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Zapata Computing Holdings Inc. (ZPTA)
:ZPTA
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Risk Overview Q1, 2024
Risk Distribution
50% Finance & Corporate
21% Tech & Innovation
15% Ability to Sell
9% Legal & Regulatory
3% Production
3% Macro & Political
Finance & Corporate - Financial and accounting risks. Risks related to the execution of corporate activity and strategy
This chart displays the stock's most recent risk distribution according to category. TipRanks has identified 6 major categories: Finance & corporate, legal & regulatory, macro & political, production, tech & innovation, and ability to sell.
Risk Change Over Time
S&P500 Average
Sector Average
Risks removed
Risks added
Risks changed
Zapata Computing Holdings Risk Factors
New Risk (0)
Risk Changed (0)
Risk Removed (0)
No changes from previous report
The chart shows the number of risks a company has disclosed. You can compare this to the sector average or S&P 500 average.
The quarters shown in the chart are according to the calendar year (January to December). Businesses set their own financial calendar, known as a fiscal year. For example, Walmart ends their financial year at the end of January to accommodate the holiday season.
The quarters shown in the chart are according to the calendar year (January to December). Businesses set their own financial calendar, known as a fiscal year. For example, Walmart ends their financial year at the end of January to accommodate the holiday season.
Risk Highlights Q1, 2024
Main Risk Category
Finance & Corporate
With 34 Risks
Finance & Corporate
With 34 Risks
Number of Disclosed Risks
68
-29
From last reportS&P 500 Average: 31
68
-29
From last reportS&P 500 Average: 31
Recent Changes
64Risks added
93Risks removed
4Risks changed
Since Mar 2024
64Risks added
93Risks removed
4Risks changed
Since Mar 2024
Number of Risk Changed
4
+4
From last reportS&P 500 Average: 3
4
+4
From last reportS&P 500 Average: 3
See the risk highlights of Zapata Computing Holdings in the last period.
Risk Word Cloud
The most common phrases about risk factors from the most recent report. Larger texts indicate more widely used phrases.
Risk Factors Full Breakdown - Total Risks 68
Finance & Corporate
Total Risks: 34/68 (50%)Below Sector Average
Share Price & Shareholder Rights17 | 25.0%
Share Price & Shareholder Rights - Risk 1
Our business and operations could be negatively affected if we become subject to any securities litigation or shareholder activism, which could cause us to incur significant expense, hinder execution of business and growth strategy and impact our stock price.Added
Share Price & Shareholder Rights - Risk 2
The market price of our Common Stock and warrants has been and may continue to be volatile and fluctuate substantially, which could cause the value of your investment to decline.Added
The trading price of our Common Stock and Warrants has been and may continue to be volatile and could be subject to fluctuations in response to various factors, some of which are beyond our control. For example, between April 1, 2024 shortly following the completion of the Merger, and May 10, 2024, the price per share of Common Stock has been as high as $15.50 per share and as low as $1.15 per share. These fluctuations could cause you to lose all or part of your investment in our Common Stock and Warrants. Factors that could cause fluctuations in the trading price of our Common Stock and Warrants include the following:
- price and volume fluctuations in the overall stock market from time to time;- volatility in the trading prices and trading volumes of technology industry stocks;- changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;- sales of shares of our Common Stock and Warrants by stockholders or by us;- failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who follow our company or our failure to meet these estimates or the expectations of investors;- the financial projections we may provide to the public, any changes in those projections or our failure to meet those projections;- announcements by us or our competitors of new offerings;- the public's reaction to our press releases, other public announcements and filings with the SEC;- rumors and market speculation involving us or other companies in our industry;- actual or anticipated changes in our results of operations or fluctuations in our results of operations;- actual or anticipated developments in our business, our competitors' businesses or the competitive landscape generally;- litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors;- developments or disputes concerning our intellectual property or other proprietary rights;- announced or completed acquisitions of businesses, services or technologies by us or our competitors;- new laws or regulations or new interpretations of existing laws or regulations applicable to our business;- changes in accounting standards, policies, guidelines, interpretations or principles;any significant change in our management;- economic instability in the global financial markets and slow or negative growth of our markets; and - other factors described in this "Risk Factors" section.
In addition, in the past, following periods of volatility in the overall market and the market price of a particular company's securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management's attention and resources.
Share Price & Shareholder Rights - Risk 3
Our Certificate of Incorporation designates a state or federal court located within the State of Delaware as the exclusive forum for certain disputes between our stockholders and us, and also provides that the federal district courts will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act, each of which could limit our stockholders' ability to choose the judicial forum for disputes with us or our directors, officers, stockholders, or employees.Added
Our Certificate of Incorporation provides that, unless we consent to the selection of an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for any internal or intra-corporate claim or any action asserting a claim governed by the internal affairs doctrine, including, but not limited to, (i) any derivative action brought by a stockholder on our behalf, (ii) any claim of breach of a fiduciary duty owed by any of our directors, officers, stockholders, or employees and (iii) any claim against us arising under our Certificate of Incorporation, Bylaws or the DGCL. The Certificate of Incorporation designates the United States District Court for the District of Delaware as the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act.
This exclusive forum provision will not apply to claims under the Exchange Act, but will apply to other state and federal law claims including actions arising under the Securities Act. Section 22 of the Securities Act, however, created 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 a forum selection provision as written in connection with claims arising under the Securities Act.
This choice of forum provision may have the effect of increasing costs for investors to bring a claim against us and our directors and officers and of limiting 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 (but not prevent) lawsuits with respect to such claims.
Share Price & Shareholder Rights - Risk 4
Delaware law and provisions in our Certificate of Incorporation and Bylaws might discourage, delay or prevent a change in control of the Company or changes in our management and, therefore, depress the trading price of our Common Stock.Added
Our status as a Delaware corporation and the anti-takeover provisions of the DGCL may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder without the approval of holders of two-thirds of the voting power of our stockholders other than the interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our Certificate of Incorporation and Bylaws contain provisions that may make the acquisition of the Company more difficult, including the following:
- our Board is classified into three classes of directors with staggered three-year terms, and directors can only be removed from office for cause by the affirmative vote of holders of at least a majority of the voting power of our then-outstanding capital stock;- certain amendments to our Certificate of Incorporation will require the approval of stockholders holding two-thirds of the voting power of its then-outstanding capital stock;- our stockholders will only be able to take action at a meeting of stockholders and will not be able to take action by written consent for any matter;- vacancies on our Board will be able to be filled only by our Board and not by stockholders;- certain litigation against us can only be brought in Delaware;- our Certificate of Incorporation authorizes undesignated preferred stock, the terms of which may be established by our Board, which shares may be issued without the approval of the holders of our capital stock; and - advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders.
These anti-takeover defenses could discourage, delay, or prevent a transaction involving a change in control of the Company. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing or to cause us to take other corporate actions they desire, any of which, under certain circumstances, could limit the opportunity for our stockholders to receive a premium for their shares of Common Stock.
Share Price & Shareholder Rights - Risk 5
Our Common Stock is and will be subordinate to all of our indebtedness, future indebtedness, and any preferred stock, and effectively subordinated to all indebtedness and preferred equity claims against its subsidiaries.Added
Shares of our Common Stock are common equity interests and, as such, is junior to the Senior Secured Notes and will rank junior to all of our future indebtedness and other liabilities. Additionally, holders of our Common Stock may become subject to the prior dividend and liquidation rights of holders of any series of preferred stock that our Board may designate and issue without any action on the part of the holders of our Common Stock. Furthermore, our right to participate in a distribution of assets upon any of its subsidiaries' liquidation or reorganization is subject to the prior claims of that subsidiary's creditors and preferred stockholders.
Share Price & Shareholder Rights - Risk 6
We may issue additional Common Stock or other equity securities without stockholder approval, which would dilute existing stockholders' ownership interests and may depress the market price of our Common Stock.Added
We may issue additional shares of common stock or other equity securities of equal or senior rank in the future in connection with, among other things, financings, future acquisitions, repayment of outstanding indebtedness, employee benefit plans and exercises of outstanding options, warrants and other convertible securities without stockholder approval, in a number of circumstances.
On December 19, 2023, we and Legacy Zapata entered into the Purchase Agreement with Lincoln Park pursuant to which Lincoln Park has agreed to purchase, at our option, up to $75,000,000 of Common Stock from time to time over a 36-month period following the Commencement Date. On April 11, 2024, we issued 712,025 shares of our Common Stock to Lincoln Park as Commitment Shares. On April 12, 2024, we filed the Lincoln Park Registration Statement, which registers for resale the Commitment Shares and an additional 12,287,975 additional shares of Common Stock that may be issued to Lincoln Park in the future under the Purchase Agreement. On April 18, 2024, the Lincoln Park Registration Statement was declared effective.
When we sell shares to Lincoln Park, Lincoln Park may resell all, some or none of those shares of Common Stock at any time or from time to time in its discretion. Therefore, sales to Lincoln Park by us under the Purchase Agreement may result in substantial dilution to the interests of other holders of Common Stock. In addition, if we sell a substantial number of shares of Common Stock to Lincoln Park under the Purchase Agreement, or if investors expect that we will do so, the actual sales of shares of Common Stock or the mere existence of our arrangement with Lincoln Park may make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect such sales. While we have currently registered only 13,000,000 shares of Common Stock under the Lincoln Park Registration Statement, we may register and issue up to 150,712,025 shares of Common Stock in total to Lincoln Park if, for example, all the Common Stock were issued to Lincoln Park at the Floor Price of $0.50.
If we sell Common Stock to Lincoln Park, Lincoln Park would receive shares of Common Stock for up to 36 months following the Commencement Date at a discount to the then current market price (or at a discount to the average of the three lowest closing sale prices during the ten consecutive business days ending on the business day immediately preceding the purchase date). This gives Lincoln Park an incentive to sell such shares immediately. As such, Lincoln Park would not be subject to the same level of market risk as other investors. Each potential Lincoln Park purchase would result in the issuance of additional shares of Common Stock, which would further dilute our stockholders, and may in turn decrease the trading price of our Common Stock and our ability to obtain additional financing.
Additionally, on March 25, 2024, we entered into the Forward Purchase Agreement, pursuant to which Sandia has the right to purchase shares from us up to the Maximum Number of Shares (as defined in the Forward Purchase Agreement). Any transaction that constitutes a Dilutive Offering will trigger an increase in the Maximum Number of Shares to an amount equal to the quotient of (i) 1,500,000 divided by (ii) the quotient of (a) the price of such Dilutive Offering divided by (b) $10.00. Sandia's payment for the purchase of any Additional Shares will be netted against our equal cash prepayment to Sandia for such Additional Shares, so we will not receive any proceeds for such issuance until the end of the term of the Forward Purchase Agreement, unless Sandia elects to early terminate some or all of the shares subject to such agreement. Accordingly, Sandia may be incentivized to purchase Additional Shares immediately following a Dilutive Offering. The Forward Purchase Agreement excludes from the definition of Dilutive Offering drawdowns on the Purchase Agreement occurring during the 180 days after the effectiveness of the Lincoln Park Registration Statement, but following the end of such period, any drawdowns under the Purchase Agreement may constitute a Dilutive Offering. Additional purchases of Additional Shares pursuant to the Forward Purchase Agreement by Sandia may substantially dilute our Common Stock (See "We will need additional capital to continue as a going concern, implement our business plan or respond to business opportunities or unforeseen circumstances and such financing may not be available").
Our issuance of additional shares of Common Stock or other equity securities of equal or senior rank would have the following effects:
- a stockholder's proportionate ownership interest in the Company would decrease;- the amount of cash available per share, including for payment of dividends (if any) in the future, may decrease;- the relative voting strength of each previously outstanding share of Common Stock may be diminished; and - the market price of the Common Stock may decline.
Share Price & Shareholder Rights - Risk 7
Sales of a substantial amount of the Common Stock in the public markets may cause the market price of the Common Stock to decline.Added
Pursuant to certain lock-up agreements and restrictions in our Bylaws related to securities issued to Legacy Zapata stockholders in connection with the Merger and subject to certain exceptions, Legacy Zapata stockholders are contractually restricted from selling or transferring any of their shares. However, simultaneously with the closing of the Merger, we released from lock-up restrictions an aggregate of 2,300,000 shares of Common Stock held by stockholders subject to the Zapata Preferred Stock Lock-Up Agreement on a pro rata basis. Additionally, following the expiration of the lock-up periods prescribed in such documents, Legacy Zapata stockholders will not be restricted from selling Common Stock held by them, other than by applicable securities laws. As such, sales of a substantial number of shares of our Common Stock in the public market could occur at any time following the expiration of the applicable lock-up period. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our Common Stock.
As restrictions on resale end and registration statements are available for use, the sale or possibility of sale of these shares could have the effect of increasing the volatility in the price of our Common Stock or the market price of our Common Stock could decline if the holders of currently restricted shares of Common Stock sell them or are perceived by the market as intending to sell them. Moreover, the sale of shares under the Purchase Agreement, any announcement or other public disclosure regarding such sales should they occur, the perceived risk of such sales, the dilution that would result from such sales should they occur and the resulting downward pressure on our share price as a result of the foregoing could encourage investors to engage in short sales of our Common Stock. By increasing the number of shares of Common Stock offered for sale as a result of the resale registration statements we are filing and expect to file, material amounts of short selling could further contribute to progressive price declines in our Common Stock.
Share Price & Shareholder Rights - Risk 8
The potential exercise of additional rights under the Resale Registration Rights Agreement (as defined below) may adversely affect the market price of our Common Stock.Added
Up to twice in any 12-month period, certain of our and Legacy Zapata's stockholders party to the Amended and Restated Registration Rights Agreement, dated as of September 6, 2023, by and among certain of our security holders and us (the "Resale Registration Rights Agreement") may request to sell all or any portion of their registrable securities in an underwritten offering so long as the total offering price is reasonably expected to exceed $50 million or all of such holders' remaining registrable securities. We also agreed to provide customary "piggyback" registration rights, subject to certain exceptions.
Share Price & Shareholder Rights - Risk 9
The exercise of Warrants of our stock would increase the number of shares eligible for future resale in the public market and result in dilution to our stockholders. Such dilution will increase if more of our shares are redeemed.Added
As of March 31, 2024, we had outstanding Warrants to purchase an aggregate of 25,049,982 shares of our Common Stock, comprised of 11,499,982 Public Warrants and 13,550,000 Private Warrants, all of which are currently exercisable. The likelihood that those Warrants will be exercised increases if the trading price of shares of our stock exceeds the exercise price of the Warrants. The exercise price of these Warrants is $11.50 per share.
There is no guarantee that the Warrants will ever be in the money after they become exercisable and prior to their expiration, and as such, the Warrants may expire worthless.
To the extent the Warrants are exercised, additional shares of Common Stock will be issued, which will result in dilution to the holders of our stock and increase the number of shares eligible for resale in the public market. Holders of Warrants do not have a right to redeem the Warrants. Sales of substantial numbers of shares of Common Stock issued upon the exercise of Warrants in the public market or the potential that such Warrants may be exercised could also adversely affect the market price of our Common Stock.
Share Price & Shareholder Rights - Risk 10
If securities analysts do not publish research or reports about our business or if they publish negative evaluations of our Common Stock, the market price and trading volume of our Common Stock could decline.Added
The trading market for our Common Stock will rely, in part, on the research and reports that industry or financial analysts publish about us or our business. We do not currently have, and may never obtain, research coverage by industry or financial analysts. If no, or few, analysts commence coverage of us, the trading price of our Common 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 Common Stock, the price of our Common Stock could decline. If one or more of these analysts cease to cover our Common Stock, we could lose visibility in the market for our Common Stock, which in turn could cause our stock price to decline.
Share Price & Shareholder Rights - Risk 11
Reports published by analysts, including projections in those reports that differ from our actual results, could adversely affect the price and trading volume of Common Stock.Added
Securities research analysts may establish and publish their own periodic projections for us. These projections may vary widely and may not accurately predict the results we actually achieve. The share price of our Common Stock may decline if our actual results do not match the projections of these securities research analysts. If any of the analysts who may cover us issue an adverse or misleading opinion regarding us, our business model, our intellectual property or our stock performance, change their recommendation regarding shares of our Common Stock adversely or provide more favorable relative recommendations about our competitors, the price of shares of our Common Stock would likely decline. If one or more of these analysts ceases covering us or fails to publish reports on us regularly, the share price or trading volume of our Common Stock could decline.
Share Price & Shareholder Rights - Risk 12
There can be no assurance that we will be able to comply with the continued listing standards of Nasdaq.Added
Our Common Stock is listed on Nasdaq under the symbol "ZPTA." However, there is no guarantee that we will be able to comply with the continued listing standards of Nasdaq. 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:
- reduced liquidity;- a limited availability of market quotations for Common Stock;- a potential determination that Common Stock is a "penny stock," which will require brokers trading in Common Stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for shares of Common Stock;- a limited amount of analyst coverage; and a decreased ability to issue additional securities or obtain additional financing in the future.
Share Price & Shareholder Rights - Risk 13
Future issuances of Common Stock or rights to purchase Common Stock, including pursuant to our 2024 Equity and Incentive Plan (the "2024 Plan") or 2024 Employee Stock Purchase Plan (the "2024 ESPP"), or in connection with a Dilutive Offering Reset under the Forward Purchase Agreement, could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.Added
We have approximately 571.0 million shares of Common Stock authorized but unissued as of March 31, 2024, including (i) approximately 3.0 million shares issuable upon the exercise of options assumed from Legacy Zapata as a result of the Merger, (ii) approximately 3.5 million shares initially reserved under the 2024 Plan, (iii) approximately 0.6 million shares initially reserved for issuance under the 2024 ESPP, and (iv) approximately 25.0 million shares issuable upon exercise of Warrants. Our Certificate of Incorporation and the applicable provisions of the General Corporation Law of the State of Delaware (the "DGCL") authorize us to issue these shares of Common Stock and options, rights, warrants and appreciation rights relating to Common Stock for the consideration and on the terms and conditions established by our Board in its sole discretion, whether in connection with acquisitions, or otherwise.
We have outstanding Senior Secured Notes with an aggregate principal amount of $2,000,000 that are convertible at the option of the holder at a price of $8.50 per share, a Purchase Agreement with Lincoln Park, pursuant to which we may instruct Lincoln Park to purchase our shares, and a Forward Purchase Agreement, pursuant to which, in certain circumstances, Sandia may be entitled to purchase Additional Shares from us. See "Risk Factors-We will need additional capital to continue as a going concern, implement our business plan or respond to business opportunities or unforeseen circumstances and such financing may not be available."
In the future, we expect to obtain financing or to further increase our capital resources by issuing additional shares of our capital stock or offering debt (subject to the limitations under the Senior Secured Notes) or other equity securities, including senior or subordinated notes, debt securities convertible into equity, or shares of preferred stock. Issuing additional shares of capital stock, other equity securities, or securities convertible into equity may dilute the economic and voting rights of our then-existing stockholders, reduce the market price of our Common Stock, or both. Debt securities convertible into equity could be subject to adjustments in the conversion ratio pursuant to which certain events may increase the number of equity securities issuable upon conversion. Preferred stock, if issued, could have a preference with respect to liquidating distributions or a preference with respect to dividend payments that could limit our ability to pay dividends to the holders of our Common Stock. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond its control, which may adversely affect the amount, timing, or nature of its future offerings. As a result, holders of our Common Stock bear the risk that our future offerings may reduce the market price of our Common Stock and dilute their percentage ownership.
Share Price & Shareholder Rights - Risk 14
The agreements for our outstanding Warrants designate the courts of the State of New York or the United States District Court for the Southern District of New York as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by holders of Warrants, which could limit the ability of such warrant holders to obtain a favorable judicial forum for disputes with the Company.Changed
The agreements for our outstanding Warrants (the "Warrant Agreements") provide that, subject to applicable law, (i) any action, proceeding or claim against us arising out of or relating in any way to the warrant agreement, including under the Securities Act, will be brought and enforced in the courts of the State of New York or the United States District Court for the Southern District of New York, and (ii) we irrevocably submit to such jurisdiction, which jurisdiction shall be the exclusive forum for any such action, proceeding or claim. We will waive any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum.
Notwithstanding the foregoing, these provisions of the Warrant Agreements do not apply to suits brought to enforce any liability or duty created by the Exchange Act or any other claim for which the federal district courts of the United States of America are the sole and exclusive forum. Any person or entity purchasing or otherwise acquiring any interest in any of them shall be deemed to have notice of and to have consented to the forum provisions in the Warrant Agreements. If any action, the subject matter of which is within the scope the forum provisions of the warrant agreement, is filed in a court other than a court of the State of New York or the United States District Court for the Southern District of New York (a "foreign action") in the name of any holder of Warrants, such holder shall be deemed to have consented to (x) the personal jurisdiction of the state and federal courts located in the State of New York in connection with any action brought in any such court to enforce the forum provisions (an "enforcement action"), and (y) having service of process made upon such warrant holder in any such enforcement action by service upon such warrant holder's counsel in the foreign action as agent for such warrant holder.
This choice-of-forum provision may limit a warrant holder's ability to bring a claim in a judicial forum that it finds favorable for disputes with the Company, which may discourage such lawsuits. Alternatively, if a court were to find this provision of the Warrant Agreements inapplicable or unenforceable with respect to one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could materially and adversely affect our business, financial condition and results of operations and result in a diversion of the time and resources of our management and Board.
Share Price & Shareholder Rights - Risk 15
We are an "emerging growth company," and a "smaller reporting company," and if we take advantage of certain exemptions from disclosure requirements available to emerging growth companies, this could make our securities less attractive to investors and may make it more difficult to compare our performance with other public companies.Changed
We are an "emerging growth company," as defined in the JOBS Act, and for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy 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 earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of our initial public offering, (b) in which we have total annual gross revenue of over $1.235 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock held by non-affiliates exceeds $700 million as of the last business day of the second fiscal quarter of such year and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock, and our stock price may be more volatile.
Further, are 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 voting and non-voting common stock held by non-affiliates is less than $250 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than $100 million during the most recently completed fiscal year and the market value of our voting and non-voting common stock held by non-affiliates was less than $700 million measured on the last business day of our second fiscal quarter. To the extent we take advantage of such reduced disclosure obligations, it may also make comparison of its financial statements with other public companies difficult or impossible.
Share Price & Shareholder Rights - Risk 16
We may amend the terms of the Warrants in a manner that may be adverse to the holders of such Warrants, with the approval of at least 50% of the then-outstanding warrants issued pursuant to our Public Warrant Agreement dated as of January 12, 2022 ("Public Warrants") and, in the case of the warrants issued pursuant to our Private Warrant Agreement dated as of January 12, 2022 ("Private Warrants") with the approval of at least 50% of the then-outstanding Private Warrants. As a result, the exercise price of such warrants could be increased, the exercise period could be shortened and the number of shares of Common Stock purchasable upon exercise of such warrants, could be decreased, all without approval of the holders of each Warrant affected.Changed
The Public Warrants were issued in registered form under the Public Warrant Agreement and the Private Warrants are being registered for resale pursuant to this registration statement. The Warrant Agreements provide that the terms of the Warrants may be amended without the consent of any holder for the purpose of (i) curing any ambiguity or correcting any mistake or defective provision, including to conform the provisions of the Warrant Agreements to the descriptions of the terms of the Warrants set forth in the prospectus for the registration of such Warrants, (ii) adding or changing any provisions with respect to matters or questions arising under the Warrant Agreements as the parties may deem necessary or desirable and that the parties deem to not adversely affect the rights of the registered holders of the Warrants and (iii) providing for the delivery of an "alternative issuance" (as defined in the Warrant Agreement), but requires approval by the holders of at least 50% of the then-outstanding Public Warrants and, in the case of the Private Warrants, approval by the holders of at least 50% of the then-outstanding Private Warrants, to make any other changes. Accordingly, we may amend the terms of the Warrants in a manner adverse to a holder if holders of at least 50% of the then-outstanding Public Warrants (and at least 50% of the then-outstanding Private Warrants, in the case of the Private Warrants), approve of such amendment. Examples of such amendments could be amendments to, among other things, increase the exercise price of the Warrants, convert the Warrants into cash, or shorten the exercise period or decrease the number of shares of Common Stock purchasable upon exercise of a Warrant.
Share Price & Shareholder Rights - Risk 17
An active trading market for our Common Stock and Warrants may never develop or be sustained, which may cause shares of our Common Stock and Warrants to trade at a discount to the price implied by the Merger and make it difficult to sell shares of our Common Stock and Warrants.Changed
Our Common Stock is listed on the Nasdaq Global Market and our Warrants are listed on the Nasdaq Capital Market under the symbols "ZPTA" and "ZPTAW," respectively. However, we cannot assure you that an active trading market for our Common Stock or Warrants will develop on that exchange or elsewhere or, if developed, that any such trading market will be sustained. Accordingly, we cannot assure you of the likelihood that an active trading market for our Common Stock or Warrants will develop or be maintained, the liquidity of any trading market, your ability to sell your shares of our Common Stock or Warrants when desired or the prices that you may obtain for your securities.
Accounting & Financial Operations7 | 10.3%
Accounting & Financial Operations - Risk 1
We do not currently intend to pay cash dividends on our Common Stock, so any returns will be substantially limited to the value of our Common Stock.Added
Accounting & Financial Operations - Risk 2
If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.Added
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"), and the rules and regulations of the applicable listing standards of Nasdaq, including regular attestations by management concerning its internal control over financial reporting. Management may not be able to effectively and timely implement controls and procedures that adequately respond to these increased regulatory compliance and reporting requirements. If we are not able to implement the additional requirements of Section 404 of the Sarbanes-Oxley Act ("Section 404") in a timely manner or with adequate compliance, we may not be able to assess whether our internal control over financial reporting is effective and may fail to provide timely and accurate financial information to investors. This may subject us to adverse regulatory consequences and could harm investor confidence. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting, and financial compliance costs, make some activities more difficult, time consuming, and costly, and place significant strain on our personnel, systems, and resources.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. The controls required are not currently in place; however, we are working to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also working to design and maintain our internal control over financial reporting.
Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. In addition, changes in accounting principles or interpretations could also challenge our internal controls and require that we establish new business processes, systems, and controls to accommodate such changes. We have limited experience with implementing the systems and controls that will be necessary to operate as a public company, as well as adopting changes in accounting principles or interpretations mandated by the relevant regulatory bodies. Additionally, if these new systems, controls, or standards and the associated process changes do not give rise to the benefits that we expect or do not operate as intended, it could adversely affect our financial reporting systems and processes, the effectiveness of internal control over financial reporting, and/or our ability to produce timely and accurate financial reports. Moreover, our business may be harmed if we experience problems with any new systems and controls, resulting in delayed implementation or increased costs to correct any issues.
Further, in addition to the material weaknesses described below, weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our business or cause us to fail to meet our reporting obligations. That failure could result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting. Those reports will eventually be included in our periodic reports filed with the SEC. Ineffective disclosure controls or internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on Nasdaq.
Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until our first annual report filed with the SEC when we are an accelerated filer or a large accelerated filer. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting has been designed, documented, or is actively operating. Any failure to maintain effective disclosure controls and internal control over financial reporting could harm our business and could cause a decline in the trading price of our common stock.
Accounting & Financial Operations - Risk 3
We have identified material weaknesses in our internal control over financial reporting. If we are unable to remediate these weaknesses, identify additional material weaknesses in the future, or otherwise fail to maintain an effective system of internal control over financial reporting, this may result in misstatements in our financial statements, cause us to fail to meet periodic reporting obligations, or cause our access to capital markets to be impaired.Added
In connection with the preparation and audit of Legacy Zapata's financial statements as of and for the fiscal years ended December 31, 2023, and 2022, material weaknesses have been identified in its internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis.
The material weaknesses we identified include:
- Legacy Zapata did not employ sufficient accounting and financial reporting personnel with requisite knowledge and experience in the application of U.S. GAAP and SEC rules to facilitate accurate and timely financial reporting.
- Legacy Zapata did not maintain an effective risk assessment process, which led to improperly designed controls.
- Legacy Zapata did not design and maintain appropriate control activities; including those to support the appropriate segregation of duties over the review of account reconciliations, manual journal entries and safeguarding of assets.
- Legacy Zapata did not design and maintain formal accounting policies, procedures and controls over significant accounts and disclosures to achieve complete, accurate and timely financial accounting, reporting and disclosures.
- Legacy Zapata did not document, thoroughly communicate, and monitor controls processes and relevant accounting policies and procedures.
These material weaknesses could result in a misstatement of account balances or disclosures that would result in a material misstatement to our combined annual or interim financial statements that would not be prevented or detected. Had Legacy Zapata performed an evaluation of its internal control over financial reporting in accordance with Section 404, additional control deficiencies may have been identified by management, and those control deficiencies could have also represented one or more material weaknesses.
In an effort to remediate the material weaknesses, we have retained an accounting consulting firm to provide additional depth and breadth to our technical accounting and financial reporting capabilities. We intend to engage internal control consultants to assist us in performing a risk assessment to identify relevant risks and specify needed objectives. With their assistance, we intend to formalize and communicate our policies and procedures surrounding our financial close, financial reporting and other accounting processes, and to further develop and document necessary policies and procedures regarding our internal control over financial reporting, such that we are able to perform a Section 404 analysis of our internal control over financial reporting when and as required. We cannot assure that these measures will significantly improve or remediate the material weaknesses described above. We also cannot assure that we have identified all or that we will not have additional material weaknesses in the future. Accordingly, a material weakness may still exist when we report on the effectiveness of our internal control over financial reporting for purposes of our management's required attestation. Further, while we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm.
We have incurred and expect to incur additional costs to remediate these control deficiencies, though there can be no assurance that our efforts will be successful or that we will avoid potential future material weaknesses. If we are unable to successfully remediate our existing or any future material weaknesses in our internal control over financial reporting, or if we identify any additional material weaknesses, the accuracy and timing of our financial reporting may be adversely affected, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements, investors may lose confidence in our financial reporting, and our stock price may decline as a result. We also could become subject to investigations by Nasdaq, the SEC or other regulatory authorities.
Accounting & Financial Operations - Risk 4
Our ability to use existing or future net operating loss carryforwards and other tax attributes may be limited.Added
We have incurred net operating losses ("NOLs") for tax purposes for each year since our incorporation and we expect to continue to operate at a loss for the foreseeable future. As of December 31, 2023, Legacy Zapata had a cumulative U.S. federal carryforward of approximately $62.1 million and a cumulative state NOL carryforward of approximately $37.7 million. If not utilized, an immaterial amount of U.S. federal NOLs generated prior to 2018 will expire at various dates through 2037 and the state NOLs will expire at various dates through 2042. The U.S. federal NOLs generated after 2017 can be carried forward indefinitely. Under the U.S. Internal Revenue Code of 1986, as amended (the "Code"), the deductibility of the U.S. federal NOL carryforward as of December 31, 2023 (other than the immaterial amount generated prior to 2018) and all future U.S. federal NOL carryforwards is limited to 80% of taxable income, limiting or delaying in part the use of NOL carryforwards if and when we cease operating at a loss. We may potentially use these U.S. federal and state NOLs to offset taxable income for U.S. federal and state income tax purposes. However, the use of these NOLs may be subject to numerous limitations under the Code and under state tax laws. Among such limitations, Section 382 of the Code may limit the use of these NOLs in any year for U.S. federal income tax purposes in the event of certain past or future changes in ownership of us or Legacy Zapata. An ownership change under Section 382 of the Code, referred to in this discussion as an ownership change, generally occurs if one or more stockholders or groups of stockholders who own at least 5% of a company's stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. We have not conducted a Section 382 study to determine whether the use of our NOLs is impaired under Section 382 of the Code as a result of any prior ownership change. We may have previously undergone one or more ownership changes. An ownership change in respect of us also could be deemed to be an ownership change in respect of Legacy Zapata. The Merger, or future issuances or sales of our securities, including certain transactions involving our securities that are outside of our control, could result in ownership changes. Ownership changes that have occurred in the past or that may occur in the future could result in the imposition of an annual limit under Section 382 of the Code on the amount of pre ownership change NOLs and other tax attributes that we or Legacy Zapata could use to reduce our taxable income, potentially increasing or accelerating its liability for income taxes, and also potentially causing those tax attributes to expire unused. States may impose similar limitations on the use of applicable NOLs. We have recorded a valuation allowance related to NOL carryforwards and other deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets.
Any limitation on using NOLs, whether under Section 382 of the Code or otherwise under U.S. federal or state tax laws, could, depending on the extent of such limitation and the NOLs previously used, result in Legacy Zapata or us retaining less cash after payment of U.S. federal and state income taxes in respect of any year in which we have taxable income, rather than losses, than we would be entitled to retain if such NOLs were available as an offset against such income for U.S. federal and state income tax reporting purposes, which could adversely impact our operating results.
Accounting & Financial Operations - Risk 5
We are an early-stage company with a limited operating history, in a nascent industry, making it difficult to forecast future results.Added
We were founded in 2017 to develop and provide software with related services and proprietary IP to utilize quantum math on near term classical and future quantum hardware. Most recently, we are an Industrial Generative AI software company that develops custom quantum-inspired generative AI applications and provides accompanying services to solve complex industrial problems. The market focus for our Industrial Generative AI solutions and the use of quantum math and algorithms are nascent fields with uncertainly on future market uptake and in technological progress in the field.
There can be no assurance that we can or will meet the challenges commonly faced by early-stage companies, including the need to scale operations and to achieve and manage rapid growth. A number of factors could cause our scaling efforts to be adversely impacted, including any increased competition, lesser-than-expected growth or contraction of our overall market, our inability to accurately forecast demand for our customer offerings, our inability to establish sales or other partnerships with service firms, an inability to develop repeatable solutions, an inability to grow our team, or our failure, for any reason, to capitalize on growth opportunities. We have encountered and will encounter risks and uncertainties frequently experienced by early-stage companies in rapidly changing industries, such as the risks and uncertainties described herein. We cannot provide assurance that we can meet the challenges faced by all companies, including established companies, in rapidly changing or nascent industries. The failure to address these challenges successfully or promptly could have a material adverse effect on our future profitability.
Accounting & Financial Operations - Risk 6
We have a history of operating losses, which are expected to continue for the foreseeable future.Added
We have incurred significant operating losses since our inception. We incurred net losses of $22.6 million and $5.1 million during the three months ended March 31, 2024 and 2023, respectively, and we have a cumulative deficit since the formation of Legacy Zapata in November 2017 through March 31, 2024 of approximately $112.1 million. We believe that we will continue to incur operating and net losses each quarter at least for the foreseeable future. The size of future losses will depend on several factors, including the degree to which we expand our scientific, product, software engineering, sales and other teams, and the revenue that we can generate from sales of our Industrial Generative AI solutions. We also expect that our operating expenses will increase as a result of becoming a public company and will continue to increase as we grow our business.
Accounting & Financial Operations - Risk 7
Our estimate of market opportunities may prove to be inaccurate.Added
At present, there is no mature market for generative AI. This creates significant uncertainty in determining the potential market for our Industrial Generative AI solutions. For example, it is possible to estimate the current and potential total addressable market for generative AI as an industry, but these estimates are based on third-party estimates and our own internal judgment, both of which may be materially inaccurate. There can be no assurance that our or third-party estimates of the potential total addressable market for generative AI are correct, and such numbers do not account for the substantially more limited service obtainable market for our Industrial Generative AI solutions. Additionally, our market opportunities, future prospects, and future profitability will be materially lessened by delays in widespread enterprise adoption of generative AI, if enterprises adopt generative AI at all, which would reduce the relevant total addressable market.
Debt & Financing4 | 5.9%
Debt & Financing - Risk 1
We expect to require additional capital to pursue our business objectives and growth strategy, respond to business opportunities, challenges or unforeseen circumstances, and pay off deferred expenses incurred in connection with the Merger, and we may be unable to raise capital or additional financing when needed on acceptable terms, or at all.Added
Debt & Financing - Risk 2
We will need additional capital to continue as a going concern, implement our business plan or respond to business opportunities or unforeseen circumstances and such financing may not be available.Added
Through March 31, 2024, we have funded our operations primarily with proceeds from sales of Convertible Preferred Stock, Senior Notes (which were subsequently exchanged for Senior Secured Notes) and the Senior Secured Notes. Our continuation as a going concern is dependent upon our ability to identify future debt or equity financing and generate profitable operations from our operations. There can be no assurance that such capital will be available in sufficient amounts or on terms acceptable to us. These factors raise substantial doubt about our ability to continue as a going concern.
Our business plan also contemplates a substantial scaling of Zapata across all departments, including science, software engineering, and product design, in order to launch multiple products and/or offerings in a timely manner to obtain and preserve a competitive advantage. This scaling will require substantial capital at a time when we project we will be operating at a loss before we become profitable, and this may take longer than we anticipate. Consequently, our expansion is limited in proportion to our growth in revenue and available capital. The capital required to sustain our business during this period may be greater than anticipated. We have also deferred certain costs incurred in connection with the Merger, with deferred payments coming due as early as May 2024. In addition, presently unforeseen opportunities or circumstances may require capital beyond what we currently project. The period during which we expect to operate at a loss may be extended by circumstances beyond our control.
We may obtain additional financing through public or private equity or debt financings (subject to the limitations under the Senior Secured Notes), such as the Purchase Agreement, that may result in dilution to stockholders, the issuance of securities with priority as to liquidation and/or dividend and other rights more favorable than the Common Stock, or the imposition of debt covenants and repayment obligations or other restrictions that may adversely affect our business. For example, as of March 31, 2024, we have outstanding an aggregate principal amount of $2.0 million in Senior Secured Notes. These Senior Secured Notes, among other things, convert at the option of the holder at $8.50 per shares and prohibit Legacy Zapata from issuing additional indebtedness, subject to limited exceptions. There is no guarantee that future financing will be at financial terms equal to or more favorable than these, and we may need to enter into future equity or, if available, debt financing at significantly less favorable terms. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.
Additionally, the Forward Purchase Agreement may negatively impact our ability to raise additional capital through equity or debt financings, due to the potential substantial dilution to our stockholders that could occur during the term of the instrument (which will be no more than two years from the date of the closing of the Merger), or may negatively affect our ability to obtain favorable or acceptable terms in connection with any such equity or debt financing. Under the Forward Purchase Agreement, the Reset Price is $10.00 per share. Beginning 180 days after the closing of the Merger, the Reset Price will subject to monthly resets, to be the greater of (a) $4.50 and (b) the 30-day volume weighted average price of shares of Common Stock immediately preceding the reset date (but not to exceed $10.00). If during the term of the Forward Purchase Agreement, we sell or issue any shares of Common Stock or securities convertible or exercisable for shares of Common Stock at an effective price of less than the Reset Price (a "Dilutive Offering"), then the Reset Price would immediately reset to the effective price of such offering, subject to certain exceptions, including drawdowns under the Purchase Agreement during the 180 days following effectiveness of the Lincoln Park Registration Statement. Reduction of the Reset Price would reduce any payments Sandia may be obligated to pay us with respect to any Terminated Shares. Additionally, in the event of a Dilutive Offering, the maximum number of shares available under the Forward Purchase Agreements could be increased if the Dilutive Offering occurs at a price below $10.00 per share. The maximum number of shares would be reset to the quotient of (i) 1,500,000 divided by (ii) the quotient of (a) the price of such Dilutive Offering divided by (b) $10.00. Depending on the Reset Price over the 24 months following the closing of the Merger (which may be impacted by the price at which shares of our Common Stock could be sold through a potential public or private equity offering) and the manner in which the Forward Purchase Agreement transactions are settled, we may never receive any payments under the Forward Purchase Agreement, and will still be required to pay an adjustment amount of $2.00 per share in cash or $2.25 per share in issuances of additional shares, which would adversely affect our liquidity and capital needs. Additionally, any proceeds to which we may be entitled pursuant to the Forward Purchase Agreement are not held in any bankruptcy-protected account, escrow account, trust account, or any similar arrangement, and there is no requirement for Sandia to hold such amount separate or apart from any other funds of Sandia prior to the settlement of the transactions pursuant to the Forward Purchase Agreement. The lack of any such bankruptcy-protected arrangement subjects us to further risk that we may never have access to the settlement proceeds if the Sellers fail to make payments when due, default under the Forward Purchase Agreement, become insolvent or declare bankruptcy.
We may also seek additional financing even if in our view such additional financing is not required in order to take advantage of favorable market conditions or for strategic considerations. There can be no assurance that additional financing will be available on favorable terms, or at all. The inability to obtain such additional financing if needed may adversely affect our ability to operate at the levels necessary to execute our business plan or may force us into bankruptcy.
Debt & Financing - Risk 3
While the Senior Secured Notes are outstanding, Legacy Zapata is subject to substantial restrictions, including on the ability to incur additional indebtedness, which could adversely affect Legacy Zapata's and our business and financial condition.Added
Pursuant to the Senior Secured Note Purchase Agreement, we issued and sold, or issued in exchange for Senior Notes, an aggregate of $16.2 million in aggregate principal amount of Senior Secured Notes. Following the closing of the Merger, $2.0 million in aggregate principal amount of Senior Secured Notes remain outstanding. The Senior Secured Notes bear compounding interest at the rate of 15% per annum and all accrued but unpaid interest thereon will be due and payable on December 15, 2026. If the aggregate principal amount of all Senior Secured Notes outstanding is $3.0 million or less, Legacy Zapata can repay the Senior Secured Notes until after December 15, 2025. While any Senior Secured Notes are outstanding, Legacy Zapata cannot incur additional indebtedness for borrowed money, and cannot create, incur, assume or suffer to exist any lien on any property or assets, in each case except in limited circumstances. Accordingly, we will be significantly limited in our ability to obtain additional debt financing for so long as the Senior Secured Notes remain outstanding. The Senior Secured Notes are convertible at the option of the holder at a conversion price of $8.50 per share. However, there is no guarantee that the remaining noteholders will convert their Senior Secured Notes.
Debt & Financing - Risk 4
A significant portion of the assets of Legacy Zapata, which serves as our operating entity, are pledged to the holders of the Senior Secured Notes and failure to repay obligations to these noteholders when due, or any other default events, will have a material adverse effect on Legacy Zapata's and our business and could result in foreclosure on Legacy Zapata's assets.Added
In connection with the issuance of Senior Secured Notes in December 2023, Legacy Zapata entered into a Security Agreement with Acquiom Agency Services LLC as collateral agent on behalf of the noteholders (the "Security Agreement"). The Security Agreement creates a security interest in all of the property of Legacy Zapata and Zapata Government Services, Inc., its wholly owned subsidiary, subject to certain exceptions specified in the Security Agreement (the "Collateral"). Pursuant to the Security Agreement, Zapata Government Services, Inc. has agreed to guarantee the obligations of Zapata under the Security Agreement and the Senior Secured Note.
Upon the occurrence of an Event of Default under the Security Agreement, the Collateral Agent will have certain rights under the Security Agreement, including the right to take control of the Collateral and, in certain circumstances, sell the Collateral to cover obligations owed to the holders of the Senior Secured Notes pursuant to its terms. "Event of Default" under the Security Agreement means (i) any default of the terms, conditions or covenants of the Security Agreement (after giving effect to any applicable grace or cure period); (ii) failure to pay any principal or interest payment on the due date or any other payments required under the terms of the Senior Secured Note within 15 days of notification of such failure to pay, (iii) Legacy Zapata or any guarantor is in default under any loan agreement or any other indebtedness for borrowed money, in each case in a principal amount of greater than $200,000 that has not been cured or waived, or (iv) Legacy Zapata or any guarantor enters into any voluntary or involuntary bankruptcy or insolvency proceedings. Any such default would have a material adverse effect on Legacy Zapata's and, by extension, our, business and our stockholders could lose their entire investment in us.
Corporate Activity and Growth6 | 8.8%
Corporate Activity and Growth - Risk 1
Our management team has limited experience in operating a public company.Added
Corporate Activity and Growth - Risk 2
We incurred significant costs as a result of the Merger and will incur significant increased costs as a result of being a public company, and our management will be required to devote substantial time to new compliance initiatives.Added
We and Legacy Zapata have both incurred significant, non-recurring costs in connection with consummating the Merger, and have deferred certain closing costs, which we are obligated to pay over time. We may also incur additional costs to retain key employees.
As a public company, we will incur significant legal, accounting and other expenses that Legacy Zapata did not incur as a private company. These expenses may increase even more after it is no longer an "emerging growth company." Our management and other personnel will need to devote a substantial amount of time and incur significant expense in connection with compliance initiatives. For example, we will need to implement additional internal controls, both generally and to address the material weaknesses discussed in "Risks Related to Zapata's Financial Condition and Status as an Early Stage Company," and disclosure controls and procedures, retain a transfer agent and adopt an insider trading policy. As a public company, we will bear all of the internal and external costs of preparing and distributing periodic public reports in compliance with our obligations under the securities laws.
In addition, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act, and the related rules and regulations implemented by the SEC and Nasdaq, have increased legal and financial compliance costs and will make some compliance activities more time-consuming. For example, Nasdaq imposes requirements to obtain stockholder approval for the issuance of equity securities in a variety of circumstances, and this requirement can limit the financing alternatives available to us and thereby increase the cost of capital, which could reduce shareholder returns. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment will result in increased general and administrative expenses and may divert management's time and attention from our other business activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us, and we could be subject to the delisting of our Common Stock, fines, sanctions and other regulatory action, which may be harmful to its business. In the future, it may be more expensive or more difficult for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our Board, particularly to serve on its audit committee and compensation committee, and qualified executive officers.
Corporate Activity and Growth - Risk 3
As a former shell company, we will face certain disadvantages relative to companies that pursue a traditional initial public offering, including ineligibility for certain forms and rules for extended periods.Added
Prior to the Merger, we were a special purpose acquisition company, a form of shell company under the rules of the SEC. Shell companies are more highly regulated than non-shell operating companies and face significant additional restrictions on their activities under federal securities laws. Following the Merger, we are no longer a shell company. However, companies that were formerly shell companies continue to face disadvantages under SEC rules, including (a) the inability to use Form S-3 until at least one year after the filing of information equivalent to that required by Form 10 after ceasing to be a shell company, (b) the inability to qualify as a "well-known seasoned issuer" and file automatically effective registration statements for three years after ceasing to be a shell company, (c) the inability to "incorporate by reference" information in certain registration statements filed under the Securities Act of 1933, ass amended (the "Securities Act") for a period of three years after ceasing to be a shell company, (d) the inability to use most free writing prospectuses until at least three years after a qualifying business combination, (e) the inability to use Form S-8 to register shares issuable in connection with certain compensatory plans and arrangements until 60 days after the filing of information equivalent to that required by Form 10, (f) the inability of stockholders to rely on Rule 144 for resales of securities until at least one year after the filing of information equivalent to that required by Form 10 and the provision of current public information, and (g) exclusion from certain safe harbors for offering-related communications under the Securities Act for three years after ceasing to be a shell company, including for research reports and certain communications in connection with business combinations. We expect that these disadvantages will make it more challenging and expensive, and create greater risks and delays, for us and our stockholders to offer securities. These challenges may make our securities less attractive than those of companies that are not former shell companies and may raise our relative cost of capital.
Corporate Activity and Growth - Risk 4
Our business plan could suffer if we are not able to renew existing contractual relationships with third parties or enter into certain important strategic partnerships, and if we are unable to ensure that our Industrial Generative AI solutions offerings interoperate with a variety of software applications that are developed by others, we may become less competitive and our resulting operations may be harmed.Added
As an Industrial Generative AI solutions company, our solutions must provide our customers with the ability to use products of third parties, such as GPUs, which we do not manufacture. The cost or availability of these dependencies could be adversely affected by a variety of factors, including the transition to a clean energy economy, local and regional environmental regulations, and geopolitical disruptions. Our Industrial Generative AI solutions must integrate with a variety of hardware and software platforms, and we need to continuously modify and enhance our AI software libraries to adapt to changes in hardware and software technologies. In particular, we have developed our AI software libraries to be able to easily integrate with key third-party applications, including the applications of software providers that compete with us as well as our partners. We are typically subject to standard terms and conditions of such providers or open source licenses, which govern the distribution, operation, and fees of such software systems, and which are subject to change by such providers from time to time. Our business will be harmed if any provider of such software systems:
- discontinues or limits our access to its software;- modifies its terms of service or other policies, including fees charged to, or other restrictions on us, or other platform and application developers;- changes or modifies its open source license;- changes how information is accessed by us or our customers;- establishes more favorable relationships with one or more of our competitors; or - develops or otherwise favors its own competitive offerings over AI software libraries.
Third-party services and products are constantly evolving, and we may not be able to modify our Industrial Generative AI solutions to assure their compatibility with that of other third parties as they continue to develop or emerge in the future or we may not be able to make such modifications in a timely and cost-effective manner. In addition, some of our competitors may be able to disrupt the operations or compatibility of our AI software libraries with their products or services, or exert strong business influence on our ability to, and terms on which we, operate our Industrial Generative AI solutions. Should any of our competitors modify their products or standards in a manner that degrades the functionality of our AI software libraries or gives preferential treatment to our competitors or competitive products, whether to enhance their competitive position or for any other reason, the interoperability of our AI software libraries with these products could decrease and our business, results of operations, and financial condition would be harmed. If we are not permitted or able to integrate with these and other third-party applications in the future, our business, results of operations, and financial condition would be harmed.
Corporate Activity and Growth - Risk 5
Our business plan could suffer if we are not able to enter into important strategic partnerships.Added
As part of our growth plans, we expect to expand, sell to, with, and through partners, including developing repeatable solutions built with services firms, and developing partnerships with system integrators and consulting services firms. However, our relationships with these partners may not result in additional business. If we are unable to enter into beneficial and contractual strategic partnerships, or further its relationship with existing partners, or is unable to do so on favorable terms, then its growth could be limited or delayed.
Corporate Activity and Growth - Risk 6
The pursuit of inorganic growth opportunities could result in harm to our business.Added
We may pursue growth opportunities by acquiring complementary businesses or other assets for strategic purposes, such as companies with expertise in software development, data management such as Extract Transform, Load (ETL), AI, natural language understanding (NLU), or market verticals in which we are interested; companies with an IP portfolio that could compliment ours; companies with customer lists that could shorten the sales cycle to significant customers. The pursuit of such strategic opportunities could be both expensive and distracting, could have a significant impact on the company's capital structure, and even if the transaction is completed as desired the results may not be as predicted.
We do not have any negotiations in progress, nor have we entered into any contracts for acquisitions as of the date of this report. However, to the extent such opportunities may arise, there can be no assurance that the pursuit of any such opportunities will succeed and, if they fail, they could have a material adverse effect on our business and future profitability.
Tech & Innovation
Total Risks: 14/68 (21%)Above Sector Average
Innovation / R&D3 | 4.4%
Innovation / R&D - Risk 1
If the market for our Industrial Generative AI solutions fails to develop or grow as we expect, or if businesses fail to adopt our Industrial Generative AI solutions, our business, operating results, and financial condition could be adversely affected.Added
Innovation / R&D - Risk 2
Our business could be negatively impacted by delays in development of our software platform.Added
We have plans, including adequate staffing and other resources, that we believe will result in the development of and continued improvements to its software platform on a schedule that permits the execution of our business plan in a timely manner. Any delays in platform design and engineering work required to accomplish this could result in corresponding delays in the implementation of our business plan in the market. We are presently unaware of any outstanding design or engineering issues that cannot be resolved in the normal course, but the failure to complete necessary components of or improvements to its platform in a timely manner would have a serious negative impact on the company and might cause the company to fail.
Innovation / R&D - Risk 3
We may not be able to scale our business and Industrial Generative AI solutions quickly enough to meet customer and market demand and to remain competitive in the Industrial Generative AI solutions market.Added
In order to grow our business, we will need to scale our operations in every area from our existing start-up capacity. These challenges will require that we:
- scale our product design team to design and continually re-design our Industrial Generative AI solutions in order to maintain a competitive position in the market, including increasing the number of employees following our previous reductions in force;- increase the size of our software engineering team to produce in a competitively timely manner stable Industrial Generative AI solutions based on the chosen design elements;- increase the size of our services team to provide ongoing services in connection with our Industrial Generative AI solutions;- expand our customer-support services;- expand our scientific research and development in order to generate IP required or helpful to our business, including IP to develop our Industrial Generative AI solutions, to provide freedom to operate for our Industrial Generative AI solutions and/or, and to create barriers to competition, on an accelerated time frame in order to minimize the risk that third-parties might first create potentially blocking IP;- increase our sales and marketing teams and efforts;- develop and expand relationships with large service firms to leverage sales of our Industrial Generative AI solutions;- develop and expand our operational, financial and legal systems and teams to accommodate an expected increase in customer and partner relationships and additional expected legal requirements imposed as a result of international data privacy regulations and securities compliance and reporting obligations imposed by the Merger;- establish and maintain and scale effective financial disclosure controls and procedures;- expand our executive and administrative teams in all areas including finance, accounting, operations, human resources, and legal, in order to effectively manage our growth; and - expand our access to computing hardware and specifically Graphics Processing Unit chips ("GPUS"), which have faced supply limitations.
If we cannot successfully overcome these challenges and manage the organizational growth required to do so, then our business, including our ability to establish and maintain a competitive place in the market, financial condition, and profitability, may be materially adversely affected.
Trade Secrets2 | 2.9%
Trade Secrets - Risk 1
Our patent applications may not result in issued patents or our patent rights may be contested, circumvented, invalidated or limited in scope, any of which could have a material adverse effect on our ability to prevent others from interfering with our commercialization of our products.Added
Trade Secrets - Risk 2
We may face patent infringement and other intellectual property claims that could be costly to defend, result in injunctions and significant damage awards or other costs (including indemnification of third parties or costly licensing arrangements (if licenses are available at all)) and limit our ability to use certain key technologies in the future or require development of non-infringing products, services, or technologies, which could result in a significant expenditure and otherwise harm our business.Added
We may become subject to intellectual property disputes. Our success depends, in part, on our ability to develop and commercialize our products, services and technologies without infringing, misappropriating or otherwise violating the intellectual property rights of third parties. However, we may not be aware that our products, services or technologies are infringing, misappropriating or otherwise violating third-party intellectual property rights and such third parties may bring claims alleging such infringement, misappropriation or violation. For example, there may be issued patents of which we are unaware, held by third parties that, if found to be valid and enforceable, could be alleged to be infringed by our current or future products, services or technologies. There also may be pending patent applications of which we are not aware that may result in issued patents, which could be alleged to be infringed by our current or future products, services or technologies. Because patent applications can take years to issue and are often afforded confidentiality for some period of time, there may currently be pending applications, unknown to us, that later result in issued patents that could cover our current or future products, services or technologies. Lawsuits can be time-consuming and expensive to resolve, and they divert management's time and attention. Numerous patents and pending patent applications owned by others exist in the fields in which we have developed and are developing our technology. Companies that have developed and are developing technology are often required to defend against litigation claims based on allegations of infringement, misappropriation or other violations of intellectual property rights. Our products, services or technologies may not be able to withstand any third-party claims against their use. In addition, many companies have the capability to dedicate substantially greater resources to enforce their intellectual property rights and to defend claims that may be brought against them. In a patent infringement claim against us, we may assert, as a defense, that we do not infringe the relevant patent claims, that the patent is invalid or both. The strength of our defenses will depend on the patents asserted, the interpretation of these patents, and its ability to invalidate the asserted patents. However, we could be unsuccessful in advancing non-infringement and/or invalidity arguments in its defense. In the United States, issued patents enjoy a presumption of validity, and the party challenging the validity of a patent claim must present clear and convincing evidence of invalidity, which is a high burden of proof. Conversely, the patent owner need only prove infringement by a preponderance of the evidence, which is a lower burden of proof. Our patent portfolio may not be large enough to deter patent infringement claims, and our competitors and others may now and in the future have significantly larger and more mature patent portfolios. Any litigation may also involve patent holding companies or other adverse patent owners that have no relevant solution revenue, and therefore, our patent portfolio may provide little or no deterrence as it would not be able to assert its patents against such entities or individuals. If a third party is able to obtain an injunction preventing us from accessing such third-party intellectual property rights, or if we cannot license or develop alternative technology for any infringing aspect of our business, we may be forced to limit or stop sales of its products, services or technologies or cease business activities related to such intellectual property. Although the company carries general liability insurance, our insurance may not cover potential claims of this type or may not be adequate to indemnify us for all liability that may be imposed. We cannot predict the outcome of lawsuits and cannot ensure that the results of any such actions will not have an adverse effect on its business, financial condition or results of operations. Any intellectual property litigation to which we might become a party, or for which it is required to provide indemnification, regardless of the merit of the claim or its defenses, may require us to do one or more of the following:
- cease selling or using solutions or services that incorporate the intellectual property rights that allegedly infringe, misappropriate or violate the intellectual property of a third party;- make substantial payments for legal fees, settlement payments or other costs or damages;- obtain a license, which may not be available on reasonable terms or at all, to sell or use the relevant technology;- redesign the allegedly infringing solutions to avoid infringement, misappropriation or violation, which could be costly, time-consuming or impossible; or - indemnify organizations using our services or platform or third-party service providers.
Even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of its management and harm its business and operating results. Moreover, 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 common stock. The occurrence of infringement claims may grow as the market for our products, services and technologies grows. Accordingly, our exposure to damages resulting from infringement claims could increase and this could further exhaust its financial and management resources.
Technology9 | 13.2%
Technology - Risk 1
Our use of third-party open source software could negatively affect our ability to offer and sell subscriptions to our Industrial Generative AI solutions and subject us to possible litigation.Added
Technology - Risk 2
Our business plan depends, in part, on access to public clouds through major cloud providers and there is no guarantee that access will be available on reasonable terms.Added
Our Industrial Generative AI solutions will permit deployment of our software in various scenarios, including on the premises of a customer, hybrid clouds controlled by the customer, or a public cloud controlled by us. Although not necessary in all customer engagements, an important aspect of business plan is to make our Industrial Generative AI solutions available via a public cloud controlled by us. To accomplish this, we are required to negotiate cloud access with one or more cloud providers. The two largest public cloud providers, Amazon Web Services ("AWS") and Microsoft Azure ("Azure"), are both engaged in their own initiatives that could compete with our Industrial Generative AI solutions in whole or in part. There is a risk that a cloud provider important to our business plan could use control of their public cloud to deny or place us at a competitive disadvantage by various means, including embedding innovations or privileged interoperating capabilities in products competing with ours, bundling competing products, requiring unfavorable pricing, including terms or conditions or regulatory requirements that make our Industrial Generative AI solutions uncompetitive, or leveraging their existing relationships with our customers to pressure customers to use their products rather than ours.
There can be no guarantee that we will be able to deploy our Industrial Generative AI solutions on public clouds controlled by competitors. The failure to be able to access public clouds, or the imposition of restrictive terms as a condition to such access, limit the adoption and use of our Industrial Generative AI solutions by customers, increase our operating expenses, damage our brand, and/or place us at a disadvantage when competing for customer accounts. Any of these could have a material adverse effect on our business operations, market share, and profitability.
Technology - Risk 3
Our business plan depends, in part, on access to GPU and other specialized hardware either directly through the purchase of computing hardware and installation in data centers, or through third party providers. There is no guarantee that access through either path will be available on reasonable terms, or at all.Added
Many of the techniques developed by us would require the use of specialized hardware to execute an algorithm in a time or cost efficient manner as required by the constraints of an application. Access to this hardware can be obtained through the purchase of this hardware and installation in a data center, or through a third-party infrastructure service provider. Hardware could be purchased from providers such as NVIDIA, Intel, AMD, D-Wave, or Fujitsu. Supply chain problems, chip shortages, or geopolitical conditions beyond our control could all impact our ability to access this hardware, either directly or through a third-party provider. Additionally, getting space in an existing facility and maintaining the hardware would require additional expertise that would need to be either hired or contracted by us, and identifying and hiring such experts could be costly and time-consuming. We could also face difficulties securing terms to host this hardware on reasonable terms, or at all.
Alternatively, instead of competing to purchase hardware directly, we could rent time on that hardware from infrastructure service providers. In this case, we would rely on third party providers to provide cloud-based network access to these on an hourly, annual, or other basis. However, there can be no assurance that these third party provides could obtain access to hardware on reasonable terms, or at all.
Additionally, external factors, including the coronavirus pandemic, have caused a chip shortage, making it difficult for third party suppliers, such as NVIDIA and AMD, to keep up with demand. Consequently, we may have difficulty obtaining access to GPUs at reasonable prices, or at all.
Technology - Risk 4
Our success could be materially affected by problems with or defects in the Orquestra platform or our other software offerings.Added
In addition to issues commonly facing all providers of commercial software, the development of our Industrial Generative AI solutions involves converting novel, complex scientific algorithms into software code. We may experience unintended design and/or implementation defects or other quality issues in our software code. We may also experience defects in the products and services of third parties on which we rely to provide our products and services, including third-party cloud providers. Problems can be caused by a variety of factors, including premature or failed introduction of new products, vulnerabilities or defects in proprietary and open source software, human error or misconduct, design limitations, or denial of service or other security-related incidents. We do not have a contractual right with our public cloud providers that will compensate us for any losses due to availability interruptions in the public cloud.
Any defects in the Orquestra platform or other software offerings, whether caused by defective design, defective coding, or defects introduced through third-party components; any disruptions in our ability to provide our Industrial Generative AI solutions, including by means of public cloud; and/or any other quality issues with our Industrial Generative AI solutions could affect our business reputation and brand, could cause us to spend material amounts to address the defects, could cause material delays in the execution of our business plan, and could have a material adverse effect on our business opportunities, revenue, and future profitability.
Technology - Risk 5
Our current Industrial Generative AI solutions, as well as applications, features, and functionality that we may introduce in the future or that we offer but have not yet sold, may not be widely accepted by our customers or may receive negative attention, each of which may lower our margins and harm our business.Added
Our ability to engage, retain, and increase our base of customers and to increase our revenue will depend on our ability to successfully market our existing Industrial Generative AI solutions, as well as create new applications, features, and functionality. Additionally, we have not yet sold one of our Industrial Generative AI solutions, Zapata AI Prose, to any customers. We may introduce significant changes to our existing Industrial Generative AI solutions or develop and introduce new applications, including technologies with which we have little or no prior development or operating experience. These new applications and updates, as well as our existing solutions that we have marketed but not yet sold, may fail to engage, retain, and increase our base of customers or may suffer from lag in adoption. New applications may initially suffer from performance and quality issues that may negatively impact our ability to market and sell such applications to new and existing customers. The short-and long-term impact of any major change to our Industrial Generative AI solutions, or the introduction of new applications or initial sales of our applications to enterprise customers, is particularly difficult to predict. If new or enhanced applications fail to engage, retain, and increase our base of customers, we may fail to generate sufficient revenue, operating margin, or other value to justify our investments in such applications, any of which may harm our business.
Technology - Risk 6
If we fail to respond to rapid technological changes, extend our Industrial Generative AI solutions, or develop new features and functionality, our ability to remain competitive could be impaired.Added
The market for our Industrial Generative AI solutions is characterized by rapid technological change, particularly since generative AI is a new and evolving industry, including frequent new platform and application introductions and enhancements, changing customer demands, and evolving industry standards. The introduction of software embodying new technologies can quickly make existing software obsolete and unmarketable. Generative AI, particularly incorporating quantum techniques, are inherently complex, and it can take a long time and require significant research and development expenditures to develop and test new or enhanced software. The success of any enhancements or improvements to our existing Industrial Generative AI solutions or any new applications depends on several factors, including timely completion, competitive pricing, adequate quality testing, integration with existing technologies, and overall market acceptance, particularly as we provide custom solutions for specific use cases.
Any failure of our Industrial Generative AI solutions to operate effectively with future infrastructure platforms and technologies could impact our ability to attain new customers. If we are unable to respond to these changes in a timely and cost-effective manner, our Industrial Generative AI solutions may become less marketable, less competitive, or obsolete, and our business may be adversely affected.
The introduction of new generative AI platforms and applications by competitors or the development of entirely new technologies to replace existing offerings could make our Industrial Generative AI solutions obsolete or adversely affect our business, results of operations, and financial condition. We may experience difficulties with software development, design, or marketing that could delay or prevent our development, introduction, or implementation of new Industrial Generative AI solutions, features, or capabilities, applying our existing Industrial Generative AI solutions to new use cases. Any delays could result in adverse publicity, loss of revenue or market acceptance, or claims by customers brought against us, all of which could harm our business.
Technology - Risk 7
Because we derive all of our current revenue from our Orquestra and Zapata AI Sense and related services, and our Industrial Generative AI offerings include only these solutions and Zapata AI Prose, failure of generative AI solutions in general and our Industrial Generative AI solutions in particular to satisfy customer demands or to achieve increased market acceptance would adversely affect our business, results of operations, financial condition, and growth prospects, and the current state of the generative AI industry is still new and rapidly evolving, so there is no guarantee that it will succeed.Added
We derive and expect to continue for the foreseeable future to derive all of our revenue from our Industrial Generative AI solutions, including corresponding services. As such, the market acceptance of generative AI solutions in general, and our Industrial Generative AI solutions in particular, are critical to our continued success. Market acceptance of generative AI solutions depends in part on market awareness of the benefits that generative AI solutions can provide over legacy products and services. In addition, in order for cloud-based generative AI solutions to be widely accepted, organizations must overcome any concerns with placing sensitive information on a cloud-based platform. Demand for our Industrial Generative AI solutions in particular is affected by a number of other factors, some of which are beyond our control. These factors include continued market acceptance of our software, the pace at which existing customers realize benefits from the use of our Industrial Generative AI solutions and provide word of mouth success stories, the timing of development and release of new products by our competitors, technological change, reliability and security, the pace at which enterprises undergo digital transformation, and developments in data privacy regulations. We expect that the needs of our current and potential customers will continue to rapidly change and increase in complexity. We will need to improve the functionality and performance of our software continually to meet those rapidly changing, complex demands. If we are unable to continue to meet customer demands or to achieve more widespread market acceptance of generative AI solutions in general or our Industrial Generative AI solutions in particular, our business operations, financial results, and growth prospects will be materially and adversely affected.
While generative models have existed for about two decades in largely their current form, the larger commercial impact and growth of generative AI occurred quite recently. This is exemplified through recent investment increases in generative AI by venture capitalists, who have increased their positions in generative AI from $408 million in 2018 to $4.8 billion and $4.5 billion in 2021 and 2022, respectively. We believe that the release of ChatGPT by OpenAI in late 2022 represents an inflection point for growth in the generative AI industry. This expected influx of investment could accelerate development from fundamental science to new technology applications. As generative AI is applied to new areas with untested conditions and new use cases, it is possible that, despite post-ChatGPT market enthusiasm, we could discover that generative AI is unfit for an application or use case. The field as a whole is rapidly evolving, which could mean that techniques that were once competitive become quickly outpaced by new techniques. With so many players entering the market, new techniques could be discovered by our competitors, allowing competitors to develop superior products or processes. If new techniques are discovered and shared publicly, the cost of re-implementing or adopting new best practices could be substantial. Given many of our competitors are larger companies with more employees and better access to financial resources, we may not be able to implement such new techniques as quickly as its competitors, or at all.
Generative AI is about creating numerical models from training data and then sampling from those models to generate new data. This process is inherently complex with many opportunities for flaws. Even with excellent training data and strong application, these models are non-deterministic, meaning they can give different outputs for the same inputs at different times. All of these factors can lead to false predictions and incorrect outputs. Additionally, many implementations of these techniques are not explainable, meaning a person is unable to clearly explain the reason why a model provided a certain output. This unpredictability could deter potential customers from purchasing our solutions. For these reasons, the impact of generative AI may be far more limited than analysts currently predict following the release of ChatGPT and other well-known generative AI programs.
There can also be no assurance that our analysis of the eventual market need is correct. If our judgment on this topic is incorrect then the future value of our products and services, our competitive place in the market, and our future profitability may be materially less than we currently project.
Technology - Risk 8
Our business relies on computer systems which are vulnerable to attack and/or failure.Added
As is the case with nearly every business, we rely on computers and computer networks, both public and private, to perform most of the actions required for us to do business, including internal and external communications, development of our software and IP, storage of our business and financial records, and deployment of our Industrial Generative AI solutions. Such computer systems are inherently susceptible to unintentional failures as well as various forms of cyber-attack, including denial of service attacks, ransomware attacks, email hacking and phishing, computer malware and viruses, and social engineering attacks. Like other companies, we may also be the subject of unauthorized access resulting from employee misconduct. These risks are potentially greater for us because the nature of our business provides an additional incentive for bad actors, including foreign nation states and domestic and foreign businesses, to attack our systems for the purpose of gaining information about generative AI, quantum computing and quantum algorithms, the development of which currently is a priority for many businesses and countries.
Our Orquestra platform is built to be accessed through third-party public cloud providers such as AWS and Azure. These providers may also experience breaches and attacks to their products which may impact our systems. Data security breaches may also result from non-technical means, such as actions by an employee with access to our systems. While we and our third-party cloud providers have implemented security measures designed to protect against security breaches, these measures could fail or may be insufficient, resulting in the unauthorized disclosure, modification, misuse, destruction, or loss of sensitive or confidential information.
Any of the previously identified or similar threats could cause a security incident or other interruption that could result in unauthorized, unlawful, or accidental acquisition, modification, destruction, loss, alteration, encryption, disclosure of, or access to our sensitive information, or our technology systems, or those of the third parties upon whom we rely. A security incident or other interruption could disrupt our ability (and that of third parties upon whom we rely) to provide our platform or other software. Any actual or potential security breach of our software, our operational systems, our physical facilities, or the systems or facilities of our vendors, or the perception that one has occurred, could result in adverse consequences, such as litigation, indemnity obligations, regulatory enforcement actions, investigations, fines, penalties, mitigation and remediation costs, disputes, reputational harm, diversion of management's attention, and other liabilities and damage to our business. Even though we do not control the security measures of third parties, we may be perceived or asserted to be responsible for any breach of such measures or suffer reputational harm even where we do not have recourse to the third party that caused the breach. In addition, any failure by our vendors to comply with applicable law or regulations could result in proceedings against us by governmental entities or others, with further financial, operational, and reputational damage.
The costs to respond to a security breach and/or to mitigate any security vulnerabilities that may be identified could be significant, our efforts to address these problems may not be successful, and these problems could result in unexpected interruptions, delays, cessation of service, negative publicity, and other harm to our business and our competitive position. We could be required to fundamentally change our business activities and practices in response to a security breach or related regulatory actions or litigation, which could have an adverse effect on our business. In addition, laws, regulations, government guidance, and industry standards and practices in the United States and elsewhere are rapidly evolving to combat these threats. We may face increased compliance burdens regarding such requirements from regulators and customers regarding our products and services and also incur additional costs for oversight and monitoring of security risks relating to our own services. Most jurisdictions have enacted laws requiring companies to notify individuals, regulatory authorities, and others of security breaches involving certain types of data. In addition, our agreements with certain customers and partners may require us to notify them in the event of a security breach involving customer or partner data on our systems. Such mandatory disclosures are costly, could lead to negative publicity, may cause our customers to lose confidence in the effectiveness of our security measures, and require us to expend significant capital and other resources to respond to or alleviate problems caused by the actual or perceived security breach may cause us to breach customer contracts.
If we (or a third party upon whom we rely) experience a security incident or are perceived to have experienced a security incident, we may experience adverse consequences such as government enforcement actions (for example, investigations, fines, penalties, audits, and inspections); additional reporting requirements and/or oversight; restrictions on processing sensitive information; litigation (including class claims); indemnification obligations; negative publicity; reputational harm; monetary fund diversions; interruptions in our operations (including availability of data); financial loss; and other similar harms. Litigation resulting from security breaches may adversely affect our business. Unauthorized access to our software, systems, networks, or physical facilities could result in litigation with our customers or other relevant stakeholders. These proceedings could force us to spend money in defense or settlement, divert management's time and attention, increase our costs of doing business, or adversely affect our reputation. We could be required to fundamentally change our business activities and practices or modify our software capabilities in response to such litigation, which could have an adverse effect on our business. If a security breach were to occur, and the confidentiality, integrity or availability of our data or the data of our partners or our customers was disrupted, we could incur significant liability, or our software, systems, or networks may be perceived as less desirable, which could negatively affect our business and damage our reputation.
We may not have adequate insurance coverage for security incidents or breaches, including fines, judgments, settlements, penalties, costs, attorney fees and other impacts that arise out of incidents or breaches. Depending on the facts and circumstances of such an incident, the damages, penalties and costs could be significant and may not be covered by insurance or could exceed our applicable insurance coverage limits. If the impacts of a security incident or breach, or the successful assertion of one or more large claims against us that exceeds our available insurance coverage, or results in changes to our insurance policies (including premium increases or the imposition of large deductible or co-insurance requirements), it could have an adverse effect on our business. In addition, we cannot be sure that our existing insurance coverage and coverage for errors and omissions will continue to be available on acceptable terms or that our insurers will not deny coverage as to all or part of any future claim or loss. Our risks are likely to increase as we grow our customer base, and store, transmit, and otherwise process increasingly large amounts of proprietary and sensitive data. There can be no assurance that we can successfully prevent such occurrences, which could damage our reputation and/or result in the theft our important IP, either of which could damage our business prospects and future profitability.
Technology - Risk 9
If open source software programmers, many of whom we do not employ, or our own internal programmers do not continue to develop and enhance open source technologies, we may be unable to develop new technologies, adequately enhance our existing technologies or meet customer requirements for innovation, quality and price.Added
We rely to a significant degree on a number of open source software programmers, or committers and contributors, to develop and enhance components of our Industrial Generative AI solutions. Additionally, members of the corresponding Apache Software Foundation Project Management Committees ("PMCs"), many of whom are not employed by us, are primarily responsible for the oversight and evolution of the codebases of important components of the open source data management ecosystem. If the open source data management committees and contributors fail to adequately further develop and enhance open source technologies, or if the PMCs fail to oversee and guide the evolution of open source data management technologies in the manner that we believe is appropriate to maximize the market potential of our solutions, then we would have to rely on other parties, or we would need to expend additional resources, to develop and enhance our Industrial Generative AI solutions. We also must devote adequate resources to our own internal programmers to support their continued development and enhancement of open source technologies, and if we do not do so, we may have to turn to third parties or experience delays in developing or enhancing open source technologies. We cannot predict whether further developments and enhancements to these technologies would be available from reliable alternative sources. In either event, we may incur additional development expenses and experience delays in technology release and upgrade. Delays in developing, completing, or delivering new or enhanced components to our Industrial Generative AI solutions could cause our offerings to be less competitive, impair customer acceptance of our solutions, and result in delayed or reduced revenue for our solutions.
Ability to Sell
Total Risks: 10/68 (15%)Above Sector Average
Competition5 | 7.4%
Competition - Risk 1
Our business is dependent on growing and retaining competitive teams of sufficient size in the areas of algorithm development, product development, and software engineering; the failure to achieve any one of these objectives could materially affect our business.Added
Competition - Risk 2
Competitors may develop products and technologies that are superior to our Industrial Generative AI solutions.Added
Our business plan is based on the belief that the value of our Industrial Generative AI solutions will be enhanced by delivering, in a single unified software platform, the ability to: allow deployment in any desired environment; permit the development or implementation of applications and services that are capable of all data handling tasks, including processing input data in a manner calculated to maximize the ultimate Industrial Generative AI solution. Presently, we are unaware of any competing product either on the market or announced as being under development that we believe reasonably could be deemed to provide all of these features in a unified platform. However, products and services addressing enterprise level computational problems are presently being supplied by large, well-established companies in the areas of data management and AI, such as DataRobot, Inc., Dataiku Inc., Databricks, Inc., Domino Data Lab, Inc., Palantir Technologies Inc. and C3.ai, Inc. These companies, by using existing talent or hiring Ph.D.-level experts in mathematics, computer science, physics, and related fields, could develop software that utilizes similar or better mathematical techniques as to what we have found to date, and develop and offer these to the market as competitive libraries, services, and applications. Large-scale public cloud providers, such as Google, Inc., Microsoft, Inc. and Amazon Web Services, Inc. have all-in-one machine learning solutions. It is possible, if not likely, that, if they have not already begun, these existing companies will seek to build advanced algorithm expertise and integrate quantum techniques running on currently available classical hardware into their existing platforms and leverage their existing customer relationships to press adoption of these solutions, which could create a direct competition to our software platform.
Many of our existing and potential competitors have, or could have, substantial competitive advantages such as:
- greater name recognition, longer operating histories, and larger customer bases;- larger sales and marketing budgets and resources and the capacity to leverage their sales efforts and marketing expenditures across a broader portfolio of products and services;- existing, broader, deeper, or otherwise more established relationships with sales partners and customers;- wider geographic presence or greater access to larger customer bases;- greater focus in specific geographies or industries;- lower labor and research and development costs;- larger and more mature intellectual property portfolios; and - substantially greater financial, technical, and other resources to provide support, make acquisitions, hire talent, and develop and introduce new products and services.
There can be no guarantee that a competitor will not develop a product superior to ours or one that is perceived by the market to be superior. Nor can there be any guarantee that a combination of products will not be able to provide solutions that are superior, or are perceived to be superior, to our Industrial Generative AI solutions. The introduction of such a product or combination of products could have a material adverse effect on our business, profitability, and financial condition.
Competition - Risk 3
The generative AI industry is highly competitive and we may not be successful in establishing itself as a viable competitor without regard to the value of our Industrial Generative AI solutions.Added
Generative AI is an industry with great promise that has attracted global interest and participation. In addition, the recent rapid rise of the generative AI industry has given rise to less-established public and private companies, including new startups, which may compete, in whole or in part, with our products and services. This competition in the market for generative AI is already great and is expected to intensify over time.
To compete successfully in this market, we must develop our products and technologies in a timely manner, effectively market these products against multiple competitors, and support these products at levels expected by enterprise customers. Delays in the introduction of new products may cause our existing or potential customers to adopt our competitors' products, making it difficult or impossible for our products later to displace the competitive products without regard to the relative value of the respective products.
There can be no assurance that we can timely deliver products that will result in us having a material share of this market, even if our products are superior. Our inability to establish a position and market share in this highly competitive industry will adversely affect our future prospects and may cause the company to fail.
Competition - Risk 4
Because of the characteristics of open source software, there may be fewer technology barriers to entry by new competitors and it may be relatively easy for new and existing competitors with greater resources than we have to compete with us.Added
One of the characteristics of open source software is that the governing license terms generally allow liberal modifications of the code and distribution thereof to a wide group of companies and/or individuals. As a result, others could easily develop new platforms and applications based upon those open source programs that compete with existing open source software that we support and incorporate into our Industrial Generative AI solutions. Such competition with use of the open source projects that we utilize can materialize without the same degree of overhead and lead time required by us, particularly if the customers do not value the differentiation of our proprietary components. It is possible for new and existing competitors with greater resources than ours to develop their own open source software or hybrid proprietary and open source software offerings, potentially reducing the demand for, and putting price pressure on, our Industrial Generative AI solutions. In addition, some competitors make open source software available for free download and use or may position competing open source software as a loss leader. We cannot guarantee that we will be able to compete successfully against current and future competitors or that competitive pressure and/or the availability of open source software will not result in price reductions, reduced operating margins and loss of market share, any one of which could seriously harm our business.
Competition - Risk 5
There is no guarantee that our IP will provide the desired competitive advantage.Added
We seek to provide ourselves with a competitive advantage by making key elements of our Industrial Generative AI solutions proprietary, through one of two means. First, we pursue patent protection for some inventions that we believe qualify for protection under the patent laws. In cases in which patent protection is sought, the details of the invention eventually will be made public in the normal course, usually within eighteen months of filing. As to these inventions, competitors will eventually know the details of and can use the inventions to compete with us, unless a patent is granted prohibiting such use and we can learn of violations and effectively enforce our patent rights in light of the costs and complexities involved in such enforcement litigation. Second, some elements of our Industrial Generative AI solutions we seek to protect as trade secrets. As to our trade secrets, competitors will not be able to know our techniques provided the trade secrets are not improperly disclosed, but if a competitor independently develops the same technique and files for and is granted patent protection we could find ourselves prohibited by the patent laws from practicing our trade secret technology.
There is no assurance that our pending or future patent applications will be granted and provide us patent protection as to the claims in those applications. Moreover, we cannot guarantee that our patent rights will not be violated by competitors, that we will be able to detect such violations, or that if violations are detected we will be in a position effectively to enforce our patent rights. Nor can we guarantee that our trade secrets will remain secret and not be disclosed to competitors either inadvertently or through violation of contractual secrecy agreements, or that our trade secrets are not independently developed by competitors. The failure of our IP strategy to protect key elements of our Industrial Generative AI solutions could materially reduce any competitive advantage we might otherwise have and have a corresponding adverse effect on our market share and/or profitability.
Demand2 | 2.9%
Demand - Risk 1
Our business plan relies upon the adoption of its Industrial Generative AI solutions by enterprise customers.Added
Demand - Risk 2
A limited number of customers have accounted for most of our revenue. If existing customers do not renew or expand their contracts with us, or if our relationships with these customers are impaired or terminated, our revenue could decline, and our results of operations would be adversely impacted.Added
As of March 31, 2024, our accounts receivable was from three main customers, representing approximately 62%, 26% and 12% of our total accounts receivable, of which 62% is from Andretti Global, a related party. We had four customers that represented greater than 10% of our total revenue for the three months ended March 31, 2024 and revenue recognized from these four customers represented approximately 36%, 22%, 20% and 14% of total revenue, of which 36% is from Andretti Global, a related party. In total, we had five customers during the year ended December 31, 2023, including two enterprise customers and agreements with two customers that we deem to be government contracts, consisting of a direct contract with the Defense Advanced Research Projects Agency ("DARPA"), a part of the United States Department of Defense, and a subcontract with L3Harris Technologies, Inc. ("L3Harris") in connection with their work for DARPA.
Historically, we had seven customers during the twelve months ended December 31, 2022, and four customers during the twelve months ended December 31, 2021. Until we can successfully broaden and diversify our customer base, we may continue to rely on only a few customers to generate our revenues. Although it is our strategy to market our products and services to a larger number of enterprise customers, there is no assurance that our strategy or efforts will be successful. By enterprise customers, we mean large businesses that have the size and resources to dominate a specific market, high revenue and a significant number of employees. If we fail to generate revenue from a broader customer base, our reliance on just a few customers may continue for an extended period of time, and the loss of any key customer will have material adverse effect on our operating results and financial condition.
Our customers have no obligation to renew, upgrade, or expand their subscriptions with us after the terms of their existing subscriptions expire. In addition, our customers may opt to decrease their usage of our Industrial Generative AI solutions. It is not possible for us to predict the future level of demand from our larger customers for our Industrial Generative AI solutions. As a result, we cannot provide assurance that our customers will renew, upgrade, or expand their subscriptions with us, if they renew at all. If one or more of our customers elect not to renew their subscriptions with us, or if our customers renew their subscriptions with us for shorter time periods, or if our customers decrease their usage of our Industrial Generative AI solutions, or if our customers otherwise seek to renegotiate terms of their existing agreements on terms less favorable to us, our business and results of operations would be adversely affected. Achieving renewal or expansion of usage and subscriptions may require us to engage increasingly in sophisticated and costly sales and support efforts that may not result in additional sales. In addition, the rate at which our customers expand the deployment of our Industrial Generative AI solutions depends on a number of factors. If our efforts to expand our relationships with our customers are not successful, our business, financial condition, and results of operations may be harmed. Additionally, if our customers do not provide word of mouth support for our Industrial Generative AI solutions, this could limit our ability to attract new customers.
Sales & Marketing3 | 4.4%
Sales & Marketing - Risk 1
Our business depends on our ability to attract new customers and on our existing customers purchasing additional subscriptions from us and/or renewing their existing subscriptions.Added
Sales & Marketing - Risk 2
Our sales cycles can be long and unpredictable, and our sales efforts require considerable time and expense.Added
Our results of operations may fluctuate, in part, because of the complexity of customer problems that our Industrial Generative AI solutions address, the resource-intensive nature of our sales efforts, the length and variability of the sales cycle for our offerings, and the difficulty in making short-term adjustments to our operating expenses. The timing of our sales is difficult to predict. The length of our sales cycle, from initial evaluation to payment for our subscriptions and related services can vary substantially from customer to customer and could extend over a number of years for some customers. Our sales efforts involve educating our customers about the use, technical capabilities, and benefits of our offerings. Customers often undertake a prolonged evaluation process. In addition, the size of potential customers may lead to longer sales cycles. We may also face unexpected deployment challenges with large organizations or more complicated deployment of our offerings. Large organizations may demand additional features, support services, and pricing concessions or require additional security management or control features. Some organizations may also require an on-premise solution rather than a cloud solution, which potentially requires additional implementation time and potentially a longer sales cycle. We may spend substantial time, effort and money on sales efforts to large organizations without any assurance that our efforts will produce any sales. As a result, it is difficult to predict exactly when, or even if, we will make a sale to a potential customer or if we can increase sales to our existing customers.
Individual sales can be part of a long sales cycle, which impacts our ability to plan and manage cash flows and margins. These large individual sales have, in some cases, occurred in quarters subsequent to those we anticipated, or have not occurred at all. If our sales cycle lengthens or our substantial upfront investments do not result in sufficient revenue to justify our investments, our operating results could be adversely affected. In addition, within each quarter, it is difficult to project which month a deal will close. Therefore, it is difficult to determine whether we are achieving our quarterly expectations and whether we will achieve annual expectations. Most of our expenses are relatively fixed or require time to adjust. Therefore, if expectations for our business are not accurate, we may not be able to adjust our cost structure on a timely basis, and our margins and cash flows may differ from expectations.
Sales & Marketing - Risk 3
Any failure to offer high-quality support services for our customers may harm our relationships with our customers and, consequently, our business.Added
Once our Industrial Generative AI solutions are deployed, our customers depend on our services teams to resolve technical and operational issues relating to our Industrial Generative AI solutions. Our ability to provide effective support is largely dependent on our ability to attract, train, and retain qualified personnel with experience in interfacing with customers. If the number of our customers grows, this will put additional pressure on our customer services teams. We may be unable to respond quickly enough to accommodate short-term increases in customer demand for support. We also may be unable to modify the future, scope, and delivery of our support to compete with changes in the services provided by our competitors. Increased customer demand for support services, without corresponding revenue, could increase costs and negatively affect our operating results. In addition, if we experience increased customer demand for support, we may face increased costs that may harm our results of operations. If our customer base expands, we will need to hire additional support staff to deliver and support our Industrial Generative AI solutions, and our business may be harmed. Our ability to attract new customers is highly dependent on our business reputation and on our ability to deliver value to our customers. Any failure to deliver value, or a perception that we do not deliver value for our customers, would harm our business.
Legal & Regulatory
Total Risks: 6/68 (9%)Below Sector Average
Regulation3 | 4.4%
Regulation - Risk 1
We are potentially subject to governmental export and import control laws that could negatively impact our business.Added
Regulation - Risk 2
We are subject to U.S. and foreign anti-corruption, anti-bribery, and similar laws, the violation of which can lead to substantial harm to our business.Added
We are subject to various anti-corruption and anti-bribery laws in the U.S., including the U.S. Foreign Corrupt Practices Act of 1977, as amended, and the U.S. domestic bribery laws, the U.K. Bribery Act, and other anti-corruption and anti-money laundering laws in the countries in which we conduct activities. Such laws prohibit companies, their employees, and their third-party agents and representatives from authorizing, promising, offering, soliciting, or accepting, directly or indirectly, improper payments or benefits to or form any person whether in the public or private sector. Awareness of and compliance with these laws is of particular concern to us, because we are and intend in the future to be doing business with both U.S. and foreign entities, some of which are affiliates of the U.S. or foreign governments. In addition, our business is likely to require us to seek governmental approvals from time to time. Detecting, investigating, and resolving any actual or alleged violations of these laws can be expensive and time-consuming.
There can be no assurance that our efforts to comply with these laws will be successful and a failure to comply, whether such failure results from the actions of our own employees or a third-party representing us, could result in costly internal or outside investigations, whistleblower complaints, governmental investigations and enforcement actions, substantial financial settlements, fines or other criminal penalties, injunctions or other bans limiting our ability to do business, reputational harm, and other collateral consequences, any of which could have a material adverse effect on our profitability and the value of our Common Stock.
Regulation - Risk 3
Sales to government entities and highly regulated organizations are subject to a number of challenges and risks.Added
While our primary revenue model is based on multi-year engagements with enterprise customers, we selectively pursue U.S. government contracts as a complementary revenue source. This includes our existing work with DARPA, which in 2022 selected us, alongside several other enterprise, academic, and technology partners, to quantify the long-term utility of quantum computers. We may also target highly regulated organizations. Sales to such entities are subject to a number of challenges and risks. Selling to such entities can be highly competitive, expensive, and time consuming, often requiring significant upfront time and expense without any assurance that these efforts will generate a sale. Government contracting requirements may change and in doing so restrict our ability to sell into the government sector. Government demand and payment for our Industrial Generative AI solutions may be affected by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our Industrial Generative AI solutions.
Further, governmental and highly regulated entities may demand contract terms that differ from our standard arrangements and may be less favorable than terms agreed with private sector customers.
Contracts with governmental entities may also include preferential pricing terms, including, but not limited to, "most favored customer" pricing. In the event that we are successful in being awarded a government contract, such award may be subject to appeals, disputes, or litigation, including but not limited to bid protests by unsuccessful bidders.
As a government contractor or subcontractor, we must comply with laws, regulations, and contractual provisions relating to the formation, administration, and performance of government contracts, which affect how we and our partners do business with government agencies. As a result of actual or perceived noncompliance with government contracting laws, regulations, or contractual provisions, we may be subject to non-ordinary course audits and internal investigations which may prove costly to our business financially, divert management time, or limit our ability to continue selling our products and services to our government customers. These laws and regulations may impose other added costs on our business, and failure to comply with these or other applicable regulations and requirements, including non-compliance in the past, could lead to claims for damages from our channel partners, downward contract price adjustments or refund obligations, civil or criminal penalties, and termination of contracts and suspension or debarment from government contracting for a period of time with government agencies. Any such damages, penalties, disruption, or limitation in our ability to do business with a government would adversely impact, and could have a material adverse effect on, our business, results of operations, financial condition, public perception and growth prospects.
Governmental and highly regulated entities may have statutory, contractual, or other legal rights to terminate contracts with us or our partners for convenience or for other reasons. Any such termination may adversely affect our ability to contract with other government customers as well as our reputation, business, financial condition, and results of operations. All these factors can add further risk to business conducted with these customers. If sales expected from a government entity or highly regulated organization for a particular quarter are not realized in that quarter or at all, our business, financial condition, results of operations, and growth prospects could be materially and adversely affected.
Litigation & Legal Liabilities1 | 1.5%
Litigation & Legal Liabilities - Risk 1
We are exposed to risks associated with litigation, investigations, and regulatory proceedings.Added
Environmental / Social2 | 2.9%
Environmental / Social - Risk 1
Laws and regulations governing data use, privacy, and security could burden our business.Added
Environmental / Social - Risk 2
Compliance with data use, privacy, and security laws will be an inherent feature in our product design and a change in those laws could negatively affect the value of our Industrial Generative AI solutions.Added
We seek to provide generative AI solutions, as well as quantum inspired and quantum information processing enhanced AI solutions to large enterprise users located anywhere in the world. We anticipate that the data required to be processed by such solutions can be located in different jurisdictions, subject to different and changing data laws. We also anticipate that our future enterprise customers may have their own policies with respect to the manner in which the data they maintain can be handled, stored, and used. Our Industrial Generative AI solutions are and will continue to be designed to permit compliance with any applicable data laws or internal IT policy of enterprise customers.
There can be no assurance, however, that our software product design is adequate to permit the deployment of our Industrial Generative AI solutions in compliance with existing data laws or customer policies or that these laws and/or policies will not change in the future in a way that makes deployment of our solutions impossible or more costly. A failure on our part to design and re-design our software platform to permit compliance with applicable data laws and customer policies could limit our sales, harming our growth and profitability, or in the worst case create substantial contract liability to a customer for causing a breach of applicable data laws with respect to the customer's data.
Production
Total Risks: 2/68 (3%)Below Sector Average
Employment / Personnel2 | 2.9%
Employment / Personnel - Risk 1
The failure to attract and retain additional qualified personnel or to maintain our company culture could harm our business and prevent us from executing our business strategy.Added
Employment / Personnel - Risk 2
We are highly dependent on our founders and key employees.Added
Our performance to date has relied and will for the foreseeable future rely heavily on our founders and key employees. The retention of these key employees, together with additional key hires, is considered critical to the long-term success of the company. All of our personnel, including the key scientists, engineers, and executives, are "at will" employees who could leave the company to accept alternative employment at any time. The more success we achieve serves to increase the risk that competitors, including large, well-established companies with far greater resources, will seek to hire our employees, including key employees. We are aware of this vulnerability and seek to address it through both succession planning and retention incentives. The loss of any key employee, especially to a competitor, could have a material adverse effect on our business, including by delaying the roll-out of products or diminishing the quantity or quality of our scientific output.
Our future success is also highly dependent on locating and hiring highly qualified key employees, both to replace any losses of key employees, including following our previous reductions in force, as well as to supplement our current employees.
Macro & Political
Total Risks: 2/68 (3%)Below Sector Average
Economy & Political Environment1 | 1.5%
Economy & Political Environment - Risk 1
Widespread damage to the global economy would likely adversely affect our business.Added
International Operations1 | 1.5%
International Operations - Risk 1
We have customers and sales teams outside the United States, where we may be subject to increased business and economic risks that could harm our business.Added
See a full breakdown of risk according to category and subcategory. The list starts with the category with the most risk. Click on subcategories to read relevant extracts from the most recent report.
FAQ
What are “Risk Factors”?
Risk factors are any situations or occurrences that could make investing in a company risky.
The Securities and Exchange Commission (SEC) requires that publicly traded companies disclose their most significant risk factors. This is so that potential investors can consider any risks before they make an investment.
They also offer companies protection, as a company can use risk factors as liability protection. This could happen if a company underperforms and investors take legal action as a result.
It is worth noting that smaller companies, that is those with a public float of under $75 million on the last business day, do not have to include risk factors in their 10-K and 10-Q forms, although some may choose to do so.
How do companies disclose their risk factors?
Publicly traded companies initially disclose their risk factors to the SEC through their S-1 filings as part of the IPO process.
Additionally, companies must provide a complete list of risk factors in their Annual Reports (Form 10-K) or (Form 20-F) for “foreign private issuers”.
Quarterly Reports also include a section on risk factors (Form 10-Q) where companies are only required to update any changes since the previous report.
According to the SEC, risk factors should be reported concisely, logically and in “plain English” so investors can understand them.
How can I use TipRanks risk factors in my stock research?
Use the Risk Factors tab to get data about the risk factors of any company in which you are considering investing.
You can easily see the most significant risks a company is facing. Additionally, you can find out which risk factors a company has added, removed or adjusted since its previous disclosure. You can also see how a company’s risk factors compare to others in its sector.
Without reading company reports or participating in conference calls, you would most likely not have access to this sort of information, which is usually not included in press releases or other public announcements.
A simplified analysis of risk factors is unique to TipRanks.
What are all the risk factor categories?
TipRanks has identified 6 major categories of risk factors and a number of subcategories for each. You can see how these categories are broken down in the list below.
1. Financial & Corporate
- Accounting & Financial Operations - risks related to accounting loss, value of intangible assets, financial statements, value of intangible assets, financial reporting, estimates, guidance, company profitability, dividends, fluctuating results.
- Share Price & Shareholder Rights – risks related to things that impact share prices and the rights of shareholders, including analyst ratings, major shareholder activity, trade volatility, liquidity of shares, anti-takeover provisions, international listing, dual listing.
- Debt & Financing – risks related to debt, funding, financing and interest rates, financial investments.
- Corporate Activity and Growth – risks related to restructuring, M&As, joint ventures, execution of corporate strategy, strategic alliances.
2. Legal & Regulatory
- Litigation and Legal Liabilities – risks related to litigation/ lawsuits against the company.
- Regulation – risks related to compliance, GDPR, and new legislation.
- Environmental / Social – risks related to environmental regulation and to data privacy.
- Taxation & Government Incentives – risks related to taxation and changes in government incentives.
3. Production
- Costs – risks related to costs of production including commodity prices, future contracts, inventory.
- Supply Chain – risks related to the company’s suppliers.
- Manufacturing – risks related to the company’s manufacturing process including product quality and product recalls.
- Human Capital – risks related to recruitment, training and retention of key employees, employee relationships & unions labor disputes, pension, and post retirement benefits, medical, health and welfare benefits, employee misconduct, employee litigation.
4. Technology & Innovation
- Innovation / R&D – risks related to innovation and new product development.
- Technology – risks related to the company’s reliance on technology.
- Cyber Security – risks related to securing the company’s digital assets and from cyber attacks.
- Trade Secrets & Patents – risks related to the company’s ability to protect its intellectual property and to infringement claims against the company as well as piracy and unlicensed copying.
5. Ability to Sell
- Demand – risks related to the demand of the company’s goods and services including seasonality, reliance on key customers.
- Competition – risks related to the company’s competition including substitutes.
- Sales & Marketing – risks related to sales, marketing, and distribution channels, pricing, and market penetration.
- Brand & Reputation – risks related to the company’s brand and reputation.
6. Macro & Political
- Economy & Political Environment – risks related to changes in economic and political conditions.
- Natural and Human Disruptions – risks related to catastrophes, floods, storms, terror, earthquakes, coronavirus pandemic/COVID-19.
- International Operations – risks related to the global nature of the company.
- Capital Markets – risks related to exchange rates and trade, cryptocurrency.