ITEM 1A. RISK FACTORS
An investment in the Company’s common stock involves a high degree of risk. In determining whether to purchase the Company’s common stock, an investor should carefully consider all of the material risks described below, together with the other information contained in this report before deciding to purchase the Company’s securities. An investor should only purchase the Company’s securities if he or she can afford to suffer the loss of his or her entire investment.
Risks Related to Our Business and Our Industry
We are a young company with a limited operating history, making it difficult for you to evaluate our business and your investment.
We are an early-stage company with limited operating history. We have not yet demonstrated sales of products at a level capable of covering our fixed expenses. Since inception, we have demonstrated limited capability to produce sufficient materials to generate the ongoing revenues necessary to sustain our operations in the long-term, nor have we demonstrated the ability to generate sufficient sales to sustain the business. There can be no assurance that we will ever produce a profit.
Many of our products represent new products that have not yet been fully tested in commercial product settings and for which manufacturing operations have not yet been fully scaled. This means that investors are subject to all the risks incident to the creation and development of multiple new products and their associated manufacturing processes, and each investor should be prepared to withstand a complete loss of their investment.
Because we are subject to these uncertainties, there may be risks that management has failed to anticipate, and you may have a difficult time evaluating our business and your investment in us. Our ability to become profitable depends primarily on our ability to
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successfully commercialize our products in the future. Even if we successfully develop and market our products, we may not generate sufficient or sustainable revenue to achieve or sustain profitability, which could cause us to cease operations.
We primarily sell engineered materials or products made with these materials to other companies for incorporation into their products. Although KULR’s technologies were previously used in numerous advanced space and industrial applications for NASA, there has been no significant incorporation of our materials or products into customer products that are released for commercial sale as of the date of this report. Because there is no demonstrated history of large-scale commercial success for our products, it is possible that such commercial success may never happen and that we will never achieve the level of revenues necessary to sustain our business.
We will need to raise substantial additional capital in the future to fund our operations, and we may be unable to raise such funds when needed and on acceptable terms, which could have a materially adverse effect on our business.
We anticipate that we will incur operating losses for the foreseeable future. We will need to raise substantial additional capital to fund our operations, and if we are not successful in securing additional financing on acceptable terms, we may be required to delay significantly, reduce the scope of or eliminate one or more of our research or development programs, downsize our general and administrative infrastructure, or seek alternative measures to avoid insolvency, including arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies, product candidates or products.
We could experience significant disruptions in supply from our current or future supply sources which may be exacerbated by macroeconomic trends, including trade policies, political events and other international disputes.
We could experience significant disruptions as a result of global supply chain issues and, in the event of a disruption, we cannot make any assurances that we would be able to locate alternative suppliers of materials of comparable quality at an acceptable price, or alternative purchasers of our products. Identifying suitable suppliers and purchasers is a resource-intensive process that requires us to become satisfied with quality control, responsiveness and service, financial stability and labor and other ethical practices. Any delays, interruption or increased costs in the manufacturing and delivery of our products could adversely affect our ability to meet customer demand and could result in reduced net sales, lower gross margins and operating income. We cannot predict the extent to which supply chain disruptions may affect our customers, suppliers or end markets, or the indirect effects such disruptions may have on our operations and demand for our products.
In addition, geopolitical changes, such as trade disruptions, including the imposition of tariffs by the U.S. on imports from certain countries and any resulting counter-tariffs, political unrest, warfare and military or armed conflict, including those involving China, Ukraine/Russia and the Middle East and the resulting macro-economic impacts from such geopolitical changes, could directly or indirectly cause or exacerbate supply chain disruptions and may further complicate existing supply chain constraints and demand for our products.
Increased tariffs or other trade restrictions involving the United States and key trading partners, including, among others, China, Canada and Mexico, may increase the cost of raw materials and components, disrupt cross-border supply chains and adversely affect our customers’ financial condition and demand for our products. Ongoing trade disputes may continue to escalate which could increase the costs of our products and the components we use to manufacture them.
Additionally, the conflict between Russia and Ukraine and the conflicts in the Middle East have resulted in worldwide geopolitical and macroeconomic uncertainty, and we cannot predict how the conflicts will evolve or the timing thereof. If these conflicts continue for a significant time or further expand to other countries and depending on the ultimate outcomes of these conflicts, which remain uncertain, they could have additional adverse effects on macroeconomic conditions, including but not limited to, increased costs, constraints on the availability of commodities, supply chain disruptions and decreased business spending. Furthermore, continuation of the conflicts could give rise to: disruptions to our or our business partners’ global technology infrastructure, including through cyber-attack or cyber-intrusion; our ability to implement and execute our business strategy; terrorist activities; increased foreign currency fluctuations; and constraints, volatility, or disruption in the capital markets. The occurrence of any of these events may impact our ability to obtain raw materials to manufacture our products, serve our customers, raise additional capital when needed on acceptable terms, if at all, any of which could have a material adverse effect on our business, results of operations, cash flows and financial condition.
We have limited experience in higher volume manufacturing that will be required to support profitable operations, and the risks and costs associated with scaling to larger production quantities may be substantial.
We have limited experience manufacturing our products. We have established small-scale commercial or pilot-scale production facilities for our carbon-based thermal management products, but these facilities do not have the existing production capacity to produce sufficient quantities of materials for us to reach sustainable sales levels. At present, we rely on outsourced partners to produce high volume products. In order to develop internal capacity to produce much higher volumes, it will be necessary to produce multiples of
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existing processes or engineer new production processes in some cases. If we are unable to scale-up our production processes and facilities to support sustainable sales levels, the Company may be forced to curtail or cease operations.
We have a long and complex sales cycle and have not demonstrated the ability to operate successfully in this environment.
It has been our experience since our inception that the average sales cycle for our products can range from one to five years from the time a customer begins testing our products until the time that they could be successfully used in a commercial product. We have only demonstrated a limited track record of success in completing customer development projects, which makes it difficult for you to evaluate the likelihood of our future success. The sales and development cycle for our products is subject to customer budgetary constraints, internal acceptance procedures, competitive product assessments, scientific and development resource allocations, and other factors beyond our control. If we are not able to successfully accommodate these factors to enable customer development success, we will be unable to achieve sufficient sales to reach profitability. In this case, the Company may not be able to raise additional funds and may be forced to curtail or cease operations and you could lose all or a significant part of your investment.
We are dependent on customers and partners to design and test our solution into new applications which may not be brought to market successfully.
Our solutions are targeted for new applications and devices that require high performance and unique features offered by our products, and potential customers may not be aware of our unique offerings. Developing new applications and devices involves a lengthy and complex process, and they may not be commercialized on a timely basis, or at all. The Company’s success is directly related to the marketability and adoption of these new products.
Furthermore, because the Company’s solutions are relatively new to mass market consumer electronics, the design and testing time is longer than traditional solutions. Moreover, in transitioning to new technologies and products, we may not achieve design wins, our customers may delay transitioning to these new technologies, our competitors may transition more quickly than we do, or we may experience product delays, cost overruns or performance issues that could harm our operating results and financial condition.
We could be adversely affected by our exposure to customer concentration risk and reduced manufacturing capacity.
We are subject to customer concentration risk as a result of our reliance on a relatively small number of customers for a significant portion of our revenues. During 2025, we had 2 customers whose purchases, in the aggregate, accounted for 28% of total revenue pursuant to our Energy Management Platform segment, and 1 customer whose purchases accounted for 100% of total revenue pursuant to our Mining of Digital Assets segment. Due to the nature of our business and the relatively large size of many of the applications our customers are developing, we anticipate that we will be dependent on a relatively small number of customers for the majority of our revenues for the next several years. Even if we expand our customer base, it is possible that orders from only one or two customers could exhaust most or all of our existing manufacturing capacity. Accordingly, if one or more of these customers were to stop ordering our products or if we are unable to meet the manufacturing capacity demanded by new customers, there would be a risk of significant loss of future revenues, which could in turn have a material adverse effect on our business and on your investment.
We operate in an advanced technology arena where hypothesized properties and benefits of our products may not be achieved in practice, or in which technological change may alter the attractiveness of our products.
Because there is no sustained history of successful use of our products in commercial applications, there is no assurance that broad successful commercial applications may be technically feasible. Some of the scientific and engineering data related to our products has been generated in our own laboratories or in laboratory environments at our customers or third-parties. Laboratory data is not always representative of commercial applications.
Likewise, we operate in a market that is subject to rapid technological change. Part of our business strategy is to monitor such change and take steps to remain technologically current, but there is no assurance that such strategy will be successful. If we are not able to adapt to new advances in materials sciences, or if unforeseen technologies or materials emerge that are not compatible with our products and services or that could replace our products and services, our revenues and business prospects would likely be adversely affected. Such an occurrence may have severe consequences, including the potential for our investors to lose all of their investment.
Competitors that are larger and better funded may cause the Company to be unsuccessful in selling its products.
The Company operates in highly competitive markets. Global research relating to thermal management solutions is being conducted by substantially larger companies who have greater financial, personnel, technical, and marketing resources than the Company. There can be no assurance that the Company’s strategy of offering better thermal management solutions based on the Company’s proprietary carbon fiber-based products will be able to compete with other companies, many of whom will have significantly
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greater resources, on a continuing basis. In the event that we cannot compete successfully, the Company may be forced to cease operations.
Failure to effectively expand our sales and marketing capabilities could harm our ability to increase our customer base and achieve broader market acceptance of our solutions.
Our ability to grow our customer base, achieve broader market acceptance, grow revenue, and achieve and sustain profitability will depend, to a significant extent, on our ability to effectively expand our sales and marketing operations and activities and educate potential customers about our solutions. Substantial amounts of time and energy are dedicated to our sale and marketing efforts, and our operating results will suffer if our sales and marketing efforts do not contribute significantly to increasing revenue.
We make significant investments in research and development of new products and services that may not achieve expected returns.
We have made and will continue to make significant investments in research, development, and marketing for existing products, services, and technologies, as well as new technology or new applications of existing technology. Investments in new technology are speculative. Commercial success depends on many factors, including but not limited to, innovativeness, engineering support, and effective distribution and marketing. There is no assurance that we will be rewarded from our investments in developing new services and products. If our customers do not perceive our latest offerings as providing significant new functionality or other value, they may reduce their purchases of services or products, thus unfavorably affecting revenue and profits. We may not achieve significant revenue from new products and services, or new applications of existing products and services, for several years, if at all. New products and services may not be profitable, and even if they are profitable, operating margins for some new products, services and businesses may not be as high as the margins we have experienced historically. Furthermore, developing new technologies is complex and unpredictable, which can require long development and testing periods. Significant delays in new releases or significant problems in creating new products or offering new services could adversely affect our revenue and profits.
Because of our small size and limited operating history, we are dependent on key employees.
The Company’s operations and development are dependent upon the experience and knowledge of Michael Mo, our Chief Executive Officer, Shawn Canter, our Chief Financial Officer, Dr. William Walker, our Chief Technology Officer. If the services of any of these individuals should become unavailable, the Company’s business operations might be adversely affected. If several of these individuals became unavailable at the same time, the ability of the Company to continue normal business operations might be adversely affected to the extent that revenue or profits could be diminished, and you could lose all or a significant amount of your investment.
Our success depends in part on our ability to protect our intellectual property rights, and our inability to enforce these rights could have a material adverse effect on our competitive position.
We rely on the patent, trademark, copyright and trade-secret laws of the United States and to protect our intellectual property rights. We may be unable to prevent third parties from using our intellectual property without our authorization. The unauthorized use of our intellectual property could reduce any competitive advantage we have developed, reduce our market share or otherwise harm our business. In the event of unauthorized use of our intellectual property, litigation to protect or enforce our rights could be costly, and we may not prevail.
Many of our technologies are not covered by any patent or patent application, and our issued and pending U.S. patents may not provide us with any competitive advantage and could be challenged by third parties. Our inability to secure issuance of our pending patent applications may limit our ability to protect the intellectual property rights these pending patent applications were intended to cover. Our competitors may attempt to design around our patents to avoid liability for infringement and, if successful, our competitors could adversely affect our market share. Furthermore, the expiration of our patents may lead to increased competition.
Our pending trademark applications may not be approved by the responsible governmental authorities and, even if these trademark applications are granted, third parties may seek to oppose or otherwise challenge these trademark applications. A failure to obtain trademark registrations in the United States and in other countries could limit our ability to protect our products and their associated trademarks and impede our marketing efforts in those jurisdictions.
In addition, effective patent, trademark, copyright and trade secret protection may be unavailable or limited in some foreign countries. We also rely on unpatented proprietary manufacturing expertise, continuing technological innovation and other trade secrets to develop and maintain our competitive position. Although we generally enter into confidentiality agreements with our employees and third parties to protect our intellectual property, these confidentiality agreements are limited in duration and could be breached, and may not provide meaningful protection of our trade secrets or proprietary manufacturing expertise. Adequate remedies may not be available
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if there is an unauthorized use or disclosure of our trade secrets and manufacturing expertise. In addition, others may obtain knowledge about our trade secrets through independent development or by legal means. The failure to protect our processes, apparatus, technology, trade secrets and proprietary manufacturing expertise, methods and compounds could have a material adverse effect on our business by jeopardizing critical intellectual property.
Where a product formulation or process is kept as a trade secret, third parties may independently develop or invent and patent products or processes identical to our trade-secret products or processes. This could have an adverse impact on our ability to make and sell products or use such processes and could potentially result in costly litigation in which we might not prevail.
We could face intellectual property infringement claims that could result in significant legal costs and damages and impede our ability to produce key products, which could have a material adverse effect on our business, financial condition and results of operations.
If our technologies conflict with the proprietary rights of others, we may incur substantial costs as a result of litigation or other proceedings and we could face substantial monetary damages and be precluded from commercializing our products, which would materially harm our business and financial condition.
Patents in the thermal management solutions industry are numerous and may, at times, conflict with one another. As a result, it is not always clear to industry participants, including us, which patents cover the multitude of product types. Ultimately, the courts must determine the scope of coverage afforded by a patent and the courts do not always arrive at uniform conclusions.
A patent owner may claim that we are making, using, selling or offering for sale an invention covered by the owner’s patents and may go to court to stop us from engaging in such activities. Such litigation is not uncommon in our industry. Patent lawsuits can be expensive and would consume time and other resources. There is a risk that a court would decide that we are infringing a third party’s patents and would order us to stop the activities covered by the patents, including the commercialization of our products. In addition, there is a risk that we would have to pay the other party damages for having violated the other party’s patents (which damages may be increased, as well as attorneys’ fees ordered paid, if infringement is found to be willful), or that we will be required to obtain a license from the other party in order to continue to commercialize the affected products, or to design our products in a manner that does not infringe a valid patent. We may not prevail in any legal action, and a required license under the patent may not be available on acceptable terms or at all, requiring cessation of activities that were found to infringe a valid patent. We also may not be able to develop a non-infringing product design on commercially reasonable terms, or at all.
We may not obtain U.S. Government contracts to further develop our technology.
We can give no assurances that we will be successful in obtaining government contracts. The process of applying for government contracts is lengthy, and we cannot be certain that we will be successful in complying with all requirements throughout the application process. Accordingly, we cannot be certain that we will be awarded any U.S. Government contracts utilizing our carbon fiber-based solutions.
Our future growth and success depend on our ability to sell effectively to, and manage relationships with, large enterprise and defense customers.
Our potential customers are manufacturers of products that tend to be large enterprises and organizations, including defense customers. Therefore, our future success will depend on our ability to effectively sell our products to such large customers. Sales to these customers involve risks that may not be present (or that are present to a lesser extent) with sales to smaller customers. These risks include, but are not limited to, increased purchasing power and leverage held by large customers in negotiating contractual arrangements with us and longer sales cycles and the associated risk that substantial time and resources may be spent on a potential customer that elects not to purchase our products or solutions.
Large organizations often undertake a significant evaluation process that results in a lengthy sales cycle. In addition, product purchases by large organizations are frequently subject to budget constraints, multiple approvals and unanticipated administrative, processing and other delays. Finally, large organizations typically have longer implementation cycles, require greater product functionality and scalability, require a broader range of services, demand that vendors take on a larger share of risks, require acceptance provisions that can lead to a delay in revenue recognition and expect greater payment flexibility. All of these factors can add further risk to business conducted with these potential customers.
Downturns in general economic conditions could adversely affect our profitability.
Downturns in general economic conditions can cause fluctuations in demand for our products, product prices, volumes and gross margins. Future economic conditions may not be favorable to our industry. A decline in the demand for our products or a shift to
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lower-margin products due to deteriorating economic conditions could adversely affect sales of our products and our profitability and could also result in impairments of certain of our assets.
Furthermore, any uncertainty in economic conditions may result in a slowdown to the global economy that could affect our business by reducing the prices that our customers may be able or willing to pay for our products or by reducing the demand for our products.
An increase in the cost of raw materials or electricity might affect our profits.
Recently, cost inflation stemming from geopolitical factors, global crises and other macroeconomic factors has caused prices to increase across various sectors of the economy. Any increase in the prices of our raw materials or energy might affect the overall cost of our products. If we are not able to raise our prices to pass on increased costs to our customers, we would be unable to maintain our existing profit margins. Our major cost components include items such as production materials and electricity, which are typically readily available industrial commodities. During our history as a business, we have not seen any material impact on our cost structure from fluctuations in raw material or energy costs, but this could change in the future.
Our results of operations could deteriorate if our manufacturing operations were substantially disrupted for an extended period.
Our manufacturing operations may be subject to disruption due to extreme weather conditions, floods and similar events, major industrial accidents, strikes and lockouts, adoption of new laws or regulations, changes in interpretations of existing laws or regulations or changes in governmental enforcement policies, civil disruption, riots, terrorist attacks, war, and other events. We cannot assure you that no such events will occur. If such an event occurs, it could have a material adverse effect on us.
We may become subject to liabilities related to risks inherent in working with hazardous materials.
Our development and manufacturing processes involve the controlled use of hazardous materials, such as acetone and other flammable chemicals, as well as lithium-ion batteries and components. We are subject to federal, provincial and local laws, including EPA, OSHA and other regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. Although we believe that our safety procedures for handling and disposing of such materials comply with the standards prescribed by such laws and regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, we could be held liable for any damages that result and any such liability could exceed our resources. We are not specifically insured with respect to this liability. Although we believe that we are in compliance in all material respects with applicable environmental laws and regulations and currently do not expect to make material capital expenditures for environmental control facilities in the near-term, if we fail to comply with these regulations substantial fines could be imposed on us and we could be required to suspend production, alter manufacturing processes or cease operations. In addition, there can be no assurance that we will not be required to incur significant costs to comply with environmental laws and regulations in the future, or that our operations, business or assets will not be materially adversely affected by current or future environmental laws or regulations.
Significant disruptions of information technology systems, breaches of data security and other incidents could materially adversely affect our business, results of operations and financial condition.
We maintain information in digital and other forms that is necessary to conduct our business, and we are increasingly dependent on information technology systems and infrastructure to operate our business. In the ordinary course of our business, we collect, store and transmit large amounts of confidential information, including intellectual property, proprietary business information and personal information. It is critical that we do so in a secure manner to maintain the privacy, security, confidentiality, and integrity of such confidential information. Our internal information technology systems and infrastructure, and those of any future collaborators and our contractors, consultants, vendors and other third parties on which we rely, are vulnerable to damage or unauthorized access or use resulting from computer viruses, malware, natural disasters, terrorism, war, telecommunication and electrical failures, cyber-attacks or cyber-intrusions over the Internet, denial or degradation of service attacks, ransomware, hacking, phishing schemes intended to cause an unauthorized transfer of funds and other social engineering attacks, attachments to emails, persons inside our organization or persons with access to systems inside our organization.
Additionally, while we have implemented security measures to protect our data security and information technology systems, our efforts to address these problems may not be successful, and these problems could result in unexpected interruptions, delays, cessation of service, negative publicity and other harm to our business and our competitive position. If such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our product development programs. Any security compromise affecting us, our partners or our industry, whether real or perceived, could harm our reputation, erode confidence in the
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effectiveness of our security measures and lead to regulatory scrutiny, which could materially adversely affect our business, results of operations and financial condition.
See Item 1C – Cybersecurity for a discussion of our information technology systems.
The failure of financial institutions or transactional counterparties could adversely affect our current and projected business operation and our financial condition and results of operations.
We maintain domestic cash deposits in Federal Deposit Insurance Corporation, or FDIC, insured banks that exceed the FDIC insurance limits. The failure of a bank, or other adverse conditions in the financial or credit markets impacting financial institutions at which we maintain balances, could adversely impact our operations, liquidity, and financial performance. Bank failures; events involving limited liquidity, defaults, non-performance, or other adverse developments that affect financial institutions; or concerns or rumors about such events may lead to liquidity constraints. For example, in March 2023, Silicon Valley Bank failed and was taken into receivership by the FDIC. We cannot guarantee that our deposits in excess of the FDIC or other comparable insurance limits will be backstopped by the U.S. or applicable foreign government, or that any bank or financial institution with which we do business will be able to obtain needed liquidity from other banks or government institutions or by acquisition in the event of a failure or liquidity crisis.
Future adverse regulations could affect the viability of the business.
As a small generator of hazardous substances, we are subject to local governmental regulations relating to the storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances, such as acetone that is used in very small quantities to manufacture our products. We are currently in compliance with these regulations. However, there can be no assurance that future regulations might not change or raise the compliance standards, with which the Company may no longer comply or for which we may incur substantial costs to comply.
As far as we are aware, there are no current regulations elsewhere in the world that prevent or prohibit the sale of the Company’s products. However, there is no assurance that any regulations will not be enacted in the future to require the Company’s products or production materials to be subject to test for toxicity or other health effects before they can be sold or used in the production process. If such regulations are enacted in the future, they may result in expensive and time-consuming tests or other actions to ensure regulatory compliance, which could adversely affect the Company’s business. There can be no assurance that future regulations might not severely limit or even prevent the sale of the Company’s products in major markets, which could severely limit the Company’s financial prospects and cause investors to lose some or all of their investment.
Our directors and officers may be exposed to liability.
We currently maintain a policy for director and officer liability insurance, also known as “D&O Insurance.” However, the maximum coverage under our D&O Insurance policy may not be sufficient to cover all such liability exposure and, as a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers or, in the event of liabilities beyond our maximum coverage, we may become subject to liability under our D&O indemnification obligations.
Compliance with changing regulation of corporate governance and public disclosure will result in additional expenses and will divert time and attention away from revenue generating activities.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, and related SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the public markets and public reporting. Our management team has invested and will need to continue to invest significant management time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased selling, general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities, which could have an adverse effect on our business.
If we fail to maintain effective internal controls over financial reporting, the price of our common stock may be adversely affected.
Our internal control over financial reporting could in the future have weaknesses and conditions that could require correction or remediation, the disclosure of which may have an adverse impact on the price of our common stock. We are required to establish and maintain appropriate internal controls over financial reporting. Failure to establish those controls, or any failure of those controls once established, could adversely affect our public disclosures regarding our business, prospects, financial condition or results of operations. In addition, management’s assessment of internal controls over financial reporting may identify weaknesses and conditions that need to
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be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting or disclosure of management’s assessment of our internal controls over financial reporting may have an adverse impact on the price of our common stock.
We are required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act of 2002 and if we fail to comply in a timely manner, our business could be harmed and our stock price could decline.
Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require an annual assessment of internal controls over financial reporting, and for certain issuers an attestation of this assessment by the issuer’s independent registered public accounting firm. The standards that must be met for management to assess the internal controls over financial reporting as effective are complex, and require significant documentation, testing, and possible remediation to meet the detailed standards.
We expect to incur significant expenses and to devote resources to Section 404 compliance on an ongoing basis. It is difficult for us to predict how long it will take or how costly it will be to complete the assessment of the effectiveness of our internal control over financial reporting for each year and to remediate any deficiencies in our internal control over financial reporting. As a result, we may not be able to complete the assessment and remediation process on a timely basis. In addition, although attestation requirements by our independent registered public accounting firm are not presently applicable to us, we could become subject to these requirements in the future and we may encounter problems or delays in completing the implementation of any resulting changes to internal controls over financial reporting. In the event that our Chief Executive Officer or Chief Financial Officer determine that our internal control over financial reporting is not effective as defined under Section 404, we cannot predict how regulators will react or how the market prices of our shares will be affected; however, we believe that there is a risk that investor confidence and share value may be negatively affected.
Risks Relating to Our Bitcoin Treasury Strategy and Holdings
WE ARE NOT REGISTERED AS AN INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF 1940 AND STOCKHOLDERS DO NOT HAVE THE PROTECTIONS ASSOCIATED WITH OWNERSHIP OF SHARES IN A REGISTERED INVESTMENT COMPANY NOR THE PROTECTIONS AFFORDED BY THE COMMODITIES EXCHANGE ACT.
Our BTC acquisition and holdings strategies may expose us to various risks associated with BTC
Our BTC acquisition and holdings strategies may expose us to various risks associated with BTC, including the following:
BTC is a highly volatile asset. BTC is a highly volatile asset and has experienced, and may continue to experience, significant price volatility, including sharp declines over short periods. While BTC prices are determined primarily using data from various exchanges, over-the-counter markets and derivative platforms, they have historically been volatile and are impacted by a variety of factors, such as market sentiment, adoption trends, regulatory developments, macroeconomic conditions and speculation. Currently, we do not use a formula or specific methodology to determine whether or when we will sell BTC and decisions to hold or sell BTC are made by management based on market conditions and liquidity needs. Such decisions, however well-informed, may result in untimely sales and even losses, adversely affecting an investment in us.
BTC does not pay interest or dividends. BTC does not pay interest or other returns, and we can only generate cash from our BTC holdings if we sell our BTC or implement strategies to create income streams or otherwise generate cash by using our BTC holdings. Even if we pursue any such strategies, we may be unable to create income streams or otherwise generate cash from our BTC holdings, and any such strategies may subject us to additional risks.
We purchase BTC using primarily proceeds from equity financings. Our ability to execute on the acquisition portion of our BTC strategy depends in significant part on our ability to obtain equity financing. If we are unable to obtain equity financing on favorable terms or at all, we may not be able to successfully execute on our BTC strategy.
We will be subject to counterparty risks, including in particular risks relating to our custodians. Although we intend to implement various measures that are designed to mitigate our counterparty risks, including by storing substantially all of the bitcoin we may own in custody accounts at U.S.-based, institutional-grade custodians and negotiating contractual arrangements intended to establish that our property interest in custodially-held bitcoin is not subject to claims of our custodians’ creditors, applicable insolvency law is not fully developed with respect to the holding of digital assets in custodial accounts. If our custodially-held bitcoin were nevertheless considered to be the property of our custodians’ estates in the event that any such custodians were to enter bankruptcy, receivership or similar insolvency proceedings, we could be treated as a general unsecured creditor of such custodians, inhibiting our
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ability to exercise ownership rights with respect to such bitcoin and this may ultimately result in the loss of the value related to some or all of such bitcoin. Even if we are able to prevent our bitcoin from being considered the property of a custodian’s bankruptcy estate as part of an insolvency proceeding, it is possible that we would still be delayed or may otherwise experience difficulty in accessing our bitcoin held by the affected custodian during the pendency of the insolvency proceedings. Any such outcome could have a material adverse effect on our financial condition and the market price of our common stock.
Changes in the trading price of BTC or changes in the manner in which we own BTC could have significant accounting impacts, including increasing the volatility of our results. The Company has adopted ASU 2023-08, which requires us to measure our BTC holdings at fair value in our statement of financial position, and to recognize gains and losses from changes in the fair value of our BTC in net income each reporting period. ASU 2023-08 also requires us to provide certain interim and annual disclosures with respect to our BTC holdings. Volatility in the price of BTC could have a material impact on the carrying value of our digital assets on our balance sheet, increase the volatility of our financial results, and it could also have adverse tax consequences, which in turn could have a material adverse effect on our financial results and the market price of our common stock.
The broader digital assets industry, including the technology associated with digital assets, the rate of adoption and development of, and use cases for, digital assets, market perception of digital assets, and the legal, regulatory, and accounting treatment of digital assets are constantly developing and changing, and there may be additional risks in the future that are not possible to predict.
Additionally, while we currently intend to own BTC directly, we may investigate other potential approaches to owning BTC, including indirect ownership (for example, through ownership interests in a fund that owns BTC). If we were to own all or a portion of our BTC in a different manner, the accounting treatment for our BTC, our ability to use our BTC as collateral for additional borrowings, and the regulatory requirements to which we are subject, may correspondingly change.
BTC and other digital assets are novel assets, and are subject to significant legal, commercial, regulatory and technical uncertainty.
BTC and other digital assets are relatively novel and are subject to significant uncertainty, which could adversely impact their price. The application of state and federal securities laws and other laws and regulations to digital assets is unclear in certain respects, and it is possible that regulators in the United States or foreign countries may interpret or apply existing laws and regulations in a manner that adversely affects the price of BTC.
The U.S. federal government, states, regulatory agencies, and foreign countries may also enact new laws and regulations, or pursue regulatory, legislative, enforcement or judicial actions, that could materially impact the price of BTC or the ability of individuals or institutions such as us to own or transfer BTC. For example, the U.S. executive branch, the SEC, the European Union’s Markets in Crypto Assets Regulation, among others have been active in recent years, and in the U.K., the Financial Services and Markets Act 2023, or FSMA 2023 became law. It is not possible to predict whether, or when, any of these developments will lead to Congress granting additional authorities to the SEC or other regulators, or whether, or when, any other federal, state or foreign legislative bodies will take any similar actions. It is also not possible to predict the nature of any such additional authorities, how additional legislation or regulatory oversight might impact the ability of digital asset markets to function or the willingness of financial and other institutions to continue to provide services to the digital assets industry, nor how any new regulations or changes to existing regulations might impact the value of digital assets generally and BTC specifically. The consequences of increased regulation of digital assets and digital asset activities could adversely affect the market price of BTC and in turn adversely affect the market price of our common stock.
Moreover, the risks of engaging in a BTC treasury strategy are relatively novel and have created, and could continue to create, complications due to the lack of experience that third parties have with companies engaging in such a strategy, such as increased costs of director and officer liability insurance or the potential inability to obtain such coverage on acceptable terms in the future.
The growth of the digital assets industry in general, and the use and acceptance of BTC in particular, may also impact the price of BTC and is subject to a high degree of uncertainty. The pace of worldwide growth in the adoption and use of BTC may depend, for instance, on public familiarity with digital assets, ease of buying, accessing or gaining exposure to BTC, institutional demand for BTC as an investment asset, the participation of traditional financial institutions in the digital assets industry, consumer demand for BTC as a means of payment, and the availability and popularity of alternatives to BTC. Even if growth in BTC adoption occurs in the near or medium-term, there is no assurance that BTC usage will continue to grow over the long-term.
Because BTC has no physical existence beyond the record of transactions on the BTC blockchain, a variety of technical factors related to the BTC blockchain could also impact the price of BTC. For example, malicious attacks by miners, inadequate mining fees to incentivize validating of BTC transactions, hard “forks” of the BTC blockchain into multiple blockchains, and advances in digital computing, algebraic geometry, and quantum computing could undercut the integrity of the BTC blockchain and negatively affect the price of BTC. The liquidity of BTC may also be reduced and damage to the public perception of BTC may occur, if financial institutions
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were to deny or limit banking services to businesses that hold BTC, provide BTC-related services or accept BTC as payment, which could also decrease the price of BTC. Similarly, the open-source nature of the BTC blockchain means the contributors and developers of the BTC blockchain are generally not directly compensated for their contributions in maintaining and developing the blockchain, and any failure to properly monitor and upgrade the BTC blockchain could adversely affect the BTC blockchain and negatively affect the price of BTC.
Recent actions by U.S. banking regulators have reduced the ability of BTC-related services providers to gain access to banking services and liquidity of BTC may also be impacted to the extent that changes in applicable laws and regulatory requirements negatively impact the ability of exchanges and trading venues to provide services for BTC and other digital assets. In addition, while the current administration has expressed support regarding the development and use of digital assets as the industry has anticipated, the specific regulatory frameworks are still to be developed. Expectations around U.S. digital asset policy, including potential sentiments that the U.S. government is not moving quickly enough or not meeting policy expectations, may adversely affect the price of BTC.
Regulatory change reclassifying BTC as a security could lead to our classification as an “investment company” under the Investment Company Act of 1940, as amended, or the 1940 Act, and could adversely affect the market price of BTC and the market price of our common stock.
While senior SEC officials have stated their view that bitcoin is not a “security” for purposes of the federal securities laws, a contrary determination by the SEC could lead to our classification as an “investment company” under the Investment Company Act, which would subject us to significant additional regulatory controls that could have a material adverse effect on our ability to execute on our bitcoin treasury strategy, and our business and operations and may also require us to substantially change the manner in which we conduct our business.
In addition, if bitcoin is determined to constitute a security for purposes of the federal securities laws, the additional regulatory restrictions imposed by such a determination could adversely affect the market price of bitcoin and in turn adversely affect the market price of our Common Stock.
Our intended BTC holdings may be less liquid than our existing cash and cash equivalents and may not be able to serve as a source of liquidity for us to the same extent as cash and cash equivalents.
Historically, the BTC markets have been characterized by significant volatility in price, limited liquidity and trading volumes compared to sovereign currencies markets, relative anonymity, a developing regulatory landscape, potential susceptibility to market abuse and manipulation, compliance and internal control failures at exchanges, and various other risks inherent in its entirely electronic, virtual form and decentralized network. During times of market instability, we may not be able to sell our BTC at favorable prices or at all. For example, a number of BTC trading venues temporarily halted deposits and withdrawals in 2022. As a result, our BTC holdings may not be able to serve as a source of liquidity for us to the same extent as cash and cash equivalents. Further, BTC we may hold with our custodians and transact with our trade execution partners may not enjoy the same protections as are available to cash or securities deposited with or transacted by institutions subject to regulation by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation. Additionally, we may be unable to enter into term loans or other capital raising transactions collateralized by our unencumbered BTC or otherwise generate funds using our BTC holdings, including in particular during times of market instability or when the price of BTC has declined significantly. If we are unable to sell our BTC, enter into additional capital raising transactions using BTC as collateral, or otherwise generate funds using our BTC holdings, or if we are forced to sell our BTC at a significant loss, in order to meet our working capital requirements, our business and financial condition could be negatively impacted.
If we or our third-party service providers experience a security breach or cyberattack and unauthorized parties obtain access to our BTC, or if our private keys are lost or destroyed, or other similar circumstances or events occur, we may lose some or all of our BTC and our financial condition and results of operations could be materially adversely affected.
Currently, we intend to hold any BTC we may own, in custody accounts at U.S.-based institutional-grade digital asset custodians. Security breaches and cyberattacks are of particular concern with respect to our BTC. BTC and other blockchain-based cryptocurrencies and the entities that provide services to participants in the BTC ecosystem have been, and may in the future be, subject to security breaches, cyberattacks, or other malicious activities. For example, in October 2021 it was reported that hackers exploited a flaw in the account recovery process and stole from the accounts of at least 6,000 customers of the Coinbase exchange, although the flaw was subsequently fixed and Coinbase reimbursed affected customers. Similarly, in November 2022, hackers exploited weaknesses in the security architecture of the FTX Trading digital asset exchange and reportedly stole over $400 million in digital assets from customers. A successful security breach or cyberattack could result in:
a partial or total loss of our BTC in a manner that may not be covered by insurance or the liability provisions of the custody agreements with the custodians who hold our BTC;
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harm to our reputation and brand;
improper disclosure of data and violations of applicable data privacy and other laws; or
significant regulatory scrutiny, investigations, fines, penalties, and other legal, regulatory, contractual and financial exposure.
Further, any actual or perceived data security breach or cybersecurity attack directed at other companies with digital assets or companies that operate digital asset networks, regardless of whether we are directly impacted, could lead to a general loss of confidence in the broader BTC blockchain ecosystem or in the use of the BTC network to conduct financial transactions, which could negatively impact us.
Attacks upon systems across a variety of industries, including industries related to BTC, are increasing in frequency, persistence, and sophistication, and, in many cases, are being conducted by sophisticated, well-funded and organized groups and individuals, including state actors. The techniques used to obtain unauthorized, improper or illegal access to systems and information (including personal data and digital assets), disable or degrade services, or sabotage systems are constantly evolving, may be difficult to detect quickly, and often are not recognized or detected until after they have been launched against a target. These attacks may occur on our systems or those of our third-party service providers or partners. We may experience breaches of our security measures due to human error, malfeasance, insider threats, system errors or vulnerabilities or other irregularities. In particular, we expect that unauthorized parties will attempt, to gain access to our systems and facilities, as well as those of our partners and third-party service providers, through various means, such as hacking, social engineering, phishing and fraud. Threats can come from a variety of sources, including criminal hackers, hacktivists, state-sponsored intrusions, industrial espionage, and insiders. In addition, certain types of attacks could harm us even if our systems are left undisturbed. For example, certain threats are designed to remain dormant or undetectable, sometimes for extended periods of time, or until launched against a target and we may not be able to implement adequate preventative measures. Further, there has been an increase in such activities due to the increase in work-from-home arrangements. The risk of cyberattacks could also be increased by cyberwarfare in connection with the ongoing Russia-Ukraine and Israel-Hamas conflicts, or other future conflicts, including potential proliferation of malware into systems unrelated to such conflicts. Any future breach of our operations or those of others in the BTC industry, including third-party services on which we rely, could materially and adversely affect our financial condition and results of operations.
We rely entirely on third-party mining service providers and pool operators, and any failure by those counterparties could prevent us from maintaining our mining operations and receiving our estimated digital asset rewards.
Under our lease agreements, third parties own, house, power, and maintain all our leased miners, and our role is limited to supplying the contractual computing power that the operator directs to the mining pools of our choice. We therefore have no physical possession of the machines, no direct visibility into uptime or energy-cost management and only limited contractual remedies if the operator experiences hardware failures, cyber-incidents, regulatory shutdowns, curtailments, or insolvency. Should the operator misallocate hashrate, under-report our fractional share of daily block rewards, or alter pool-reward formulas, our revenue could decline sharply while our fixed lease payments continue. Because we do not control the equipment, we may be unable to redeploy, repossess, or remarket the rigs, leaving us fully exposed to the operator’s performance and creditworthiness. Any material disruption or dispute with this third party would materially and adversely affect our financial condition.
Because substantial portions of our lease commitments are paid in advance of the respective term, if our daily fractional share of block rewards falls below expectations or the value of the mining rewards substantially decreases, we may not achieve profitability or could suffer substantial losses.
We pre-pay or commit to short-term and long-term lease fees that are recorded as cost of revenue, even though the bitcoin rewards we receive fluctuate daily. Our entitlement is calculated each 24-hour period as a fraction of the total blocks the entire bitcoin network is expected, and not guaranteed, to generate. If the network produces fewer blocks than forecast, our operator’s pool misses solved blocks, or if network difficulty rises more swiftly than anticipated, our realized revenue from digital assets mined may fall short of the expected return while lease obligations remain fixed. In such cases the cumulative bitcoin earned over the lease term may be unable to offset the cash we have expended, forcing us to recognize operating losses and constraining our liquidity.
We receive non-cash consideration that is subject to daily fair-value remeasurement, creating significant earnings volatility and potential liquidity mismatches.
We recognize revenue each day at the fair value, in U.S. dollars, of the bitcoin awarded by the pool operator, and we subsequently mark our digital-asset inventory to fair value at every reporting date, recording unrealized gains or losses in the statement of operations. Bitcoin’s market price can be highly volatile; a sharp decline after the award date can convert recently recognized revenue into an accounting loss and erode shareholders’ equity, while a rapid price increase may inflate GAAP income without generating the
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cash needed to satisfy fixed lease and operating expenses. Because lease costs are largely fixed and paid in cash, any liquidity shortfalls could require us to liquidate treasury holdings at unfavorable prices, and materially and adversely affect our financial condition.
Bitcoin network difficulty, hashrate growth, and our lack of owned equipment may render the hashrate output of our leased miners uncompetitive.
A miner’s share of block rewards is proportional to its hashrate relative to the global network hashrate. Network difficulty automatically rises when aggregate hashrate increases, often following periods of elevated bitcoin prices or the release of more efficient mining models. If global hashrate grows faster than the incremental hashrate we are able to secure under existing or future leases, our percentage of daily rewards will contract. Unlike miners that own their rigs and can swiftly liquidate and reinvest, we are bound by fixed-term leases that restrict our ability to swap in newer models, scale capacity, or relocate hardware to cheaper power markets. Should the price of bitcoin stagnate or fall while difficulty rises, the revenue generated by our leased fleet may drop below the all-in lease and power costs, forcing us to mine at a loss or idle equipment while continuing to pay the lease. Moreover, accurately forecasting future difficulty is inherently uncertain; unexpected spikes could prevent us from recovering our lease commitments and erode our competitive position.
Risks Relating to Our Common Stock and Preferred Stock
An active, liquid and orderly market for our common stock may not develop or be sustained, and you may not be able to sell your common stock without adversely affecting the price, or at all depending on volume offered for sale at any time.
Our common stock trades on the NYSE American LLC Exchange (“NYSE American”). We cannot assure you that an active trading market for our common stock will develop or be sustained. The lack of an active market may impair your ability to sell the common stock at the time you wish to sell or at a price that you consider reasonable. An inactive market may also impair our ability to raise capital by selling common stock and may impair our ability to acquire other businesses or technologies using our common stock as consideration, which, in turn, could materially adversely affect our business.
We are subject to the continued listing requirements of the NYSE American. If we are unable to comply with such requirements, our common stock would be delisted from the NYSE American, which would limit investors’ ability to effect transactions in our common stock and subject us to additional trading restrictions.
Our common stock is currently listed on the NYSE American. In order to maintain our listing, we must maintain certain share prices, financial and share distribution targets, including maintaining a minimum amount of stockholders’ equity and a minimum number of public stockholders. In addition to these objective standards, the NYSE American may delist the securities of any issuer if, in its opinion, the issuer’s financial condition and/or operating results appear unsatisfactory; if it appears that the extent of public distribution or the aggregate market value of the security has become so reduced as to make continued listing on the NYSE American inadvisable; if the issuer sells or disposes of principal operating assets or ceases to be an operating company; if an issuer fails to comply with the NYSE American’s listing requirements; if an issuer’s common stock sells at what the NYSE American considers a “low selling price” (generally trading below $0.20 per share for an extended period of time); or if any other event occurs or any condition exists which makes continued listing on the NYSE American, in its opinion, inadvisable.
On December 20, 2023, we received a letter from the staff of NYSE American stating that the Company’s stockholders’ equity as reported in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 was not in compliance with the NYSE American’s continued listing standards under Section 1003(a)(iii) of the NYSE American Company Guide (the “Company Guide”). Section 1003(a)(iii) of the Company Guide requires a listed company to have stockholders’ equity of $6 million or more if the listed company has reported losses from continuing operations and/or net losses in its five most recent fiscal years. The Company submitted a plan to the NYSE American on January 19, 2024 advising of actions it has taken or will take to regain compliance with the continued listing standards by June 20, 2025. On March 5, 2024, we received a notification from the NYSE American that the Company’s plan to regain compliance was accepted.
On February 12, 2024, we received a letter from the staff of NYSE American stating that the Company’s securities’ performance of trading price is below compliance criteria pursuant to Section 1003(f)(v) of the NYSE American Company Guide, which NYSE American determined to be a 30-trading day average of less than $0.20 per share. The Company’s continued listing was predicated on it demonstrating sustained price improvement within a reasonable period of time, which NYSE American had determined to be no later than August 12, 2024, or otherwise effecting a reverse stock split of the Company’s common stock.
On May 6, 2024, the Company received a letter from the staff of NYSE American indicating that the Company had regained compliance with the NYSE American continued listing standard set forth in Section 1003(f)(v) of the NYSE American Company Guide due to its shares of common stock demonstrating sustained price improvement.
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On December 18, 2024, the Company received a letter from the staff of NYSE American indicating that the Company had regained compliance with the NYSE American continued listing standard set forth in Sections 1003(a)(i), (ii) and (iii) of the Company Guide. To resolve the deficiency, the Company demonstrated compliance with the applicable standards for two consecutive quarters, pursuant to Section 1009(f) of the Company Guide. Effective as of the opening of trading on December 17, 2024, the compliance indicator was removed, and the Company’s name was removed from the list of NYSE American noncompliant issuers. The Company remains subject to the NYSE American’s continued listing standards.
If the NYSE American delists our common stock from trading on its exchange and we are not able to list our securities on another national securities exchange, we expect our common stock would qualify to be quoted on the OTC Bulletin Board ® or on the Pink Sheets ® (a quotation medium operated by Pink Sheets LLC). If this were to occur, we could face significant material adverse consequences, including:
a limited availability of market quotations for our securities;
reduced liquidity for our securities;
a determination that our common stock is a “penny stock” which will require brokers trading in our common stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our securities;
a limited amount of news and analyst coverage; and
a decreased ability to issue additional securities or obtain additional financing in the future.
If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. Our research coverage by industry and financial analysts is currently limited. Even if our analyst coverage increases, if one or more of the analysts who cover us downgrade our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
Shares eligible for future sale may adversely affect the market.
From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144 promulgated under the Securities Act, subject to certain limitations. In general, pursuant to amended Rule 144, non-affiliate stockholders may sell freely after six months subject only to the current public information requirement. Affiliates may sell after six months subject to the Rule 144 volume, manner of sale (for equity securities), and current public information and notice requirements. Any substantial sales of our common stock pursuant to Rule 144 may have a material adverse effect on the market price of our common stock.
We could issue additional common stock, which might dilute the book value of our common stock.
Our Board of Directors has the authority, without action or vote of our stockholders, to authorize the issuance of all or a part of our authorized but unissued shares. Such stock issuances could be made at a price that reflects a discount or a premium from the then-current trading price of our common stock. In addition, in order to raise capital, we have and may need to issue securities that are convertible into or exchangeable for a significant amount of our common stock. These issuances would dilute the percentage ownership interest, which would have the effect of reducing your influence on matters on which our stockholders vote and might dilute the book value of our common stock. You may incur additional dilution if holders of stock options, whether currently outstanding or subsequently granted, exercise their options, or if warrant holders exercise their warrants, whether currently outstanding or subsequently granted, to purchase shares of our common stock.
Our common stock could be further diluted as a result of the issuance of convertible securities, warrants or options.
In the past, we have issued convertible securities (such as convertible debentures and notes), warrants and options in order to raise money or as compensation for services and incentive compensation for our employees and directors. We have shares of common stock reserved for issuance upon the exercise of certain of these securities and may increase the shares reserved for these purposes in
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the future. Our issuance of these convertible securities, options and warrants could affect the rights of our stockholders, could reduce the market price of our common stock or could result in adjustments to exercise prices of outstanding warrants (resulting in these securities becoming exercisable for, as the case may be, a greater number of shares of our common stock), or could obligate us to issue additional shares of common stock to certain of our stockholders.
We may require additional capital to support business growth, and if capital is not available to us or is available only by diluting existing stockholders, our business, operating results and financial condition may suffer.
We may require additional capital to continue to develop and grow our business and operations, including responding to business opportunities, challenges or unforeseen circumstances, and we cannot be certain that additional financing will be available, which could limit our ability to grow and jeopardize our ability to continue our business operations. We fund our capital needs from available working capital; however, the timing of available working capital and capital funding needs may not always coincide, and the levels of working capital may not fully cover capital funding requirements. From time to time, we may need to supplement our working capital from operations with proceeds from financing activities. There can be no assurance that we will be able to obtain any additional financing on terms that are acceptable to us, or at all.
If we raise additional funds through issuances of equity, our existing stockholders could experience significant dilution, and any new securities we issue could have rights, preferences and privileges superior to those of holders of our shares of common stock. Additionally, any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities.
Further, a severe or prolonged economic downturn could result in a variety of risks to our business, including weakened demand for our products or services and our inability to raise additional capital when needed on acceptable terms, if at all. Failure to secure any necessary financing in a timely manner and on favorable terms could impair our ability to achieve our growth strategy, could harm our financial performance and stock price and could require us to delay or abandon our business plans. We cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely impact our business.
Global economic uncertainty and financial market volatility caused by political instability, changes in international trade relationships and conflicts, such as the war in Ukraine and conflicts in the Middle East, could make it more difficult for us to access financing and could adversely affect our business and operations.
Our ability to raise capital is subject to the risk of adverse changes in the market value of our stock. Periods of macroeconomic weakness or recession and heightened market volatility caused by adverse geopolitical developments could increase these risks, potentially resulting in adverse impacts on our ability to raise further capital on favorable terms. The impact of geopolitical tension, such as a deterioration in the bilateral relationship between the US and China or an escalation in conflict between Russia and Ukraine and the conflicts in the Middle East, including any resulting sanctions, export controls or other restrictive actions that may be imposed by the US and/or other countries against governmental or other entities in, for example, Russia, also could lead to disruption, instability and volatility in global trade patterns, which may in turn impact our ability to source necessary reagents, raw materials and other inputs for our research and development operations.
We do not intend to pay dividends.
We do not anticipate paying cash dividends on our common stock in the foreseeable future. We may not have sufficient funds to legally pay dividends. Even if funds are legally available to pay dividends, we may nevertheless decide in our sole discretion not to pay dividends. The declaration, payment and amount of any future dividends will be made at the discretion of our board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors our board of directors may consider relevant. There is no assurance that we will pay any dividends in the future, and, if dividends are paid, there is no assurance with respect to the amount of any such dividend.
Voting power of our stockholders is highly concentrated by insiders.
Our officers, directors and affiliates currently beneficially own approximately 70.45% of the voting power of our voting stock. Such concentrated control of the Company may adversely affect the value of our common stock. If you acquire our common stock, you may have no effective voice in our management. Sales by our insiders or affiliates, along with any other market transactions, could affect the value of our common stock.
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We have shares of Series A Voting Preferred Stock outstanding with super voting rights.
Our outstanding capital stock as of the date hereof consists of common stock and Series A Voting Preferred Stock. All 1,000,000 shares of Series A Voting Preferred Stock have been issued to Mr. Michael Mo, our Chairman and Chief Executive Officer. Each share of common stock is entitled to one vote and each share of Series A Voting Preferred Stock is entitled to 100 votes on any matter on which action of the stockholders of the Company is sought. Approximately 97.30% of Mr. Mo’s voting power stems from his holdings of the Series A Voting Preferred Stock. The Series A Voting Preferred Stock will vote together with the common stock.
Our certificate of incorporation or the Certificate of Designation of Preferences, Rights and Limitations of the Non-convertible Series A Voting Preferred Stock do not provide for any sunset provisions that limit the lifespan of our Series A Voting Preferred Stock, including in the case of the death of a Series A Voting Preferred Stock stockholder or intra-family transfers of shares of Series A Voting Preferred Stock. The holders of Series A Voting Preferred Stock are not entitled to receive dividends of any kind or to any liquidation preference. The Series A Voting Preferred Stock is not convertible into common stock or any other equity authorized to be issued by the Company.
In addition to the dilutive effect on the voting power and value of our common stock, the foregoing structure of our capital stock may render our common stock ineligible for inclusion in certain securities market indices, and thus adversely affect the price and liquidity of, and public sentiment regarding, our common stock or other securities. The existence of, and voting rights associated with, our Series A Voting Preferred Stock, either alone or in conjunction with certain of the other provisions of our certificate of incorporation, could also have the effect of delaying, deterring or preventing a change in our control or make the removal of our management more difficult.
Our Chairman and CEO owns our Series A Voting Preferred Stock and will be able to exert significant control over matters subject to stockholder approval.
Michael Mo, our Chairman and CEO, currently beneficially owns common stock and Series A Voting Preferred Stock that provide him with 70.28% of the voting power of our voting stock. Therefore, even after any further dilution from future equity issuances, he will have the ability to substantially influence us through this ownership position. For example, he may be able to significantly influence elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. His interests may not always coincide with our corporate interests or the interests of other stockholders, and he may act in a manner with which you may not agree or that may not be in the best interests of our other stockholders. So long as he continues to hold a significant amount of voting power, he will continue to be able to strongly influence or effectively control our decisions.
Our certificate of incorporation allows for our board to create a new series of preferred stock without further approval by our stockholders, which could adversely affect the rights of the holders of our common stock.
Our Board of Directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our Board of Directors have the authority to authorize the issuance of up to 20,000,000 shares of our preferred stock, terms of which may be determined by the Board without further stockholder approval. As a result, our Board of Directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock.
In addition, our Board of Directors could authorize the issuance of a series of preferred stock that has greater voting power than our common stock or that is convertible into our common stock, which could decrease the relative voting power of our common stock or result in dilution to our existing stockholders.
On January 26, 2024, our Board of Directors approved, authorized, and ratified the issuance of 730,000 shares of previously designated Non-convertible Series A Voting Preferred Stock to the Chairman and Chief Executive Officer of the Company, Michael Mo, for no consideration, subject to the Board reserving the full and unequivocal right to revoke, rescind, transfer or otherwise cancel the issued Non-convertible Series A Voting Preferred Stock in the event Michael Mo is removed from any position with the Company or resigns from all positions with the Company. On January 16, 2025, the Board of Directors approved the issuance of an additional 270,000 shares of Non-convertible Series A Voting Preferred Stock to the Chief Executive Officer, bringing his total holdings up to 1,000,000 shares of Series A Voting Preferred Stock.
The issuance of up to 1,000,000 shares of Non-convertible Series A Voting Preferred Stock was previously approved and authorized by a vote of the majority stockholders of the Company and reinforces and enhances the Company’s flexibility to optimize the Company’s negotiating position in any potential current and/or future engagements with commercial, financial, and/or strategic
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parties, and to provide defenses against potential hostile third-party actions. Each record holder of Non-convertible Series A Voting Preferred Stock has 100 votes per share of Non-convertible Series A Voting Preferred Stock held by such record holder, but the Series A Voting Preferred Stock is otherwise identical in every other respect to the voting rights of the holders of common stock entitled to vote at any regular or special meeting of the stockholders or by written consent.
