ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk.
Current investors and potential investors should consider carefully
the risks and uncertainties described below and in our Annual
Report, together with all other information contained in this
Quarterly Report on Form 10-Q and our Annual Report, including our
financial statements, the related notes and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” before making
investment decisions with respect to our common stock. If any of
the following risks actually occur, our business, financial
condition, results of operations and future growth prospects would
likely be materially and adversely affected. Under these
circumstances, the trading price and value of our common stock
could decline, and you may lose all or part of your investment. The
risks and uncertainties described in this Quarterly Report on
Form 10-Q and in our Annual Report are not the only ones
facing our Company. Additional risks and uncertainties of which we
are not presently aware, or that we currently consider immaterial,
may also impair our business operations. The risk factors set forth
below that are marked with an asterisk (*) contain changes to
the similarly titled risk factors included in Part I, Item 1A
of our Annual Report.
Risks Related to our Company and our Business
*The COVID-19 pandemic has adversely affected, and is expected to
continue to pose risks to our business, results of operations,
financial condition and cash flows, and other epidemics or
outbreaks of infectious diseases may have a similar
impact.
As
previously disclosed, we face risks related to the ongoing COVID-19
pandemic. COVID-19 has spread across the globe during 2020 and is
impacting economic activity worldwide. COVID-19 has caused
disruption and volatility in the global capital markets, and has
caused an economic slowdown. The COVID-19 pandemic and its
associated economic uncertainty may negatively impact our sales
volumes in 2020. In response to COVID-19, national and local
governments around the world have instituted certain measures,
including travel bans, prohibitions on group events and gatherings,
shutdowns of certain businesses, curfews, shelter-in-place orders
and recommendations to practice social distancing. The duration of
these measures is unknown, may be extended and additional measures
may be imposed.
Among
the potential effects of COVID-19 include, but are not limited to,
the following:
●
Reduced consumer
and investor confidence, instability in the credit and financial
markets, volatile corporate profits, and reduced business and
consumer spending, which may adversely affect our results of
operations by reducing our sales, margins and/or net income as a
result of a slowdown in customer orders.
●
Reduced demand for
our products due to store closures and reduced operating hours of
our customers.
●
Disruptions in
supply chain, leading to inadequate levels of inventory that may
lower our sales.
To the
extent the COVID-19 pandemic adversely affects our business,
results of operations, financial condition and cash flows, it may
also heighten many of the other risks described in this section.
The ultimate impact of COVID-19 on our business, results of
operations, financial condition and cash flows is dependent on
future developments, including the duration of the pandemic and the
related length of its impact on the global economy, which are
uncertain and cannot be predicted at this time.
*We have a history of operating losses, may need additional
financing to meet our future long-term capital requirements and may
be unable to raise sufficient capital on favorable terms or at
all.
We have
recorded a net loss of approximately $5.9 million for the three
months ended March 31, 2020 and we have a history of losses and may
continue to incur operating and net losses for the foreseeable
future. We incurred net losses of approximately $32.1 million and
$33.3 million for the years ended December 31, 2019 and December
31, 2018, respectively. As of March 31, 2020, our accumulated
deficit was approximately $127.8 million. We have not achieved
profitability on an annual basis. We may not be able to reach a
level of revenue to continue to achieve and sustain profitability.
If our revenues grow slower than anticipated, or if operating
expenses exceed expectations, then we may not be able to achieve
and sustain profitability in the near future or at all, which may
depress our stock price.
As of
March 31, 2020, our cash and cash equivalents totaled approximately
$13.6 million. While we anticipate that our current cash, cash
equivalents, cash to be generated from operations, $5.0 million
received from the private placement subsequent to the period ended
March 31, 2020 and available line of credit up to $7.0 million from
Western Alliance Bank will be sufficient to meet our projected
operating plans through at least the next twelve months, we may
require additional funds, either through additional equity or debt
financings or collaborative agreements or from other sources. We
have no commitments to obtain such additional financing, and we may
not be able to obtain any such additional financing on terms
favorable to us, or at all. Further, as a result of the COVID-19
pandemic and actions taken to slow its spread, the global credit
and financial markets have experienced extreme volatility,
including diminished liquidity and credit availability, declines in
consumer confidence, declines in economic growth, increases in
unemployment rates and uncertainty about economic stability. There
can be no assurance that further deterioration in credit and
financial markets and confidence in economic conditions will not
occur. If equity and credit markets deteriorate, it may make any
necessary debt or equity financing more difficult to obtain, more
costly and/or more dilutive. If adequate financing is not
available, the Company will further delay, postpone or terminate
product and service expansion and curtail certain selling, general
and administrative operations. The inability to raise additional
financing may have a material adverse effect on the future
performance of the Company.
*Failure to remediate a material weakness in internal accounting
controls could result in material misstatements in our financial
statements.
Our
management has identified a material weakness in our internal
control over financial reporting and has concluded that, due to
such material weakness, our disclosure controls and procedures were
not effective as of March 31, 2020. The material weakness in
internal control over financial reporting resulted from a
deficiency in our disclosure controls and procedures which could
have resulted in us not disclosing a material potential loss that
was reasonably possible, and therefore requiring a qualitative
disclosure in our consolidated financial statements under ASC 450
– Contingencies. The
material weakness has not been remediated as of March 31, 2020. If
not remediated, or if we identify further material weaknesses in
our internal controls, our failure to establish and maintain
effective disclosure controls and procedures and internal control
over financial reporting could result in material misstatements in
our financial statements and a failure to meet our reporting and
financial obligations, each of which could have a material adverse
effect on our financial condition and the trading price of our
common stock.
Our capital requirements will depend on many factors.
Our
capital requirements will depend on many factors,
including:
●
the
revenues generated by sales of our products;
●
the
costs associated with expanding our sales and marketing efforts,
including efforts to hire independent agents and sales
representatives and obtain required regulatory approvals and
clearances;
●
the
expenses we incur in developing and commercializing our products,
including the cost of obtaining and maintaining regulatory
approvals; and
●
unanticipated
general and administrative expenses, including expenses involved
with our ongoing litigation with Elysium.
Because
of these factors, we may seek to raise additional capital within
the next twelve months both to meet our projected operating plans
after the next twelve months and to fund our longer term strategic
objectives. Additional capital may come from public and private
equity or debt offerings, borrowings under lines of credit or other
sources. These additional funds may not be available on favorable
terms, or at all. There can be no assurance we will be successful
in raising these additional funds. Furthermore, if we issue equity
or debt securities to raise additional funds, our existing
stockholders may experience dilution and the new equity or debt
securities we issue may have rights, preferences and privileges
senior to those of our existing stockholders. In addition, if we
raise additional funds through collaboration, licensing or other
similar arrangements, it may be necessary to relinquish valuable
rights to our products or proprietary technologies, or grant
licenses on terms that are not favorable to us. If we cannot raise
funds on acceptable terms, we may not be able to develop or enhance
our products, obtain the required regulatory clearances or
approvals, execute our business plan, take advantage of future
opportunities, or respond to competitive pressures or unanticipated
customer requirements. Any of these events could adversely affect
our ability to achieve our development and commercialization goals,
which could have a material and adverse effect on our business,
results of operations and financial condition.
*We are currently engaged in substantial and complex litigation
with Elysium Health, Inc. and Elysium Health LLC ("Elysium"), the
outcome of which could materially harm our business and financial
results.
We are currently engaged in litigation with Elysium, a customer
that represented 19% of our net sales for the year ended December
31, 2016. Elysium has made no purchases from us since August 9,
2016. The litigation includes multiple complaints and counterclaims
by us and Elysium in venues in California and New York, as well as
a patent infringement complaint filed by the Company and Trustees
of Dartmouth College. For further details on this litigation,
please refer to Part II, Item 1 of this Quarterly Report on Form
10-Q.
The litigation is substantial and complex, and it has caused and
could continue to cause us to incur significant costs, as well as
distract our management over an extended period. The litigation may
substantially disrupt our business and we cannot assure you that we
will be able to resolve the litigation on terms favorable to us. If
we are unsuccessful in resolving the litigation on favorable terms
to us, we may be forced to pay compensatory and punitive damages
and restitution for any royalty payments that we received from
Elysium, which payments could materially harm our business, or be
subject to other remedies, including injunctive relief. In
addition, Elysium has not paid us approximately $2.7 million for
previous purchase orders. We may not collect the full amount owed
to us by Elysium, and as a result, we wrote off the full amount as
uncollectible expense. We cannot predict the outcome of our
litigation with Elysium, which could have any of the results
described above or other results that could materially adversely
affect our business.
*Interruptions in our relationships or declines in our business
with major customers could materially harm our business and
financial results.
A.S. Watson Group accounted for approximately 13% of our sales
during the quarter ended March 31, 2020. Due to COVID-19, our sales
to A.S. Watson Group decreased in the first quarter of 2020
compared to the fourth quarter of 2019 as A.S. Watson Group was
negatively impacted by store closures and reduced operating hours.
Any interruption in our relationship or decline in our business
with this customer or other customers upon whom we become highly
dependent could cause harm to our business. Factors that could
influence our relationship with our customers upon whom we may
become highly dependent include:
●
our
ability to maintain our products at prices that are competitive
with those of our competitors;
●
our
ability to maintain quality levels for our products sufficient to
meet the expectations of our customers;
●
our
ability to produce, ship and deliver a sufficient quantity of our
products in a timely manner to meet the needs of our
customers;
●
our
ability to continue to develop and launch new products that our
customers feel meet their needs and requirements, with respect to
cost, timeliness, features, performance and other
factors;
●
our
ability to provide timely, responsive and accurate customer support
to our customers; and
●
the
ability of our customers to effectively deliver, market and
increase sales of their own products based on ours.
Our future success largely depends on sales of our TRU
NIAGEN®
product.
In
connection with our strategic shift from an ingredient and testing
company to a consumer focused company, we expect to generate a
significant percentage of our future revenue from sales of our TRU
NIAGEN® product. As a result, the market acceptance of TRU
NIAGEN® is critical to our continued success, and if we are
unable to expand market acceptance of TRU NIAGEN®, our
business, results of operations, financial condition, liquidity and
growth prospects would be materially adversely
affected.
*Decline in the state of the
global economy and financial market conditions could adversely
affect our ability to conduct business and our results of
operations.
Global
economic and financial market conditions, including disruptions in
the credit markets and the impact of the global economic
deterioration may materially impact our customers and other parties
with whom we do business. For example, the COVID-19 pandemic and
actions taken to slow its spread, have caused the global credit and
financial markets to experience extreme volatility, including
diminished liquidity and credit availability, declines in consumer
confidence, declines in economic growth, increases in unemployment
rates and uncertainty about economic stability. These conditions
could negatively affect our future sales of our ingredient lines as
many consumers consider the purchase of nutritional products
discretionary. Decline in general economic and financial market
conditions could materially adversely affect our financial
condition and results of operations. Specifically, the impact of
these volatile and negative conditions may include decreased demand
for our products and services, a decrease in our ability to
accurately forecast future product trends and demand, and a
negative impact on our ability to timely collect receivables from
our customers. The foregoing economic conditions may lead to
increased levels of bankruptcies, restructurings and liquidations
for our customers, scaling back of research and development
expenditures, delays in planned projects and shifts in business
strategies for many of our customers. Such events could, in turn,
adversely affect our business through loss of sales.
We may need to increase the size of our organization, and we can
provide no assurance that we will successfully expand operations or
manage growth effectively.
Our
significant increase in the scope and the scale of our product
launches, including the hiring of additional personnel, has
resulted in significantly higher operating expenses. As a result,
we anticipate that our operating expenses will continue to
increase. Expansion of our operations may also cause a significant
demand on our management, finances and other resources. Our ability
to manage the anticipated future growth, should it occur, will
depend upon a significant expansion of our accounting and other
internal management systems and the implementation and subsequent
improvement of a variety of systems, procedures and controls. There
can be no assurance that significant problems in these areas will
not occur. Any failure to expand these areas and implement and
improve such systems, procedures and controls in an efficient
manner at a pace consistent with our business could have a material
adverse effect on our business, financial condition and results of
operations. There can be no assurance that our attempts to expand
our marketing, sales, manufacturing and customer support efforts
will be successful or will result in additional sales or
profitability in any future period. As a result of the expansion of
our operations and the anticipated increase in our operating
expenses, as well as the difficulty in forecasting revenue levels,
we expect to continue to experience significant fluctuations in our
results of operations.
Changes in our business strategy, including entering the consumer
product market, or restructuring of our businesses may increase our
costs or otherwise affect the profitability of our
businesses.
As
changes in our business environment occur we may adjust our
business strategies to meet these changes or we may otherwise
decide to restructure our operations or businesses or assets. In
addition, external events including changing technology, changing
consumer patterns and changes in macroeconomic conditions may
impair the value of our assets. When these changes or events occur,
we may incur costs to change our business strategy and may need to
write down the value of assets. In any of these events, our costs
may increase, we may have significant charges associated with the
write-down of assets or returns on new investments may be lower
than prior to the change in strategy or restructuring. For example,
if we are not successful in developing our consumer product
business, our sales may decrease and our costs may
increase.
The success of our consumer product and ingredient business is
linked to the size and growth rate of the vitamin, mineral and
dietary supplement market and an adverse change in the size or
growth rate of that market could have a material adverse effect on
us.
An
adverse change in the size or growth rate of the vitamin, mineral
and dietary supplement market could have a material adverse effect
on our business. Underlying market conditions are subject to change
based on economic conditions, consumer preferences and other
factors that are beyond our control, including media attention and
scientific research, which may be positive or
negative.
The future growth and profitability of our consumer product
business will depend in large part upon the effectiveness and
efficiency of our marketing efforts and our ability to select
effective markets and media in which to market and
advertise.
Our consumer products business success depends on our ability to
attract and retain customers, which significantly depends on our
marketing practices. Our future growth and profitability will
depend in large part upon the effectiveness and efficiency of our
marketing efforts, including our ability to:
●
create greater awareness of our brand;
●
identify the most effective and efficient levels of spending in
each market, media and specific media vehicle;
●
determine the appropriate creative messages and media mix for
advertising, marketing and promotional expenditures;
●
effectively manage marketing costs (including creative and media)
to maintain acceptable customer acquisition costs;
●
acquire cost-effective television advertising;
●
select the most effective markets, media and specific media
vehicles in which to market and advertise; and
●
convert consumer inquiries into actual orders.
Unfavorable publicity or consumer perception of our products and
any similar products distributed by other companies could have a
material adverse effect on our business.
We
believe the nutritional supplement market is highly dependent upon
consumer perception regarding the safety, efficacy and quality of
nutritional supplements generally, as well as of products
distributed specifically by us. Consumer perception of our products
can be significantly influenced by scientific research or findings,
regulatory investigations, litigation, national media attention and
other publicity regarding the consumption of nutritional
supplements. We cannot assure you that future scientific research,
findings, regulatory proceedings, litigation, media attention or
other favorable research findings or publicity will be favorable to
the nutritional supplement market or any product, or consistent
with earlier publicity. Future research reports, findings,
regulatory proceedings, litigation, media attention or other
publicity that are perceived as less favorable than, or that
question, such earlier research reports, findings or publicity
could have a material adverse effect on the demand for our products
and consequently on our business, results of operations, financial
condition and cash flows.
Our
dependence upon consumer perceptions means that adverse scientific
research reports, findings, regulatory proceedings, litigation,
media attention or other publicity, if accurate or with merit,
could have a material adverse effect on the demand for our products, the
availability and pricing of our ingredients, and our business,
results of operations, financial condition and cash flows. Further,
adverse public reports or other media attention regarding the
safety, efficacy and quality of nutritional supplements in general,
or our products specifically, or associating the consumption of
nutritional supplements with illness, could have such a material
adverse effect. Any such adverse public reports or other
media attention could arise even if the adverse effects associated
with such products resulted from consumers’ failure to
consume such products appropriately or as directed and the content
of such public reports and other media attention may be beyond our
control.
We may incur material product
liability claims, which could increase our costs and adversely
affect our reputation, revenues and operating
income.
As a
consumer product and ingredient supplier we market and manufacture
products designed for human and animal consumption, we are subject
to product liability claims if the use of our products is alleged
to have resulted in injury. Our products consist of vitamins,
minerals, herbs and other ingredients that are classified as food
ingredients, dietary supplements, or natural health products, and,
in most cases, are not necessarily subject to pre-market regulatory
approval in the United States. Some of our products contain
innovative ingredients that do not have long histories of human
consumption. Previously unknown adverse reactions resulting from
human consumption of these ingredients could occur. In addition,
the products we sell are produced by third-party manufacturers. As
a marketer of products manufactured by third parties, we also may
be liable for various product liability claims for products we do
not manufacture. We may, in the future, be subject to various
product liability claims, including, among others, that our
products include inadequate instructions for use or inadequate
warnings concerning possible side effects and interactions with
other substances. A product liability claim against us could result
in increased costs and could adversely affect our reputation with
our customers, which, in turn, could have a materially adverse
effect on our business, results of operations, financial condition
and cash flows.
*We acquire ingredients for our
products from foreign suppliers, and may be negatively affected by
the risks associated with international trade and importation
issues.
We
acquire ingredients for a number of our products from suppliers
outside of the United States. Accordingly, the
acquisition of these ingredients is subject to the risks generally
associated with importing raw materials, including, among other
factors, delays in shipments, changes in economic and political
conditions, quality assurance, health epidemics affecting the
region of such suppliers, including COVID-19, nonconformity to
specifications or laws and regulations, tariffs, trade disputes and
foreign currency fluctuations. While we
have a supplier certification program and audit and inspect our
suppliers’ facilities as necessary both in the United States
and internationally, we cannot assure you that raw materials
received from suppliers outside of the United States will conform
to all specifications, laws and regulations. There have
in the past been quality and safety issues in our industry with
certain items imported from overseas. We may incur
additional expenses and experience shipment delays due to
preventative measures adopted by the U.S. governments, our
suppliers and our company.
The insurance industry has become
more selective in offering some types of coverage and we may not be
able to obtain insurance coverage in the
future.
The
insurance industry has become more selective in offering some types
of insurance, such as product liability, product recall, property
and directors’ and officers’ liability insurance. Our
current insurance program is consistent with both our past level of
coverage and our risk management policies. However, we cannot
assure you that we will be able to obtain comparable insurance
coverage on favorable terms, or at all, in the
future. Certain of our customers as well as prospective
customers require that we maintain minimum levels of coverage for
our products. Lack of coverage or coverage below these minimum
required levels could cause these customers to materially change
business terms or to cease doing business with us
entirely.
If we experience product recalls, we may incur significant and
unexpected costs, and our business reputation could be adversely
affected.
We may be exposed to product recalls and adverse public relations
if our products are alleged to be mislabeled or to cause injury or
illness, or if we are alleged to have violated governmental
regulations. A product recall could result in substantial and
unexpected expenditures, which would reduce operating profit and
cash flow. In addition, a product recall may require significant
management attention. Product recalls may hurt the value of our
brands and lead to decreased demand for our products. Product
recalls also may lead to increased scrutiny by federal, state or
international regulatory agencies of our operations and increased
litigation and could have a material adverse effect on our
business, results of operations, financial condition and cash
flows.
*We depend on key personnel, the loss of any of which could
negatively affect our business.
We
depend greatly on Frank L. Jaksch Jr., Robert N. Fried, Kevin M.
Farr, Mark J. Friedman and Megan Jordan, who are our Executive
Chairman of the Board, Chief Executive Officer, Chief Financial
Officer, General Counsel and Chief Communications Officer,
respectively. We also depend greatly on other key employees,
including key scientific and marketing personnel. In general, only
highly qualified and trained scientists have the necessary skills
to develop our products and provide our services. Only marketing
personnel with specific experience and knowledge in health care are
able to effectively market our products. In addition,
some of our manufacturing, quality control, safety and compliance,
information technology, sales and e-commerce related positions are
highly technical as well. We face intense competition for these
professionals from our competitors, customers, marketing partners
and other companies throughout the industries in which we
compete. Our success will depend, in part, upon our ability to
attract and retain additional skilled personnel, which will require
substantial additional funds. There can be no assurance that we
will be able to find and attract additional qualified employees or
retain any such personnel. Our inability to hire qualified
personnel, the loss of services of our key personnel, or the loss
of services of executive officers or key employees that may be
hired in the future may have a material and adverse effect on our
business.
*Our operating results may fluctuate significantly as a result of a
variety of factors, many of which are outside of our
control.
We are
subject to the following factors, among others, that may negatively
affect our operating results:
●
the
announcement or introduction of new products by our
competitors;
●
our
ability to upgrade and develop our systems and infrastructure to
accommodate growth;
●
the
decision by significant customers to reduce purchases;
●
disputes
and litigation with competitors;
●
our
ability to attract and retain key personnel in a timely and
cost-effective manner;
●
technical
difficulties;
●
the
amount and timing of operating costs and capital expenditures
relating to the expansion of our business, operations and
infrastructure;
●
regulation
by federal, state or local governments; and
●
general
economic conditions as well as economic conditions specific to the
healthcare industry.
For
example, our operating results may be harmed by the effect of the
COVID-19 pandemic on global economic conditions. As a result of our
limited operating history and the nature of the markets in which we
compete, it is extremely difficult for us to make accurate
forecasts. We have based our current and future expense levels
largely on our investment plans and estimates of future events
although certain of our expense levels are, to a large extent,
fixed. Assuming our products reach the market, we may be unable to
adjust spending in a timely manner to compensate for any unexpected
revenue shortfall. Accordingly, any significant shortfall in
revenues relative to our planned expenditures would have an
immediate adverse effect on our business, results of operations and
financial condition. Further, as a strategic response to changes in
the competitive environment, we may from time to time make certain
pricing, service or marketing decisions that could have a material
and adverse effect on our business, results of operations and
financial condition. Due to the foregoing factors, our revenues and
operating results are and will remain difficult to
forecast.
We face significant competition, including changes in
pricing.
The
markets for our products and services are both competitive and
price sensitive. Many of our competitors have significant
financial, operations, sales and marketing resources and experience
in research and development. Competitors could develop new
technologies that compete with our products and services or even
render our products obsolete. If a competitor develops superior
technology or cost-effective alternatives to our products and
services, our business could be seriously harmed.
The
markets for some of our products are also subject to specific
competitive risks because these markets are highly price
competitive. Our competitors have competed in the past by lowering
prices on certain products. If they do so again, we may be forced
to respond by lowering our prices. This would reduce sales revenues
and increase losses. Failure to anticipate and respond to price
competition may also impact sales and aggravate
losses.
We
believe that customers in our markets display a significant amount
of loyalty to their supplier of a particular product. To the extent
we are not the first to develop, offer and/or supply new products,
customers may buy from our competitors or make materials
themselves, causing our competitive position to
suffer.
Many of our competitors are larger and have greater financial and
other resources than we do.
Our
products compete and will compete with other similar products
produced by our competitors. These competitive products could be
marketed by well-established, successful companies that possess
greater financial, marketing, distributional, personnel and other
resources than we possess. Using these resources, these companies
can implement extensive advertising and promotional campaigns, both
generally and in response to specific marketing efforts by
competitors, and enter into new markets more rapidly to introduce
new products. In certain instances, competitors with greater
financial resources also may be able to enter a market in direct
competition with us, offering attractive marketing tools to
encourage the sale of products that compete with our products or
present cost features that consumers may find
attractive.
We may never develop any additional products to
commercialize.
We have
invested a substantial amount of our time and resources in
developing various new products. Commercialization of these
products will require additional development, clinical evaluation,
regulatory approval, significant marketing efforts and substantial
additional investment before they can provide us with any revenue.
Despite our efforts, these products may not become commercially
successful products for a number of reasons, including but not
limited to:
●
we may
not be able to obtain regulatory approvals for our products, or the
approved indication may be narrower than we seek;
●
our
products may not prove to be safe and effective in clinical
trials;
●
we may
experience delays in our development program;
●
any
products that are approved may not be accepted in the
marketplace;
●
we may
not have adequate financial or other resources to complete the
development or to commence the commercialization of our products or
will not have adequate financial or other resources to achieve
significant commercialization of our products;
●
we may
not be able to manufacture any of our products in commercial
quantities or at an acceptable cost;
●
rapid
technological change may make our products obsolete;
●
we may
be unable to effectively protect our intellectual property rights
or we may become subject to claims that our activities have
infringed the intellectual property rights of others;
and
●
we may
be unable to obtain or defend patent rights for our
products.
In
addition, we may never achieve technical feasibility under the
supply agreement with Nestec Ltd., and therefore our sales and
profit expectations resulting from this agreement may be
reduced.
We may not be able to partner with others for technological
capabilities and new products and services.
Our
ability to remain competitive may depend, in part, on our ability
to continue to seek partners that can offer technological
improvements and improve existing products and services that are
offered to our customers. We are committed to attempting to keep
pace with technological change, to stay abreast of technology
changes and to look for partners that will develop new products and
services for our customer base. We cannot assure prospective
investors that we will be successful in finding partners or be able
to continue to incorporate new developments in technology, to
improve existing products and services, or to develop successful
new products and services, nor can we be certain that newly
developed products and services will perform satisfactorily or be
widely accepted in the marketplace or that the costs involved in
these efforts will not be substantial.
If we fail to maintain adequate quality standards for our products
and services, our business may be adversely affected and our
reputation harmed.
Dietary
supplement, nutraceutical, food and beverage, functional food,
analytical laboratories, pharmaceutical and cosmetic customers are
often subject to rigorous quality standards to obtain and maintain
regulatory approval of their products and the manufacturing
processes that generate them. A failure to maintain, or, in some
instances, upgrade our quality standards to meet our
customers’ needs, could cause damage to our reputation and
potentially substantial sales losses.
Our ability to protect our intellectual property and proprietary
technology through patents and other means is uncertain and may be
inadequate, which would have a material and adverse effect on
us.
Our
success depends significantly on our ability to protect our
proprietary rights to the technologies used in our products. We
rely on patent protection, as well as a combination of copyright,
trade secret and trademark laws and nondisclosure, confidentiality
and other contractual restrictions to protect our proprietary
technology, including our licensed technology. However, these legal
means afford only limited protection and may not adequately protect
our rights or permit us to gain or keep any competitive advantage.
For example, our pending United States and foreign patent
applications may not issue as patents in a form that will be
advantageous to us or may issue and be subsequently successfully
challenged by others and invalidated. In addition, our pending
patent applications include claims to material aspects of our
products and procedures that are not currently protected by issued
patents. Both the patent application process and the process of
managing patent disputes can be time consuming and expensive.
Competitors may be able to design around our patents or develop
products which provide outcomes which are comparable or even
superior to ours. Steps that we have taken to protect our
intellectual property and proprietary technology, including
entering into confidentiality agreements and intellectual property
assignment agreements with some of our officers, employees,
consultants and advisors, may not provide us with meaningful
protection for our trade secrets or other proprietary information
in the event of unauthorized use or disclosure or other breaches of
the agreements. Furthermore, the laws of foreign countries may not
protect our intellectual property rights to the same extent as do
the laws of the United States.
In the
event a competitor infringes our licensed or pending patent or
other intellectual property rights, enforcing those rights may be
costly, uncertain, difficult and time consuming. Even if
successful, litigation to enforce our intellectual property rights
or to defend our patents against challenge could be expensive and
time consuming and could divert our management’s attention.
We may not have sufficient resources to enforce our intellectual
property rights or to defend our patents rights against a
challenge. The failure to obtain patents and/or protect our
intellectual property rights could have a material and adverse
effect on our business, results of operations and financial
condition.
Our patents and licenses may be subject to challenge on validity
grounds, and our patent applications may be rejected.
We rely
on our patents, patent applications, licenses and other
intellectual property rights to give us a competitive advantage.
Whether a patent is valid, or whether a patent application should
be granted, is a complex matter of science and law, and therefore
we cannot be certain that, if challenged, our patents, patent
applications and/or other intellectual property rights would be
upheld. If one or more of those patents, patent applications,
licenses and other intellectual property rights are invalidated,
rejected or found unenforceable, that could reduce or eliminate any
competitive advantage we might otherwise have had.
We may become subject to claims of infringement or misappropriation
of the intellectual property rights of others, which could prohibit
us from developing our products, require us to obtain licenses from
third parties or to develop non-infringing alternatives and subject
us to substantial monetary damages.
Third
parties could, in the future, assert infringement or
misappropriation claims against us with respect to products we
develop. Whether a product infringes a patent or misappropriates
other intellectual property involves complex legal and factual
issues, the determination of which is often uncertain. Therefore,
we cannot be certain that we have not infringed the intellectual
property rights of others. There may be third-party patents or
patent applications with claims to materials, formulations, methods
of manufacture or methods for use related to the use or manufacture
of our products, and our potential competitors may assert that some
aspect of our product infringes their patents. Because patent
applications may take years to issue, there also may be
applications now pending of which we are unaware that may later
result in issued patents upon which our products could infringe.
There also may be existing patents or pending patent applications
of which we are unaware upon which our products may inadvertently
infringe.
Any
infringement or misappropriation claim could cause us to incur
significant costs, place significant strain on our financial
resources, divert management’s attention from our business
and harm our reputation. If the relevant patents in such claim were
upheld as valid and enforceable and we were found to infringe them,
we could be prohibited from manufacturing or selling any product
that is found to infringe unless we could obtain licenses to use
the technology covered by the patent or are able to design around
the patent. We may be unable to obtain such a license on terms
acceptable to us, if at all, and we may not be able to redesign our
products to avoid infringement, which could materially impact our
revenue. A court could also order us to pay compensatory damages
for such infringement, plus prejudgment interest and could, in
addition, treble the compensatory damages and award attorney fees.
These damages could be substantial and could harm our reputation,
business, financial condition and operating results. A court also
could enter orders that temporarily, preliminarily or permanently
enjoin us and our customers from making, using, or selling
products, and could enter an order mandating that we undertake
certain remedial activities. Depending on the nature of the relief
ordered by the court, we could become liable for additional damages
to third parties.
The prosecution and enforcement of patents licensed to us by third
parties are not within our control. Without these technologies, our
products may not be successful and our business would be harmed if
the patents were infringed on or misappropriated without action by
such third parties.
We have
obtained licenses from third parties for patents and patent
application rights related to the products we are developing,
allowing us to use intellectual property rights owned by or
licensed to these third parties. We do not control the maintenance,
prosecution, enforcement or strategy for many of these patents or
patent application rights and as such are dependent in part on the
owners of the intellectual property rights to maintain their
viability. If any third party licensor is unable to successfully
maintain, prosecute or enforce the licensed patents and/or patent
application rights related to our products, we may become subject
to infringement or misappropriate claims or lose our competitive
advantage. Without access to these technologies or suitable
design-around or alternative technology options, our ability to
conduct our business could be impaired significantly.
We may be subject to damages resulting from claims that we, our
employees, or our independent contractors have wrongfully used or
disclosed alleged trade secrets of others.
Some of
our employees were previously employed at other dietary supplement,
nutraceutical, food and beverage, functional food, analytical
laboratories, pharmaceutical and cosmetic companies. We may also
hire additional employees who are currently employed at other such
companies, including our competitors. Additionally, consultants or
other independent agents with which we may contract may be or have
been in a contractual arrangement with one or more of our
competitors. We may be subject to claims that these employees or
independent contractors have used or disclosed such other
party’s trade secrets or other proprietary information.
Litigation may be necessary to defend against these claims. Even if
we are successful in defending against these claims, litigation
could result in substantial costs and be a distraction to our
management. If we fail to defend such claims, in addition to paying
monetary damages, we may lose valuable intellectual property rights
or personnel. A loss of key personnel or their work product could
hamper or prevent our ability to market existing or new products,
which could severely harm our business.
*Litigation may harm our business.
Substantial,
complex or extended litigation could cause us to incur significant
costs and distract our management. For example, lawsuits by
employees, stockholders, collaborators, distributors, customers,
competitors or others could be very costly and substantially
disrupt our business. Disputes from time to time with such
companies, organizations or individuals are not uncommon, and we
cannot assure you that we will always be able to resolve such
disputes or on terms favorable to us. As further described in Part
II, Item 1 of this Quarterly Report on Form 10-Q, we are currently
involved in substantial and complex litigation with Elysium.
Unexpected results could cause us to have financial exposure in
these matters in excess of recorded reserves and insurance
coverage, requiring us to provide additional reserves to address
these liabilities, therefore impacting profits.
Our sales and results of operations for our analytical reference
standards and services segment depend on our customers’
research and development efforts and their ability to obtain
funding for these efforts.
Our
analytical reference standards and services segment customers
include researchers at pharmaceutical and biotechnology companies,
chemical and related companies, academic institutions, government
laboratories and private foundations. Fluctuations in the research
and development budgets of these researchers and their
organizations could have a significant effect on the demand for our
products. Our customers determine their research and development
budgets based on several factors, including the need to develop new
products, the availability of governmental and other funding,
competition and the general availability of resources. As we
continue to expand our international operations, we expect research
and development spending levels in markets outside of the United
States will become increasingly important to us.
Research
and development budgets fluctuate due to changes in available
resources, spending priorities, general economic conditions,
institutional and governmental budgetary limitations and mergers of
pharmaceutical and biotechnology companies. Our business could be
harmed by any significant decrease in life science and high
technology research and development expenditures by our customers.
In particular, a small portion of our sales has been to researchers
whose funding is dependent on grants from government agencies such
as the United States National Institute of Health, the National
Science Foundation, the National Cancer Institute and similar
agencies or organizations. Government funding of research and
development is subject to the political process, which is often
unpredictable. Other departments, such as Homeland Security or
Defense, or general efforts to reduce the United States federal
budget deficit could be viewed by the government as a higher
priority. Any shift away from funding of life science and high
technology research and development or delays surrounding the
approval of governmental budget proposals may cause our customers
to delay or forego purchases of our products and services, which
could seriously damage our business.
Some of
our customers receive funds from approved grants at a particular
time of year, many times set by government budget cycles. In the
past, such grants have been frozen for extended periods or have
otherwise become unavailable to various institutions without
notice. The timing of the receipt of grant funds may affect the
timing of purchase decisions by our customers and, as a result,
cause fluctuations in our sales and operating results.
Demand for our products and services are subject to the commercial
success of our customers’ products, which may vary for
reasons outside our control.
Even if
we are successful in securing utilization of our products in a
customer’s manufacturing process, sales of many of our
products and services remain dependent on the timing and volume of
the customer’s production, over which we have no control. The
demand for our products depends on regulatory approvals and
frequently depends on the commercial success of the
customer’s supported product. Regulatory processes are
complex, lengthy, expensive, and can often take years to
complete.
We may bear financial risk if we under-price our contracts or
overrun cost estimates.
In
cases where our contracts are structured as fixed price or
fee-for-service with a cap, we bear the financial risk if we
initially under-price our contracts or otherwise overrun our cost
estimates. Such underpricing or significant cost overruns could
have a material adverse effect on our business, results of
operations, financial condition and cash flows.
*We rely on single or a limited number of third-party suppliers for
the raw materials required to produce our products.
Our
dependence on a limited number of third-party suppliers or on a
single supplier, and the challenges we may face in obtaining
adequate supplies of raw materials, involve several risks,
including limited control over pricing, availability, health
epidemics affecting the region of such suppliers (including the
coronavirus), quality and delivery schedules. We cannot be certain
that our current suppliers will continue to provide us with the
quantities of these raw materials that we require or satisfy our
anticipated specifications and quality requirements. Due to
COVID-19, there may be delays in shipments from our suppliers. Any
supply interruption in limited or sole sourced raw materials could
materially harm our ability to manufacture our products until a new
source of supply, if any, could be identified and qualified.
Although we believe there are other suppliers of these raw
materials, we may be unable to find a sufficient alternative supply
channel in a reasonable time or on commercially reasonable terms.
Any performance failure on the part of our suppliers could delay
the development and commercialization of our products, or interrupt
production of then existing products that are already marketed,
which would have a material adverse effect on our
business.
We may not
be successful in acquiring complementary businesses or products on
favorable terms.
As part of our business strategy, we intend to consider
acquisitions of similar or complementary businesses or products. No
assurance can be given that we will be successful in identifying
attractive acquisition candidates or completing acquisitions on
favorable terms. In addition, any future acquisitions will be
accompanied by the risks commonly associated with acquisitions.
These risks include potential exposure to unknown liabilities of
acquired companies or to acquisition costs and expenses, the
difficulty and expense of integrating the operations and personnel
of the acquired companies, the potential disruption to the business
of the combined company and potential diversion of our management's
time and attention, the impairment of relationships with and the
possible loss of key employees and clients as a result of the
changes in management, the incurrence of amortization expenses and
write-downs and dilution to the shareholders of the combined
company if the acquisition is made for stock of the combined
company. In addition, successful completion of an acquisition may
depend on consents from third parties, including regulatory
authorities and private parties, which consents are beyond our
control. There can be no assurance that products, technologies or
businesses of acquired companies will be effectively assimilated
into the business or product offerings of the combined company or
will have a positive effect on the combined company's revenues or
earnings. Further, the combined company may incur significant
expense to complete acquisitions and to support the acquired
products and businesses. Any such acquisitions may be funded with
cash, debt or equity, which could have the effect of diluting or
otherwise adversely affecting the holdings or the rights of our
existing stockholders.
*If we experience a significant disruption in our information
technology systems or if we fail to implement new systems and
software successfully, our business could be adversely
affected.
We
depend on information systems throughout our company to control our
manufacturing processes, process orders, manage inventory, process
and bill shipments and collect cash from our customers, respond to
customer inquiries, contribute to our overall internal control
processes, maintain records of our property, plant and equipment,
and record and pay amounts due vendors and other creditors. Due to
COVID-19, most of our employees have been working remotely from
home and we have depended on communication tools and remote
connections to our information technology systems to conduct
business virtually. If we were to experience a prolonged disruption
in our information systems that involve interactions amongst
employees as well as with customers and suppliers, it could result
in the loss of sales and customers and/or increased costs, which
could adversely affect our overall business operation.
If we are unable to maintain sales, marketing and distribution
capabilities or maintain arrangements with third parties to sell,
market and distribute our products, our business may be
harmed.
To
achieve commercial success for our products, we must sell our
product lines and/or technologies at favorable prices. In addition
to being expensive, maintaining such a sales force is
time-consuming. Qualified direct sales personnel with experience in
the natural products industry are in high demand, and there can be
no assurance that we will be able to hire or retain an effective
direct sales team. Similarly, qualified independent sales
representatives both within and outside the United States are in
high demand, and we may not be able to build an effective network
for the distribution of our product through such representatives.
There can be no assurance that we will be able to enter into
contracts with representatives on terms acceptable to us.
Furthermore, there can be no assurance that we will be able to
build an alternate distribution framework should we attempt to do
so.
We may
also need to contract with third parties in order to market our
products. To the extent that we enter into arrangements with third
parties to perform marketing and distribution services, our product
revenue could be lower and our costs higher than if we directly
marketed our products. Furthermore, to the extent that we enter
into co-promotion or other marketing and sales arrangements with
other companies, any revenue received will depend on the skills and
efforts of others, and we do not know whether these efforts will be
successful. If we are unable to establish and maintain adequate
sales, marketing and distribution capabilities, independently or
with others, we will not be able to generate product revenue, and
may not become profitable.
*Our business could be negatively impacted by cyber security
threats.
In the
ordinary course of our business, we use our data centers and our
networks to store and access our proprietary business information.
We face various cyber security threats, including cyber security
attacks to our information technology infrastructure and attempts
by others to gain access to our proprietary or sensitive
information. Due to COVID-19, there may be additional cyber
security threats as most of our employees work from home, utilizing
network connections outside of the Company premises. Information
security risks have significantly increased in recent years in part
due to the proliferation of new technologies and the increased
sophistication and activities of organized crime, hackers, data and
related privacy breaches, terrorists and other external parties,
including foreign private parties and state actors. The procedures
and controls we use to monitor these threats and mitigate our
exposure may not be sufficient to prevent cyber security incidents.
The result of these incidents could include disrupted operations,
lost opportunities, misstated financial data, liability for stolen
assets or information, theft of our intellectual property, loss of
data and other personally identifiable information, increased costs
arising from the implementation of additional security protective
measures, litigation and reputational damage. Any remedial costs or
other liabilities related to cyber security incidents may not be
fully insured or indemnified by other means.
Compliance with global privacy and data security requirements could
result in additional costs and liabilities to us or inhibit our
ability to collect and, if applicable, process data globally, and
the failure to comply with such requirements could have a material
adverse effect on our business, financial condition or results of
operations.
The
regulatory framework for the collection, use, safeguarding,
sharing, transfer and other processing of information worldwide is
rapidly evolving and is likely to remain uncertain for the
foreseeable future. For example, the European Union’s General
Data Protection Regulation (“GDPR”) imposes strict
obligations on the processing of personal data, including, without
limitation, personal health data, and the free movement of such
data. The GDPR applies to any company established in the European
Union as well as any company outside the European Union that
processes personal data in connection with the offering of goods or
services to individuals in the European Union or the monitoring of
their behavior. The GDPR provides data protection obligations for
processors and controllers of personal data, including, for
example, obligations relating to: processing health and other
sensitive data; obtaining consent of individuals; providing notice
to individuals regarding data processing activities; responding to
data subject requests; taking certain measures when engaging
third-party processors; notifying data subjects and regulators of
data breaches; implementing safeguards to protect the security and
confidentiality of personal data; and transferring personal data to
countries outside the European Union, including the U.S. The GDPR
imposes fines for breaches of data protection requirements and
provides other remedies for parties who suffer harm as a result of
a data breach. The GDPR and other changes in laws or regulations
associated with the enhanced protection of certain types of
sensitive data, such as healthcare data or other personal
information from our clinical trials, could require us to change
our business practices or lead to government enforcement actions,
private litigation or significant penalties against us and could
have a material adverse effect on our business, financial condition
or results of operations.
Additionally,
California recently enacted legislation that has been dubbed the
first “GDPR-like” law in the U.S. Known as the
California Consumer Privacy Act (the “CCPA”), it
creates new individual privacy rights for consumers (as that word
is broadly defined in the law) and places increased privacy and
security obligations on entities handling personal data of
consumers. The CCPA, which went into effect on January 1, 2020,
requires covered companies to provide new disclosures to California
consumers, and provides such consumers new ways to opt-out of
certain sales of personal information. The CCPA provides for
penalties for violations, as well as other remedies for parties who
suffer harm as a result of a data breach, which may increase data
breach litigation. The CCPA may increase our compliance costs and
potential liability.
*We are subject to financial and operating covenants in our
business financing agreement with Western Alliance Bank (the
“Credit Agreement”) and any failure to comply with such
covenants, or obtain waivers in the event of non-compliance, could
limit our borrowing availability under the Credit Agreement,
resulting in our being unable to borrow under the Credit Agreement
and materially adversely impact our liquidity. In addition, our
operations may not provide sufficient cash to meet the repayment
obligations of debt incurred under the Credit
Agreement.
The
Credit Agreement contains affirmative and restrictive covenants,
including covenants regarding delivery of financial statements,
maintenance of inventory, payment of taxes, maintenance of
insurance, dispositions of property, business combinations or
acquisitions and incurrence of additional indebtedness, among other
customary covenants, in each case subject to limited
exceptions.
There
can be no assurance that we will be able to comply with the
financial and other covenants in the Credit Agreement, and the
effects of COVID-19 may make it more difficult for us to comply
with such covenants. Our failure to comply with these covenants
could cause us to be unable to borrow under the Credit Agreement
and may constitute an event of default which, if not cured or
waived, could result in the acceleration of the maturity of any
indebtedness then outstanding under the Credit Agreement, which
would require us to pay all amounts then outstanding. If we are
unable to repay those amounts, Western Alliance Bank could proceed
against the collateral granted to them to secure that debt, which
would seriously harm our business. Such an event could
materially adversely affect our financial condition and liquidity.
Additionally, such events of non-compliance could impact the terms
of any additional borrowings and/or any credit renewal terms. Any
failure to comply with such covenants may be a disclosable event
and may be perceived negatively. Such perception could adversely
affect the market price for our common stock and our ability to
obtain financing in the future.
Risks Related to Regulatory Approval of Our Products and Other
Government Regulations
We are subject to regulation by various federal, state and foreign
agencies that require us to comply with a wide variety of
regulations, including those regarding the manufacture of products,
advertising and product label claims, the distribution of our
products and environmental matters. Failure to comply with these
regulations could subject us to fines, penalties and additional
costs.
Some of
our operations are subject to regulation by various United States
federal agencies and similar state and international agencies,
including the Department of Commerce, the FDA, the FTC, the
Department of Transportation and the Department of Agriculture.
These regulations govern a wide variety of product activities, from
design and development to labeling, manufacturing, handling, sales
and distribution of products. If we fail to comply with any of
these regulations, we may be subject to fines or penalties, have to
recall products and/or cease their manufacture and distribution,
which would increase our costs and reduce our sales.
We are
also subject to various federal, state, local and international
laws and regulations that govern the handling, transportation,
manufacture, use and sale of substances that are or could be
classified as toxic or hazardous substances. Some risk of
environmental damage is inherent in our operations and the products
we manufacture, sell, or distribute. Any failure by us to comply
with the applicable government regulations could also result in
product recalls or impositions of fines and restrictions on our
ability to carry on with or expand in a portion or possibly all of
our operations. If we fail to comply with any or all of these
regulations, we may be subject to fines or penalties, have to
recall products and/or cease their manufacture and distribution,
which would increase our costs and reduce our sales.
Government regulations of our customer’s business are
extensive and are constantly changing. Changes in these regulations
can significantly affect customer demand for our products and
services.
The
process by which our customers’ industries are regulated is
controlled by government agencies and depending on the market
segment can be very expensive, time consuming, and uncertain.
Changes in regulations or the enforcement practices of current
regulations could have a negative impact on our customers and, in
turn, our business. At this time, it is unknown how the FDA will
interpret and to what extent it will enforce GMPs, regulations that
will likely affect many of our customers. These uncertainties may
have a material impact on our results of operations, as lack of
enforcement or an interpretation of the regulations that lessens
the burden of compliance for the dietary supplement marketplace may
cause a reduced demand for our products and services.
Changes in government regulation or in practices relating to the
pharmaceutical, dietary supplement, food and cosmetic industry
could decrease the need for the services we provide.
Governmental
agencies throughout the world, including in the United States,
strictly regulate the pharmaceutical, dietary supplement, food and
cosmetic industries. Our business involves helping pharmaceutical
and biotechnology companies navigate the regulatory drug approval
process. Changes in regulation, such as a relaxation in regulatory
requirements or the introduction of simplified drug approval
procedures, or an increase in regulatory requirements that we have
difficulty satisfying or that make our services less competitive,
could eliminate or substantially reduce the demand for our
services. Also, if the government makes efforts to contain drug
costs and pharmaceutical and biotechnology company profits from new
drugs, our customers may spend less, or reduce their spending on
research and development. If health insurers were to change their
practices with respect to reimbursements for pharmaceutical
products, our customers may spend less, or reduce their spending on
research and development.
If we should in the future become required to obtain regulatory
approval to market and sell our goods we will not be able to
generate any revenues until such approval is received.
The
pharmaceutical industry is subject to stringent regulation by a
wide range of authorities. While we believe that, given our present
business, we are not currently required to obtain regulatory
approval to market our goods because, among other things, we do not
(i) produce or market any clinical devices or other products, or
(ii) sell any medical products or services to the customer, we
cannot predict whether regulatory clearance will be required in the
future and, if so, whether such clearance will at such time be
obtained for any products that we are developing or may attempt to
develop. Should such regulatory approval in the future be required,
our goods may be suspended or may not be able to be marketed and
sold in the United States until we have completed the regulatory
clearance process as and if implemented by the FDA. Satisfaction of
regulatory requirements typically takes many years, is dependent
upon the type, complexity and novelty of the product or service and
would require the expenditure of substantial
resources.
If
regulatory clearance of a good that we propose to propose to market
and sell is granted, this clearance may be limited to those
particular states and conditions for which the good is demonstrated
to be safe and effective, which would limit our ability to generate
revenue. We cannot ensure that any good that we develop will meet
all of the applicable regulatory requirements needed to receive
marketing clearance. Failure to obtain regulatory approval will
prevent commercialization of our goods where such clearance is
necessary. There can be no assurance that we will obtain regulatory
approval of our proposed goods that may require it.
Risks Related to the Securities Markets and Ownership of our Equity
Securities
*The market price of our common stock may be volatile and adversely
affected by several factors.
The
market price of our common stock could fluctuate significantly in
response to various factors and events, including, but not limited
to:
●
our ability to
integrate operations, technology, products and
services;
●
our ability to
execute our business plan;
●
our operating
results are below expectations;
●
our issuance of
additional securities, including debt or equity or a combination
thereof,;
●
announcements of
technological innovations or new products by us or our
competitors;
●
acceptance of and
demand for our products by consumers;
●
media coverage
regarding our industry or us;
●
disputes with or
our inability to collect from significant customers;
●
loss of any
strategic relationship;
●
industry
developments, including, without limitation, changes in healthcare
policies or practices;
●
economic and other
external factors, including effects of the COVID-19
pandemic;
●
reductions in
purchases from our large customers;
●
period-to-period
fluctuations in our financial results; and
●
whether an active
trading market in our common stock develops and is
maintained.
In
addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. These market
fluctuations may also materially and adversely affect the market
price of our common stock.
Our shares of common stock may be thinly traded, so you may be
unable to sell at or near ask prices or at all.
We
cannot predict the extent to which an active public market for our
common stock will develop or be sustained. This situation may be
attributable to a number of factors, including the fact that we are
a small company that is relatively unknown to stock analysts, stock
brokers, institutional investors and others in the investment
community who generate or influence sales volume, and that even if
we came to the attention of such persons, they tend to be risk
averse and would be reluctant to follow an unproven company such as
ours or purchase or recommend the purchase of our shares until such
time as we have become more seasoned and viable. As a consequence,
there may be periods of several days or weeks when trading activity
in our shares is minimal or non-existent, as compared to a seasoned
issuer which has a large and steady volume of trading activity that
will generally support continuous sales without an adverse effect
on share price. We cannot assure you that a broader or more active
public trading market for our common stock will develop or be
sustained, or that current trading levels will be sustained or not
diminish.
We have not paid cash dividends in the past and do not expect to
pay cash dividends in the foreseeable future. Any return on
investment may be limited to the value of our common
stock.
We have
never paid cash dividends on our capital stock and do not
anticipate paying cash dividends on our capital stock in the
foreseeable future. The payment of dividends on our capital stock
will depend on our earnings, financial condition and other business
and economic factors affecting us at such time as the board of
directors may consider relevant. If we do not pay dividends, our
common stock may be less valuable because a return on your
investment will only occur if the common stock price
appreciates.
*Changes in tax laws or regulations that are applied adversely to
us or our customers may have a material adverse effect on our
business, cash flow, financial condition or results of
operations.
New
income, sales, use or other tax laws, statutes, rules, regulations
or ordinances could be enacted at any time, which could adversely
affect our business operations and financial performance. Further,
existing tax laws, statutes, rules, regulations or ordinances could
be interpreted, changed, modified or applied adversely to us. For
example, legislation enacted in 2017 informally titled the Tax Cuts
and Jobs Act enacted many significant changes to the U.S. tax laws.
Future guidance from the Internal Revenue Service and other tax
authorities with respect to the Tax Cuts and Jobs Act may affect
us, and certain aspects of the Tax Cuts and Jobs Act could be
repealed or modified in future legislation. For example, the
Coronavirus Aid, Relief, and Economic Security Act (the
“CARES Act”), modified certain provisions of the Tax
Cuts and Jobs Act. In addition, it is uncertain if and to what
extent various states will conform to the Tax Cuts and Jobs Act,
the CARES Act, or any newly enacted federal tax legislation.
Changes in corporate tax rates, the realization of net deferred tax
assets relating to our operations, the taxation of foreign
earnings, and the deductibility of expenses under the Tax Cuts and
Jobs Act or future reform legislation could have a material impact
on the value of our deferred tax assets, could result in
significant one-time charges, and could increase our future U.S.
tax expense.
*Our ability to use our net operating loss carryforwards and
certain other tax attributes may be limited.
Our
federal net operating losses (“NOL”s) generated in
taxable years ending prior to December 31, 2017 could expire
unused. Under the Tax Cuts and Jobs Act, as modified by the CARES
Act, federal NOLs incurred in taxable years beginning after
December 31, 2017, may be carried forward indefinitely, but the
deductibility of such federal NOLs in tax years beginning after
December 31, 2020, is limited to 80% of taxable income. It is
uncertain if and to what extent various states will conform to the
Tax Cuts and Jobs Act or the CARES Act. In addition, under
Sections 382 and 383 of the Internal Revenue Code of 1986, as
amended, and corresponding provisions of state law, if a
corporation undergoes an “ownership change,” which is
generally defined as a greater than 50% change (by value) in its
equity ownership over a three-year period, the corporation’s
ability to use its pre-change NOL carryforwards and other
pre-change tax attributes (such as research tax credits) to offset
its post-change income or taxes may be limited. We may experience
ownership changes in the future as a result of subsequent shifts in
our stock ownership, some of which may be outside of our control.
As a result, if we earn net taxable income, our ability to use our
pre-ownership change NOL carryforwards to offset U.S. federal
taxable income may be subject to limitations, which could
potentially result in increased future tax liability to us. In
addition, at the state level, there may be periods during which the
use of NOLs is suspended or otherwise limited, which could
accelerate or permanently increase state taxes owed.
Stockholders may experience significant dilution if future equity
offerings are used to fund operations or acquire complementary
businesses.
If
future operations or acquisitions are financed through the issuance
of additional equity securities, stockholders could experience
significant dilution. Securities issued in connection with future
financing activities or potential acquisitions may have rights and
preferences senior to the rights and preferences of our common
stock. In addition, the issuance of shares of our common stock upon
the exercise of outstanding options or warrants may result in
dilution to our stockholders.
We may become involved in securities class action litigation that
could divert management’s attention and harm our
business.
The
stock market in general, and the stocks of early stage companies in
particular, have experienced extreme price and volume fluctuations.
These fluctuations have often been unrelated or disproportionate to
the operating performance of the companies involved. If these
fluctuations occur in the future, the market price of our shares
could fall regardless of our operating performance. In the past,
following periods of volatility in the market price of a particular
company’s securities, securities class action litigation has
often been brought against that company. If the market price or
volume of our shares suffers extreme fluctuations, then we may
become involved in this type of litigation, which would be
expensive and divert management’s attention and resources
from managing our business.
As a
public company, we may also from time to time make forward-looking
statements about future operating results and provide some
financial guidance to the public markets. Projections may not be
made in a timely manner or we might fail to reach expected
performance levels and could materially affect the price of our
shares. Any failure to meet published forward-looking statements
that adversely affect the stock price could result in losses to
investors, stockholder lawsuits or other litigation, sanctions or
restrictions issued by the Securities and Exchange
Commission.
*We have a significant number of outstanding options. Future sales
of these shares could adversely affect the market price of our
common stock.
As of
March 31, 2020, we had outstanding options for an aggregate
of approximately 12.2 million shares of common stock at a
weighted average exercise price of $3.86 per share. The holders may
sell many of these shares in the public markets from time to time,
without limitations on the timing, amount or method of sale. As and
when our stock price rises, if at all, more outstanding options
will be in-the-money and the holders may exercise their options and
sell a large number of shares. This could cause the market price of
our common stock to decline.
Our amended and restated bylaws, as amended (our
“Bylaws”) provide that the Court of Chancery of the
State of Delaware is the exclusive forum for certain disputes
between us and our stockholders, which could limit our
stockholders’ ability to obtain a favorable judicial forum
for disputes with us or our directors, officers or
employees.
Our Bylaws provide that the Court of Chancery of the State of
Delaware will be the sole and exclusive forum for (i) any
derivative action or proceeding brought on our behalf,
(ii) any action asserting a claim of breach of a fiduciary
duty owed by any of our directors or officers to our company or our
stockholders, (iii) any action asserting a claim against our
company arising pursuant to any provision of the Delaware General
Corporation Law or our amended and restated certificate of
incorporation or Bylaws, or (iv) any action asserting a claim
against our company governed by the internal affairs doctrine. This
choice of forum provision does not apply to suits brought to
enforce a duty or liability created by the Securities Act of 1933,
as amended, or the Exchange Act, or any other claim for which the
federal courts have exclusive
jurisdiction.
This choice of forum provision may limit a stockholder’s
ability to bring certain claims in a judicial forum that it finds
favorable for disputes with us or any of our directors, officers,
other employees or stockholders, which may discourage lawsuits with
respect to such claims, although our stockholders will not be
deemed to have waived our compliance with federal securities laws
and the rules and regulations thereunder. If a court were to find
this choice of forum provision to be inapplicable or unenforceable
in an action, we may incur additional costs associated with
resolving such action in other jurisdictions, which could adversely
affect our business and financial condition.