Item 1A. Risk Factors.
An investment in our securities is speculative in nature and involves a high degree of risk. In addition to the other information contained in this report, our stockholders and prospective investors should carefully consider the following risk factors in evaluating us and our business, any of which could materially adversely affect our business, financial condition, or operating results and could result in a loss of your investment.
We have a history of losses, a large accumulated deficit and may incur future losses. We may be unable to achieve or maintain profitability in the future.
The Company commenced operations in 2016 and began generating commercial revenues in 2017. The Company incurred net losses of $5,543,908, $7,263,567 and $7,592,539 for the years ended December 31, 2022, 2021, and 2020, respectively. At December 31, 2022, we had an accumulated deficit of $39,474,622. We are subject to all the problems, expenses, difficulties, complications and delays encountered in establishing a new business. The Company does not know if it will become commercially viable and ever generate significant revenues or operate at a profit.
We have incurred a material amount of indebtedness to fund our operations, the terms of which have required us to pledge substantially all of our assets as security. Our ability to conduct our business could be materially affected if we were unable to repay or extend the maturity dates of our outstanding indebtedness.
As of the filing date of this report, we had outstanding borrowings of $4,603,278 of principal amount, of which:
approximately $200,000 at 10% interest was due in October 2022, and we are currently in default on payment;
approximately $3,278 at 9.5% interest is due in May 2023;
approximately $3,000,000 at 10% interest is due in October 2024 (“Credit Line”);
approximately $1,250,000 at 10% interest is due in October 2024; and
approximately $150,000 at 3.75% interest is due in June 2050;
Further, in connection with the Credit Line which is for an amount up to $3,000,000 by the Wit Trust, we have granted the trust a security interest in our assets, such that all of our tangible and intangible assets are subject to a lien held by the trust.
The debt instruments include events of default, including, among other things, payment defaults, any breach by us of representations, warranties or covenants, certain bankruptcy events and, and in connection with the Credit Line, if any lawsuit, money judgment, writ or similar process is entered or filed against us or our subsidiary or any of our assets for more than $100,000. If an event of default were to occur under any of the debt instruments and we were unable to obtain a waiver for the default or extend the maturity dates of the debt instruments, the counterparties could, among other remedies, accelerate our obligations under the debt instrument, and in connection with the Credit Line exercise the creditor’s right to foreclose on their security interests, which would cause substantial harm to our business and prospects.
The Company needs additional financing to continue operations and become profitable; if we do not raise additional capital, we will need to curtail or cease operations; and our financial statements contain a going concern qualification.
We require additional capital for the development of our business operations. We may also encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may increase our capital needs and/or cause us to spend our cash resources faster than we expect. Accordingly, we will need to obtain additional funding in order to continue our operations. The uncertainties surrounding our ability to fund our operations raise substantial doubt about our ability to continue as a going concern.
For the past five years, the Company has funded its development activities primarily through private placements of debt and equity, and stockholder loans. As of December 31, 2022, we had approximately $55,273 in cash. The report of our independent registered public accounting firm on our financial statements for the year ended December 31, 2022, includes an explanatory paragraph stating that our lack of revenues and working capital raise substantial doubt about our ability to continue as a going concern. To become profitable, the Company will require additional financing. There can be no assurance that additional financing will be available to the Company when needed, on favorable terms or otherwise. The exact amount of additional financing raised, if any, will determine how quickly we can reach profitability on our operations. If additional funding is not obtained, we may need to reduce, defer or cancel product development efforts, our production and marketing operations, or overhead expenditures to the extent necessary. Moreover, any such additional financing may dilute the interests of existing stockholders. The absence of additional financing, if and when needed, could cause the Company to full implementation of its business plan in whole or in part, its business activities, the Company and its prospects and have an effect on the Company’s financial condition and results of operations.
COVID-19 and Other Macroeconomic Factors.
The COVID-19 pandemic had a significant impact around the world and has created significant volatility, uncertainty, and economic disruption. It prompted governments and businesses to take unprecedented measures in response. While economies of various countries have rebounded from the global Covid-19 economic shutdown that began in the late first quarter and early second quarter of calendar year 2020, the impact of the Covid-19 pandemic continued, to varying degrees, in 2022 and continues, to varying degrees, in 2023 due to mounting inflationary cost pressures and potential recession indicators that have now negatively impacted the global economy. We continue to monitor the effects of the pandemic and macroeconomic environment and take appropriate steps to mitigate the impact on our business, employees and financial condition; however, the nature and extent of this impact in future periods remains difficult to predict due to numerous uncertainties outside our control.
Our limited operating history makes it difficult for potential investors to evaluate our business prospects.
The Company commenced operations in 2016 and began generating commercial revenues in 2017. Accordingly, we have a limited operating history upon which to base an evaluation of our business and prospects. Operating results for future periods are subject to numerous uncertainties, and we cannot assure you that the Company will achieve or sustain profitability in the future.
The Company’s prospects must be considered in light of the risks encountered by companies in the early stage of development, particularly companies in new and rapidly evolving markets. Future operating results will depend upon many factors, including our success in attracting and retaining motivated and qualified personnel, our ability to establish credit lines or obtain financing, our ability to develop and market new products, our ability to control costs, and general economic conditions. We cannot assure you that the Company will successfully address any of these risks. There can be no assurance that our efforts will be successful or that we will ultimately be able to attain profitability.
The Company’s ultimate success will be dependent in part on our ability to successfully develop, produce and market a portfolio of natural phytocannabinoid-rich industrial hemp products, and market acceptance of our planned products.
Our ultimate success will be dependent in part on our ability to successfully develop, produce and market a portfolio of natural phytocannabinoid-rich industrial hemp products. We are an agribusiness and grow our product indoors and outdoors, and there are risks associated with the production of our product relating to such things as weather, soil deterioration, and infestation that could affect our supplies and inventory. In addition, market acceptance by and demand for our products from consumers will also be key factors in our ability to succeed. If we are unable to develop and market our portfolio of existing and planned products or if they are not accepted by consumers, our business, results of operations and financial condition could be seriously harmed.
We face substantial risk of product liability claims and potential adverse product publicity.
Like any other retailer, distributor or manufacturer of products that are designed to be ingested, we face an inherent risk of exposure to product liability claims, regulatory action and litigation if our products are alleged to have caused loss or injury. Although we carry products liability insurance, a successful products liability claim brought against us that is in excess of our insurance coverage limits or assertion or settlement of any uninsured claim, or a significant number of insured claims could have a material adverse effect 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.
A significant product defect could materially harm our brand image and could force us to conduct a product recall. This could damage our relationships with our customers and reduce end-user loyalty. A product recall would be particularly harmful to us because we have limited financial and administrative resources to effectively manage a product recall and it would detract management’s attention from implementing our core business strategies. As a result, a significant product defect or product recall could cause a decline in our sales and profitability and could reduce or deplete our financial resources.
We need to undertake additional significant marketing efforts for our present and planned products.
Until 2019, our marketing efforts were limited in large part to sales in the business-to-business channel. In order to achieve profitability, we need to undertake significant marketing efforts for our existing and planned products in the business-to-consumer and medical channels, including building awareness of our Veritas Farms™ brand and promoting both online and “brick and mortar” sales. While we have significantly expanded our efforts since 2019, these marketing efforts must continue on an ongoing basis. There is no assurance that any marketing strategy we develop can be successfully implemented or if implemented, that it will result in significant sales of our existing and planned products.
Our agreements with customers do not require the purchase of any specified amount of products.
Our agreements with customers do not require them to purchase any specified amounts of our products or dollar amounts of sales or to make any purchases whatsoever. Therefore, we cannot assure you that, in any future period, our sales generated from our customers, individually or in the aggregate, will equal or exceed historical levels. We also cannot assure you that, if sales to any of our customers cease or decline, we will be able to replace these sales with sales to either existing or new customers in a timely manner, or at all. A cessation or reduction of sales, or a decrease in the prices of products sold to one or more of these customers could cause a significant decline in our net sales and profitability.
If the Company fails to properly manage its growth, the Company’s business could suffer.
A significant part of the Company’s strategy will be to expand sales and marketing of its existing products into new channels and geographic markets and develop, sell and market additional products, such as those in its Veritas Farms™ product line. As we continue to grow our business and develop products, we expect to need additional research, development, managerial, operational, sales, marketing, financial, accounting, legal and other resources. The Company expects its growth to place a significant strain on management, as well as on operational and financial resources and systems. In addition, some members of our management do not have significant experience managing a CBD agribusiness operation, so our management may not be able to manage such growth effectively. Additionally, the majority of our personnel are currently working remotely, which may limit their ability to perform certain job functions and may negatively impact productivity. In the long term, we may experience challenges to productivity and collaboration, and technology infrastructure security, as personnel work remotely on a regular basis. To effectively manage our growth, we must continue to adapt to a remote work environment. To manage growth effectively, the Company will need to maintain a system of management controls, and attract and retain qualified personnel, as well as develop, train and manage management-level and other employees. to manage our growth effectively could cause us to over-invest or under-invest in infrastructure, and result in or in our infrastructure, which could have a material effect on the ability to implement our planned growth strategies, as well as on the Company’s business, results of operations and financial condition.
Our management may not be able to control costs in an effective or timely manner.
The Company’s management has used reasonable efforts to assess, predict and control costs and expenses. However, the Company only has a limited operating history upon which to base those efforts. Implementing our business plan may require more employees, capital equipment, supplies or other expenditure items than management has predicted. Likewise, the cost of compensating employees and consultants or other operating costs may be higher than management’s estimates, which could lead to sustained losses.
We expect our quarterly financial results to fluctuate.
We expect our net sales and operating results to vary significantly from quarter to quarter due to a number of factors, including changes in:
Demand for our products;
Our ability to obtain and retain existing customers or encourage repeat purchases;
Our ability to manage our product inventory;
General economic conditions, both domestically and in foreign markets;
Advertising and other marketing costs; and
Costs of creating and expanding product lines.
As a result of the variability of these and other factors, our operating results in future quarters may be below the expectations of our stockholders.
Cybersecurity breaches of our IT systems could degrade our ability to conduct our business operations and deliver products and services to our customers, delay our ability to recognize revenue, compromise the integrity of our software programs, result in significant data losses and the theft of our intellectual property, damage our reputation, expose us to liability to third parties and require us to incur significant additional costs to maintain the security of our networks and data.
We increasingly depend upon our IT systems to conduct virtually all of our business operations, ranging from our internal operations and product development activities to our marketing and sales efforts and communications with our customers and business partners. Computer programmers may attempt to penetrate our network security, or that of our website, and misappropriate our proprietary information or cause interruptions of our service. Because the techniques used by such computer programmers to access or sabotage networks change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques. In addition, sophisticated hardware and operating system software and applications that we produce or procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of the system. We have also outsourced a number of our business functions to third-party contractors, and our business operations also depend, in part, on the of our contractors’ own cybersecurity measures. Similarly, we rely upon distributors, resellers and system integrators to sell our products and our sales operations depend, in part, on the reliability of their cybersecurity measures. Additionally, we depend upon our employees to appropriately handle confidential data and deploy our IT resources in a safe and secure fashion that does not our network systems to security and the of data. Accordingly, if our cybersecurity systems and those of our contractors to protect access, sophisticated and the of data by our employees and contractors, our ability to conduct our business effectively could be .
The market for CBD products is highly competitive and the Company faces substantial competition. If we are unable to compete effectively in the market, our business and operating results could be materially and adversely affected.
The industrial hemp cultivation and derivative products industry is relatively new and rapidly evolving. While we believe that the industry is fragmented at the present time, there are numerous competitors, including Green Roads, Charlotte’s Webb, Folium Biosciences, Mary’s Nutritional and CV Sciences, some of whom are larger and more well-established with a longer operating history and greater financial resources than does the Company. Moreover, we may also face competition with larger firms in consumer products manufacturing and distribution industry, who elect to enter the market given the relatively low barriers to entry. The Company believes that it competes effectively with its competitors because of its vertical integration through the cultivation, extraction, formulation, manufacturing and distribution processes, the quality of its products and customer service. However, no assurance can be given that the Company will effectively compete with its existing or future competitors. In addition, competition may drive the prices of our products down, which may have a materially adverse effect on our business.
Given the rapid changes affecting the global, national and regional economies generally, and the CBD industry specifically, the Company may experience difficulties in further establishing and maintaining a competitive advantage in the marketplace. The Company’s success will depend on our ability to keep pace with any changes in such markets, especially legal and regulatory changes. Our success will depend on our ability to respond to, among other things, changes in the economy, market conditions and competitive pressures. Any failure to anticipate or respond adequately to such changes could have a material adverse effect on the Company’s business, financial condition and results of operations.
Our failure to appropriately and timely respond to changing consumer preferences and demand for new products and services could significantly harm our customer relationships and have a material adverse effect on our business, financial condition and results of operations.
Our business is subject to changing consumer trends and preferences. Our failure to accurately predict or react to these trends could negatively impact consumer opinion of us as a source for the latest products, which in turn could harm our customer relationships and cause us to lose market share. The success of our product offerings depends upon a number of factors, including our ability to:
Anticipate customer needs;
Innovate and develop new products;
Successfully introduce new products in a timely manner;
Price our products competitively with retail and online competitors;
Deliver our products in sufficient volumes and in a timely manner; and
Differentiate our product offerings from those of our competitors.
If we do not introduce new products or make enhancements to meet the changing needs of our customers in a timely manner, some of our products could be rendered obsolete, which could have a material adverse effect on our financial condition and results of operations.
Recent turnover with our executive officers and board of directors may disrupt our operations, our strategic focus or our ability to drive stockholder value.
There have been significant changes to our executive officers and board of directors since May 2021 as previously reported in our Current Reports on Form 8-K filed May 12, 2021, August 12, 2021, June 3, 2022, July 5, 2022, July 28, 2022, November 14, 2022 and December 12, 2022, which includes the following: (1) on May 12, 2021, in accordance with the terms of a Securities Purchase Agreement dated May 12, 2021 with the Wit Trust, an existing stockholder, and the sale to the Wit Trust of the Series B Convertible Preferred Stock and Series A Convertible Preferred Stock, (i) Bao T. Doan and Marc J. Horowitz stepped down from the board of directors, (ii) Alexander M. Salgado stepped down as Chief Executive Officer and a director of the Company, (iii) Michael Pelletier stepped down as an employee of the Company, except pursuant to a consulting agreement entered into with Mr. Pelletier on the same date, he continued to serve as Chief Financial Officer until August 11, 2021, (iv) Stephen E. Johnson (“Mr. Johnson”), Dr. van der Post and Craig Fabel (“Mr. Fabel”) were elected and appointed as directors on the board of directors, (v) Thomas E. Vickers (Mr. Vickers”), an incumbent director, was appointed as Chairperson of the Board, (vi) Mr. Johnson was appointed as Chief Executive Officer and President of the Company, and (vii) Ramon A. Pino was appointed as Executive Vice President of Finance, Treasurer and Secretary of the Company, and who was subsequently appointed as Chief Financial Officer on August 11, 2021; (2) on June 1, 2022, Kristen High (“Ms. High”) was elected and appointed as a director on the board of directors; (3) on June 30, 2022, Dave Smith, the Company’s COO, ; (4) on July 25, 2022, (i) Mr. Johnson stepped down as Chief Executive Officer, President and a director, and (ii) Alessandro M. Annoscia (“Mr. Annoscia”) was appointed as Chief Executive Officer, President and a director on the board of directors, (5) on November 7, 2022, (i) Mr. Annoscia stepped down as Chief Executive Officer, President, and a director, and (ii) Mr. Vickers was appointed interim Chief Executive Officer and interim President, and (6) on December 8, 2022, (i) Kellie Newton, Mr. Fabel, and Ms. High were removed as directors on the board of directors, and (ii) Gary A. Shangold was elected and appointed as a director on the board of directors. Turnover among our executive officers and board of directors may our operations, our strategic focus or our ability to drive stockholder value, and could have a material effect on our operations, business and financial condition.
We are dependent upon our executive officers and the loss of any of such individuals could have an adverse effect on the Company.
There have been significant changes to our executive officers and board of directors since May 2021 as described in the previous risk factor “Recent turnover with our executive officers and board of directors may disrupt our operations, our strategic focus or our ability to drive stockholder value.” Our success depends in large part upon the efforts of Mr. Vickers, our interim Chief Executive Officer and interim President and Mr. Pino, our Chief Financial Officer. While we are party to an employment agreement with Mr. Pino, we do not have an agreement with Mr. Vickers nor is Mr. Vickers receiving any compensation for his services as interim Chief Executive Officer and interim President. In addition, we do not currently maintain “key man” life insurance on any of our executive officers. Accordingly, the loss of the services of any of our executive officers, could potentially have a material adverse effect on the Company.
The Company’s success will be dependent in part upon its ability to attract qualified personnel and consultants.
The Company’s success will be dependent in part upon its ability to attract qualified management, including a permanent Chief Executive Officer, President and Chief Operating Officer, operational, administrative, product development and marketing and sales personnel and consultants. The inability to do so on favorable terms may harm the Company’s proposed business.
Increases in costs, disruption of supply or shortage of materials, including raw materials could harm our business.
The Company may experience increases in the cost or a sustained interruption in the supply or shortage of materials needed for the growing and production of its products. Any such an increase or supply interruption could materially negatively impact our business, prospects, financial condition and operating results. We use various materials, including raw materials, in our business. The prices for these materials fluctuate depending on market conditions and global demand for these materials and could adversely affect our business and operating results. Substantial increases in the prices for our materials increase our operating costs, and could reduce our margins if we cannot recoup the increased costs through increased prices for our products and services.
Natural elements and adverse weather events can disrupt our business.
Our business involves the growing of hemp, an agricultural product. Such business will be subject to the risks inherent in the agricultural business, such as insects, plant diseases and similar agricultural risks. Further, to the extent that our products are grown outside, we are subject to weather and climate conditions. Extended cold streaks, rain or snow, or generally cold weather or adverse climate conditions, could materially adversely affect our hemp plants. Accordingly, there can be no assurance that natural elements will not have a material adverse effect on any future production of our products.
There is limited availability of clinical studies regarding industrial hemp-based products.
Although hemp plants have a long history of human consumption, there is little long-term experience with human consumption of certain of these innovative product ingredients or combinations thereof in concentrated form. Although the Company performs research and/or tests the formulation and production of its products, there is limited clinical data regarding the safety and benefits of ingesting industrial hemp-based products. Any instance of illness or negative side effects of ingesting industrial hemp-based products would have a material adverse effect on our business and operations.
We do not have any business interruption insurance, and this may cause us to be unable to continue as a going concern if there is an interruption to our business.
There are a variety of things that may cause an interruption in our business, such as weather events. We do not carry business interruption insurance, which means that if our business is interrupted, we could be unable to produce, develop and market our products, and could lose substantial revenue and cash flow, materially harming our business, operations, and financial results.
We depend upon our trademarks and proprietary rights, and any failure to protect our intellectual property rights or any claims that we are infringing upon the rights of others may adversely affect our competitive position.
Our commercial success depends, in large part, on our ability to obtain, maintain and protect our current and future brands (including Veritas Farms™), our proprietary formulations and products and to defend our intellectual property rights. Our ability to successfully implement our business plan depends on our ability to build and maintain brand recognition using trademarks, service marks, trade dress and other intellectual property. We cannot be sure that trademarks will be issued with respect to any future trademark applications or that our competitors will not challenge, invalidate or circumvent any existing or future trademarks issued to us. We may rely on trade secret, trademark, patent and copyright laws, and confidentiality and other agreements with employees and third parties, all of which offer only limited protection. The steps we have taken and the steps we will take to protect our proprietary rights may not be adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights. If our efforts to protect our intellectual property are or , or if any third party or on our intellectual property, the value of our brands may be , which could have a material effect on the Company’s business and prevent our brands from or maintaining market acceptance. Protecting use of our trademarks and other intellectual property rights may be expensive, and in some cases not possible. In some cases, it may be or to detect third-party or of our intellectual property rights, and proving any such may be even more .
The Company may experience difficulty opening or maintaining bank accounts.
Because the use, sale and distribution of cannabis remains illegal under federal law, many banks will not accept deposits from or provide other bank services to businesses involved with cannabis. Consequently, those businesses involved in the cannabis industry continue to encounter difficulty establishing banking relationships, which may increase over time. Our inability to maintain our current bank accounts would make it difficult for us to operate our business, increase our operating costs, and pose additional operational, logistical and security challenges and could result in our inability to implement our business plan. Furthermore, the inability to open bank accounts may make it difficult for our existing and potential customers to operate and may make it difficult for them to contract with us.
Laws and regulations affecting the CBD industry are evolving under the Farm Bill, and changes to applicable regulations may materially affect our future operations in the CBD market.
The CBD used by the Company is derived from hemp as defined in the Farm Bill and codified at 7 USC 1639o means “the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.” The cannabis sativa plant and its derivatives may also be deemed marijuana, depending on certain factors. “Marijuana” is a Schedule I controlled substance and is defined in the Federal Controlled Substances Act (“CSA”) at 21 USC Section 802(16) as “all parts of the plant Cannabis sativa L., whether growing or not; the seeds thereof; the resin extracted from any part of such plant; and every compound, manufacture, salt, derivative, mixture, or preparation of such plant, its seeds or resin.” Exemptions to that definition provided in 21 USC Section 802(16) include “the mature stalks of such plant, fiber produced from such stalks, oil or cake made from the seeds of such plant, any other compound, manufacture, salt, derivative, mixture, or preparation of such mature stalks (except the resin extracted therefrom), fiber, oil, or cake, or the sterilized seed of such plant which is incapable of germination” or hemp as defined in 7 USC 1639o.
Substances meeting the definition of hemp in the Farm Bill and 7 USC 1639o may be used in clinical studies and research through an Investigational New Drug (“IND”) application with the FDA. Substances scheduled as controlled substances, like marijuana, require more rigorous regulation, including interaction with several agencies including the FDA, the U.S. Drug Enforcement Administration (“DEA”), and the National Institute on Drug Abuse within the National Institutes of Health (“NIH”).
Accordingly, if the CBD used by the Company is deemed marijuana and, therefore, a Schedule I controlled substance, the Company could be subject to significant additional regulation, as well as enforcement actions and penalties pertaining to the CSA, and any resulting liability could require the Company to modify or cease its operations.
Furthermore, in conjunction with the Farm Bill, the FDA released a statement about the status of CBD as a nutritional supplement, noting that the Farm Bill explicitly preserved the FDA’s authority to regulate products containing cannabis or cannabis-derived compounds under the Federal Food, Drug, and Cosmetic Act (“FDCA”) and Section 351 of the Public Health Service Act. Any difficulties we experience in complying with existing and/or new government regulation could increase our operating costs and adversely impact our results of operations in future periods. The FDA has issued guidance titled “FDA Regulation of Cannabis and Cannabis-Derived Products, Including Cannabidiol (CBD)” pursuant to which the FDA has taken the position that CBD is prohibited from use as an ingredient in a food or beverage or as a dietary ingredient in or as a dietary supplement based on several provisions of the FDCA. In the definition of “dietary supplement” found in the FDCA at 21 USC 321(ff), an article authorized for investigation as a new drug, antibiotic, or biological for which substantial clinical investigations have been instituted and for which the existence of such investigations has been made public, is excluded from the definition of dietary supplement. A similar provision in the FDCA at 21 USC 331(ll) makes it a prohibited act to introduce or deliver into commerce any food with a substance that was as a new drug prior to being included in a food. There are no similar exclusions for the use of CBD in non-drug topical products, as long as such products otherwise comply with applicable laws. The FDA created a task to address the further regulation of CBD and other cannabis-derived products and is currently evaluating the applicable science and pathways for regulating CBD and other cannabis-derived ingredients.
As a result of the Farm Bill’s recent passage, we expect that there will be a constant evolution of laws and regulations affecting the CBD industry which could affect the Company’s plan of operations. Local, state and federal hemp laws and regulations may be broad in scope and subject to changing interpretations. These changes may require us to incur substantial costs associated with legal compliance and may ultimately require us to alter our business plan. Furthermore, violations of these laws, or alleged violations, could disrupt our business and result in a material adverse effect on our operations. We cannot predict the nature of any future laws, regulations, interpretations or applications, and it is possible that regulations may be enacted in the future that will be directly applicable to our business.
Changes to state laws pertaining to industrial hemp could slow the use of industrial hemp, which could impact our revenues in future periods. Approximately 40 states have authorized industrial hemp programs pursuant to the Farm Bill. Additionally, various states have enacted state-specific laws pertaining to the handling, manufacturing, labeling, and sale of CBD and other hemp products. Compliance with state-specific laws and regulations could impact our operations in those specific states. Continued development of the industrial hemp industry will be dependent upon new legislative authorization of industrial hemp at the state level, and further amendment or supplementation of legislation at the federal level. Any number of events or occurrences could slow or halt progress all together in this space. While progress within the industrial hemp industry is currently encouraging, growth is not assured, and while there appears to be ample public support for favorable legislative action, numerous factors may impact or negatively affect the legislative process(es) within the various states where we have business interests.
Our business is subject to compliance with government regulation, and the failure and costs associated therewith to comply with present and future government regulation could harm our business, results of operations, financial condition and prospects, could put us out of business and could cause you to lose your entire investment.
We are subject to numerous federal, state, local, and foreign laws and regulations, including those relating to:
the production of our products;
environmental protection;
interstate commerce and taxation; and
workplace and safety conditions, minimum wage and other labor requirements.
The Farm Bill, along with the Agricultural Act of 2014, the corresponding Consolidated Appropriations Act of 2016 provisions (as extended by resolution into 2018) and Colorado’s Industrial Hemp Regulatory Program and related state law, provide for the cultivation of hemp, and processing and manufacturing of hemp products, as part of agricultural pilot programs and/or state plans adopted by individual states, including Colorado (pursuant to which we operate). The uncertainty of conflicting interpretations of these legislative authorities, as they relate to: (a) the CSA’s provisions relating to the possession, cultivation, processing or other handling of “marijuana” or (b) the FDCA’s provisions relating to the permissibility of hemp-derived ingredients in finished consumer goods and products presents a substantial risk to the success and ongoing viability of the Company and the hemp industry in general. The uncertainty is a deterrent to investment in cannabis related businesses, securing channels of distribution and obtaining banking, payment processing services, transfer agent, clearing, and other financial services. Investors face uncertainty in the ability to deposit and clear the securities offered herein.
New legislation or regulations may be introduced at either the federal and/or state level which, if passed, would impose substantial new regulatory requirements on the manufacture, packaging, labeling, advertising and distribution and sale of hemp-derived products. New legislation or regulations may require the reformulation, elimination or relabeling of certain products to meet new standards and revisions to certain sales and marketing materials, and it is possible that the costs of complying with these new regulatory requirements could be material.
The FDA, FTC and their state-level equivalents, possess broad authority to enforce the provisions of federal and state law, respectively, applicable to consumer products and safeguards as such relate to foods, dietary supplements and cosmetics, including powers to issue a public warning or notice of violation letter to a company, publicize information about illegal products, detain products intended for import or export (in conjunction with U.S. Customs and Border Protection) or otherwise deemed illegal, request a recall of illegal products from the market, and request the Department of Justice, or the state-level equivalent, to initiate a seizure action, an injunction action, or a criminal prosecution in the U.S. or respective state courts. The initiation of any regulatory action towards industrial hemp or hemp derivatives by the FDA, FTC or any other related federal or state agency, would result in greater legal cost to the Company, may result in substantial financial and enjoinment from certain business-related activities, and if such actions were publicly reported, they may have a materially effect on the Company, its business and its results of operations.
Unfavorable interpretations of laws governing hemp processing activities could subject us to enforcement or other legal proceedings and limit our business and prospects.
There are no express protections in the United States under applicable federal or state law for possessing or processing hemp biomass derived from lawful hemp not exceeding 0.3% THC on a dry weight basis and intended for use in finished product, but that may temporarily exceed 0.3% THC during the interim processing stages. While it is a common occurrence for hemp biomass to have variance in THC content during interim processing stages after cultivation but prior to use in finished products, there is risk that state or federal regulators or law enforcement could take the position that such hemp biomass is a Schedule I controlled substance in violation of the CSA and similar state laws. In the event that the Company’s operations are deemed to violate any laws, the Company could be subject to enforcement actions and penalties, and any resulting liability could cause the Company to modify or cease its operations.
Costs associated with compliance with various laws and regulations could impact our financial results.
The manufacture, labeling and distribution of CBD products is regulated by various federal, state and local agencies. These governmental authorities may commence regulatory or legal proceedings, which could restrict our ability to market CBD based products in the future. The FDA may regulate our products to ensure that the products are not adulterated or misbranded. We may also be subject to regulation by other federal, state and local agencies with respect to our CBD based products. Our advertising activities are subject to regulation by the FTC under the Federal Trade Commission Act. In recent years, the FTC and state attorneys general have initiated numerous investigations of dietary and nutritional supplement companies and products. Any actions or investigations initiated against the Company by governmental authorities or private litigants could have a material adverse effect on our business, financial condition and results of operations. Any actions or investigations initiated against the Company by governmental authorities or private litigants could have a material effect on our business, financial condition and results of operations.
The shifting regulatory environment necessitates building and maintaining of robust systems to achieve and maintain compliance in multiple jurisdictions and increases the possibility that we may violate one or more of the legal requirements applicable to our business and products. If our operations are found to be in violation of any applicable laws or regulations, we may be subject to penalties, including, without limitation, civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, injunctions, or product withdrawals, recalls or seizures, any of which could adversely affect our ability to operate our business, our financial condition and results of operations.
Uncertainty caused by potential changes to legal regulations could impact the use and acceptance of CBD products.
There is substantial uncertainty and differing interpretations and opinions among federal, state and local regulatory agencies, legislators, academics and businesses as to the scope of operation of Farm Bill-compliant hemp programs relative to the emerging regulation of cannabinoids and the CSA. These different opinions include, but are not limited to, the regulation of cannabinoids by the DEA and/or the FDA, and the extent to which manufacturers of products containing Farm Bill-compliant cultivators and processors may engage in interstate commerce. The existing uncertainties in the CBD regulatory landscape in the United States cannot be resolved without further federal, and perhaps state-level, legislation and regulation or a definitive judicial interpretation of existing laws and regulations. If these uncertainties are not resolved in the near future or are resolved in a manner inconsistent with our business plan, such uncertainties may have an adverse effect upon our plan of operations and the introduction of our CBD-based products in different markets.
If we fail to obtain necessary permits, licenses and approvals under applicable laws and regulations, our business and plan of operations may be adversely impacted.
We may be required to obtain and maintain certain permits, licenses and regulatory approvals in the jurisdictions where we sell or plan to sell our products. There can be no assurance that we will be able to obtain or maintain any necessary licenses, permits or approvals. Any material delay in obtaining, or inability to obtain, such licenses, permits and approvals is likely to delay and/or inhibit our ability to carry out our plan of operations, and could have a material adverse effect on our business, financial condition and results of operations.
Our and our independent distributors’ failure to comply with applicable advertising laws and regulations could adversely affect our financial conditions and results of operations.
The advertisement of our products is subject to extensive regulations in the markets in which we do business. We and our independent distributors may fail to comply with such regulations governing the advertising of our products. We cannot ensure that all marketing materials used by us and our independent distributors will comply with applicable regulations, including bans on false or misleading product claims. If we or our independent distributors fail to comply with applicable regulations, we could be subjected to claims of false advertising, misrepresentation, significant financial penalties, and/or costly mandatory product recalls and relabeling requirements with respect to our products, any of which could have a material adverse effect on our business, reputation, financial condition and results of operations.
We may seek to grow our business through key joint ventures, partnerships, and strategic alliances, including acquisitions of, or investments in, new or complementary businesses, facilities, technologies, offerings, or products, and the failure to manage these strategic alliances, or to integrate them with our existing business, could have a material adverse effect on us.
In the future we intend to consider opportunities in key joint ventures, partnerships, and strategic alliances, and or acquire or make investments in new or complementary businesses, facilities, technologies, offerings, or products, which may enhance our capabilities, complement our current products or expand the breadth of our markets. Strategic alliances and or acquisitions involve numerous risks, including:
we may find that the joint venture, partnership, and strategic alliance do not improve our financial and/or strategic position as planned;
problems integrating the strategic business alliance and or acquired business, including issues maintaining uniform standards, procedures, controls and policies;
unanticipated costs associated with strategic business alliances and or acquisitions;
diversion of management’s attention from our existing business;
risks associated with entering new markets in which we may have limited or no experience;
the risks associated with businesses we acquire, which may differ from or be more significant than the risks our other businesses face;
potential unknown liabilities associated with a strategic business alliance and or business we acquire; and
increased legal and accounting costs.
Our ability to successfully grow through strategic transactions depends upon our ability to identify, negotiate, complete and integrate suitable target businesses, facilities, technologies, products and services. These efforts could be expensive and time-consuming and may disrupt our ongoing business and prevent management from focusing on our operations. As a result of future strategic transactions, we might need to issue additional equity securities, spend our cash, or incur debt (which may only be available on unfavorable terms, if at all) or contingent liabilities, any of which could reduce our profitability and harm our business. If we are unable to identify suitable strategic relationships, or if we are unable to integrate any acquired businesses, facilities, technologies, offerings and products effectively, our business, financial condition, and results of operations could be materially and adversely affected. Also, while we intend to employ several different methodologies to assess potential business opportunities, the new business opportunities may not meet or exceed our expectations or objectives.
We are and plan to continue to be subject to the periodic reporting requirements of the Securities Exchange Act of 1934 that requires us to incur audit fees and legal fees in connection with the preparation of such reports. These additional costs could reduce or eliminate our ability to earn a profit.
We are and plan to continue to be required to file periodic reports with the SEC pursuant to the Exchange Act and the rules and regulations promulgated thereunder. To comply with these requirements, our independent registered public accounting firm has to review our financial statements on a quarterly basis and audit our financial statements on an annual basis. Moreover, our legal counsel has to review and assist in the preparation of such reports. The incurrence of such costs is an expense to our operations, may increase as the Company grows and therefore have a negative effect on our ability to meet our overhead requirements and earn a profit. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock, if an active market ever develops, could drop significantly.
Our internal controls are inadequate, which could cause our financial reporting to be unreliable and lead to misinformation being disseminated to the public.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Rule 13a-15(f) under the Exchange Act, internal control over financial reporting is a process designed by, or under the supervision of, the principal executive and principal financial officers and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”) and includes those policies and procedures that:
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and/or directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Our executive officers have identified two material weaknesses that have caused management to conclude that, as of December 31, 2022 our disclosure controls and procedures, and our internal control over financial reporting, were not effective at the reasonable assurance level. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting and or disclosure controls and procedures such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. As described in Item 9A. Controls and Procedures, the identified material weaknesses at December 31, 2022 relate to the following:
We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
The Jobs Act and the Company’s designation as a “smaller reporting company” under the Exchange Act has reduced the information that the Company is required to disclose, which could adversely affect the price of our common stock.
Under the Jobs Act, the information that the Company is required to disclose has been reduced in a number of ways.
Before the adoption of the Jobs Act, the Company was required to register the common stock under the Exchange Act within 120 days after the last day of the first fiscal year in which the Company had total assets exceeding $1,000,000 and 500 record holders of the common stock; the Jobs Act has changed this requirement such that the Company must register the common stock under the Exchange Act within 120 days after the last day of the first fiscal year in which the Company has total assets exceeding $10,000,000 and 2,000 record holders or 500 record holders who are not “Accredited Investors.” As a result, the Company is now required to register the common stock under the Exchange Act substantially later than previously.
Since the Company is not required, among other things, to file reports under Section 13 of the Exchange Act or to comply with the proxy requirements of Section 14 of the Exchange Act until such registration occurs or to comply with certain provisions of Sarbanes-Oxley Act and the Dodd-Frank Act and certain provisions and reporting requirements of or under the Securities Act and the Exchange Act, and the Company’s officers, directors and 10% stockholders are not required to file reports under Section 16(a) of the Exchange Act until such registration occurs, the Jobs Act has had the effect of reducing the amount of information that the Company and its officers, directors and 10% stockholders are required to provide for the foreseeable future.
In addition, the Company is a “smaller reporting company,” as defined in Rule 12b-2 under the Exchange Act. A smaller reporting company is generally defined as a company with less than $250 million of public float or a company with less than $100 million in annual revenues and either no public float or a public float that is less than $700 million. As a smaller reporting company, we are not required to provide certain information in our SEC reports as is otherwise required by larger companies. Accordingly, the Company is not required, among other things, to provide information in its SEC reports as to “risk factors”, “selected financial data”, “supplementary financial information”, “quantitative and qualitative disclosures about market risk”, “only two-year MD&A comparison rather than three-year comparison”, “compensation discussion and analysis”, “grants of plan-based awards table”, “option exercises and stock vested table”, “pension benefits table”, “nonqualified deferred compensation table”, “disclosure of compensation policies and practices related to risk management”, “pay ratio disclosure”, “compensation committee report”, “description of policies/procedures for the review, approval or ratification of related party transactions”, or “auditor’s attestation of management’s assessment of internal control over financial reporting”. We will remain a smaller reporting company until the last day of the fiscal year in which (1) the market value of our shares of common stock held by non-affiliates exceeds $250 million as of the end of our second fiscal quarter ending June 30th of each year, or (2) our annual revenues exceeded $100 million during such completed fiscal year and the market value of our shares of common stock held by non-affiliates exceeds $700 million as of the end of our second fiscal quarter ending June 30th of each year. For as long as we continue to be a smaller reporting company, we expect that we will take of the reduced disclosure obligations available to us as a result of this classification. We also expect that we will remain a smaller reporting company for the foreseeable future, and we could retain our smaller reporting company status indefinitely depending on the size of our revenues and public float.
As a result of such reduced disclosure, the price for the common stock may be adversely affected, if an active market ever develops.
Public companies are subject to risks relating to securities fraud and derivative lawsuits, which may have a material adverse effect on our business, operations, and financial results.
As a publicly traded company, we are subject to state and federal securities laws. There is a risk that we may be subject to lawsuits that allege that we have violated such laws. Such a lawsuit would cause us to incur significant legal fees and could take up significant time of our executive officers and directors. We may be unable to defend or settle such an action, causing a material adverse effect on our business, operations, and financial results.
Such allegations could materially harm our reputation among investors and damage our ability to raise funds, issue securities, or remain liquid. It may reduce trading volume and cause a significant decline in the market price of our shares of common stock, damaging your ability to sell the shares of common stock.
Trading on the OTCQB may be volatile and sporadic, which could depress the market price of our common stock and make it difficult for our stockholders to resell their shares. Moreover, there is only a limited trading market for our common stock and we cannot guarantee the existence of an active established public trading market for our shares of common stock.
Our shares of common stock are currently quoted on the OTCQB market tier of the over-the-counter market operated by OTC Markets Group, Inc. (“OTC Markets”). Trading in stock quoted on the OTCQB is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with our operations or business prospects. This volatility could depress the market price of our shares of common stock for reasons unrelated to operating performance. Accordingly, OTCQB may provide less liquidity for holders of our shares of common stock than a national securities exchange such as the Nasdaq Stock Market. Moreover, there is a limited trading market for our common stock. We cannot predict the extent to which investor interest in us will lead to the development of an active trading market or how liquid that trading market might become. If a liquid trading market does not develop or is not sustained, investors may find it difficult to dispose of shares of our common stock and may suffer a loss of all or a substantial portion of their investment in our common stock.
Market prices for our shares of common stock may also be influenced by a number of other factors, including:
the issuance of new equity securities pursuant to a public or private offering;
changes in interest rates;
competitive developments, including announcements by competitors of new products or services or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
variations in quarterly operating results;
change in financial estimates by securities analysts;
the depth and liquidity of the market for our shares;
investor perceptions of the Company and its industry generally; and
general economic and other national conditions.
All of the foregoing factors may limit the ability of an investor to liquidate their investment in our common stock. There is no assurance that we can successfully develop or maintain an active established trading market for our shares of common stock. Accordingly, investors should be prepared to hold the securities for an indefinite period of time.
Trading and listing of securities of cannabis related businesses, including our common stock, may be subject to restrictions.
In the United States, many clearing houses for major broker-dealer firms, including Pershing LLC, the largest clearing, custody and settlement firm in the United States, have refused to handle securities or settle transactions of companies engaged in cannabis related business. This means that certain broker-dealers cannot accept for deposit or settle transactions in the securities of cannabis related businesses. Further, stock exchanges in the United States, including Nasdaq and the New York Stock Exchange, have historically refused to list certain cannabis related businesses, including cannabis retailers, that operate primarily in the United States. Our existing operations, and any future operations or investments, may become the subject of heightened scrutiny by clearing houses and stock exchanges, in addition to regulators and other authorities in the United States. Any existing or future restrictions imposed by Pershing LLC, or any other applicable clearing house, stock exchange or other authority, on trading in our common stock could have a material adverse effect on the liquidity of our common stock.
Were our common stock to be considered penny stock, and therefore become subject to the penny stock rules, U.S. broker-dealers may be discouraged from effecting transactions in shares of our common stock.
Broker-dealers are generally prohibited from effecting transactions in “penny stocks” unless they comply with the requirements of Section 15(h) of the Exchange Act and the rules promulgated thereunder. These rules apply to the stock of companies whose shares are not traded on a national stock exchange, trade at less than $5.00 per share or who do not meet certain other financial requirements specified by the SEC. Trades in our common stock are subject to these rules, which include Rule 15g-9 under the Exchange Act, which imposes certain requirements on broker/dealers who sell securities subject to the rule to persons other than established customers and accredited investors. For transactions covered by the rule, brokers/dealers must make a special written determination that the penny stock is a suitable investment for purchasers of the securities and receive the purchaser’s written agreement to the transaction prior to sale.
The penny stock rules also require a broker/dealer, prior to effecting a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. A broker/dealer also must provide the customer with current bid and offer quotations for the relevant penny stock and information on the compensation of the broker/dealer and its salesperson in the transaction. A broker/dealer must also provide monthly account statements showing the market value of each penny stock held in a customer’s account. The bid and offer quotations, and the broker/dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation.
Our securities have in the past constituted “penny stock” within the meaning of the rules. The additional sales practice and disclosure requirements imposed upon U.S. broker-dealers may discourage such broker-dealers from effecting transactions in shares of our common stock, which could severely limit the market liquidity of such shares and impede their sale in the secondary market.
Our directors with the consent of the majority of the holders of the Series B Convertible Preferred Stock have the right to authorize the issuance of shares of our preferred stock and additional shares of our common stock.
Our directors, within the limitations and restrictions contained in our articles of incorporation, with the consent of the majority of the holders of the Series B Convertible Preferred Stock and under certain circumstances with the consent of the majority of the holders of the Series A Convertible Preferred Stock, and without further action by the holders of our common stock, have the authority to issue shares of preferred stock from time to time in one or more series and to fix the number of shares and the relative rights, conversion rights, voting rights, and terms of redemption, liquidation preferences and any other preferences, special rights and qualifications of any such series. While we have no intention of issuing additional shares of preferred stock at the present time, we continue to seek to raise capital through the sale of our securities and may issue shares of preferred stock in connection with a particular investment. Any issuance of shares of preferred stock could adversely affect the rights of holders of our common stock.
The shares of Series B Convertible Preferred Stock issued in May 2021 provide super-voting rights that resulted in a change of control of the Company.
Each outstanding share of the Series B Convertible Preferred Stock of the Company entitles the holder to 250 votes at any meeting of our stockholders, for an aggregate of 250,000,000 votes, and such shares of Series B Convertible Preferred Stock will vote together with the common stockholders. As a result of the change in control, the holder of the Series B Convertible Preferred Shares could vote the shares in a manner that could be contrary to the interests of the holders of our common stock. All shares of the Series B Convertible Preferred Stock are owned by the Wit Trust.
The Cornelis F. Wit Revocable Living Trust controls approximately 88% of our outstanding voting securities. This concentration of ownership may have an effect on matters requiring the approval of our stockholders, including transactions that are otherwise favorable to our common stockholders.
As of the date of filing this report, the Wit Trust Wit Trust owned approximately 88% of our outstanding voting securities. As a result of this majority ownership of voting securities, the Wit Trust has the ability to exert substantial control over all matters requiring approval by our stockholders and our board of directors, including the election and removal of directors, any proposed merger, consolidation or sale of all or substantially all of our assets and other significant corporate transactions, and may delay, deter or prevent a change in control and may make some transactions more difficult or impossible to complete without the support of the Wit Trust, regardless of the impact of such transaction on our other stockholders. This concentration of control could be disadvantageous to other stockholders with interests different from those of the Wit Trust.
We do not expect to pay cash dividends in the foreseeable future and any return to investors is expected to result, if at all, only from potential increases in the price of our common stock, and; in respect of rights to the payment of dividends, the Series A Convertible Preferred Stock and Series B Convertible Preferred Stock rank senior to the common stock.
We have never paid cash dividends on our common stock. We do not expect to pay cash dividends on our shares of common stock at any time in the foreseeable future. The future payment of dividends directly depends upon our future earnings, capital requirements, financial requirements and other factors that our board of directors will consider. Since we do not anticipate paying cash dividends on our common stock, return on your investment, if any, will depend solely on an increase, if any, in the market value of our shares of common stock. Further, in respect of rights to the payment of dividends, the Series A Convertible Preferred Stock and Series B Convertible Preferred Stock rank senior to the common stock and any other class or series of stock of the Company.
The “market overhang” from options, warrants, preferred stock and convertible securities could adversely impact the market price of our common stock.
The “market overhang” from options, warrants, preferred stock and convertible securities could adversely impact the market price of our common stock as a result of the dilution which would result if such securities were exercised for or converted into common stock. As of the date of filing this report, there were 41,625,331 shares of our common stock outstanding. In addition, the Company has issued and outstanding (i) 4,000,000 shares of Series A Convertible Preferred Stock, each share convertible into 20 shares of common stock for an aggregate of 80,000,000 shares of common stock, (ii) 1,000,000 shares of Series B Convertible Preferred Stock, each share convertible into 5 shares of common stock for an aggregate of 5,000,000 shares of common stock, and (iii) options, warrants and other securities exercisable for or convertible into 68,555,270 shares of common stock. All outstanding shares of our common stock are eligible for sale in the public market under applicable federal securities laws, subject in certain cases to the requirements of Rule 144 under the Securities Act, and shares issued upon the exercise or conversion of outstanding options, warrants, preferred stock or other convertible securities may also be eligible for sale in the public market, to the extent permitted by Rule 144 or other applicable securities laws and the provisions of the applicable option, warrant, preferred stock and convertible securities agreements. If these shares are sold, or if it is perceived that they may be sold, in the public market, the trading price of our common stock could fall.
Future issuances of our common stock or rights to purchase our common stock, including pursuant to our equity incentive plans, could result in additional dilution to the percentage ownership of our stockholders and could cause the price of our common stock to decline.
We have historically funded our operations in large part with proceeds from equity and convertible debt financings, and we expect to continue to do so in the future. If we sell common stock or other equity or convertible debt securities in the future, our then-existing stockholders could be materially diluted by such issuances and new investors could gain rights, preferences and privileges senior to the holders of our common stock, which could cause the price of our common stock to decline.
We may seek to grow our business through key joint ventures, partnerships, and strategic alliances, including acquisitions of, or investments in, new or complementary businesses, facilities, technologies, offerings, or products, and the failure to manage these strategic alliances, or to integrate them with our existing business, could have a material adverse effect on us.
In the future we intend to consider opportunities in key joint ventures, partnerships, and strategic alliances, and or acquire or make investments in new or complementary businesses, facilities, technologies, offerings, or products, which may enhance our capabilities, complement our current products or expand the breadth of our markets. Strategic alliances and or acquisitions involve nume rous risks, including:
we may find that the joint venture, partnership, and strategic alliance do not improve our financial and/or strategic position as planned;
problems integrating the strategic business alliance and or acquired business, including issues maintaining uniform standards, procedures, controls and policies;
unanticipated costs associated with strategic business alliances and or acquisitions;
diversion of management’s attention from our existing business;
risks associated with entering new markets in which we may have limited or no experience;
the risks associated with businesses we acquire, which may differ from or be more significant than the risks our other businesses face;
potential unknown liabilities associated with a strategic business alliance and or business we acquire; and
increased legal and accounting costs.
Our ability to successfully grow through strat egic transactions depends upon our ability to identify, negotiate, complete and integrate suitable target businesses, facilities, technologies, products and services. These efforts could be expensive and time-consuming and may disrupt our ongoing business and prevent management from focusing on our operations. As a result of future strategic transactions, we might need to issue additional equity securities, spend our cash, or incur debt (which may only be available on unfavorable terms, if at all) or contingent liabilities, any of which could reduce our profitability and harm our business. If we are unable to identify suitable strategic relationships, or if we are unable to integrate any acquired businesses, facilities, technologies, offerings and products effectively, our business, financial condition, and results of operations could be materially and adversely affected. Also, while we intend to employ several different methodologies to assess potential business opportunities, the new business opportunities may not meet or exceed our expectations or objectives.
