Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in Part 1, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended February 29, 2024, filed with the SEC on June 13, 2024. Except as set forth below, there have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended February 29, 2024.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
As of February 29, 2024, we had U.S. federal net operating loss (NOL) carryforwards of $14.5 million and various state NOLs, which we may use to reduce future taxable income. We have established a valuation allowance against the carrying value of these deferred tax assets. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future taxable income.
In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (the Code) a corporation that undergoes an ownership change (i.e., a more-than 50% ownership change by one or more stockholders or groups of stockholders who own at least 5% of a companys stock over a three-year testing period) is subject to limitations on its ability to utilize its NOLs to offset future taxable income. Furthermore, our ability to utilize NOLs of companies that we have acquired or may acquire in the future may be subject to limitations. Changes in our stock ownership, some of which are outside of our control, could also result in limitations under Section 382 of the Code. Our NOLs may also be limited under similar provisions of state law. For these reasons, we may not be able to realize a tax benefit from the use of our NOLs.
The sale of shares of our common stock acquired by purchasers in private placement transactions could cause the price of our common stock to decline.
We have registered for sale by investors in a private placement transaction (the Selling Stockholders) up to 1,250,000 shares of our common stock. Depending on a variety of factors, including market liquidity of our common stock, the sale of shares by the Selling Stockholders may cause the trading price of our common stock to decline.
Our need for future financing may result in the issuance of additional securities, which will cause investors to experience dilution.
Our cash requirements may vary from those now planned, depending upon numerous factors. Accordingly, we may need to obtain additional funding in connection with our continuing operations. There are no other commitments by any person for future financing. Our securities may be offered to other investors at a price lower than the price per share offered to current stockholders, or upon terms which may be deemed more favorable than those offered to current stockholders. In addition, the issuance of securities in any future financing may dilute an investors equity ownership and have the effect of depressing the market price for our securities. Moreover, we may issue securities from time to time to procure qualified personnel or for other business reasons. The issuance of any such securities, which is at the discretion of our board of directors, may further dilute the equity ownership of our stockholders.
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We have additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our common stock.
Our Amended and Restated Certificate of Incorporation authorizes the issuance of 46,000,000 shares of common stock and 250,000 shares of preferred stock. In certain circumstances, our common stock, as well as the awards available for issuance under our equity incentive plans, can be issued by our board of directors without stockholder approval. Any future issuances of such stock would further dilute the percentage ownership of us held by holders of preferred stock and common stock. In addition, the issuance of certain securities, including pursuant to the terms of our stockholder rights plan, may be used as an anti-takeover device without further action on the part of our stockholders, and may adversely affect the holders of the common stock.
Future sales of shares of common stock could cause the market price for our common stock to decline.
We cannot predict the effect, if any, that market sales of shares of our common stock or the availability of shares of common stock for sale will have on the market price of our common stock prevailing from time to time. Sales of substantial amounts of shares of common stock in the public market, or the perception that those sales will occur, could cause the market price of our common stock to decline or be depressed.
Our New Credit Agreement imposes operating and financial restrictions on us.
On September 30, 2024, we entered into a credit agreement with RMC Credit Facility, LLC (the New Credit Agreement), which is secured by certain personal property and real property of the Company. The New Credit Agreement contains covenants that limit the ability of the Company to:
incur and guarantee additional debt;
incur liens;
make acquisitions and other investments;
dispose of assets; or
make capital expenditures in any fiscal year in excess of $3.5 million.
Further, the New Credit Agreement contains financial covenants that require compliance with a maximum ratio of total liabilities to total net worth and a minimum current ratio, in each case tested at the end of each fiscal quarter. These covenants may adversely affect our ability to finance our operations, meet or otherwise address our capital needs, pursue business opportunities or react to market conditions, or otherwise restrict our activities or business plans. We cannot assure you that we will be able to comply with any such restrictive covenants. A breach of any of these covenants could result in an event of default under the New Credit Agreement. In the event that we are unable to comply with these covenants in the future, we would seek an amendment or waiver of the covenants. We cannot assure you that any such waiver or amendment would be granted. If an event of default occurs, the lender may elect to accelerate our obligations under the New Credit Agreement. We might not be able to repay our debt or borrow sufficient funds to refinance it on terms that are acceptable to us or at all.
Servicing our debt under New Credit Agreement may require a significant amount of cash, and we may not have sufficient cash flow from our business to pay all of our indebtedness.
As of SepteNovember 30, 2024, we had $6.0 million principal amount outstanding under our New Credit Agreement. Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness under the New Credit Agreement depends on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt, or obtaining additional debt financing or equity capital on terms that may be onerous or highly dilutive. Our ability to refinance any future
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indebtedness will
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depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. Additionally, the New Credit Agreement contains, and any of our future debt agreements may also contain, restrictive covenants that may prohibit us from adopting some or any of these alternatives. For example, the New Credit Agreement contains negative covenants that restrict the Companys ability to incur indebtedness, create liens, make investments, dispose of assets and make certain capital expenditures. Our failure to comply with these covenants could result in an event of default under our indebtedness which, if not cured or waived, could result in the acceleration of our debt under the New Credit Agreement.
In addition, our indebtedness, combined with our other financial obligations and contractual commitments, could have other important consequences. For example, it could:
require a portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital and capital expenditures, and for other general corporate purposes;
make us more vulnerable to adverse changes in general U.S. and worldwide economic, industry, and competitive conditions and adverse changes in government regulations;
limit our flexibility in planning for, or reacting to, changes in our business and industry; and
place us at a disadvantage compared to our competitors who have less debt.
Any of these factors could harm our business, results of operations, and financial condition. In addition, if we incur additional indebtedness, the risks related to our business and our ability to service or repay our indebtedness would increase.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.