There are certain inherent risks which will have an effect on our
development in the future and the most significant risks and
uncertainties known and identified by our management are described
below.
Risks
Related to Pandemics
The effects of the recent COVID-19 coronavirus pandemic are not
immediately known, but may adversely affect our business, results
of operations, financial condition, liquidity, and cash
flow.
Presently,
the impact of COVID-19 has not shown any imminent adverse effects
on our business. This notwithstanding, it is still unknown and
difficult to predict what adverse effects, if any, COVID-19 can
have on our business, or against the various aspects of same, or
how COVID-19 will continue to effect the world as the virus case
numbers rise and fall.
As of
the date of this Quarterly Report, COVID-19 coronavirus has been
declared a pandemic by the World Health Organization, has been
declared a National Emergency by the United States Government and
has resulted in several states being designated disaster zones.
COVID-19 coronavirus caused significant volatility in global
markets. The spread of COVID-19 coronavirus has caused public
health officials to recommend precautions to mitigate the spread of
the virus, especially as to travel and congregating in large
numbers. In addition, certain states and municipalities have
enacted, and additional cities are considering, quarantining and
“shelter-in-place” regulations which severely limit the
ability of people to move and travel and require non-essential
businesses and organizations to close. While some states are
considering lifting their “shelter-in-place”
restrictions and travel bans, as they are removed there is no
certainty that an outbreak will not occur and additional
restrictions imposed again in response.
It is
unclear how such restrictions, which will contribute to a general
slowdown in the global economy, will affect our business, results
of operations, financial condition and our future strategic
plans.
Recent
shelter-in-place and essential-only travel regulations could
negatively impact our customers. In addition, while our products
are manufactured in the United States, we still could experience
significant supply chain disruptions due to interruptions in
operations at any or all of our suppliers’ facilities or
downline suppliers. If we experience significant delays in
receiving our products we will experience delays in fulfilling
orders and ultimately receiving payment, which could result in loss
of sales and a loss of customers, and adversely impact our
financial condition and results of operations. The current status
of COVID-19 coronavirus closures and restrictions could also
negatively impact our ability to receive funding from our existing
capital sources as each business is and has been affected
uniquely.
If any of our employees, consultant, customers, or visitors were to
become infected we could be forced to close our operations
temporarily as a preventative measure to prevent the risk of spread
which could also negatively impact our ability to receive funding
from our existing capital sources as each business is and has been
affected uniquely
In addition, our headquarters are located in Seattle, Washington
and EZ-Clone is located in Sacramento, California, each of which
have experienced restrictions on individuals and business shutdowns
as the result of COVID-19. It is unclear at this time how these
restrictions will be continued and/or amended as the pandemic
evolves. We are hopeful that COVID-19 closures will have only a
limited effect on our operations and revenues.
General securities market uncertainties resulting from the COVID-19
pandemic.
Since
the outset of the pandemic the United States and worldwide national
securities markets have undergone unprecedented stress due to the
uncertainties of the pandemic and the resulting reactions and
outcomes of government, business and the general population. These
uncertainties have resulted in declines in all market sectors,
increases in volumes due to flight to safety and governmental
actions to support the markets. As a result, until the pandemic has
stabilized, the markets may not be available to the Company for
purposes of raising required capital. Should we not be able
to obtain financing when required, in the amounts necessary to
execute on our plans in full, or on terms which are economically
feasible we may be unable to sustain the necessary capital to
pursue our strategic plan and may have to reduce the planned future
growth and/or scope of our operations.
Risks Related to Our Business
Risks Associated with EZ-CLONE Enterprises, Inc.
On October 15, 2018, we closed the Purchase and Sale Agreement with
EZ-CLONE Enterprises, Inc., a California corporation (the
“Agreement”). On November 5, 2019, the Company
amended the Agreement with one 24.5% shareholder of EZ-CLONE
Enterprises, Inc. (“EZ-CLONE”), to extend the date to
purchase the remaining 49% of stock of EZ-CLONE in exchange for a
20% extension fee (a total of $171,000 for the 49% or $85,500 for
each 24.5% shareholder) of the $855,000 cash payable at the earlier
of the closing of $2,000,000 in funding or nine months (July 2020).
We did not close the purchase of the remaining 49% of stock of
EZ-CLONE by the extended deadline.
On September 15, 2020, we received notice that William Blackburn
and Brad Mickelsen (“Plaintiffs”), minority
shareholders of EZ-CLONE Enterprises, Inc., a majority owned
subsidiary of the Company, filed a complaint against the Company
and its officers Marco Hegyi and Mark Scott
(“Officers”), in the Superior Court of California,
County of Sacramento (“Complaint”) for claims related
to breach under the Purchase and Sale Agreement dated October 15,
2018 between the Company and Plaintiffs. The Complaint also alleges
that the Company and its Officers made certain false
representations and other claims to consummate the Transaction and
as a result has failed to complete the second closing as required
under Purchase and Sale Agreement. The Plaintiffs are seeking
rescission of the Purchase and Sale Agreement, unspecified damages
in excess of ten thousand dollars, and other equitable
relief.
On
September 15, 2020, the Company filed a notice of removal with the
California Superior Court, County of Sacramento and the United
States District Court for the Eastern District of California.
The case was removed to Federal District Court for the Eastern
District of California and Plaintiffs filed an Ex Parte Application
for TRO and an Order for Preliminary Injunction with the Federal
Court. The TRO was granted on September 16, 2020 and a
preliminary injunction hearing was scheduled for September 29,
2020. After reviewing all pleadings and oral arguments at the
hearing, the Court issued a ruling granting Plaintiffs’
request for a preliminary injunction.
Presently
the parties are providing legal briefs to the Federal court to
determine if rescission should be granted. If we are unsuccessful and the court grants
Plaintiffs’ request for rescission the resulting actions are
speculative at this time but could include the return of the
consideration exchanged as part of the acquisition subject to
certain adjustments as the result of several variables which the
court will consider. If the court denies Plaintiffs request for
rescission the litigation will continue regarding the breach
of contract claims and contractual remedies for breach and the
Court may or may not dissolve the preliminary injunction as a
result.
A decision to grant rescission could materially harm our business
as EZ-Clone represents a significant
portion of our operations.
As of
September 30, 2020, we recorded a liability of $2,131,000 for
acquisition payable of which a $1,105,000 is payable in stock and
$1,026,000 is payable in cash.
Our acquisition of EZ-CLONE thus far has been positive for our
overall results of operations. Additionally, we have spent a
significant amount of time and effort modifying our business plans
and focuses toward the clone industry. If we fail to close on the
remaining 49% of EZ-CLONE or settle the above legal action, we may
experience direct consequences including, but not limited to,
claims for breach of contract for failure to close on a contractual
obligation, possible rescission of the EZ-CLONE acquisition,
damages, and other equitable relief.
Risks Associated with Securities Purchase Agreements with
Chicago Venture
Partners, L.P. (“Chicago Venture”), Iliad Research and Trading, L.P.
(“Iliad”) and Odyssey Research and Trading, LLC,
(“Odyssey”) and
Silverback Capital Corporation.
The
Securities Purchase Agreements with Chicago Venture, Iliad and
Odyssey will terminate if we file protection from its creditors, a
Registration Statement on Form S-1 is not effective, and our market
capitalization or the trading volume of our common stock does not
reach certain levels. If terminated, we will be unable to draw down
all or substantially all of Notes.
Our
ability to require Chicago Venture, Iliad and Odyssey to fund the
Notes is at mutual discretion, subject to certain limitations.
Chicago Venture, Iliad and Odyssey are obligated to fund if each of
the following conditions are met; (i) the average and median daily
dollar volumes of our common stock for the twenty (20) and sixty
(60) trading days immediately preceding the funding date are
greater than $100,000; (ii) our market capitalization on the
funding date is greater than $17,000,000; (iii) we are not in
default with respect to share delivery obligations under the note
as of the funding date; and (iv) we are current in our reporting
obligations.
On
September 1, 2020, Iliad sold a Note for $500,000 to Silverback
Capital Corporation.
There
is no guarantee that we will be able to meet the foregoing
conditions or any other conditions under the Securities Purchase
Agreements and/or Notes or that we will be able to draw down any
portion of the amounts available under the Securities Purchase
Agreements and/or Notes.
If we
are not able to draw down all amounts possible under the Securities
Purchase Agreements or if the Securities Purchase Agreements are
terminated, we may be forced to curtail the scope of our operations
or alter our business plan if other financing is not available to
us.
Our common stock.
As of March 4, 2019, we began to trade on the OTC
Pink
Sheet stocks system because our bid price had closed below $0.01 for
more than 30 consecutive calendar days. As of March 17, 2020,
we commenced trading on the
OTCQB Market ("OTCQB") after successfully up-listing from the OTC
Pink Market.
This
action had a material adverse effect on our business, financial
condition and results of operations. If we are unable to obtain
additional financing when it is needed, we will need to restructure
our operations, and divest all or a portion of our
business.
We have been involved in Legal Proceedings.
We have
been involved in certain disputes and legal proceedings as
discussed in the section title “Legal Proceedings”.
Defending such litigation may be lengthy and costly, strain our
resources and divert management’s attention from their core
responsibilities, which would have a negative impact on our
business. In addition, as a public company, we are also potentially
susceptible to litigation, such as claims asserting violations of
securities laws. Any such claims, with or without merit, if not
resolved, could be time-consuming and result in costly litigation.
There can be no assurance that an adverse result in any future
proceeding would not have a potentially material adverse on our
business, results of operations or financial
condition.
We may engage in acquisitions, mergers, strategic alliances, joint
ventures and divestures that could result in final results that are
different than expected.
In the normal course of business, we engage in discussions relating
to possible acquisitions, equity investments, mergers, strategic
alliances, joint ventures and divestitures. Such transactions are
accompanied by a number of risks, including the use of significant
amounts of cash, potentially dilutive issuances of equity
securities, incurrence of
debt on potentially unfavorable terms as well as impairment
expenses related to goodwill and amortization expenses related to
other intangible assets, the possibility that we may pay too much
cash or issue too many of our shares as the purchase price for an
acquisition relative to the economic benefits that we ultimately
derive from such acquisition, and various potential difficulties
involved in integrating acquired businesses into our
operations.
From time to time, we have also engaged in discussions with
candidates regarding the potential acquisitions of our product
lines, technologies and businesses. If a divestiture such as this
does occur, we cannot be certain that our business, operating
results and financial condition will not be materially and
adversely affected. A successful divestiture depends on various
factors, including our ability to effectively transfer liabilities,
contracts, facilities and employees to any purchaser; identify and
separate the intellectual property to be divested from the
intellectual property that we wish to retain; reduce fixed costs
previously associated with the divested assets or business; and
collect the proceeds from any divestitures.
If we do not realize the expected benefits of any acquisition or
divestiture transaction, our financial position, results of
operations, cash flows and stock price could be negatively
impacted.
Our proposed business is dependent on laws pertaining to the
marijuana industry.
Continued development of the marijuana industry is dependent upon
continued legislative authorization of the use and cultivation of
marijuana at the state level. Any number of factors
could slow or halt progress in this area. Further,
progress, while encouraging, is not assured. While there
may be ample public support for legislative action, numerous
factors impact the legislative process. Any one of these
factors could slow or halt use of marijuana, which would negatively
impact our proposed business.
As of November 4, 2020, thirty five states and the District of
Columbia allow its citizens to use medical
cannabis. Additionally, fifteen states and the District
of Columbia have legalized cannabis for adult use. The
state laws are in conflict with the federal Controlled Substances
Act, which makes marijuana use and possession illegal on a national
level. The Obama administration previously effectively stated that
it is not an efficient use of resources to direct law federal law
enforcement agencies to prosecute those lawfully abiding by
state-designated laws allowing the use and distribution of medical
marijuana. The Trump administration position is
unknown. However, there is no guarantee that the Trump
administration will not change current policy regarding the
low-priority enforcement of federal laws. Additionally,
any new administration that follows could change this policy and
decide to enforce the federal laws strongly. Any such
change in the federal government’s enforcement of current
federal laws could cause significant financial damage to us and its
shareholders.
Further, while we do not harvest, distribute or sell marijuana, by
supplying products to growers of marijuana, we could be deemed to
be participating in marijuana cultivation, which remains illegal
under federal law, and exposes us to potential criminal liability,
with the additional risk that our business could be subject to
civil forfeiture proceedings.
●
Arizona,
Montana, South Dakota, New Jersey passed adult use
legislation
●
Mississippi
passed medicinal use legislation set to go into effect in
2021.
●
The
total count is 35 + DC for Medicinal. 15 + DC for adult
use.
●
Additionally,
Georgia, Virginia, Kentucky, Iowa, Texas, and Indiana allow very
low level THC based oil for medicinal purposes, but are generally
not included in the count. Language is updated
above.
The marijuana industry faces strong opposition.
It is
believed by many that large, well-funded businesses may have a
strong economic opposition to the marijuana industry. We
believe that the pharmaceutical industry clearly does not want to
cede control of any product that could generate significant
revenue. For example, medical marijuana will likely
adversely impact the existing market for the current
“marijuana pill” sold by mainstream pharmaceutical
companies. Further, the medical marijuana industry could
face a material threat from the pharmaceutical industry, should
marijuana displace other drugs or encroach upon the pharmaceutical
industry’s products. The pharmaceutical industry
is well funded with a strong and experienced lobby that eclipses
the funding of the medical marijuana movement. Any
inroads the pharmaceutical industry could make in halting or
impeding the marijuana industry harm our business, prospects,
results of operation and financial condition.
Marijuana remains illegal under Federal
law.
Marijuana
is a Schedule-I controlled substance and is illegal under federal
law. Even in those states in which the use of marijuana
has been legalized, its use remains a violation of federal
law. Since federal law criminalizing the use of
marijuana preempts state laws that legalize its use, strict
enforcement of federal law regarding marijuana would harm our
business, prospects, results of operation and financial
condition.
Raising additional capital to implement our business plan and pay
our debts will cause dilution to our existing stockholders, require
us to restructure our operations, and divest all or a portion of
our business.
We need
additional financing to implement our business plan and to service
our ongoing operations and pay our current debts. There can be no
assurance that we will be able to secure any needed funding, or
that if such funding is available, the terms or conditions would be
acceptable to us.
If we
raise additional capital through borrowing or other debt financing,
we may incur substantial interest expense. Sales of additional
equity securities will dilute on a pro rata basis the percentage
ownership of all holders of common stock. When we raise more equity
capital in the future, it will result in substantial dilution to
our current stockholders.
If we
are unable to obtain additional financing when it is needed, we
will need to restructure our operations, and divest all or a
portion of our business.
Closing of bank and merchant processing accounts could have a
material adverse effect on our business, financial condition and/or
results of operations.
As a
result of the regulatory environment, we have experienced the
closing of several of our bank and merchant processing accounts. We
have been able to open other bank accounts. However, we may have
other banking accounts closed. These factors impact management and
could have a material adverse effect on our business, financial
condition and/or results of operations.
Federal regulation and enforcement may adversely affect the
implementation of medical marijuana laws and regulations may
negatively impact our revenues and profits.
Currently,
there are thirty seven states plus the District of Columbia that
have laws and/or regulation that recognize in one form or another
legitimate medical uses for cannabis and consumer use of cannabis
in connection with medical treatment. Many other states are
considering legislation to similar effect. As of the date of this
writing, the policy and regulations of the Federal government and
its agencies is that cannabis has no medical benefit and a range of
activities including cultivation and use of cannabis for personal
use is prohibited on the basis of federal law and may or may not be
permitted on the basis of state law. Active enforcement of the
current federal regulatory position on cannabis on a regional or
national basis may directly and adversely affect the willingness of
customers of GrowLife to invest in or buy products from GrowLife
that may be used in connection with cannabis. Active enforcement of
the current federal regulatory position on cannabis may thus
indirectly and adversely affect revenues and profits of the
GrowLife companies.
Our history of net losses has raised substantial doubt regarding
our ability to continue as a going concern. If we do not continue
as a going concern, investors could lose their entire
investment.
Our
history of net losses has raised substantial doubt about our
ability to continue as a going concern, and as a result, our
independent registered public accounting firm included an
explanatory paragraph in its report on our financial statements as
of and for the years ended December 31, 2019 and 2018 with
respect to this uncertainty. Accordingly, our ability to continue
as a going concern will require us to seek alternative financing to
fund our operations. This going concern opinion could materially
limit our ability to raise additional funds through the issuance of
new debt or equity securities or otherwise. Future reports on our
financial statements may include an explanatory paragraph with
respect to our ability to continue as a going concern.
We have a history of operating losses and there can be no assurance
that we can again achieve or maintain profitability.
We have
experienced net losses since inception. As of September 30, 2020,
we had an accumulated deficit of $151.4 million. There can be no assurance
that we will achieve or maintain profitability.
We are subject to corporate governance and internal control
reporting requirements, and our costs related to compliance with,
or our failure to comply with existing and future requirements,
could adversely affect our business.
We must
comply with corporate governance requirements under the
Sarbanes-Oxley Act of 2002 and the Dodd–Frank Wall Street
Reform and Consumer Protection Act of 2010, as well as additional
rules and regulations currently in place and that may be
subsequently adopted by the SEC and the Public Company Accounting
Oversight Board. These laws, rules, and regulations continue to
evolve and may become increasingly stringent in the future. We are
required to include management’s report on internal controls
as part of our annual report pursuant to Section 404 of the
Sarbanes-Oxley Act. We strive to continuously evaluate and improve
our control structure to help ensure that we comply with Section
404 of the Sarbanes-Oxley Act. The financial cost of compliance
with these laws, rules, and regulations is expected to remain
substantial.
We
cannot assure you that we will be able to fully comply with these
laws, rules, and regulations that address corporate governance,
internal control reporting, and similar matters. Failure to comply
with these laws, rules and regulations could materially adversely
affect our reputation, financial condition, and the value of our
securities.
Our inability or failure to effectively manage our growth could
harm our business and materially and adversely affect our operating
results and financial condition.
Our
strategy envisions growing our business. We plan to expand our
product, sales, administrative and marketing organizations. Any
growth in or expansion of our business is likely to continue to
place a strain on our management and administrative resources,
infrastructure and systems. As with other growing businesses, we
expect that we will need to further refine and expand our business
development capabilities, our systems and processes and our access
to financing sources. We also will need to hire, train, supervise
and manage new and retain contributing employees. These processes
are time consuming and expensive, will increase management
responsibilities and will divert management attention. We cannot
assure you that we will be able to:
●
expand
our products effectively or efficiently or in a timely
manner;
●
allocate
our human resources optimally;
●
meet
our capital needs;
●
identify
and hire qualified employees or retain valued employees;
or
●
incorporate
effectively the components of any business or product line that we
may acquire in our effort to achieve growth.
Our
operating results may fluctuate significantly based on customer
acceptance of our products. As a result, period-to-period
comparisons of our results of operations are unlikely to provide a
good indication of our future performance. Management expects that
we will experience substantial variations in our net sales and
operating results from quarter to quarter due to customer
acceptance of our products. If customers do not accept our
products, our sales and revenues will decline, resulting in a
reduction in our operating income.
Customer
interest for our products could also be impacted by the timing of
our introduction of new products. If our competitors introduce new
products around the same time that we issue new products, and if
such competing products are superior to our own, customers’
desire for our products could decrease, resulting in a decrease in
our sales and revenues. To the extent that we introduce new
products and customers decide not to migrate to our new products
from our older products, our revenues could be negatively impacted
due to the loss of revenue from those customers. In the event that
our newer products do not sell as well as our older products, we
could also experience a reduction in our revenues and operating
income.
If we do not successfully generate additional products and
services, or if such products and services are developed but not
successfully commercialized, we could lose revenue
opportunities.
Our
future success depends, in part, on our ability to expand our
product and service offerings. To that end we have engaged in the
process of identifying new product opportunities to provide
additional products and related services to our customers. The
process of identifying and commercializing new products is complex
and uncertain, and if we fail to accurately predict
customers’ changing needs and emerging technological trends
our business could be harmed. We may have to commit significant
resources to commercializing new products before knowing whether
our investments will result in products the market will accept.
Furthermore, we may not execute successfully on commercializing
those products because of errors in product planning or timing,
technical hurdles that we fail to overcome in a timely fashion, or
a lack of appropriate resources. This could result in competitors
providing those solutions before we do and a reduction in net sales
and earnings.
The
success of new products depends on several factors, including
proper new product definition, timely completion and introduction
of these products, differentiation of new products from those of
our competitors, and market acceptance of these products. There can
be no assurance that we will successfully identify new product
opportunities, develop and bring new products to market in a timely
manner, or achieve market acceptance of our products or that
products and technologies developed by others will not render our
products or technologies obsolete or noncompetitive.
Our future success depends on our ability to grow and expand our
customer base. Our failure to achieve such growth or
expansion could materially harm our business.
To
date, our revenue growth has been derived primarily from the sale
of our products and through the purchase of existing businesses.
Our success and the planned growth and expansion of our business
depend on us achieving greater and broader acceptance of our
products and expanding our customer base. There can be no assurance
that customers will purchase our products or that we will continue
to expand our customer base. If we are unable to effectively market
or expand our product offerings, we will be unable to grow and
expand our business or implement our business strategy. This could
materially impair our ability to increase sales and revenue and
materially and adversely affect our margins, which could harm our
business and cause our stock price to decline.
If we
incur substantial liability from litigation, complaints, or
enforcement actions resulting from misconduct by our distributors,
our financial condition could suffer. We will require that our
distributors comply with applicable law and with our policies and
procedures. Although we will use various means to address
misconduct by our distributors, including maintaining these
policies and procedures to govern the conduct of our distributors
and conducting training seminars, it will still be difficult to
detect and correct all instances of misconduct. Violations of
applicable law or our policies and procedures by our distributors
could lead to litigation, formal or informal complaints,
enforcement actions, and inquiries by various federal, state, or
foreign regulatory authorities against us and/or our distributors
and could consume considerable amounts of financial and other
corporate resources, which could have a negative impact on our
sales, revenue, profitability and growth prospects. As we are
currently in the process of implementing our direct sales
distributor program, we have not been, and are not currently,
subject to any material litigation, complaint or enforcement action
regarding distributor misconduct by any federal, state or foreign
regulatory authority.
Our
future manufacturers could fail to fulfill our orders for products,
which would disrupt our business, increase our costs, harm our
reputation and potentially cause us to lose our
market.
We may
depend on contract manufacturers in the future to produce our
products. These manufacturers could fail to produce products to our
specifications or in a workmanlike manner and may not deliver the
units on a timely basis. Our manufacturers may also have to obtain
inventories of the necessary parts and tools for production. Any
change in manufacturers to resolve production issues could disrupt
our ability to fulfill orders. Any change in manufacturers to
resolve production issues could also disrupt our business due to
delays in finding new manufacturers, providing specifications and
testing initial production. Such disruptions in our business and/or
delays in fulfilling orders would harm our reputation and would
potentially cause us to lose our market.
Our inability to effectively protect our intellectual property
would adversely affect our ability to compete effectively, our
revenue, our financial condition and our results of
operations.
We may
be unable to obtain intellectual property rights to effectively
protect our business. Our ability to compete effectively may be
affected by the nature and breadth of our intellectual property
rights. While we intend to defend against any threats to our
intellectual property rights, there can be no assurance that any
such actions will adequately protect our interests. If we are
unable to secure intellectual property rights to effectively
protect our technology, our revenue and earnings, financial
condition, and/or results of operations would be adversely
affected.
We may
also rely on nondisclosure and non-competition agreements to
protect portions of our technology. There can be no assurance that
these agreements will not be breached, that we will have adequate
remedies for any breach, that third parties will not otherwise gain
access to our trade secrets or proprietary knowledge, or that third
parties will not independently develop the technology.
We do
not warrant any opinion as to non-infringement of any patent,
trademark, or copyright by us or any of our affiliates, providers,
or distributors. Nor do we warrant any opinion as to invalidity of
any third-party patent or unpatentability of any third-party
pending patent application.
Our industry is highly competitive and we have less capital and
resources than many of our competitors, which may give them an
advantage in developing and marketing products similar to ours or
make our products obsolete.
We are
involved in a highly competitive industry where we may compete with
numerous other companies who offer alternative methods or
approaches, may have far greater resources, more experience, and
personnel perhaps more qualified than we do. Such resources may
give our competitors an advantage in developing and marketing
products similar to ours or products that make our products
obsolete. There can be no assurance that we will be able to
successfully compete against these other entities.
Transfers of our securities may be restricted by virtue of state
securities “blue sky” laws, which prohibit trading
absent compliance with individual state laws. These restrictions
may make it difficult or impossible to sell shares in those
states.
Transfers
of our common stock may be restricted under the securities or
securities regulations laws promulgated by various states and
foreign jurisdictions, commonly referred to as "blue sky" laws.
Absent compliance with such individual state laws, our common stock
may not be traded in such jurisdictions. Because the securities
held by many of our stockholders have not been registered for
resale under the blue sky laws of any state, the holders of such
shares and persons who desire to purchase them should be aware that
there may be significant state blue sky law restrictions upon the
ability of investors to sell the securities and of purchasers to
purchase the securities. These restrictions may prohibit the
secondary trading of our common stock. Investors should consider
the secondary market for our securities to be a limited
one.
We are dependent on key personnel.
Our
success depends to a significant degree upon the continued
contributions of key management and other personnel, some of whom
could be difficult to replace. We do not maintain key man life
insurance covering our officers. Our success will depend on the
performance of our officers and key management and other personnel,
our ability to retain and motivate our officers, our ability to
integrate new officers and key management and other personnel into
our operations, and the ability of all personnel to work together
effectively as a team. Our failure to retain and recruit
officers and other key personnel could have a material adverse
effect on our business, financial condition and results of
operations.
We have no insurance.
We have
no directors’ and officers’ liability insurance and
limited commercial liability insurance policies. Any significant
claims would have a material adverse effect on our business,
financial condition and results of
operations.
Risks Related to our Common Stock
Chicago Venture, Iliad and Odyssey could have significant influence
over matters submitted to stockholders for approval.
As a
result of funding from Chicago Venture, Iliad and Odyssey as
previously detailed, they exercise significant control over
us.
While
there are limits on the ownership by each party, if these companies
were to choose to act together, they would be able to significantly
influence all matters submitted to our stockholders for approval,
as well as our officers, directors, management and affairs. For
example, these companies, if they choose to act together, could
significantly influence the election of directors and approval of
any merger, consolidation or sale of all or substantially all of
our assets. This concentration of voting power could delay or
prevent an acquisition of us on terms that other stockholders may
desire.
Trading in our stock is limited by the SEC’s penny stock
regulations.
Our
stock is categorized as a penny stock. The SEC has adopted Rule
15g-9 which generally defines "penny stock" to be any equity
security that has a market price (as defined) less than US$ 5.00
per share or an exercise price of less than US $5.00 per share,
subject to certain exclusions (e.g., net tangible assets in excess
of $2,000,000 or average revenue of at least $6,000,000 for the
last three years). The penny stock rules impose additional sales
practice requirements on broker-dealers who sell to persons other
than established customers and accredited investors. The penny
stock rules require a broker-dealer, prior to a transaction in a
penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document in a form prepared by the
SEC, which provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker-dealer
also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction, and monthly
account statements showing the market value of each penny stock
held in the customer's account. The bid and offer quotations, and
the broker-dealer and salesperson compensation information, must be
given to the customer orally or in writing prior to effecting the
transaction and must be given to the customer in writing before or
with the customer's confirmation. In addition, the penny stock
rules require that prior to a transaction in a penny stock not
otherwise exempt from these rules, the broker-dealer must make a
special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written
agreement to the transaction. Finally, broker-dealers may not
handle penny stocks under $0.10 per share.
These
disclosure requirements reduce the level of trading activity in the
secondary market for the stock that is subject to these penny stock
rules. Consequently, these penny stock rules would affect the
ability of broker-dealers to trade our securities if we become
subject to them in the future. The penny stock rules also could
discourage investor interest in and limit the marketability of our
common stock to future investors, resulting in limited ability for
investors to sell their shares.
FINRA sales practice requirements may also limit a
shareholder’s ability to buy and sell our stock.
In
addition to the “penny stock” rules described above,
FINRA has adopted rules that require that in recommending an
investment to a customer, a broker-dealer must have reasonable
grounds for believing that the investment is suitable for that
customer. Prior to recommending speculative low priced securities
to their non-institutional customers, broker-dealers must make
reasonable efforts to obtain information about the customer’s
financial status, tax status, investment objectives and other
information. Under interpretations of these rules, FINRA believes
that there is a high probability that speculative low priced
securities will not be suitable for at least some customers. The
FINRA requirements make it more difficult for broker-dealers to
recommend that their customers buy our common stock, which may
limit your ability to buy and sell our stock and have an adverse
effect on the market for our shares.
The market price of our common stock may be volatile.
The
market price of our common stock has been and is likely in the
future to be volatile. Our common stock price may fluctuate in
response to factors such as:
●
Halting
of trading by the SEC or FINRA.
●
Announcements
by us regarding liquidity, legal proceedings, significant
acquisitions, equity investments and divestitures, strategic
relationships, addition or loss of significant customers and
contracts, capital expenditure commitments, loan, note payable and
agreement defaults, loss of our subsidiaries and impairment of
assets,
●
Issuance
of convertible or equity securities for general or merger and
acquisition purposes,
●
Issuance
or repayment of debt, accounts payable or convertible debt for
general or merger and acquisition purposes,
●
Sale of
a significant number of shares of our common stock by
shareholders,
●
General
market and economic conditions,
●
Quarterly
variations in our operating results,
●
Investor
relation activities,
●
Announcements
of technological innovations,
●
New
product introductions by us or our competitors,
●
Competitive
activities, and
●
Additions
or departures of key personnel.
These
broad market and industry factors may have a material adverse
effect on the market price of our common stock, regardless of our
actual operating performance. These factors could have a material
adverse effect on our business, financial condition, and/or results
of operations.
The sale of a significant number of our shares of common stock
could depress the price of our common stock.
Sales
or issuances of a large number of shares of common stock in the
public market or the perception that sales may occur could cause
the market price of our common stock to decline. As of September
30, 2020, there are also (i) stock option grants outstanding for
the purchase of 506,667 common shares at a $1.496 average exercise
price; and (ii) warrants for the purchase of 2,418,680 shares of common shares at a
$3.465 average exercise price. In
addition, we have an unknown number of common shares to be issued
under the Crossover, 12% convertible promissory note financing and
Labrys agreements in the case of default. In addition, we have an
unknown number of common shares to be issued under the Chicago
Venture, Iliad and St. George financing agreements because the
number of shares ultimately issued to Chicago Venture depends on
the price at which Chicago Venture converts its debt to shares and
exercises its warrants. The lower the conversion or exercise
prices, the more shares that will be issued to Chicago Venture upon
the conversion of debt to shares. We will not know the exact number
of shares of stock issued to Chicago Venture until the debt is
actually converted to equity.
These
stock option grant, warrant and contingent shares could result in
further dilution to common stockholders and may affect the market
price of the common stock.
Significant
shares of common stock are held by our principal shareholders,
other Company insiders and other large shareholders. As affiliates
as defined under Rule 144 of the Securities Act or Rule 144 of the
Company, our principal shareholders, other Company insiders and
other large shareholders may only sell their shares of common stock
in the public market pursuant to an effective registration
statement or in compliance with Rule 144.
These
stock option grant, warrant and contingent shares could result in
further dilution to common stockholders and may affect the market
price of the common stock.
Some of our convertible debentures and warrants may require
adjustment in the conversion price.
Our
Convertible Notes Payable may require an adjustment in the current
conversion price of $0.102 per share if we issue common stock,
warrants or equity below the price that is reflected in the
convertible notes payable. Our warrant with St. George may require
an adjustment in the exercise price. The conversion price of the
convertible notes and warrants will have an impact on the market
price of our common stock. Specifically, if under the terms of the
convertible notes the conversion price goes down, then the market
price, and ultimately the trading price, of our common stock will
go down. If under the terms of the convertible notes the conversion
price goes up, then the market price, and ultimately the trading
price, of our common stock will likely go up. In other words, as
the conversion price goes down, so does the market price of our
stock. As the conversion price goes up, so presumably does the
market price of our stock. The more the conversion price goes down,
the more shares are issued upon conversion of the debt which
ultimately means the more stock that might flood into the market,
potentially causing a further depression of our stock.
We do not anticipate paying any cash dividends on our capital stock
in the foreseeable future.
We have
never declared or paid cash dividends on our capital stock. We
currently intend to retain all of our future earnings, if any, to
finance the growth and development of our business, and we do not
anticipate paying any cash dividends on our capital stock in the
foreseeable future. In addition, the terms of any future debt
agreements may preclude us from paying dividends. As a result,
capital appreciation, if any, of our common stock will be your sole
source of gain for the foreseeable future.
Anti-takeover provisions may limit the ability of another party to
acquire our company, which could cause our stock price to
decline.
Our
certificate of incorporation, as amended, our bylaws and Delaware
law contain provisions that could discourage, delay or prevent a
third party from acquiring our company, even if doing so may be
beneficial to our stockholders. In addition, these provisions could
limit the price investors would be willing to pay in the future for
shares of our common stock.
We may issue preferred stock that could have rights that are
preferential to the rights of common stock that could discourage
potentially beneficially transactions to our common
shareholders.
An
issuance of additional shares of preferred stock could result in a
class of outstanding securities that would have preferences with
respect to voting rights and dividends and in liquidation over our
common stock and could, upon conversion or otherwise, have all of
the rights of our common stock. Our Board of Directors'
authority to issue preferred stock could discourage potential
takeover attempts or could delay or prevent a change in control
through merger, tender offer, proxy contest or otherwise by making
these attempts more difficult or costly to achieve. The
issuance of preferred stock could impair the voting, dividend and
liquidation rights of common stockholders without their
approval.
If the company were to dissolve or wind-up, holders of our common
stock may not receive a liquidation preference.
If we
were too wind-up or dissolve the Company and liquidate and
distribute our assets, our shareholders would share ratably in our
assets only after we satisfy any amounts we owe to our
creditors. If our liquidation or dissolution were
attributable to our inability to profitably operate our business,
then it is likely that we would have material liabilities at the
time of liquidation or dissolution. Accordingly, we
cannot give you any assurance that sufficient assets will remain
available after the payment of our creditors to enable you to
receive any liquidation distribution with respect to any shares you
may hold.