Item 1A - Risk Factors

Our business, financial condition, results of operations and cash flows are subject to a number of risk factors that may adversely affect our business, financial condition, results of operations or cash flows. If any significant adverse developments resulting from these risk factors should occur, the trading price of our securities could decline, and moreover, investors in our securities could lose all or part of their investment in our securities.

You should refer to the explanation of the qualifications and limitations on forward-looking statements under “Special Note Regarding Forward-Looking Statements.” All forward-looking statements made by us are qualified by the risk factors described below.

Risks Related to our Business, Operations, and Industry

We have incurred losses to date and will likely continue to incur losses.

We have incurred net losses since we commenced operations. For the years ended December 31, 2019 and 2018, our net losses were $89.8 million and $12.1 million, respectively. We had an accumulated deficit of $112.5 million as of December 31, 2019. Our cumulative net losses have had, and likely will continue to have, a material adverse effect on our working capital, assets, and stockholders’ equity. We will likely continue to incur losses in the future and may never generate revenue sufficient to become profitable or to sustain profitability. Continuing losses may impair our ability to raise the additional capital required to continue and expand our operations. Risks to our operating results include those that may be caused by the spread of coronavirus, including absences affecting manufacturing and sales force personnel leading to reduced customer purchasing activity.

We may be unable to comply with the financial covenants in our loan agreement with our senior lender, East West Bank.

Our loan agreement with East West Bank (“EWB”) imposes various obligations and financial covenants on us. Borrowings bear interest at a variable interest rate and are collateralized by substantially all of our assets. In addition, the loan agreement limits our ability to dispose of all or any part of our business or property; merge or consolidate with or into any other business organization; incur or prepay additional indebtedness; declare or pay any dividend or make a distribution on any class of our stock; or enter into specified material transactions with our affiliates.

As of December 31, 2019, we were not in compliance with the minimum adjusted EBITDA covenant under the EWB loan agreement. While EWB waived non-compliance with this covenant and agreed to less stringent covenants in the future, we were required to provide several concessions that will impact our future liquidity and capital resources. Whenever we request a waiver or amendment, there is a risk that the lender will not grant the request or will demand concessions that increase our interest costs and improve the lenders security in the event of a future default. For example, when we entered into the third amendment with EWB in March 2020, we agreed to (i) increase the interest rate by 1.5%, (ii) set aside $15.1 million in restricted cash accounts controlled by EWB, and (iii) raise at least $30.0 million through equity financings for the year ending December 31, 2020. Despite the less stringent covenants in the third amendment, if our financial performance does not improve, additional covenant violations may occur. There is no assurance that EWB will waive future instances of noncompliance.

Failure to achieve and maintain effective internal controls could have a material adverse effect on our business.

If we cannot provide reliable financial reports, our operating results could be harmed. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Based on our evaluation as of September 30, 2019, we identified a material weakness in internal control over financial reporting as a result of inadequate controls over the preparation and review of our consolidated statements of cash flows. While this material weakness was remediated in the fourth quarter of 2019, it is possible that we will have additional material weaknesses in the future. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. Failure to achieve and maintain an effective internal control environment could cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our stock price. Failure to maintain our internal controls could also potentially subject us to sanctions or investigations by the SEC or other regulatory authorities.

Growth of operations will depend on the acceptance of our products and consumer discretionary spending.

The acceptance of our healthy beverage and better-for-you products by both consumers and by retailers to gain distribution is critically important to our success. Our business could be harmed if there are shifts in retailer priorities and shifts in user preferences away from our products, and if we are unable to develop effective healthy beverage and better-for-you products that appeal to both retailers and consumers. Our success depends to a significant extent on discretionary user spending, which is influenced by general economic conditions and the availability of discretionary income. We may experience an inability to generate revenue during economic downturns or during periods of uncertainty, where users may purchase products that are cheaper or forego purchasing any healthy products. Any material decline in the amount of discretionary spending could have a material adverse effect on our sales, results of operations, business, and financial condition.

Our products may not become, or continue to be, appealing and, as a result, there may not be demand for these products and our sales could decrease, which would result in a loss of revenue. Additionally, interest in our products may not continue, which could adversely affect our business and revenues.

Demand for products we sell depends on many factors, including the number of customers we are able to attract and retain over time, the competitive environment in the healthy beverage and better-for-you products industry, as well as the beverage and retail industry as a whole. Lack of demand may force us to reduce prices below our desired pricing level or increase promotional spending, and the inability to anticipate changes in user preferences and to meet consumers’ needs in a timely cost effective manner could result in immediate and longer term declines in the demand for the products we offer, which could adversely affect our sales, cash flows and overall financial condition. An investor could lose his or her entire investment as a result.

Future acquisitions, strategic investments, partnerships, or alliances could be difficult to identify and integrate, divert the attention of management, disrupt our business, dilute stockholder value, and adversely affect our financial condition and results of operations.

We may seek to acquire or invest in businesses and product lines that we believe could complement or expand our product offerings, or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating, and pursuing suitable acquisitions, whether or not the acquisitions are completed. If we acquire businesses, we may not be able to integrate successfully the acquired personnel, operations, and technologies, or effectively manage the combined business following the acquisition. We may not be able to find and identify desirable acquisition targets or be successful in entering into an agreement with any particular target or obtain adequate financing to complete such acquisitions. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our results of operations. In addition, if an acquired business fails to meet our expectations, our business, financial condition, and results of operations may be adversely affected.

A substantial portion of our total assets are classified as long-lived assets that are subject to periodic impairment testing. If we determine that impairment exists in the future, it could have a material adverse impact on our results of operations.

Under our accounting policies, we consider whether events and circumstances have occurred that would indicate if it is “more likely than not” that an impairment of our long-lived assets has occurred. We perform an annual goodwill impairment evaluation during the fourth quarter of each calendar year. Evaluating whether impairment exists involves substantial judgment and estimation. If we project a sustained decline in a reporting unit’s revenues and earnings, it will have a significant negative impact on the fair value of the reporting unit which could result in material impairment charges in the future. Such a decline could be driven by, among other things: (i) changes in strategic priorities; (ii) anticipated decreases in product pricing, sales volumes, and long-term growth rates as a result of competitive pressures or other factors; and (iii) the inability to achieve, or delays in achieving the goals of our strategic initiatives and synergies. Adverse changes to macroeconomic factors, such as increases to long-term interest rates, would also negatively impact the fair value of our reporting units.

During 2019, we determined that our long-lived assets were impaired for an aggregate of $47.2 million. As of December 31, 2019, a substantial portion of our total assets are long-lived assets that are subject to future impairment evaluations. Accordingly, future impairment charges could have a material adverse impact on our results of operations.

We face strong and varied competition.

Our products and industry as a whole are subject to strong and varied competition. Such competitors include: (1) large multinational corporations in the beverage and healthy beverage industries, including but not limited to companies that have established loyal customer bases over several decades; (2) healthy beverage companies that have an established customer base, and have the same or a similar business plan as we do and may be looking to expand; (3) a variety of other local and national healthy beverage companies; and (4) multinational corporations in the direct selling business that have large, loyal independent distributor bases.

Many of our current and potential competitors are well established and have longer operating histories, greater financial and operational resources, and greater name and brand recognition than we have. As a result, these competitors may have greater credibility with both existing and potential customers. They also may offer more products and more aggressively promote and sell their products. Our competitors may also support more aggressive pricing than we can, which could adversely affect sales, cause us to decrease our prices to remain competitive, or otherwise reduce the overall gross profit earned on our products. We may be unable to develop or sustain a market position or expand our business. We anticipate that the intensity of competition will increase.

If we are unable to attract and retain active IPCs and customers in our direct-to-consumer business, our business may be harmed.

We distribute our Tahitian Noni, TruAge, and TeMana products through and to approximately 280,000 independent contractor IPCs and customers, and we depend upon them directly for a substantial amount of our revenue. To increase our revenue, we must increase the number of, and the productivity of, our IPCs. Thus, our success in the Noni by NewAge segment depends in part upon our ability to attract, retain, and motivate a large base of IPCs. We cannot accurately predict how the number and productivity of our IPCs may fluctuate, because we are relying primarily on our IPC leaders to recruit, train, and motivate new IPCs. Several related factors affect retention and motivation, including general business and economic conditions, adverse publicity, investigations or legal proceedings, government regulations or actions, public perceptions about our products, and other competing direct-to-consumer companies that are larger than us and compete for a limited number of persons who desire to become independent distributors.

In our direct-to-consumer business, Tahitian Noni Juice and TruAge® MAX constitute a significant portion of our sales.

Tahitian Noni Juice and MAX constitute a significant portion of our Noni by NewAge segment sales, accounting for approximately 82% and 85% of our net revenue in 2019 and 2018, respectively. We face strong competition from other companies producing noni and other superfruit products. If consumer demand for these products shifts or declines or our competitors are more successful in the markets in which we do business, our financial condition and operating results would be harmed.

We depend on a limited number of suppliers of raw and packaging materials.

We rely upon a limited number of suppliers for raw and packaging materials used to make and package our products. Our success depends in part upon our ability to consistently obtain such materials at a quality that meets our requirements. The price and availability of these materials are subject to market conditions. Increases in the price of our products due to the increase in the cost of raw materials could have a negative effect on our business.

If we cannot obtain sufficient quantities of raw and packaging materials, delays or reductions in product shipments could occur which would have a material adverse effect on our business, financial condition, and results of operations. The supply and price of raw materials used to produce our products can be affected by several factors beyond our control, such as frosts, droughts, other weather conditions, economic factors affecting growing decisions, various plant diseases and pests, transportation interruption and foreign imposed restrictions. If any of the foregoing were to occur, such condition may have a material adverse effect on our business, financial condition, and results of operations. In addition, our results of operations depend upon our ability to accurately forecast our requirements of raw materials. Any failure by us to accurately forecast our demand for raw materials could result in an inability to meet higher than anticipated demand for products or producing excess inventory, either of which may adversely affect our results of operations.

The noni we use in our direct-to-consumer business is grown and harvested exclusively in French Polynesia. Noni fruit is the most important raw material used in our Tahitian Noni and TeMana products, and it is important to our success. If the government of French Polynesia prohibited the exportation or use of noni, or, if we could not source noni fruit in French Polynesia in sufficient quantities to meet demand for our products due to adverse weather, natural disasters, soil overuse, labor shortages, or any other reason, our financial condition and results would be harmed. Any adverse publicity regarding the quality of noni grown in French Polynesia would also have an adverse impact on our results and financial condition.

We depend on our noni processing plant in Tahiti.

Our processing plant in Tahiti produces all the noni puree used in our Tahitian Noni Juice, MAX, and many other noni-based products. Noni puree is sent to manufacturing facilities in American Fork, Utah, Japan, Germany, and China. As a result, we are dependent upon the uninterrupted and efficient operation of our processing plant in Tahiti. The Tahiti operation is subject to power failures, breakdown, failure, or substandard performance of equipment, improper installation or operation of equipment, natural or other disasters, labor strikes, and the need to comply with the requirements or directives of government agencies, including the FDA. The occurrence of these or any other operational problems at our facility may have a material adverse effect on our business, financial condition, and results of operations.

We depend on third party manufacturers for a portion of our business.

A portion of our revenue is dependent on third party manufacturers that we do not control. The majority of these manufacturers’ business comes from producing or selling either their own products or our competitors’ products. As independent companies, these manufacturers make their own business decisions. They may determine whether, and to what extent, they manufacture our products, our competitors’ products, and their own products. They may devote more resources to other products or take other actions detrimental to our brands. Usually they can terminate their manufacturing arrangements with us without cause. We may need to increase support for our brands in their territories and may not be able to pass on price increases to them. Their financial condition could also be adversely affected by conditions beyond our control, and our business could suffer. Deteriorating economic conditions could negatively affect the financial viability of third-party manufacturers. Any of these factors could negatively affect our business and results of operations.

Failure of third-party distributors upon which we rely could hurt our business.

We rely heavily on third party distributors for the sale of our products to retailers. Our distributors may also provide distribution services to competing brands, and larger, national or international brands, and may be to varying degrees influenced by their continued business relationships with other larger beverage, and specifically, healthy beverage companies. Our independent distributors may be influenced by a large competitor if they rely on that competitor for a significant portion of their sales. Our distributors may not continue to effectively market and distribute our products. The loss of any significant distributor or the inability to replace a poorly performing distributor in a timely fashion could have a material adverse effect on our business, financial condition, and results of operations. Furthermore, we may not successfully attract new distributors as they increase their presence in their existing markets or expand into new markets.

We may violate applicable government laws and regulations.

We are subject to a variety of federal, state, and local laws and regulations in the U.S. and foreign countries, some of which are rapidly changing or conflicting. These laws and regulations apply to many aspects of our business including the manufacture, safety, labeling, transportation, advertising, and sale of our products. Violations of these laws or regulations in the manufacture, safety, labeling, transportation and advertising of our products could damage our reputation and/or result in regulatory actions with substantial penalties. In addition, any significant change in such laws or regulations or their interpretation, or the introduction of higher standards or more stringent laws or regulations, could cause increased compliance costs or capital expenditures. For example, changes in recycling and bottle deposit laws or special taxes on our beverages and our ingredients could increase our costs. Regulatory focus on the health, safety and marketing of beverage products is increasing. Certain federal or state regulations or laws affecting labeling our products, such as California’s “Prop 65,” which requires warnings on any product with substances that the state lists as potentially causing cancer or birth defects, are or could become applicable to our products.

In certain jurisdictions, these legal and regulatory requirements may be more stringent than those in the United States. Noncompliance with applicable regulations or requirements could subject us to investigations, sanctions, mandatory recalls, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties or injunctions, and may result in our inability to provide certain products and services to prospective clients or clients. If any governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, or if customers make claims against us for compensation, our business, financial condition, and results of operations could be harmed. In addition, responding to any action will likely result in a significant diversion of management’s attention and resources and an increase in professional fees and costs. Enforcement actions and sanctions could further harm our business, financial condition, and results of operations.

Our IPCs could violate marketing or advertising laws or regulations.

In our direct-to-consumer business, we sell through IPCs. Each IPC signs an agreement with Noni by NewAge agreeing to comply with all our policies and procedures, including without limitation our Policy Manual. Our policies prohibit false and misleading advertising and making improper health and income claims. We require IPCs to clear all promotional materials in advance with our Compliance Department. However, despite our efforts, occasionally IPCs violate our policies and publish inappropriate marketing materials describing our products or programs. It is impossible to monitor all social media outlets and all IPC communications. Our Compliance Department takes commercially reasonable means, including a computer program that actively searches for improper advertising, to find improper IPC advertising—and when we find such advertising, we require the IPC to correct it. Some such promotional communications have lingered for years in obscure places on the internet and, by the time we find them, the IPC is no longer affiliated with us and is not cooperative in removing the offending advertising. These violations by IPCs could lead to actions against us by regulatory agencies, states’ attorney generals, and private parties and could have an adverse impact on our business, financial condition, and operational results.

Our proposed CBD product line is subject to varying, and rapidly changing laws, regulations, administrative practices, enforcement approaches, judicial interpretations, and consumer perceptions and we may be unable to commercialize or CBD infused beverages.

We have announced the launch of a new product line consisting of CBD-infused beverages. Our intention is to commercialize the new line of beverages when legally permitted in local markets. In February 2020, we launched a CBD beverage shot in Japan. However, in Japan, the U.S. and elsewhere the CBD and cannabis industry is evolving and subject to varying, and rapidly changing laws, regulations, administrative practices, enforcement approaches, judicial interpretations, and consumer perceptions. For example, the Agriculture Improvement Act of 2018 removes hemp from the Controlled Substances Act and permits the production and marketing of hemp and derivatives of cannabis with less than 0.3 percent concentrations of THC. However, in a 2019 statement from Scott Gottlieb, then FDA Commissioner, the Commissioner reemphasized its agency’s authority and intent to regulate products containing cannabis or cannabis derived compounds under the Federal Food, Drug and Cosmetic Act and Section 351 of the Public Health Service Act. We do not market or sell CBD beverages in the U.S. and do not intend to market or sell CBD ingestible products in the U.S. until we can do so in compliance with applicable laws.

Our ongoing investment in new product lines and products and technologies is inherently risky and could disrupt our ongoing businesses.

We have invested and expect to continue to invest in new product lines, products, and technologies. Such endeavors may involve significant risks and uncertainties, including distraction of management from current operations, insufficient revenues to offset liabilities assumed and expenses associated with these new investments, inadequate return of capital on our investments and unidentified issues not discovered in our due diligence of such strategies and offerings. Because these new ventures are inherently risky, such strategies and offerings may not be successful and will not adversely affect our reputation, financial condition, and operating results.

We depend on attracting, retaining, developing, and motivating key personnel, including a small number of key management personnel, and losing them could hurt our business.

Our success depends on our ability to attract, retain, develop, and motivate highly qualified personnel. In addition, we rely on a small number of key individuals to manage our business and operations. We do not carry key person insurance covering members of management. The competition for qualified personnel for our industry is intense. We will need to hire additional personnel as we continue to expand. We may not attract, retain, and develop quality personnel on acceptable terms due to the competition for such personnel, which could have an adverse effect on our business operations, financial condition and operating results.

We need to attract and retain talented employees.

Success in the beverage industry, specifically as it relates to our healthy functional beverage products, does and will continue to require highly talented and experienced employees. Due to the growth in this market segment, such personnel and the talent and experience they possess is in high demand. We may be unable to attract and retain these employees. If we fail to attract, train, motivate, and retain talented personnel, our business, financial condition, and operating results may be materially and adversely impacted.

We face various operating hazards that could result in the reduction of our operations.

Our operations are subject to certain hazards and liability risks, such as defective, contaminated, or damaged products. The occurrence of such a problem could result in a costly product recall and serious damage to our reputation for product quality, and potential lawsuits. Although we maintain insurance against certain risks under various general liability and product liability insurance policies, our insurance may not be adequate to fully cover any incidents of product contamination or injuries resulting from our operations and our products, or damages to reputation and goodwill. We may not be able to continue to maintain insurance with adequate coverage for liabilities or risks arising from our business operations on acceptable terms. Even if the insurance is adequate, insurance premiums could increase significantly which could result in higher costs to us.

Events such as severe weather conditions, natural disasters, regional and global epidemics, government policies and treaties, hostilities, and social unrest, among others, can adversely affect our results and prospects.

Severe weather conditions, natural disasters, hostilities and social unrest, any shifting climate patterns, terrorist activities, health epidemics or pandemics (or expectations about them), including the recent outbreak of respiratory illness caused by a novel coronavirus first identified in Wuhan, Hubei Province, China in December 2019 that has spread to North America and Europe, and changes in government policies and treaties can adversely affect consumer spending and confidence levels and product supply availability and costs, as well as the local operations in impacted markets, all of which can affect our results and prospects. The recent outbreak of the coronavirus has recently become a pandemic, and neither the duration nor scope of the disruption can be predicted. Therefore, while we expect this outbreak to negatively impact our results, the related financial impact cannot be reasonably estimated at this time.

Substantial disruption to production at our manufacturing and distribution facilities could occur.

A disruption in production at our beverage manufacturing facilities could have a material adverse effect on our business. In addition, a disruption could occur at any of our other facilities or those of our suppliers, bottlers, or distributors. The disruption could occur for many reasons, including fire, natural disasters, weather, water scarcity, manufacturing problems, disease, strikes, transportation or supply interruption, government regulation, cybersecurity attacks or terrorism. Alternative facilities with sufficient capacity or capabilities may not be available, may cost substantially more, or may take a significant time to start production, each of which could negatively affect our business and financial performance.

We are subject to seasonality related to sales of our products.

Our business is subject to seasonal fluctuations. Historically, a significant portion of our net revenue and net earnings has been realized during the period from May through September. Accordingly, our operating results may vary significantly from quarter to quarter. Our operating results for any particular quarter are not necessarily indicative of any other results. If our sales were to be substantially below seasonal norms, our annual revenues and earnings could be materially and adversely affected.

Litigation and publicity concerning product quality, health, and other issues could adversely affect our results of operations, business, and financial condition.

Our business could be adversely affected by litigation and complaints from customers or government authorities resulting from product defects or contamination, operations, workplace inspections, alleged data breaches, or other issues. Adverse publicity about these allegations may negatively affect us, whether or not the allegations are true, by discouraging customers from buying our products. We could also incur significant liabilities if a lawsuit or claim results in a decision against us, or litigation costs, regardless of the result. Further, any litigation may distract our key employees or cause them to expend resources and time normally devoted to the operation of our business.

We have experienced significant growth resulting in changes to our organization and structure, which if not effectively managed, could have a negative impact on our business.

Our headcount and operations have grown substantially in recent years. We increased the number of full-time employees over the past two years from 172 employees on December 31, 2017 to 934 employees on December 31, 2019. We believe that our corporate culture has been a critical component of our success. We have invested substantial time and resources in building our team and nurturing our culture. As we expand our business and operate as a public company, we may find it difficult to maintain our corporate culture while managing our employee growth. Any failure to manage our anticipated growth and related organizational changes to preserve our culture could negatively affect growth and achievement of our business objectives.

In addition, our organizational structure has become more complex because of our significant growth. We have added employees and may need to continue to scale and adapt our operational, financial, and management controls, and our reporting systems and procedures. The expansion of our systems and infrastructure may require us to commit additional financial, operational, and management resources before our revenue increases and with no assurances that our revenue will increase. If we fail to manage our growth, we likely will be unable to execute our business strategy, which could have a negative impact on our business, financial condition, and results of operations.

Our ability to use our net operating loss carryforwards may be limited.

We have incurred net operating losses (“NOLs”) for U.S. income tax purposes during our history. If we continue to generate taxable losses, unused losses will carry forward to offset future taxable income until such unused losses expire. Under Internal Revenue Code (“Code”) Section 382, if a corporation undergoes an “ownership change,” generally defined as a greater than 50 percent change (by value) in its equity ownership by certain stockholders over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards, or NOLs, (and other pre-change tax attributes as applicable) to offset its post change income may be limited. We may have experienced ownership changes in the past and may experience ownership changes and/or subsequent shifts in our stock ownership (some of which shifts are outside our control). If we generate net taxable income, our ability to use our pre-change NOLs to offset such taxable income could be subject to limitations. Similar provisions of state tax law may also apply. Even if we attain profitability, we may be unable to use a material portion of our NOL’s and other tax attributes. We have performed a preliminary Section 382 analysis. The preliminary calculations indicate that the Company’s NOLs do not appear to be subject to the limitation.

Our business is susceptible to risks associated with global operations.

We have subsidiaries with offices in 25 countries and sales in 60 countries. This provides access to international markets both for our Noni by NewAge products and for our traditional NewAge product line. Our current global operations and future initiatives involve a variety of risks, including:

If we are not able to successfully address the risks that may arise in connection with a global business, our financial condition and business result will be adversely affected.

Economic uncertainties or downturns in the general economy could disproportionately affect the demand for our products and services and negatively affect our results of operations.

General worldwide economic conditions have experienced significant fluctuations in recent years, and market volatility and uncertainty remain widespread. During challenging economic times, our distribution customers may face issues with their cash flows and in gaining timely access to sufficient credit or obtaining credit on reasonable terms, which could impair their ability to pay us and adversely affect our revenue. If such conditions occur, we may have to increase our allowances for doubtful accounts and write-offs of accounts receivable, and our results of operations would be harmed. An economic turndown could also decrease demand for our products due to pricing concerns. The economic conditions in the U.S. and the countries in which we do business also affect foreign exchange rates. We cannot predict the timing, strength, or duration of any economic slowdown or recovery, whether global, regional or within specific markets. If the conditions of the general economy or markets in which we operate worsen, our business could be harmed. In addition, even if the overall economy remains relatively strong, the market for our products and services may not experience growth.

If we fail to enhance our brand, our ability to expand our customer base will be impaired and our financial condition may suffer.

We believe that the development of our trade names and various brands are critical to achieving widespread awareness of our products, and is important to attracting new customers and maintaining existing customers. We also believe that the importance of brand recognition will increase as competition in our market increases. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable products at competitive prices. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our brand. If we fail to promote and maintain our brand, our business could be adversely impacted.

Our China business accounts for a significant part of our revenue and anticipated growth. Any decline in sales in China would harm our business results, as would any adverse regulatory action. Repatriation of profits from China may not be ensured.

Our operations in China are conducted by Morinda’s wholly owned subsidiary, Tahitian Noni Beverages (China) Company Limited (“TNI China”). TNI China received a direct selling license from the Chinese Ministry of Commerce in 2015. Our China sales have been growing at a double-digit rate for the past several years, making China our second largest market. If we cannot continue to grow sales through our TNI China business, it will have an adverse impact on our global results.

China is a large and vibrant market but doing business in China requires navigation of a difficult regulatory environment. China has published regulations governing direct selling—and several administrative methods and proclamations have been issued. These regulations require TNI China to use a business model different from the one we offer in other markets. For TNI China to operate under these regulations, we have created and implemented a model specifically for China. However, it is possible that interpretations of direct selling laws could adversely affect our business in China or lead to fines against us or our IPCs.

It can take one to three years to obtain product registrations in China. The lengthy process for obtaining product registrations often prevents us from launching new product initiatives in China on the same timelines as other markets around the world.

Chinese regulations prevent persons who are not Chinese nationals from selling in China. Our IPCs that do not have a China presence or IPCs or wholesalers in China may have engaged or may engage in activities that violate our policies in this market, or that violate Chinese law or other applicable law, and therefore result in regulatory action and adverse publicity.

Our operations in China are subject to risks and uncertainties related to general economic and political conditions, epidemics such as coronavirus discussed above, and legal developments in China. For example, as a result of negative media coverage about the healthcare-related product claims made by a competitor in the direct selling industry in China, in 2019 the government increased its scrutiny of activities within the healthcare market, including direct selling. The Chinese government exercises significant control over the Chinese economy, including but not limited to controlling capital investments, allocating resources, setting monetary policy, controlling foreign exchange, and monitoring foreign exchange rates, implementing and overseeing tax regulations, providing preferential treatment to certain industry segments or companies, and issuing necessary licenses to conduct business. Accordingly, any adverse change in the Chinese economy, the Chinese legal system, or Chinese governmental, economic, or other policies could have a material adverse effect on our business in China and our prospects generally.

Over the past several years, the Company has received periodic license fees and annual dividends from TNI China. However, there is no guarantee this will continue, and any change in government policy affecting payment of license fees or repatriation of profits could harm the results and financial performance of the Company and reduce our access to cash resources.

Limits on the sales compensation we can pay to our IPCs in certain countries could harm our business and cause regulatory risks.

Certain markets, including China, Korea, Indonesia, and Vietnam, impose limits on the sales compensation we can pay our IPCs. For example, in Korea, local regulations limit sales compensation to 35% of our total revenue in Korea. These regulations may inhibit persons from becoming IPCs or cause interested persons to join competitors not focused on compliance. We have had to modify our compensation plan in certain markets to comply. It is difficult to keep compensation within limits and we may, therefore, be at risk of violating limits even as we are trying to act under the regulations. It is not always clear which revenues and expenses are within the scope of regulations. Any failure to keep sales compensation within legal limits in the above and other markets could result in fines or other sanctions, including suspensions.

It is difficult and costly to protect and enforce our proprietary rights.

Our commercial success will depend in part on obtaining and maintaining trademark protection, patent protection, and trade secret protection of our products and brands, and successfully defending that intellectual property against third-party challenges. We can only protect our intellectual property if we have obtained rights under valid and enforceable trademarks, patents, or trade secrets that cover our products and brands. Changes in either the trademark and patent laws or in interpretations of trademark and patent laws in the U.S. and other countries may diminish the value of our intellectual property. We cannot predict the breadth of claims that may be allowed or enforced in our issued trademarks or our issued patents. Future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage.

We may face intellectual property infringement claims that could be time-consuming and costly to defend, and could result in our loss of significant rights and the assessment of treble damages.

From time to time we may face intellectual property infringement, misappropriation, or invalidity/non-infringement claims from third parties. Some of these claims may lead to litigation. The outcome of any such litigation can never be guaranteed, and an adverse outcome could affect us negatively. For example, if a third party prevailed in an infringement claim against us, we may have to pay substantial damages (including up to treble damages if such infringement was willful). In addition, we could face an injunction, barring us from conducting the allegedly infringing activity. The outcome of the litigation could require us to enter into a license agreement which may not be under acceptable, commercially reasonable, or practical terms or we may be precluded from obtaining a license. It is also possible that an adverse finding of infringement against us may require us to dedicate substantial resources and time in developing non-infringing alternatives, which may or may not be possible. With diagnostic tests, we would also need to include non-infringing technologies which would require us to re-validate our tests. Any such re-validation, besides being costly and time consuming, may be unsuccessful.

Finally, we may initiate claims to assert or defend our own intellectual property against third parties. Any intellectual property litigation, irrespective of whether we are the plaintiff or the defendant, and regardless of the outcome, is expensive and time-consuming, and could divert our management’s attention from our business and negatively affect our operating results or financial condition.

Risks Related to our Common Stock and Corporate Governance

The price of our Common Stock may be volatile and adversely affected by many factors.

The market price of our Common Stock could fluctuate significantly in response to various factors and events, including without limitation:

These market and industry factors may materially reduce the market price of our Common Stock, regardless of our operating performance. Securities markets have from time to time experienced significant price and volume fluctuations unrelated to the performance of particular companies.

You may experience future dilution as a result of future equity offerings.

In order to raise additional capital, we may in the future offer additional shares of our Common Stock or other securities convertible into or exchangeable for our Common Stock. For example, we issued approximately 6.0 million and 34.7 million shares of our Common Stock in public offerings for the years ended December 31, 2019 and 2018, respectively. You may be unable to sell shares or other securities in any other offering at a price per share that is equal to or greater than the most recently publicly-traded price or the price per share paid by existing investors, and investors purchasing our shares or other securities in the future could have rights superior to existing stockholders. The price per share at which we sell additional shares of our Common Stock or other securities convertible into or exchangeable for our Common Stock in future transactions may be higher or lower than the price per share at this time.

Reports published by analysts, including projections in those reports that differ from our actual results, could hurt the price and trading volume of our common shares.

Securities research analysts may establish and publish their own periodic projections for us. These projections may vary widely and may not accurately predict the results we actually achieve. Our share price may decline if our actual results do not match the projections of these securities research analysts. Similarly, if one or more analysts who write reports on us downgrades our stock or publishes inaccurate or unfavorable research about our business, our share price could decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, our share price or trading volume could decline. If no analysts commence coverage of us, the market price and volume for our common shares could be hurt.

We have not and may never pay dividends to shareholders.

We have not declared or paid any cash dividends or distributions on our capital stock. Our loan agreement with East West Bank prohibits us from paying dividends. We intend to retain our future earnings to support operations and to finance expansion, and therefore we do not anticipate paying any cash dividends on our Common Stock in the foreseeable future.

The declaration, payment, and amount of any future dividends will be made at the discretion of the 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 as the board of directors considers relevant. Dividends may never be paid, and, if dividends are paid, the amount of any such dividend is unknown. If we do not pay dividends, our Common Stock may be less valuable because a return on an investor’s investment will only occur if our stock price appreciates.

Our failure to meet the continued listing requirements of Nasdaq could cause a delisting of our Common Stock.

If we fail to satisfy the continued listing requirements of Nasdaq, such as the corporate governance requirements or the minimum closing bid price requirement, Nasdaq may delist our Common Stock. Such a delisting would likely have a negative effect on the price of our Common Stock and would impair your ability to sell or purchase our Common Stock when you wish to do so. If our Common Stock is delisted, our Common Stock may not become listed again.