Item 1A. Risk Factors
ITEM 1A.
RISK FACTORS
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 Item 8 of this Report, and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” included in 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
The effect of COVID-19 and other possible
pandemics and similar outbreaks could result in material adverse effects on our business, financial position, results of operations and
cash flows.
The COVID-19 outbreak has spread globally and has led governments and
other authorities around the world, including federal, state and local authorities in the United States and abroad, to impose measures
intended to reduce its spread, including restrictions on freedom of movement and business operations such as travel bans, border closings,
business limitations and closures (subject to exceptions for essential operations and businesses), quarantines and shelter-in-place orders.
The recent surges of COVID-19, including due to more contagious and/or vaccine-resistant variants, have resulted in the reimposition of
certain restrictions and may lead to other restrictions being implemented in response to efforts to reduce the spread of COVID-19. Given
the dynamic nature of these circumstances and the related adverse impact these restrictions have had, and may continue to have, on the
economy generally, our business and the business of our suppliers, our results of operations and financial condition may be adversely
impacted by the COVID-19 pandemic.
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Beginning in March 2020, most of our employees transitioned to remote
working arrangements, which are continuing through the date of this Report. There can be no assurance that these arrangements will not
ultimately result in lower work efficiency and productivity, which in turn may adversely affect our business. In addition, the COVID-19
pandemic resulted in industry events, trade shows and business travel being suspended, cancelled and/or significantly curtailed. The cessation
of trade shows and business travel resulted in our lead pipeline being negatively impacted, which negatively affected our sales during
fiscal 2021. While some industry events, trade shows and business travel have resumed, if these activities are suspended, cancelled and/or
significantly curtailed in the future, whether due to surges of COVID-19 or otherwise related to the pandemic, our sales may continue
to be negatively impacted in the future.
In addition, the impact of the COVID-19 pandemic and measures to prevent
its spread subject 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 in light of COVID-19;
·
adverse impacts on our ability to distribute or deliver our products or services, including due to the negative impact of COVID-19 on air travel, 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 located in areas more severely impacted by COVID-19, which could 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 the COVID-19 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, including new information which may emerge concerning the severity of COVID-19, actions taken to contain COVID-19, additional surges
of COVID-19 infections due to the rate of public acceptance and efficacy of COVID-19 vaccines or due to new and more contagious and/or
vaccine resistant variants, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19
pandemic has subsided, we may experience adverse impacts to our business, financial condition, results of operations, and prospects as
a result of its global economic impact, including any economic downturn or recession that has occurred or may occur in the future. The
adverse impact of the COVID-19 pandemic on our business, results of operations and financial condition could be material.
We may 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 subject to market shortages and substantial price fluctuations
in the past. 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.
For instance, we have recently experienced increased delays in shipments of semiconductor chips. As a result, we have sought alternate
sources of certain components, which have been at a higher cost. Because semiconductor chips continue to be subject to an ongoing significant
shortage, our ability to source components that use semiconductor chips has been adversely affected. These supply interruptions have resulted
in increased component delivery lead times and increased costs to obtain components with available semiconductor chips. To the extent
this semiconductor chip shortage or other shortages continue, the production of our products may be impacted.
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Delays in deliveries or
quality control problems with our component suppliers could damage our reputation and could cause our net revenue to decline and harm
our results of operations.
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;
·
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;
·
effects of terrorist attacks abroad;
·
greater difficulty in staffing and managing foreign operations; and
·
increased financial accounting and reporting burdens and complexities.
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. When we do this, we may incur substantial expenses, risk
material delays or encounter other unexpected issues.
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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, 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, we expect that our revenues from these products will continue to decline. 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 the risks that differ from those facing our hardware products.
We continue to dedicate significant
engineering resources to our management software platform, applications, and SaaS offerings, including ConsoleFlow™. 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 the needs of particular businesses. 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 product line, that we will receive
meaningful revenue from or realize a profit from this new product line or that diverting our management’s attention to this product
line will not have a material adverse effect on our existing business, and in turn on our results of operations, financial condition and
prospects.
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 quarterly revenues and 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.
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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 and expense 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 causes us to lack visibility into future demand for our products, which makes it difficult for us to
predict our revenues or operating results.
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.
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.
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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
37% of our net revenue in fiscal 2021. 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, 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.
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.
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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 M2M 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 may 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 ODMs. For instance, we acquired Maestro, Intrinsyc and the Transition Networks and Net2Edge businesses of CSI in 2019, 2020 and
2021, respectively. 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 majority of our physical inventory
management process, as well as the shipping and receiving of our inventory, is performed by third-party logistics providers in Los Angeles,
California and Hong Kong. There is a possibility that these 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.
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.
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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.
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. Increased global information
technology (“IT”) 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 recent, 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 IT security threats
involves significant costs. Although we have taken steps to protect the security of our information systems, we have, from time to time,
experienced 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
cyber threats, 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. 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 our products become subject to cybersecurity breaches, or
if public perception is that they are vulnerable to cyberattacks, our reputation and business could suffer.
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 offering, ConsoleFlow, we expect to store, convey and potentially 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.
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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. Further, as regulatory
focus on privacy and data security issues continues to increase and worldwide laws and regulations concerning the protection of information
become more complex, the potential risks and costs of compliance to our business will intensify.
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.
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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.
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 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.
Risk Related to Liquidity and Capital Resources
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.
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:
·
to fund working capital requirements;
·
to update, enhance or expand the range of products we offer;
·
to increase our sales and marketing activities; or
·
to respond to competitive pressures or perceived opportunities, such as investment, acquisition and international expansion activities.
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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 senior credit facility
and junior credit facility may restrict our financial and operational flexibility and, in certain cases, our ability to operate.
The terms of our amended and restated senior credit facility and junior
credit facility restrict, among other things, our ability to incur additional liens and indebtedness; dispose of assets; make investments;
pay dividends or make certain other restricted payments; consummate certain asset sales; enter into certain transactions with affiliates;
merge or consolidate with other persons; or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of
our assets; or enter into certain speculative hedging arrangements. Further, we are currently and may in the future be required to maintain
specified financial ratios, including pursuant to a maximum senior leverage ratio, a minimum fixed charge coverage ratio or 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 credit agreement and the related loan and security agreement, we have
pledged substantially all of our assets to our senior lender, Silicon Valley Bank, and our junior lender, SVB Innovation Credit Fund VIII,
L.P.
Risks Related to International
Operations
Rising concern
regarding international tariffs could materially and adversely affect our business and results of operations.
The current political
landscape has introduced significant uncertainty with respect to future trade regulations and existing international trade agreements,
as shown by the U.S.-initiated renegotiation of the North America Free Trade Agreement, and Brexit in Europe. This uncertainty includes
the possibility of imposing tariffs or penalties on products manufactured outside the U.S., including the US government’s institution
of a 25% tariff on a range of products from China and subsequent tariffs imposed by the U.S. as well as tariffs imposed by trading partners
on U.S. goods, and the potential for increased trade barriers between the UK and the European Union. The institution of trade tariffs
both globally and between the U.S. and China specifically, carries the risk of negatively affecting the overall economic conditions of
both China and the U.S., which could have a negative impact on us.
We cannot predict whether,
and to what extent, there may be changes to international trade agreements or whether 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 may result in local sourcing
initiatives, or other developments that make it more difficult to sell our products in foreign countries, which would negatively impact
our business and operating results.
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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.
In particular, the uncertainty with respect to the ability of certain
European countries to continue to service their sovereign debt obligations and the related European financial restructuring efforts may
cause the value of the Euro and other European currencies to fluctuate. If the value of European
currencies, including the Euro, deteriorates, thus reducing the purchasing power of European customers, our sales could be adversely
affected .
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.
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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 UK 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. are expected to 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.
Current or future litigation
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.
In particular, litigation regarding
intellectual property rights occurs frequently in our industry. 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.
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
If we are unable to attract,
retain or motivate key senior management and technical personnel, it could seriously 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 you 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 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;
·
mergers and acquisitions; 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.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
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