We operate in a rapidly changing environment that involves numerous
risks and uncertainties. Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described
in this section, as well as other information contained in this Report and in our other filings with the SEC. This section should be read
in conjunction with the consolidated financial statements and accompanying notes thereto included in Part II, Item 8 of this Report, and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7
of this Report. If any of these risks or uncertainties actually occurs, our business, financial condition, results of operations or prospects
could be materially harmed. In that event, the market price for our common stock could decline and you could lose all or part of your
investment. In addition, risks and uncertainties not presently known to us or that we currently deem immaterial may also adversely affect
our business.
Risks Related to Our Operations and Industry
We depend upon a relatively small number of distributors and end-user
customers for a large portion of our revenue, and a decline in sales to these major customers would materially adversely affect our business,
financial condition, and results of operations.
Historically, we have relied upon a small number of distributors and end-user
customers for a significant portion of our net revenue. Our customer concentration could fluctuate, depending on future customer requirements,
which will depend on market conditions in the industry segments in which our customers participate. The loss of one or more significant
customers or a decline in sales to our significant customers could result in a material loss of sales and possible increase in excess
inventories which would adversely affect our business, financial condition, and results of operations.
We have experienced and may in the future experience constraints
in the supply of certain materials and components that could affect our operating results.
Some of our integrated circuits are only available from a single source
and in some cases, are no longer being manufactured. From time to time, integrated circuits, and potentially other components used in
our products, will be phased out of production by the manufacturer. When this happens, we attempt to purchase sufficient inventory to
meet our needs until a substitute component can be incorporated into our products. Nonetheless, we may be unable to purchase sufficient
components to meet our demands, or we may incorrectly forecast our demands, and purchase too many or too few components. In addition,
our products use components that have been in the past and may in the future be subject to market shortages and substantial price fluctuations,
whether due to a pandemic or epidemic, the war between Ukraine and Russia, conflict in the Middle East, hostilities in the Red Sea, tensions
between China and Taiwan, increased tariffs and changes in U.S. trade policies or otherwise. For instance, the market is currently experiencing
memory supply shortages, which has led to higher costs and constrained availability of memory components. From time to time, we have been
unable to meet customer orders because we were unable to purchase necessary components for our products. We do not have long-term supply
arrangements with most of our vendors to obtain necessary components, including semiconductor chips, or technology for our products and
instead purchase components on a purchase order basis. If we are unable to purchase components from these suppliers, our product shipments
could be prevented or delayed, which could result in a loss of sales. If we are unable to meet existing orders or to enter into new orders
because of a shortage in components, we will likely lose net revenue, risk losing customers and risk harm to our reputation in the marketplace,
which could adversely affect our business, financial condition or results of operations.
Our business related to government contracts subjects us to additional
risks.
We believe that the continued growth of our presence in the drone and defense
technology markets will depend, to a certain degree, on the ability of our customers to win government contracts and subcontracts, in
particular from the U.S. Department of War. The funding of U.S. government programs is uncertain and dependent on continued congressional
appropriations and administrative allotment of funds based on an annual budgeting process. Many government customers are subject to budgetary
constraints and our continued performance under these contracts or subcontracts, or award of additional contracts or subcontracts from
these agencies, has in the past and could in the future be impacted by spending reductions, budget cutbacks, or government shutdowns.
A significant decline in government expenditures generally, or with respect to programs for which we provide products, could lead to delays
in negotiations of contracts or increased costs and could adversely affect our business.
7
U.S. government contracts generally permit the government to terminate
the contract without prior notice, at the government’s convenience. On contracts for which we are a subcontractor or for which we
provide our products to the contractor or subcontractor, the U.S. government could terminate the contract for convenience or otherwise,
irrespective of our performance. Also, sales to the U.S. government and its contractors as well as foreign military and government customers,
either directly or as a subcontractor to other contractors, often use a competitive bidding process and have unique purchasing and delivery
requirements, which often makes the timing of sales to these customers unpredictable.
In addition, maintaining compliance with government regulations, including
audit requirements of the U.S. government and our customers that are subject to these requirements, could require us to put in place controls
and procedures to monitor compliance with applicable regulations that may be costly or burdensome to implement. Failure to comply with
the terms of applicable government contracts or regulations, or an unfavorable audit, could result in the government or our customers
ceasing to buy our products and services, a reduction of revenue, fines or civil or criminal liability, all of which could have a material
adverse effect on our business, financial condition, results of operations and prospects.
Future operating results depend upon our ability to timely obtain
components in sufficient quantities and on acceptable terms.
We and our contract manufacturers are responsible for procuring raw materials
for our products. Our products incorporate some components and technologies that are only available from single or limited sources of
supply. Depending on a limited number of suppliers exposes us to risks, including limited control over pricing, availability, quality
and delivery schedules. Moreover, due to our limited sales, we may not be able to convince suppliers to continue to make components available
to us unless there is demand for these components from their other customers. If any one or more of our suppliers cease to provide us
with sufficient quantities of components in a timely manner or on terms acceptable to us, we would have to seek alternative sources of
supply and we may have difficulty identifying additional or replacement suppliers for some of our components.
We outsource substantially all of our manufacturing to contract manufacturers
in Asia. If our contract manufacturers are unable or unwilling to manufacture our products at the quality and quantity we request, our
business could be harmed.
We use contract manufacturers based in Asia to manufacture substantially
all of our products. Generally, we do not have guaranteed supply agreements with our contract manufacturers or suppliers. If any of these
subcontractors or suppliers were to cease doing business with us, we might not be able to obtain alternative sources in a timely or cost-effective
manner. Our reliance on third-party manufacturers, especially in countries outside of the U.S., exposes us to a number of significant
risks, including:
· reduced control over delivery schedules, quality assurance, manufacturing yields and production costs;
· lack of guaranteed production capacity or product supply;
· effects of terrorist attacks or geopolitical conflicts abroad;
· reliance on these manufacturers to maintain competitive manufacturing technologies;
· unexpected changes in regulatory requirements, taxes, trade laws and tariffs;
· reduced protection for intellectual property rights in some countries;
· differing labor regulations;
· disruptions to the business, financial stability or operations, including due to strikes, labor disputes or other disruptions to the workforce, of these manufacturers;
· compliance with a wide variety of complex regulatory requirements;
· fluctuations in currency exchange rates;
· changes in a country’s or region’s political or economic conditions;
· greater difficulty in staffing and managing foreign operations; and
· increased financial accounting and reporting burdens and complexities.
8
Any problems that we may encounter with the delivery, quality or cost of
our products from our contract manufacturers or suppliers could cause us to lose net revenue, damage our customer relationships and harm
our reputation in the marketplace, each of which could materially and adversely affect our business, financial condition or results of
operations.
From time to time, we may transition the manufacturing of certain products
from one contract manufacturer to another. For example, in connection to the increased tariffs imposed by the U.S. against China, we have
transitioned our contract manufacturing out of China for U.S.-bound products. We have and may in the future incur substantial expenses,
risk material delays or encounter other unexpected issues in connection with this transition or future transitions.
Certain of our products are sold into mature markets, which could
limit our ability to continue to generate revenue from these products. Our ability to sustain and grow our business depends on our ability
to develop, market, scale, and sell new products.
Certain of our products are sold into mature markets that are characterized
by a trend of declining demand. As the overall market for these products decreases due to the adoption of new technologies, our revenues
from these products have declined, and we expect they will continue to decline in the future. As a result, our future prospects will depend
on our ability to develop and successfully market new products that address new and growing markets. Our failure to develop new products
or failure to achieve widespread customer acceptance of any new products could cause us to lose market share and cause our revenues to
decline. There can be no assurance that we will not experience difficulties that could delay or prevent the successful development, introduction,
marketing and sale of new products or product enhancements. Factors that could cause delays include regulatory and/or industry approvals,
product design cycle and failure to identify products or features that customers demand. In addition, the introduction and sale of new
products often involves a significant technical evaluation, and we often face delays because of our customers’ internal procedures
for evaluating, approving and deploying new technologies. For these and other reasons, the sales cycle associated with new products is
typically lengthy, often lasting six to 24 months and sometimes longer. Therefore, there can be no assurance that our introduction or
announcement of new product offerings will achieve any significant or sustainable degree of market acceptance or result in increased revenue
in the near term.
Our software offerings are subject to risks that differ from those
facing our hardware products.
We continue to dedicate engineering resources to our management software
platform, applications, and SaaS offerings. These product and service offerings are subject to significant additional risks that are not
necessarily related to our hardware products. Our ability to succeed with these offerings will depend in large part on our ability to
provide customers with software products and services that offer features and functionality that address their specific needs. We may
face challenges and delays in the development of this product line as the marketplace for products and services evolves to meet the needs
and desires of customers. We cannot provide assurances that we will be successful in operating and growing this product line.
In light of these risks and uncertainties, we may not be able to establish
or maintain market share for our software and SaaS offerings. As we develop new product lines, we must adapt to market conditions that
are unfamiliar to us, such as competitors and distribution channels that are different from those we have known in the past. We have and
will encounter competition from other solutions providers, many of whom may have more significant resources than us with which to compete.
There can be no assurance that we will recover our investments in this segment, or that we will receive meaningful revenue from or realize
a profit from this new segment.
We may experience significant fluctuation in our revenue because
the timing of large orders placed by some of our customers is often project-based.
Our operating results fluctuate because we often receive large orders from
customers that coincide with the timing of the customer’s project. Sales of our products and services may be delayed if customers
delay approval or commencement of projects due to budgetary constraints, internal acceptance review procedures, timing of budget cycles
or timing of competitive evaluation processes. In addition, sometimes our customers make significant one-time hardware purchases for projects
which are not repeated. We sell primarily on a purchase order basis rather than pursuant to long-term contracts, and we expect fluctuations
in our revenues as a result of one-time project-based purchases to continue in the future. In addition, our sales may be subject to significant
fluctuations based on the acceleration, delay or cancellation of customer projects, or our failure to complete one or a series of significant
potential sales. Because a significant portion of our operating expenses are fixed, even a single order can have a disproportionate effect
on our operating results. As a result of the factors discussed above, and due to the complexities of the industry in which we operate,
it is difficult for us to forecast demand for our current or future products with any degree of certainty, which means it is difficult
for us to forecast our sales. If our quarterly or annual operating results fall below the expectations of investors or securities analysts,
the price of our common stock could decline substantially.
9
The lengthy sales cycle for our products and services, along with
delays in customer completion of projects, make the timing of our revenues difficult to predict.
We have a lengthy sales cycle for many of our products that generally extends
between six and 24 months and sometimes longer due to a lengthy customer evaluation and approval process. The length of this process can
be affected by factors over which we have little or no control, including the customer’s budgetary constraints, timing of the customer’s
budget cycles, and concerns by the customer about the introduction of new products by us or by our competitors. As a result, sales cycles
for customer orders vary substantially among different customers. The lengthy sales cycle is one of the factors that has caused, and may
continue to cause, our revenues and operating results to vary significantly from quarter to quarter. In addition, we may incur substantial
expenses and devote significant management effort to develop potential relationships that do not result in agreements or revenues, which
may prevent us from pursuing other opportunities. Accordingly, excessive delays in sales could be material and adversely affect our business,
financial condition or results of operations.
The nature of our products, customer base and sales channels results
in lack of visibility into future demand for our products, which makes it difficult for us to forecast our manufacturing and inventory
requirements.
We use forecasts based on anticipated product orders to manage our manufacturing
and inventory levels and other aspects of our business. However, several factors contribute to a lack of visibility with respect to future
orders, including:
· the lengthy and unpredictable sales cycle for our products that can extend from six to 24 months or longer;
· the project-driven nature of many of our customers’ requirements;
· we primarily sell our products indirectly through distributors;
· the uncertainty of the extent and timing of market acceptance of our new products;
· the need to obtain industry certifications or regulatory approval for our products;
· the lack of long-term contracts with our customers;
· the diversity of our product lines and geographic scope of our product distribution;
· we have some customers who make single, non-recurring purchases; and
· a large number of our customers typically purchase in small quantities.
This lack of visibility impacts our ability to forecast our inventory requirements.
If we overestimate our customers’ future requirements for products, we may have excess inventory, which would increase our costs
and potentially require us to write-off inventory that becomes obsolete. Additionally, if we underestimate our customers’ future
requirements, we may have inadequate inventory, which could interrupt and delay delivery of our products to our customers, harm our reputation,
and cause our revenues to decline. If any of these events occur, they could prevent us from achieving or sustaining profitability and
the value of our common stock may decline.
10
Delays in qualifying revisions of existing products for certain of
our customers could result in the delay or loss of sales to those customers, which could negatively impact our business and financial
results.
Our industry is characterized by intense competition, rapidly evolving
technology and continually changing customer preferences and requirements. As a result, we frequently develop and introduce new versions
of our existing products, which we refer to as revisions.
Prior to purchasing our products, some of our customers require that products
undergo a qualification process, which may involve testing of the products in the customer’s system. A subsequent revision to a
product’s hardware or firmware, changes in the manufacturing process or our selection of a new supplier may require a new qualification
process, which may result in delays in sales to customers, loss of sales, or us holding excess or obsolete inventory.
After products are qualified, it can take additional time before the customer
commences volume production of components or devices that incorporate our products. If we are unsuccessful or delayed in qualifying any
new or revised products with a customer, that failure or delay would preclude or delay sales of these products to the customer, and could
negatively impact our financial results. In addition, new revisions to our products could cause our customers to alter the timing of their
purchases, by either accelerating or delaying purchases, which could result in fluctuations of our net revenue from quarter to quarter.
We depend on distributors for a majority of our sales and to complete
order fulfillment.
We depend on the resale of products through distributor accounts for a
substantial majority of our worldwide net revenue. In addition, sales through our top five distributors accounted for approximately 32%
of our net revenue in fiscal 2026. A significant reduction of effort by one or more distributors to sell our products or a material change
in our relationship with one or more distributors may reduce our access to certain end customers and adversely affect our ability to sell
our products. Furthermore, if a key distributor materially defaults on a contract or otherwise fails to perform, our business and financial
results would suffer.
In addition, the financial health of our distributors and our continuing
relationships with them are important to our success. Our business could be harmed if the financial health of these distributors impairs
their performance and we are unable to secure alternate distributors.
Our ability to sustain and grow our business depends in part on the
success of our distributors and resellers.
A substantial part of our revenues is generated through sales by distributors
and resellers. To the extent they are unsuccessful in selling our products, or if we are unable to obtain and retain a sufficient number
of high-quality distributors and resellers, our operating results could be materially and adversely affected. In addition, our distributors
and resellers may devote more resources to marketing, selling and supporting products and services that are competitive with ours, than
to our products. They also may have incentives to promote our competitors’ products over our products, particularly for our competitors
with larger volumes of orders, more diverse product offerings and a longer relationship with our distributors and resellers. In these
cases, one or more of our important distributors or resellers may stop selling our products completely or may significantly decrease the
volume of products they sell on our behalf. This sales structure also could subject us to lawsuits, potential liability and reputational
harm if, for example, any of our distributors or resellers misrepresents the functionality of our products or services to customers or
violates laws or our corporate policies. If we fail to effectively manage our existing or future distributors and resellers effectively,
our business and operating results could be materially and adversely affected.
Changes to the average selling prices of our products could affect
our net revenue and gross margins and adversely affect results of operations.
In the past, we have experienced reductions in the average selling prices
and gross margins of our products. We expect competition to continue to increase, and we anticipate this could result in additional downward
pressure on our pricing. Our average selling prices for our products might also decline as a result of other reasons, including promotional
programs introduced by us or our competitors and customers who negotiate price concessions. To the extent we are able to increase prices,
we may experience a decline in sales volumes if customers decide to purchase competitive products. If any of these were to occur, our
gross margins could decline and we might not be able to reduce the cost to manufacture our products enough or at all to keep up with the
decline in prices.
11
If we are unable to sell our inventory in a timely manner, it could
become obsolete, which could require us to write-down or write off obsolete inventory, which could harm our operating results.
At any time, competitive products may be introduced with more attractive
features or at lower prices than ours. If this occurs, and for other reasons, we may not be able to accurately forecast demand for our
products and our inventory levels may increase. There is a risk that we may be unable to sell our inventory in a timely manner to avoid
it becoming obsolete. If we are required to substantially discount our inventory or are unable to sell our inventory in a timely manner,
we would be required to increase our inventory reserves or write off obsolete inventory and our operating results could be substantially
harmed.
Our failure to compete successfully in our highly competitive market
could result in reduced prices and loss of market share.
The market in which we operate is intensely competitive, subject to rapid
technological advances and highly sensitive to evolving industry standards. The market can also be affected significantly by new product
and technology introductions and marketing and pricing activities of industry participants. Our products compete directly with products
produced by a number of our competitors. Many of our competitors and potential competitors have greater financial and human resources
for marketing and product development, more experience conducting research and development activities, greater experience obtaining regulatory
approval for new products, larger distribution and customer networks, more established relationships with contract manufacturers and suppliers,
and more established reputations and name recognition. For these and other reasons, we may not be able to compete successfully against
our current or potential future competitors. In addition, the amount of competition we face in the marketplace may change and grow as
the market for IoT and machine-to-machine networking solutions grows and new companies enter the marketplace. Present and future competitors
may be able to identify new markets, adapt new technologies, develop and commercialize products more quickly and gain market acceptance
of products with greater success. As a result of these competitive factors, we may fail to meet our business objectives and our business,
financial condition and operating results could be materially and adversely affected.
Acquisitions, strategic partnerships, joint ventures or investments
may impair our capital and equity resources, divert our management’s attention or otherwise negatively impact our operating results.
We have in the past and may in the future pursue acquisitions, strategic
partnerships and joint ventures that we believe would allow us to complement our growth strategy, increase market share in our current
markets and expand into adjacent markets, broaden our technology and intellectual property and strengthen our relationships with distributors,
OEMs and original design manufacturers. Our previous acquisitions have required, and any future acquisition, partnership, joint venture
or investment may also require, that we pay significant cash, issue equity and/or incur substantial debt. Acquisitions, partnerships or
joint ventures may also result in the loss of key personnel and the dilution of existing stockholders to the extent we are required to
issue equity securities. In addition, acquisitions, partnerships or joint ventures require significant managerial attention, which may
be diverted from our other operations. These capital, equity and managerial commitments may impair the operation of our business. Furthermore,
acquired businesses may not be effectively integrated, may be unable to maintain key pre-acquisition business relationships, may not result
in expected synergies, an increase in revenues or earnings or the delivery of new products, may contribute to increased fixed costs, and
may expose us to unanticipated liabilities. If any of these occur, we may fail to meet our business objectives and our business, financial
condition and operating results could be materially and adversely affected.
We may experience difficulties associated with utilizing third-party
logistics providers.
A portion of our physical inventory management process, as well as the
shipping and receiving of our inventory, is performed by a third-party logistics provider in Hong Kong. There is a possibility that third-party
logistics providers will not perform as expected and we could experience delays in our ability to ship, receive, and process the related
data in a timely manner. This could adversely affect our financial position, results of operations, cash flows and the market price of
our common stock.
12
Relying on third-party logistics providers could increase the risk of the
following: failing to receive accurate and timely inventory data, theft or poor physical security of our inventory, inventory damage,
ineffective internal controls over inventory processes or other similar business risks out of our immediate control.
The effect of a pandemic or major public health concern,
could result in material adverse effects on our business, financial position, results of operations and cash flows.
Pandemics or similar outbreaks have had, and may in the future have,
an adverse impact on the economy, our business and the businesses of our suppliers, and our results of operations and financial condition.
For example, a previous pandemic resulted in industry events, trade shows and business travel being suspended, cancelled and/or significantly
curtailed. If these activities are suspended, cancelled and/or significantly curtailed in the future, whether due to a possible pandemic
and similar outbreak, our sales may be negatively impacted in the future.
In addition, the impact of possible pandemics subjects us to various
risks and uncertainties that could materially adversely affect our business, results of operations and financial condition, including
the following:
· significant volatility or decreases in the demand for our products or extended sales cycles;
· changes in customer behavior and preferences, as customers may experience financial difficulties and/or may delay orders or reduce their spending;
· adverse impacts on our ability to distribute or deliver our products or services, as well as temporary disruptions, restrictions or closures of the facilities of our suppliers or customers and their contract manufacturers;
· further disruptions in our contract manufacturers’ ability to manufacture our products, as some contract manufacturers and suppliers of materials used in the production of our products are, or may be, located in areas more severely impacted by a possible pandemic, which has in the past limited and could in the future limit, our ability to obtain sufficient materials to produce and manufacture our products; and
· volatility in the availability of raw materials and components that our contract manufacturers purchase and volatility in raw material and other input costs.
The duration and extent of a future pandemic’s effect on our
operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted at this time.
The adverse impact of a possible future pandemic or similar outbreak on our business, results of operations and financial condition may
be material.
13
Risks Related to Technology, Cybersecurity and Intellectual Property
Cybersecurity breaches and other disruptions could compromise our
information and expose us to liability, which could cause our business and reputation to suffer.
Increased global information technology security threats and more sophisticated
and targeted computer crime pose a risk to the security of our systems and networks and the confidentiality, availability and integrity
of our data. There have been several highly publicized cases in which organizations of various types and sizes have reported the unauthorized
disclosure of customer or other confidential information, as well as cyberattacks involving the dissemination, theft and destruction of
corporate information, intellectual property, cash or other valuable assets. There have also been several highly publicized cases in which
hackers have requested “ransom” payments in exchange for not disclosing customer or other confidential information or for
not disabling the target company’s computer or other systems. The secure processing, maintenance and transmission of the information
that we collect and store on our systems is critical to our operations and implementing security measures designed to prevent, detect,
mitigate or correct these or other cybersecurity threats involve significant costs.
Although we have taken steps to protect the security of our information
systems, we have, from time to time, experienced, and we expect to continue experiencing, threats to our data and systems, including malware,
phishing and computer virus attacks, and it is possible that in the future our safety and security measures will not prevent the systems’
improper functioning or damage, or the improper access or disclosure of personally identifiable information such as in the event of cyber-attacks.
In addition, due to the fast pace and unpredictability of cybersecurity threats, including from emerging technologies, such as advanced
forms of machine learning, AI, and quantum computing, long-term implementation plans designed to address cybersecurity risks become obsolete
quickly and, in some cases, it may be difficult to anticipate or immediately detect such incidents and the damage they cause. In addition,
such threats could be introduced as a result of our customers and business partners incorporating the output of an AI tool that includes
a threat, such as introducing malicious code by incorporating AI generated source code. Any unauthorized access, disclosure or other loss
of information could result in legal claims or proceedings, disrupt our operations, damage our reputation, and cause a loss of confidence
in our products and services, which could adversely affect our business.
If unauthorized access is obtained to the personal and/or proprietary
data we collect and store, our products become subject to cybersecurity breaches, or if public perception is that they are vulnerable
to cyberattacks, our reputation and business could suffer.
In the ordinary course of our business, we collect and store sensitive
data, including intellectual property, our proprietary business information and that of our customers, suppliers and business partners,
and personally identifiable information of our employees, on our networks and third-party cloud software providers. If there is unauthorized
access to such information, we may incur significant costs or liabilities and lose customer confidence in us, which would harm our reputation
and results of operations. In addition, we could be subject to liability, or our reputation could be harmed if technologies integrated
into our products, or our products, fail to prevent cyberattacks, or if our partners or customers fail to safeguard the systems with security
policies that conform to industry best practices. In addition, any cyberattack or security breach that affects a competitor’s products
could lead to the negative perception that our solutions are or could be subject to similar attacks or breaches.
Some of our software offerings may be subject to various cybersecurity
risks, which are particularly acute in the cloud-based technologies operated by us and other third parties that form a part of our solutions.
In connection with certain implementations of our management software platform,
application, and SaaS offerings, we expect to store, convey and process data produced by devices. This data may include confidential or
proprietary information, intellectual property or personally identifiable information of our customers or other third parties with whom
they do business. It is important for us to maintain solutions and related infrastructure that are perceived by our customers and other
parties with whom we do business to provide a reasonable level of reliability and security. Despite available security measures and other
precautions, the infrastructure and transmission methods used by our products and services may be vulnerable to interception, attack or
other disruptive problems. Additionally, some of our products include capabilities to support AI which may further increase our products
susceptibility or perceived susceptibility of security risks.
If a cyberattack or other security incident were to allow unauthorized
access to or modification of our customers’ data or our own data, whether due to a failure with our systems or related systems operated
by third parties, we could suffer damage to our brand and reputation. The costs we would incur to address and fix these incidents could
significantly increase our expenses. These types of security incidents could also lead to lawsuits, regulatory investigations and increased
legal liability, including in some cases contractual costs related to customer notification and fraud monitoring.
14
Failure to comply with data privacy laws and regulations could have
a materially adverse effect on our reputation, results of operations or financial condition, or have other adverse consequences.
Certain of our products and services as well as the operations of our business
may involve access or exposure to personally identifiable or otherwise confidential information and customer data and systems, the misuse
or improper disclosure of which could result in legal liability. The collection, hosting, transfer, disclosure, use, storage and security
of personal information is subject to federal, state and foreign data privacy laws. These laws, (“Privacy and Data Protection Requirements”)
which are not uniform, do one or more of the following: regulate the collection, transfer (including in some cases, the transfer outside
the country of collection), processing, storage, use and disclosure of personal information, and require notice to individuals of privacy
practices and in some cases consent to collection of personal information; give individuals certain access, correction and deletion rights
with respect to their personal information; and prevent the use or disclosure of personal information, or require providing opt-outs for
the use and disclosure of personal information, for secondary purposes such as marketing. Under certain circumstances, some of these laws
require us to provide notification to affected individuals, data protection authorities and/or other regulators in the event of a data
breach. In many cases, these laws apply not only to third-party transactions, but also to transfers of information among us and our subsidiaries.
Laws and regulations in this area are evolving and generally becoming more
stringent. For example, the European General Data Protection Regulation (the “GDPR”) requires us to meet stringent requirements
regarding (i) our access, use, disclosure, transfer, protection, or otherwise processing of personal information; and (ii) the ability
of data subjects to exercise their related various rights such as to access, correct or delete or limit the use of their personal data.
Under the GDPR and the U.K.’s version of the GDPR, information transfers from the European Union and the U.K. to the U.S. are generally
prohibited unless certain measures are followed.
The 2018 California Consumer Privacy Act and California Privacy Rights
Act of 2020 provide individuals similar rights with respect to the processing of their personal data. Multiple states in the U.S. have
enacted such privacy laws, and data privacy laws are scheduled to become effective in several others in 2026.
There is also the possibility of federal privacy legislation and increased
enforcement by the Federal Trade Commission under its power to regulate unfair and deceptive trade practices. Markets in the Asia Pacific
region have also recently adopted GDPR-like legislation, including China’s Personal Information Protection Law. Failure to meet
Privacy and Data Protection Law requirements could result in significant civil penalties (including fines up to 4% of annual worldwide
revenue under the GDPR) as well as criminal penalties. Privacy and data protection law requirements also confer a private right of action
in some countries, including under the GDPR.
As these laws continue to evolve, we may be required to make changes to
our systems, services, solutions and/or products to enable us and/or our clients to meet the new legal requirements, including by taking
on more onerous obligations, limiting our storage, transfer and processing of data and, in some cases, limiting our service and/or solution
offerings in certain locations and our ability to market to customers. Changes in these laws, or the interpretation and application thereof,
may also increase our potential exposure through significantly higher potential penalties for non-compliance. The costs of compliance
with, and other burdens imposed by, such laws and regulations and client demand in this area may limit the use of, or demand for, our
services, solutions and/or products, make it more difficult and costly to meet client expectations, or lead to significant fines, penalties
or liabilities for noncompliance, any of which could adversely affect our business, financial condition, and results of operations.
Issues related to the responsible use of AI may result in reputational,
competitive and financial harm and liability.
We offer products that include capabilities to support AI deployment and
we expect this part of our business to grow. As with many new emerging technologies, AI presents risks and challenges and increasing ethical
concerns relating to its responsible use that could affect the adoption of AI, and thus our business. Third-party misuse of AI applications,
models, or solutions, or ineffective or inadequate AI development or deployment practices by us or our customers or business partners,
could cause harm to individuals, our business or impair the public’s acceptance of AI. Moreover, we may be subject to competitive
harm, regulatory action and legal liability as a result of new proposed legislation regulating AI, new applications of existing data protection,
privacy and intellectual property and other laws. Such regulations could cause us to incur greater compliance costs and could also impact
our ability to sell or the ability of our customers and users worldwide to acquire, deploy and use systems that include our AI-related
products and services, which could thus require us to change our business practices and could adversely affect our business, financial
condition and results of operations. If the AI-related products that we offer have unintended consequences or unintended usage or customization
by our customers or are otherwise controversial due to their perceived or actual impact on human rights, privacy, employment or other
social, economic or political issues the public’s acceptance of AI may be impaired and may result in reputational and financial
harm and liability to our business.
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If software that we incorporate into our products were to become
unavailable or no longer available on commercially reasonable terms, it could adversely affect sales of our products, which could disrupt
our business and harm our financial results.
Certain of our products contain software developed and maintained by third-party
software vendors or which are available through the “open source” software community. We also expect that we may incorporate
software from third-party vendors and open source software in our future products. Our business would be disrupted if this software, or
functional equivalents of this software, were either no longer available to us or no longer offered to us on commercially reasonable terms.
In either case, we would be required to either redesign our products to function with alternate third-party software or open source software,
or develop these components ourselves, which would result in increased costs and could result in delays in our product shipments. Furthermore,
we might be forced to limit the features available in our current or future product offerings.
Our products may contain undetected software or hardware errors or
defects that could lead to an increase in our costs, reduce our net revenue or damage our reputation.
We currently offer warranties ranging from one to five years on each of
our products. Our products could contain undetected software or hardware errors or defects. If there is a product failure, we might have
to replace all affected products, or we might have to refund the purchase price for the units. Regardless of the amount of testing we
undertake, some errors might be discovered only after a product has been installed and used by customers. Any errors discovered after
commercial release could result in financial losses and claims against us. Significant product warranty claims against us could harm our
business, reputation and financial results and cause the market price of our common stock to decline.
We may not be able to adequately protect or enforce our intellectual
property rights, which could harm our competitive position or require us to incur significant expenses to enforce our rights.
We rely primarily on a combination of laws, such as patent, copyright,
trademark and trade secret laws, and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect
our proprietary rights. Despite any precautions that we have taken:
· laws and contractual restrictions might not be sufficient to prevent misappropriation of our technology or deter others from developing similar technologies;
· other companies might claim intellectual property rights based upon prior use that negatively impacts our ability to enforce our trademarks and patents; and
· policing unauthorized use of our patented technology and trademarks is difficult, expensive and time-consuming, and we might be unable to determine the extent of this unauthorized use.
Also, the laws of some of the countries in which we market and manufacture
our products offer little or no effective protection of our proprietary technology. Reverse engineering, unauthorized copying or other
misappropriation of our proprietary technology could enable third parties to benefit from our technology without paying us for it. Consequently,
we may be unable to prevent our proprietary technology from being exploited by others in the U.S. or abroad, which could require costly
efforts to protect our technology. Policing the unauthorized use of our technology, trademarks and other proprietary rights is expensive,
difficult and, in some cases, impracticable. Litigation may be necessary in the future to enforce or defend our intellectual property
rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation could
result in substantial costs and diversion of management resources, either of which could harm our business. Accordingly, despite our efforts,
we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property, which may harm our business,
financial condition and results of operations.
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The impact of natural disasters and other business interruptions
could negatively impact our supply chain and customers resulting in an adverse impact to our revenues and profitability.
Certain of our components and other materials used in producing our products
are from regions susceptible to natural disasters. A natural disaster could damage equipment and inventory at our suppliers’ facilities,
adversely affecting our supply chain. If we are unable to obtain these materials, we could experience a disruption to our supply chain
that would hinder our ability to produce our products in a timely manner, or cause us to seek other sources of supply, which may be more
costly or which we may not be able to procure on a timely basis. In addition, our customers may not follow their normal purchasing patterns
or temporarily cease purchasing from us due to impacts to their businesses in the region, creating unexpected fluctuations or decreases
in our revenues and profitability. Natural disasters in other parts of the world on which our operations are reliant also could have material
adverse impacts on our business.
In addition, our operations and those of our suppliers are vulnerable to
interruption by fire, earthquake, power loss, telecommunications failure, cybersecurity breaches, IT systems failure, terrorist attacks,
climate change and other events beyond our control. A substantial portion of our facilities, including our corporate headquarters and
other critical business operations, are located near major earthquake faults and, therefore, may be more susceptible to damage if an earthquake
occurs. We do not carry earthquake insurance for direct earthquake-related losses. If a business interruption occurs, whether due to a
natural disaster or otherwise, our business could be materially and adversely affected.
Risks Related to Liquidity and Capital Resources
We maintain cash deposits in excess of federally insured limits.
Adverse developments affecting financial institutions, including bank failures, could adversely affect our liquidity and financial performance.
We regularly maintain domestic cash deposits in the Federal Deposit Insurance
Corporation (“FDIC”) insured banks, which exceed the FDIC insurance limits. Bank failures, events involving limited liquidity,
defaults, non-performance or other adverse developments that affect financial institutions, or concerns or rumors about such events, may
lead to widespread demands for customer withdrawals and liquidity constraints that may result in market-wide liquidity problems. For example,
in March 2023, Silicon Valley Bank (“SVB”), Signature Bank Corp., and Silvergate Capital Corp., each failed and were taken
into receivership by the FDIC. At that time, we maintained deposits amounting to approximately 85% of our total cash at SVB. While we
were able to regain full access to our deposits with SVB and have taken steps to diversify our banking relationships since then, our loan
agreement with SVB currently requires us to hold 75% of our US cash balances at SVB. Consequently, any future failure of that bank could
simultaneously prevent access to both a substantial portion of our cash holdings and to our credit line for funds needed to meet our working
capital requirements and other financial commitments. Our cash balances are concentrated at a small number of financial institutions.
In addition, macroeconomic conditions have caused turmoil in the banking sector in the past and may do so again in the future. A failure
to timely access our cash on deposit with SVB or other banks could require the scaling back of our operations and production, negatively
affect our credit, and prevent us from fulfilling contractual obligations. Moreover, there can be no assurance that our deposits in excess
of the FDIC or other comparable insurance limits will be backstopped by the U.S. or any applicable foreign government in the future or
that any bank or financial institution with which we do business will be able to obtain needed liquidity from other banks, government
institutions or by acquisition in the event of a future failure or liquidity crisis, and such uninsured deposits may ultimately be lost.
In addition, if any of the parties with whom we conduct business are unable to access funds due to the status of their financial institution,
such parties’ ability to pay their obligations to us or to enter into new commercial arrangements requiring additional payments
to us could be adversely affected.
We have a history of losses.
We have historically incurred net losses. There can be no assurance that
we will generate net profits in future periods. Further, there can be no assurance that we will be cash flow positive in future periods. In
the event that we fail to achieve profitability in future periods, the value of our common stock may decline. In addition, if we
are unable to achieve or maintain positive cash flows, we would be required to seek additional funding, which may not be available on
favorable terms, if at all.
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We may need additional capital and it may not be available on acceptable
terms, or at all.
To remain competitive, we must continue to make significant investments
to operate our business and develop our products. Our future capital requirements will depend on many factors, including the timing and
amount of our net revenue, research and development expenditures, expenses associated with any strategic partnerships or acquisitions
and infrastructure investments, and expenses related to litigation, each of which could negatively affect our ability to generate additional
cash from operations. If cash generated from operations is insufficient to satisfy our working capital requirements, we may need to raise
additional capital. Looking ahead at long-term needs, we may need to raise additional funds for a number of purposes, including, but not
limited to:
· to fund working capital requirements;
· to update, enhance or expand the range of products we offer;
· to refinance existing indebtedness;
· to increase our sales and marketing activities;
· to respond to competitive pressures or perceived opportunities, such as investment, acquisition and international expansion activities; or
· to acquire additional businesses
We may seek additional capital from public or private offerings of our
capital stock, borrowings under our existing or future credit lines or other sources. If we issue equity or debt securities to raise additional
funds, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges
senior to those of our existing stockholders. In addition, if we raise additional funds through collaborations, licensing, joint ventures,
or other similar arrangements, it may be necessary to relinquish valuable rights to our potential future products or proprietary technologies,
or grant licenses on terms that are not favorable to us. There can be no assurance that we will be able to raise any needed capital on
terms acceptable to us, if at all. If we are unable to secure additional financing in sufficient amounts or on favorable terms, we may
not be able to develop or enhance our products, take advantage of future opportunities, respond to competition or continue to operate
our business.
The terms of our Amended and Restated Loan Agreement may restrict
our financial and operational flexibility and, in certain cases, our ability to operate.
The terms of our Fifth Amended and Restated Loan and Security Agreement
(the “Amended Loan Agreement”) restrict, among other things, our ability to incur liens or indebtedness, dispose of assets,
make investments, make certain restricted payments, merge or consolidate and enter into certain transactions with our affiliates. Further,
we are currently and may in the future be required to maintain specified financial ratios, including pursuant to a minimum interest coverage
ratio, and to satisfy a minimum liquidity test. Our ability to meet those financial ratios and tests can be affected by events beyond
our control, and there can be no assurance that we will meet those tests. Pursuant to our Amended Loan Agreement, we have pledged substantially
all of our assets to our senior lender, SVB. In addition, our Amended Loan Agreement requires us to hold 75% of our US cash balances at
SVB, which may limit our ability to manage our cash holdings effectively.
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Risks Related to International Operations
Future imposition of tariffs could materially and adversely affect
our business and results of operations.
We cannot predict whether, and to what extent, there may be changes to
international trade agreements or whether additional quotas, duties, tariffs, exchange controls or other restrictions on our products
will be changed or imposed. If we are unable to source our products from the countries where we wish to purchase them, either because
of regulatory changes or for any other reason, or if the cost of doing so increases, it could have a material adverse effect on our business,
financial condition and results of operations. Furthermore, imposition of tariffs or other developments may result in our implementing
local or alternative sourcing initiatives that make it more difficult to sell our products in foreign countries, which would negatively
impact our business and operating results.
Recent judicial rulings and changes in tariff policies have introduced
uncertainty regarding the applicability, scope, and duration of certain U.S. tariffs, and availability of refunds for invalidated tariffs.
There remains substantial uncertainty regarding the availability, timing, and amount of potential refunds, if any, the scope and duration
of newly announced tariffs, and the possibility of further additional or modified tariffs or retaliatory actions.
We face risks associated with our international operations that could
impair our ability to grow our revenues abroad as well as our overall financial condition.
We believe that our future growth is dependent in part upon our ability
to increase sales in international markets. These sales are subject to a variety of risks, including geopolitical events, fluctuations
in currency exchange rates, tariffs, import restrictions and other trade barriers, unexpected changes in regulatory requirements, longer
accounts receivable payment cycles, potentially adverse tax consequences, and export license requirements. In addition, we are subject
to the risks inherent in conducting business internationally, including political and economic instability and unexpected changes in diplomatic
and trade relationships. In many markets where we operate, business and cultural norms are different than those in the U.S., and practices
that may violate laws and regulations applicable to us such as the Foreign Corrupt Practices Act (the “FCPA”) unfortunately
are more commonplace. Although we have implemented policies and procedures with the intention of ensuring compliance with these laws and
regulations, our employees, contractors and agents, as well as distributors and resellers involved in our international sales, may take
actions in violation of our policies. Many of our vendors and strategic business allies also have international operations and are subject
to the risks described above. Even if we are able to successfully manage the risks of international operations, our business may be adversely
affected if one or more of our business partners are not able to successfully manage these risks. There can be no assurance that one or
more of these factors will not have a material adverse effect on our business strategy and financial condition.
Foreign currency exchange rates may adversely affect our results.
We are exposed to market risk primarily related to foreign currencies and
interest rates. In particular, we are exposed to changes in the value of the U.S. dollar versus the local currency in which our products
are sold and our services are purchased, including devaluation and revaluation of local currencies. Accordingly, fluctuations in foreign
currency rates could adversely affect our revenues and operating results.
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Risks Related to Regulatory Compliance and Legal Matters
Our inability to obtain appropriate industry certifications or approvals
from governmental regulatory bodies could impede our ability to grow revenues in our wireless products.
The sale of our wireless products in some geographical markets
is sometimes dependent on the ability to gain certifications and/or approvals by relevant governmental bodies. In addition, many of
our products are certified as meeting various industry quality and/or compatibility standards. Failure to obtain these
certifications or approvals, or delays in receiving any needed certifications or approvals, could impact our ability to compete
effectively or at all in these markets and could have an adverse impact on our revenues.
Our failure to comply effectively with regulatory laws pertaining
to our foreign operations could have a material adverse effect on our revenues and profitability.
We are required to comply with U.S. government export regulations in the
sale of our products to foreign customers, including requirements to properly classify and screen our products against a denied parties
list prior to shipment. We are also required to comply with the provisions of the FCPA and all other anti-corruption laws, such as the
U.K. Anti-Bribery Act, of all other countries in which we do business, directly or indirectly, including compliance with the anti-bribery
prohibitions and the accounting and recordkeeping requirements of these laws. Violations of the FCPA or other similar laws could trigger
sanctions, including ineligibility for U.S. government insurance and financing, as well as large fines. Failure to comply with the aforementioned
regulations could also affect our decision to sell our products in international jurisdictions, which could have a material adverse effect
on our revenues and profitability.
Our failure to comply effectively with the requirements of applicable
environmental legislation and regulation could have a material adverse effect on our revenues and profitability.
Certain states and countries have passed regulations relating to chemical
substances in electronic products and requiring electronic products to use environmentally friendly components. For example, the European
Union has the Waste Electrical and Electronic Equipment Directive, the Restrictions of Hazardous Substances Directive, and the Regulation
on Registration, Evaluation, Authorization and Restriction of Chemicals. In the future, China and other countries including the U.S. may
adopt further environmental compliance programs. In order to comply with these regulations, we may need to redesign our products to use
different components, which may be more expensive, if they are available at all. If we fail to comply with these regulations, we may not
be able to sell our products in jurisdictions where these regulations apply, which could have a material adverse effect on our revenues
and profitability.
Evolving expectations from investors, customers, lawmakers, regulators,
and other stakeholders regarding environmental, social and governance practices and disclosures may adversely affect our reputation, adversely
impact our ability to attract and retain employees or customers, expose us to increased scrutiny from the investment community or enforcement
authorities or otherwise adversely impact our business and results of operations.
We may become subject to increased scrutiny and evolving expectations from
investors, customers, lawmakers, regulators, and other stakeholders on environmental, social and governance (“ESG”) practices
and disclosures, including those related to environmental stewardship, climate change, diversity, equity and inclusion, forced labor,
racial justice, and workplace conduct. Regulators have imposed in the past, and may impose in the future, ESG-related rules and guidance,
which may conflict with one another and impose additional costs on us or expose us to new or additional risks. Moreover, certain organizations
that provide information to investors have developed ratings for evaluating companies on their approach to different ESG-related matters,
and unfavorable ratings of us or our industry may lead to negative investor sentiment and the diversion of investment to other companies
or industries. As a smaller company, we may not have resources to meet the evolving ESG-related expectations of the investment community.
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Current or future litigation, including related to intellectual property,
could adversely affect us.
We are subject to a wide range of claims and lawsuits in the course of
our business. Any lawsuit may involve complex questions of fact and law and may require the expenditure of significant funds and the diversion
of other resources. The results of litigation are inherently uncertain, and adverse outcomes are possible. Adverse outcomes may have a
material adverse effect on our business, financial condition or results of operations.
In particular, litigation regarding intellectual property rights occurs
frequently in our industry. There is a risk that other third parties could claim that our products, or our customers’ products,
infringe on their intellectual property rights or that we have misappropriated their intellectual property. In addition, software, business
processes and other property rights in our industry might be increasingly subject to third-party infringement claims as the number of
competitors grows and the functionality of products in different industry segments overlaps. Other parties might currently have, or might
eventually be issued, patents that pertain to the proprietary rights we use. Any of these third parties might make a claim of infringement
against us. The results of litigation are inherently uncertain, and adverse outcomes are possible.
Responding to any infringement claim, regardless of its validity, could:
· be time-consuming, costly and/or result in litigation;
· divert management’s time and attention from developing our business;
· require us to pay monetary damages, including treble damages if we are held to have willfully infringed;
· require us to enter into royalty and licensing agreements that we would not normally find acceptable;
· require us to stop selling or to redesign certain of our products; or
· require us to satisfy indemnification obligations to our customers.
If any of these occur, our business, financial condition or results of
operations could be adversely affected.
General Risk Factors
High interest rates may negatively impact our results of operations
and financing costs.
Interest rates are highly sensitive to many factors that are beyond our
control, including general economic conditions and policies of various governmental and regulatory agencies. Higher interest rates may
hinder opportunities in markets where we do business, have negative impacts on the global economy, or lead customers to decrease or delay
spending on products and projects, including on products that we sell, which may in each case have a material adverse effect on our business,
financial condition and results of operations. In addition, higher interest rates impact the amount of interest we pay for our debt obligations
and leases and continued and sustained increases in interest rates has in the past and may in the future negatively impact our financing
costs or cash flow.
If we are unable to attract, retain or motivate key senior management
and technical personnel, it could materially harm our business.
Our financial performance depends substantially on the performance of our
executive officers and of key engineers, marketing and sales employees. We are particularly dependent upon our technical personnel, due
to the specialized technical nature of our business. If we were to lose the services of our executive officers or any of our key personnel
and were not able to find replacements in a timely manner, our business could be disrupted, other key personnel might decide to leave,
and we might incur increased operating expenses associated with finding and compensating replacements.
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Our quarterly operating results may fluctuate, which could cause
the market price of our common stock to decline.
We have experienced, and expect to continue to experience, significant
fluctuations in net revenue, expenses and operating results from quarter to quarter. We therefore believe that quarter to quarter comparisons
of our operating results are not a good indication of our future performance, and investors should not rely on them to predict our future
operating or financial performance or the future performance of the market price of our common stock. A high percentage of our operating
expenses are relatively fixed and are based on our forecast of future revenue. If we were to experience an unexpected reduction in net
revenue in a quarter, we would likely be unable to adjust our short-term expenditures significantly. If this were to occur, our operating
results for that fiscal quarter would be harmed. In addition, if our operating results in future fiscal quarters were to fall below the
expectations of equity analysts and investors, the market price of our common stock would likely fall.
The market price of our common stock may be volatile based on a number
of factors, many of which are not under our control.
The market price of our common stock has been highly volatile. The market
price of our common stock could be subject to wide fluctuations in response to a variety of factors, many of which are out of our control,
including:
· adverse changes in domestic or global economic, market and other conditions;
· new products or services offered by our competitors;
· our completion of or failure to complete significant one-time sales of our products;
· actual or anticipated variations in quarterly operating results;
· changes in financial estimates by securities analysts;
· announcements of technological innovations;
· our announcement of significant mergers, acquisitions, strategic partnerships, joint ventures or capital commitments;
· conditions or trends in the industry;
· additions or departures of key personnel;
· increased competition from industry consolidation; and
· sales of common stock by our stockholders or us or repurchases of common stock by us.
In addition, the Nasdaq Capital Market often experiences price and volume
fluctuations. These fluctuations often have been unrelated or disproportionate to the operating performance of companies listed on the
Nasdaq Capital Market.
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