Item
1A. Risk Factors
MARKET RISKS
Competition within the environment sustainability
industry may prevent us from remaining profitable.
The alternative energies industry is competitive
and fragmented and includes numerous small companies capable of competing effectively in the market we target as well as several
large companies that possess substantially greater financial and other resources than we do. Larger competitors’ greater
resources could allow those competitors to compete more effectively than we can with our Technologies. A number of competitors
have developed more mature businesses than us and have successfully built their names in the international alternative energy markets.
These various competitors may be able to offer products, sustainability technologies or services more competitively priced and
more widely available than our Technologies and may also have greater resources to create or develop new technologies and products
than us. Failure to compete in the alternative energy industry may prevent us from becoming profitable, and thus you may lose your
entire investment.
Significant drop in oil price may have
a material adverse effect on our business.
In March 2020, Saudi Arabia triggered an
oil price war in response to Russia’s refusal to reduce oil production in order to keep prices for oil at a moderate
level. This economic conflict resulted in a sharp drop of the oil price over the spring of 2020, including low-sulphur fuel oil.
The corresponding reduction in the price of low-sulphur fuel oil could negatively affect the demand for our marine scrubbers. Fuels
with higher sulphur content have been cheaper than low-sulphur fuel historically. Our marine scrubbers allow our customers to use
fuels with higher sulphur content. A decrease in the demand for marine scrubbers, which allow the use of heavy fuel oil under IMO
2020, could reduce our sales of marine scrubbers.
Our business
is impacted by customer concentration.
Two customers that are under the same common ownership and control
accounted for an aggregate 71% and 0%, respectively, of our revenues for the years ended March 31, 2020 and 2019. The rapid rise
in importance of these customers has been of great benefit to the business, but the potential loss of these customers could have
a material adverse effect on our financial position and results of operations.
We face risks associated with our plans
to market our Technologies and operate internationally.
We have begun to market our Technologies
internationally and bid for projects in many different jurisdictions. We have limited experience operating internationally, including
developing and manufacturing our products to comply with the commercial and legal requirements of international markets. Our success
in international markets will depend, in part, on our ability and that of our partners to secure relationships with foreign partners,
and our ability to manufacture and install our Technologies that meet foreign regulatory and commercial requirements. Additionally,
our planned international operations are subject to other inherent risks, including potential difficulties in enforcing contractual
obligations and intellectual property rights in foreign countries, and could be adversely affected due to fluctuations
in currency exchange rates, political and economic instability, acts or threats of terrorism, changes in governmental policies
or policies of central banks, expropriation, nationalization and/or confiscation of assets, price controls, fund transfer restrictions,
capital controls, exchange rate controls, taxes, unfavorable political and diplomatic developments, changes in legislation or regulations
and other additional developments or restrictive actions over which we will have no control.
Our ability to conduct business in international
markets may be affected by political, legal, tax and regulatory risks.
Net sales from outside the United States
comprised 92% and 100% of our net sales for the years ended March 31, 2020 and March 31, 2019, respectively. Further, certain of
our third-party suppliers and manufacturers are located in China and European countries. Our ability to capitalize on growth in
new international markets and to maintain the current level of operations in our existing international markets is exposed to the
risks associated with international operations, including:
|
|
●
|
burdens of complying with a wide variety of laws and regulations, including more stringent regulations
relating to data privacy and security, particularly in the European Union;
|
|
|
●
|
political and economic instability;
|
|
|
●
|
the imposition of government controls;
|
|
|
●
|
an inability to use or to obtain adequate intellectual property protection for our key brands and
products;
|
|
|
●
|
tariffs and customs duties and the classifications of our goods by applicable governmental bodies;
|
|
|
●
|
the lack of well-established or reliable legal systems in certain areas or a legal system subject
to undue influence or corruption;
|
|
|
●
|
a business culture in which illegal sales practices may be prevalent;
|
|
|
●
|
logistics and sourcing;
|
|
|
●
|
the presence of high inflation in the economies of international markets;
|
|
|
●
|
military conflicts; and
|
The occurrence of any of these risks could
negatively affect our international business and consequently our overall business, financial condition and results of operations.
FINANCIAL AND
LIQUIDITY RISKS
We may not be able to secure additional financing to meet
our future capital needs due to changes in general economic conditions.
We anticipate needing significant capital
to develop our sales force and effectively market the Technologies. We may use capital more rapidly than currently anticipated
and incur higher operating expenses than currently expected, and we may be required to depend on external financing to satisfy
our operating and capital needs. We may need new or additional financing in the future to conduct our operations or expand our
business. Any sustained weakness in the general economic conditions and/or financial markets in the United States or globally could
adversely affect our ability to raise capital on favorable terms or at all. From time to time we have relied, and may also rely
in the future, on access to financial markets as a source of liquidity to satisfy working capital requirements and for general
corporate purposes. We may be unable to secure debt or equity financing on terms acceptable to us, or at all, at the time when
we need such funding.
Risk of increase
volatility of financial markets resultant from global COVID-19 pandemic
Beginning in 2020, the global COVID-19
pandemic significantly increased the volatility of financial markets worldwide. Significant volatility or disruptions of the capital
markets could eliminate our access to financing, and/or significantly increase its cost. Such volatility or disruptions in the
capital markets may cause lenders to be unwilling to provide us with financing to fund our ongoing operations and growth.
OPERATIONAL
RISKS
We have a limited operating history
with significant losses.
We have yet to establish any history of profitable operations.
We incurred a cumulative deficit of $73,832,654 for the period from April 5, 2011 (inception) to June 30, 2020. We generated our
first revenues during the year ended March 31, 2018 of $1,995,000. We generated our first net income during the year ended March
31, 2020 of $10,381,420 and a further $1,488,681 for the quarter ended June 30, 2020. We expect that future revenues and profitability
will be sufficient to sustain our operations for the foreseeable future. Our profitability will depend on our ability to successfully
market and sell the Technologies and there can be no assurance that we will be able to do so.
We are dependent upon our officers for
execution of our business plan.
As a result, our future success depends
heavily upon the continuing services of the members of our senior management team. If one or more of our senior executives or other
key personnel are unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all,
and our business may be disrupted and our financial condition and results of operations may be materially and adversely affected.
Competition for senior management and key personnel is intense, the pool of qualified candidates is very limited, and we may not
be able to retain the services of our senior executives or key personnel, or attract and retain high-quality senior executives
or key personnel in the future. We do not currently maintain key man insurance on our senior managers. The loss of the services
of our senior management team and employees could result in a disruption of operations which could result in reduced revenues.
Outbreaks of epidemic diseases, including
COVID-19, could adversely impact our business operations.
Our business could be adversely affected
by a widespread second wave of the COVID-19 pandemic which has been predicted by health experts. Many countries have imposed travel
bans, quarantines, and other emergency public health measures. This could have an adverse effect on our ability to travel, distribute
and install products, as well as force the temporary closure of offices and facilities. In addition, the global marine transportation
industry has been negatively affected by travel restrictions and shutdown of businesses. This in turn can reduce demand for our
marine scrubbers to these shipping customers if many vessels sit idle or are taken out of service during the outbreak. On June
19, 2020, the Company closed the Norway office as we rethink the sales strategy in the marine division.
The pandemic could also impact our customers
and suppliers negatively in operations and financial conditions. Any disruption of our suppliers or customers would likely impact
our sales and operating results. Further, a pandemic could result in a worldwide health crisis and economic downturn, which could
impact our operating results.
We will continue to be dependent on
certain third-party - PowerChinaSPEM relationship risk
PowerChinaSPEM is based in Shanghai, China
and provides design, procurement, project management, manufacturing, installation, and other services to us in the marine scrubber
business which constitutes the majority of our sales. The business would be adversely affected should the relationship terminate,
or be made difficult through the imposition of political, financial, fiscal, regulatory or similar restrictions between China and
the U.S. PowerChinaSPEM is reliant on sourcing raw materials and supplies from both within and outside China, and these supplies
could also be disrupted by further severe health pandemics, such as the recent Covid-19 outbreak, severe weather, the occurrence
of threat of wars of other conflicts, and other similar events.
Our management has significant control over our affairs.
Currently, our officers and directors collectively
beneficially own approximately 21.5% of our outstanding common stock. Accordingly, our officers and directors are in a position
to significantly affect major corporate transactions and the election of our directors. There is no provision for cumulative voting
for our directors.
Our information technology systems,
processes, and sites may suffer interruptions, failures, or attacks which could affect our ability to conduct business.
Our information technology systems provide
critical data connectivity, information, and services for internal and external users. These include, among other things, processing
transactions, summarizing, and reporting results of operations, complying with regulatory, legal or tax requirements, storing project
information and other processes necessary to manage the business. Our systems and technologies, or those of third parties on which
we rely, could fail, or become unreliable due to equipment failures, software viruses, cyber threats, terrorist acts, natural disasters,
power failures or other causes. Cybersecurity threats are evolving and include, but are not limited to, malicious software, cyber
espionage, attempts to gain unauthorized access to our sensitive information, including that of our customers, suppliers, and subcontractors,
and other electronic security breaches that could lead to disruptions in mission critical systems, unauthorized release of confidential
or otherwise protected information, and corruption of data. Although we utilize various procedures and controls to monitor and
mitigate these threats, there can be no assurance that these procedures and controls will be sufficient to prevent security threats
from materializing. If any of these events were to materialize, the costs related to cyber or other security threats or disruptions
may not be fully insured or indemnified and could have a material adverse effect on our reputation, operating results, and financial
condition.
We are subject to legal proceedings
and legal compliance risks that could harm our business.
From time to time, we may be subject to
contract disputes or litigation. In connection with any disputes or litigation in which we are involved, we may incur costs and
expenses in connection with defending ourselves or in connection with the payment of any settlement or judgment or compliance with
any ruling in connection therewith. The expense of defending litigation may be significant. The amount of time to resolve lawsuits
is unpredictable and defending ourselves may divert management’s attention from the day-to-day operations of our business,
which could adversely affect our business, financial condition, results of operations and cash flows. In addition, an unfavorable
outcome in any such litigation could have a material adverse effect on our business, results of operations, financial condition
and cash flows.
Our financial results may be adversely
affected by changes in accounting principles generally accepted in the United States.
Generally accepted accounting principles
in the United States, or GAAP, are subject to interpretation by the Financial Accounting Standards Board, or FASB, the American
Institute of Certified Public Accountants, the SEC and various bodies formed to promulgate and interpret appropriate accounting
principles. See Note 2 to our consolidated financial statements included in this report regarding the effect of new accounting
pronouncements on our financial statements. Any difficulties in implementing these pronouncements could cause us to fail to meet
our financial reporting obligations, which could result in regulatory discipline and harm investors’ confidence in us. Further,
the implementation of new accounting pronouncements or a change in other principles or interpretations could have a significant
effect on our financial results.
If our estimates or judgments relating
to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could
fall below expectations of investors, resulting in a decline in our stock price.
The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in our consolidated
financial statements and accompanying notes. For example, our revenue recognition policy is complex, and we often must make estimates
and assumptions that could prove to be inaccurate. We base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances. Significant assumptions and estimates used in preparing our consolidated
financial statements include those related to revenue recognition and the cost of providing the contractual warranty to our customers. Our
operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions,
which could cause our operating results to fall below the expectations of investors, resulting in a decline in our stock price.
If we fail to effectively mitigate the
material weaknesses and maintain an effective system of internal controls, we may not be able to accurately report our financial
results or prevent fraud.
Effective internal controls over financial
reporting are necessary for us to provide reliable and accurate financial reports and effectively prevent fraud. A material weakness
is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of our company’s annual or interim financial statements will not be prevented or
detected on a timely basis. In its assessment of the effectiveness of internal control over financial reporting as of March 31,
2020, our company determined that there were control deficiencies that constituted material weaknesses, as described below:
|
|
●
|
We do not have an audit committee
– while not being legally obligated to have an audit committee, it is the management’s view that such a committee,
including a financial expert member, is an utmost important entity level control over our Company’s financial statements.
Currently the board of directors acts in the capacity of the audit committee and does not include a member that is considered to
be independent of management to provide the necessary oversight of management’s activities. It is the intention of management
to increase the number of members on our board of directors and nominate an audit committee including a financial expert in the
fiscal year ending March 31, 2021, though there is no certainty that this will be achieved.
|
|
|
●
|
We did not have adequate accounting
personnel throughout the year ended March 31, 2020 – the Company has hired a number of qualified reporting accountants
in Q4 2020. However, it takes time to implement controls over segregation of duties and financial and accounting processes. Furthermore,
loss of these people or our inability to replace them with similarly skilled and trained individuals or new processes in a timely
manner could adversely impact our internal control mechanisms.
|
REGULATORY
RISKS
Our business is subject to environmental
and consumer protection legislation and any changes in such legislation could prevent us from remaining profitable.
The energy production and technology industries
are subject to many laws and regulations which govern the protection of the environment, quality control standards, health and
safety requirements, and the management, transportation and disposal of hazardous substances and other waste. Environmental laws
and regulations may require removal or remediation of pollutants and may impose civil and criminal penalties for violations. Some
environmental laws and regulations authorize the recovery of natural resource damages by the government, injunctive relief and
the imposition of stop, control, remediation, and abandonment orders. Similarly, consumer protection laws impose quality control
standards on products marketed to the public and prohibit the distribution and marketing of products not meeting those standards.
The costs arising
from compliance with environmental and consumer protection laws and regulations may increase operating costs for both us and our
potential customers. Any regulatory changes that impose additional environmental restrictions or quality control requirements on
us or on our potential customers could adversely affect us through increased operating costs and potential decreased demand for
our services, which could prevent us from remaining profitable.
Changes in tax laws or regulations or
adverse outcomes resulting from examination of our income or other tax returns could adversely affect our operating results and
financial condition.
We are subject to income taxes in the United
States and various foreign jurisdictions. A number of factors may adversely affect our future effective tax rates, such
as the jurisdictions in which our profits are determined to be earned and taxed; changes in the valuation of our deferred tax assets
and liabilities; adjustments to estimated taxes upon finalization of various tax returns; changes in available tax credits, grants
and other incentives; changes in stock-based compensation expense; the availability of loss or credit carry-forwards to offset
taxable income; changes in tax laws, regulations, accounting principles or interpretations thereof; or examinations by US federal,
state or foreign jurisdictions that disagree with interpretations of tax rules and regulations in regard to positions taken on
tax filings. A change in our effective tax rate due to any of these factors may adversely affect our future results from operations.
In addition, as our business grows, we
are required to comply with increasingly complex taxation rules and practices. We are subject to tax in the U.S. and in foreign
tax jurisdictions as we expand internationally. The development of our tax strategies requires additional expertise and may impact
how we conduct our business. If our tax strategies are ineffective or we are not in compliance with domestic and international
tax laws, our financial position, operating results and cash flows could be adversely affected.
STRATEGIC AND
TECHNOLOGY RISKS
There exist a number of strategic challenges,
which we may not be able to overcome.
Our prospects must be considered in light
of the risks, expenses, delays and difficulties frequently encountered in establishing a new business in an emerging and evolving
industry, including the following factors:
|
|
●
|
our business model and strategy are still
evolving and are continually being reviewed and revised;
|
|
|
●
|
we may not be able to raise the capital
required to develop our initial client based and reputation; and
|
|
|
●
|
we may not be able to successfully develop
our planned products and services.
|
We cannot be sure that we will be successful
in meeting these challenges and addressing these risks and uncertainties. If we are unable to do so, our business will not be successful
and the value of your investment in us will decline.
We may not be able to expand our business or manage our future
growth effectively.
We may not be able to expand our business
or manage future growth, which will require successful execution of:
|
|
●
|
expanding our existing customers and expanding to new markets;
|
|
|
|
|
|
|
●
|
ensuring manufacture, delivery and installation of our products;
|
|
|
●
|
implementing and improving additional
and existing administrative, financial and operations systems, procedures and controls;
|
|
|
|
|
|
|
●
|
hiring additional employees;
|
|
|
●
|
expanding and upgrading our technological capabilities;
|
|
|
|
|
|
|
●
|
managing relationships with our customers and suppliers and strategic partnerships with other third parties;
|
|
|
●
|
maintaining adequate liquidity and financial resources; and
|
|
|
|
|
|
|
●
|
continuing to increase our revenues from operations.
|
Ensuring delivery of our products is subject
to many market risks, including scarcity, significant price fluctuations and competition. Maintaining adequate liquidity is dependent
upon a variety of factors, including continued revenues from operations, working capital improvements, and compliance with our
debt instruments. We may not be able to achieve our growth strategy during the foreseeable future. If we are unable
to manage our growth effectively, we may not be able to take advantage of market opportunities, develop new products, satisfy customer
requirements, execute our business plan, or respond to competitive pressures.
The development and expansion of our business
through acquisitions, joint ventures, and other strategic transactions may create risks that may reduce the benefits we anticipate
from these strategic alliances and may prevent us from achieving or sustaining profitability.
We intend to enter into technology acquisition
and licensing agreements and strategic alliances such as joint ventures or partnerships in order to develop and commercialize our
proposed technologies and services, and to increase our competitiveness. We currently do not have any commitments or agreements
regarding acquisitions, joint ventures or other strategic alliances. Our management is unable to predict whether or when we will
secure any such commitments or agreements, or whether such commitments or agreements will be secured on favorable terms and conditions.
Our ability to continue or expand our operations
through acquisitions, joint ventures or other strategic alliances depends on many factors, including our ability to identify acquisitions,
joint ventures, or partnerships, or access capital markets on acceptable terms. Even if we are able to identify strategic alliance
targets, we may be unable to obtain the necessary financing to complete these transactions and could financially overextend ourselves.
Acquisitions, joint ventures or other strategic
transactions may present financial, managerial and operational challenges, including diversion of management attention from existing
business and difficulties in integrating operations and personnel. Acquisitions or other strategic alliances also pose the risk
that we may be exposed to successor liability relating to prior actions involving a predecessor company, or contingent liabilities
incurred before a strategic transaction. Due diligence conducted in connection with an acquisition, and any contractual guarantees
or indemnities that we receive from sellers of acquired companies, may not be sufficient to protect us from, or compensate us for,
actual liabilities. Liabilities associated with an acquisition or a strategic transaction could adversely affect our business and
financial performance and reduce the benefits of the acquisition or strategic transaction.
We may fail to successfully integrate
any additional acquisitions made by us into our operations.
As part of our business strategy, we may
look for opportunities to grow by acquiring other product lines, technologies or facilities that complement or expand our existing
business. We may be unable to identify additional suitable acquisition candidates or negotiate acceptable terms. In addition, we
may not be able to successfully integrate any assets, liabilities, customers, systems or management personnel we may acquire into
our operations and we may not be able to realize related revenue synergies and cost savings within expected time frames. There
can be no assurance that we will be able to successfully integrate any prior or future acquisition.
We are at risk that the Technologies
will not perform to expectations.
As at the date of this report, the Technologies
have been tested to satisfactory requirements but there is no guarantee that the Technologies will continue to perform satisfactorily
in the future which would damage our prospects.
The market for alternative energy products,
technologies or services is emerging and rapidly evolving and its future success is uncertain. Insufficient demand for the Technologies
would prevent us from achieving or sustaining profitability.
It is possible that we may spend large
sums of money to bring the Technologies to market, but demand may not develop or may develop more slowly than we anticipate.
Our future success is currently dependent
on our Technologies and:
|
|
●
|
our ability to quickly react to technological
innovations;
|
|
|
●
|
the
cost-effectiveness of our Technologies;
|
|
|
●
|
the performance and reliability of alternative
energy products and services that we develop;
|
|
|
●
|
our ability to formalize marketing relationships
or secure commitments for our Technologies, products and services;
|
|
|
●
|
realization of sufficient funding to support
our marketing and business development plans.
|
We may be unable to develop widespread
commercial markets for our Technologies. We may be unable to sustain profitability.
We are at risk that we are unable to
manufacture our Technologies in accordance with contractual terms.
All contracts which we secure for the sale
of our Technologies will require that we supply a functioning emission control system. There is a risk that we are unable to manufacture
and supply our Technologies in accordance with contractual terms. Any failure by us to perform our obligations under any such contract
may have a detrimental impact on our financial standing and reputation.
Delays in or not completing our product
and Technology development goals may adversely affect our revenue and profitability.
If we experience delays in meeting our
development goals, our products exhibit technical defects, or if we are unable to meet cost or performance goals, including power
output, useful life and reliability, the profitable commercialization of our products will be delayed. In this event, potential
purchasers of our products may choose alternative technologies and any delays could allow potential competitors to gain market
advantages. We cannot assure that we will successfully meet our commercialization schedule in the future.
We may not be able to protect important
intellectual property and we could incur substantial costs defending against claims that our products infringe on the proprietary
rights of others.
We hold Technology patents registered in
many countries and jurisdictions, but there is a risk that claims against us related to infringement of proprietary rights may
be difficult and costly to defend. Should we be unsuccessful in our defences, this could have an adverse effect on our financial
results and position.
RISKS RELATED
TO THE OWNERSHIP OF OUR COMMON STOCK
The restructuring of existing, or the
raising of new, equity or debt securities may affect detrimentally our existing shareholders.
If we do raise funds by issuing additional
equity or convertible debt securities, the ownership percentages of existing stockholders would be reduced, and the securities
that we issue may have rights, preferences or privileges senior to those of the holders of our common stock or may be issued at
a discount to the market price of our common stock which would result in dilution to our existing stockholders. If we raise additional
funds by issuing debt, we may be subject to debt covenants, which could place limitations on our operations including our ability
to declare and pay dividends. Our inability to raise additional funds on a timely basis would make it difficult for us to achieve
our business objectives and would have a negative impact on our business, financial condition, and results of operations.
The continued sale of our equity securities
will dilute the ownership percentage of our existing stockholders and may decrease the market price for our common stock.
As of June 30, 2020, the Company’s
cash reserves are approximately $18.9 million. We expect to continue our efforts to market, manufacture and deliver our Technologies
to customers. Should the Company need additional resources, we may consider selling additional equity securities which will result
in dilution to our existing stockholders. In short, our continued need to sell equity will result in reduced percentage ownership
interests for all of our investors, which may decrease the market price for our common stock.
We do not intend to pay dividends and
there will thus be fewer ways in which you are able to make a gain on your investment.
We have never paid dividends and do not
intend to pay any dividends for the foreseeable future. To the extent that we may require additional funding currently not provided
for in our financing plan, our funding sources may prohibit the declaration of dividends. Because we do not intend to pay dividends,
any gain on your investment will need to result from an appreciation in the price of our common stock. There will therefore be
fewer ways in which you are able to make a gain on your investment. In the future when we do intend to pay dividends, we will formalize
a dividend policy.
Because the SEC imposes additional sales
practice requirements on brokers who deal in shares of penny stocks, some brokers may be unwilling to trade our securities. This
means that you may have difficulty reselling your shares, which may cause the value of your investment to decline.
Our shares are classified as penny stocks
and are covered by Section 15(g) of the Securities Exchange Act of 1934 (the “Exchange Act”) which imposes additional
sales practice requirements on brokers-dealers who sell our securities in this offering or in the aftermarket. For sales of our
securities, broker-dealers must make a special suitability determination and receive a written agreement prior from you to making
a sale on your behalf. Because of the imposition of the foregoing additional sales practices, it is possible that broker-dealers
will not want to make a market in our common stock. This could prevent you from reselling your shares and may cause the value of
your investment to decline.
Financial Industry Regulatory Authority
(FINRA) sales practice requirements may limit your ability to buy and sell our common stock, which could depress the price of our
shares.
FINRA rules require broker-dealers to have
reasonable grounds for believing that an investment is suitable for a customer before recommending that investment to the 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 and investment objectives, among other things.
Under interpretations of these rules, FINRA believes that there is a high probability such speculative low-priced securities will
not be suitable for at least some customers. Thus, 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 shares, have an adverse effect on the market
for our shares, and thereby depress our share price.