ITEM 1A. RISK FACTORS
Risks Related to our Business
Investing in our common stock involves a high degree of risk. You should carefully consider the following Risk Factors before deciding whether to invest in Amerityre. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations or our financial condition. If any of the events discussed in the Risk Factors below occur, our business, financial condition, results of operations or prospects could be materially and adversely affected. In such case, the value and marketability of the common stock could decline.
Recent market condition changes in the chemical markets have forced us to increase the prices we charge customers for our products and could have a material adverse effect on demand for our products, results of operations, and our financial condition.
During the past 2 years we have evaluated and increased our product pricing, most recently in May 2022, to offset these raw material cost increases. We continue to work with our suppliers to secure adequate quantities of raw materials to meet the increased demand for our products. While management believes these responses to be necessary to address these issues, there can be no assurance they will be sufficient, nor that they will not cause us to lose customer orders or customers, which would have a material adverse effect on our financial condition and results of operations.
If the inflationary pressures in the United States and elsewhere continue, we could experience reduced margins and lose future business .
The current inflationary pressures may adversely affect our margins particularly since we have lacked the capital to accumulate material inventory. Although we have blanket order with some of our customers the duration on fixed pricing is limited, often to three months, due to increasing price risk on our materials. This customer pricing pressure may also result in the loss of contracts and/or future business. Finally, we are experiencing rising labor costs which may further tighten margins. Additionally, given our location next to California that recently enacted legislation requiring fast food locations to pay hourly employees at least $22 per hour and beginning in 2024 with mandatory inflationary increases even capped at 3.5% per year, we may see pressure on our wages to hourly employees as well as other labor cost increases.
The effects of Russia ’ s invasion of Ukraine on the capital markets and the economy is uncertain, we may have to deal with a recessionary economy and economic uncertainty including possible adverse effects upon the capital markets.
While the effects of Russia’s invasion of Ukraine and the resulting international sanctions are uncertain, they have already had an immediate effect on the global and United States economy by causing, among other things, increased inflation and substantial increases in the prices of oil, gas and other commodities. The conflict has created increased uncertainty in the capital markets with declines in leading market indexes. The duration of this conflict and its impacts are uncertain but may contribute to a likely recession.
If we incur material losses due to a weakening economy or other factors, we may encounter difficulty in raising capital to meet our capital expenditure or working capital needs.
While we incurred a small net income from operations in four of the past five fiscal years, Amerityre lost money from operations in all periods prior to fiscal year 2017. While we are optimistic that we will be able to continue this positive profitability trend, there is no guarantee that this will be the case, particularly given the economic uncertainty regarding the strength of the world economy in the coming year.
Since inception, we have been able to cover our operating losses from the sale of our securities. If we were to experience losses or negative net cash flow from operations in the future, there is no guarantee that funding sources will be available to cover future operating losses, and funding sources that are available could have a dilutive effect on our current investors. If we are unable to obtain adequate sources of funds to operate our business, we may not be able to continue as a going concern. Based on our financial results of the past two fiscal years we do not anticipate liquidity issues.
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Our business operations and plans could be adversely affected in the event we need additional financing and are unable to obtain such funding. The capital markets in general and for microcap companies are subject to a variety of risks including the recent weakness that is adversely affecting smaller companies like us, such as a lack of business diversification and domestic and global economic declines. To the extent that our business strategy requires expanding our operations, such expansion could be costly to implement and may cause us to experience significant losses. Insufficient funds may prevent us from implementing our business strategy or may require us to delay, scale back or eliminate certain opportunities for the commercialization of our technology and products. If we cannot generate adequate sales of our products or increase our revenues through licensing of our technology or other means, we may be to operations.
Our results of operations have been and may in the future be adversely impacted by another COVID-19 pandemic.
The COVID-19 pandemic resulted in significant volatility in the U.S. and global economies and led to a dramatic reduction in economic activity worldwide. We continue to experience adverse supply chain issues which are attributable to COVID-19. During the pandemic Amerityre continued normal operations as an essential business. Due to COVID-19, we have sustained price increases from our suppliers which have reduced our gross profit margins, although we seemingly have avoided issues. To date we have successfully implemented our own price increases to offset some of these cost increases. There is also a risk that some customers may not be able to pay for Amerityre products already shipped due to reductions in their revenues and a deterioration of their financial position as a result of supply chain shortages.
We cannot predict whether new strains of the virus pose the risk of future shutdowns, which could hinder our ability to manufacture and sell our products and materially adversely affect our results of operations.
A reduction in the growth rate of the U.S. or global economy could have an adverse impact on our business, operating results and financial position .
The national shutdown of the U.S. economy due to COVID-19 put the U.S. and global economies in a tailspin. While the US economy recovered, current financial market conditions and US government fiscal policy has begun to adversely affect the economy, and it appears the economy is heading for an extended slowdown as the US Federal Reserve raises market interest rates to fight inflation. Further, while market conditions in the agricultural commodity markets have improved over the past year, other potential headwinds to economic growth overall are the continuation and/or increase in tariffs, a trade war, renegotiated trade agreements with international trading partners, and Federal Reserve policies that tighten credit or cause other imbalances in the economy. A continuation or worsening of these conditions, including credit and capital markets disruptions, could have an adverse impact on our business, operating results and financial position. We may experience declines in revenues and cash flows because of reduced orders, payment or other factors caused by the economic of our customers and prospective customers. We may experience supply chain , or other associated with financial constraints faced by our suppliers and customers. Any of these potential could our efforts to increase our sales and might, if and extensive enough, cause our sales to , jeopardizing our ability to operate.
Because we face competition in all phases of our business, we may not be able to increase or maintain revenue or profitability, which may have an adverse effect our results of operations or stock price.
Several factors may affect future sales of our products even if we are successful in increasing our revenue base. These factors include whether competitors produce alternative or superior products, whether the cost of our products is competitive in the marketplace, and whether we can establish effective product sales and distribution networks. The tire industry is a highly competitive, global industry. Most of our competitors are larger companies with greater financial resources. Their access to greater resources enables them to adapt more quickly to changes in the markets we have targeted. Our competitors can devote greater resources to the development and marketing of new products. Most of the products we have developed have not obtained broad market acceptance and rely on our emerging technologies. To significantly improve our competitive position, we will need to make significant ongoing investments in manufacturing, customer support, marketing, sales, research and development and intellectual property protection. Intense competitive activity in the tire industry has caused and will likely continue to cause pressures on our business, as well as pressure on certain of our customers or suppliers. Further, to the extent macroeconomic events, such as COVID-19 pandemic, affect the industry generally, we may have navigating and adjusting to such circumstances relative to our larger, -capitalized competitors in the tire industry. For example, by virtue of their larger scale of operations and wider market access, many of our larger competitors have been to continue offering relatively lower prices for their products in the wake of increases in the costs of supplies and production, whereas we have been to increase our prices in response to market developments such as supply caused by factors such as weather conditions, geopolitical friction and COVID-19. To as a company, we must continue to manufacture quality products and sell adequate quantities of products at prices sufficient to generate profits. We may not these objectives, which may have an effect on our results of operations or stock price.
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Further, we trade on the OTCQB which generally is an illiquid market, are subject to the Securities and Exchange Commission (the “SEC”)’s penny stock rules and have no analyst coverage, all of which creates illiquidity and makes raising capital more difficult and expensive.
We may experience delays in resolving unexpected technical issues in the development of new technology, resulting in increased development costs and delays of anticipated sales and revenues.
As we develop and improve our products, we frequently address chemical, manufacturing and/or equipment-related issues. Some of these challenges cannot be anticipated because the products we are developing are new. The revision of existing manufacturing processes or procurement of specialized equipment may result in delays, and we may not meet our projected timetable for bringing products to market. Such delays may interfere with existing manufacturing activities, negatively affect revenues and/or increasing our cost of operations.
We have entered new market segments where we have limited resources, and we may be unable to successfully manage planned growth .
We have less marketing and product development resources at our disposal compared to our competitors in the tire industry. To remain profitable, our products must be cost-effective, economical to produce, and have the ability to be distributed on a commercially viable scale. Furthermore, if our technologies and products do not achieve or maintain market acceptance, we may not be profitable.
Our success depends on our ability to license, market and distribute, and commercialize our technologies and products effectively. We have limited manufacturing, marketing and distribution resources. Those resources we do have will therefore be critical to the success of new product offerings, and any unexpected issues therewith could be materially harmful to our business plans. We may not properly ascertain or assess any and all risks inherent in the industry. We may not be successful in entering into new licensing or marketing arrangements on favorable terms or at all. If we are unable to meet the challenges posed by our planned licensing, manufacturing, distribution and sales growth, our business may fail.
Our limited resources and working capital levels may hinder our ability to take advantage of business development opportunities in our various market segments, reducing growth and profitability of the Company.
Although our available working capital has increased over the past fiscal year, we continue to have limited resource levels relative to our competitors. This has forced us to prioritize choices regarding the pursuit of new market opportunities. Our inability to raise significant additional working capital has resulted in the Company deferring potentially attractive market opportunities. The Company continues to finance new business opportunities using internally generated cash flow. If we are not able to raise additional capital going forward, it is possible that additional opportunities to improve the Company’s market position will be lost.
We are subject to governmental regulations, including environmental and health and safety regulations.
Our business operations are subject to a variety of national, state and local laws and regulations, many of which deal with environmental, health and safety, and employment issues. While we believe we are in material compliance with applicable environmental, worker health and safety and employment requirements, there can be no assurances that we are correct, that we will continue to comply, or that new laws or regulations will not be passed that limit our ability to continue or expand our operations without expending significant additional funding on compliance. Our raw materials and tire manufacturing process are less hazardous than traditional rubber tire manufacturing. However, significant expenditures may be necessary if future compliance standards change or unknown conditions that require remediation are discovered. Further, there is a trend in some neighboring states, like California, Washington, and Oregon, towards passing employee friendly legislation. For example, a California court recently upheld a challenge to a statute classifying “gig economy” workers such as Uber drivers as employees under California employment law, rather than independent contractors. These laws increase compliance costs and the cost of doing business. We cannot predict what legislation Nevada may pass, or what case law may develop interpreting such laws. If we fail to comply with present and future laws and regulations, we could be subject to future liabilities or in our operations and costs, which could have a material effect on our business.
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We attempt to protect the critical elements of our proprietary technology as trade secrets. Because of our reliance on trade secrets, we are unable to prevent third parties from independently developing technologies that are similar or superior to our technology or from successfully reverse engineering or otherwise replicating our technology.
In certain cases, where the disclosure of information required to obtain a patent would divulge critical proprietary data, we may choose not to patent elements of our proprietary technology and intellectual property. Instead, we rely on trade secret laws to protect certain elements of our proprietary technology and processes, such as our key polyurethane formulations. These formulations are critical elements of our proprietary technology. While we enter into non-disclosure agreements with our employees and certain third parties with which we do business, our trade secrets could nonetheless be compromised by third parties, or intentionally or accidentally by our employees. It is also possible that others will independently develop technologies that are similar or superior to our technology. Third parties may also legally reverse engineer our products. Independent development, reverse engineering, or other legal copying of those elements of our proprietary technology could enable third parties to benefit from our technologies without compensating us. The protection of proprietary technology through claims of trade secret status has been the subject of increasing and by various companies both in order to protect proprietary rights as well as for competitive reasons, even when proprietary are . The of to protect our trade secrets or the defense of such is and given the uncertainty and rapid development of the principles of law pertaining to this area. Intellectual property has had two trends which can make it prohibitively expensive - (i) the use of funding companies and (ii) the presence of large law firms. The effect is to increase legal and expert fees. These factors also arise with respect to the following patent risk factors. We may also be subject to by other parties with regard to the use of technology information and data that may be deemed proprietary to others. The independent development of technologies that are similar or to our technology or the reverse engineering of our products by third parties would have a material effect on our business and results of operations. In addition, the of our ability to use any of our trade secrets or other proprietary technology would have a material effect on our business and results of operations. Because trade secrets do not ensure and pose such issues with respect to enforcement, third parties may to partner with us or may pay lesser compensation for use of our technology which is protected only by trade secrets.
Our business depends on the protection of our patents and other intellectual property and may suffer if we are unable to adequately protect such intellectual property .
Our success and ability to compete are substantially dependent upon our intellectual property. We rely on patent, trademark and copyright laws, trade secret protection and confidentiality or license agreements with our employees, customers, strategic partners and others to protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may be inadequate. There are events that are outside of our control that pose a threat to our intellectual property rights as well as to our products and services. For example, effective intellectual property protection may not be available in every country in which we license our technology, or our products are distributed. Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective. The risk of unauthorized access to our intellectual property and other confidential business information is further exacerbated with the general trend toward remote working in the past six-months, and as a result we may be more susceptible to computer hackers seeking access to our proprietary information. Any of our intellectual property rights could our business and our ability to compete. Also, protecting our intellectual property rights is and time consuming. Any increase in the use of our intellectual property could make it more expensive to do business and our operating results. In addition, other parties may independently develop similar or competing technologies designed around any patents that may be issued to us.
We have been granted a number of U.S. patents relating to certain aspects of our manufacturing technology and processes and use of polyurethane to make tires, and we may seek further patents on future innovations. Our ability to either manufacture products or license our technology is substantially dependent on the validity and enforcement of these patents and patents pending. We cannot guarantee that our patents will not be invalidated, circumvented, or challenged, that patents will be issued for our patents pending, that the rights granted under the patents will provide us competitive advantages or that our current and future patent applications will be granted.
Third parties may invalidate our patents.
Third parties may seek to challenge, invalidate, circumvent or render unenforceable any patents or proprietary rights owned by or licensed to us based on, among other things:
subsequently discovered prior art or engineering designs;
lack of entitlement to the priority of an earlier, related application; or
failure to comply with the written description, best mode, enablement or other applicable requirements.
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United States patent law requires that a patent must disclose the “best mode” of creating and using the invention covered by a patent. If the inventor of a patent knows of a better way, or “best mode,” to create the invention and fails to disclose it, that failure could result in the loss of patent rights. Our decision to protect certain elements of our proprietary technologies as trade secrets and to not disclose such technologies in patent applications, may serve as a basis for third parties to challenge and ultimately invalidate certain of our related patents based on a failure to disclose the mode of creating and using the claimed in the applicable patent. If a third party is in the validity of our patents, our to enforce our intellectual property rights could our business.
We may be liable for infringing the intellectual property rights of others .
Our products and technologies may be the subject of claims of intellectual property infringement in the future. Our technologies may not be able to withstand any third-party claims or rights against their use. Any intellectual property claims, with or without merit, could be time-consuming, expensive to litigate or settle, could divert resources and attention and could require us to obtain a license to use the intellectual property of third parties. We may be unable to obtain licenses from these third parties on favorable terms, if at all. Even if a license is available, we may have to pay substantial royalties to obtain it. If we cannot defend such claims or obtain necessary licenses on reasonable terms, we may be precluded from offering most or all of our products or services and our business and results of operations will be affected.
Because our tire products are derived from relatively new technology, our product liability insurance costs will likely increase and we may be exposed to product liability risks that could adversely affect profitability .
Even if tests indicate that our tires meet industry performance standards, these products may subject us to significant product liability claims because the technology is relatively new and there is little history of long-term use in particular applications. Moreover, because our products are and will be used in applications where their failure could result in injury, we could also be subject to product liability claims. Introduction of such new products and increased use of our existing products will most likely increase our product liability premiums and defense of potential claims could increase insurance costs even further, which could substantially increase our expenses. Any insurance we obtain may not be sufficient to cover the losses incurred through such lawsuits.
Significant increases in the price of chemicals, steel and other raw materials used in our products could increase our production costs and decrease our profit margins or make our products less competitive in the marketplace due to price increases .
The materials used to produce our products are susceptible to price fluctuations due to supply and demand trends, economic factors, and other unforeseen factors. If we are successful in implementing our business strategy, the quantities of chemical raw materials required by us or by others that utilize our technology may increase significantly. Shortages have recently resulted in chemical price increases. The COVID-19 pandemic has seen us experience increased chemical and supply costs and reduced our gross profit margins. We have experienced increases in the cost of wheel components due to the increased cost of steel and the imposition of tariffs. Existing trade agreements with foreign countries may be subject to change in the future, with tariffs or import duties being levied by the US government increasing the cost of our foreign-based raw materials. Chinese tariffs have resulted in an increase in our cost of our imported components. Because we are introducing products that will compete, in part, on the basis of price, we may be unable to pass cost increases on to our customers in order to stay competitive. If we are unable to pass on raw material cost increases to our customers, our future results of operations and cash flow will be materially affected. Because of factors such as COVID-19, we may encounter issues with our manufacturing facility or resources supply which may materially and impact our business.
Our ability to execute our business plan would be harmed if we are unable to retain or attract key personnel .
Our technology has been developed by a small team and only a limited number of team members maintain the technical knowledge to produce our products. Our future success depends, to a significant extent, upon our ability to retain and attract the services of our key personnel. The loss of the services of our Chief Executive Officer could hinder our ability to effectively manage our business and implement our growth strategies. Finding suitable replacements could be difficult, and competition for experienced personnel is intense. We do not carry key person insurance on any of our officers.
If our data or our users ’ content is hacked, including through privacy and data security breaches, our business could be damaged, and we could be subject to liability. Because the personal information that we, our customers or our vendors collect may be vulnerable to breach, theft or loss, any of these factors could adversely affect our reputation and operations.
Our business is and we expect it will continue to be reliant upon the Internet. Cyber security events have caused significant damage to large well-known companies. If our systems are hacked and our confidential information is misappropriated, we could be subject to liability. Further, if third party vendors experience data or cyber security breaches, sensitive business or customer information could be subject to similar risks.
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Possession and use of personal information of our customers and vendors subjects us to risks and costs that could harm our business. We also collect and maintain personal information of our employees in the ordinary course of our business. Errors in the storage, use or transmission of personal information could result in a breach of customer or employee privacy. Possession and use of personal information in our operations also subjects us to possible regulatory burdens that could require notification of data breaches and restrict our use of personal information. We cannot guarantee that there will not be a breach, loss or theft of personal information that we store or our third parties’ store. If we are hacked and there is a breach, theft or loss of personal information could have a material adverse effect on our reputation and results of operations and result in liability under state and federal privacy statutes and legal or administrative actions by state attorneys general, private , and federal regulators and by such other international laws including the European Union’s GDPR and their respective enforcement mechanisms, any of which could have a material effect on our business, financial condition, results of operations and cash flows.
We may fail to detect the existence of a breach of user content and be unable to prevent unauthorized access to user and company content. The techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and are often not recognized until launched against a target. They may originate from less regulated third world countries where lax local enforcement and poverty create opportunities for hacking. If our security measures are breached, or our personal information or that of our customers, suppliers, employees, or independent contractors is otherwise accessed through unauthorized means, or if any such actions are believed to occur, we may be materially harmed.
As of the date of this filing we have not experienced a breach of data security.
If we fail to comply with laws and regulations relating to privacy, data protection, information security, advertising and consumer protection, government access requests, or new laws in one or more of these areas are enacted, it could result in proceedings, actions, or penalties against us and could adversely affect our business, financial condition, and results of operations.
We rely on a variety of marketing techniques, and we are or may become subject to various laws and regulations that govern such marketing and advertising practices. A variety of federal, state, and international laws and regulations govern the collection, use, retention, sharing, and security of personal data.
Laws and regulations relating to privacy, data protection, information security, marketing and advertising, and consumer protection are evolving and subject to potentially differing interpretations. These requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another or may conflict with other regulations or our current practices. As a result, our practices may not have complied or may not comply in the future with all such laws, regulations, requirements, and obligations. We have implemented various features, integrations, and capabilities as well as contractual obligations intended to enable us to comply with applicable privacy and security requirements in our collection, use, and transmittal of data, but these features do not ensure our compliance and may not be effective against all potential privacy concerns. As a United States company, we may be obliged to disclose data pursuant to government requests under United States law. Compliance with such requests may be inconsistent with local laws in other countries where our customers reside. Any failure, or perceived , by us to comply with our posted privacy policies or with any privacy or consumer protection-related laws, regulations, industry self-regulatory principles, industry standards or codes of conduct, regulatory guidance, orders to which we may be subject, or other legal obligations relating to privacy or consumer protection, whether federal, state, or international, could affect our reputation, brand, and business, and may result in , proceedings, or actions us by governmental entities, customers, users of our website, third party service providers, or others, or may require us to change our operations and/or using certain types of data. Any such , proceedings, or actions could our reputation, brand, and business, us to incur significant expenses in defense of such proceedings or actions, result in publicity, our management, increase our costs of doing business, result in a of customers or vendors, and result in the imposition of monetary .
The legislative and regulatory bodies or self-regulatory organizations in various jurisdictions both inside and outside the United States may expand current laws or regulations, enact new laws or regulations, or issue revised rules or guidance regarding privacy, data protection, consumer protection, information security, and online advertising. For example, in June 2018 the State of California enacted the California Consumer Privacy Act of 2018 (the “CCPA”), which took effect on January 1, 2020. The CCPA requires companies that process personal information on California residents to make new disclosures to consumers about such companies’ data collection, use, and sharing practices and inform consumers of their personal information rights such as deletion rights, allows consumers to opt out of certain data sharing with third parties, and provides a new cause of action for data breaches. Additionally, in November 2020, California enacted the California Privacy Rights Act of 2020 (the “CPRA”), which amends and expands the scope of the CCPA, while introducing new privacy protections that extend beyond those included in the CCPA and its implementing regulations. The CCPA, as amended and expanded by the CPRA, is one of the most prescriptive general privacy law in the United States and may lead to similar laws being enacted in other U.S. states or at the federal level. Most of the provisions of the CPRA become fully operative beginning on January 1, 2023.
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The State of Nevada has also passed a law, which took effect on October 1, 2019, that amends the state’s online privacy law to allow consumers to submit requests to prevent websites and online service providers (“Operators”) from selling personally identifiable information that Operators collect through a website or online service. As to Nevada, as of October 1, 2021, Nevada’s amended privacy law imposes additional obligations on qualifying “data brokers” and permits consumers to opt out of a broader range of sales of their personal information. The Nevada act applies to any person whose primary business is “purchasing covered information” about Nevada residents “with whom the person does not have a direct relationship” if the information is purchased “from operators or other data brokers and making sales of such covered information.” Qualifying data brokers must establish a designated request address through which a Nevada consumer can ask to opt out of the sale of their covered information. In summary, Nevada consumers now have a broad right to opt out whenever a qualifying “operator” or “data broker” makes covered information available in exchange for money. This aligns Nevada’s opt-out right more closely with similar consumer privacy rights in Colorado and Virginia. At least 35 states and the District of Columbia in 2022 introduced or considered almost 200 consumer privacy bills. More and more states may continue to enact similar laws. Proposed federal legislation, like the American Data Privacy and Protection Act, will likely continue to be debated and, at some point, may be enacted in some form.
As to other states, on March 2, 2021, the Governor of Virginia signed into law the Virginia Consumer Data Protection Act (the “VCDPA”). The VCDPA creates consumer rights, similar to the CCPA, but also imposes security and assessment requirements for businesses. In addition, on July 7, 2021, Colorado enacted the Colorado Privacy Act (“CoCPA”), joining the growing list of states adopting comprehensive consumer privacy laws. Additionally, the Federal Trade Commission and many state attorneys general are interpreting federal and state consumer protection laws to impose standards for the online collection, use, dissemination, and security of data. Each of these privacy, security, and data protection laws and regulations, and any other such changes or new laws or regulations, could impose significant limitations, require changes to our business model or practices, or restrict our use or storage of personal information, which may increase our compliance expenses and make our business more costly or less efficient to conduct. In addition, any such changes could compromise our ability to develop an adequate marketing strategy and pursue our growth strategy effectively, which, in turn, could adversely affect our business, financial condition, and results of operations. Further, the data protection laws of various jurisdictions often differ greatly and the regulatory landscape in general is constantly changing, and we may be to effectively adapt and comply particularly with respect to our website and online sales Section 6(3) of a Connecticut statute signed May 10, 2022, states a data controller shall “establish, implement and maintain reasonable administrative, technical and physical data security practices to protect the confidentiality, and accessibility of personal data appropriate to the volume and nature of the personal data at issue.” The date for that law is July 1, 2023. Utah’s Consumer Privacy Act provides consumers the right to know what personal data a business collects, how the business uses the personal data, and whether the business sells the personal data. The date is December 31, 2023. Additionally, Maine recently enacted the Data Collection Protection Act, creating the Maine Data Collection Protection Act, which prohibits data collectors from collecting and aggregating, selling, or using specific types of public documents or information.
In addition, federal and state governmental authorities continue to evaluate the privacy implications inherent in the use of third-party “cookies” and other methods of online tracking for behavioral advertising and other purposes. The U.S. government has enacted, has considered, or is considering legislation or regulations that could significantly restrict the ability of companies and individuals to utilize online behavioral tracking, such as by regulating the level of consumer notice and consent required before a company can employ cookies or other electronic tracking tools or the use of data gathered with such tools. Additionally, some providers of consumer devices and web browsers have implemented, or announced plans to implement, means to make it easier for Internet users to prevent the placement of cookies or to block other tracking technologies, which could, if widely adopted, result in the use of third-party cookies and other methods of online tracking becoming significantly less effective. The regulation of the use of these cookies and other current online tracking and advertising practices or a loss in our ability to make effective use of services that employ such technologies could increase our costs of operations and limit our ability to acquire new customers on cost-effective terms and consequently, materially and affect our business, financial condition, and results of operations.
Risks Related to our Common Stock
Because our common stock is subject to the “ penny stock ” rules, brokers cannot generally solicit the purchase of our common stock, which adversely affects its liquidity and market price.
The Securities and Exchange Commission has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock on the OTCQB is presently less than $5.00 per share and therefore our common stock is considered a penny stock according to SEC rules. Further, we do not expect our stock price to rise above $5.00 in the immediate future. The penny stock designation requires any broker-dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules limit the ability of broker-dealers to solicit purchases of our common stock and therefore reduce the liquidity of the public market for our shares.
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Moreover, as a result of apparent regulatory pressure from the SEC and the Financial Industry Regulatory Authority, a growing number of broker-dealers decline to permit investors to purchase and sell or otherwise make it difficult to sell shares of penny stocks. The penny stock designation may continue to have a depressive effect upon our common stock price.
If our common stock becomes subject to a “ chill ” imposed by the Depository Trust Company (the “ DTC ” ), your ability to sell your shares may be limited.
The DTC acts as a depository or nominee for street name shares that investors deposit with their brokers. DTC in the last several years has increasingly imposed a chill or freeze on the deposit, withdrawal and transfer of common stock of issuers whose common stock trades on the tiers of the OTC Markets like that of the Company. Depending on the type of restriction, a chill or freeze can prevent shareholders from buying or selling shares and prevent companies from raising money. A chill or freeze may remain imposed on a security for a few days or an extended period of time (in at least one instance a number of years). While we have no reason to believe a chill or freeze will be imposed against our common stock in the future, if it were your ability to sell your shares would be limited. In such event, your investment will be adversely affected.
Due to factors beyond our control, our stock price may be volatile.
Any of the following factors could affect the market price of our common stock:
Our future financial results;
Any downturn in the economy in the United States, including currently as a result of increased interest rates;
The effect of tariffs and other political factors which increases our costs and causes economic issues for farmers who cease or reduce purchases of our products;
Regulatory changes including new laws and rules which adversely affect us;
Our public disclosure of the terms of any financing which we consummate in the future;
Our failure to generate increasing material revenues;
Our failure to remain profitable;
Any acquisitions we may consummate;
Announcements by us or our competitors of significant contracts;
Changes in our management; or
Changes in market valuations of similar companies.
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs and divert our management’s time and attention, which would otherwise be used to benefit our business.
Because we may issue preferred stock without the approval of our shareholders and have other anti-takeover defenses, it may be more difficult for a third party to acquire us and could depress our stock price .
In general, our Board of Directors may issue, without a vote of our shareholders, one or more additional series of preferred stock that have more than one vote per share. Without these restrictions, our Board could issue preferred stock to investors who support us and our management and give effective control of our business to our management. Additionally, issuance of preferred stock could block an acquisition resulting in both a drop in our stock price and a decline in interest of our common stock. This could make it more difficult for shareholders to sell their common stock. This could also cause the market price of our common stock shares to drop significantly, even if our business is performing well.
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Because we may not be able to attract the attention of major brokerage firms, it could have a material impact upon the price of our common stock.
It is not likely that securities analysts of major brokerage firms will provide research coverage for our common stock since these firms cannot recommend the purchase of our common stock under the penny stock rules referenced in an earlier risk factor. The absence of such coverage limits the likelihood that an active market will develop for our common stock. It may also make it more difficult for us to attract new investors at times when we require additional capital.
Our common stock may be affected by limited trading volume and price fluctuations, which could adversely impact the value of our common stock.
There has been limited trading in our common stock and there can be no assurance that an active trading market in our common stock will either develop or be maintained. Our common stock may experience significant price and volume fluctuations in the future, which could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially. These fluctuations may also cause short sellers to periodically enter the market in the belief that we will have poor results in the future.
Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.
If our shareholders sell substantial amounts of our outstanding common stock, it could create a circumstance commonly referred to as an “overhang” and in anticipation of which the market price of our common stock could fall. The existence of an overhang, whether or not sales have occurred or are occurring, could make it difficult to raise additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate. In May 2020, our 2013 Series Preferred Shares automatically converted into 20,000,000 shares of common stock constituting approximately 27% of our outstanding common stock as of the date of this report. These shares are subject to the limitations of Rule 144(e )(1) under the Securities Act of 1933 which, among other things, limit the number of shares which can be sold to 1% of our outstanding stock every three months.
