Item 1A. Risk Factors
ITEM
1A. RISK FACTORS.
Our business is subject to numerous
risks. We caution you that the following important factors, among others, could cause our actual results to differ materially from those
expressed in statements made by us or on our behalf in filings with the SEC, press releases or communications with investors and others.
Any or all of our statements in this annual report and in any other public statements we make may turn out to be wrong. They can be affected
by inaccurate assumptions or by known or unknown risks and uncertainties. The factors mentioned in the discussion below will be important
in determining future results. Consequently, actual future results may vary materially from those anticipated in this annual report or
our other public statements. The occurrence of any of the events or developments described below could harm our financial condition,
results of operations, business and prospects. In such an event, the market price of our common stock could decline. Additional
risks and uncertainties not presently known to us or that we currently deem immaterial also may have similar adverse effects on us.
Risks
Related to Our Business
We
are not currently profitable and may never become profitable.
We
have incurred losses in every reporting period since we commenced business operations in 2010 and expect to continue to incur significant
losses for the foreseeable future. Our net loss applicable to common stockholders for the years ended December 31, 2021 and 2020 were
$7,488,172 and $7,009,414, respectively. As of December 31, 2021, our accumulated deficit was $40,593,180. There is no assurance that
any revenues we generate will be sufficient for us to become profitable or to maintain profitability. Our revenues for the years ended
December 31, 2021 and December 31, 2020 were $1,651,765 and $807,488, respectively, and our operating expenses for those periods were
$9,571,185 and $5,914,299, respectively. Our current revenues are not sufficient to fund our operations. We cannot predict when, if ever,
we might achieve profitability and we are not certain that we will be able to sustain profitability, if achieved. If we fail to achieve
or maintain profitability, the market price of our securities is likely to be adversely affected.
We
will require additional financing to continue our operations, and there is no assurance that we will be able to obtain such financing
on acceptable terms, or at all.
As of December 31, 2021, we
had cash of $11,447,047. We will need to raise additional financings to fund our operations, maintain compliance with the
NASDAQ listing requirements and implement our business plan. There is no assurance as to the amount and availability of any required
future financing or the terms thereof. Such financing, if in the form of equity, may be highly dilutive to our existing stockholders
and may otherwise include onerous terms. If in the form of debt, such financing may include covenants and repayment obligations which
may be difficult to meet and that could adversely affect our business operations. To the extent that funds are not available to us, we
may be required to delay, limit or terminate our business operations and may lose our NASDAQ listing.
Our
operating history makes evaluation of our business difficult.
We
are continuing to develop our technologies and to implement our business plan. Our ability to implement a successful business plan remains
unproven, and there is no assurance that we will ever generate sufficient revenues to sustain our business. Our operating history, together
with the other risks discussed in this “Risk Factors” section, may make it difficult for you to evaluate our business in
connection with making a decision about whether to invest in our securities.
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We
face the risks normally associated with a new business.
We
face all of the risks inherent in a new business, including the expenses, difficulties, complications and delays frequently encountered
in connection with conducting new operations and efforts to develop and commercialize technologies. These uncertainties include developing
our technologies and our brand name, raising capital to meet our working capital requirements and developing a customer base, among others.
If we are not effective in addressing these risks, we will not be able to operate profitably in the future, and we may not have adequate
working capital to meet our obligations as they become due.
Our
business may be adversely affected by a global economic downturn.
Any
economic downturn generally could cause a drop in government spending and business investment, which could have a material adverse effect
on our business. Further, as a result of the current global economic and geopolitical situation, there may be a disruption or
delay in performance by our third-party contractors and suppliers. If such third parties are unable to adequately satisfy their contractual
commitments to us in a timely manner, our business could be adversely affected.
We
could incur significant damages if we are unable to adequately discharge our contractual obligations.
Our
failure to comply with contract requirements or to meet our clients’ performance expectations on a contract could materially and
adversely affect our financial performance and our reputation. This, in turn, would impact our ability to compete for new clients and
contracts. Our failure to meet contractual obligations could also result in substantial actual and consequential damages under the terms
of such contracts. In addition, some of our contracts require us to indemnify clients for our failure to meet performance standards and/or
contain liquidated damages provisions and financial penalties related to performance failures. Although we do have liability insurance,
the policy limits may not be adequate to provide protection against all such potential liabilities.
Some
of our clients may terminate our contracts prior to completion, which could result in revenue shortfalls and reduce profitability or
cause losses on contracts.
Some of our
contracts with clients contain initial or base periods of one or more years, as well as option periods typically covering more than one-half
of the contract’s initial duration. However, such clients are under no obligation to exercise the option to extend the contract
term. The profitability of some of our contracts could be adversely impacted if such options are not exercised and the contract term
is not extended accordingly. Additionally, our contracts contain provisions permitting a client to terminate the contract on short notice,
with or without cause. The unexpected termination of significant contracts could result in significant revenue shortfalls. If revenue
shortfalls occur and are not offset by corresponding reductions in expenses, our business could be adversely affected. We cannot anticipate
if, when or to what extent a client might terminate its contracts with us.
10
We
may not be able to effectively control and manage our growth, which would negatively impact our operations.
We
have operated our current line of business for approximately eleven years, and we expect to grow in the near future as our business develops
and becomes further established. If our business grows as we anticipate, it will be necessary for us to manage our expansion in an orderly
fashion. Any significant growth in our activities or in the market for our services will require extension of our managerial, operational,
marketing and other resources. Future growth will also impose significant additional responsibilities upon the members of management
to identify, recruit, maintain, integrate, and motivate new employees. Our failure to manage growth effectively may lead to operational
inefficiencies that will have a negative effect on our profitability. Additionally, if our growth comes at the expense of providing quality
service and generating reasonable profits, our ability to successfully bid for contracts and our profitability will be adversely affected.
We cannot assure investors that we will be able to effectively manage any future growth we may experience.
Failure
to obtain adequate insurance coverage could put us at risk for uninsured losses.
Some
or all of our customers may require insurance as a requirement to conduct business with us. A lthough
we currently have product liability insurance, we may be unable to obtain or maintain adequate liability insurance on acceptable
terms, if at all, and there is a risk that our insurance will not provide adequate coverage against our potential losses. Additionally,
there are certain types of losses that may not be insurable at a cost that we can afford, and insurance may not be available at any cost
with respect to certain losses. Claims or losses in excess of any insurance coverage we may obtain, or the lack of insurance coverage,
could put us at risk of loss for any uninsured loss, which would have a material adverse effect on our business and financial condition.
We
are dependent on key personnel, and the loss of any of these individuals could harm our business.
We
depend on key scientific and other personnel. The loss of any of these individuals
could harm our business and significantly delay or prevent the achievement of our business objectives. In addition, our delivery of services
will be labor-intensive: when we are awarded a contract, we may need to quickly hire project leaders and project management personnel.
The additional staff may also create a concurrent demand for increased administrative personnel. The success of our business will require
that we attract, develop, motivate and retain:
●
experienced
and innovative executive officers;
●
senior
managers who have successfully managed or designed programs in the public sector; and
●
information
technology professionals who have designed or implemented complex information technology projects.
Innovative,
experienced and technically proficient individuals are in great demand and are likely to remain a limited resource. We may be unable
to continue to attract and retain desirable executive officers, senior managers, and technology professionals. Our inability to hire
sufficient personnel on a timely basis or the loss of significant numbers of executive officers and senior managers could adversely affect
our business.
We
may be dependent on cash flow and payments from customers in order to meet our expense obligations.
A
number of factors may cause our revenues, cash flow and operating results to vary from quarter to quarter, including the following:
●
the
progression of contracts;
●
the
rate of customer adoption of our new subscription pricing program;
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●
the
commencement, completion or termination of contracts during any particular quarter;
●
the
schedules of government agencies and large multinational corporations for awarding contracts;
●
the
failure of our customers to fulfill their obligations under contracts with us; and
●
the
term of awarded contracts and potential acquisitions.
Changes
in the volume of activity and the number of contracts commenced, completed or terminated during any quarter may cause significant variations
in our cash flow from operations because a significant portion of our expenses are fixed. Fixed expenses include, rent, payroll, insurance,
employee benefits, taxes and other administrative costs and overhead. Moreover, we expect to incur significant operating expenses during
the start-up and early stages of large contracts and typically do not receive corresponding payments in that same quarter.
We
may make acquisitions in the future that we are unable to effectively manage given our limited resources.
We
may choose to grow our business by acquiring other entities. We may be unable to manage businesses that we have acquired or to integrate
them successfully without incurring substantial expenses, delays or other problems that could negatively impact our results of operations.
Moreover, business combinations involve additional risks, including:
●
diversion
of management’s attention;
●
loss
of key personnel;
●
our
becoming significantly leveraged as a result of the incurrence of debt to finance an acquisition;
●
assumption
of unanticipated legal or financial liabilities;
●
unanticipated
operating, accounting or management difficulties in connection with the acquired entities;
●
amortization
of acquired intangible assets, including goodwill; and
●
dilution
to existing stockholders and our earnings per share.
Also,
client dissatisfaction or performance problems with an acquired firm could materially and adversely affect our reputation as a whole.
Further, the acquired businesses may not achieve the revenues and earnings that we anticipated.
We
may be unable to develop or commercialize new and rapidly evolving technologies.
Many
of our activities involve developing products or processes that are based upon new, rapidly evolving technologies. The ability to commercialize
or further develop these technologies could fail for a variety of reasons, both within and outside of our control.
12
We
may be unable to protect our intellectual property rights.
Our
success in part depends on the ability to protect our intellectual property and proprietary technology. To do so, we will be required
to prosecute patent applications and maintain patents, obtain new patents and pursue trade secret and other intellectual property protection. There can be no assurance that our program for protection of intellectual property
and proprietary technology will be sufficient to protect our intellectual property and proprietary technology from competitors. Our business
is also subject to the risk that our issued patents will not provide us with significant competitive advantages if, for example, a competitor
was to independently develop or obtain similar or superior technologies. In addition, our issued patents may be challenged or infringed
upon by third parties. The enforcement of intellectual property rights is subject to considerable uncertainty and can be expensive and
time-consuming. Patent reform laws and court decisions interpreting such laws, may create additional uncertainty around our ability to
obtain and enforce patent protection. Any significant impairment of our intellectual property rights could harm our business and our
ability to compete. The unauthorized use of our intellectual property could make it more expensive to do business and harm our operating
results. Proprietary trade secrets and unpatented know-how are also very important to our business; however, trade secrets are difficult
to protect. Our employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully
disclose our confidential information to competitors, and confidentiality agreements may not provide an adequate remedy in the event
of unauthorized disclosure of confidential or proprietary information.
We
may be sued by third parties who claim that we have infringed their intellectual property rights.
We
may be exposed to future litigation by third parties based on claims that our research, development and commercialization activities
infringe the intellectual property rights of third parties to which we do not hold licenses or other rights, or that we have misappropriated
the trade secrets of others. Any litigation or claims against us, whether or not valid, could result in substantial costs, and could
place a significant strain on our financial and human resources. In addition, if successful, such claims could cause us to pay substantial
damages. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there
is a risk that some of our confidential information could be compromised by disclosure during this type of litigation.
Our
bylaws contain provisions indemnifying our officers and directors against all costs, charges, and expenses incurred by them.
Our
bylaws contain provisions with respect to the indemnification of our officers and directors against all costs, charges and expenses actually
and reasonably incurred by an officer or director paid to settle an action or satisfy a judgment in a civil, criminal or administrative
action or proceeding to which he or she is made a party by reason of being or having been one of our directors or officers. To
the extent that our directors’ and officers’ insurance policy does not provide reimbursement for such costs, charges, expenses
and other amounts, we may incur substantial expenses in satisfying our indemnification obligations.
Our
operating costs could be significantly higher than we expect, and this could reduce our future profitability.
In
addition to general economic conditions, market fluctuations and international risks, significant increases in operating, development
and implementation costs could adversely affect us due to numerous factors, many of which are beyond our control.
13
A
cyber incident could result in information theft, data corruption, operational disruption and/or financial loss.
Businesses
have become increasingly dependent on digital technologies to conduct day-to-day operations. At the same time, cyber incidents, including
deliberate attacks or unintentional events, have increased. A cyber-attack could include gaining unauthorized access to digital systems
for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption or result in denial
of service on websites. We depend on digital technology, including information systems and related infrastructure, to process and record
financial and operating data, and communicate with our employees and business partners. Our technologies, systems, networks, and those
of our business partners may become the target of cyber-attacks or information security breaches that could result in the unauthorized
release, gathering, monitoring, misuse, loss or destruction of proprietary and other information, or other disruption of our business
operations. Although to-date we have not experienced any losses relating to cyber-attacks, there is no assurance that we will not suffer
such losses in the future. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue
to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities.
Our
results of operations may be negatively impacted by the COVID-19 pandemic.
The
spread of the coronavirus, which has caused a broad impact globally, including restrictions on travel and quarantine policies put in
place by businesses and governments, may have a material economic effect on our business. Additionally, the coronavirus may result in disruption of financial
markets, which may reduce our ability to access capital either at all or on favorable terms.
Risks
Related to Our Securities
The
price of our securities is subject to volatility related or unrelated to our operations, which could result in substantial losses
for our stockholders.
Between
January 1, 2021 and December 31, 2021, the trading price of our common stock has ranged from a low of $1.77 to a high of $7.64 and could
be subject to wide fluctuations in the future in response to various factors, some of which are beyond our control. These
factors include those discussed previously in this “Risk Factors” section and others, such as:
●
delays
or failures in the commercialization of our current or future products and services;
●
quarterly
variations in our results of operations or those of our competitors;
●
changes
in our earnings estimates or recommendations by securities analysts or adverse publicity about us or our products or services;
●
announcements
by us or our competitors of new products and services, significant contracts, commercial relationships, acquisitions or capital commitments;
●
adverse
developments with respect to our intellectual property rights;
●
commencement
of litigation involving us or our competitors;
●
any
major changes in our board of directors or management;
●
market
conditions in our industry; and
●
general
economic conditions in the United States and abroad.
In
addition, the stock market, in general, may experience broad market fluctuations, which may adversely affect the market price or liquidity
of our securities.
We
could be subject to securities class action litigation.
Any
sudden decline in the market price of our securities could trigger securities class action lawsuits against us. If any of our stockholders
were to bring such a lawsuit against us, we could incur substantial costs defending the lawsuit and the time and attention of our management
would be diverted from our business and operations. We also could be subject to damages claims if we are found to be at fault in connection
with a decline in our market price of our securities.
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Historically,
there has been a limited trading market in our common stock, and you may therefore have difficulty selling your securities at a price
that you determine is satisfactory.
Our
common stock is listed on The Nasdaq Capital Market. Historically, there has been a limited trading market for our common stock. There
is no assurance that our common stock will actively trade in the public market at or above a price that you consider acceptable. If an
active market for our common stock is not maintained, it may be difficult for you to sell your shares of common stock when you wish to
sell them or at a price that you consider satisfactory. An inactive trading market may also impair our ability to raise capital to continue
to fund operations by selling securities and may impair our ability to acquire other companies or technologies by using our securities
as consideration.
There
is no assurance that we will satisfy the continued listing requirements of The NASDAQ Capital Market.
We
cannot assure you that we will be able to continue to satisfy the continued listing requirements of The Nasdaq Capital Market. For example,
there is no assurance that our common stock will continue to have a bid price of at least $1.00 per share, which is the minimum bid
price under such continued listing requirements, or that we will be able to satisfy other quantitative continued listing requirements,
including the minimum stockholders’ equity requirement of at least $2,500,000 for continued listing on The Nasdaq Capital Market,
which we have previously failed to satisfy. If we fail to satisfy a Nasdaq requirement for continued listing, Nasdaq could provide notice
that our common stock will become subject to delisting. In such event, Nasdaq rules would permit us to appeal the decision to reject
our proposed compliance plan or any delisting determination to a Nasdaq Hearings Panel. If our securities are de-listed from The Nasdaq
Capital Market, our stockholders could incur material adverse consequences such as reduced liquidity for their securities and reduced
market prices for their securities. Following such de-listing, we could encounter increased difficulty in issuing additional securities
at an attractive price, or at all, in order to fund our operations.
You
may experience additional dilution as a result of future equity offerings.
In
order to raise additional capital, we may in the future offer additional shares of our common stock or other securities convertible into
or exchangeable for our common stock. The price per share at which we sell additional shares of our common stock, or securities convertible
or exchangeable into common stock, in future transactions may be lower than the price per share that you paid for our common stock.
We
have broad discretion in the use of the net proceeds of our securities offerings and may not use them effectively.
We
intend to use our cash for the development of our products and services. Our management has broad discretion in the use of cash and will
have the right to use our cash in ways that differ substantially from our current plans. Management may spend our cash in ways that do
not improve our results of operations or enhance the value of our securities. The failure by management to apply funds effectively could
result in financial losses that could have a material and adverse effect on our business and cause the market price of our securities
to decline.
We
do not intend to pay dividends on our common stock, and your ability to achieve a return on your investment will depend on appreciation
in the market price of our securities.
We
currently intend to invest our future earnings, if any, to fund our growth and not to pay any cash dividends on our common stock. Since
we do not intend to pay dividends, your ability to receive a return on your investment will depend on any future appreciation in the
market price of our securities. There is no assurance that our securities will appreciate in price.
15
If
securities or industry analysts do not publish research or reports about us, or if they issue adverse or misleading opinions regarding
us or our securities, the market price of our securities and their trading volume could decline.
If
we do not obtain and maintain research coverage by securities and industry analysts, the market price for our securities may be adversely
affected. The market price of our securities also may decline if any analyst who covers us issues an adverse or erroneous opinion regarding
us, our business model, our intellectual property or our performance. If one or more analysts cease coverage of us or fail to regularly
publish reports on us, we could lose visibility in the financial markets, which could cause the market price of our securities and their
trading volume to decline and possibly adversely affect our ability to engage in future financings.
Sales
of a substantial number of shares of our common stock in the public market could cause our stock price to fall.
Sales
of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in
the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. As
of December 31, 2021, we had 10,498,802 outstanding shares of common stock. Future sales of a large number of our shares or upon exercise
of our outstanding warrants and stock options, or the perception that a large number of shares may be sold, could have a material adverse
effect on the trading price of our common stock.
We
will incur significant costs to ensure compliance with U.S. and Nasdaq reporting and corporate governance requirements.
We
incur significant costs associated with our public company reporting requirements and with applicable U.S. and Nasdaq corporate governance
requirements, including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by the SEC and Nasdaq. These applicable
rules and regulations also make it more difficult and more expensive for us to obtain director and officer liability insurance 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 difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive
officers.
If
we fail to maintain effective internal control over financial reporting, the market price of our securities may be adversely affected.
As
a public reporting company, we are required to establish and maintain effective internal control over financial reporting. Failure to
establish such internal control, or any failure of such internal control once established, could adversely impact our public disclosures
regarding our business, financial condition or results of operations. Any failure of our internal control over financial reporting could
also prevent us from maintaining accurate accounting records and discovering accounting errors and financial frauds.
Rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual assessment of our internal control over financial
reporting. The standards that must be met for management to assess the internal control over financial reporting as effective are complex,
and require significant documentation, testing and possible remediation to meet the detailed standards. We may encounter problems or
delays in completing activities necessary to make an assessment of our internal control over financial reporting. If we cannot assess
our internal control over financial reporting as effective, investor confidence and share value may be negatively impacted. In addition,
management’s assessment of internal control over financial reporting may identify weaknesses and conditions that need to be addressed
in our internal control over financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses
and conditions that need to be addressed in our internal control over financial reporting (including those weaknesses identified in our
periodic reports), or disclosure of management’s assessment of our internal control over financial reporting may have an adverse
impact on the price of our securities.
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Provisions
in our articles of incorporation and bylaws could discourage a takeover that stockholders may consider favorable and may lead to entrenchment
of management.
Our
articles of incorporation and bylaws contain provisions that could delay or prevent changes in control or changes in our management without
the consent of our board of directors. These provisions include the following:
●
a
classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership
of a majority of our board of directors;
●
no
cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
●
the
exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors
or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of
directors;
●
the
ability of our board of directors to authorize the issuance of additional shares of preferred stock and to determine the terms of
those shares, including preferences and voting rights, without stockholder approval, which could adversely affect the rights of our
common stockholders or be used to deter a possible acquisition of our company;
●
the
ability of our board of directors to alter our bylaws without obtaining stockholder approval;
●
the
required approval of the holders of at least two-thirds of the shares entitled to vote at an election of directors to adopt, amend
or repeal our bylaws or repeal the provisions of our articles of incorporation and bylaws regarding the election and removal of directors;
●
a
prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting
of our stockholders;
●
the
requirement that a special meeting of stockholders may be called only by the chairman of the board of directors, the chief executive
officer, the president (in the absence of a chief executive officer) or the board of directors, which may delay the ability of our
stockholders to force consideration of a proposal or to take action, including the removal of directors; and
●
advance
notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters
to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation
of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.
●
the
ability of our directors to issue one or more series of preferred stock with dividend, liquidation, conversion, voting or other rights
which would dilute the interest of or impair the voting power of our common stockholders.
These
provisions could inhibit or prevent possible transactions that some stockholders may consider attractive.
We
could issue one or more additional series of shares of preferred stock with the effect of diluting existing stockholders and impairing
their voting and other rights.
Our
Board of Directors is authorized to issue up to 10,000,000 shares of preferred stock and may determine the terms of future preferred
stock offerings without further action by our stockholders. If we issue preferred stock, it could affect your rights or reduce the value
of our outstanding common stock. In particular, specific rights granted to future holders of preferred stock may include voting rights,
preferences as to dividends and liquidation, conversion, and redemption rights, sinking fund provisions, and restrictions on our ability
to merge with or sell our assets to a third party. As of December 31, 2021, 465 shares of our preferred stock are outstanding, consisting
of 132 shares of Series D Preferred Stock and 333 shares of Series E Preferred Stock. In addition to the possible negative effect on
the market price of our common shares resulting from the public sale or perceived sale of common shares issuable upon conversion or exercise
of these securities, the Certificate of Designations for the Series D Preferred Stock provides that upon occurrence of certain triggering
events described in the Certificate, including but not limited to, payment defaults, breaches of the transaction documents pertaining
to the Series D Preferred Stock and failure to maintain listing on the NASDAQ Capital Market, the Series D Preferred Shares would become
subject to redemption, at the option of the holder, at a 125% premium to the underlying value of the Series D Shares being redeemed.
17
ITEM
1B. UNRESOLVED STAFF COMMENTS.
Not
applicable.