ITEM 1A. RISK FACTORS
Our results of operations have not resulted
in profitability and we may not be able to achieve profitability going forward.
We have incurred net losses amounting
to $56.6 million for the period from inception (February 20, 2007) through September 30, 2016. We have had net losses
in each quarter since our inception. We expect that we will continue to incur net losses for the foreseeable future. We may incur
significant losses in the future for several reasons, including the other risks described in this report, and we may encounter
unforeseen expenses, difficulties, complications, delays and other unknown events. Accordingly, we may not be able to achieve
or maintain profitability. Our management is developing plans to alleviate the negative trends and conditions described above
and there is no guarantee that such plans will be successfully implemented. There is no assurance that even if we
successfully implement our business plan, that we will be able to curtail our losses. If we incur additional significant
operating losses, our stock price may decline, perhaps significantly.
The development of our business in
the near future is contingent upon the implementation of orders from UPS and other key customers for the purchase of E-GENs and
if the Company is unable to perform under these orders, its business will be significantly impacted in a negative manner.
On
June 4, 2014, the Company entered into a Vehicle Purchase Agreement with United Parcel Service Inc. (“UPS”) pursuant
to which the relationship by which the Company would sell vehicles to UPS was outlined. To date, we have received orders to purchase
343
E-GENs from UPS. We have entered into various purchase
orders with UPS relating to the delivery of the vehicles ordered. Currently, the schedule agreed to with UPS requires that we deliver
regular monthly deliveries of vehicles per month. However, these deadlines are expected to evolve as the UPS operations personnel
from the seven states are involved in the scheduling. There is no guarantee that the Company will be able to perform under
these orders and if it does perform, that UPS will purchase additional vehicles from the Company. Further, if the Company is not
able to raise the required capital to purchase required parts and pay certain vendors, the Company may not be able to comply with
UPS’s deadlines. Accordingly, despite the receipt of the orders from UPS, there is no guarantee, due to the Company’s
financial constraints and status as a development stage corporation, that the Company will be able to deliver such vehicles or
that it will receive additional orders whether from UPS or other potential customers.
If we are unable to perform under our orders with UPS, the Company business will be significantly impacted
in a negative manner.
We have yet to achieve positive cash flow
and, given our projected funding needs, our ability to generate positive cash flow is uncertain.
We have had negative cash flow from
operating activities of $13.3 million and $4.2 million for the nine months ended September 30, 2016 and 2015. We anticipate that
we will continue to have negative cash flow from operating and investing activities for the foreseeable future as we expect to
incur increased research and development, sales and marketing, and general and administrative expenses and make significant capital
expenditures in our efforts to increase sales and commence operations at our Union City facility. Our business also will at times
require significant amounts of working capital to support our growth, particularly as we acquire inventory to support our anticipated
increase in production. An inability to generate positive cash flow for the foreseeable future may adversely affect our ability
to raise needed capital for our business on reasonable terms, diminish supplier or customer willingness to enter into transactions
with us, and have other adverse effects that may decrease our long-term viability. There can be no assurance we will achieve positive
cash flow in the foreseeable future.
We need access to additional financing, which
may not be available to us on acceptable terms or at all. For the year ended December 31, 2015, our independent registered public
accounting firm issued a report on our 2015 financial statements that contains an explanatory paragraph stating that the lack of
sales, negative working capital and stockholders’ deficit, raise substantial doubt about our ability to continue as a going
concern. If we cannot access additional financing when we need it and on acceptable terms, our business, prospects, financial condition,
operating results and ability to continue as a going concern could be adversely affected.
Our growth-oriented business plan to
design, produce, sell and service commercial electric vehicles through our Union City facility will require continued capital
investment. Our research and development activities will require continued investment. For the year ended December 31, 2015, our
independent registered public accounting firm issued a report on our 2015 financial statements that contains an explanatory paragraph
stating that the lack of sales, negative working capital and stockholders’ deficit, raise substantial doubt about our ability
to continue as a going concern. Considering the financing recently closed in November 2015 in order to implement our operations
through December 31, 2016 we will need to raise approximately $6 million. This capital will be necessary to fund our ongoing operations,
continue research, development and design efforts, open our sales, service and assembly facilities, improve infrastructure and
introduce new or improve existing vehicle models. We cannot be certain that additional financing will be available to us on favorable
terms when required, or at all, particularly given that we do not now have a committed credit facility with any government or
financial institution. If we cannot obtain additional financing when we need it and on terms acceptable to us, our business, prospects,
financial condition, operating results and ability to continue as a going concern could be adversely affected.
Our limited operating history makes it difficult
for us to evaluate our future business prospects and make decisions based on those estimates of our future performance
.
We have basically been a research and development
company since beginning operations in February 2007. We have a limited operating history and have generated limited revenue. As
we move more toward a manufacturing environment it is difficult, if not impossible, to forecast our future results based upon our
historical data. Because of the uncertainties related to our lack of historical operations, we may be hindered in our ability to
anticipate and timely adapt to increases or decreases in revenues or expenses. If we make poor budgetary decisions as a result
of unreliable historical data, we could be less profitable or incur losses, which may result in a decline in our stock price.
Failure to successfully integrate the Workhorse®
brand, logo, intellectual property, patents and assembly plant in Union City, Indiana into our operations could adversely affect
our business and results of operations.
As part of our strategy to become an OEM, in
March 2013, we acquired Workhorse and the Workhorse Assets including the Workhorse® brand, logo, intellectual property, patents
and assembly plant in Union City, Indiana. The Workhorse acquisition may expose us to operational challenges and risks, including
the diversion of management’s attention from our existing business, the failure to retain key Workhorse dealers and our ability
to commence operations at the plant in Union City, Indiana. Our ability to sustain our growth and maintain our competitive position
may be affected by our ability to successfully integrate the Workhorse Assets.
Our business, prospects, financial condition
and operating results will be adversely affected if we cannot reduce and adequately control the costs and expenses associated
with operating our business, including our material and production costs.
We incur significant costs and expenses
related to procuring the materials, components and services required to develop and produce our electric vehicles. We have secured
supply agreements for our critical components including our batteries. However, these are dependent on volume to ensure that they
are available at a competitive price. Thus, our current cost projections are considerably higher than the projected revenue stream
that such vehicles will produce. As a result, we are continually working on initiatives to reduce our cost structure so that we
may effectively compete. If we do not properly manage our costs and expenses our net losses will continue which will negatively
impact our stock price.
Our future growth is dependent upon the willingness
of operators of commercial vehicle fleets to adopt electric vehicles and on our ability to produce, sell and service vehicles that
meet their needs. If the market for commercial electric vehicles does not develop as we expect or develops more slowly than we
expect, our business, prospects, financial condition and operating results will be adversely affected.
Our growth is dependent upon the adoption of
electric vehicles by operators of commercial vehicle fleets and on our ability to produce, sell and service vehicles that meet
their needs. The entry of commercial electric vehicles into the medium-duty commercial vehicle market is a relatively new development,
particularly in the United States, and is characterized by rapidly changing technologies and evolving government regulation, industry
standards and customer views of the merits of using electric vehicles in their businesses. This process has been slow as without
including the impact of government or other subsidies and incentives, the purchase prices for our commercial electric vehicles
currently is higher than the purchase prices for diesel-fueled vehicles. As part of our sales efforts, we must educate fleet managers
as to the economical savings during the life of the vehicle. As such, we believe that operators of commercial vehicle fleets consider
a number of factors when deciding whether to purchase our commercial electric vehicles (or commercial electric vehicles generally)
or vehicles powered by internal combustion engines, particularly diesel-fueled or natural gas-fueled vehicles. We believe these
factors include:
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the difference in the initial purchase prices of commercial electric vehicles and vehicles with comparable GVWs powered by internal combustion engines, both including and excluding the impact of government and other subsidies and incentives designed to promote the purchase of electric vehicles;
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the total cost of ownership of the vehicle over its expected life, which includes the initial purchase price and ongoing operating and maintenance costs;
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the availability and terms of financing options for purchases of vehicles and, for commercial electric vehicles, financing options for battery systems;
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the availability of tax and other governmental incentives to purchase and operate electric vehicles and future regulations requiring increased use of nonpolluting vehicles;
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government regulations and economic incentives promoting fuel efficiency and alternate forms of energy;
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fuel prices, including volatility in the cost of diesel;
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the cost and availability of other alternatives to diesel fueled vehicles, such as vehicles powered by natural gas;
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corporate sustainability initiatives;
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commercial electric vehicle quality, performance and safety (particularly with respect to lithium-ion battery packs);
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the quality and availability of service for the vehicle, including the availability of replacement parts;
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the limited range over which commercial electric vehicles may be driven on a single battery charge;
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access to charging stations and related infrastructure costs, and standardization of electric vehicle charging systems;
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electric grid capacity and reliability; and
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If, in weighing these factors, operators of
commercial vehicle fleets determine that there is not a compelling business justification for purchasing commercial electric vehicles,
particularly those that we produce and sell, then the market for commercial electric vehicles may not develop as we expect or may
develop more slowly than we expect, which would adversely affect our business, prospects, financial condition and operating results.
If our customers are unable to efficiently and
effectively integrate our electric vehicles into their existing commercial fleets our sales may suffer and our business, prospects,
financial condition and operating results may be adversely affected.
Our sales strategy involves a comprehensive
plan for the pilot and roll-out of our electric vehicles, as well as the ongoing replacement of existing commercial vehicles with
our electric vehicles, that is tailored to the individual needs of our customers. If we are unable to develop and execute fleet
integration strategies or fleet management support services that meet our customers' unique circumstances with minimal disruption
to their businesses, our customers may not realize the economic benefits they expect from our electric vehicles. If this were to
occur, our customers may not order additional vehicles from us, which could adversely affect our business, prospects, financial
condition and operating results.
We currently do not have long-term supply
contracts with guaranteed pricing which exposes us to fluctuations in component, materials and equipment prices. Substantial increases
in these prices would increase our operating costs and could adversely affect our business, prospects, financial condition and
operating results.
Because we currently do not have long-term supply
contracts with guaranteed pricing, we are subject to fluctuations in the prices of the raw materials, parts and components and
equipment we use in the production of our vehicles. Substantial increases in the prices for such raw materials, components and
equipment would increase our operating costs and could reduce our margins if we cannot recoup the increased costs through increased
vehicle prices. Any attempts to increase the announced or expected prices of our vehicles in response to increased costs could
be viewed negatively by our customers and could adversely affect our business, prospects, financial condition and operating results.
If we are unable to scale our operations
at our Union City facility in an expedited manner from our limited low volume production to high volume production, our business,
prospects, financial condition and operating results could be adversely affected.
We are currently assembling our orders
at our Union City facility which is acceptable for our existing orders. To satisfy increased demand, we will need to quickly scale
operations in our Union City facility as well as scale our supply chain including access to batteries. Our business, prospects,
financial condition and operating results could be adversely affected if we experience disruptions in our supply chain, if we
cannot obtain materials of sufficient quality at reasonable prices or if we are unable to scale our Union City facility.
We depend upon key personnel and need additional
personnel.
Our success depends on the continuing services
of Stephen Burns, CEO, and top management. On December 8, 2010, we entered into an employment agreement with Mr. Burns for a term
of two years which automatically renews for one year periods unless either of the parties elects to not renew for such period.
The loss of any of these individuals could have a material and adverse effect on our business operations. Additionally, the success
of our operations will largely depend upon its ability to successfully attract and maintain competent and qualified key management
personnel. As with any company with limited resources, there can be no guarantee that we will be able to attract such individuals
or that the presence of such individuals will necessarily translate into profitability for our company. Our inability to attract
and retain key personnel may materially and adversely affect our business operations. Any failure by our management to effectively
anticipate, implement, and manage the changes required to sustain our growth would have a material adverse effect on our business,
financial condition, and results of operations.
We face competition. A few of our competitors
have greater financial or other resources, longer operating histories and greater name recognition than we do and one or more of
these competitors could use their greater resources and/or name recognition to gain market share at our expense or could make it
very difficult for us to establish market share.
Companies currently competing in the
fleet logistics market offering alternative fuel medium-duty trucks include Ford Motor Company and Freightliner. Ford and Freightliner
are currently selling alternative fuel fleet vehicles including hybrids. In the electric medium duty truck market in the United
States, we compete with a few other manufacturers, including Electric Vehicles International and Smith Electric Vehicles. Ford
and Freightliner have more significant financial resources, established market positions, long-standing relationships with customers
and dealers, and who have more significant name recognition, technical, marketing, sales, financial and other resources than we
do. Although we believe that HorseFly™, our unmanned aerial system (UAS), is unique in the marketplace in that it currently
does not have any competitors when it comes to a UAS that works in combination with a truck, there are better financed competitors
in this emerging industry, including Google and Amazon. While we are seeking to partner with existing delivery companies to improve
their efficiencies in the last mile of delivery, our competitors are seeking to redefine the delivery model using drones from
a central location requiring extended flight patterns. Our competitors’ new aerial delivery model would essentially eliminate
traditional package delivery companies. Our model is focused on coupling our delivery drone with delivery trucks supplementing
the existing model and providing shorter term flight patterns. Google and Amazon have more significant financial resources, established
market positions, long-standing relationships with customers, more significant name recognition and a larger scope of resources
including technical, marketing and sales than we do. The resources available to our competitors to develop new products and introduce
them into the marketplace exceed the resources currently available to us. As a result, our competitors may be able to compete
more aggressively and sustain that competition over a longer period that we can. This intense competitive environment may require
us to make changes in our products, pricing, licensing, services, distribution, or marketing to develop a market position. Each
of these competitors has the potential to capture market share in our target markets which could have an adverse effect on our
position in our industry and on our business and operating results.
If we are unable to keep up with advances
in electric vehicle technology, we may suffer a decline in our competitive position.
There are companies in the electric
vehicle industry that have developed or are developing vehicles and technologies that compete or will compete with our vehicles.
We cannot assure that our competitors will not be able to duplicate our technology or provide products and services similar to
ours more efficiently. If for any reason we are unable to keep pace with changes in electric vehicle technology, particularly
battery technology, our competitive position may be adversely affected. We plan to upgrade or adapt our vehicles and introduce
new models to continue to provide electric vehicles that incorporate the latest technology. However, there is no assurance that
our research and development efforts will keep pace with those of our competitors.
Our electric vehicles compete for market
share with vehicles powered by other vehicle technologies that may prove to be more attractive than ours.
Our target market currently is serviced by manufacturers
with existing customers and suppliers using proven and widely accepted fuel technologies. Additionally, our competitors are working
on developing technologies that may be introduced in our target market. If any of these alternative technology vehicles can provide
lower fuel costs, greater efficiencies, greater reliability or otherwise benefit from other factors resulting in an overall lower
total cost of ownership, this may negatively affect the commercial success of our vehicles or make our vehicles uncompetitive or
obsolete.
We currently have a limited number of customers,
with whom we do not have long-term agreements, and expect that a significant portion of our future sales will be from a limited
number of customers and the loss of any of these high-volume customers could materially harm our business.
A significant portion of our projected future
revenue, if any, is generated from a limited number of vehicle customers. Additionally, much of our business model is focused on
building relationships with large customers. Currently we have no contracts with customers that include long-term commitments or
minimum volumes that ensure future sales of vehicles. As such, a customer may take actions that affect us for reasons that we cannot
anticipate or control, such as reasons related to the customer’s financial condition, changes in the customer’s business
strategy or operations or as the result of the perceived performance or cost-effectiveness of our vehicles. The loss of or a reduction
in sales or anticipated sales to our most significant customers could have an adverse effect on our business, prospects, financial
condition and operating results.
Changes in the market for electric vehicles
could cause our products to become obsolete or lose popularity.
The modern electric vehicle industry is in its
infancy and has experienced substantial change in the last few years. To date, demand for and interest in electric vehicles has
been slower than forecasted by industry experts. As a result, growth in the electric vehicle industry depends on many factors,
including, but not limited to:
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continued development of product technology, especially batteries
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the environmental consciousness of customers
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the ability of electric vehicles to successfully compete with vehicles powered by internal combustion engines
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limitation of widespread electricity shortages; and
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whether future regulation and legislation requiring increased use of non-polluting vehicles is enacted
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We cannot assume that growth in the electric
vehicle industry will continue. Our business may suffer if the electric vehicle industry does not grow or grows more slowly than
it has in recent years or if we are unable to maintain the pace of industry demands.
The unavailability, reduction, elimination
or adverse application of government subsidies, incentives and regulations could have an adverse effect on our business, prospects,
financial condition and operating results.
We believe that, currently, the availability
of government subsidies and incentives including those available in New York, California and Chicago is an important factor considered
by our customers when purchasing our vehicles, and that our growth depends in part on the availability and amounts of these subsidies
and incentives. Any reduction, elimination or discriminatory application of government subsidies and incentives because of budgetary
challenges, policy changes, the reduced need for such subsidies and incentives due to the perceived success of electric vehicles
or other reasons may result in the diminished price competitiveness of the alternative fuel vehicle industry.
We may be unable to keep up with changes
in electric vehicle technology and, as a result, may suffer a decline in our competitive position.
Our current products are designed for
use with, and are dependent upon, existing electric vehicle technology. As technologies change, we plan to upgrade or adapt our
products to continue to provide products with the latest technology. However, our products may become obsolete or our research
and development efforts may not be sufficient to adapt to changes in or to create the necessary technology. Thus, our potential
inability to adapt and develop the necessary technology may harm our competitive position.
The failure of certain key suppliers to provide
us with components could have a severe and negative impact upon our business.
We have secured supply agreements for our critical
components including our batteries. However, these are dependent on volume to ensure that they are available at a competitive price.
Further, we rely on a small group of suppliers to provide us with components for our products. If these suppliers become unwilling
or unable to provide components or if we are unable to meet certain volume requirements in our existing supply agreements, there
are a limited number of alternative suppliers who could provide them. Changes in business conditions, wars, governmental changes,
and other factors beyond our control or which we do not presently anticipate could affect our ability to receive components from
our suppliers. Further, it could be difficult to find replacement components if our current suppliers fail to provide the parts
needed for these products. A failure by our major suppliers to provide these components could severely restrict our ability to
manufacture our products and prevent us from fulfilling customer orders in a timely fashion.
Product liability or other claims could have
a material adverse effect on our business.
The risk of product liability claims, product
recalls, and associated adverse publicity is inherent in the manufacturing, marketing, and sale of electrical vehicles. Although
we have product liability insurance for our consumer and commercial products, that insurance may be inadequate to cover all potential
product claims. We also carry liability insurance on our products. Any product recall or lawsuit seeking significant monetary damages
either in excess of our coverage, or outside of our coverage, may have a material adverse effect on our business and financial
condition. We may not be able to secure additional product liability insurance coverage on acceptable terms or at reasonable costs
when needed. A successful product liability claim against us could require us to pay a substantial monetary award. Moreover, a
product recall could generate substantial negative publicity about our products and business and inhibit or prevent commercialization
of other future product candidates. We cannot provide assurance that such claims and/or recalls will not be made in the future.
We may have to devote substantial resources
to implementing a retail product distribution network.
Dealers are often hesitant to provide
their own financing to contribute to our product distribution network. Thus, we anticipate that we may have to provide financing
or other consignment sale arrangements for dealers. A capital investment such as this presents many risks, foremost among them
being that we may not realize a significant return on our investment if the network is not profitable. Our inability to collect
receivables from dealers could cause us to suffer losses. Lastly, the amount of time that our management will need to devote to
this project may divert them from performing other functions necessary to assure the success of our business.
Regulatory requirements may have a negative
impact upon our business.
While our vehicles are subject to substantial
regulation under federal, state, and local laws, we believe that our vehicles are or will be materially in compliance with all
applicable laws. However, to the extent the laws change, or if we introduce new vehicles in the future, some or all of our vehicles
may not comply with applicable federal, state, or local laws. Further, certain federal, state, and local laws and industrial standards
currently regulate electrical and electronics equipment. Although standards for electric vehicles are not yet generally available
or accepted as industry standards, our products may become subject to federal, state, and local regulation in the future. Compliance
with these regulations could be burdensome, time consuming, and expensive.
Our products are subject to environmental and
safety compliance with various federal and state regulations, including regulations promulgated by the EPA, NHTSA, and various
state boards, and compliance certification is required for each new model year. The cost of these compliance activities and the
delays and risks associated with obtaining approval can be substantial. The risks, delays, and expenses incurred in connection
with such compliance could be substantial.
Our success may be dependent on protecting
our intellectual property rights.
We rely on trade secret protections to protect
our proprietary technology as well as several registered patents and one patent application. Our patents relate to the vehicle
chassis assembly, vehicle header and drive module and manifold for electric motor drive assembly. Our existing patent application
relates to the onboard generator drive system for electric vehicles. Our success will, in part, depend on our ability to obtain
additional trademarks and patents. We are working on obtaining patents and trademarks registered with the United States Patent
and Trademark Office but have not finalized any as of this date. Although we have entered into confidentiality agreements with
our employees and consultants, we cannot be certain that others will not gain access to these trade secrets. Others may independently
develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets.
We may be exposed to liability for infringing
upon the intellectual property rights of other companies.
Our success will, in part, depend on our ability
to operate without infringing on the proprietary rights of others. Although we have conducted searches and are not aware of any
patents and trademarks which our products or their use might infringe, we cannot be certain that infringement has not or will not
occur. We could incur substantial costs, in addition to the great amount of time lost, in defending any patent or trademark infringement
suits or in asserting any patent or trademark rights, in a suit with another party.
Our electric vehicles make use of lithium-ion
battery cells, which, if not appropriately managed and controlled, on rare occasions have been observed to catch fire or vent smoke
and flames. If such events occur in our electric vehicles, we could face liability for damage or injury, adverse publicity and
a potential safety recall, any of which could adversely affect our business, prospects, financial condition and operating results.
The battery packs in our electric vehicles use
lithium-ion cells, which have been used for years in laptop computers and cell phones. On rare occasions, if not appropriately
managed and controlled, lithium-ion cells can rapidly release the energy they contain by venting smoke and flames in a manner that
can ignite nearby materials.
Our facilities could be damaged or adversely
affected as a result of disasters or other unpredictable events. Any prolonged disruption in the operations of our facility would
adversely affect our business, prospects, financial condition and operating results.
We engineer and assemble our electric vehicles
in a facility in Loveland, Ohio and we intend to locate the assembly function to our facility in Union City. Any prolonged disruption
in the operations of our facility, whether due to technical, information systems, communication networks, accidents, weather conditions
or other natural disaster, or otherwise, whether short or long-term, would adversely affect our business, prospects, financial
condition and operating results
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We have never paid cash dividends on our common
stock and do not anticipate paying cash dividends in the foreseeable future. The payment of dividends on our common stock will
depend on earnings, financial condition and other business and economic factors affecting the company 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 investment
will only occur due to stock price appreciation.
Our stock price and trading volume may be
volatile, which could result in substantial losses for our stockholders.
The equity trading markets may experience periods
of volatility, which could result in highly variable and unpredictable pricing of equity securities. The market price of our common
stock could change in ways that may or may not be related to our business, our industry or our operating performance and financial
condition. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. We
have experienced significant volatility in the price of our stock. We cannot assure that the market price of our common stock will
not fluctuate or decline significantly in the future. In addition, the stock markets in general can experience considerable price
and volume fluctuations.
We may be exposed to potential risks relating
to our internal controls over financial reporting and our ability to have those controls attested to by our independent auditors.
As directed by Section 404 of the Sarbanes-Oxley
Act of 2002 ("SOX 404"), the Securities and Exchange Commission adopted rules requiring smaller reporting companies,
such as our company, to include a report of management on the company's internal controls over financial reporting in their annual
reports for fiscal years ending on or after December 15, 2007. We were required to include the management report in annual reports
starting with the year ending December 31, 2009. Previous SEC rules required a non-accelerated filer to include an attestation
report in its annual report for years ending on or after June 15, 2010. Section 989G of the Dodd-Frank Act added SOX Section 404(c)
to exempt from the attestation requirement smaller issuers that are neither accelerated filers nor large accelerated filers under
Rule 12b-2. Under Rule 12b-2, subject to periodic and annual reporting criteria, an “accelerated filer” is an issuer
with market value of $75 million, but less than $700 million; a “large accelerated filer” is an issuer with market
value of $700 million or greater. As a result, the exemption effectively applies to companies with less than $75 million in market
capitalization. We expect that this exemption will not apply to us during the year ended December 31, 2017.