Item 1A. Risk Factors
ITEM 1A. RISK FACTORS
The
following risks and uncertainties should be carefully considered in addition to the other information included in this Report. If any
of the following conditions or other unknown conditions should occur, our business, financial condition or operating results could be
materially harmed. An investment in our securities is speculative in nature, involves a high degree of risk and should not be made by
an investor who cannot bear the economic risk of its investment for an indefinite period of time and who cannot afford the loss of its
entire investment.
Risks Related to our Business and Industry
We are a relatively new company, with our
sales having only commenced in July 2019, and we continue to have some of the risks associated with start-up ventures.
We formed our corporation
in 2018. Since formation, we have focused on research, development and certification of our first energy storage system. We began marketing,
sales, and installations via our certified installers in May 2019 (although no sales were completed in the year ended June 30, 2019).
We may never achieve commercial success with our energy storage systems. We have limited historical financial data upon which we may base
our projected revenue and operating expenses. Our relatively short operating history makes it difficult for potential investors to evaluate
our technology or prospective operations and business prospects. Accordingly, we continue to be subject to many of the risks inherent
in business development, financing, unexpected expenditures, and complications and delays that often occur in a new business. Investors
should evaluate an investment in us in light of the uncertainties encountered by developing companies in a competitive environment. There
can be no assurance that our efforts will be successful or that we will ultimately be able to attain profitability.
We have a history of net losses and we are
uncertain about our future profitability.
We have incurred significant
net losses since our inception. For the years ended June 30, 2024 and 2023, we have incurred net losses of $2.3 million and $2.6 million,
respectively. As of June 30, 2024, we had an accumulated deficit of $20.7 million. If our revenue grows more slowly than currently anticipated,
or if operating expenses are higher than expected, we may be unable to consistently achieve profitability, our financial condition will
suffer, and the value of our common stock could decline. Even if we are successful increasing our sales, we may incur losses in the foreseeable
future as we continue to develop and market our products. If sales revenue from any of our current products or any additional products
that we develop in the future is insufficient, or if our product development is delayed, we may be unable to achieve profitability and,
in the event we are unable to secure financing for prolonged periods of time, we may need to temporarily cease operations and, possibly,
shut them down altogether. Furthermore, even if we are able to achieve profitability, we may be unable to sustain or increase such profitability
on a quarterly or annual basis, which would adversely impact our financial condition and significantly reduce the value of our common
stock.
We may experience in the future, delays
or other complications in the design, manufacture, launch and production ramp of our energy storage products which could harm our brand,
business, prospects, financial condition and operating results.
We may encounter unanticipated
challenges, such as supply chain or logistics constraints, that lead to delays in producing and ramping our energy storage products. Any
significant delay or other complication in the production of our products or the development, manufacture, and production ramp of our
future products, including complications associated with expanding our production capacity and supply chain or obtaining or maintaining
regulatory approvals, and/or coronavirus impacts, could materially damage our brand, business, prospects, financial condition and operating
results.
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We may be unable to meet our growing energy
storage production plans and delivery plans, any of which could harm our business and prospects.
Our plans call for achieving
and sustaining significant increases in energy storage systems production and deliveries. Our ability to achieve these plans will depend
upon a number of factors, including our ability to utilize installed manufacturing capacity, achieve the planned production yield and
further increase capacity as planned while maintaining our desired quality levels and optimize design and production changes, and our
suppliers’ ability to support our needs. If we are unable to realize our plans, our brand, business, prospects, financial condition
and operating results could be materially damaged.
We are dependent on our two main component
vendors for our suppliers of batteries, inverters and other raw materials and the inability of these single-source suppliers to deliver
necessary components of our products according to our schedule and at prices, quality levels and volumes acceptable to us, or our inability
to efficiently manage these components, could have a material adverse effect on our financial condition and operating results.
Our products contain numerous
purchased parts which we source globally from direct suppliers, the majority of whom are currently single-source suppliers. Any significant
unanticipated demand would require us to procure additional components in a short amount of time. While we believe that we will be able
to secure additional or alternate sources of supply for most of our components in a relatively short time frame, there is no assurance
that we will be able to do so or develop our own replacements for certain highly customized components of our products. In addition, if
we are required to use alternative suppliers for certain critical components, we may need to have our products go through a re-certification
process with various regulatory bodies, which process may be lengthy. In such event, we would not be able to sell our products using these
new components until we received all required certifications.
If we encounter unexpected
difficulties with key suppliers such as our inverter or lithium-iron phosphate cell supplier, and if we are unable to fill these needs
from other suppliers, we could experience production delays and potential loss of access to important technology and parts for producing,
servicing and supporting our products. This limited, and in many cases single source, supply chain exposes us to multiple potential sources
of delivery failure or component shortages for the production of our products. The loss of any single or limited source supplier or the
disruption in the supply of components from these suppliers could lead to significant product design changes and delays in product deliveries
to our customers, which could hurt our relationships with our customers and result in negative publicity, damage to our brand and a material
and adverse effect on our business, prospects, financial condition and operating results.
Changes in our supply chain may result in
increased cost. If we are unsuccessful in our efforts to control and reduce supplier costs, our operating results will suffer.
There is no assurance that
our suppliers will ultimately be able to meet our cost, quality and volume needs, or do so at the times needed. Furthermore, as the scale
of our energy storage systems increase, we will need to accurately forecast, purchase, warehouse and transport to our manufacturing facilities
components at much higher volumes than we have experience with. If we are unable to accurately match the timing and quantities of component
purchases to our actual needs, or successfully implement automation, inventory management and other systems to accommodate the increased
complexity in our supply chain, we may incur unexpected production disruption, storage, transportation and write-off costs, which could
have a material adverse effect on our financial condition and operating results.
We are currently selling two primary products
and if these products that we sell or install fail to perform as expected, our reputation could be harmed and our ability to develop,
market and sell our products and services could be harmed.
If our energy products were
to contain defects in design and manufacture that cause them not to perform as expected or that require repair or take longer than expected
to become enabled or are legally restricted, our ability to develop, market and sell our products and services could be harmed. While
we intend to perform internal testing on the products we manufacture, as a start-up company we currently have no frame of reference by
which to evaluate detailed long-term quality, reliability, durability and performance characteristics of our battery packs, inverters,
and energy storage products. There can be no assurance that we will be able to detect and fix any defects in our products prior to their
sale to or installation for consumers. Any product defects, delays or legal restrictions on product features, or other failure of our
products to perform as expected could harm our reputation and result in delivery delays, product recalls, product liability claims, significant
warranty and other expenses, and could have a material adverse impact on our business, financial condition, operating results and prospects.
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We depend on a small number of wholesale
dealers for a significant portion of our revenues to date.
Due to our limited operating
history, we depend on a relatively small number of wholesale dealers and installers, primarily in California, for our revenue. In the
year ended June 30, 2024, two such dealers represented approximately 20% and 14% of the Company’s revenues whereas in the year ended
June 30, 2023, three such dealers represented approximately 25%, 15% and 13% of the Company’s revenues. As of June 30, 2024, three
such dealers represented approximately 22%, 18% and 14% of the Company’s accounts receivable. Our limited customer base and concentration
could expose us to the risk of substantial losses if a single dominant customer stops purchasing, or significantly reduces orders for,
our products. Our ability to maintain close relationships with these top customers is essential to the growth and profitability of our
business. If we fail to sell our products to one or more of these top customers in any particular period, or if a large customer purchases
fewer of our products, defers orders or fails to place additional orders with us, or if we fail to develop additional major customers,
our revenue could decline, and our results of operations could be adversely affected.
If we fail to scale our business operations
and otherwise manage future growth and adapt to new conditions effectively as we grow our company, we may not be able to produce, market,
sell and service our products successfully.
Any failure to manage our
growth effectively could materially and adversely affect our business, prospects, operating results and financial condition. Our future
operating results depend to a large extent on our ability to manage our expansion and growth successfully. We may not be successful in
undertaking this expansion if we are unable to control expenses and avoid cost overruns and other unexpected operating costs; adapt our
products and conduct our operations to meet local requirements; implement the required infrastructure, systems and processes; and find
and hire the right skills to make our growth successful.
If we are unable to achieve our targeted
manufacturing costs for our energy storage products our financial condition and operating results will suffer.
As a relatively new company,
we have limited historical data that ensures our targeted manufacturing costs will be achievable. While we expect in the future to better
understand and control our manufacturing costs, there is no guarantee we will be able to achieve sufficient cost savings to reach our
gross margin and profitability goals. We may also incur substantial costs or cost overruns in utilizing and increasing the production
capability of our energy storage system facilities.
If we are unable to achieve
production cost targets on our products pursuant to our plans, we may not be able to meet our gross margin and other financial targets.
Many of the factors that impact our manufacturing costs are beyond our control, such as potential increases in the costs of our materials
and components, such as lithium iron phosphate, nickel and other components of our battery cells. If we are unable to continue to control
and reduce our manufacturing costs, our operating results, business and prospects will be harmed.
Increases in costs, disruption of supply
or shortage of materials, in particular for inverters and lithium iron phosphate cells, could harm our business.
We may experience increases
in the cost or a sustained interruption in the supply or shortage of materials. Any such increase, supply interruption or shortage could
materially and negatively impact our business, prospects, financial condition and operating results. We use various materials in our business,
including inverters and lithium iron phosphate cells, from suppliers.
The prices for these materials
fluctuate, and their available supply may be unstable, depending on market conditions and global demand for these materials, including
as a result of increased production of energy storage products by our competitors, and could adversely affect our business and operating
results. For instance, we are exposed to multiple risks relating to inverters and lithium iron phosphate cells.
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These risks include:
· an increase in the cost, or decrease in the available supply, of materials used;
· disruption in the supply of cells due to quality issues or recalls by manufacturers;
· tariffs on the materials we source in China, which make up a significant amount of the materials we require;
· fluctuations in the value of the Chinese Renminbi against the U.S. dollar as our purchases for energy
storage products are denominated in Chinese Renminbi.; and
· potential increases in global shipping costs.
Our business is dependent
on the continued supply of inverters and battery cells for the battery packs used in our energy storage products. Any disruption in the
supply of inverters or battery cells could disrupt production of our battery packs we require for our energy storage product. Substantial
increases in the prices for our materials or prices charged to us would increase our operating costs, and could reduce our margins if
we cannot recoup the increased costs through increased prices. Any attempts to increase prices in response to increased material costs
could result in cancellations of energy storage orders and therefore materially and adversely affect our brand, image, business, prospects
and operating results.
Recent increases in mortgage interest rates
may result in a decrease in demand by homeowners for our residential energy storage systems.
Sales volume in our homeowner
channel is partially dependent on the construction of new homes and the sale of existing homes in our residential markets. Many customers
of our installation partners rely on mortgage loans from banks and other lenders in order to finance a substantial portion of the purchase
price for their home, including any related improvements. Increased mortgage interest rates may lead to lower demand for new homes and
a reduced number of homes available for solar origination through our homeowner channel. Additionally, increased interest rates may result
in fewer secondary home sales, a reduction in the number of customers refinancing their mortgages and uncertainty about the economy.
We are currently operating in a period of
economic uncertainty and capital markets disruption, which has been significantly impacted by geopolitical instability due to the ongoing
military conflicts between Russia and Ukraine and between Gaza and Israel. Our business, financial condition and results of operations
may be materially and adversely affected by any negative impact on the global economy and capital markets resulting from these conflicts
or any other geopolitical tensions.
U.S. and global markets are
experiencing volatility and disruption following the escalation of geopolitical tensions and the start of the military conflicts between
Russia and Ukraine, beginning in in February 2022, and between Gaza and Israel, beginning in in October 2023. Although the length and
impact of these ongoing military conflicts are highly unpredictable, they could lead to further market disruptions, including significant
volatility in commodity prices, credit and capital markets, as well as supply chain interruptions. We are continuing to monitor the situations
in both of these areas and globally and assessing any potential impacts on our business.
Any of the above mentioned
factors could affect our business, prospects, financial condition, and operating results. The extent and duration of the military actions,
sanctions and resulting market disruptions are impossible to predict, but could be substantial. Any such disruptions may also magnify
the impact of other risks described in this report.
We may become subject to product liability
claims, which could harm our financial condition and liquidity if we are not able to successfully defend or insure against such claims.
Although we believe we have
designed our products for safety, product liability claims, even those without merit, could harm our business, prospects, operating results
and financial condition. Our risks in this area are particularly pronounced given that we have only recently begun to deliver energy storage
products. Moreover, a product liability claim could generate substantial negative publicity about our products and business and could
have material adverse effect on our brand, business, prospects and operating results.
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The markets in which we operate are in their
infancy and highly competitive, and we may not be successful in competing in these industries as the industry further develops. We currently
face competition from new and established domestic and international competitors and expect to face competition from others in the future,
including competition from companies with new technology.
The worldwide energy storage
market is in its infancy, and we expect it will become more competitive in the future. We also expect more regulatory burden as customers
adopt this new technology. There is no assurance that our energy storage systems will be successful in the respective markets in which
they compete. A significant and growing number of established and new companies, as well as other companies, have entered or are reported
to have plans to enter the energy storage market. Most of our current and potential competitors have significantly greater financial,
technical, manufacturing, marketing, sales networks and other resources than we do and may be able to devote greater resources to the
design, development, manufacturing, distribution, promotion, sale and support of their products. Increased competition could result in
lower unit sales, price reductions, revenue shortfalls, loss of customers and loss of market share, which could harm our business, prospects,
financial condition and operating results. The energy storage industry is highly competitive.
We face competition from other
manufacturers, developers and installers of energy storage systems, as well as from large utilities. Decreases in the retail prices of
electricity from utilities or other renewable energy sources could make our products less attractive to customers. Reduction in various
federal and state rebate and incentive programs could also adversely affect product adoption.
Our products and services are subject to
substantial regulations, which are evolving, and unfavorable changes or failure by us to comply with these regulations could substantially
harm our business and operating results.
As a manufacturer of energy
storage systems, we are impacted by federal, state and local regulations and policies concerning electricity pricing, the interconnection
of electricity generation and storage equipment with the electric grid, and the sale of electricity generated by third-party owned systems.
For example, existing or proposed regulations and policies would permit utilities to limit the amount of electricity generated by our
customers with their solar energy systems, adjust electricity rate designs such that the price of our products may not be competitive
with that of electricity from the grid, restrict us and our customers qualifying for government incentives and benefits that apply to
renewable energy, and limit or eliminate net energy metering. If such regulations and policies remain in effect or are adopted in other
jurisdictions, or if other regulations and policies that adversely impact the interconnection or use of our energy storage systems are
introduced, they could deter potential customers from purchasing our energy storage products, which could harm our business, prospects,
financial condition and results of operations.
On April 14, 2023, California
implemented Net Energy Metering 3 (NEM3) for subsequent new solar installations. NEM3 reduces the amount of NEM credit for each kilowatt
(KW) of solar power sent to the utility from a rate of approximately $0.20 per KW to $0.09 per KW (each Utility varies). NEM3 effectively
increases the average solar Return of Investment (ROI) from 5-6 years to 10-12 years (each Utility varies). Effectively, the Company believes
that solar installation in California currently makes little financial sense without also including a battery system. Typically, installing
NeoVolta nets a ROI of 4-6 years. We estimate that NEM3 reduced our sales from the enactment date in December 2022 continuing through
our last fiscal quarter, as solar installers worked off their permitted NEM2 installs. We expect our sales to gradually increase going
forward.
Our business and operations would suffer
in the event of third-party computer system failures, cyber-attacks on third-party systems or deficiency in our cyber security.
We rely on information technology
(“IT”) systems, including third-party “cloud based” service providers, to keep financial records, maintain product
support data, and corporate records, to communicate with staff and external parties and to operate other critical functions. This includes
critical systems such as email, other communication tools, electronic document repositories and archives. If any of these third-party
information technology providers are compromised due to computer viruses, unauthorized access, malware, natural disasters, fire, terrorism,
war and telecommunication failures, electrical failures, cyber-attacks or cyber-intrusions over the internet, then sensitive emails or
documents could be exposed or deleted. Similarly, we could incur business disruption if our access to the internet is compromised, and
we are unable to connect with third-party IT providers. The risk of a security breach or disruption, particularly through cyber-attacks
or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity
and sophistication of attempted attacks and intrusions from around the world have increased. To the extent that any disruption or security
breach results in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information,
we could incur liability and delay of our product development and support efforts.
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We may need to assert intellectual property-related
claims or defend ourselves against intellectual property infringement claims, which may be time-consuming and could cause us to incur
substantial costs.
Others, including our competitors,
may hold or obtain patents, copyrights, trademarks or other proprietary rights that could prevent, limit or interfere with our ability
to make, use, develop, sell or market our products and services, which could make it more difficult for us to operate our business. From
time to time, the holders of such intellectual property rights may assert their rights and urge us to take licenses, and/or may bring
suits alleging infringement or misappropriation of such rights. We may consider the entering into licensing agreements with respect to
such rights, although no assurance can be given that such licenses can be obtained on acceptable terms or that litigation will not occur,
and such licenses could significantly increase our operating expenses. In addition, if we are determined to have infringed upon a third
party’s intellectual property rights, we may be required to cease making, selling or incorporating certain components or intellectual
property into the goods and services we offer, to pay substantial damages and/or license royalties, to redesign our products and services,
and/or to establish and maintain alternative branding for our products and services. In the event that we were required to take one or
more such actions, our business, prospects, operating results and financial condition could be materially adversely affected. In addition,
any litigation or claims, whether or not valid, could result in substantial costs, negative publicity and diversion of resources and management
attention.
In August 2021, we entered
into an exclusive long term supply agreement with our Asian supplier pertaining to our inverter component. This agreement contains provisions
that address the ownership and use of intellectual property rights. While we are unaware of any present dispute concerning this agreement
or our other agreements that concern ownership of or use of intellectual property rights, future disputes may arise concerning this or
other agreements we have entered into that concern ownership of or use of intellectual property rights.
Our business could be negatively impacted
if we fail to adequately protect our intellectual property rights.
We consider our intellectual
property rights to be important assets, and seek to protect them through a combination of patent, trademark, copyright and trade secret
laws, as well as licensing and confidentiality agreements. These protections may not be adequate to prevent third parties from using our
intellectual property without our authorization, breaching any confidentiality agreements with us, copying or reverse engineering our
products, or developing and marketing products that are substantially equivalent to or superior to our own. The unauthorized use of our
intellectual property by others could reduce our competitive advantage and harm our business. Not only are intellectual property-related
proceedings burdensome and costly, but they could span years to resolve and we might not ultimately prevail. We cannot guarantee that
any patents, issued or pending, will provide us with any competitive advantage or will not be challenged by third parties. Moreover, the
expiration of our patents may lead to increased competition with respect to certain products.
Potential tariffs or a global trade war
have increased our costs and could further increase the cost of our products, which could adversely impact the competitiveness of our
products and our financial results.
In 2019, the Trump Administration
announced tariffs on goods imported from China in connection with China’s intellectual property practices. Our products depend on
materials from China, namely inverters and batteries, which are the main components of our products. Traditionally, the tariff rate for
our imports has been 3.4%. Presently, our tariff rate is 10.9% on these imports. To date, the Biden Administration has made no significant
changes to these Chinese tariffs.
We cannot predict what actions
may ultimately be taken with respect to tariffs or trade relations between the United States and China, what products may be subject to
such actions, or what actions may be taken by the China in retaliation. The tariffs described above, the adoption and expansion of trade
restrictions, the occurrence of a trade war, or other governmental action related to tariffs, trade agreements or related policies have
the potential to adversely impact our supply chain and access to equipment, our costs and our product margins. Any such cost increases
or decreases in availability could slow our growth and cause our financial results and operational metrics to suffer.
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Our industry is subject to technological
change, and our failure to continue developing new and improved products and to bring these products rapidly to market could have an adverse
impact on our business.
New products, or refinements
and improvements to our existing products, may have technical failures, delayed introductions, higher than expected production costs or
may not be well accepted by our customers. If we are not able to anticipate, identify, develop and market high quality products in line
with technological advancements that respond to changes in customer preferences, demand for our products could decline and our operating
results could be adversely affected.
Public company compliance may make it more
difficult to attract and retain officers and directors.
The Sarbanes-Oxley Act and
rules subsequently implemented by the SEC have required changes in corporate governance practices of public companies. As a recent Nasdaq
listed public company, we expect these rules and regulations to increase our compliance costs and to make certain activities more time
consuming and costly. As a public company, we also expect that these rules and regulations may make it more difficult and expensive for
us to obtain director and officer liability insurance in the future and we may be required to accept reduced policy limits and coverage
or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and
retain qualified persons to serve on our Board of Directors or as executive officers.
Confidentiality agreements with employees
and third parties may not prevent unauthorized disclosure of trade secrets and other proprietary information, and our inability to maintain
the confidentiality of that information, due to unauthorized disclosure or use, or other event, could have a material adverse effect on
our business.
In addition to the protection
afforded by patents, we seek to rely on trade secret protection and confidentiality agreements to protect proprietary know-how that is
not patentable or that we elect not to patent, processes for which patents are difficult to enforce, and any other elements of our product
discovery and development processes that involve proprietary know-how, information, or technology that is not covered by patents. Trade
secrets, however, may be difficult to protect. We seek to protect our proprietary processes, in part, by entering into confidentiality
agreements with our employees, consultants, advisors, contractors and collaborators. Although we use reasonable efforts to protect our
trade secrets, our employees, consultants, advisors, contractors, and collaborators might intentionally or inadvertently disclose our
trade secret information to competitors. In addition, competitors may otherwise gain access to our trade secrets or independently develop
substantially equivalent information and techniques. Furthermore, the laws of some foreign countries do not protect proprietary rights
to the same extent or in the same manner as the laws of the United States. As a result, we may encounter significant problems in protecting
and defending our intellectual property both in the United States and abroad. If we are unable to prevent unauthorized material disclosure
of our intellectual property to third parties, or misappropriation of our intellectual property by third parties, we will not be able
to establish or maintain a competitive advantage in our market, which could materially adversely affect our business, operating results
and financial condition.
We are heavily reliant on the services of
both Ardes Johnson, our Chief Executive Officer, and Brent Willson, our former CEO and current chief technology officer, and the departure
or loss of either officer could disrupt our business.
We depend heavily on the continued
efforts of Ardes Johnson, our Chief Executive Officer, who joined the Company in April 2024, and Brent Willson, our former CEO and current
chief technology officer , who are essential to our strategic vision and day-to-day operations and would be difficult to
replace. The departure or loss of either Mr. Johnson or Mr. Willson, or the inability to timely hire and retain qualified replacements,
could negatively impact our ability to manage our business.
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If we are unable to recruit and retain key
management, technical and sales personnel, our business would be negatively affected.
For our business to be successful,
we need to attract and retain highly qualified technical, management and sales personnel. The failure to recruit additional key personnel
when needed with specific qualifications and on acceptable terms or to retain good relationships with our partners might impede our ability
to continue to develop, commercialize and sell our products. To the extent the demand for skilled personnel exceeds supply, we could experience
higher labor, recruiting and training costs in order to attract and retain such employees. We face competition for qualified personnel
from other companies with significantly more resources available to them and thus may not be able to attract the level of personnel needed
for our business to succeed.
Artificial intelligence presents risks and
challenges that can impact our business, including by posing security risks to our confidential information, proprietary information and
personal data.
Issues in the development
and use of artificial intelligence, combined with an uncertain regulatory environment, may result in reputational harm, liability, or
other adverse consequences to our business operations. As with many technological innovations, artificial intelligence presents risks
and challenges that could impact our business. We may adopt and integrate generative artificial intelligence tools into our systems for
specific use cases. Our vendors may incorporate generative artificial intelligence tools into their offerings without disclosing this
use to us, and the providers of these generative artificial intelligence tools may not meet existing or rapidly evolving regulatory or
industry standards with respect to privacy and data protection and may inhibit our or our vendors’ ability to maintain an adequate
level of service and experience. If we, our vendors, or our third-party partners experience an actual or perceived breach or privacy or
security incident because of the use of generative artificial intelligence, we may lose valuable intellectual property and confidential
information and our reputation and the public perception of the effectiveness of our security measures could be harmed. Further, bad actors
around the world use increasingly sophisticated methods, including the use of artificial intelligence, to engage in illegal activities
involving the theft and misuse of personal information, confidential information, and intellectual property. Any of these outcomes could
damage our reputation, result in the loss of valuable property and information, and adversely impact our business.
Risks Related to Our Securities
Our executive officers and directors will
exercise significant control over us for the foreseeable future, which will limit our shareholders ability to influence corporate matters
and could delay or prevent a change in corporate control.
Our executive officers and
directors currently hold or have the right to acquire, in the aggregate, up to approximately 18.1 % of our outstanding common stock. As
a result, these stockholders will be able to influence our management and affairs and heavily influence the outcome of matters submitted
to our stockholders for approval, including the election of directors and any sale, merger, consolidation, or sale of all or substantially
all of our assets.
These stockholders may have
interests, with respect to their common stock, that are different from our other stockholders and the concentration of voting power among
one or more of these stockholders may have an adverse effect on the price of our common stock.
In addition, this concentration
of ownership might adversely affect the market price of our common stock by: (1) delaying, deferring or preventing a change of control
of our company; (2) impeding a merger, consolidation, takeover or other business combination involving our company; or (3) discouraging
a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company.
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Nevada law and provisions in our articles
of incorporation and bylaws could make a takeover proposal more difficult.
We are a Nevada corporation
and the anti-takeover provisions of the Nevada Revised Statutes may discourage, delay or prevent a change in control by prohibiting us
from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested
stockholder, even if a change in control would be beneficial to our existing stockholders. In addition, our articles of incorporation
and bylaws may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Our
articles of incorporation and bylaws:
· authorize the issuance of “blank check” preferred stock that could be issued by our board
of directors to thwart a takeover attempt;
· place restrictive requirements (including advance notification of stockholder nominations and proposals)
on how special meetings of stockholders may be called by our stockholders; do not provide stockholders with the ability to cumulate their
votes; and
· provide that our board of directors may amend our bylaws.
Additionally, our authorized
capital includes preferred stock issuable in one or more series. Our board has the authority to issue preferred stock and determine the
price, designation, rights, preferences, privileges, restrictions and conditions, including voting and dividend rights, of those shares
without any further vote or action by stockholders. The rights of the holders of common stock will be subject to, and may be adversely
affected by, the rights of holders of any preferred stock that may be issued in the future. The issuance of additional preferred stock,
while providing desirable flexibility in connection with possible financings and acquisitions and other corporate purposes, could make
it more difficult for a third party to acquire a majority of the voting power of our outstanding voting securities, which could deprive
our holders of common stock of a premium that they might otherwise realize in connection with a proposed acquisition of our company.
As an “emerging growth company”
under the Jumpstart Our Business Startups Act, or JOBS Act, we are permitted to, and intend to, rely on exemptions from certain disclosure
requirements.
As an “emerging growth
company” under the JOBS Act, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. We are
an emerging growth company until the earliest of:
· the last day of the fiscal year during which we have total annual gross revenues of $1 billion or more;
· the last day of the fiscal year following the fifth anniversary of our initial public offering;
· the date on which we have, during the previous 3-year period, issued more than $1 billion in non-convertible
debt; or
· the date on which we are deemed a “large accelerated issuer” as defined under the federal
securities laws.
For so long as we remain an
emerging growth company, we will not be required to:
· have an auditor report on our internal control over financial reporting pursuant to the Sarbanes-Oxley
Act of 2002;
· comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding
mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial
statements (auditor discussion and analysis);
· submit certain executive compensation matters to shareholders advisory votes pursuant to the “say
on frequency” and “say on pay” provisions (requiring a non-binding shareholder vote to approve compensation of certain
executive officers) and the “say on golden parachute” provisions (requiring a non-binding shareholder vote to approve golden
parachute arrangements for certain executive officers in connection with mergers and certain other business combinations) of the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010; and
· include detailed compensation discussion and analysis in our filings under the Securities Exchange Act
of 1934, as amended, and instead may provide a reduced level of disclosure concerning executive compensation.
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For so long as we remain an
emerging growth company, we:
· may present only two years of audited financial statements and only two years of related Management’s
Discussion and Analysis of Financial Condition and Results of Operations, or MD&A; and
· are eligible to claim longer phase-in periods for the adoption of new or revised financial accounting
standards under §107 of the JOBS Act.
We intend to take advantage
of all of these reduced reporting requirements and exemptions.
Certain of these reduced reporting
requirements and exemptions were already available to us due to the fact that we also qualify as a “smaller reporting company”
under SEC rules. For instance, smaller reporting companies are not required to obtain an auditor attestation and report regarding management’s
assessment of internal control over financial reporting; are not required to provide a compensation discussion and analysis; are not required
to provide a pay-for-performance graph or CEO pay ratio disclosure; and may present only two years of audited financial statements and
related MD&A disclosure.
We cannot predict if investors
will find our securities less attractive due to our reliance on these exemptions. If investors were to find our common stock less attractive
as a result of our election, we may have difficulty raising additional capital.
Our shareholders may experience dilution
of their ownership interests because of the future issuance of additional shares of our common or preferred stock or other securities
that are convertible into or exercisable for our common or preferred stock.
We are authorized to issue an aggregate of 100,000,000
shares of common stock and 5,000,000 shares of “blank check” preferred stock. In the future, we may issue our authorized but
previously unissued equity securities, resulting in the dilution of the ownership interests of our present stockholders.
We intend to seek to raise
additional funds, finance acquisitions or develop strategic relationships by issuing equity or convertible debt securities, which would
reduce the percentage ownership of our existing stockholders. Our board of directors has the authority, without action or vote of the
stockholders, to issue all or any part of our authorized but unissued shares of common or preferred stock. Our articles of incorporation
authorizes us to issue up to 100,000,000 shares of common stock and 5,000,000 shares of preferred stock. Future issuances of common or
preferred stock would reduce our stockholders influence over matters on which stockholders vote and would be dilutive to earnings per
share. In addition, any newly issued preferred stock could have rights, preferences and privileges senior to those of the common stock.
Those rights, preferences and privileges could include, among other things, the establishment of dividends that must be paid prior to
declaring or paying dividends or other distributions to holders of our common stock or providing for preferential liquidation rights.
These rights, preferences and privileges could negatively affect the rights of holders of our common stock, and the right to convert such
preferred stock into shares of our common stock at a rate or price that would have a dilutive effect on the outstanding shares of our
common stock.
We do not anticipate paying dividends on
our common stock, and investors may lose the entire amount of their investment.
Cash dividends have never
been declared or paid on our common stock, and we do not anticipate such a declaration or payment for the foreseeable future. We expect
to use future earnings, if any, to fund business growth. Therefore, stockholders will not receive any funds absent a sale of their shares
of common stock. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur
if our stock price appreciates. We cannot assure stockholders of a positive return on their investment when they sell their shares, nor
can we assure that stockholders will not lose the entire amount of their investment.
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The Warrants we issued in our July 2022
offering are speculative in nature, and the trading market for our Warrants are volatile, sporadic and limited.
The Warrants we issued in
our July 2022 offering do not confer any rights of common stock ownership on their holders, such as voting rights or the right to receive
dividends, but rather merely represent the right to acquire shares of our common stock at a fixed price for a limited period of time.
Specifically, commencing on the date of issuance, holders of the Warrants may exercise their right to acquire the common stock and pay
an exercise price of $4.00 per share, up to five years from the date of issuance, after which date any unexercised Warrants will expire
and have no further value. In addition, the trading market for the Warrants is volatile, sporadic and limited.
Holders of the Warrants we issued in our
July 2022 offering will have no rights as a common stockholder until they acquire our common stock .
Until holders of the Warrants
we issued in our July 2022 offering acquire shares of our common stock upon exercise of the Warrants, the holders will have no rights
with respect to shares of our common stock issuable upon exercise of the Warrants. Upon exercise of the Warrants, the holder will be entitled
to exercise the rights of a common stockholder as to the security exercised only as to matters for which the record date occurs after
the exercise.
Although our securities became listed on
Nasdaq in August 2022, there can be no assurance that we will be able to comply with the continued listing standards of Nasdaq, a failure
of which could result in a de-listing of our common stock .
The Nasdaq Capital Market
requires that the trading price of its listed stocks remain above one dollar in order for the stock to remain listed. If a listed stock
trades below one dollar for more than 30 consecutive trading days, then it is subject to delisting from Nasdaq. In addition, to maintain
a listing on Nasdaq, we must satisfy minimum financial and other continued listing requirements and standards, including those regarding
director independence and independent committee requirements, minimum stockholders’ equity, and certain corporate governance requirements.
Additionally, we may become subject to an evolving set of compliance regulations pertaining to environmental, social and governance (“ESG”)
matters as well as cybersecurity standards that are promulgated by Nasdaq or other regulatory bodies. If we are able to maintain the listing
of our securities on Nasdaq, we may be unable to satisfy these requirements or standards and we could subject our securities to delisting,
which would have a negative effect on the price of our common stock and would impair our security holders’ ability to sell or purchase
our common stock or Warrants when they wish to do so. In the event of a delisting, we would expect to take actions to restore our compliance
with the listing requirements, but we can provide no assurance that any such action taken by us would allow our securities to become listed
again, stabilize the market price or improve the liquidity of our securities, prevent our securities from dropping below the minimum bid
price requirement, or prevent future non-compliance with the listing requirements.
The price of our common stock and Warrants
may be volatile.
The market price of our common
stock and Warrants is highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our
control, including the following:
· changes in our industry;
· competitive pricing pressures;
· our ability to obtain working capital financing;
· additions or departures of key personnel;
· conversions from preferred stock to common stock;
· sales of our common and preferred stock;
· our ability to execute our business plan;
· operating results that fall below expectations;
· loss of any strategic relationship;
· regulatory developments; and
· economic and other external factors.
In addition, the securities markets have from
time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies.
These market fluctuations may also materially and adversely affect the market price of our common stock and Warrants.
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Negative research about our business published
by analysts or journalists could cause our stock price to decline. A lack of regularly published research about our business could cause
trading volume or our stock price to decline.
The trading market for our
common stock depends in part on the research and reports that analysts and journalists publish about us or our business. If analysts or
journalists publish inaccurate or unfavorable research about our business, our stock price would likely decline. If we fail to meet the
expectations of analysts for our operating results, or if the analysts who covers us downgrade our stock, our stock price would likely
decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could
decrease, which could cause our stock price and trading volume to decline.
Claims for indemnification by our directors
and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available
to us.
Our articles of incorporation
and bylaws contain provisions that eliminate, to the maximum extent permitted by the corporation law of the State of Nevada, the personal
liability of our directors and executive officers for monetary damages for breach of their fiduciary duties as a director or officer.
Our articles of incorporation and bylaws also provide that we will indemnify our directors and executive officers and may indemnify our
employees and other agents to the fullest extent permitted by the corporation law of the State of Nevada. Any claims for indemnification
made by our directors or officers could impact our cash resources and our ability to fund the business.
Shareholder activism could cause material
disruption to our business.
Publicly traded companies
have increasingly become subject to campaigns by activist investors advocating corporate actions such as actions related to environment,
social and governance (ESG) matters, among other issues. Responding to proxy contests and other actions by such activist investors or
others in the future could be costly and time-consuming, disrupt our operations and divert the attention of our Board of Directors and
senior management from the pursuit of our business strategies, which could adversely affect our results of operations and financial condition.