Form S-1/A Opti-Harvest, Inc.
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As filed with the Securities and Exchange Commission on February 3, 2023.
Registration No. 333-267203
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
TO
FORM
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(Exact name of registrant as specified in its charter)
| (State or Other Jurisdiction of | (Primary Standard Industrial | (IRS Employer | ||
| Incorporation or Organization) | Classification Number) | Identification Number) |
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Chief Executive Officer
Opti-Harvest, Inc.
(310) 788-0200
(Address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Thomas E. Puzzo, Esq. Law Offices of Thomas E. Puzzo, PLLC 3823 44th Ave. NE Seattle, Washington 98105 (206) 522-2256 |
Andrew M. Tucker, Esq. Nelson Mullins Riley & Scarborough LLP 101 Constitution Avenue, NW, Suite 900 Washington, D.C. 20001 (202) 689-2933 |
Approximate date of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act.
The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the U.S. Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state or other jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED FEBRUARY 3, 2023
PRELIMINARY PROSPECTUS
2,000,000 Shares of Common Stock
This is our initial public offering. We are offering 2,000,000 shares of common stock, par value $0.0001 per share, assuming an initial public offering price of $4.00 per share (which is the midpoint of the estimated range of the initial public offering price set forth below). We currently estimate that the initial public offering price will be between $3.50 and $4.50 per share.
Currently, there is no public market for our common stock. We have applied to list our common stock under the symbol “OPHV” on the Nasdaq Capital Market. The closing of this offering is contingent upon the successful listing of our common stock on the Nasdaq Capital Market.
We have two classes of capital stock: common stock and Series A Preferred Stock. Our capital structure involving our Series A preferred stock differs significantly from those companies that have typical dual or multi-class capital structures. Each share of our common stock will entitle the holder to one vote. We also have one share of Series A preferred stock outstanding, owned by Jonathan Destler, our Founder and Head of Corporate Development, which share is the subject of a voting trust, which entitles our sole director Jeffrey Klausner, to vote a number of votes that is equal to 110% of the issued and outstanding shares of our common stock, as well as the right to appoint a director. This means that, for the foreseeable future, the control of our company will be concentrated with the trustee through his voting power over the Series A Preferred Stock and with Mr. Destler through his ownership of our Series A Preferred Stock, and even if Mr. Destler sells a significant portion of shares of our common stock that he owns directly or indirectly, he will still maintain greater than 50% of the voting power of us. The terms of Series A preferred stock also include protective provisions that require the consent of the Series A Preferred stockholder in order for us to make any fundamental change to our business or corporate structure. This means that changes to our board of directors or management, our Certificate of Incorporation, as amended, our Bylaws, our business direction, or any change in control, merger or other business combination, or takeover involving us may not occur without the consent of the trustee, as long as Mr. Destler owns his share of Series A Preferred Stock. See the section titled “Description of Capital Stock” for more information. The objective of the Series A Preferred Stock is to fortify control of our company with Mr. Destler.
Immediately following the completion of this offering, Mr. Destler will own approximately 61.9% of the voting power of our outstanding capital stock, assuming an initial public offering price of $4.00 per share (which is the midpoint of the estimated range of the initial public offering price shown on this cover page of the prospectus) and assuming no exercise of the underwriters’ option to purchase additional shares and warrants, and we will be a “controlled company,” within the meaning of Nasdaq listing standards. Therefore, we will qualify for, and intend to rely on, exemptions from certain Nasdaq corporate governance requirements. See “Management Controlled Company Exception.”
We are an “emerging growth company” and a “smaller reporting company” as defined under the federal securities laws and, as such, have elected to comply with certain reduced public company reporting requirements. See “Prospectus Summary—Implications of Being an Emerging Growth Company and a Smaller Reporting Company.”
Investing in shares of our common stock and warrants involves a high degree of risk. See “Risk Factors” beginning on page 14 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities.
| Per Unit | Total | |||||||
| Initial public offering price | $ | $ | ||||||
| Underwriting discounts and commissions (1) | $ | $ | ||||||
| Proceeds to us, before expenses | $ | $ | ||||||
| (1) | Does not include a non-accountable expense allowance equal to 1% of the gross proceeds of this offering payable to Westpark Capital, the representative of the underwriters. We have also agreed to issue warrants to the representative of the underwriters. The registration statement, of which this prospectus forms a part, also registers the issuance of the representative’s warrants and shares of common stock issuable upon exercise of the representative’s warrants. See “Underwriting” for additional information regarding underwriters’ compensation. |
We have granted a 45-day option to the underwriters, exercisable one or more times in whole or in part, to purchase up to an aggregate of 300,000 additional shares of common stock and/or up to 300,000 additional warrants (equal to 15% of the shares of common stock sold in the offering) in any combination thereof, to cover over-allotments, if any, from us at the initial public offering price, less underwriting discounts and commissions.
Neither the Securities and Exchange Commission, or the SEC, nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the common stock to purchasers on or before February , 2023.
WESTPARK CAPITAL
The date of this prospectus is February 3, 2023
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TABLE OF CONTENTS
We and the underwriters have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any related free writing prospectuses. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the common stock offered by this prospectus, and only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus or in any applicable free writing prospectus is current only as of its date. Our business, results of operations, financial condition, and prospects may have changed since that date.
For investors outside the United States: We have not, and the underwriters have not, done anything that would permit this offering or the possession or distribution of this prospectus or any free writing prospectus in connection with this offering in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the common stock and the distribution of this prospectus outside the United States. See “Underwriting.”
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PROSPECTUS SUMMARY
This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the information under “Risk Factors,” “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included elsewhere in this prospectus before investing in our securities.
In this prospectus, unless otherwise stated or the context otherwise requires, references to “Company,” “we,” “us,” “our,” “Opti-Harvest” or similar references mean Opti-Harvest, Inc.
Overview
Opti-Harvest is an agricultural innovation company with products backed by a portfolio of patented and patent pending technologies focused on solving several critical challenges faced by agribusinesses: maximizing crop yield, accelerating crop growth, optimizing land and water resources, reducing labor costs and mitigating negative environmental impacts.
Our advanced agriculture technology (Opti-Filter™) and precision farming (Opti-View™) platforms, enable commercial growers and home gardeners to harness, optimize and better utilize sunlight, the planet’s most fundamental and renewable natural resource. Our sustainable agricultural technology solutions are powered by the sun, maximizing a free and renewable resource with no need for additional chemicals, fertilizers or labor.
We are developing revenue streams for the following product lines:
| ● | Opti-Filter™ Products; | |
| ● | ChromaGro™ Products; and | |
| ● | OptiView™ SaaS Licensing |
Recent Events
Litigation against Jonathan Destler, our former Chief Executive Officer and former director, and Don Danks, a former director
On September 30, 2022, a Complaint (the “Complaint”), captioned Securities and Exchange Commission vs. David Stephens, Donald Linn Danks, Jonathan Destler and Robert Lazarus, and Daniel Solomita and 8198381 Canada, Inc., as relief defendants, Case No. ‘22CV1483AJB DEB, was filed in the United States District Court, Southern District of California. In general, the Complaint alleges that Jonathan Destler, a co-founder and our former Chairman and Chief Executive Officer, and Donald Danks, a co-founder and a former director, and a current employee, were part of a control group that committed securities fraud in connection with the purchase and sale of securities of Loop Industries, Inc., a Nasdaq-listed company.
On November 22, 2022, an Indictment (the “Indictment”), captioned United States of America v. David Stephens, Donald Danks, Jonathan Destler and Robert Lazarus, Case No. ‘22CR2701 BAS, was filed in the United States District Court, Southern District of California. In general, the Indictment alleges that Mr. Destler and Mr. Danks conspired to and committed securities fraud, based on the same allegations in the Complaint. The indictment also alleges that Donald Danks engaged in money laundering.
Furthermore, the Complaint and the Indictment allege that Mr. Destler and Mr. Danks were part of a control group consisting of four other persons (David Stephens, Jonathan Destler, Don Danks and Robert Lazarus) who used a third person to make an unregistered offering of securities. The third person is a deceased former-stockholder of Opti-Harvest, whose Opti-Harvest shares are now held by his estate.
Transfer of Voting Control of Mr. Destler’s Opti-Harvest Shares to Opti-Harvest
Although Mr. Destler (and Mr. Danks, who on January 9, 2023, resigned as an employee of Opti-Harvest) have denied to Opti-Harvest the claims made against them in the Complaint and the Indictment, Mr. Destler agreed to resign his positions as a director, Chief Executive Officer, President and Secretary with Opti-Harvest, and transfer voting control (while retaining ownership) of his shares of common stock and Series A Preferred Stock, to the board of directors of Opti-Harvest. Accordingly, Jeffrey Klausner, Opti-Harvest’s, sole director is the sole trustee of a Voting Trust Agreement, dated December 23, 2022, by and among Opti-Harvest, Inc., Mr. Destler, entities Mr. Destler controls, Mr. Destler’s spouse, and Mr. Klausner, pursuant to which Mr. Klausner, on behalf of Opti-Harvest, votes Mr. Destler’s shares of common stock and Series A Preferred Stock.
It should be noted that the term “Trust” in the title “Voting Trust Agreement” is used for naming convention only, and no trust, as an entity, has been created in connection with the Voting Trust Agreement. Accordingly, Mr. Klausner, as the trustee under the Voting Trust, does not owe any fiduciary duty to Mr. Destler, his affiliated entities, or his spouse, under the Voting Trust Agreement. Mr. Klausner’s sole duty under the Voting Trust Agreement is to vote Mr. Destler’s beneficial ownership in Opti-Harvest securities.
Under the Voting Trust Agreement, Mr. Destler had agreed and consented to the appointment of any member of our board of directors to be appointed a trustee under the Voting Trust Agreement. Therefore, future members of our board of directors may become a trustee under the Voting Trust Agreement. Whether any future member of our board of directors may become a trustee under the Voting Trust Agreement would depend on whether any such new director would want to and agree to becoming a trustee under the Voting Trust Agreement.
The Voting Trust Agreement terminates on the first to occur of (i) final disposition of the proceedings related to the Complaint and the Indictment, or (ii) mutual agreement of Opti-Harvest and Mr. Destler.
Opti-Harvest Internal Investigation
The filing of the Complaint and the Indictment caused our board of directors to ask external legal counsel, who is also counsel to Opti-Harvest in this offering, to conduct an investigation to determine whether Mr. Destler and/or Mr. Danks have any plan, agreement, arrangement or understanding to commit any act which could be construed as securities fraud in connection with Opti-Harvest and this offering. Our legal counsel conducted an internal investigation into whether any officer, director or employee of Opti-Harvest has, or is aware of, any plan, agreement, arrangement or understanding to (i) manipulate the price or trading volume of common stock or other securities of Opti-Harvest, or (ii) publish or otherwise disseminate false, untrue, or misleading information, or information with material omissions of fact, about or otherwise regarding Opti-Harvest. Our legal counsel concluded, based verbal interviews with Mr. Destler, Mr. Danks, and each officer and director of Opti-Harvest, and based on written responses from each of officers, our director and our employees (including Mr. Destler and Mr. Danks), that there does not exist any plan, agreement, arrangement or understanding to (i) manipulate the price or trading volume of common stock or other securities of Opti-Harvest, or (ii) publish or otherwise disseminate false, untrue, or misleading information, or information with material omissions of fact, about or otherwise regarding Opti-Harvest.
Appointment of Geoffrey Andersen as Chief Executive Officer
In connection with the filing of the Complaint and the Indictment, and the agreement of Mr. Destler to transfer voting control of his voting securities of Opti-Harvest to Mr. Klausner under the Voting Trust Agreement, our board of directors appointed Jeffrey Andersen as our Chief Executive Officer, effective December 8, 2022. Mr. Andersen had previously, since July 14, 2021, served as a member of our Advisory Board. In his advisory capacity to us, Mr. Andersen worked closely with Opti-Harvest on all facets of growing our business and strategy, including government relations, building financial models, product development, technology development, marketing, and general business strategy, which allowed Mr. Andersen to not only garner a great deal of information about, and be part of, our business and operations, but to also be the lighting rod for our long-term business strategy. This and his 25-year career serving in multiple leadership and business development roles at agriculture-related businesses, led to the board of directors asking Mr. Andersen to serve as our Chief Executive Officer, which he has agreed to do, for a term of two years, stating that he believed in the viability of our business.
Our Technology and Products
We are building a global agriculture technology business providing advanced equipment and precision agriculture software and solutions.
Opti-Filter™
Opti-Filter products are designed to optimize land and water resources by utilizing sunlight in novel ways to accelerate growth in newly planted crops (Opti-Gro, Opti-Shield and ChromaGro products), and improve production in mature vineyards and orchards (Opti-Skylights and Opti-Panels products). Opti-Filter photo-selective technology turns sunlight into scattered, red-enriched light, maximizing the sun’s most productive rays and filtering out those that inhibit growth and production, which results in enhanced foliage activity, fruitfulness, shorter time to production, and substantial increases in marketable yield. These benefits are enhanced further by significant reductions in labor costs and other related expenses associated with conventional farming practices. Increasing outputs (yield, revenues) and lowering inputs (labor costs, resources) are age-old challenges for farmers. Our consumer product line (ChromaGro) is focused on the home garden market.
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Opti-View
The Opti-Filter family of products is complimented by our Agricultural Intelligence™ technology which collects and processes critical environmental data from a variety of sensors and industry partners to provide predictive analytics and recommendations that are designed to enable growers to incorporate powerful data into their decision-making process. We believe this system will provide far greater insights than any single system could and will enable growers to collect and interpret crucial data from which to make better choices to improve yield and maximize resources including irrigation and labor.
Our products are marketed to two key markets: commercial agriculture and home garden and fall into three categories:
| ● | Advanced Farm Equipment (Opti-Filter family of products), | |
| ● | Home Garden Product (ChromaGro, powered by Opti-Filter), and | |
| ● | Precision Agriculture (Opti-View). |
We began commercializing our Opti-Gro and ChromaGro products in the first half of 2021, our Opti-Shield and Opti-Panel late in the first half of 2022, and we plan to commercialize our Opti-Skylight products in the first half of 2023. Our Opti-View product is currently in our research and development phase with an anticipated commercial offering in the second half of 2023.
Advanced Farm Equipment
Growth accelerating products for newly planted crops
1. Opti-Gro™ units function as individual plant-growth chambers that target multiple biological processes to naturally accelerate growth and shorten time to first crop and maturity in table and raisin grapes, and wine grape vines.
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Opti-Gro units are applied soon after vine planting and typically left in place for one season only. However, their positive impacts last several seasons after their removal.
2. Opti-Shields™ are designed to fit newly planted fruit trees, nut trees and other crops.
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Opti-Shields are applied soon after planting and kept for two years.
Products improving production in mature orchards and vineyards
1. Opti-Panels™ utilize Opti-Filter technology to reduce labor costs and improve production in mature vineyards and crops grown on trellis systems.
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Opti-Panels are installed by retrofitting into current trellis systems, or along with initial construction, and remain in the vineyard or orchard for many years.
2. Opti-Skylight™ funnels penetrate the canopy of mature fruit and nut trees to improve production in mature tree crops.
Opti-Skylight is a parabolic collector which concentrates and directs sunlight to the inner canopy, while a translucent down tube delivers the production-enhancing effects of red enriched light throughout the canopy.
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Home Garden Product
ChromaGro units are designed for use in home gardens in rural (backyards, professional gardens) and urban (patios, balconies and terraces) settings.
Precision Agriculture
Opti-View is a proprietary, high sophisticated, multi-vendor AI and machine learning precision agriculture platform for commercial agriculture. It integrates data from our own suite of sensors with data streams from strategic partners. It is designed to empower farmers with better data – by offering valuable insights from predictive analytics so they can better manage their crop yields and key inputs including water and labor. We call this Agricultural Intelligence™.
Our Competitive Strengths
We believe that we have several key strengths that provide us with a competitive advantage:
| ● | We have developed a transformative agricultural technology platform with multiple product applications: Our technology is patented, functional and proven with a growing number of customers across major markets in North America and around the world. We expect this trend to accelerate as our base of installations grows. | |
| ● | We have a strong intellectual property portfolio: Opti-Harvest owns five patent families, including two U.S. patents, one granted European patent, granted patents in each of Brazil, Chile, Peru, Israel, and Mexico, as well as at least one pending international (PCT) application and over thirty additional patent applications pending worldwide as of May 30, 2022. Opti-Harvest has 5 years of R&D experience, and continues to drive innovation. | |
| ● | We have a strong ecosystem of relationships: Through the course of the previous five years and over 65 field trials, Opti-Harvest has developed strong collaborative relationships with many leading growers in the commercial agriculture ecosystem; growers who are in the best position to recognize the multiple benefits our technology and products bring to their farming initiatives. These industry partnerships and collaborative relationships are key to our technical and economic success and are not easily replicated. | |
| ● | We are committed to ESG: Opti-Harvest has an authentic and overarching commitment to ESG, sustainability and social impact. We are committed to a broad set of stakeholders, including our employees, our community, our environment, our customers, and our stockholders. This commitment aligns with our mission to provide farmer-focused solutions to sustainably feed our world. We see opportunities in many areas of the agricultural value chain to address some of today’s most significant challenges including food security, farmer livelihood, and resource use efficiency. |
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| ● | We are decarbonizing agriculture: Fresh produce accounts for roughly one-tenth of food related greenhouse gas (GHG emissions), or approximately 1% of GHG emissions in the U.S. (transportation accounts for 28% of that carbon footprint). We are committed to developing technologies that reduce CO₂ emissions across our installed and potential customer base and that reduce the agriculture’s contribution to climate change. GHG emissions associated with fresh produce production include on-farm inputs (applied water, biocides, direct electricity use, direct fuel use and other materials and resources) as well as upstream GHG emissions associated with the production and supply of these inputs. We believe our technologies reduce consumption of several of these GHG inputs by improving production, operational efficiencies, and resource utilization. | |
| ● | We are conserving resources: An important physiological response to our technology includes as much as 50% mitigation of plant daily water stress, more efficient uptake of water and soil nutrients as well as increased photosynthetic uptake of carbon dioxide from the atmosphere. | |
| ● | We have an experienced leadership and scientific team: Opti-Harvest has built an experienced multi-disciplinary leadership and scientific team with a strong track record of driving scientific and product innovation and revenue growth in several technology businesses. Each member of our leadership team has decades of experience in their respective area of expertise. | |
| ● | We continue to drive innovation. By continuing to focus on innovation and enhancement of our product offerings, we believe we can build significant market share, product usage and customer satisfaction. Our research and development, engineering, marketing and executive leadership teams bring expertise from a variety of fields including horticultural science, agronomy, optical physics, materials science, electronics and networking, product design, software development, machine learning and AI. |
Our Growth Strategy
Each of the growth initiatives outlined below depends on our ability to develop broad acceptance of our products. We continuously work to market our products and believe we will have acceptance of our products in both the consumer grower and commercial agriculture segments through the execution of the following strategies:
| ● | Sales and Marketing: Opti-Harvest’s growth and success depend upon developing and implementing go-to-market strategies that ensure superior customer satisfaction, retention, and expansion. As Opti-Harvest transitions from field trials to comprehensive commercialization initiatives, opportunities for industry partnerships and/or developing marketing, sales and distribution capabilities internally will be evaluated and piloted to ensure all aspects of customer and product support are validated. Our initial commercialization strategy is focused on marketing our products that use Opti-Filter technology. The introduction of our Opti-View solution represents an important opportunity to expand revenues from both installed Opti-Filter customers as well as a stand-alone solution to commercial customers. | |
| ● | Expansion into New Geographies: Opti-Harvest intends to initially derive the majority of its revenues from select markets in North America. We anticipate significant growth opportunities to expand our business in additional regions in North America and in international markets around the world. | |
| ● | Finance / Lease Model: We intend to establish finance partners that will allow us to offer financial terms to commercial agriculture customers and establish sales velocity and scale. |
Selected Risks Associated with Our Business
Our business is subject to a number of risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this summary. These risks include, but are not limited to, the following:
| ● | There is uncertainty regarding our ability to continue as a going concern, indicating the possibility that we may be required to curtail or discontinue our operations in the future. If we discontinue our operations, you may lose all of your investment. |
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| ● | We are an early-stage agricultural technology business, with no experience in the market, and failure to successfully compensate for this inexperience may adversely impact our operations and financial position. | |
| ● | Our technology and agricultural growth products have only been developed in the last several years, and we have had only limited opportunities to deploy and assess their performance in the field at full scale. | |
| ● | Our failure to protect our intellectual property may significantly impair our competitive advantage. | |
| ● | We rely on a limited number of suppliers, manufacturers, and logistics partners for our products. A loss of any of these partners could negatively affect our business. | |
| ● | Upon termination of the Voting Trust Agreement, Jonathan Destler, our Founder and Head of Corporate Development, will be able to control all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. | |
| ● | We are a “controlled company” within the meaning of the Nasdaq rules and, as a result, qualify for, and will rely on, exemptions from certain corporate governance requirements that provide protection to stockholders of other companies. | |
| ● | An active trading market for our common stock and warrants may not develop, and you may not be able to resell your shares at or above the initial public offering price. |
Patent Purchase Agreement
On April 7, 2017, we and DisperSolar LLC (“DisperSolar”) entered into a Patent Purchase Agreement (the “Agreement”) pursuant to which we acquired certain patents (intellectual property) of DisperSolar. DisperSolar developed the patents for harvesting, transmission, spectral modification and delivery of sunlight to shaded areas of plants.
Under the Agreement, we agreed to pay the following for the acquisition DisperSolar’s intellectual property:
| (i) | Initial Payment: $150,000 deposited into the Seller Account within 10 days of the Effective Date (the “Initial Payment”). | |
| (ii) | Initial Milestone Payments: Additional payments in the aggregate combined amount up to $450,000 upon reaching defined milestones (the “Milestone Payments”). As of the date of this prospectus, no remaining milestone payment obligations remain. | |
| (iii) | Earnout Payments: $800,000 paid on the on-going basis at a rate of 50% of gross margin and/or License Revenue from the date of the first commercial sale of a Covered Product or the first receipt by Purchaser of License Revenue, until the aggregate combined Gross Margin and License Revenue reach $1.6 million. As of the date of his prospectus, we recorded no earnout payment obligations as no gross margin was realized. |
We will pay to DisperSolar royalties as follows:
| (i) | Following the recognition by us of the first $1.6 million in aggregate combined gross margin and license revenue, and until we pay to DisperSolar an aggregate amount in royalties of $30 million, we shall pay to DisperSolar royalties on sales of covered products at a rate of 8% of gross margin. | |
| (ii) | Once we paid to DisperSolar an aggregate amount in royalties of $30 million, we shall pay to DisperSolar royalties on sales of covered products at a rate of 4.75% of gross margin until the earlier of (x) such time as covered products are not covered by any claims of any assigned patent, and (y) the date of the consummation of a strategic transaction. |
As of the date of this prospectus, we recorded no royalties payment obligations as no gross margin was realized.
We will pay to DisperSolar 7.6% of all license consideration received by us until the date of the consummation of a Strategic Transaction. “Strategic Transaction” means a transaction or a series of related transactions that results in an acquisition of the Company by a third party, including by way of merger, purchase of capital stock or purchase of assets or change of control or otherwise.
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“Strategic Transaction Consideration” means any cash consideration and the fair market value of any non-cash consideration paid to us by any acquirer as consideration for the Strategic Transaction, less the costs and expenses incurred by a purchaser for the purpose of consummating a Strategic Transaction. We will pay to DisperSolar a percentage of all License Consideration received by a prospective purchaser as follows:
| (i) | 3.8% of the first $50 million of the Strategic Transaction Consideration; | |
| (ii) | 5.7% of the next $100 million of the Strategic Transaction Consideration (i.e., over $50 million and up to $150 million); and | |
| (iii) | 7.6% of Strategic Transaction Consideration over $150 million. |
Our Chief Science Officer, Yosepha Shahak Ravid, and our Chief Technology Officer, Nicholas Booth, are both control persons of DisperSolar and named inventors of the acquired patents we acquired from DisperSolar.
Corporate Information
Our executive offices are located at 1801 Century Park East, Suite 520, Los Angeles, California 90067, and our telephone number is (310) 788-0200. Our website address is www.opti-harvest.com. We do not incorporate information on or accessible through our website into this prospectus, and you should not consider any information on, or that can be accessed through our website as a part of this prospectus and the inclusion of our website address in this prospectus is an inactive textual reference only. We were incorporated under the laws of the State of Delaware on June 20, 2016.
Implications of Being an Emerging Growth Company and a Smaller Reporting Company
We qualify as an “emerging growth company”, as defined in Section 2(a) of the Securities Act of 1933, as amended, or the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable, in general, to public companies that are not emerging growth companies. These provisions include:
| ● | the option to present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations in this prospectus; | |
| ● | not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002; | |
| ● | reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and | |
| ● | exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. |
We will remain an emerging growth company until the earliest to occur of: (i) the last day of the first fiscal year in which our annual gross revenue exceeds $1.07 billion; (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter; (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; and (iv) the last day of the fiscal year ending after the fifth anniversary of the completion of this offering.
As an emerging growth company, we can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. If we were to subsequently elect instead to comply with these public company effective dates, such election would be irrevocable pursuant to the JOBS Act.
We are also a “smaller reporting company” as defined in the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as the market value of our common stock held by non-affiliates is less than $250.0 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than $100.0 million during the most recently completed fiscal year, and the market value of our common stock held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter.
Reverse Stock Split
On the effective date of this Prospectus, our Board of Directors and stockholders have approved resolutions authorizing a reverse stock split of the outstanding shares of our common stock on the basis of 0.6786 shares for every one share of common stock. All share and per share information in this prospectus (other than in the historical financial statements included herein beginning at page F-1) has been adjusted to reflect the reverse stock split of the authorized and outstanding common stock.
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The Offering
| Common stock offered by us: | Up to 2,000,000 shares of common stock, assuming an initial public offering price of $4.00 per share (which is the midpoint of the estimated range of the initial public offering price shown on the cover page of this prospectus). | |
| Common stock to be outstanding immediately after the offering: | 25,821,275 shares of common stock or 26,121,275 shares if the underwriters exercise the over-allotment option in full), assuming an initial public offering price of $4.00 per share (which is the midpoint of the estimated range of the initial public offering price shown on the cover page of this prospectus). | |
| Over-allotment option | The underwriters have an option for a period of 45 days to purchase up to additional shares of our common stock and/or warrants sold in the offering in any combination thereof, to cover over-allotments, if any. | |
| Use of proceeds | We estimate the that net proceeds from the sale of our shares in this offering will be approximately $6,780,000 or approximately $7,872,000 if the underwriters exercise their option to purchase additional shares in full), based on the assumed initial public offering price of $4.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
We currently intend to use the net proceeds we receive from this offering to repay the outstanding principal and interest accrued on Convertible Promissory Notes, to fund the sales and marketing, as well as research and development and field trial activities supporting commercialization of our products, and to use the remainder of the net proceeds for general corporate purposes, including working capital and operating expenses. See the section entitled “Use of Proceeds” for additional information. | |
| Controlled company | Upon the closing of this offering, Jonathan Destler will beneficially own more than 50% of the voting power for the election of members of our board of directors and we will be a “controlled company” under the Nasdaq rules. As a controlled company, we qualify for, and intend to rely on, exemptions from certain Nasdaq corporate governance requirements. See “Management—Controlled company exception.” | |
| Voting rights | Each share of common stock will entitle the holder to one vote. We also have one share of Series A preferred stock outstanding, which entitles its holder to a number of votes that is equal to 110% of the issued and outstanding shares of our common stock. Holders of our common stock and Series A preferred stock will generally vote together as a single class, unless otherwise required by law or our certificate of incorporation. The outstanding share of our Series A preferred stock is owned by our Founder and Head of Corporate Development, Jonathan Destler and the subject of a voting trust under the Voting Trust Agreement pursuant to which our sole director, Jeffrey Klausner, is trustee and has to right to vote the shares. Immediately following the completion of this offering, Mr. Destler will own approximately 61.9% of the voting power of our outstanding capital stock (based on the assumed initial public offering price of $4.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus), assuming no exercise of the underwriters’ option to purchase additional shares. Upon termination of the Voting Trust Agreement, Mr. Destler will have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of our directors and the approval of any change of control transaction. See “Description of Capital Stock” for additional information. |
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| Representative’s warrants | We have agreed to issue to Westpark Capital, acting as the representative of underwriters of the offering, referred to as the “Representative,” compensation warrants to purchase up to 3% of the number of shares of common stock issued in this offering, referred to as the “Representative’s Warrants.” The Representative’s Warrants will be exercisable commencing 180 days after, and will terminate five years from, the effective date of the offering. The Representative’s Warrants are exercisable at a per share price equal to 120% of the initial public offering price per share in the offering. The Representative’s Warrants will provide for cashless exercise, a one-time demand registration right and unlimited piggyback rights.
| |
| Risk factors | Investing in our securities involves a high degree of risk. As an investor, you should be able to bear a complete loss of your investment. You should carefully read “Risk Factors” on page 14 in this prospectus for a discussion of factors that you should consider before deciding to invest in our common stock and warrants. | |
| Lock-up | We, all of our directors and officers and our shareholders who hold the number of shares of our common stock equal to 1% or more of our issued and outstanding shares of common stock have agreed with the underwriters, subject to certain exceptions, not to sell, transfer or dispose of, directly or indirectly, any of our common stock or securities convertible into or exercisable or exchangeable for our common stock for a period of six months after the closing of this offering. See “Underwriting” for more information. | |
| Nasdaq symbol | In connection with this offering, our common stock have been approved for listing on the Nasdaq Capital Market (“Nasdaq”) under the symbol “OPHV.” We will not apply for listing of our common stock on any other nationally recognized trading system. The closing of this offering is contingent upon the successful listing of our common stock on the Nasdaq Capital Market. |
The number of shares of our common stock that will be outstanding after this offering is based on (i) an assumed initial public offering price of $4.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, (ii) shares of our common stock outstanding as of the date of this prospectus, and (iii) excludes the following:
| ● | 3,467,646 shares of common stock reserved for issuance upon the exercise of outstanding options at a weighted average exercise price of $3.11 per share, as well as any future increases in the number of shares of our common stock reserved for issuance under our equity incentive plan; | |
| ● | 1,643,146 shares of common stock reserved for issuance upon the exercise of outstanding warrants at a weighted average exercise price of $4.58 per share; | |
| ● | up to 853,191 shares of common stock issuable upon conversion of $4,023,298 of Senior Convertible Promissory Notes (the “Notes”) and interest accrued, based on an assumed initial public offering price of $4.00 per share, the midpoint of the price range set forth on the cover page of this prospectus; | |
| ● | up to 53,254 shares of common stock issuable upon conversion of $251,124 of Convertible Promissory Notes (the “Promissory Notes”) and interest accrued, based on an assumed initial public offering price of $4.00 per share, the midpoint of the price range set forth on the cover page of this prospectus; | |
| ● | 2,437,012 shares of common stock reserved for issuance upon the exercise of outstanding warrants issued with our Notes. Each Warrant is exercisable at a price equal to 115% of the Company’s initial public offering price; | |
| ● | 42,413 shares of common stock reserved for issuance upon the exercise of outstanding warrants issued with our Promissory Notes. Each Warrant is exercisable at a price equal to 80% of the Company’s initial public offering price; | |
| ● | 152,685 restricted stock units issued to our employees; | |
| ● | 1 share of common stock reserved for issuance upon the conversion of 1 share of Series A preferred stock; and | |
| ● | up to 60,000 shares of common stock issuable upon exercise of the representative’s warrants issued in connection with this offering. |
In this prospectus, unless otherwise indicated or the context otherwise requires, the number of shares of common stock outstanding and the other information based thereon reflects and assumes the following:
| ● | no exercise by the underwriters of their option to purchase additional shares of common stock from us; and | |
| ● | no exercise of Representative’s Warrants. |
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SUMMARY FINANCIAL DATA
The following tables summarize our historical financial data as of and for the periods indicated. We derived the summary statement of operations data for the years ended December 31, 2021 and 2020 and our summary balance sheet data as of December 31, 2021 set forth below from our audited financial statements contained elsewhere in this prospectus. We derived the summary statement of operations data for the nine months ended September 30, 2022 and 2021 and our summary balance sheet data as of September 30, 2022 from our unaudited condensed financial statements contained elsewhere in this prospectus, and such summary information is not necessarily indicative of results to be expected for the full year. The unaudited condensed financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our financial position as of September 30, 2022 and the results of operations for the nine months ended September 30, 2022 and 2021. You should read this data together with our financial statements and related notes included elsewhere in this prospectus and the information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The summary financial data included in this section are not intended to replace the financial statements and related notes included elsewhere in this prospectus and are qualified in their entirety by those financial statements and related notes. Our historical results are not necessarily indicative of our future results.
On the effective date of this Prospectus, our Board of Directors and stockholders have approved resolutions authorizing a reverse stock split of the outstanding shares of our common stock on the basis of 0.6786 shares for every one share of common stock. All share and per share information in this prospectus (other than in the historical financial statements included herein beginning at page F-1) has been adjusted to reflect the forward stock split of the authorized and outstanding common stock.
In the table below, amounts are rounded to nearest thousands, except share and per share amounts.
Nine Months Ended September 30, | Year Ended December 31, | |||||||||||||||
| 2022 | 2021 | 2021 | 2020 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| Statement of Operations Data: | ||||||||||||||||
| Total revenues | $ | 30,000 | $ | 40,000 | $ | 40,000 | $ | 20,000 | ||||||||
| Total cost of revenues | 55,000 | 92,000 | 102,000 | 115,000 | ||||||||||||
| Operating expenses | 7,810,000 | 6,987,000 | 9,212,000 | 3,189,000 | ||||||||||||
| Financing costs | (1,554,000 | ) | - | |||||||||||||
| Interest expense | (2,589,000 | ) | (19,000 | ) | (817,000 | ) | - | |||||||||
| Gain on forgiveness of debt | - | 38,000 | 38,000 | - | ||||||||||||
| Net loss | $ | (11,978,000 | ) | $ | (7,020,000 | ) | $ | (10,053,000 | ) | $ | (3,284,000 | ) | ||||
| Net loss per share, basic and diluted | $ | (0.36 | ) | $ | (0.23 | ) | $ | (0.32 | ) | $ | (0.12 | ) | ||||
| Weighted-average shares used in computing net loss per share, basic and diluted | 33,237,352 | 30,489,968 | 30,970,657 | 27,621,029 | ||||||||||||
| Pro forma net loss | $ | (11,978,000 | ) | $ | (7,020,000 | ) | $ | (10,053,000 | ) | $ | (3,284,000 | ) | ||||
| Pro forma net loss per share, basic and diluted | $ | (0.58 | ) | $ | (0.34 | ) | $ | (0.48 | ) | $ | (0.18 | ) | ||||
| Pro forma weighted-average shares used in computing net loss per share, basic and diluted | 22,554,867 | 20,690,492 | 21,016,688 | 18,743,630 | ||||||||||||
In the table below, amounts are rounded to nearest thousands.
| September 30, 2022 | December 31, 2021 | |||||||
| (unaudited) | ||||||||
| Balance Sheet Data: | ||||||||
| Cash | $ | 840,000 | $ | 1,715,000 | ||||
| Total current assets | $ | 1,319,000 | $ | 1,820,000 | ||||
| Total assets | $ | 2,936,000 | $ | 3,441,000 | ||||
| Total current liabilities | $ | 5,386,000 | $ | 2,259,000 | ||||
| Long-term debt, net of current portion | $ | 60,000 | $ | 25,000 | ||||
| Total liabilities | $ | 5,446,000 | $ | 2,284,000 | ||||
| Total shareholders’ equity (deficit) | $ | (2,510,000 | ) | $ | 1,157,000 | |||
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RISK FACTORS
An investment in our securities is speculative and involves a high degree of risk including the risk of a loss of your entire investment. You should carefully consider the following risk factors. These risk factors contain, in addition to historical information, forward looking statements that involve risks and uncertainties. Our actual results could differ significantly from the results discussed in the forward-looking statements. The occurrence of any of the adverse developments described in the following risk factors could materially and adversely harm our business, financial condition, results of operations or prospects. In such event, the value of our securities could decline, and you could lose all or a substantial portion of your investment. In addition, the risks and uncertainties discussed below are not the only ones we face. Our business, financial condition, results of operations or prospects could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material, and these risks and uncertainties could result in a complete loss of your investment. In assessing the risks and uncertainties described below, you should also refer to the other information contained in this prospectus.
Risks Related to Our Business and Industry
There is uncertainty regarding our ability to continue as a going concern, indicating the possibility that we may be required to curtail or discontinue our operations in the future. If we discontinue our operations, you may lose all of your investment.
We have incurred net losses of $31.2 million from our inception on June 20, 2016 to September 30, 2022 and have completed only the preliminary stages of our business plan. We anticipate incurring additional losses before generating any revenues and will depend on additional financing in order to meet our continuing obligations and ultimately, to attain profitability. The report of our independent registered public accounting firm on our financial statements for the year ended December 31, 2021 included an explanatory paragraph describing conditions that raise substantial doubt about our ability to continue as a going concern. The conditions giving rise to this uncertainty are also disclosed in Note 1 to our financial statements for the year ended December 31, 2021 and nine months ended September 30, 2022, respectively, appearing at the end of this prospectus, citing our recurring losses and cash used in operations among other factors. Our ability to continue as a going concern will be determined by our ability to generate sufficient cash flow to sustain our operations and/or raise additional capital in the form of debt or equity financing. We believe that the inclusion of a going concern explanatory paragraph in the report of our registered public accounting firm will make it more difficult for us to secure additional financing or enter into strategic relationships with distributors on terms acceptable to us, if at all, and likely will materially and adversely affect the terms of any financing that we might obtain. Our financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
Pandemics and epidemics, including the ongoing COVID-19 pandemic, natural disasters, terrorist activities, political unrest, and other outbreaks could have a material adverse impact on our business, results of operations, financial condition and cash flows or liquidity.
During the ongoing global COVID-19 pandemic, the capital markets are experiencing pronounced volatility, which may adversely affect investor’s confidence and, in turn may affect our initial public offering.
In addition, the COVID-19 pandemic has caused us to modify our business practices (such as employee travel plan and cancellation of physical participation in meetings, events, and conference), and we may take further actions as required by governmental authorities or that we determine are in the best interests of our employees, customers, and business partners. In addition, the business and operations of our manufacturers, suppliers, and other business partners have also been adversely impacted by the COVID-19 pandemic and may be further adversely impacted in the future, which could result in delays in our ability to commercialize our agricultural products and services.
As a result of social distancing, travel bans, and quarantine measures, access to our facilities, users, management, and support staff has been limited, which in turn has impacted, and will continue to impact, our operations, and financial condition.
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The extent to which COVID-19 impacts our, and those of our suppliers’ and potential users’, business, results of operations, and financial condition will depend on future developments, which are uncertain and cannot be predicted, including, but not limited to, the occurrence of an additional “wave,” duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even if the COVID-19 outbreak subsides, we may continue to experience materially adverse impacts to our business as a result of its global economic impact, including any recession that has occurred or may occur in the future.
We are also vulnerable to natural disasters and other calamities. Although we have servers that are hosted in an offsite location, our backup system does not capture data on a real-time basis, and we may be unable to recover certain data in the event of a server failure. We cannot assure you that any backup systems will be adequate to protect us from the effects of fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins, war, riots, terrorist attacks or similar events. Any of the foregoing events may give rise to interruptions, breakdowns, system failures, technology platform failures or internet failures, which could cause the loss or corruption of data or malfunctions of software or hardware.
We had negative cash flow for the year ended December 31, 2021 and the nine months ended September 30, 2022.
We had negative operating cash flow for the year ended December 31, 2021 and the nine months ended September 30, 2022. To the extent that we have negative operating cash flow in future periods, we may need to allocate a portion of our cash reserves to fund such negative cash flow. We may also be required to raise additional funds through the issuance of equity or debt securities. There can be no assurance that we will be able to generate a positive cash flow from our operations, that additional capital or other types of financing will be available when needed or that these financings will be on terms favorable to us.
We are an early-stage agricultural technology business, with no experience in the market, and failure to successfully compensate for this inexperience may adversely impact our operations and financial position.
We were incorporated on June 20, 2016, and we are an early-stage agricultural technology business, with few substantial tangible assets in a highly competitive industry. We have limited operating history, a small customer base and low revenue to date. This makes it difficult to evaluate our future performance and prospects. Our prospectus must be considered in light of the risks, expenses, delays and difficulties frequently encountered in establishing a new business in an evolving agricultural technology industry characterized by intense competition, including:
● 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 customer base and reputation;
● we may not be able to successfully implement our business model and strategy; and
● our management consists of few persons and is heavily reliant on Geoff Andersen, our Chief Executive Officer, and Jonathan Destler, our Founder and Head of Corporate Development.
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 you could lose all or a substantial portion of your investment.
We expect to suffer losses in the immediate future that may cause us to curtail or discontinue our operations.
We expect to incur operating losses in future periods. These losses will occur because we do not yet have any revenues to offset the expenses associated with the development of our agricultural technology business, garnering revenues, and our business operations, generally. We cannot guarantee that we will ever be successful in generating revenues in the future. We recognize that if we are unable to generate revenues, we will not be able to earn profits or continue operations. There is no history upon which to base any assumption as to the likelihood that we will prove successful, and we can provide investors with no assurance that we will generate any operating revenues or ever achieve profitable operations. If we are unsuccessful in addressing these risks, our business will almost certainly fail.
We may not be able to execute our business plan or stay in business without additional funding.
Our ability to generate future operating revenues depends in part on whether we can obtain the financing necessary to implement our business plan. We will likely require additional financing through the issuance of debt and/or equity in order to establish profitable operations, and such financing may not be forthcoming. As widely reported, the global and domestic financial markets have been extremely volatile in recent months. If such conditions and constraints continue or if there is no investor appetite to finance our specific business, we may not be able to acquire additional financing through credit markets or equity markets. Even if additional financing is available, it may not be available on terms favorable to us. At this time, we have not identified or secured sources of additional financing. Our failure to secure additional financing when it becomes required will have an adverse effect on our ability to remain in business.
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The agriculture technology business is extremely competitive, and if we are not able to compete successfully against other agricultural technology businesses, both large and small, we will not be able operate our business and investors will lose their entire investment.
The agricultural technology business is extremely competitive and rapidly changing. We currently and in the future face competitive pressures from numerous actual and potential competitors. Many of our current and potential competitors in the agricultural growth business have substantial competitive advantages than we have, including:
| ● | longer operating histories; | |
| ● | significantly greater financial, technical and marketing resources; | |
| ● | greater brand name recognition; | |
| ● | better advertising and marketing; | |
| ● | existing customer bases; and | |
| ● | commercially accepted technology and products. |
Our competitors may be able to respond more quickly to new or emerging methods and changes in the agricultural technology business and devote greater resources to identify, develop and market new agricultural products and services, and better market and sell their agricultural products and services than we can.
We rely on a limited number of suppliers, manufacturers, and logistics partners for our products. A loss of any of these partners could negatively affect our business.
We rely on a limited number of suppliers to manufacture and transport our products, including in some cases only a single supplier for some of our products and components. One single supplier currently manufactures three of our four products available for sale, and houses our sole set of tooling required to manufacture these products. One additional supplier manufactures one of our products which became available for sale in the second half of fiscal year 2022. We have no material agreements with our manufacturing suppliers. Our reliance on a limited number of manufacturers for each of our products increases our risks, since we do not currently have alternative or replacement manufacturers beyond these key parties. In the event of interruption from any of our manufacturers, we may not be able to increase capacity from other sources or develop alternate or secondary sources without incurring material additional costs and substantial delays. Thus, our business could be adversely affected if one or more of our suppliers is impacted by a natural disaster or other interruption at a particular location.
If we experience a significant increase in demand for our products, or if we need to replace an existing supplier or partner, we may be unable to supplement or replace them on terms that are acceptable to us, which may undermine our ability to deliver our products to customers in a timely manner. For example, it may take a significant amount of time to identify a manufacturer that has the capability and resources to build our products to our specifications in sufficient volume. Identifying suitable suppliers, manufacturers, and logistics partners is an extensive process that requires us to become satisfied with their quality control, technical capabilities, responsiveness and service, financial stability, regulatory compliance, and labor and other ethical practices. Accordingly, a loss of any of our significant suppliers, manufactures, or logistics partners could have an adverse effect on our business, financial condition and operating results.
The loss of the services of Geoff Andersen, our Chief Executive Officer, and Jonathan Destler, our Founder and Head of Corporate Development, or our failure to timely identify and retain competent personnel could negatively impact our ability to develop our website and sell our services.
The development of our agricultural technology business and the marketing of our prospective business will continue to place a significant strain on our limited personnel, management, and other resources. Our future success depends upon the continued services of our executive officers who are developing our business, and on our ability to identify and retain competent consultants and employees with the skills required to execute our business objectives. The loss of the services of Geoff Andersen, our Chief Executive Officer, or Jonathan Destler, our Founder and Head of Corporate Development, or our failure to timely identify and retain competent personnel could negatively impact our ability to develop our website and sell our services, which could adversely affect our financial results and impair our growth.
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Our business could suffer if our former Chief Executive Officer and director, Jonathan Destler, loses his civil ligation with the SEC and/or criminal litigation with the US.
On September 30, 2022, a Complaint (the “Complaint”), captioned Securities and Exchange Commission vs. David Stephens, Donald Linn Danks, Jonathan Destler and Robert Lazarus, and Daniel Solomita and 8198381 Canada, Inc., as relief defendants, Case No. ‘22CV1483AJB DEB, was filed in the United States District Court, Southern District of California. In general, the Complaint alleges that Jonathan Destler, a co-founder and our former Chairman and Chief Executive Officer, and Donald Danks, a co-founder and a former director, and a current employee, were part of a control group that committed securities fraud in connection with the purchase and sale of securities of Loop Industries, Inc., a Nasdaq-listed company.
On November 22, 2022, an Indictment (the “Indictment”), captioned United States of America v. David Stephens, Donald Danks, Jonathan Destler and Robert Lazarus, Case No. ‘22CR2701 BAS, was filed in the United States District Court, Southern District of California. In general, the Indictment alleges that Mr. Destler and Mr. Danks conspired to and committed securities fraud, based on the same allegations in the Complaint. The indictment also alleges that Donald Danks engaged in money laundering.
Furthermore, the Complaint and the Indictment allege that Mr. Destler and Mr. Danks were part of a control group consisting of four other persons (David Stephens, Jonathan Destler, Don Danks and Robert Lazarus) who used a third person to make an unregistered offering of securities. The third person is a deceased former-stockholder of Opti-Harvest, whose Opti-Harvest shares are now held by his estate.
Mr. Destler is currently our key employee with respect to our business development because of his material role marketing selling our products. Additionally, the Voting Trust Agreement with Mr. Destler terminates on the first to occur of (i) final disposition of the proceedings related to the Complaint and the Indictment, or (ii) mutual agreement of Opti-Harvest and Mr. Destler. If Mr. Destler loses his criminal litigation, it is possible that Mr. Destler could be incarcerated, in which case our marketing and sales could suffer because of his inability to communicate with potential new and existing customers. Furthermore, final disposition of the proceedings related to the Complaint and the Indictment could possibly also mean that Mr. Destler would have voting control over us while being incarcerated. In such event, Mr. Destler’s separation from daily business activities could cause him to make voting decisions with out the knowledge of our daily operations that he has today.
We have limited human resources; we need to attract and retain highly skilled personnel; and we may be unable to manage our growth with our limited resources effectively.
The expansion of our business has placed a significant strain on our limited managerial, operational, and financial resources. We have been and will continue to be required to expand our operational and financial systems significantly and to expand, train and manage our work force in order to manage the expansion of our operations. Our future success will depend in large part on our ability to attract, train, and retain additional highly skilled executive level management with experience in our industry. Competition is intense for these types of personnel from more established organizations, many of which have significantly larger operations and greater financial, marketing, human, and other resources than we have. We may not be successful in attracting and retaining qualified personnel on a timely basis, on competitive terms or at all. To date we have had to limit the engagement of critical management and other key personnel due in part to limited financial resources. If we are not successful in attracting and retaining these personnel, our business, prospects, financial condition and operating results would be materially adversely affected. Further, our ability to manage our growth effectively will require us to continue to improve our operational, financial and management controls, reporting systems and procedures, to install new management information and control systems and to train, motivate and manage employees. If we are unable to manage growth effectively and new employees are unable to achieve adequate performance levels, our business, prospects, financial condition and operating results will be materially adversely affected.
Our lack of insurance may expose us to liabilities which could cause us to cease operations.
While we intend to maintain insurance in the future for certain risks, the amount of our insurance coverage may not be adequate to cover all claims or liabilities, and we may be forced to bear substantial costs resulting from risks and uncertainties of our business. It is also not possible to obtain insurance to protect against all operational risks and liabilities. The failure to obtain adequate insurance coverage on terms favorable to us, or at all, could have a material adverse effect on our business, financial condition and results of operations. We do not have any business interruption insurance. Any business disruption or natural disaster could result in substantial costs and diversion of resources.
Our technology and agricultural growth products have only been developed in the last several years and we have had only limited opportunities to deploy and assess their performance in the field at full scale.
The current generation of our agricultural growth products have only been developed in the last several years and are continuing to evolve. Deploying and operating our technology is a complex endeavor and, until recently, had been done primarily by a small number of customers in the agricultural crop industry, mostly as part of our field trials. As we deploy our products, we may encounter unforeseen operational, technical and other challenges, some of which could cause significant delays, trigger contractual penalties, result in unanticipated expenses, and/or damage to our reputation, each of which could materially and adversely affect our business, financial condition and results of operations.
Our agricultural growth products might not operate properly or contain defects, which could damage our reputation, give rise to claims against us, or divert application of our resources from other purposes, any of which could harm our business and operating results.
Our products are complex and may contain defects or experience failures due to any number of issues in design, materials, manufacture, deployment and/or use. Despite extensive testing, from time to time we have discovered defects or errors in our products. Material performance problems or defects in our products might arise in the future, which could have an adverse impact on our business and customer relationship and subject us to claims.
Defects and errors related to our agricultural growth products and any failure by us to identify and address them could result in delays in product introductions and updates, loss of revenue or market share, liability to customers or others, failure to achieve market acceptance or expansion, diversion of development and other resources, injury to our reputation, and increased service and maintenance costs. Defects or errors in our products might discourage existing or potential customers from purchasing from us. Correction of defects or errors could prove to be impossible or impracticable. The costs incurred in correcting any defects or errors or in responding to resulting claims or liability might be substantial and could adversely affect our operating results.
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If we do not continue to innovate and deliver high-quality, technologically advanced products and services, we will not remain competitive, and our revenue and operating results could suffer.
The market for our agricultural growth products is characterized by rapid technological advancements, changes in customer requirements, frequent new product introductions and enhancements, and changing industry standards. The life cycles of our products are difficult to estimate. Rapid technological changes and the introduction of new products and enhancements by new or existing competitors could undermine our current market position.
Our success depends in substantial part on our continuing ability to provide products and services that growers will find superior to our competitors’ products and will continue to use. Our future success will depend upon our ability to anticipate and to adapt to changes in technology and industry standards, and to effectively develop, to introduce, to market, and to gain broad acceptance of new product and service enhancements incorporating the latest technological advancements. In addition, because our agricultural growth solutions are designed to operate on a variety of agricultural products, we will need to continuously modify and enhance our solutions to keep pace with changes in design, the effects of climate change, the cost of water, evolving crop growth choices, evolving atmospheric conditions, and database technologies. We intend to continue to invest significant resources in research and development to enhance our existing products and introduce new high-quality products that customers will want. If we are unable to predict user preferences or industry changes, or if we are unable to modify our products and services on a timely basis or to effectively bring new products to market, our sales may suffer. In addition, investment in product development often involves a long return on investment cycle. We have made and expect to continue to make significant investments in product development. We may expend significant time and resources developing and pursuing sales of a particular enhancement or application that may not result in revenues in the anticipated time frame or at all, or may not result in revenue growth sufficient to offset increased expenses. Furthermore, uncertainties about the timing and nature of new functionality, or new functionality to existing platforms or technologies, could increase our research and development expenses. Any failure of our products to operate effectively with future technologies could reduce the demand for our products, result in customer dissatisfaction, and have a material adverse effect on our business, financial condition, and results of operations.
We may not have sufficient resources to make the necessary investments in new product development and we may experience difficulties that could delay or prevent the successful development, introduction, or marketing of new products or enhancements. In addition, our products or enhancements may not meet the increasingly complex customer requirements of the marketplace or achieve market acceptance at the rate we expect, or at all. Any failure by us to anticipate or respond adequately to technological advancements, customer requirements, and changing industry standards, or any significant delays in the development, introduction, or availability of new products or enhancements, could undermine our current market position.
Our products are anticipated to generally have long sales cycles and implementation periods, which may increase our costs in obtaining orders and reduces the predictability of our earnings.
Our products are technologically complex. Prospective customers, generally speaking, will have to commit significant resources and time to inspect, test and evaluate our products and to install and integrate them into existing agricultural operations and systems. Orders expected in one quarter may shift to another quarter or be cancelled as a result of the customers’ budgetary constraints, internal acceptance reviews, and other factors affecting the timing of customers’ purchase decisions. In addition, potential customers are anticipated to require a significant number of product presentations and demonstrations, in some instances evaluating products on-site where already installed, before reaching a sufficient level of confidence in the product’s performance and compatibility with the customer’s requirements to place an order. As a result, our sales process is anticipated to be subject to delays associated with lengthy approval processes that typically accompany the design and testing of new products. The sales cycles of our products are anticipated to last for many months or even years. In addition, the time required for our potential customers to incorporate our products into their operations and systems are anticipated to vary significantly with the on-site circumstances of our customers, which further complicates our planning processes and reduces the predictability of our operating results. Longer sales cycles require us to invest significant resources in attempting to make sales, which may not be realized, and delay the generation of revenue.
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DisperSolar LLC (“DisperSolar”) is a related party because our Chief Science Officer, Yosepha Shahak Ravid, and our Chief Technology Officer, Nicholas Booth, are both control persons of DisperSolar and named inventors of the acquired patents we acquired from DisperSolar under our Patent Purchase Agreement with DisperSolar. Ms. Shahak Ravid and Mr. Booth have conflicts of interest with us because they simultaneously have fiduciary duties to both us and to DisperSolar, which could cause disruptions in our operations and/or us to suffer losses.
On April 7, 2017, we and DisperSolar entered into a Patent Purchase Agreement (the “Agreement”) pursuant to which we acquired certain patents (intellectual property) of DisperSolar. DisperSolar developed the patents for harvesting, transmission, spectral modification and delivery of sunlight to shaded areas of plants.
Under the Agreement, we agreed to pay the following for the acquisition DisperSolar’s intellectual property:
| (i) | Initial Payment: $150,000 deposited into the Seller Account within 10 days of the Effective Date (the “Initial Payment”). | |
| (ii) | Initial Milestone Payments: Additional payments in the aggregate combined amount up to $450,000 upon reaching defined milestones (the “Milestone Payments”). As of the date of this prospectus, no remaining milestone payment obligations remain. |
| (iii) | Earnout Payments: $800,000 paid on the on-going basis at a rate of 50% of gross margin and/or License Revenue from the date of the first commercial sale of a Covered Product or the first receipt by Purchaser of License Revenue, until the aggregate combined Gross Margin and License Revenue reach $1,600,000. As of the date of his prospectus, we recorded no earnout payment obligations as no gross margin was realized. |
We will pay to DisperSolar royalties as follows:
| (i) | Following the recognition by us of the first $1.6 million in aggregate combined gross margin and license revenue, and until we pay to Seller an aggregate amount in royalties of $30 million, we shall pay to Seller royalties on sales of covered products at a rate of 8% of gross margin. | |
| (ii) | Once we paid to DisperSolar an aggregate amount in royalties of $30 million, we shall pay to DisperSolar royalties on sales of covered products at a rate of 4.75% of gross margin until the earlier of (x) such time as covered products are not covered by any claims of any assigned patent, and (y) the date of the consummation of a strategic transaction. |
As of the date of this prospectus, we recorded no royalties payment obligations as no gross margin was realized.
We will pay to DisperSolar 7.6% of all license consideration received by us until the date of the consummation of a Strategic Transaction. “Strategic Transaction” means a transaction or a series of related transactions that results in an acquisition of the Company by a third party, including by way of merger, purchase of capital stock or purchase of assets or change of control or otherwise.
“Strategic Transaction Consideration” means any cash consideration and the fair market value of any non-cash consideration paid to us by any acquirer as consideration for the Strategic Transaction, less the costs and expenses incurred by a purchaser for the purpose of consummating a Strategic Transaction. We will pay to DisperSolar a percentage of all License Consideration received by a prospective purchaser as follows:
| (i) | 3.8% of the first $50 million of the Strategic Transaction Consideration; | |
| (ii) | 5.7% of the next $100 million of the Strategic Transaction Consideration (i.e., over $50 million and up to $150 million); and | |
| (iii) | 7.6% of Strategic Transaction Consideration over $150 million. |
In the event that we have a dispute with DisperSolar regarding the Agreement, whether over milestone payments, earnout payments, royalty payments or Strategic Transaction Consideration with DisperSolar, or any other issue regarding the Agreement, Ms. Shahak Ravid and Mr. Booth would be in a situation where they, as our Chief Science Officer and Chief Technology Officer, respectively, have fiduciary duties to act in the best interests of us, while at the same time, a fiduciary duty to act in the best interest of DisperSolar, which is not possible. If Ms. Shahak Ravid is simultaneously our Chief Science Officer, and/or Mr. Booth is simultaneously our Chief Technology Officer, while DisperSolar is engaged in a dispute with us, Ms. Shahak Ravid and/or Mr. Booth may be unwilling to perform their duties as Chief Science Officer and Chief Technology Officer to us with the same conviction and interest as when they would not be in a dispute with us. In such a situation, if Ms. Shahak Ravid and/or Mr. Booth would refuse to resign from their respective positions as Chief Science Officer and Chief Technology Officer, our board of directors may have to vote to remove them from their respective positions as Chief Science Officer and Chief Technology Officer, which could trigger litigation, a refusal of Ms. Shahak Ravid and/or Mr. Booth to disclose critical know-how to us, or cause disruptions in our operations and/or us suffer losses.
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Risks Related to Our Intellectual Property
Our failure to protect our intellectual property may significantly impair our competitive advantage.
Our success and ability to compete depend in large part upon protecting our proprietary intellectual property. We rely on a combination of patent protection, trademark and trade secret protection, nondisclosure and nonuse agreements to protect our proprietary rights. The steps we have taken may not be sufficient to prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. The patent and trademark law and trade secret protection may not be adequate to deter third party infringement or misappropriation of our patents, trademarks and similar proprietary rights.
The patent prosecution process is expensive, time-consuming and complex, and we may not be able to file, prosecute, maintain, enforce or license all necessary or desirable patent applications at a reasonable cost or in a timely manner. We may not be able to obtain or maintain patent applications and patents due to the subject matter claimed in such patent applications and patents being in disclosures in the public domain. We have filed patent applications both in the United States and abroad seeking protection of our inventions originating from our research and development. Our patent applications may not result in issued patents, and any patents that are issued may not provide meaningful protection against competitors or competitive technologies. Further, the examination process may require us to narrow the claims for our pending patent applications, which may limit the scope of patent protection that may be obtained if these applications issue. The scope of a patent may also be reinterpreted and significantly reduced after issuance. Even if patent applications we license or own currently or in the future issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors or other third parties from competing with us, or otherwise provide us with the protection or competitive advantages we are seeking.
Any of our patents, including those we may license, may be challenged, invalidated, rendered unenforceable or circumvented. Consequently, we do not know whether any of our products will be protectable or remain protected by valid and enforceable patents. We may not prevail if our patents are challenged by competitors or other third parties. The United States federal courts or equivalent national courts or patent offices elsewhere may invalidate our patents, find them unenforceable, or narrow their scope. Furthermore, competitors may be able to design around our patents by developing similar or alternative technologies or products in a non-infringing manner, or obtain patent protection for more effective technologies, designs or methods. If these developments were to occur, our products may become less competitive and sales may decline.
Various courts, including the United States Supreme Court, have rendered decisions that affect the scope of patentability of certain inventions or discoveries relevant to some aspects of our technology. These decisions state, among other things, that a patent claim that recites an abstract idea, natural phenomenon or law of nature are not themselves patentable. Precisely what constitutes a law of nature or abstract idea is uncertain, and it is possible that certain aspects of our technology could be considered unpatentable under applicable law. As a result, the issuance, scope, validity, enforceability, and commercial value of our patent rights are highly uncertain. Depending on decisions by the United States Congress, the federal courts and the United States Patent and Trademark Office (USPTO), the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain or in-license in the future. Additionally, our pending and future patent applications may not result in patents being issued which protect our technology or products or which effectively prevent others from commercializing competitive technologies and products. In fact, patent applications may not issue as patents at all. In addition, the coverage claimed in a patent application can be significantly reduced before the patent is issued, and its scope can be reinterpreted after issuance. The scope of patent protection outside of the United States is also uncertain. Changes in either the patent laws or their interpretation in the United States and other countries may diminish our ability to protect our inventions, obtain, maintain, protect, defend and enforce our intellectual property rights and, more generally, could affect the value of our intellectual property rights or narrow the scope of our patents.
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If we are unable to obtain and maintain patent protection for our technology in a particular jurisdiction, or if the scope of the patent protection obtained is not sufficient, our competitors could develop and commercialize products similar or superior to ours, and our competitive position may be adversely affected. It is also possible that we will fail to identify patentable aspects of inventions made in the course of our development and commercialization activities before it is too late to obtain patent protection on them. Therefore, we may miss potential opportunities to strengthen our patent position. In addition, the patent prosecution process is expensive, time-consuming and complex, and we may not be able to file, prosecute, maintain, enforce or license all necessary or desirable patent applications at a reasonable cost or in a timely manner. Although we enter into non-disclosure and confidentiality agreements with parties who have access to confidential or patentable aspects of our research and development output, such as our employees, consultants, advisors, contract manufacturers and other third parties, any of these parties may breach such agreements and disclose such output before a patent application is filed, thereby jeopardizing our ability to seek patent protection. Consequently, we may not be able to prevent any third party from using any of our technology that is in the public domain to compete with our products.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position may be harmed.
In addition to seeking patent protection to protect the intellectual property underlying our products, we also rely upon unpatented trade secrets, know-how and continuing technological innovation to develop and maintain a competitive position. For example, we primarily rely on protecting our proprietary software and algorithms as a trade secret. However, trade secrets and know-how can be difficult to protect. While we endeavor to protect such proprietary information and trade secrets, in part, through confidentiality agreements with our employees, collaborators, contractors, advisors, consultants and other third parties who have access to, or house or host such information, and invention assignment agreements with our employees, consultants and other third parties involved in the development of intellectual property, there is no guarantee such efforts will succeed. The confidentiality agreements are designed to protect our proprietary information and, in some cases, our trade secrets and, in the case of agreements or clauses containing invention assignment, to grant us ownership of intellectual property and technologies that are developed through a relationship with such employees, consultants or other third parties.
We cannot guarantee that we have entered into such agreements with each party that has or may have had access to, or houses or hosts, our trade secrets or proprietary information or that has been involved in the development of intellectual property. Additionally, despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. We may not be able to prevent the unauthorized disclosure or use of our technical know-how or other trade secrets by the parties to these agreements. Monitoring unauthorized uses and disclosures is difficult and we do not know whether the steps we have taken to protect our proprietary technologies will be effective. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets.
In addition, if any of our trade secrets were to be lawfully obtained or independently developed by a competitor or other third party, we would have no right to prevent them, or those to whom they communicate such trade secrets, from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to, or independently developed by, a competitor or other third party, our competitive position would be materially and adversely harmed. Furthermore, we expect these trade secrets, know-how and proprietary information to over time be disseminated within the industry through independent development, the publication of journal articles describing the methodology and the movement of personnel from academic to industry scientific positions. Consequently, we may be unable to prevent our proprietary technology from being exploited in the United States and abroad, which could affect our ability to expand in domestic and international markets or require costly efforts to protect our technology.
We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems and cloud storage sources, but such security measures may be breached, including through cyber-hacking or cyberattacks, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known, or be independently discovered by, competitors. To the extent that our employees, consultants, contractors, collaborators or other third parties use intellectual property rights owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions, which could have a material adverse effect on our business, financial condition and results of operations.
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We may be subject to claims that we or our employees, consultants, advisors or contractors have misappropriated the intellectual property rights of a third party, including trade secrets or know-how, or are in breach of non-competition or non-solicitation agreements with our competitors, and third parties may claim an ownership interest in intellectual property we regard as our own.
Some of our employees, consultants, advisors or contractors are currently or were previously employed at or engaged by universities or other companies, including our competitors or potential competitors. Some of these employees, consultants, advisors and contractors, may have executed proprietary rights, non-disclosure and non-competition agreements in connection with such previous employment. Although we try to ensure that our employees, consultants, advisors and contractors do not use the intellectual property rights, proprietary information, know-how or trade secrets of others in their work for us, we may be subject to claims that we or these individuals have, inadvertently or otherwise, used, infringed, misappropriated or otherwise violated the intellectual property rights or disclosed the alleged trade secrets or other proprietary information, of these former employers, competitors or other third parties, or to claims that we have improperly used or obtained such trade secrets. Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel, which could adversely impact our business. An adverse determination may also result in loss of exclusivity or freedom to operate or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializing similar technology, without payment to us, or could limit the duration of the patent protection covering our products. Such challenges may also result in our inability to develop, manufacture or commercialize our products without infringing third-party patent rights. An inability to incorporate technologies or features that are important or essential to our products could have a material adverse effect on our business, financial condition and results of operations, and may prevent us from selling our current and/or planned products. Any litigation or the threat of litigation may adversely our reputation, or affect our ability to hire employees or contract with independent contractors. A loss of intellectual property, key personnel or their work product could hamper or prevent our ability to develop and commercialize new products, which could harm our business. Even if we are successful in defending against these claims, litigation could result in irreparable damage, substantial costs and be a distraction to management and other employees. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects.
Additionally, we may be subject to claims from third parties challenging our ownership interest in intellectual property rights we regard as our own, including based on claims that our employees, consultants, advisors or contractors have breached an obligation to assign inventions to another employer, to a former employer, or to another person or entity. Litigation may be necessary to defend against any other claims, and it may be necessary or we may desire to enter into a license to settle any such claim; however, there can be no assurance that we would be able to obtain a license on commercially reasonable terms, if at all. If our defense to those claims fails, in addition to paying monetary damages, a court could prohibit us from using technologies or features that are essential to our products, if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of the former employers.
In addition, while it is our policy to require our employees, consultants, advisors, contractors and other third parties who may be involved in the conception or development of intellectual property rights to execute agreements assigning such intellectual property rights to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property rights that we regard as our own. The assignment of intellectual property rights may not be self-executing, or the assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual property rights. Furthermore, individuals executing agreements with us may have preexisting or competing obligations to a third party, such as an academic institution, and thus an agreement with us may be ineffective in perfecting ownership of inventions developed by that individual. Such claims could have a material adverse effect on our business, financial condition, results of operations, and prospects.
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Changes in patent law could diminish the value of patents in general, thereby impairing our ability to protect our existing and future products.
Patent reform legislation could increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents. In 2011, the Leahy-Smith America Invents Act (Leahy-Smith Act) was signed into law. The Leahy-Smith Act includes a number of significant changes to United States patent law. These include provisions that affect the way patent applications are prosecuted and also may affect patent litigation. These also include provisions that switched the United States from a first-to-invent system to a first-inventor-to-file system, allow third-party submission of prior art to the USPTO during patent prosecution and set forth additional procedures to attack the validity of a patent by the USPTO administered post grant proceedings, including post-grant review, inter partes review and derivation proceedings. Under a first-inventor-to-file system, assuming the other requirements for patentability are met, the first inventor to file a patent application generally will be entitled to the patent on an invention regardless of whether another inventor was the first to invent the claimed invention. The USPTO recently developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, became effective in 2013. The Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business, financial condition and results of operations.
In addition, patent reform legislation may pass in the future that could lead to additional uncertainties and increased costs surrounding the prosecution, enforcement and defense of our patents and applications. Furthermore, the United States Supreme Court and the United States Court of Appeals for the Federal Circuit have made, and will likely continue to make, changes in how the patent laws of the United States are interpreted. Recent United States Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. This combination of events has created uncertainty with respect to the validity and enforceability of patents, once obtained. Similarly, foreign courts have made, and will likely continue to make, changes in how the patent laws in their respective jurisdictions are interpreted. We cannot predict future changes in the interpretation of patent laws or changes to patent laws that might be enacted into law by United States and foreign legislative bodies. Those changes may materially affect our patents or patent applications and our ability to obtain additional patent protection in the future. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects.
If our trademarks and tradenames are not adequately protected, then we may not be able to build name recognition in our markets and our business may be adversely affected.
Our current and future trademark applications in the United States and in foreign jurisdictions may not be allowed or may subsequently be opposed. Once filed and registered, our trademarks or trade names may be challenged, infringed, circumvented, declared generic or determined to be violating or infringing on other marks. We may not be able to protect our rights to these trademarks and trade names or may be forced to stop using these trademarks or trade names, which we need to build name recognition among potential partners and customers in our markets of interest. At times, competitors or other third parties may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. As a means to enforce our trademark rights and prevent infringement, we may be required to file trademark claims against third parties or initiate trademark opposition proceedings, which can be expensive and time-consuming. In addition, there could be potential trade name or trademark infringement or dilution claims brought by owners of other trademarks. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected.
We have not yet registered certain trademarks in all of our potential markets. If we apply to register trademarks in the United States and other countries, our applications may not be allowed for registration in a timely fashion or at all, and our registered trademarks may not be maintained or enforced. During trademark registration proceedings, we may receive rejections. Although we would be given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in the USPTO and in comparable agencies in many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademark applications and registrations, and our trademarks may not survive such proceedings. If we do not secure registrations for our trademarks, we may encounter more difficulty in enforcing them against third parties than we otherwise would.
Our efforts to enforce or protect our rights related to trademarks, trade secrets, domain names or other intellectual property rights may be ineffective, could result in substantial costs and diversion of resources and could adversely affect our business, financial condition and results of operations.
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We may become involved in lawsuits to protect or enforce our patents or other intellectual property rights, which could be expensive, time consuming and unsuccessful.
Competitors or other third parties may infringe, misappropriate or otherwise violate our patents or other intellectual property rights, or we may be required to defend against claims of infringement, misappropriation or other violations. In addition, our patents also may become involved in inventorship, priority or validity disputes. To counter or defend against such claims can be expensive and time-consuming. Any claims we assert against perceived infringers could provoke those parties to assert counterclaims against us alleging that we infringe their patents or other intellectual property or that our intellectual property is invalid or unenforceable. In any such proceeding, a court or other administrative body may decide that a patent or other intellectual property right owned by us is invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover such technology. Grounds for a validity challenge could include an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness, lack of written description, non-enablement or failure to claim patent-eligible subject matter. Grounds for an unenforceability assertion could include an allegation that someone connected with prosecution of the patent withheld information material to patentability from the USPTO, or made a misleading statement, during prosecution. Third parties also may raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include reexamination, post-grant review, inter partes review, interference proceedings, derivation proceedings and equivalent proceedings in foreign jurisdictions, including opposition proceedings. Such proceedings could result in the revocation or cancellation of or amendment to our patents in such a way that they no longer cover our products or prevent third parties from competing with our products. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which the patent examiner and we or our partners were unaware during prosecution. If a third party were to prevail on a legal assertion of invalidity or unenforceability, we could lose at least part, and perhaps all, of the patent protection on our products. An adverse result in any litigation or other proceeding could put one or more of our patents at risk of being invalidated or interpreted narrowly. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during litigation.
Moreover, some of our owned and patents and patent applications may in the future be co-owned with third parties. If we are unable to obtain an exclusive license to any such third party co-owners’ interest in such patents or patent applications, such co-owners may be able to license their rights to other third parties, including our competitors, and our competitors could market competing products or technology. In addition, we may need the cooperation of any such co-owners of our patents in order to enforce such patents against third parties, and such cooperation may not be provided to us. Any of the foregoing could have a material adverse effect on our business, financial condition or results of operations.
Even if resolved in our favor, litigation or other proceedings relating to intellectual property claims may cause us to incur significant expenses and could distract our management and other personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our securities. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Any of the foregoing could have a material adverse effect on our business, financial condition or results of operations.
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Third parties may initiate legal proceedings alleging that we are infringing, misappropriating, or otherwise violating their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the success of our business.
The intellectual property landscape in the field of agriculture is in flux, and it may remain uncertain for the coming years. There may be significant intellectual property related litigation and proceedings relating to our intellectual property position and proprietary rights in the future. Given the number of patents in our field of technology, we cannot be certain or guarantee that we do not infringe existing patents or that we will not infringe patents that may be granted in the future. As we move into new markets and applications for our products, incumbent participants in such markets may assert their patents and other intellectual property rights against us as a means of slowing our entry into such markets or as a means of extracting substantial license and royalty payments from us. Our competitors and others may now and, in the future, have significantly larger and more mature patent portfolios than we currently have. In addition, future litigation may involve patent holding companies or other adverse patent owners who have no relevant product or service revenue and against whom our own patents may provide little or no deterrence or protection. Therefore, our commercial success depends in part on our ability and the ability of our future collaborators to develop, manufacture, market and sell our products and use our proprietary technologies without infringing, misappropriating or otherwise violating the patents or other intellectual property rights of third parties.
Third parties may assert infringement, misappropriation or other violation claims against us based on existing patents, patents or other intellectual property that may be granted in the future, regardless of their merit. Therefore, we may in the future be subject to claims that we, or other parties we have agreed to indemnify, infringe, misappropriate or otherwise violate patents or other intellectual property rights owned or controlled by third parties. Because patent applications are published sometime after filing, and because applications can take several years to issue, there may be additional currently pending third-party patent applications that are unknown to us, which may later result in issued patents. Defense of these claims, regardless of their merit, would involve substantial litigation expenses and would be a substantial diversion of management and employee resources from our business. We may not have sufficient resources to bring these actions to a successful conclusion. There is a substantial amount of litigation and other patent challenges, both within and outside the United States, involving patent and other intellectual property rights, including patent infringement lawsuits, interferences, oppositions and inter partes review proceedings before the USPTO, and corresponding foreign patent offices. As the agriculture technology industry expands and more patents are issued, the risk increases that our products and technologies may be subject to claims of infringement of the patent rights of third parties. Numerous significant intellectual property issues may be litigated, between existing and new participants in our existing and targeted markets, and competitors may assert that our products and technologies infringe, misappropriate or otherwise violate their intellectual property rights as part of a business strategy to impede our successful entry into or growth in those markets.
We could incur substantial costs and divert the attention of our management and technical personnel in defending against any of these claims. Parties making claims against us may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources.
Because of the inevitable uncertainty in intellectual property litigation, we could lose a patent infringement or other intellectual property-related action asserted against us regardless of our perception of the merits of the case. Patent and other types of intellectual property litigation can involve complex factual and legal questions, and their outcome is uncertain. There is no assurance that a court would find in our favor on questions of infringement, validity, enforceability, or priority. A court of competent jurisdiction could hold that third-party patents which are asserted against us are valid, enforceable, and infringed, which could materially and adversely affect our ability to commercialize any future products we may develop and any other future products or technologies covered by the asserted third party patents. In order to successfully challenge the validity of any such United States patent in federal court, we would need to overcome a presumption of validity. As this burden is a high one requiring us to present clear and convincing evidence as to the invalidity of any such United States patent claim, there is no assurance that a court of competent jurisdiction would invalidate the claims of any such United States patent or find that our technology did not infringe any such claims. Further, even if we were successful in defending against any such claims, such claims could require us to divert substantial financial and management resources that we would otherwise be able to devote to our business.
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Parties making infringement, misappropriation or other violation of intellectual property claims against us may be able to obtain injunctive or other relief, which could block our ability to develop, commercialize and sell our products, and could result in the award of substantial damages against us, including treble damages, attorney’s fees, costs, and expenses if we are found to have willfully infringed. In the event of a successful claim of infringement against us, we may be required to pay damages and ongoing royalties, which could be significant, re-design our products in a non-infringing manner, which may not be commercially feasible, obtain one or more licenses from third parties, or be prohibited from selling certain products. If we are required to obtain licenses from third parties, we may not be able to obtain such licenses on acceptable or commercially reasonable terms, if at all, or these licenses may be non-exclusive, which could result in our competitors gaining access to the same intellectual property. In addition, we could encounter delays in product introductions while we attempt to develop alternative products to avoid infringing third-party patents or intellectual property rights. Any of the foregoing could have a material adverse effect on our business, results of operation, financial condition and prospects. Defense of any lawsuit or failure to obtain any of these licenses could prevent us from commercializing our technologies and products, and the prohibition of sale of any of our products could materially affect our business and our ability to gain market acceptance for our products.
It is also possible that we have failed to identify relevant third-party patents or applications. Because patent applications can take many years to issue, may be confidential for 18 months or more after filing and can be revised before issuance, there may be applications now pending which may later result in issued patents that may be infringed by our products and we may not be aware of such patents. Furthermore, applications filed before November 29, 2000 and certain applications filed after that date that will not be filed outside the United States may remain confidential until a patent issues. It is difficult for industry participants, including us, to identify all third-party patent rights that may be relevant to our products because patent searching is imperfect due to differences in terminology among patents, incomplete databases and the difficulty in assessing the meaning of patent claims. We may fail to identify relevant patents or patent applications or may identify pending patent applications of potential interest but incorrectly predict the likelihood that such patent applications may issue with claims of relevance to our technology. In addition, we may incorrectly conclude that a third-party patent is invalid, unenforceable or not infringed by our activities. Additionally, pending patent applications that have been published can, subject to certain limitations, be later amended in a manner that could cover our products.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, during the course of this kind of litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our securities.
In addition, our agreements with some of our customers, suppliers or other entities with whom we do business require us to defend or indemnify these parties to the extent they become involved in infringement claims, including the types of claims described above. We could also voluntarily agree to defend or indemnify third parties in instances where we are not obligated to do so if we determine it would be important to our business relationships. If we are required or agree to defend or indemnify third parties in connection with any infringement claims, we could incur significant costs and expenses that could adversely affect our business, operating results or financial condition.
Obtaining and maintaining our patent protection depends on compliance with various required procedures, document submissions, fee payments and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated as a result of non-compliance with these requirements.
Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to be paid to the USPTO and various governmental patent agencies outside of the United States at several stages over the lifetime of the patents and patent applications. We have systems in place to remind us to pay these fees, and we employ an outside firm and rely on our outside counsel to pay these fees due to non-United States patent agencies. The USPTO and various non-US governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. An inadvertent lapse or non-compliance with such requirements can sometimes be cured by payment of a late fee or by other means in accordance with the applicable rules. However, there are situations in which non-compliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors may be able to enter the market without infringing our patents and this circumstance would have a material adverse effect on our business, financial condition, results of operations and prospects.
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Issued patents covering our present and future products could be found invalid or unenforceable if challenged.
The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability of our patents and patent applications may be challenged in courts or patent offices in the United States and abroad. For example, we may be subject to third-party submissions of prior art to the USPTO challenging the validity of one or more claims in our patents. Such submissions may also be made prior to a patent’s issuance, precluding the granting of a patent based on one of our pending patent applications. We may also become involved in opposition, derivation, reexamination, inter partes review, post-grant review or interference proceedings. Additionally, if we initiate or become involved in legal proceedings against a third party to enforce a patent covering one of our products or technologies, the defendant could counterclaim that the patent covering our products is invalid or unenforceable. In patent litigation in the United States, counterclaims alleging invalidity or unenforceability are commonplace. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art of which we and the patent examiner were unaware during prosecution. If a third party were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our current products and other products that we may develop.
A successful third-party challenge to our patents could result in the unenforceability or invalidity of such patents, allow third parties to commercialize our technology or products and compete directly with us, without payment to us, limit the scope and duration of the patent protection of our products or result in our inability to manufacture or commercialize products without infringing third-party patent rights, which could have a material adverse impact on our business. Furthermore, if the breadth or strength of protection provided by our patents and patent applications is threatened, regardless of the outcome, it could dissuade companies from collaborating with us to license, develop or commercialize current or future products. Such challenges also may result in substantial cost and require significant time from our scientists and management, even if the eventual outcome in favorable to us.
Third parties may have developed technologies that may be related or competitive to our own technologies and such third parties may have filed or may file patent applications, or may have obtained or may obtain patents, claiming inventions that may overlap or conflict with those claimed in our patent applications or issued patents. We may not be aware of all third-party intellectual property rights potentially relating to our current or future products. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until approximately 18 months after filing or, in some cases, not until such patent applications issue as patents or at all. We, or our current or future license partners or collaborators, might not have been the first to make the inventions covered by each of our pending patent applications and we might not have been the first to file patent applications for these inventions. To determine the priority of these inventions, we may have to participate in interference proceedings, derivation proceedings or other post-grant proceedings declared by the USPTO. The outcome of such proceedings is uncertain, and other patent applications may have priority over our patent applications. Such proceedings could also result in substantial costs to us and divert our management’s attention and resources. If a third party can establish that we were not the first to make or the first to file for patent protection of such inventions, our patent applications may not issue as patents and even if issued, may be challenged and invalidated or rendered unenforceable.
Patent terms may be inadequate to protect our competitive position on our products for an adequate amount of time.
Patents have a limited lifespan. In the United States, if all maintenance fees are timely paid, the natural expiration of a patent is generally 20 years from its earliest United States non-provisional filing date. Various extensions may be available, but the life of a patent, and the protection it affords, is limited.
Even if patents covering our products are obtained, once the patent life has expired, we may be open to competition from competitive products. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.
We may not be able to protect our intellectual property rights throughout the world.
Third parties may attempt to develop and commercialize competitive products in foreign countries where we do not own any patents or patent applications or where legal recourse may be limited. This may have a significant commercial impact on our foreign business operations.
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Filing, prosecuting and defending patents on our products in all countries throughout the world would be prohibitively expensive, and the laws of foreign countries may not protect our rights to the same extent as the laws of the United States, even in jurisdictions where we do pursue patent protection. In some cases, we may not be able to obtain patent protection for certain products outside the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, even in jurisdictions where we a do pursue patent protection, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our other products and technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we have patent protection but enforcement is not as strong as that in the United States. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.
Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual property protection, which could make it difficult for us to stop the infringement of our patents, if pursued or obtained, or marketing of competing products in violation of our intellectual property rights generally. Proceedings to enforce our intellectual property rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.
Many countries, including India, China, and certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of such patent. If we or any of our future licensors are forced to grant a license to third parties with respect to any patents relevant to our business, our competitive position may be impaired, and our business, financial condition and results of operations may be adversely affected.
Intellectual property rights do not necessarily address all potential threats.
The degree of current and future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations and may not adequately protect our business or permit us to maintain our competitive advantage. For example:
| ● | others may be able to make products that are not covered by the claims of our patents or that incorporates certain technology in our products that is in the public domain; | |
| ● | we, or our current or future licensors or collaborators, might not have been the first to make the inventions covered by the applicable issued patent or pending patent application that we own or license now or may own or license in the future; | |
| ● | we, or our future licensors or collaborators, might not have been the first to file patent applications covering certain of our or their inventions; | |
| ● | others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights; | |
| ● | it is possible that our current or future pending patent applications will not lead to issued patents; | |
| ● | issued patents that we hold rights to may be held invalid or unenforceable, including as a result of legal challenges by our competitors or other third parties; | |
| ● | others may have access to the same intellectual property rights licensed to us in the future on a nonexclusive basis; | |
| ● | our competitors or other third parties might conduct research and development activities in countries where we do not have patent rights and then use the information learned from such activities to develop competitive technologies and products for sale in our major commercial markets; | |
| ● | we may not develop additional proprietary technologies that are patentable; | |
| ● | the patents of others may harm our business; and | |
| ● | we may choose not to file a patent in order to maintain certain trade secrets or know-how, and a third party may subsequently file a patent covering such intellectual property rights. |
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Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our Capital Structure
The structure of our capital stock as contained in our Certificate of Incorporation, as amended, has the effect of concentrating voting control with the trustee of the Series A Preferred Stock held for the benefit of Jonathan Destler, limiting your ability to influence corporate matters.
Our Series A Preferred Stock entitles its holder to a number of votes that is equal to 110% of the issued and outstanding shares of our common stock, and our common stock, which is the stock we are offering in this initial public offering, has one vote per share. Our Founder and Head of Corporate Development, Jonathan Destler, owns the sole outstanding share of our Series A Preferred Stock. The voting trust created under the Voting Trust Agreement holds all shares of common stock and the one share of Series A Preferred Stock held by Mr. Destler, and vests in the trustee, the power to vote the shares held by Mr. Destler in any stockholder vote or written consent in lieu of a stockholders’ meeting. The terms and conditions of the Voting Trust Agreement provides that the members of our board of directors have full discretion to appoint a trustee to vote the shares. The current sole trustee of the voting trust is Jeffrey Klausner, our sole director. The voting trustee does not have any economic rights or investment power with respect to the shares of common stock and Series A Preferred Stock transferred to the voting trust; their rights consist solely of voting rights. The holders of our outstanding common stock, excluding Mr. Destler, will hold 38.1% of the voting power of our outstanding capital stock following this offering, with Mr. Destler holding 61.9% of such voting power in the aggregate, assuming an initial public offering price of $4.00 per unit (which is the midpoint of the estimated range of the initial public offering price shown on the cover page of this prospectus) and assuming no exercise of the underwriters’ option to purchase additional shares. Mr. Destler will retain greater than 50% of the voting power even if he reduces, potentially significantly, his economic interest in shares of our common stock. Therefore, Mr. Destler will control our management and affairs and all matters requiring stockholder approval, including election of directors and significant corporate transactions, such as a merger or other sale of us or our assets, for the foreseeable future. Additionally, each share of Series A Preferred Stock shall automatically convert into one share of common stock upon the first to occur of (a) a transfer of such share of Series A Preferred Stock other than to Mr. Destler, or (b) the death or incapacity of Mr. Destler. Each share of Series A Preferred Stock is convertible into one share of common stock, at the election of the holder of the Series A Preferred Stock.
So long as the voting trust holds the one share of Series A Preferred Stock owned by Mr. Destler, the trustee under the Voting Trust Agreement will have voting control of us. This concentrated control will limit your ability to influence corporate matters for the foreseeable future, and, as a result, the market price of our common stock could be adversely affected.
As a stockholder, even a controlling stockholder, upon termination of the Voting Trust Agreement, Mr. Destler will be entitled to vote his shares in his own interests, which may not always be in the interests of our stockholders generally.
Our Founder and Head of Corporate Development will continue to own a significant percentage of our common stock and our Series A Preferred Stock and the trustee will be able to exert significant control over matters subject to stockholder approval.
Jonathan Destler, a Founder and Head of Corporate Development, currently beneficially owns common stock and Series A Preferred Stock that provides the trustee with 62.7% of the voting power of our voting stock. Upon the closing of this offering, Mr. Destler will beneficially own approximately 61.9% of the voting power of our outstanding voting stock, assuming an initial public offering price of $4.00 per unit (which is the midpoint of the estimated range of the initial public offering price shown on the cover page of this prospectus) and assuming no exercise of the underwriters’ option to purchase additional shares. Therefore, even after this offering, the trustee will have the ability to control us through voting of Mr. Destler’ Series A Preferred Stock. For example, he may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. The trustee’s interests may not always coincide with our corporate interests or the interests of other stockholders, and he may act in a manner with which you may not agree or that may not be in the best interests of our other stockholders. So long as Mr. Destler’s sole share of Series A Preferred Stock or a significant amount of our equity is subject to the Voting Trust, the trustee will continue to be able to effectively control our decisions.
The structure of our capital stock, involving Series A Preferred Stock, may adversely affect the trading market for our securities.
Certain stock index providers, such as S&P Dow Jones, Russell 2000, S&P 500, S&P MidCap 400 and S&P SmallCap 600 exclude companies with multiple classes of capital stock from being added to certain stock indices. In addition, several stockholder advisory firms and large institutional investors oppose the use of multiple class structures. As a result, the dual class structure of our capital stock may prevent the inclusion of our common stock in such indices, may cause stockholder advisory firms to publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure, and may result in large institutional investors not purchasing shares of our common stock. Any exclusion from stock indices could result in a less active trading market for our securities. Any actions or publications by stockholder advisory firms or institutional investors critical of our corporate governance practices or capital structure could also adversely affect the value of our securities.
Risks Associated With This Offering
We will incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.
As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. We will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which will require, among other things, that we file with the SEC annual, quarterly and current reports with respect to our business and financial condition. In addition, the Sarbanes-Oxley Act of 2002, as amended, or Sarbanes-Oxley Act, as well as rules subsequently adopted by the SEC and the Nasdaq Capital Market to implement provisions of the Sarbanes-Oxley Act, impose significant requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Further, in July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted. There are significant corporate governance and executive compensation related provisions in the Dodd-Frank Act that require the SEC to adopt additional rules and regulations in these areas, such as “say on pay” and proxy access. Emerging growth companies may implement many of these requirements over a longer period and up to five years from the pricing of this offering. We intend to take advantage of these extended transition periods, but cannot guarantee that we will not be required to implement these requirements sooner than budgeted or planned and thereby incur unexpected expenses. Stockholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact the manner in which we operate our business in ways we cannot currently anticipate.
We expect the rules and regulations applicable to public companies to substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly. If these requirements divert the attention of our management and personnel from other business concerns, they could have a material adverse effect on our business, financial condition and results of operations. The increased costs will decrease our net income or increase our net loss and may require us to reduce costs in other areas of our business or increase the prices of our products or services. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain the same or similar coverage. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.
If we fail to establish and maintain proper and effective internal control over financial reporting, our operating results and our ability to operate our business could be harmed.
Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. In connection with this offering, we intend to begin the process of documenting, reviewing and improving our internal controls and procedures for compliance with Section 404 of the Sarbanes-Oxley Act, which will require annual management assessment of the effectiveness of our internal control over financial reporting. We have begun recruiting additional finance and accounting personnel with certain skill sets that we will need as a public company.
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Implementing any appropriate changes to our internal controls may distract our officers and employees, entail substantial costs to modify our existing processes, and take significant time to complete. These changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and harm our business. In addition, investors’ perceptions that our internal controls are inadequate or that we are unable to produce accurate financial statements on a timely basis may harm our the price of our securities and make it more difficult for us to effectively market and sell any of our present or future product candidates that may receive regulatory approval.
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
Upon completion of this offering, we will become subject to certain reporting requirements of the Exchange Act. Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to management, recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements or insufficient disclosures due to error or fraud may occur and not be detected.
The market price of our securities is likely to be volatile, which could result in substantial losses for purchasers of our securities in this offering or could subject us to litigation.
The trading prices of the securities of technology companies have been highly volatile. Accordingly, the market price of our common stock and warrants is likely to be subject to wide fluctuations. Factors affecting the market price of our common stock and warrants include:
| ● | variations in our operating results, earnings per share, cash flows from operating activities, deferred revenue, and other financial metrics and non-financial metrics, and how those results compare to analyst expectations; | |
| ● | forward looking guidance to industry and financial analysts related to future revenue and earnings per share; | |
| ● | the net increases in the number of customers and paying subscriptions, either independently or as compared with published expectations of industry, financial or other analysts that cover our company; | |
| ● | changes in the estimates of our operating results or changes in recommendations by securities analysts that elect to follow our securities; | |
| ● | announcements of technological innovations, new services or service enhancements, strategic alliances or significant agreements by us or by our competitors; | |
| ● | announcements by us or by our competitors of mergers or other strategic acquisitions, or rumors of such transactions involving us or our competitors; | |
| ● | announcements of customer additions and customer cancellations or delays in customer purchases; | |
| ● | recruitment or departure of key personnel; | |
| ● | disruptions in our service due to computer hardware, software or network problems; | |
| ● | the economy as a whole, market conditions in our industry, and the industries of our customers; and | |
| ● | trading activity by a limited number of stockholders who beneficially own a majority of our outstanding voting power. |
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In addition, if the market for technology stocks or the stock market in general experiences uneven investor confidence, the market price of our securities could decline for reasons unrelated to our business, operating results or financial condition. The market price of our securities might also decline in reaction to events that affect other companies within, or outside, our industry even if these events do not directly affect us. As a result of this volatility, you may not be able to sell your securities at or above the initial public offering price. Some companies that have experienced volatility in the trading price of their securities have been the subject of securities class action litigation. If we are to become the subject of such litigation, it could result in substantial costs and a diversion of management’s attention and resources.
An active trading market for our securities may not develop, and you may not be able to resell your securities at or above the initial public offering price.
Prior to this offering, there has been no public market for shares of our common stock being offered. Although we intend to apply to list shares of our common stock on The Nasdaq Capital Market, an active trading market for our common stock and warrants may never develop or be sustained following this offering. The initial public offering price of our securities was determined through negotiations between us and the underwriters. Among the factors considered in determining the initial offering price were our future prospects and the prospects of our industry in general, our revenue, net income and certain other financial and operating information in recent periods, and the financial ratios, market prices of securities and certain financial and operating information of companies engaged in activities similar to ours. However, there can be no assurance that following this offering our shares of common stock or warrants will trade at a price equal to or greater than the offering price. In the absence of an active trading market for our securities, investors may not be able to sell their securities at or above the initial public offering price or at the time that they would like to sell.
Our failure to meet the continuing listing requirements of The NASDAQ Capital Market could result in a de-listing of our securities.
If we fail to satisfy the continuing listing requirements of NASDAQ, such as the corporate governance, stockholders’ equity or minimum closing bid price requirements, NASDAQ may take steps to delist our securities. Such a delisting would likely have a negative effect on the price of our securities and would impair your ability to sell or purchase our securities when you wish to do so. In the event of a delisting, we would likely take actions to restore our compliance with NASDAQ’s listing requirements, but we can provide no assurance that any such action taken by us would allow our securities to become listed again, stabilize the market price or improve the liquidity of our securities, prevent our securities from dropping below the NASDAQ minimum bid price requirement or prevent future non-compliance with NASDAQ’s listing requirements.
Our securities may be subject to the “penny stock” rules of the SEC and the trading market in our securities is limited, which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock.
The SEC has adopted Rule 15g-9 which establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
| ● | that a broker or dealer approve a person’s account for transactions in penny stocks; and | |
| ● | the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. |
In order to approve a person’s account for transactions in penny stocks, the broker or dealer must:
| ● | obtain financial information and investment experience objectives of the person; and | |
| ● | make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. |
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The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which:
| ● | sets forth the basis on which the broker or dealer made the suitability determination; and | |
| ● | affirms that the broker or dealer received a signed, written agreement from the investor prior to the transaction. |
Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our securities and cause a decline in the market value of our securities.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
Shareholders should be aware that, according to SEC Release No. 34-29093, the market for “penny stocks” has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. Unless our securities are approved for listing on Nasdaq, the occurrence of these patterns or practices could increase the future volatility of our share price.
If securities analysts do not publish research or reports about our business or if they publish negative evaluations of our stock, the price of our stock could decline.
The trading market for our securities will rely in part on the research and reports that industry or financial analysts publish about us or our business. We may never obtain research coverage by industry or financial analysts. If no or few analysts commence coverage of us, the trading price of our stock would likely decrease. Even if we do obtain analyst coverage, if one or more of the analysts covering our business downgrade their evaluations of our stock, the price of our stock could decline. If one or more of these analysts cease to cover our stock, we could lose visibility in the market for our stock, which in turn could cause the price of our securities to decline.
If securities or industry analysts adversely change their recommendations regarding our securities or if our operating results do not meet their expectations, the price of our securities could decline.
The trading market for our securities will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause the price of our securities or trading volume to decline. Moreover, if one or more of the analysts who cover our company downgrades our securities or if our operating results do not meet their expectations, the price of our securities could decline.
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If you purchase our securities in this offering, you will incur immediate and substantial dilution in the book value of your shares.
You will suffer immediate and substantial dilution in the net tangible book value of the common stock you purchase in this offering. Based on the assumed initial public offering price of $4.00 per share, which is the midpoint of the estimated offering range set forth on the cover page of this prospectus, and assuming no exercise of the warrants being offered in this offering, purchasers of common stock in this offering will experience immediate dilution of $3.83 per share (or $3.79 per share if the underwriters exercise the over-allotment option to purchase additional shares of common stock and warrants in full), with respect to the net tangible book value of the common stock. In addition, investors purchasing common stock in this offering will contribute 31% of the total amount invested by stockholders since inception but will only own 8% of the shares of common stock outstanding. In the past, we issued options and other securities to acquire common stock at prices significantly below the initial public offering price. To the extent these outstanding securities are ultimately exercised, investors purchasing common stock in this offering will sustain further dilution. See the section of this prospectus titled “Dilution” for a more detailed description of the dilution to new investors in the offering.
The one share of Series A Preferred Stock owned by Jonathan Destler entitles the trustee to voting power equal to 110% of the issued and outstanding shares of common stock. Therefore, the issuance of additional shares of our common stock will cause the trustee’s voting power to increase and further dilute the voting power of other stockholders. For example, if we issue 1,000,000 shares in this offering, the trustee’s voting power will increase by the equivalent of voting power equal to 1,100,000 shares of common stock. Issuing new shares dilutes existing holders more than in a typical dual class structure, with simply voting and non-voting shares, and it may be very difficult for the common stockholders to ever determine their voting power because of the variable voting rights of the Series A preferred stock.
Raising additional capital may cause dilution to our stockholders, including purchasers of common stock in this offering, restrict our operations or require us to relinquish rights to our technologies or current or future product candidates.
Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of private and public equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. To the extent that we raise additional capital through the sale of common stock or securities convertible or exchangeable into common stock, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that materially adversely affect your rights as a common stockholder. Debt financing, if available, would increase our fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.
If we raise funds through additional collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our intellectual property, future revenue streams, research programs or current or future product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, scale back or discontinue the development and commercialization of one or more of our product candidates, delay our pursuit of potential in-licenses or acquisitions or grant rights to develop and market current or future product candidates that we would otherwise prefer to develop and market ourselves.
We may issue additional equity securities, or engage in other transactions that could dilute our book value or relative rights of our securities, which may adversely affect the market price of our common stock and warrants.
Our board of directors may determine from time to time that we need to raise additional capital by issuing additional shares of our common stock or other securities. Except as otherwise described in this prospectus, we will not be restricted from issuing additional shares of common stock, including securities that are convertible into or exchangeable for, or that represent the right to receive, shares of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, or nature of any future offerings, or the prices at which such offerings may be affected. Additional equity offerings may dilute the holdings of existing stockholders or reduce the market price of our common stock and warrants, or both. Holders of our securities are not entitled to pre-emptive rights or other protections against dilution. New investors also may have rights, preferences and privileges that are senior to, and that adversely affect, then-current holders of our securities. Additionally, if we raise additional capital by making offerings of debt or preferred stock, upon our liquidation, holders of our debt securities and preferred stock, and lenders with respect to other borrowings, may receive distributions of its available assets before the holders of our common stock.
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Anti-takeover effects of certain provisions of Delaware state law hinder a potential takeover of our company.
We are subject to statutory “anti-takeover” provisions under Delaware law; the provisions of Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, Section 203 of the Delaware General Corporate Law, or DGCL, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These antitakeover provisions and other provisions in our certificate of incorporation and bylaws could make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors and could also delay or impede a merger, tender offer or proxy contest involving our company. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing or cause us to take other corporate actions you desire. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our securities to decline.
Certain provisions of our bylaws are intended to strengthen the position of our board of directors in the event of a hostile takeover attempt. These provisions have the effect of providing our board of directors with the sole power to fill vacancies on our board of directors and providing that stockholders may only call a special meeting by the request, in writing, of stockholders owning individually or together ten percent or more of the entire capital stock of the corporation issued and outstanding and entitled to vote.
Therefore, the provisions of the control share acquisition act do not apply to acquisitions of our shares and will not until such time as these requirements have been met. At such time as they may apply to us, the provisions of the control share acquisition act may discourage companies or persons interested in acquiring a significant interest in or control of us, regardless of whether such acquisition may be in the interest of our stockholders.
We may include provisions in our Certificate of Incorporation that may discourage a third party from making a proposal to acquire us, even if some of our stockholders might consider the proposal to be in their best interests. For example, we may amend our articles of incorporation to authorize our board of directors to issue one or more classes or series of preferred stock that could discourage or delay a tender offer or change in control. In addition, we may enter into a stockholder rights plan, commonly known as a “poison pill,” that may delay or prevent a change of control.
The trustee under the Voting Trust Agreement has voting control over the Series A Preferred Stock and common stock owned by Mr. Destler is able to control all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions.
Currently, Mr. Destler beneficially owns approximately 21.7% of our outstanding common stock and 100% of our Series A preferred stock, which has voting power equal to 110% of our issued and outstanding shares of common stock. The voting trust created under the Voting Trust Agreement holds all shares of common stock and the one share of Series A Preferred Stock held by Mr. Destler, and vests in the trustee, the power to vote the shares held by Mr. Destler in any stockholder vote or written consent in lieu of a stockholders’ meeting. The terms and conditions of the Voting Trust Agreement provides that the members of our board of directors have full discretion to appoint a trustee to vote the shares. The current sole trustee of the voting trust is Jeffrey Klausner, our sole director. The voting trustee does not have any economic rights or investment power with respect to the shares of common stock and Series A Preferred Stock transferred to the voting trust; their rights consist solely of voting rights. Immediately following the completion of this offering, Mr. Destler will have approximately 61.9% of the voting power of our outstanding capital stock, assuming an initial public offering price of $4.00 per unit (which is the midpoint of the estimated range of the initial public offering price shown on the cover page of this prospectus) and assuming no exercise of the underwriters’ option to purchase additional shares. As a result, Mr. Destler has substantial voting power in all matters submitted to our stockholders for approval, including, but not limited to:
| ● | Election of our board of directors; | |
| ● | Removal of any of our directors or officers; | |
| ● | Amendment of our Certificate of Incorporation or Bylaws; | |
| ● | Adoption of measures that could delay or prevent a change in control or impede a merger, takeover or other business combination involving us. |
Additionally, the one share of Series A Preferred Stock issued to Mr. Destler contains protective provisions, which precludes us from taking certain actions without Mr. Destler’s approval. More specifically, so long as any shares of Series A Preferred Stock are outstanding, we are not permitted to take certain actions without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, voting as a separate class, including for example and without limitation, amending our articles of incorporation, changing or modifying the rights of the Series A Preferred Stock, including increasing or decreasing the number of authorized shares of Series A Preferred Stock, increasing or decreasing the size of the board of directors or removing the director appointed by the holders of our Series A Preferred Stock and declaring or paying any dividend or other distribution.
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We are a “controlled company” within the meaning of the Nasdaq rules and, as a result, qualify for, and will rely on, exemptions from certain corporate governance requirements that provide protection to the stockholders of companies that are subject to such corporate governance requirements.
Upon completion of this offering, Jonathan Destler, our Founder and Head of Corporate Development, will continue to beneficially own more than 50% of the voting power for the election of members of our board of directors. As a result, we will be a “controlled company” within the meaning of the Nasdaq rules. Under these rules, a listed company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain of Nasdaq’s corporate governance requirements.
As a controlled company, we will rely on certain exemptions from the Nasdaq standards that may enable us not to comply with certain Nasdaq corporate governance requirements. Accordingly, we have opted not to implement a stand-alone nominating and corporate governance committee and our compensation committee will not be fully independent. As a consequence of our reliance on certain exemptions from the Nasdaq standards provided to “controlled companies,” you will not have the same protections afforded to stockholders of companies that are subject to all of the Nasdaq corporate governance requirements. See “Management—Controlled company exception.”
Sales of a significant number of shares of our common stock or warrants in the public markets, or the perception that such sales could occur, could depress the market price of our securities.
Sales of a substantial number of shares of our common stock or warrants in the public markets, or the perception by the market that those sales could occur, could depress the market price of our securities and impair our ability to raise capital through the sale of additional equity securities. We, our directors and our executive officers have agreed not to sell, dispose of or hedge any common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus continuing through and including the date that is 180 days after the date of this prospectus, subject to certain exceptions. We cannot predict the effect that future sales of our common stock or warrants would have on the market price of our securities.
We have broad discretion to use the net proceeds from this offering and our investment of these proceeds pending any such use may not yield a favorable return.
Our management will have broad discretion as to the application of the remaining net proceeds from this offering upon the repayment of the outstanding principal and interest accrued on Senior Convertible Promissory Notes, as described below in “Use of Proceeds,” and could use them for purposes other than those contemplated at the time of the offering. Our management may use the remaining net proceeds for corporate purposes that may not improve our financial condition or market value of our securities.
We are an emerging growth company and a smaller reporting company, and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies and smaller reporting companies will make our securities less attractive to investors.
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act, or JOBS Act, enacted in April 2012. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements, and exemptions from the requirements of holding nonbinding advisory votes on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years following the year in which we complete this offering, although circumstances could cause us to lose that status earlier. We will remain an emerging growth company until the earlier of (i) the last day of the fiscal year (a) following the fifth anniversary of the closing of this offering, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which requires the market value of our common stock that is held by non-affiliates to exceed $700 million as of the prior June 30th, and (ii) the date on which we have issued more than $1 billion in non-convertible debt during the prior three-year period.
Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to not “opt out” of this exemption from complying with new or revised accounting standards and, therefore, we will adopt new or revised accounting standards at the time private companies adopt the new or revised accounting standard and will do so until such time that we either (i) irrevocably elect to “opt out” of such extended transition period or (ii) no longer qualify as an emerging growth company.
Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company,” which would allow us to continue to take advantage of many of the same exemptions from disclosure requirements, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements. We cannot predict if investors will find our securities less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and the price of our securities may be more volatile.
Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be your sole source of gain.
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. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.
After the completion of this offering, we may be at an increased risk of securities class action litigation.
Historically, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because we are a smaller company, and smaller companies tend to experience greater volatility in the price of their securities. If we were to be sued, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements concerning our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business operations and financial performance and condition. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “potential,” “positioned,” “seek,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words.
These forward-looking statements include, but are not limited to, statements about:
| ● | our ability to continue as a going concern; | |
| ● | availability of additional funds in the future on acceptable terms or at all; | |
| ● | our estimates of our expenses, ongoing losses, future revenue, capital requirements and our need for, or ability to obtain, additional financing; | |
| ● | our ability to retain and recruit key personnel, including the continued development of our sales and marketing infrastructure; | |
| ● | our ability to maintain intellectual property protection for our products; | |
| ● | developments relating to our competitors and our industry; | |
| ● | our expectations regarding the period during which we will qualify as an emerging growth company under the JOBS Act; | |
| ● | our expected use of our existing cash and cash equivalents and the proceeds from this offering. | |
| ● | the impact of the COVID-19 pandemic on our business and operations; | |
| ● | other events or factors, including those resulting from war or incidents of terrorism; | |
| ● | anticipated trends and challenges in our business and the markets in which we operate; and | |
| ● | other risks and uncertainties, including those listed under the caption “Risk Factors.” |
Forward-looking statements are based on management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate, and management’s beliefs and assumptions are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this prospectus may turn out to be inaccurate. Furthermore, if the forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. Factors that may cause actual results to differ materially from current expectations include, among other things, those described in the section entitled “Risk Factors” and elsewhere in this prospectus. Potential investors are urged to consider these factors carefully in evaluating these forward-looking statements.
In addition, forward-looking statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this prospectus, and while we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and we may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements. You should not place undue reliance on our forward-looking statements.
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MARKET, INDUSTRY AND OTHER DATA
This prospectus contains estimates, statistical data and other information concerning our industry, market and competitive position from our own internal estimates and research, as well as from independent market research, industry and general publications and surveys, governmental agencies and publicly available information in addition to research, surveys and studies conducted by third parties. Internal estimates are derived from publicly available information released by industry analysts and third-party sources, our internal research and our industry experience, and are based on assumptions made by us based on such data and our knowledge of our industry and market, which we believe to be reasonable. In some cases, we do not expressly refer to the sources from which this data is derived.
In that regard, when we refer to one or more sources of this type of data in any paragraph, you should assume that other data of this type appearing in the same paragraph is derived from the same sources, unless otherwise expressly stated or the context otherwise requires.
Industry data and other third-party information have been obtained from sources believed to be reliable, but we have not independently verified any third-party information. In addition, while we believe the industry, market and competitive position data included in this prospectus is reliable and based on reasonable assumptions, such data involve risks and uncertainties and are subject to change based on various factors, including those discussed in the section titled “Risk Factors.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties or by us.
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USE OF PROCEEDS
We estimate the net proceeds from this initial public offering of securities will be approximately $6,780,000, or $7,872,000 if the underwriters exercise their option to purchase additional common stock in full, assuming an initial public offering price of $4.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
Each $1.00 increase (decrease) in the assumed initial public offering price of $4.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our net proceeds by approximately $1,820,000, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
We currently intend to use the net proceeds from this offering as follows:
| ● | Up to approximately $4,000,000 for the repayment of outstanding principal and interest accrued on Senior Convertible Promissory Notes, referred to as the “Notes”; | |
| ● | Up to approximately $251,000 for the repayment of outstanding principal and interest accrued on our Convertible Promissory Notes, referred to as the “Promissory Notes”; | |
| ● | approximately $2,000,000 to fund the sales and marketing, as well as research and development and field trial activities supporting ongoing commercialization of our products; and | |
| ● | the remainder for general corporate purposes, including working capital and operating expenses. |
As of the date of this prospectus, the outstanding aggregate principal amount of the Notes was approximately $3,491,000 and outstanding accrued interest was $548,000. The Notes bear interest rate of 12% per annum and mature 12 months after the date of the issuance of the Notes, provided, however, that noteholders have the right to call the Notes prior to maturity starting from the earlier of: (i) the closing date of this offering or (ii) June 30, 2023. The proceeds of this indebtedness will be used by us for our general corporate purposes.
As of the date of this prospectus, the outstanding aggregate principal amount of the Promissory Notes was approximately $250,000 with accrued interest of $1,000. The Promissory Notes bear an interest rate of 10% per annum and mature 12 months after the date of the issuance of the Promissory Notes; provided, however, that the Company may, at its option, extend such maturity date an additional six (6) months. The Company may exercise its Extension Option by providing 14 days’ notice to Lender of its intent to extend the Maturity Date an additional six months.
We may also use a portion of our net proceeds to acquire or invest in complementary products, technologies, or businesses; however, we currently have no agreements or commitments to complete any such transactions.
We believe, based on our current operating plan, that our current capital resources, along with the net proceeds from this offering, will be sufficient for us to fund our operating expenses and capital expenditure requirements for at least the next twelve months. However, our expected use of the net proceeds from this offering described above represents our intentions based upon our current plans and business conditions. We cannot predict with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering or the amounts that we will actually spend on the uses set forth above. The amounts and timing of our actual expenditures will depend on numerous factors, including the time and cost necessary to conduct our planned commercialization activities, the results of our planned field trials and other factors described in the section titled “Risk Factors” in this prospectus, as well as the amount of cash used in our operations and any unforeseen cash needs.
Therefore, our actual expenditures may differ materially from the estimates described above. We may find it necessary or advisable to use the net proceeds for other purposes, and we will have broad discretion over the allocation of the net proceeds from this offering.
We intend to invest the net proceeds from this offering that are not used as described above in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments and U.S. government securities.
DIVIDEND POLICY
We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business, and therefore do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our board of directors and will depend on, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions, business prospects and other factors our board of directors may deem relevant. Investors should not purchase our securities with the expectation of receiving cash dividends.
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CAPITALIZATION
The following table sets forth our capitalization as of September 30, 2022:
● on an actual basis;
● following each of the foregoing, the 1-for-0.6786 reverse stock split of our outstanding shares of common stock; and;
● on a pro forma basis to reflect the sale of common stock by us in this offering at an initial price to the public of $4.00 per unit, resulting in net proceeds to us of $6,780,000 after deducting (i) underwriter commissions and non-accountable expenses of $720,000 and (ii) our estimated other offering expenses of $500,000; and
● on a pro forma basis to reflect the sale of common stock by us in this offering, assuming the underwriters elect to exercise the over-allotment option in full, at an initial price to the public of $4.00 per unit, resulting in net proceeds to us of $7,872,000 after deducting (i) underwriter commissions and non-accountable expenses of $828,000 and (ii) our estimated other offering expenses of $500,000. The table below assumes no exercise by the underwriters of their option to purchase additional shares of common stock and/or warrants from us.
The pro forma information below is illustrative only and our capitalization following the completion of this offering is subject to adjustment based on the initial public offering price of our common stock and other terms of this offering determined at pricing and includes up to approximately $4,000,000 for the repayment of outstanding principal and interest accrued on Senior Convertible Promissory Notes, which were issued by us in September and October 2021, and $250,000 for the repayment of outstand principal and interest accrued on Convertible Promissory Notes, which were issued in January and February 2023. You should read this table together with our financial statements and the related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
In the table below, amounts are rounded to nearest thousands, except share and per share amounts.
| As of September 30, 2022 (unaudited) | ||||||||||||||||
| Actual | Pro Forma (1) | Post-Offering Pro Forma without Over- Allotment Option | Post-Offering Pro Forma with Over- Allotment Option | |||||||||||||
| Cash | $ | 840,000 | $ | 250,000 | $ | 3,597,000 | $ | 4,689,000 | ||||||||
| Senior convertible notes payable, including interest accrued | 3,915,000 | - | - | - | ||||||||||||
| Convertible notes payable, including interest accrued | 250,000 | - | - | |||||||||||||
| Shareholders’ equity (deficit): | ||||||||||||||||
| Preferred stock, $0.0001 par value per share; 1,000,000 shares authorized, 1 share issued and outstanding, actual; | - | - | - | - | ||||||||||||
| Common stock, $0.0001 par value per share: 100,000,000 shares authorized, 34,678,480 shares issued and outstanding, actual (26,032,817 and 26,407,817 pro forma); | 3,000 | - | 3,000 | 3,000 | ||||||||||||
| Additional paid in capital | 28,655,000 | - | 35,435,000 | 36,527,000 | ||||||||||||
| Accumulated deficit | (31,168,000 | ) | - | (31,168,000 | ) | (31,168,000 | ) | |||||||||
| Total shareholders’ equity (deficit) | (2,510,000 | ) | - | 4,270,000 | 5,362,000 | |||||||||||
| Total liabilities and shareholders’ equity | $ | 2,936,000 | $ | - | $ | 5,801,000 | $ | 6,893,000 | ||||||||
| (1) | In January and February 2023, the Company issued Convertible Promissory Notes (“Promissory Notes”) totaling $250,000. The Promissory Notes bear an interest rate of 10% per annum and mature 12 months after the date of the issuance of the Promissory Notes; provided, however, that the Company may, at its option, extend such maturity date an additional six (6) months. |
The table above excludes the following shares:
| ● | 3,128,346 shares of common stock reserved for issuance upon the exercise of outstanding options at a weighted average exercise price of $2.96 per share, as well as any future increases in the number of shares of our common stock reserved for issuance under our equity incentive plan; |
| ● | 1,643,146 shares of common stock reserved for issuance upon the exercise of outstanding warrants at a weighted average exercise price of $4.58 per share; |
| ● | up to 2,437,012 shares of common stock issuable upon conversion of $3,491,235 of Senior Convertible Promissory Notes (the “Notes”) and interest accrued, based on an assumed initial public offering price of $6.78 per unit, the midpoint of the price range set forth on the cover page of this prospectus; |
| ● | up to 53,254 shares of common stock issuable upon conversion of $251,124 of Convertible Promissory Notes (the “Promissory Notes”) and interest accrued, based on an assumed initial public offering price of $4.00 per share, the midpoint of the price range set forth on the cover page of this prospectus; |
| ● | 1,106,875 shares of common stock reserved for issuance upon the exercise of outstanding warrants issued with our Notes. Each Warrant is exercisable at a price equal to 115% of the Company’s initial public offering price; |
| ● | 42,413 shares of common stock reserved for issuance upon the exercise of outstanding warrants issued with our Promissory Notes. Each Warrant is exercisable at a price equal to 80% of the Company’s initial public offering price; |
| ● | 135,720 restricted stock units issued to our employees; |
| ● | 1 share of common stock reserved for issuance upon the conversion of 1 share of Series A preferred stock; and |
| ● | up to 60,000 shares of common stock issuable upon exercise of the representative’s warrants issued in connection with this offering. |
Each $1.00 increase (decrease) in the assumed initial public offering price of $4.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our net proceeds by approximately $1,820,000 assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
DILUTION
If you invest in our securities in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our common stock included in the unit offered by this prospectus and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering.
As of September 30, 2022, our historical net tangible book value was $(2,510,000), or $(0.11) per share of our common stock. Net tangible book value per share represents our total tangible assets (total assets less intangible assets) less total liabilities and convertible preferred stock, divided by the total number of our outstanding shares of common stock as of September 30, 2022.
After giving effect to the sale and issuance of common stock in this offering, at the assumed initial public offering price of $4.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our as adjusted net tangible book value as of September 30, 2022, would have been approximately $4,720,000, or $0.17 per share of our common stock. This represents an immediate increase in pro forma net tangible book value of approximately $0.27 per share to our existing stockholders and an immediate dilution of $3.44 per share to new investors.
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Dilution per share to investors participating in this offering is determined by subtracting as adjusted net tangible book value per share after this offering from the initial public offering price per unit paid by investors participating in this offering. The following table illustrates this dilution (without giving effect to any exercise by the underwriters of their option to purchase additional shares):
| Assumed initial public offering price per unit | $ | 4.00 | ||||||
| Net tangible book value per share at September 30, 2022 | $ | (0.11 | ) | |||||
| Increase in net tangible book value per share attributable to investors participating in this offering | $ | 0.27 | ||||||
| As adjusted net tangible book value per share immediately after this offering | $ | 0.17 | ||||||
| Dilution in net tangible book value per share to new investors participating in this offering | $ | 3.83 |
The dilution information discussed above is illustrative and will change based on the actual initial public offering price and other terms of this offering determined at pricing. If the underwriters exercise their option to purchase additional common stock in full, our as adjusted net tangible book value per share after this offering would be approximately $0.31 per share, and the dilution in as adjusted net tangible book value per share to new investors participating in this offering would be $3.79 per share.
A $1.00 increase (decrease) in the assumed initial public offering price of $4.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the as adjusted net tangible book value by $0.07 per share and the dilution to investors participating in this offering by $0.93 per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated expenses payable by us.
The following table summarizes, on an as adjusted basis as of September 30, 2022, the differences between the number of shares of common stock included in the common stock purchased from us, the total cash consideration and the average price per share paid to us by existing stockholders and by new investors purchasing common stock in this offering at the assumed initial public offering price of $4.00 per unit, the midpoint of the price range set forth on the cover of this prospectus before deducting underwriting discounts and commissions and estimated offering expenses payable by us. As the table shows, new investors purchasing common stock in this offering will pay an average price per share substantially higher than our existing investors paid.
| Shares Purchase | Total Consideration | Average Price Per | ||||||||||||||||||
| Number | Percent | Amount | Percent | Share | ||||||||||||||||
| Existing stockholders | 22,268,368 | 92 | % | $ | 17,416,000 | 69 | % | $ | 0.78 | |||||||||||
| New investors participating in this offering, excluding underwriting discounts and commissions and estimated offering expenses payable by us | 2,000,000 | 8 | % | 8,000,000 | 31 | % | $ | 4.00 | ||||||||||||
| Total | 24,268,368 | 100 | % | $ | 25,416,000 | 100 | % | $ | 1.05 | |||||||||||
The number of shares of common stock to be outstanding after this offering is based on 26,248,835 shares of common stock outstanding at September 30, 2022, and excludes the following:
| ● | 3,128,346 shares of common stock reserved for issuance upon the exercise of outstanding options at a weighted average exercise price of $2.96 per share, as well as any future increases in the number of shares of our common stock reserved for issuance under our equity incentive plan; |
| ● | 1,643,146 shares of common stock reserved for issuance upon the exercise of outstanding warrants at a weighted average exercise price of $4.58 per share; |
| ● | up to 2,437,012 shares of common stock issuable upon conversion of $3,491,235 of Senior Convertible Promissory Notes (the “Notes”) and interest accrued, based on an assumed initial public offering price of $6.78 per unit, the midpoint of the price range set forth on the cover page of this prospectus; |
| ● | up to 53,254 shares of common stock issuable upon conversion of $251,124 of Convertible Promissory Notes (the “Promissory Notes”) and interest accrued, based on an assumed initial public offering price of $4.00 per share, the midpoint of the price range set forth on the cover page of this prospectus; |
| ● | 1,106,875 shares of common stock reserved for issuance upon the exercise of outstanding warrants issued with our Notes. Each Warrant is exercisable at a price equal to 115% of the Company’s initial public offering price; |
| ● | 42,413 shares of common stock reserved for issuance upon the exercise of outstanding warrants issued with our Promissory Notes. Each Warrant is exercisable at a price equal to 80% of the Company’s initial public offering price; |
| ● | 135,720 restricted stock units issued to our employees; |
| ● | 1 share of common stock reserved for issuance upon the conversion of 1 share of Series A preferred stock; and |
| ● | up to 60,000 shares of common stock issuable upon exercise of the representative’s warrants issued in connection with this offering. |
To the extent that outstanding options or warrants are exercised, or shares are issued under our equity incentive plans or upon the conversion of our convertible notes, you will experience further dilution. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities may result in further dilution to our stockholders.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements, the related notes, and the other financial information included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual business, financial condition and results of operations could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly under “Risk Factors.” See also “Special Note Regarding Forward-Looking Statements.” Our historical results are not necessarily indicative of the results that may be expected for any period in the future.
Overview
Opti-Harvest is an agricultural innovation company with products backed by a portfolio of patented and patent pending technologies focused on solving several critical challenges faced by agribusinesses: maximizing crop yield, accelerating crop growth, optimizing land and water resources, reducing labor costs and mitigating negative environmental impacts.
Our advanced agriculture technology (Opti-Filter™) and precision farming (Opti-View™) platforms, enable commercial growers and home gardeners to harness, optimize and better utilize sunlight, the planet’s most fundamental and renewable natural resource.
Our sustainable agricultural technology platform is powered by the sun. It maximizes a free and renewable resource with no need for additional chemicals or fertilizers.
From inception in 2016 through the present date, we have made substantial investments in building our intellectual property portfolio, developing, and optimizing our product designs, and conducting over 65 multi-year field trials to test and measure the effectiveness of our products. Based on our field trials and the positive feedback from our partners, we began commercializing our Opti-Gro and ChromaGro products in the first half of 2021, our Opti-Shield and Opti-Panel products late in the first half of 2022, and we plan to commercialize our Opti-Skylight products in the first half of 2023. Our Opti-View product is currently in our research and development phase with an anticipated commercial offering in the second half of 2023. We remain focused on developing new products and enhancing existing products.
With the recent commercialization of several of our products, we are making significant investments in sales and marketing, tooling to manufacture our products, and infrastructure investments to meet planned customer demand. We will also incur additional expenses generally associated with being a publicly traded company, including the cost of regulatory compliance, director fees, insurances, investor relations, upgraded systems, and enhanced internal controls.
Recent Trends - Market Conditions
During the period ended September 30, 2022, the COVID-19 pandemic continued to impact our operating results and the Company anticipates a residual effect for the balance of the year. In addition, the pandemic could cause reduced demand for our products if, for example, the pandemic results in a recessionary economic environment which negatively effects the consumers who purchase our products. Based on the recent increase in demand for our products, we believe that over the long term, there will continue to be strong demand for our products.
Although the U.S. economy continued to grow during the first half of 2022, the continuing impact of the COVID-19 pandemic, higher inflation, the actions by the Federal Reserve to address inflation, and rising energy prices create uncertainty about the future economic environment which will continue to evolve and may impact our business in future periods. We have experienced supply chain challenges, including increased lead times, as well as inflation of raw materials, logistics and labor costs due to availability constraints and high demand. Although we regularly monitor companies in our supply chain, and use alternative suppliers when necessary and available, supply chain constraints could cause a disruption in our ability to obtain raw materials required to manufacture our products and adversely affect our operations. We expect the inflationary trends and supply chain pressures to continue throughout the remainder of 2023.
Through September 30, 2022, the Company experienced elevated freight costs as a result of a higher transportation market as the capacity in the freight market has not kept up with demand. The Company believes these challenges will continue throughout the year. In addition, the Company experienced increases in the pricing of its raw materials and delays in procuring raw materials. The disruption caused by labor shortages, significant raw material cost inflation, logistics issues and increased freight costs, and ongoing port congestion, resulted in suppressed margins. The Company anticipates a continued impact throughout 2023.
Our ability to operate without significant incremental negative operational impact from the COVID-19 pandemic will in part depend on our ability to protect our employees and protect our supply chain. The Company has endeavored to follow the recommended actions of government and health authorities to protect our employees. Since the inception of the COVID-19 pandemic and through September 30, 2022, we maintained the consistency of our operations during the onset of the COVID-19 pandemic. We will continue to innovate in managing our business, coordinating with our employees and suppliers to do our part in the infection prevention and remain flexible in responding to our customers and suppliers. However, the uncertainty resulting from the pandemic could result in an unforeseen disruption to our workforce and supply chain (for example an inability of a key supplier or transportation supplier to source and transport materials) that could negatively impact our operations.
We have not observed any material impairments of our assets or a significant change in the fair value of our assets due to the COVID-19 pandemic.
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Results of Operations for the Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020
Our sales, operating expenses, and net loss from operations for the year ended December 31, 2021 as compared to the year ended December 31, 2020 were as follows (amounts are rounded to nearest thousands):
| For the Year Ended | Percentage | |||||||||||||||
| December 31, | Change | |||||||||||||||
| 2021 | 2020 | Change | Inc. (Dec.) | |||||||||||||
| Net Sales | $ | 40,000 | $ | 20,000 | $ | 20,000 | 100 | % | ||||||||
| Cost of goods sold | 102,000 | 115,000 | (13,000 | ) | (11 | )% | ||||||||||
| Gross loss | (62,000 | ) | (95,000 | ) | 33,000 | (35 | )% | |||||||||
| Operating expenses | ||||||||||||||||
| Selling, general and administrative expenses | 6,591,000 | 1,467,000 | 5,124,000 | 349 | % | |||||||||||
| Research and development expense | 2,621,000 | 1,680,000 | 941,000 | 56 | % | |||||||||||
| Amortization of intangible assets | - | 42,000 | (42,000 | ) | (100 | )% | ||||||||||
| Total operating expenses | 9,212,000 | 3,189,000 | 6,023,000 | 189 | % | |||||||||||
| Loss from operations | (9,274,000 | ) | (3,284,000 | ) | (5,990,000 | ) | 182 | % | ||||||||
| Interest expense | (817,000 | ) | - | (817,000 | ) | 100 | % | |||||||||
| Gain on forgiveness of SBA PPP loan | 38,000 | - | 38,000 | 100 | % | |||||||||||
| Net loss | $ | (10,053,000 | ) | $ | (3,284,000 | ) | $ | (6,769,000 | ) | 206 | % | |||||
Net Sales
We began offering our first two products, ChromaGro and Opti-Gro, for sale in 2021, leading to $40,000 of net sales during the year ended December 31, 2021. Net sales during the year ended December 31, 2020 of $20,000 were from the sale of significantly discounted products originally manufactured for our research and development activities.
Cost of Goods Sold
Cost of goods sold represent the cost to manufacture our products sold. Cost of goods sold decreased by $13,000 to $102,000 for the year ended December 31, 2021, compared to $115,000 for the year ended December 31, 2020. During the year ended December 31, 2021, we recorded a $60,000 reserve for slow moving and potentially obsolete product to cost of goods sold. No similar reserve for slow moving and obsolete products were recorded during the year ended December 31, 2020.
Operating Expenses
Operating expenses include selling, general and administrative expenses, research and development costs, and amortization of intangible assets.
Our selling, general and administrative expenses increased during the year ended December 31, 2021, as we continued transitioning our sole focus on research and development activities to include the commercializing of our products in 2021. We hired employees and retained consultants and advisors to provide sales and marketing expertise and invested in required infrastructure to meet anticipated product demand. To that end, our selling, general and administrative expenses increased approximately $5.1 million to $6.6 million during the year ended December 31, 2021, compared to approximately $1.5 million during the year ended December 31, 2020. We incurred stock-based compensation expense of $3.5 million, representing $1.5 million in stock option expense related to the vesting of employee stock options, and $2.0 million on the issuances of shares of the Company’s common stock and warrants for services received from advisors and consultants during the year ended December 31, 2021. Excluding stock-based compensation, our selling, general and administrative expenses increased $1.7 million to $3.1 million compared to $1.4 million during the year ended December 31, 2020. The increase of $1.7 million was from increased consulting and advisor fees of $531,000, increased salaries and benefit expense of $397,000, increased marketing related expenses of $307,000 primarily related to the introduction of our ChromoGro product to the home garden market, increased legal and professional fees of $225,000 primarily related to our intellectual property, increased rent expense of $35,000, and increased depreciation expense of $33,000. Our remaining increase of $251,000 was across our remaining expense accounts to support our operations.
Research and development costs include advisors, consultants, software licensing, product design and development, data monitoring and collection, field trial installations, and travel related expenses. Research and development expenses increased approximately $941,000 to $2.6 million during the year ended December 31, 2021, compared to approximately $1.7 million for the year ended December 31, 2020. The increase in research and development costs were primarily due to new product design and development cost and our field trial activity, as compared to the prior year period.
Amortization of intangible assets expense was $42,000 during the year ended December 31, 2020. We had no comparable expense during the same period of the current year. The decrease in intangible amortization expense was due to our intangible assets becoming fully amortized in early calendar year 2020.
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Loss from Operations
Loss from operations increased to approximately $9.3 million for the year ended December 31, 2021, compared to $3.3 million for the year ended December 31, 2020. The increase in loss from operations was due to our increase in net sales, decreased cost of sales, offset by increased stock based compensation costs, and increased operating expenses as discussed above.
Interest Expense
Interest expense was $817,000 for the year ended December 31, 2021, representing $713,000 amortization of our debt discount, and $104,000 of interest on our loans. We had no similar expense during the year ended December 31, 2020.
Gain on Forgiveness of Debt
Gain on forgiveness of debt was $38,000 for the year ended December 31, 2021, representing a $38,000 gain on extinguishment of debt related to our SBA PPP loan. We had no similar expense during the year ended December 31, 2020.
Net Loss
Net loss increased $6.8 million to $10.1 million during the year ended December 31, 2021, compared to $3.3 million for the year ended December 31, 2020. The increase in net loss was due to the increase in net sales, decrease in cost of goods sold, gain on forgiveness of debt, offset by increased stock based compensation costs, and operating and interest expense as discussed above.
Results of Operations for the Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021
Our sales, operating expenses, and net loss from operations for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 were as follows (amounts are rounded to nearest thousands):
| For the Nine months Ended | Percentage | |||||||||||||||
| September 30, | Change | |||||||||||||||
| 2022 | 2021 | Change | Inc. (Dec.) | |||||||||||||
| Revenues | $ | 30,000 | $ | 40,000 | $ | (10,000 | ) | -25 | % | |||||||
| Cost of revenues | 55,000 | 92,000 | (37,000 | ) | -40 | % | ||||||||||
| Gross loss | (25,000 | ) | (52,000 | ) | 27,000 | -52 | % | |||||||||
| Operating expenses | ||||||||||||||||
| Selling, general and administrative expenses | 6,062,000 | 5,196,000 | 866,000 | 17 | % | |||||||||||
| Research and development expense | 1,748,000 | 1,791,000 | (43,000 | ) | -2 | % | ||||||||||
| Total operating expenses | 7,810,000 | 6,987,000 | 823,000 | 12 | % | |||||||||||
| Loss from operations | (7,835,000 | ) | (7,039,000 | ) | (796,000 | ) | 11 | % | ||||||||
| Gain on forgiveness of SBA PPP loan | - | 38,000 | 38,000 | -100 | % | |||||||||||
| Financing costs | (1,554,000 | ) | - | (1,554,000 | ) | 100 | % | |||||||||
| Interest expense | (2,589,000 | ) | (19,000 | ) | (2,570,000 | ) | 13,526 | % | ||||||||
| Net loss | $ | (11,978,000 | ) | $ | (7,020,000 | ) | $ | (4,958,000 | ) | 71 | % | |||||
Revenues
Our revenues were $30,000 and $40,000 for the nine months ended September 30, 2022 and 2021, respectively. Beginning in second half of 2022, we began offering our customers the option to rent our products for a monthly fee per unit, generating $7,000, or 23% of our revenues during the nine months ended September 30, 2022.
Cost of Revenues
Cost of revenues represent the cost to manufacture our products sold, and depreciation expense related to our rental equipment sales. Cost of revenues was $55,000 and $92,000 for the nine months ended September 30, 2022 and 2021, respectively.
Operating Expenses
Operating expenses include selling, general and administrative expenses, and research and development costs.
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Our selling, general and administrative expenses increased during the nine months ended September 30, 2022, as we continued transitioning our sole focus on research and development activities to include the commercializing of our products in 2022. We hired employees and retained consultants and advisors to provide sales and marketing expertise and invested in required infrastructure to meet anticipated product demand. To that end, our selling, general and administrative expenses increased approximately $866,000 to $6.1 million during nine months ended September 30, 2022, compared to $5.2 million during the nine months ended September 30, 2021. The net increase of $866,000 in our selling, general and administrative expenses was from increased stock based compensation expense of $811,000, increased salaries and benefit expense of $420,000, increased depreciation expense of $143,000, offset by decreased consulting and professional fees of $128,000, and decreased advertising expense $266,000. The remaining decrease of approximately $114,000 during the nine months ended September 30, 2022, was across our remaining expense accounts to support our operations.
Research and development costs include advisors, consultants, software licensing, product design and development, data monitoring and collection, field trial installations, and travel related expenses. Research and development expenses decreased approximately $43,000 to $1.7 million during the nine months ended September 30, 2022, compared to $1.8 million for the nine months ended September 30, 2021. The decrease in research and development costs were primarily due to decreased product development costs, as compared to the prior year period.
Loss from Operations
Loss from operations increased to approximately $7.8 million for the nine months ended September 30, 2022, compared to $7.0 million for the nine months ended September 30, 2021. The increase in loss from operations was due to our decrease in revenue, decreased cost of revenue, offset by increased stock based compensation costs, and increased operating expenses as discussed above.
Gain on Forgiveness of Debt
Gain on forgiveness of debt was $38,000 during the nine months ended September 30, 2021, representing a $38,000 gain on extinguishment of debt related to our SBA PPP loan. We had no similar expense during the nine months ended September 30, 2022.
Financing Costs
Financing costs was approximately $1.6 million during the nine months ended September 30, 2022, representing the fair value of common shares issued to extend the call date provision in our senior secured convertible notes. We had no similar expense during the nine months ended September 30, 2021.
Interest Expense
Interest expense increased $2.6 million to $2.6 million during the nine months ended September 30, 2022, compared to $19,000 for the nine months ended September 30, 2021. The increase in interest expense was a $2.3 million increase debt discount amortization compared to the prior year period, and an increase in interest expense of $322,000 due to an increase in debt balances as compared to the prior year period.
Net Loss
Net loss increased $5.0 million to $12.0 million during the nine months ended September 30, 2022, compared to $7.0 million for the nine months ended September 30, 2021. The increase in net loss was due to our decrease in revenues, cost of revenues, and increased operating expenses, financing costs and interest expense, as discussed above.
Liquidity and Capital Resources
Since inception, our principal sources of liquidity have been cash provided by financing, including through the private placement of equity securities, and loans. Our principal uses of cash have been primarily for labor and outside services, development of new products and improvement of existing products, expansion of marketing efforts to promote our products and brand, and capital expenditures. We anticipate that additional expenditures will be necessary to develop and expand our assets before sufficient and consistent positive operating cash flows will be achieved, including sufficient cash flows to service existing liabilities and related interest.
With the recent commercialization of our products, we are making significant investments in sales and marketing, tooling to manufacture our products, and infrastructure investments to meet planned customer demand. We will also incur additional expenses generally associated with being a publicly traded company, including the cost of financial statement audits and reviews, compliance, director fees, insurance policies, investor relations, upgraded systems, and enhanced internal controls.
We believe, based on our current operating plan, that our current capital resources, along with the net proceeds from this offering, will be sufficient for us to fund our operating expenses and capital expenditure requirements for at least the next twelve months. However, our expected use of the net proceeds from this offering described above represents our intentions based upon our current plans and business conditions. We cannot predict with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering or the amounts that we will actually spend on the uses set forth above. The amounts and timing of our actual expenditures will depend on numerous factors, including the time and cost necessary to conduct our planned commercialization activities, the results of our planned field trials and other factors described in the section titled “Risk Factors” in this prospectus, as well as the amount of cash used in our operations and any unforeseen cash needs.
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As further presented in our financial statements and related notes included in this prospectus, during the nine months ended September 30, 2022, we incurred a net loss of $12.0 million, used cash in operations of $3.6 million, and at September 30, 2022, had a stockholders’ deficit of approximately $2.5 million, and a negative working capital of approximately $4.1 million. In addition, during the fiscal year ended December 31, 2021, we incurred a net loss of $10.1 million, and used cash in operations of $5.3 million, and at December 31, 2021, we had a stockholders’ equity of approximately $1.2 million, and a negative working capital of $439,000. These factors raised substantial doubt about our ability to continue as a going concern, as noted by our independent registered public accounting firm in its report on our December 31, 2021 financial statements. We believe, based on our current operating plan, that our current capital resources, along with the net proceeds from this offering, will be sufficient for us to fund our operating expenses and capital expenditure requirements for at least the next twelve months. Additional funds may be needed in order to continue production and operations, maintain profitability and to achieve our objectives.
Our ability to continue as a going concern is dependent upon our ability to raise additional capital and to maintain revenues and generate profit from operations. During the nine months ended September 30, 2022, we raised approximately $1.6 million from the exercise of warrants, and we received proceeds of $1.6 million from a private placement transaction. During the fiscal year ended December 31, 2021, we received proceeds of $5.2 million from a private placement transaction and $3.0 million from the issuance of convertible debt. At September 30, 2022, we had cash on hand of approximately $840,000, and may not be able to generate sufficient funds from our future operations to meet our cash flow requirements.
At September 30, 2022, we had a negative working capital of approximately $4.1 million compared to a negative working capital deficit of $439,000 at December 31, 2021. The decrease in working capital was primarily to fund our net loss during the nine months ended September 30, 2022. At December 31, 2021, we had a working capital deficit of approximately $439,000 compared to a negative working capital of $321,000 at December 31, 2020. The increase in negative working capital was primarily to fund our net loss.
Loan Payable
On November 20, 2020, we financed the purchase of a vehicle for $40,000. The loan term is for 59 months, annual interest rate of 4.49%, with monthly principal and interest payments of $745, and secured by the purchased vehicle.
On January 20, 2022, the Company financed the purchase of a vehicle for $49,000. The loan term is for 71 months, annual interest rate of 15.54%, with monthly principal and interest payments of $1,066, and secured by the purchased vehicle.
Senior Convertible Notes Payable and Warrants
During the year ended December 31, 2021, the Company sold approximately $3,591,000 of Senior Convertible Promissory Notes (the “Notes”) and 3,591,235 warrants (the “Warrants”). The Company received net proceeds of $3,034,000 after deducting an original issue discount of 15%, or $539,000, and legal fees of $18,000, which was recorded as a debt discount. Each Warrant is exercisable at a price (the “Exercise Price”) equal to 115% of its initial public offering price, currently estimated to be $3.00 per share. The Company determined the fair value of the Warrants to be approximately $13.6 million of which the relative fair value of $2.5 million was allocated and recorded as a component of debt discount. The Company made principal payments of $100,000 during 2022, leaving a balance of the Notes at September 30, 2022 of $3,491,000.
The holder of the Warrants shall have the right to purchase up to the number of shares that equals the quotient obtained by dividing: (i) the Warrant Coverage Amount, by (ii) the Conversion Price. The “Warrant Coverage Amount” shall mean the amount obtained by multiplying: (A) one hundred percent (100%); by (B) aggregate principal amount of the Holder’s Note(s). The conversion price in effect on any Conversion Date shall be equal to 80% of the offering price per share of common stock in our initial public offering.
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Each Note is convertible, in the sole discretion of the holder of the Note, into shares of our common stock at a purchase price equal to 80% of the offering price of the initial public offering price currently estimated to be $3.00 per share. Each Note, issued at an original issue discount of 15%, carries interest at a rate of 12% per annum, and any interest payable under the Note shall automatically accrue and be capitalized to the principal amount of the Note, and shall thereafter be deemed to be a part of the principal amount of the Note, unless such interest is paid in cash on or prior to the maturity date of the Note.
The Notes mature 12 months from the date of the Notes, provided, however, that noteholders have the right to call the Notes prior to maturity starting from the earlier of (i) the consummation of the first underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale by the Company of not less than $10 million of its equity securities, as a result of or following which common stock shall be listed on the Nasdaq Stock Market, and (ii) December 15, 2021. Additionally, each Warrant contains a cashless exercise provision, which is effective if the shares underlying the Warrant are not covered by a registration statement 6 months from the date of issuance of the Warrant. On May 16, 2022, the Company entered into an amendment to extend the right to call provision in its senior secured convertible notes from December 15, 2021 to September 15, 2022, in exchange for issuing its senior convertible note holders an aggregate of 203,503 shares of common stock with a fair value of approximately $611,000 at the date of grant, or $3.00 per common share. On September 30, 2022, the Company entered into a second amendment to extend the right to call provision in its senior secured convertible notes from September 15, 2022 to December 31, 2022, in exchange for issuing its senior convertible note holders an aggregate of 314,579 shares of common stock with a fair value of approximately $943,000 at the date of grant, or $3.00 per common share. The aggregate amount of $1.6 million was recorded as a financing cost, a component of other expense, in the accompanying condensed statements of operations.
The shares of common stock underlying the Notes and the Warrants are subject to registration rights, and such shares must be registered within 90 days after the effectiveness of the Company’s initial public offering. If the Company fails to register the shares within 90 days, the Company agreed