AVCT American Virtual Cloud Technologies Inc

Item 1A. Risk Factors

An investment in our common stock involves a high degree of risk. You should consider carefully all of the risks described below, together with the other information contained in this Annual Report on Form 10-K, before making a decision to invest in our common stock. If any of the following events occur, our business, financial condition and operating results may be materially and adversely affected. In that event, the trading price of our common stock could decline, and you could lose all or part of your investment.

Risks Related to Our Business and Industry

Our operations and revenue will be substantially reduced following the sale of Computex, which may negatively impact the value and liquidity of our common stock.

Upon the sale of Computex, our operations will be limited to our Kandy Business, unless the Company acquires one or more companies. There can be no assurance that we will be successful at growing our Kandy Business or that the Kandy business will be successful or that we will be able to make acquisitions. A failure by us to grow our Kandy Business or to secure additional sources of revenue following the sale of Computex could negatively impact the value and liquidity of our common stock.

We will continue to incur the expense of complying with public company reporting requirements following the sale of Computex.

After the sale of Computex, we will continue to be required to comply with the applicable reporting requirements of the Securities Exchange Act of 1934, as amended, even though compliance with such reporting requirements may be economically burdensome.

General economic weakness may harm the Company’s operating results and financial condition.

The Company’s results of operations are largely dependent upon the state of the economy. Global economic weakness and uncertainty may result in decreased sales, gross margin, earnings and/or growth rates. In addition, material changes in trade agreements between the U.S. and other countries may, for example, negatively affect the Company’s ability to purchase products, its ability to import or export products, and could negatively affect pricing and product availability. Adverse economic conditions could negatively affect demand for the Company’s products and services and could impair the ability of customers to pay for such products and services.

The Company’s business could be adversely affected by the COVID-19 outbreak.

Commencing in December 2019, the COVID-19 outbreak began spreading throughout the world, including the first outbreak in the US in February 2020. On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. COVID-19 has disrupted and continues to significantly disrupt local, regional, and global economies and businesses, and is disrupting supply chains and affecting production and sales across a range of industries.

In response to the COVID-19 outbreak, the US governments and governments in many countries have taken preventative or protective actions, such as imposing restrictions on travel and business operations. Temporary closures of businesses have been ordered and numerous other businesses have temporarily closed voluntarily. These actions may continue to expand in scope, type and impact, and such measures, while intended to protect human life, are expected to have significant adverse impacts on domestic and foreign economies. It is likely that the current outbreak or continued spread of COVID-19 will cause an economic slowdown, which may result in a global recession. The effectiveness of economic stabilization efforts being taken to mitigate the effects of the COVID-19 outbreak is currently uncertain.

A public health pandemic, including COVID-19, poses the risk that the Company, its affiliates, employees, suppliers, customers and others may be prevented from conducting business activities for an indefinite period of time, due to shutdowns, travel restrictions and other actions that may be requested or mandated by governmental authorities. Such actions may prevent the Company from accessing the facilities of its customers, thereby affecting its ability to deliver products and provide services. In addition, the Company’s customers may choose to delay or abandon projects.

The Company has modified its business practices (including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences), and may take further actions as may be required by governmental authorities or that the Company determines to be in the best interests of its employees, customers, partners, and suppliers.

If such conditions continue for a significant period of time, the Company’s liquidity could be negatively impacted and it may be required to pursue additional sources of financing to obtain working capital, maintain appropriate inventory levels and meet its financial obligations. The Company’s ability to obtain any required financing is not guaranteed and is largely dependent upon evolving market conditions and other factors. The Company cannot assure you that it would be able to take any of these actions on terms that are favorable or at all, or that these actions would be successful in permitting the Company to meet its scheduled debt service obligations or satisfy its capital requirements, or that these actions would be permitted under the terms of its existing or future debt agreements, including the Company’s Comerica Credit Agreement (the “Credit Agreement”).

Even after the COVID-19 outbreak has subsided, the Company may continue to experience significant impacts to its business as a result of the global economic impact of the COVID-19 outbreak, including any economic downturn or recession or other long-term effects that have occurred or may occur in the future. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers, employees and vendors, all of which are uncertain and cannot be predicted. At this point, the extent to which COVID-19 may impact our financial condition and/or results of operations is uncertain.

The Company has customer concentration, and if the Company loses one or more of its large volume customers, its earnings may be materially affected.

Following the Company’s sale of the Computex business in March 2022, it has significant concentration of customers. The five top customers of the Company’s Kandy business, which is the Company’s sole business segment following the sale of Computex, accounted for 68% of the revenues of that business segment during Fiscal 2021. There are inherent risks whenever a significant percentage of total revenues are concentrated with a limited number of customers. Revenues from our largest customers may fluctuate from time to time based on numerous factors, including market conditions, which may be outside of our control. Contracts between the Company and its customers for the provision of products and/or services are generally in the form of non-exclusive agreements that do not contain volume purchase commitments, and are terminable by either party upon 30 days’ notice. The loss of one or more of the Company’s largest customers, the failure of such customers to pay amounts due, or a material reduction in sales dollars by such customers could have a material adverse effect on the Company’s business, financial position, results of operations and cash flows.

Changes in the IT industry, customers’ usage, IT procurement, and/or rapid changes in product standards may result in reduced demand for technology solutions and services that the Company sells.

The Company’s results of operations are influenced by a variety of factors, including the condition of the IT industry, shifts in demand for, or availability of IT hardware, software, peripherals and services. In addition, the Company’s results of operations may be influenced by industry introductions of new products, upgrades, changes in the methods of distribution, and changes in the nature of IT consumption and procurement. Further, the industry is characterized by rapid technological change and frequent introduction of new products, product enhancements and new distribution methods or channels, each of which can decrease demand for current products or render them obsolete. In addition, the proliferation of cloud technology, infrastructure as a service (IaaS), software as a service (SaaS), platform as a service (PaaS), software defined networking, or other emerging technologies could reduce the demand for products and services that the Company sells. Introduction of certain cloud offerings could influence the Company’s customers to move workloads to other cloud providers, which may reduce the procurement of products and services from the Company. With the significant investment in personnel, any of these shifts or changes could adversely impact the Company’s financial position due to competition or changes in the industry or improper focus or selection of the products and services that the Company sells. Also, if the Company fails to react in a timely manner to such changes, its results of operations could be adversely affected.

Fluctuations in oil and gas prices could directly or indirectly impact the Company’s customers, which could have a material adverse impact on the Company’s financial condition, results of operations and cash flows.

Demand for the Company’s products and services depends, in part, on expenditures by its customers. These expenditures are generally dependent on customers’ views of future oil and natural gas prices, which are sensitive to customers’ views of future economic growth. Declines, as well as anticipated declines, in oil and gas prices could result in project modifications, delays or cancellations, general business disruptions, and delays in payment of, or nonpayment of, amounts that are owed to the Company. These effects could have a material adverse effect on the Company’s financial condition, results of operations and cash flows. The oil and gas industry has historically experienced periodic downturns, which have been characterized by diminished demand for the Company’s products and services as well as downward pressure on the prices it charges. A significant downturn or sustained market uncertainty could result in a reduction in demand for the Company’s services and could adversely affect its financial condition, results of operations and cash flows.

The Company may fail to innovate or create new solutions which align with changing market and customer demand.

As a provider of a comprehensive set of solutions, which involves the offering of bundled solutions consisting of direct IT sales, advanced professional and managed services, the Company expects to encounter some of the challenges, risks, difficulties, and uncertainties frequently encountered by companies providing bundled solutions in rapidly evolving markets. Some of these challenges include the Company’s ability to increase the total number of users of its services, its ability to adapt to meet changes in its markets as well as competitive developments. The Company’s personnel must continually stay current with vendor and marketplace technology advancements and continue to create solutions which can integrate evolving vendor products and services. Further, the Company may provide customized solutions and services that are solely reliant on its own marketing, design and fulfillment services, and the Company may lack the skills or personnel to execute. The Company’s failure to innovate and provide value to its customers may erode its competitive position and market share and may lead to a decrease in revenue and financial performance.

In all of the Company’s markets, some of its competitors have greater financial, technical, marketing, and other resources than the Company does. In addition, some of these competitors may be able to respond more quickly to new or changing opportunities, technologies, and customer requirements. Many current and potential competitors engage in more extensive promotional marketing and advertising activities, offer more attractive terms to customers, and adopt more aggressive pricing and credit policies than the Company does. The Company may not be successful in achieving revenue growth which may have a material adverse effect on its future operating results as a whole.

The Company may not be able to hire and/or retain the personnel that it needs.

To increase market awareness and sales of the Company’s offerings, the Company may need to expand its marketing efforts and sales operations in the future. The Company’s products and services require a sophisticated sales effort and significant technical engineering talent. For example, its sales and engineering candidates must have highly technical hardware and software knowledge to create a customized solution for its customers’ business processes. Competition for qualified sales, marketing and engineering personnel fluctuates depending on market conditions, and the Company may not be able to hire or retain sufficient personnel to maintain and grow its business. Frequently, the Company’s competitors require their employees to agree to non-compete and non-solicitation agreements as part of their employment. This makes it more difficult for the Company to hire, and also may increase the costs of reviewing and managing non-compete restrictions. Additionally, in some cases, the Company’s relationship with a customer may be impacted by turnover in its sales or engineering team.  

The Company faces substantial competition from other companies.

The Company competes in all areas of its business against local, regional, national, and international firms, including other direct marketers; national and regional resellers; online marketplace competitors; and regional and national service providers. In addition, the Company faces competition from vendors, which may choose to market their products directly to end-users, rather than through channel partners such as the Company, and this could adversely affect the Company’s future sales. Many competitors compete principally on price and may have lower costs or charge lower prices than the Company does and, therefore, the Company’s gross margins may not be maintainable. Online market place competitors are continually improving their pricing and offerings to customers as well as making it easier to use their online marketplaces. Also, the Company’s competitors may offer better or different products and services than the Company does. In addition, the Company does not have guaranteed purchasing volume commitments from its customers and, therefore, its sales volume may be volatile.

The Company may not adequately protect itself through its contracts, or its insurance policies may not be adequate to address potential losses or claims.

The Company’s contracts may not protect it against the risks inherent in its business including, but not limited to, warranties, limitations of liability, indemnification obligations, human resources and subcontractor-related claims, patent and product liability, regulatory and compliance obligations, and data security and privacy. Also, the Company faces pressure from its customers for competitive pricing and contract terms. The Company also is subject to audits by various vendor partners and customers relating to purchases and sales under various contracts. In addition, the Company is subject to indemnification claims under various contracts.

The Company depends on having creditworthy customers to avoid an adverse impact on its operating results and financial condition.

If the credit quality of the Company’s customer base materially decreases, or if the Company experiences a material increase in its credit losses, the Company may find it difficult to continue to obtain the required capital for its business, and its operating results and financial condition may be harmed. In addition to the impact on the Company’s ability to attract capital, a material increase in its delinquency and default experience would itself have a material adverse effect on its business, operating results, and financial condition.

The Company may be liable for misuse of its customers’ or employees’ information.

Third-parties, such as hackers, could circumvent or sabotage the security practices and products used in the Company’s product and service offerings, and/or the security practices or products used in the Company’s internal IT systems, which could result in disclosure of sensitive or personal information, unauthorized procurement, or other business interruptions that could damage the Company’s reputation and disrupt its business. Attacks may range from random attempts to coordinated and targeted attacks, including sophisticated computer crime and advanced persistent threats.

If third-parties or the Company’s employees are able to maliciously penetrate its network security or otherwise misappropriate its customers’ information or employees’ personal information, or other information for which its customers may be responsible and for which the Company agrees to be responsible in connection with service contracts into which it may enter, or if the Company gives third-parties or its employees improper access to certain information, the Company could be subject to liability. This liability could include claims related to unauthorized access to devices on its network; unauthorized access to its customers’ networks, applications, data, devices, or software; and identity theft or other similar fraud-related claims. This liability could also include claims related to other misuses of or inappropriate access to personal information. Other liability could arise from claims alleging misrepresentation of the Company’s privacy and data security practices. Any such liability for misappropriation of information could decrease the Company’s profitability. In addition, federal and state agencies have been investigating various companies to determine whether they misused or inadequately secured information. The Company could incur additional expenses when new laws or regulations regarding the use of information are enacted, or if governmental agencies require the Company to substantially modify its privacy or security practices. The Company could fail to comply with applicable data privacy laws, the violation of which may result in audits, fines, penalties, litigation, or administrative enforcement actions with associated costs.

Advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments may result in a compromise or breach of the security practices the Company uses to protect sensitive customer transaction information and employee information. A party who is able to circumvent the Company’s security measures could misappropriate proprietary information or cause interruptions in the Company’s operations. Further, third-parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords, or other information or otherwise compromise the security of the Company’s internal networks and/or its customers’ information. Since techniques used to obtain unauthorized access change frequently and the size and severity of security breaches are increasing, the Company may be unable to implement adequate preventative measures or timely identify or stop security breaches while they are occurring.

The Company may be required to expend significant capital and other resources to protect against security breaches or to remediate the subsequent risks and issues caused by such breaches. The Company’s security measures are designed to protect against security breaches, but its failure to prevent such security breaches could cause it to incur significant expense to investigate and respond to a security breach and correct any problems caused by any breach, subject it to liability, damage its reputation, and diminish the value of its brand. There can be no assurance that the limitations of liability in Company contracts would be enforceable or adequate or would otherwise protect the Company from any such liabilities or damages with respect to any particular claim. The Company also cannot be sure that its existing insurance coverage for errors and omissions or security breaches will continue to be available on acceptable terms or in sufficient amounts to cover one or more large claims, or that its insurers will not deny coverage as to any future claim. The successful assertion of one or more large claims against the Company that exceeds its available insurance coverage, or changes in its insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have an adverse effect on the Company’s business, financial condition, and results of operations.

Failure to comply with new laws or changes to existing laws may adversely impact the Company’s business.

The Company’s operations are subject to numerous laws and regulations in a number of areas including, but not limited to, laws relating to labor and employment, immigration, advertising, e-commerce, tax, imports and exports, data privacy, competition, the environment, health, and safety. Compliance with these laws and regulations may be onerous and expensive, and may not be consistent across jurisdictions, thereby further increasing the cost of compliance, the cost of doing business, and the risk of noncompliance. Though the Company has designed policies and procedures to comply with applicable laws and regulations, there can be no certainty that employees, contractors, or agents will fully comply with such policies and procedures.

We may face risks associated with our growing international operations that could adversely affect the Company.

The Company’s operations outside the United States include a Canadian division that was acquired as part of the Kandy acquisition. The Company also has employees in Mexico as well as representatives in the United Kingdom and Israel. Approximately 30% of the Company’s employees are based outside of the US. For Kandy, more than 60% of its employees are based outside of the US. In addition, the Company has plans to expand its geographic footprint both within and outside the US. Foreign operations are subject to risks that are inherent in operating within different legal, political and economic environments. Among the risks are changes in tax laws, possible limitations on foreign investment and income repatriation, government price or foreign exchange controls, and restrictions on currency exchange. Such operations may require significant management attention and financial resources to successfully grow. In addition, international operations are subject to other inherent risks, including:

The departure of certain of the Company’s key executives or key members of its senior management team and/or failure to successfully implement a succession plan could adversely affect the Company’s business.

The departure of certain key executives or key members of the Company’s senior management team and/or failure to successfully implement a succession plan could disrupt the Company’s business and impair the execution of its business strategies. The Company’s executive officers are at the forefront of its strategic direction and focus, and therefore believes that its success depends in part upon its ability to retain the services of certain executive officers and senior members of its management team and also depends on its ability to successfully implement a succession plan. Therefore, the departure of any of such persons without replacement by qualified successors could adversely affect the Company’s ability to effectively manage its overall operations and successfully execute current or future business strategies and could cause instability within the Company’s workforce.

Changes in accounting standards, or the misapplication of current accounting standards, may adversely affect the Company’s future financial results.

The Company prepares its financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”). These accounting principles are subject to interpretation by the Financial Accounting Standards Board, the Public Company Accounting Oversight Board (“PCAOB”), the SEC, the American Institute of Certified Public Accountants (“AICPA”) and various other bodies formed to interpret and create appropriate accounting policies. Periodic assessments required by current or new accounting standards may result in noncash charges and/or changes in presentation or disclosure. In addition, any change in accounting standards could influence the Company’s customers’ decision to purchase from the Company or finance transactions with the Company, which could have a significant adverse effect on the Company’s financial position or results of operations.

For example, a relatively new accounting standard requires the Company to determine if it is the principal or agent in transactions with its customers. In addition, the manner in which some of the Company’s products are bundled, and the voluminous number of products and services the Company sells can add to the level of complexity. Mischaracterization of these products and services could result in misapplication of revenue recognition policies. In addition, judgements and estimates are made in the application of GAAP, such as to determine the fair value of assets acquired, and liabilities assumed in business combinations, assessments of goodwill impairment, the estimating of the allowance for doubtful accounts and the determination of the cost of professional and managed services. If the Company is unable to accurately estimate such amounts, including the time-line for completion of contracts, the profitability of its contracts and its profits overall may be materially and adversely affected.

A natural disaster or other adverse occurrence at one of the Company’s facilities could damage its business.

As of December 31, 2021, the Company has one warehouse and a distribution facility in the U.S. If such facilities were to be seriously damaged by a natural disaster or other adverse occurrence, the Company could utilize another distribution center or third-party distributors to ship products to its customers. However, this may not be sufficient to avoid interruptions in the Company’s business and may not be enough to meet the needs of all of the Company’s customers and could cause increased operating costs. In addition, the Company operates two customer facing data centers which contain its Securities Operations Center and Network Operations Center. The Company also operates certain sales offices as well as leased facilities in Ottawa, North Carolina and Mexico, along with a number of rented spaces that are used as server locations, all of which may contain business-critical data and confidential customer information. A natural disaster or other adverse occurrence at any such locations could negatively impact its business, results of operations or cash flows.

The Company could be exposed to additional risks if it continues to make strategic investments or acquisitions or enter into alliances.

The Company may continue to pursue transactions, including strategic investments, acquisitions or alliances, in an effort to extend or complement its existing business. These types of transactions involve numerous business risks, including risks related to the suitability of transaction partners, negotiated terms, the diversion of management’s attention from other business concerns, new product or service offerings into areas in which the Company has limited experience, entries into new geographic markets, its ability to retain key coworkers, its ability to retain key business relationships and risks related to integrating acquired businesses. There can be no assurance that the intended benefits of the Company’s investments, acquisitions and alliances will be realized, or that those benefits will offset the numerous risks or unforeseen factors, any of which could adversely affect the Company’s business, results of operations or cash flows.

In addition, the Company’s financial results could be adversely affected by impairment charges if goodwill and/or intangible assets that are recorded at the acquisition date should later become impaired, which could occur if market and economic conditions deteriorate. At December 31, 2021, for assets not held for sale, the carrying value of the Company’s goodwill was $10.5 million.

The Company faces risks of claims from third-parties for intellectual property infringement, including counterfeit products, that could harm its business.

The Company may be subject to claims if products that it resells is considered to infringe on the intellectual property rights of third-parties and/or are considered to be counterfeit products. Also, the vendors of certain products or services that the Company resells may not provide the Company with indemnification for infringement. However, the Company’s customers may seek indemnification from the Company, which could cause the Company to incur substantial costs in defending infringement claims against itself and its customers. In the event of such claims, the Company and its customers may be required to obtain one or more licenses from third-parties, and the Company may not be able to obtain such licenses at a reasonable cost, if at all. Defense of any lawsuit or failure to obtain any such required license could significantly increase the Company’s expenses and/or adversely affect its ability to offer one or more of its services.

Risks Related to Our Securities and Recent Acquisitions

Nasdaq may delist our securities from quotation on its exchange which could limit investors’ ability to trade in our securities and subject us to additional trading restrictions.

Our common stock and public warrants are currently listed on the Nasdaq. There can be no assurance that we will continue to be able to meet Nasdaq’s listing standards with respect to our securities. If Nasdaq delists our common stock from trading on its exchange for failure to meet the listing standards, we and our stockholders could face significant material adverse consequences including:

The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” Because our common stock and public warrants are currently listed on the Nasdaq, our common stock and public warrants are covered securities. Although the states are preempted from regulating the sale of our securities, the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular case. Further, if we were no longer listed on the Nasdaq, our securities would not be covered securities and we would be subject to regulation in each state in which we offer our securities.

If the benefits of our Kandy acquisition do not meet the expectations of investors or securities analysts, the market price of our securities may decline.

If the benefits of our Kandy acquisition do not meet the expectations of investors or securities analysts, the market price of our securities may decline. Fluctuations in the price of our securities could contribute to the loss of all or part of your investment. Even though there is an active market for our securities, the trading price of our securities could be volatile and be subject to wide fluctuations in response to various factors, some of which are beyond our control. Any of the factors listed below could have a material adverse effect on your investment in our securities and our securities may trade at prices significantly below the price you paid for them. In such circumstances, the trading price of our securities may not recover and may experience a further decline.

Factors affecting the trading price of our securities may include:

Broad market and industry factors may materially harm the market price of our securities irrespective of our operating performance. The stock market in general, and the Nasdaq in particular, have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of our securities, may not be predictable. A loss of investor confidence in the market for retail stocks or the stocks of other companies which investors perceive to be similar to the Company could depress our stock price regardless of our business, prospects, financial conditions or results of operations. A decline in the market price of our securities also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future.

As an emerging growth company and a smaller reporting company, the Company is exempt from certain public company reporting requirements for so long as the Company qualifies as an emerging growth company and/or a smaller reporting company.

The Company qualifies as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act, as modified by the JOBS Act. As such, the Company is eligible for and has taken advantage of certain reporting exemptions, including (i) the exemption from the auditor attestation requirements with respect to internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, (ii) the exemptions from say-on-pay, say-on-frequency and say-on-golden parachute voting requirements and (iii) reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements. The Company will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which the market value of its common stock that is held by non-affiliates exceeds $700 million as of June 30 of that fiscal year, (ii) the last day of the fiscal year in which it has total annual gross revenue of $1.07 billion or more during such fiscal year, (iii) the date on which it has issued more than $1 billion in non-convertible debt in the prior three-year period or (iv) the last day of the fiscal year following the fifth anniversary of the date of the first sale of its common stock in the 2017 initial public offering (“IPO”) which would be December 31, 2022. If the Company continues to expand its business through acquisitions and/or continues to grow revenues organically, we may cease to be an emerging growth company prior to December 31, 2022.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the exemption from complying with new or revised accounting standards provided in Section 7(a)(2)(B) of the Securities Act as long as such company is an emerging growth company. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the same time that private companies adopt the new or revised standard.

Additionally, we are a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (1) the market value of our common stock held by non-affiliates exceeds $250 million as of the end of that year’s second fiscal quarter, or (2) our annual revenues exceeded $100 million during such completed fiscal year and the market value of our common stock held by non-affiliates exceeds $700 million as of the end of that year’s second fiscal quarter. Investors may find our common stock less attractive because we rely on these exemptions, which may result in a less active trading market for our common stock and/or could result in our stock price being more volatile. To the extent we take advantage of such reduced disclosure obligations, it may also make comparison of our financial statements with other public companies difficult or impossible.

Our management and their affiliates control a substantial interest in us and thus may influence certain actions requiring a stockholder vote.

As of February 1, 2022, directors and executive officers beneficially owned 42.7% of our common stock, and four shareholders and their affiliates beneficially owned more than 5% of our common stock, of which three beneficially owned more than 10% of our common stock, including certain warrants. Accordingly, these individuals have considerable influence regarding the outcome of any transaction that requires stockholder approval. Furthermore, our board of directors is divided into three classes, each of which will generally serve for a term of three years with only one class of directors being elected in each year. As a consequence of our “staggered board,” only a minority of our board of directors will be considered for election in any given year. In addition, our management and their affiliates, because of their ownership position, will have considerable influence regarding the outcome of such elections.

We may not be able to timely and effectively implement controls and procedures required by Section 404 of the Sarbanes-Oxley Act that are applicable to us.

As a public company, we are required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of internal control over financial reporting. To comply with the requirements of being a public company, we are required to provide attestation on internal controls, and we may need to undertake various actions, such as implementing additional internal controls and procedures and hiring additional accounting or internal audit staff. Management may not be able to effectively and timely implement the required controls and procedures that adequately respond to the regulatory compliance and reporting requirements of such statutes. If we are not able to implement the additional requirements of Section 404 in a timely manner or with adequate compliance, the Company may not be able to assess whether its internal control over financial reporting is effective, which may subject it to adverse regulatory consequences and could harm investor confidence and the market price of our common stock. Further, as an emerging growth company, our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the date we are no longer an emerging growth company. At such time, our independent registered public accounting firm may issue a report that is adverse in the event that it is not satisfied with the level at which our controls are documented, designed or operating.

In addition, our management and other personnel will need to continue to devote a substantial amount of time to compliance initiatives applicable to public companies, including compliance with Section 404 and the evaluation of the effectiveness of our internal control over financial reporting within the prescribed timeframe.

Provisions in our Charter and Bylaws and Delaware law may inhibit a takeover of us, which could limit the price investors might be willing to pay for our common stock and could entrench management.

Our Charter and Bylaws contain provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in their best interests. Our board of directors is divided into three classes, each of which serves for a term of three years with only one class of directors being elected in each year. As a result, at a given annual meeting only a minority of the board of directors may be considered for election. Since our “staggered board” may prevent our stockholders from replacing a majority of our board of directors at any given annual meeting, it may entrench management and discourage unsolicited stockholder proposals that may be in the best interests of stockholders. Moreover, our board of directors has the ability to designate the terms of and issuance of one or more new series of preferred stock.

We are also subject to anti-takeover provisions under Delaware law, which could delay or prevent a change of control. Together, these provisions may make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities.

Changes in laws or regulations, or a failure to comply with any laws and regulations, may adversely affect our business, investments and results of operations.

We are subject to laws and regulations enacted by national, regional and local governments. In particular, we are required to comply with certain SEC and other legal requirements. Compliance with, and monitoring of, applicable laws and regulations may be difficult, time consuming and costly. Those laws and regulations and their interpretation and application may also change from time to time and those changes could have a material adverse effect on our business, investments and results of operations. In addition, a failure to comply with applicable laws or regulations, as interpreted and applied, could have a material adverse effect on our business and results of operations.

Our Charter provides, subject to limited exceptions, that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders.

Our Charter provides, to the fullest extent permitted by law, that derivative actions brought in our name, actions against directors, officers and employees for breach of fiduciary duty and other similar actions may be brought only in the Court of Chancery in the State of Delaware and, if brought outside of Delaware, the stockholder bringing the suit will be deemed to have consented to service of process on such stockholder’s counsel; provided that the exclusive forum provision will not apply to (i) suits brought to enforce any liability or duty created by the Exchange Act, (ii) any other claim for which the federal courts have exclusive jurisdiction, (iii) any claim as to which the Court of Chancery determines that there is an indispensable party not subject to the jurisdiction of the Court of Chancery (and the indispensable party does not consent to the personal jurisdiction of the Court of Chancery within ten days following such determination), (iv) any claim which is vested in the exclusive jurisdiction of a court or forum other than the Court of Chancery, or (v) any claim for which the Court of Chancery does not have subject matter jurisdiction. Furthermore, our Charter also provides that unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Accordingly, there is uncertainty as to whether a court would enforce such provision with respect to suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to the forum provisions in our Charter.

This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees or stockholders, which may discourage lawsuits with respect to such claims, although our stockholders will not be deemed to have waived our compliance with federal securities laws and the rules and regulations thereunder. Alternatively, if a court were to find the choice of forum provision contained in our Charter to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results and financial condition.

Sales of a substantial number of shares of our common stock in the public market, or the perception that they might occur, could have an adverse effect on the market price of our common stock.

As of December 31, 2021, we had various types of warrants to purchase shares of our common stock at various exercise prices. To the extent any such warrants are exercised, additional shares of common stock will be issued, which will result in dilution to our stockholders and an increase in the number of shares of common stock eligible for resale in the public market. In addition, pursuant to the Incentive Plan, equity incentive awards representing an aggregate of up to 987,000 shares of our common stock were available for issuance as of December 31, 2021. All of our outstanding warrants are subject to agreements requiring us to register for resale the underlying shares of common stock. Sales of substantial numbers of such shares in the public market or the fact that the warrants may be exercised, could adversely affect the market price of our common stock or on our ability to obtain future financing.

Because we have no current plans to pay cash dividends on our common stock for the foreseeable future, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

We may retain future earnings, if any, for future operations, expansion and debt repayment and have no current plans to pay any cash dividends for the foreseeable future. Any decision to declare and pay dividends as a public company in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur. As a result, you may not receive any return on an investment in our common stock unless you sell your shares of common stock for a price greater than that which you paid for it.

Future issuances of any equity securities may dilute the interests of our stockholders and decrease the trading price of our common stock.

Any future issuance of equity securities could dilute the interests of our stockholders and could substantially decrease the trading price of our common stock. We may issue equity or equity-linked securities in the future for a number of reasons, including to finance the Company’s operations and business strategy (including in connection with acquisitions and other transactions), to adjust the Company’s ratio of debt to equity, to satisfy its obligations upon the exercise of then-outstanding options or other equity-linked securities, if any, or for other reasons.

The periodic valuation of certain warrants could increase the volatility in our net income (loss).

The change in fair value of our warrants is the result of changes in the Company’s stock price and warrants outstanding at each reporting period and represents the mark-to-market fair value adjustments to the outstanding warrants. Significant changes in our stock price or number of warrants outstanding may adversely affect our net income (loss).