| EMERGE INTERACTIVE INC ITEM 1A RISK FACTORS In addition to the other information included in this report and our other public filings and releases, the following factors should be considered when evaluating our business, financial condition, results of operations and prospects: We have a history of net losses and negative cash flows from operations and expect to continue to incur net losses and negative cash flows from operations for at least the next year |
| If we continue to incur net losses and negative cash flows from operations, our business may not ultimately be financially viable |
| We have incurred significant net losses since inception |
| We reported a net loss of dlra7dtta4 million for the year ended December 31, 2005, or 394prca of total revenue, and a net loss of dlra6dtta8 million for the year ended December 31, 2004, or 586prca of total revenue |
| As of December 31, 2005, we had accumulated net losses totaling dlra212dtta4 million |
| Our revenue may not grow as anticipated and, as a result, our financial condition and results of operations may be harmed and our business may not be financially viable in the future |
| To achieve profitability and improve cash flow from operations, we must successfully address the following risks while maintaining or growing our profit margins: • adverse market conditions existing within segments of the US beef industry; • lack of wide-scale commercial acceptance of our products and services; • lack of wide-scale sales and distribution channels for our products and services; • failure to introduce new products and services; • inability to respond promptly to competitive and industry developments; • failure to achieve brand recognition; and • failure to upgrade and enhance our technologies to accommodate expanded product and service offerings and increased customer demand |
| Although we have recently raised dlra3dtta2 million of equity capital to support operations, if we are unable to significantly grow the sales of our products and services in the next twelve months, we will need to either raise debt or equity capital and further reduce operating costs to maintain a sufficient cash balance |
| We expect cash balances will be sufficient to operate throughout fiscal 2006 |
| Should we find it necessary to raise additional funds, we may find that such funds are either not available or are available only on terms that are unattractive due to cost or dilution of existing shareholders’ interest, or both |
| In the event that we find it necessary to raise additional funds to sustain operations and we are unable to do so, our business may not ultimately be financially viable |
| If we are unable to successfully address any of these risks, our business, results of operations and financial condition is likely to be materially adversely effected |
| 9 ______________________________________________________________________ [38]Table of Contents If our products do not achieve broad market acceptance, our business may not ultimately be successful |
| We believe that broad market acceptance, reflected in increased sales volume, will be necessary to permit us to generate a self-sustaining cash flow from operations |
| The success of our business model depends on the broad acceptance of our technologies into markets that are just now developing as a result of the growing focus on food safety and assurance |
| Furthermore, some of our primary target segments within the US beef industry are experiencing unpredictable economic conditions and are expected to continue to struggle with supply, trade and profitability issues in the near term |
| Although we believe that our products, if adopted on a wide-scale basis, would have a significant impact on improving the safety, quality and confidence in our nation’s food supply, our customers for these products historically have been very slow to change and reluctant to adopt new technologies and business practices |
| This means that before our target customers will fully embrace technology like CattleLog and VerifEYE, there will be a substantial amount of due diligence and testing to ensure that the technology not only performs but also delivers an acceptable rate of return on investment |
| If our target markets do not have the financial resources to purchase our products or do not complete their due diligence and testing and, ultimately, adopt our products, in a timely basis, our business will be harmed |
| Any significant defect in our products could cause us to lose revenue and expose us to product liability claims |
| The products we offer are inherently complex and, despite extensive testing and quality control, have in the past and may in the future contain errors or defects, especially when first introduced |
| These errors and defects could cause damage to our reputation, loss of revenue, product returns, order cancellations or lack of market acceptance for our products |
| We have in the past and may in the future need to issue corrective releases of our products to fix these errors or defects |
| Our agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims |
| However, the limitation of liability provisions contained in our agreements may not be effective as a result of existing or future federal, state or local laws or ordinances or unfavorable judicial decisions |
| Although we have not experienced any product liability claims to date, the sale and support of our products entails the risk of such claims, which could be substantial |
| In addition, our insurance against product liability may not be adequate to cover a potential claim |
| Our two business segments are difficult to evaluate because they have a limited operating history |
| Although we were formed in 1994, our current product and service offerings have a limited operating history |
| If we are unable to expand the market for the products and services of both our AIS segment and our FST segment, or if any of our products are not adopted by our target customers or do not perform as we expect them to, our results of operations and prospects will be materially and adversely impacted |
| Our business may be harmed by competitors |
| We may face competition from companies that may develop competing technologies or services |
| Because the market for beef production consists primarily of a number of large producers, it is possible that these competing technologies or services will be created by companies with significantly greater resources than ours |
| In the event we are unable to effectively compete with these potential new technologies or services, our results of operations may be materially and adversely impacted |
| Our ability to develop new products is uncertain and our products may not develop as we anticipate |
| The outcome of the lengthy and complex process of developing new products is inherently uncertain |
| Prospective products, such as derivative products relating to our existing meat inspection system, require time and resources to develop, may not ultimately be commercially viable, may not achieve commercial acceptance in the marketplace and may fail to receive regulatory approval, if required |
| In addition, new products by competitors could adversely affect the realization of products that are commercially successful |
| 10 ______________________________________________________________________ [39]Table of Contents As previously disclosed, we have been working on the application of the VerifEYE food safety technology for detection of bio-hazardous contamination on human hands and other surfaces |
| In implementing our 2006 business plan, we have completed a review of our current products under development, including the HandScan, CIS II and the cameraless version of VerifEYE products |
| Based on additional market research and the anticipated costs required to successfully bring these products to market, as well as our determination that it is necessary to implement additional cost cutting measures for 2006, the research and development of these VerifEYE derivative products have been halted |
| If we are unable to protect our intellectual property rights, our business and competitive position will be harmed |
| Proprietary rights are important to our success and our competitive position |
| We protect our intellectual property through a combination of patent, copyright, trade secret and trademark law and confidentiality agreements with third parties |
| We cannot guarantee that any of our pending patent or trademark applications will be approved |
| Even if they are approved, the patents or trademarks may be challenged by other parties, infringed upon or invalidated |
| Because brand recognition is an important component of our business strategy, the protection of our trademarks is critical to our success |
| In addition, we depend upon our proprietary database of industry and client information to provide our clients with our information services |
| Despite our efforts to protect our proprietary rights, unauthorized parties may copy aspects of our products and technology or obtain access to our confidential proprietary database |
| Other parties may also breach confidentiality agreements and other protective contracts |
| We may not become aware of these breaches or have adequate remedies available |
| In addition, effective copyright, patent and trademark protection may be unavailable in certain countries to which we might expand our operations |
| We are also reliant on our exclusive licensing agreements with Iowa State University and the Agricultural Research Service, as well as Clare Chemical Research, Inc |
| If we breach these agreements, our rights to the technology incorporated into our food safety products could be limited or eliminated, which would have a material adverse effect on our results of operations |
| In technology markets, there is generally frequent and substantial intellectual property litigation |
| We may be subject to legal proceedings and claims, including claims that we infringe third-party proprietary rights |
| There can be no assurance that third parties will not assert patent, copyright or other infringement claims against us that could prevent us from manufacturing and commercializing our products or services in the United States and abroad |
| There also can be no assurance that former employers of our present and future employees will not claim that our employees have improperly disclosed confidential or proprietary information to us |
| Any of these claims, with or without merit, could subject us to costly litigation and divert the attention of our personnel |
| If we fail to meet the expectations of public market analysts and investors, the market price of our common stock could decline |
| Our results of operations may not meet the expectations of securities analysts and investors, which could cause the price of our common stock to decline |
| Our operating results in the future may not follow any prior trends and should not be relied upon as an indication of future results |
| The factors that affect our operating results include: • our ability to generate revenues and profits in our two business segments; • our ability to retain existing customers and attract new customers; • our ability to develop and market new and enhanced products and services on a timely basis; • the introduction of new or enhanced products and services by us; • continued purchases by our existing customers; and • our ability to manage our costs |
| 11 ______________________________________________________________________ [40]Table of Contents In addition, a number of factors that are beyond our control will also affect our operating results, such as: • demand for our products and services; • product and price competition; • the introduction of new or enhanced products and services by our competitors; and • significant downturns in our targeted markets, such as the significant reduction in U S beef exports caused by public health concerns |
| We depend on certain key personnel, and the loss of any key personnel may seriously harm our business |
| Our future success depends in large part on the continued service of our key technical and management personnel and on our ability to continue to attract and retain qualified employees, particularly those highly skilled employees involved in the design and manufacture of existing products |
| The competition for such personnel is intense, and the loss of key employees could harm our business |
| Safeguard Scientifics, Inc |
| (“Safeguard”) and The Biegert Family Irrevocable Trust (the “Trust”) control a substantial portion of our stock and may influence our affairs or the price of shares of our class A common stock |
| As of March 10, 2006, Safeguard and the Trust own and have the power to vote or dispose of approximately 12prca and 18prca, respectively, of our outstanding class A common stock |
| Safeguard or the Trust, therefore, may have the ability to significantly influence matters requiring stockholder approval, such as our ability to merge or sell substantially all of our assets |
| In addition, if Safeguard or the Trust were to elect to sell a significant number of shares of our class A common stock at one time or over a short period of time, this could cause a significant decline in the price per share of our class A common stock |