease right-of-use assets are reviewed for impairment whenever events, changes or circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.

If we were to conclude that a future write-down of our long-lived assets is necessary, we would have to record the appropriate charge, which could result in a material adverse effect on our results of operations.

Inventories consist of manufactured goods, goods acquired for resale, and materials consumed in business operations.

Inventories are stated at the lower of cost or net realizable value, and we maintain an allowance for excess and obsolete inventory.

The estimate for excess and obsolete inventory is based upon assumptions about current and anticipated demand, customer preferences, business strategies, and market conditions.

We have experienced recent sales declines, which we believe are primarily a result of agricultural oversupply impacting our market.

The extent to which these market conditions will continue to impact our business, results of operations, and cash flows are uncertain and difficult to predict at this time, and may result in lower margins, inventory write-downs, accounts receivable allowances, and impairments of our long-lived assets which could have a material adverse effect on our business, financial condition and results of operations.

If we fail to manage our inventory effectively, our results of operations, financial condition and liquidity may be materially and adversely affected.

Our business requires us to manage inventory effectively.

We depend on our forecasts of demand for, and popularity of, various products to make purchase decisions and to manage our inventory of stock-keeping units.

Demand for products, however, can change significantly between the time inventory or components are ordered and the date of sale.

Demand may be affected by seasonality, new product launches, rapid changes in product cycles and pricing, product defects, promotions, changes in consumer spending patterns, changes in consumer tastes with respect to our products and other factors, and our consumers may not purchase products in the quantities that we expect.

It may be difficult to accurately forecast demand and determine appropriate levels of product or components.

From time to time in the normal course of business, we enter into agreements with our suppliers pursuant to which we are required to purchase minimum amounts of inventory over a defined time period.

We receive favorable pricing terms in exchange for this arrangement, but such agreements could lead to an oversupply of inventory.

If we fail to manage our inventory effectively or negotiate favorable credit terms with third-party suppliers, we may be subject to a heightened risk of inventory obsolescence, a decline in inventory values, and significant inventory write-downs or write-offs.

In addition, if we are required to lower sale prices in order to reduce inventory level or to pay higher prices to our suppliers, our profit margins might be negatively affected.

Any of the above may materially and adversely affect our business, financial condition and results of operations.

Our inventory is vulnerable to damage or loss caused by accidents or natural disasters, and we face the risk of theft of our products from inventory or during shipment.

Our inventory is stored at warehouses in the United States and Canada.

Our inventory is vulnerable to accidents, fire, flood, earthquakes, and similar events that may impact our facilities.

Any damage to or loss of all or a significant portion of our inventory could cause significant delays in shipment of goods to our customers, resulting in negative publicity about and diminished customer confidence in our business.

In addition, we may experience theft of our products while they are being held in inventory or during the course of their shipment to our customers by third-party carriers.

We maintain insurance to cover losses resulting from theft.

Nevertheless, if our security measures fail, losses exceed our insurance coverage, or we are not able to maintain insurance at a reasonable cost, we could incur significant losses from damage, loss or theft, any of which could substantially harm our business and results of operations.

Our peat bogs are susceptible to sudden changes in weather and the impacts of climate change.

We maintain a peat moss harvesting operation in northern Alberta, Canada.

Peat bogs rely on predictable weather;

sun and wind are required to dry the top surface, and too much rain can cause compaction and impede the ability of vacuum harvesters to collect the peat.

Peat must be harvested during a narrow window of one to two months during the summer, and if

summer is late or especially wet, this can have an adverse impact on the year’s harvest.

Conversely, if temperatures are too high, this can cause an increase in peat decomposition rates, and extended droughts can aggravate such decomposition.

Any of these risks may be further exacerbated by climate change.

If our peat bogs are damaged or our peat harvest is less than anticipated for one or more seasons, this could have an adverse impact on our business and results of operations.

A significant product defect or product recall could materially and adversely affect our brand image, causing a decline in our sales and profitability, and could reduce or deplete our financial resources.

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If inflation in these costs increases beyond our ability to control for them through measures such as implementing operating efficiencies, we may not be able to increase prices to sufficiently offset the effect of various cost increases without negatively impacting customer demand, thereby negatively impacting our margin performance and results of operations.

Acquisitions, other strategic alliances and investments could result in operating difficulties, dilution, and other harmful consequences that may adversely impact our business and results of operations.

Acquisitions are an important element of our overall corporate strategy, and these transactions entail material investments by us and are material to our financial condition and results of operations.

We expect to evaluate and enter into discussions regarding a wide array of potential strategic transactions.

The process of integrating an acquired company, business, or product has created, and will continue to create, unforeseen operating difficulties and expenditures.

The areas where we face risks may include, but are not limited to:

• diversion of management’s time and focus from operating our business to acquisition integration challenges;

• failure to successfully further develop the acquired business or products;

• implementation or remediation of controls, procedures and policies at the acquired company;

• integration of the acquired company’s accounting, information technology (IT) systems, human resources and other administrative systems, and coordination of product, engineering and sales and marketing functions;

• transition of operations, users and customers onto our existing platforms;

• reliance on the expertise of our strategic partners with respect to market development, sales, local regulatory compliance and other operational matters;

• failure to obtain required approvals on a timely basis, if at all, from governmental authorities, or conditions placed upon approval, under competition and antitrust laws which could, among other things, delay or prevent us from completing a transaction, or otherwise restrict our ability to realize the expected financial or strategic goals of an acquisition;

• in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries;

• cultural challenges associated with integrating employees from the acquired company into our organization, and retention of employees from the businesses we acquire;

• liability for or reputational harm from activities of the acquired company before the acquisition or from our strategic partners, including patent and trademark infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities;

• litigation or other claims in connection with the acquired company, including claims from terminated employees, customers, former stockholders or other third parties.

Our due diligence may fail to identify all liabilities associated with acquisitions and we may not assess the relative benefits and detriments of making an acquisition and may pay acquisition consideration exceeding the value of the acquired business.

Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments or strategic alliances could cause us to fail to realize the anticipated benefits of such acquisitions, investments or alliances, incur unanticipated liabilities, and harm our business generally.

Our acquisitions could also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses, or impairment of goodwill and purchased long-lived assets, and restructuring charges, any of which could harm our financial condition or results of operations and cash flows.

Although acquisitions are an important element of our overall corporate strategy, there can be no assurance that we will be able to identify appropriate acquisition targets, successfully acquire identified targets or successfully integrate the business of acquired companies to realize the full, anticipated benefits of such acquisitions.

We occupy many of our facilities under long-term non-cancellable leases, and we may be unable to renew or exit our leases.

Many of our manufacturing facilities and distribution centers are located on leased premises subject to non-cancellable leases.

Typically, our leases have initial terms ranging from two to twelve years, with options to renew for specified periods of time.

We believe that our future leases will likely also be long-term and non-cancellable and have similar renewal options.

If we close or stop fully utilizing a facility, we will most likely remain obligated to perform under the applicable lease, which would include, among other things, making the base rent payments and paying insurance, taxes and other expenses on the leased property for the remainder of the lease term.

Our inability to terminate a lease when we stop fully utilizing a facility or exit a market can have a significant adverse impact on our financial condition, operating results and cash flows.

In addition, at the end of the lease term and any renewal period for a facility, we may be unable to renew the lease without substantial additional cost, if at all.

If we are unable to renew our facility leases, we may close or relocate a facility, which could subject us to construction and other costs and risks, which in turn could have a material adverse effect on our business and operating results.

Further, we may not be able to secure a replacement facility in a location that is as commercially viable, including access to rail service.

Having to close a facility, even briefly to relocate, could reduce the sales that such facility would have contributed to our revenues.

We have experienced delays in relocating certain of our facilities as a result of issues impacting the availability of transportation and the provision of other services necessary to open the new location, and may continue to experience similar delays in the future.

A disruption in the operations of our freight carriers, higher shipping costs or shipping delays could disrupt our supply chain and could negatively impact our margin performance and our financial results.

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If freight and energy costs materially increase and we are unable to successfully pass all or significant portions of the increase along to our customers, or we cannot otherwise offset such increases in our cost of net revenues, our gross margin and financial results could be adversely affected.

The effects of the COVID-19 pandemic are unpredictable and may materially affect our customers and how we operate our business, and the duration and extent to which the pandemic continues (including any re-emergence of COVID-19) to threaten our future results of operations and overall financial performance remains uncertain.

In December 2019, COVID-19 was identified.

On March 11, 2020, the World Health Organization characterized COVID-19 as a global pandemic.

Since the emergence of the COVID-19 pandemic, numerous variants of the virus have been identified, some of which are more virulent than the original strain.

The COVID-19 pandemic has resulted in a widespread health crisis that has adversely affected businesses, economies and financial markets worldwide and has caused significant volatility in U.S.

and international debt and equity markets.

Vaccines for COVID-19 continue to be administered in the United States and other countries around the world, but the extent and rate of vaccine adoption, the long-term efficacy of these vaccines and other factors remain uncertain.

Authorities throughout the world have implemented measures to contain or

mitigate the spread of the virus, including physical distancing, travel bans and restrictions, closure of non-essential businesses, quarantines, work-from-home directives, mask requirements, shelter-in-place orders and vaccination programs.

Examples of how COVID-19 may impact our business, results of operations and stock price include, but are not limited to:

• COVID-19 may cause consumers to decrease spending, or pause such spending altogether, making it more difficult for us to acquire new customers, as well as retain and upsell existing customers;

• COVID-19 may interfere with our ability, or the ability of our employees, workers, contractors, suppliers and other business partners to perform our and their respective responsibilities and obligations relative to the conduct of our business.

COVID-19 may also cause disruptions from the temporary closure or suspension of activities related to the relocation of our facilities, third-party suppliers and manufacturers, restrictions on the shipment of our products, restrictions on our employees’ and other service providers’ ability to travel, the decreased willingness or ability of our customers to travel or to utilize our services and shutdowns that may be requested or mandated by governmental authorities;

• COVID-19 and related government responses to address the COVID-19 pandemic may cause sudden and extreme changes in our stock price.

Since COVID-19 was first reported, the volatility of U.S.

equity markets increased to historic levels.

This may cause extreme fluctuations in the market price of our stock.

We cannot predict if and when these fluctuations will decrease or increase.

In addition to general market conditions, the market price of our stock may become volatile or decline due to actual or anticipated impact of COVID-19 on our financial condition and results of operations or if our results of operations do not meet the expectations of the investor community or one or more of the analysts who cover our company change their recommendations regarding our company.

The duration and extent of the impact on our business from the COVID-19 pandemic depends on ongoing developments that cannot be accurately predicted at this time (e.g., the severity and transmission rate of the virus and new variants, the extent and effectiveness of containment and vaccination measures, and the impact of these and other factors on our employees, customers, vendors and partners, including their respective productivity).

Furthermore, our limited operating history combined with the uncertainty created by the COVID-19 pandemic significantly increases the difficulty of forecasting operating results and of strategic planning.

The COVID-19 pandemic has resulted in global supply chain constraints and transportation disruptions that have led to increased costs of goods and higher freight/import costs.

If we are unable to effectively predict and manage the impact of the COVID-19 pandemic on our business, our results of operations and financial condition may be negatively impacted.

Our international operations make us susceptible to the costs and risks associated with operating internationally.

We operate some of our distribution centers in Canada and Spain and source products globally.

We also operate a registered office in China.

We operate some of our distribution centers in Canada and Spain and we source and sell products globally.

We also use a purchasing team in China.

Accordingly, we are subject to risks associated with operating in foreign countries, including:

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• difficulty in obtaining distribution and support for our products;

• our ability to collect trade receivables in foreign jurisdictions.

In addition, our operations outside the United States are subject to the risk of new and different legal and regulatory requirements in local jurisdictions, potential difficulties in staffing and managing local operations and potentially adverse tax consequences.

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As a result of acquisitions, we are exposed to manufacturing risks that could adversely affect our business and results of operations.

In connection with our recent acquisitions, we have acquired several manufacturing facilities.

In connection with our acquisitions, we have acquired several manufacturing facilities.

Expansion into manufacturing exposes us to all of the risks entailed in manufacturing activities generally and there is no assurance that our manufacturing activities will not cause us to incur material unexpected costs or liabilities.

Our manufacturing processes may experience problems including equipment malfunctions, facility contamination, labor problems, raw material shortages or contamination, natural disasters, power outages, terrorist activities, safety and certification issues, or disruptions in the operations of our suppliers which could result in product defects, product recalls, product liability claims and insufficient inventory or supply of product for our customers.

For example, our acquisition of the H&G Entities and their plant nutrient and fertilizer business may expose us to handling potentially hazardous or explosive chemicals.

For example, our acquisition of the House & Garden Entities and their plant nutrient and fertilizer business may expose us to handling potentially hazardous or explosive chemicals.

We cannot eliminate the risk of accidental contamination or injury from such chemicals, and any accident caused by such chemicals could result in cleanup costs, diversion of management attention and potential liability, all of which could affect our reputation, business and results of operations.

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Government laws and regulations, including environmental laws and regulations, could result in material costs or otherwise adversely affect our financial condition and results of operations.

The manufacturing, chemical composition, packaging, storage, distribution and labeling of our products and the manner in which our business operations are conducted must comply with an extensive array of federal, state and foreign laws and regulations.

The manufacturing, composition, packaging, storage, distribution and labeling of our products and the manner in which our business operations are conducted must comply with an extensive array of federal, state and foreign laws and regulations.

If we are not successful in complying with the requirements of all such regulations, we could be fined or other actions could be taken against us by the applicable governing body, including the possibility of a required product recall.

Any such regulatory action could adversely affect our financial condition and results of operations.

It is also possible that governments and regulatory agencies will increase regulation, including the adoption of further regulations relating to the transportation, storage or use of certain chemicals, to enhance homeland security or protect the environment and such increased regulation could negatively impact our ability to obtain raw materials, components and/or finished goods or could result in increased costs.

It is also possible that governments and regulatory agencies will increase regulation, including the adoption of further regulations relating to the transportation, storage or use of certain ingredients, to enhance homeland security or protect the environment and such increased regulation could negatively impact our ability to obtain raw materials, components and/or finished goods or could result in increased costs.

In particular, legislators, consumers, investors and other stakeholders are increasingly focusing on climate change, petroleum usage, waste, recycled material content, and other sustainability concerns pertaining to companies’ ESG policies.

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In the event that such regulations result in increased product or administrative costs, we may not be in a position to increase selling prices, and therefore an increase in costs could have a material adverse effect on our business, financial condition and results of operations.

Some of our products have chemical compositions that are controlled by various state, federal and international laws and regulations that are subject to change.

Some of our products have compositions that are controlled by various state, federal and international laws and regulations that are subject to change.

We are required to comply with these laws and regulations and we seek to anticipate regulatory developments that could impact our ability to continue to produce and market our products.

We invest in research and development to maintain product formulations that comply with such laws and regulations.

There can be no assurance that we will not be required to alter the chemical composition of one or more of our products in a way that will have an adverse effect upon the product’s efficacy or marketability.

There can be no assurance that we will not be required to alter the composition of one or more of our products in a way that will have an adverse effect upon the product’s efficacy or marketability.

A delay or other inability of the Company to complete product research and development and successfully reformulate our products in response to any such regulatory requirements could have a material adverse effect on our business, financial condition and results of operations.

We are subject to numerous environmental laws and regulations that impose various environmental controls on our business operations, including, among other things, the discharge of pollutants into the air and water, the handling, use, treatment, storage and clean-up of solid and hazardous wastes and the investigation and remediation of soil and groundwater

affected by hazardous substances.

Such laws and regulations may otherwise relate to various health and safety matters that impose burdens upon our operations.

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Our ability to make, move and sell products in coordination with our suppliers is critical to our success.

Our inability to maintain sufficient internal production capacity or our inability to enter into co-packing arrangements on terms that are beneficial to the Company could have an adverse effect on our business.

Our inability to maintain sufficient internal production capacity or our inability to enter into co-packing arrangements on terms that are beneficial to us could have an adverse effect on our business.

Failure to adequately handle increasing production costs and complexity, turnover of personnel, or production capability and efficiency issues could materially impact our ability to cost effectively produce our products and meet customer demand.

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Investor advocacy groups, investment funds and influential investors are also increasingly focused on these practices, especially as they relate to the environment, climate change, health and safety, supply chain management, diversity, labor conditions and human rights, both in our own operations and in our supply chain.

Increased ESG-related compliance costs for the Company as well as among our suppliers, vendors and various other parties within our supply chain could result in material increases to our overall operational costs.

Increased ESG-related compliance costs for us as well as among our suppliers, vendors and various other parties within our supply chain could result in material increases to our overall operational costs.

Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact our reputation, ability to do business with certain partners, access to capital, and our stock price.

Climate Change may impact the availability of our facilities and, in addition, we may incur substantial costs to comply with climate change legislation and related regulatory initiatives.

Climate Change may impact the availability of our facilities, we may incur substantial costs to comply with climate change legislation and related regulatory initiatives, and weather conditions could adversely impact financial results.

Changing weather patterns and the increase in frequency of weather events such as forest fires, hurricanes and tornadoes could cause disruptions or the complete loss of our facilities.

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The effects of climate change can have an adverse effect not only to our operations, but also that of our suppliers and customers, and can lead to increased regulations and changes in consumer preferences, which could adversely affect our business, results of operations, and financial condition.

Our garden center customers and certain of our manufacturing facilities can be heavily impacted by weather conditions.

For example, periods of abnormally wet or dry weather can adversely impact the sale of certain products, while increasing demand for other products with the overall impact to us difficult to predict.

Additionally, our outdoor harvesting and other manufacturing operations may be impacted by adverse weather conditions or changing weather patterns which may adversely impact our ability to produce and sell our products.

We are subject to risks related to corporate and social responsibility and reputation.

Many factors influence our reputation including the perception of us held by our customers, suppliers, partners, shareholders, other key stakeholders, and the communities in which we operate.

We face increasing scrutiny related to

environmental, social and governance activities.

Many factors influence our reputation including the perception of us held by our customers, suppliers, partners, stockholder, other key stakeholders, and the communities in which we operate.

We face increasing scrutiny related to environmental, social and governance activities.

We risk damage to our reputation if we fail to act responsibly in a number of areas, such as diversity and inclusion, environmental stewardship, sustainability, supply chain management, climate change, workplace conduct, and human rights.

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We are also required to ensure that we have the ability to prepare financial statements that are fully compliant with all SEC reporting requirements on a timely basis.

In addition, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the Nasdaq Global Select Market and other applicable securities rules and regulations impose various requirements on public companies.

Our management and other personnel devote a substantial amount of time to compliance with these requirements.

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As a public company, we, among other things:

• prepare and distribute periodic public reports and other stockholder communications in compliance;

• prepare and distribute periodic public reports and other stockholder communications in compliance with applicable laws;

• comply with our obligations under the federal securities laws and applicable listing rules;

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In addition, if we fail to implement the requirements with respect to our internal accounting and audit functions, our ability to report our results of operations on a timely and accurate basis could be impaired and we could suffer adverse regulatory consequences or violate applicable listing standards.

There could also be a negative reaction in the financial markets

due to a loss of investor confidence in us and the reliability of our financial statements, which could have a material adverse effect on our business, financial condition and results of operations.

There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements, which could have a material adverse effect on our business, financial condition and results of operations.

The changes necessitated by becoming a public company require a significant commitment of resources and management supervision that has increased and may continue to increase our costs and might place a strain on our systems and resources.

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If we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, as applicable, fines, sanctions and other regulatory action and potentially civil litigation.

As a result of being a public company, we are obligated to develop and maintain proper and effective internal controls over financial reporting, and any failure to maintain the adequacy of these internal controls may adversely affect investor confidence in our company and, as a result, the value of our common stock.

As of December 31, 2021 we were no longer an emerging growth company, and we are now required to comply with Section 404 of the Sarbanes-Oxley Act.

Compliance with these requirements may strain our resources, increase our costs and distract management, and we may, in the future, be unable to comply with these requirements in a timely or cost-effective manner.

For the 2021 fiscal year just completed, management and our independent outside auditor have attested that our internal control environment was operating effectively and in compliance with Section 404 of the Sarbanes-Oxley Act.

However, in the future during the evaluation and testing process of our internal controls, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to certify that our internal control over financial reporting is effective.

We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal control over financial reporting in the future.

Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition or results of operations.

If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness or significant deficiency in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, and we could be subject to sanctions or investigations by the SEC or other regulatory authorities.

Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.

We are a “smaller reporting company” and, because we have opted to use the reduced reporting requirements available to us, certain investors may find investing in our securities less attractive.

We are a “smaller reporting company” under the SEC’s disclosure rules, and as such, we are permitted to comply with scaled-back disclosure obligations in our SEC filings compared to other issuers, including with respect to disclosure obligations regarding executive compensation in our periodic reports and proxy statements.

We have elected to adopt certain of the accommodations available to smaller reporting companies.

Until we cease to be a smaller reporting company, the scaled-back disclosure in our SEC filings will result in less information about our company being available than for other public companies.

If investors consider our common stock less attractive as a result of our election to use the scaled-back disclosure permitted for smaller reporting companies, there may be a less active trading market for our common stock and our share price may be more volatile.

We previously identified material weaknesses in our internal control over financial reporting and we may identify additional material weaknesses in the future , and if we are unable to achieve and maintain effective internal control over financial reporting, the accuracy and timing of our financial reporting may be adversely affected.

Prior to our IPO in December 2020, we were a private company with limited accounting and finance personnel, adequate review processes and other resources with which to address our internal controls and procedures.

As a result of being a public company, we are required to comply with Section 404 of the Sarbanes-Oxley Act and to develop and maintain proper and effective internal controls over financial reporting.

Any failure to maintain the adequacy of these internal controls may adversely affect investor confidence in our company and, as a result, the value of our common stock.

Compliance with these requirements may strain our resources, increase our costs, and we may, in the future, be unable to comply with these requirements in a timely or cost-effective manner.

Prior to our initial public offering (“IPO”) in December 2020, we were a private company with limited accounting and finance personnel and other resources with which to address our internal controls and procedures.

In connection with the audit of our financial statements for fiscal 2019, we and our independent registered public accounting firm identified control deficiencies in the design and operation of our internal control over financial reporting that constituted material weaknesses previously disclosed in our registration statement on Form S-1 which was declared effective on December 9, 2020.

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During 2021, we remediated the identified material weaknesses.

In particular, we (i) hired and continue to hire, additional qualified accounting and financial reporting personnel with technical and/or public company experience, (ii)

implemented new control procedures over certain areas previously deemed ineffective related to the preparation, review, and analysis of accounting information and financial statements and (iii) engaged and continue to engage an external advisor to assist management in completing a Sarbanes-Oxley Act compliant risk assessment, creating detailed control documentation for in-scope business and information technology processes, identifying further control gaps and providing assistance on remediation procedures, and designing and implementing a Sarbanes-Oxley Act sub-certification process.

In particular, we (i) hired additional qualified accounting and financial reporting personnel with technical and/or public company experience, (ii) implemented new control procedures over certain areas previously deemed ineffective related to the preparation, review, and analysis of accounting information and financial statements and (iii) engaged an external advisor to assist management in completing a Sarbanes-Oxley Act compliant risk assessment, creating detailed control documentation for in-scope business and information technology processes, identifying further control gaps and providing assistance on remediation procedures, and designing and implementing a Sarbanes-Oxley Act sub-certification process.

Although we have remediated previously identified material weaknesses, we cannot assure you that the steps we have taken will prevent future material weaknesses from occurring.

We can give no assurance that additional material weaknesses in our internal control over financial reporting will not be identified in the future.

Our failure to implement and maintain effective internal control over financial reporting could result in errors in our financial statements that could result in a restatement of our financial statements and cause us to fail to meet our reporting obligations.