Item 1A. Risk Factors
Item
1A. RISK FACTORS
Risk Factor Summary
Risks Related
to our Financial Results and Condition
We have incurred net losses
since inception.
We may need additional capital
to fund our expanding operations until we reach profitability, and if we are not able to obtain sufficient capital, we may be forced
to limit or curtail our operations.
Lack of long-term purchase
orders and commitments from customers may lead to a rapid decline in sales.
Our products require a continuing
investment in research and development, and may experience technical problems or delays, which could lead the business to fail.
The nature of our business
involves significant risks and uncertainties that may not be covered by insurance or indemnity.
Product quality issues and
a higher-than-expected number of warranty claims or returns could harm our business and operating results.
Our products may experience
declining unit prices and we may not be able to offset that decline with production cost decreases or higher unit sales.
Our operating results may be
adversely impacted by worldwide political, economic and public health uncertainties and specific conditions in the markets we address.
Acquisitions could divert the
attention of key personnel, be difficult to integrate, dilute our existing shareholders and adversely impact our financial results.
Our failure to effectively
manage growth could harm our business.
Our products are subject to
lengthy development cycles.
We expect to incur substantial
research and development costs related to identifying and commercializing new products and services which may never result in revenues.
Risks Related
to our Operations
Our operations may be adversely
affected if we lose our rights under third-party technology licenses.
If our customers are not satisfied
with our technical support, firmware or software updates, they may choose not to purchase our products which would adversely impact
business and operating results.
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Our use of open-source software
could negatively affect our ability to sell our products and could subject us to possible litigation.
We must recruit and retain
highly trained and experienced employees, especially engineers, in order to succeed in our business.
Our facilities and information
systems and those of our key suppliers could be damaged as a result of disasters or unpredictable events which could have an adverse
effect on our business operations.
We rely on third-party suppliers,
some of which are sole-source suppliers, to provide components for our products which may lead to supply shortages, long lead times
for components, and supply changes, any of which could disrupt our supply chain, increase our costs, and adversely impact our operating
results.
Several steps of our manufacturing
processes are dependent upon certain critical machines and tools which could result in delivery interruptions and foregone revenues.
We depend on third parties
to provide integrated circuit chip sets and other critical components for use in our products.
Risks
Related to our Industry
We operate in an emerging and rapidly growing industry which makes it difficult
to evaluate our current business and prospects.
We face competition from larger
companies that have substantially greater resources which challenges our ability to establish market share, grow our business segments,
and reach profitability.
We may not be able to keep
pace with technological advances in the drone industry.
Cybersecurity risks could adversely
affect our business and disrupt our operations.
Risks Related
to Our Enterprise Segment
U.S. government contracts are
generally not fully funded at inception and may include provisions that are not favorable to us which could adversely impact our
cash flows and results of operations.
A decline in U.S. government
budgets, changes in spending priorities, or delays in contract awards could adversely affect the revenues of our Teal subsidiary.
Our work for the U.S. government
could expose us to security risks.
We are subject to extensive
government regulation and our failure to comply with these regulations could subject us to penalties that may adversely impact our
ability to operate our business.
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Risks Related to Our Common
Stock
Our management has voting control
of the Company.
Our failure to maintain effective
internal controls over financial reporting could have an adverse impact on the Company.
We have never paid dividends
and we do not expect to pay dividends for the foreseeable future.
The listing of our securities
on Nasdaq subject us to additional regulations and compliance requirements.
Our Board of Directors may
authorize and issue shares of new classes of stock that could adversely affect current holders of our common stock.
Our shares will be subordinate
to all of our debts and liabilities which increases the risk that investors could lose their entire investment.
The market price of our shares
of common stock is subject to fluctuation.
Future capital raises may dilute
our existing stockholders’ ownership and adversely impact the fair value of their investment.
Risks Related to Regulatory Matters
The drone industry is subject
to various laws and government regulations which could complicate and delay our ability to introduce products, maintain compliance,
and avoid violations which could negatively impact our financial condition and results of operations.
Our business and products are
subject to government regulation, and we may incur additional compliance costs or be forced to suspend or cease operations if we
fail to comply.
Our results of operations may
suffer if we are not able to successfully manage our exposure to foreign exchange rate risks.
Our international operations,
including the use of foreign contract manufacturers, subjects us to international operational, financial, legal, political and public
health risks which could harm our operating results.
We could be adversely affected
by violations of the U.S. Foreign Corrupt Practices Act or similar anti-bribery laws in other jurisdictions in which we operate.
We are subject to governmental
export and import controls, and economic sanctions laws that could subject us to liability and impair our ability to compete in international
markets.
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Changes in trade policy in
the United States and other countries may have adverse impacts on our business, results of operations and financial condition.
We may collect, store, process
and use the personal information of our customers which subjects us to governmental regulation related to privacy, information security
and data protection. Any cybersecurity breaches or our failure to comply with such legal obligations by us, or by our third-party
service providers or partners, could harm our business.
Risks
Related to Intellectual Property
Our products could infringe
on the intellectual property rights of others.
Our intellectual property rights
and proprietary rights may not adequately protect our products.
Risks
Related to our Financial Results and Condition
We
have incurred net losses since inception.
We
have never been profitable and reported an accumulated deficit of approximately $81,100,000 at April 30, 2024. These losses have had
an adverse effect on our financial condition, stockholders’ equity and working capital. We will need to generate higher revenues,
improve profit margins, and control operating costs in order to attain profitability. We can provide no assurances that we will be able
to reach profitability.
We
may need additional capital to fund our expanding operations until we reach profitability, and if we are not able to obtain sufficient
capital, we may be forced to limit or curtail our operations.
If
additional equity and/or debt financing is not available, then we may not be able to continue to develop our business activities, and
we will have to modify our business plan. These factors could have a material adverse effect on our future operating results and our
financial condition. If we are unable to raise additional funds, we could be forced to cease our business activities and dissolve. In
such an event, we may incur additional financial obligations, including the accelerated maturity of debt obligations, lease termination
fees, employee severance payments, and other creditor and dissolution-related obligations.
Our
ability to raise financing through sales of equity and/or debt securities depends on general market conditions and the demand for our
common stock and/or debt securities. We may be unable to raise adequate capital through sales of equity and/or debt securities, and if
our stock has a low market price at the time of such sales, our existing stockholders could experience substantial dilution. If adequate
financing is not available or unavailable on acceptable terms, we may find we are unable to fund expansion, continue offering products
and services, take advantage of acquisition opportunities, develop or enhance services or products, or to respond to competitive pressures
in the industry which may jeopardize our ability to continue operations.
Lack
of long-term purchase orders and commitments from customers may lead to a rapid decline in sales.
Our
customers issue purchase orders solely at their own discretion. Customers are generally able to cancel orders (without penalty) or delay
the delivery of products on relatively short notice. In addition, current customers may decide not to purchase products for any reason.
If our customers do not continue to purchase our products, then our sales volume could decline rapidly with little or no warning.
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We
cannot rely on long-term purchase orders or commitments to protect us from the negative financial effects of a decline in demand for
our products. The uncertainty of product orders makes it difficult to forecast sales and allocate resources in a manner consistent with
actual sales. Moreover, expense levels and the amounts invested in capital equipment and new product development costs are based in part
on expectations of future sales and, if expectations regarding future sales are inaccurate, we may be unable to reduce costs in a timely
manner to adjust for sales shortfalls. As a result of lack of long-term purchase orders and purchase commitments, we may experience a
rapid decline in sales.
Our
products require a continuing investment in research and development, and may experience technical problems or delays, which could lead
the business to fail.
Our
research and development efforts remain subject to all the risks associated with the development of new products based on emerging and
innovative technologies. This includes, for example, unexpected technical problems or the possible insufficiency of funds for completing
development of these products. If technical problems or delays arise, further improvements in products and the introduction of future
products could be adversely impacted, and we could incur significant additional expenses, an inability to increase revenues and increasing
operating losses.
The
nature of our business involves significant risks and uncertainties that may not be covered by insurance or indemnity.
We
develop and sell products where insurance or indemnification may not be available, including (i) those using advanced and unproven technologies
and drones, and (ii) those that collect, distribute and analyze various types of information.
Failure
of certain of our products could result in loss of life or property damage. Certain products may raise questions with respect to issues
of civil liberties, intellectual property, trespass, conversion and similar concepts. Indemnification to cover potential claims or liabilities
resulting from a failure of technologies developed or deployed may be available in certain circumstances but not in others. We do
not and are not able to maintain insurance to protect against our risks and uncertainties. Substantial claims resulting from an accident,
failure of our product, or liability arising from our products in excess of any indemnity or insurance coverage (or for which indemnity
or insurance is not available or was not obtained) could harm our financial condition, cash flows, and operating results. Any accident,
even if fully covered or insured, could negatively affect our reputation among our customers and the public, and make it more difficult
for us to compete effectively.
Product
quality issues and a higher-than-expected number of warranty claims or returns could harm our business and operating results.
The
products that we sell could contain defects in design or manufacture. Defects could also occur in the products or components that are
supplied to us. There can be no assurance we will be able to detect and remedy all defects in the hardware and software we sell which
could result in product recalls, product redesign efforts, loss of revenue, reputational damage and significant warranty and other remediation
expenses. If we determine that a product does not meet product quality standards or may contain a defect, the launch of such product
could be delayed until we remedy the quality issue or defect. The costs associated with any protracted delay necessary to remedy a quality
issue or defect in a new product could be substantial.
We
generally provide a one-year warranty on all of our products. The occurrence of any material defects in our products could expose us
to liability for damages and warranty claims in excess of our current reserves, and we could incur significant costs to correct any defects,
warranty claims or other problems. In addition, if any of our product designs are defective or are alleged to be defective, we may be
required to participate in a recall campaign. In part due to the terms of our warranty policy, any failure rate of our products that
exceeds our expectations may result in unanticipated losses. Any negative publicity related to the perceived quality of our products
could affect our brand image and decrease retailer, distributor and consumer confidence and demand, which could adversely affect our
operating results and financial condition. Further, accidental damage coverage and extended warranties are regulated in the United States
at the state level and are treated differently within each state. Additionally, outside of the United States, regulations for extended
warranties and accidental damage vary from country to country. Changes in interpretation of the regulations concerning extended warranties
and accidental damage coverage on a federal, state, local or international level may cause us to incur costs or have additional regulatory
requirements to meet in the future in order to continue to offer our support services. Our failure to comply with past, present and future
similar laws could result in reduced sales of our products, reputational damage, penalties and other sanctions, which could harm our
business and financial condition.
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Our
products may experience declining unit prices and we may not be able to offset that decline with production cost decreases or higher
unit sales.
Prices
of established enterprise electronics, displays, personal computers, and mobile products tend to decline significantly over time or as
new enhanced versions are introduced, frequently every 12 to 24 months in the markets in which we compete. In order to maintain adequate
product profit margins over the long term, we believe that we will need to continuously develop product enhancements and new technologies
that will either slow price declines of our products or reduce the cost of producing and delivering our products. While we anticipate
opportunities to reduce production costs over time, we may not be able to reduce our component costs. We expect to attempt to offset
the anticipated decrease in our average selling price by introducing new products, increasing our sales volumes, or adjusting our product
mix. If we fail to do so, our results of operations will be materially and adversely affected.
Our
operating results may be adversely impacted by worldwide political, economic and public health uncertainties and specific conditions
in the markets we address.
A
deterioration in global economic, financial, and/or public health conditions, including global pandemics, economic recessions and political
turmoil could materially adversely affect (i) our ability to raise, or the terms of needed capital; (ii) demand for our current and future
products; and (iii) the supply of components for our products. We cannot predict the timing, strength, or duration of any economic slowdown
or subsequent economic recovery, worldwide, or in the drone industry.
Acquisitions
could divert the attention of key personnel, be difficult to integrate, dilute our existing shareholders and adversely impact our financial
results.
Since
January 2020, we have completed four acquisitions which have significantly increased the scope of our operations and our employee headcount.
Acquisitions include a wide range of risks, any of which could hurt our business, including the following:
difficulties in integrating the operations of a newly acquired company
including existing products and contracts, differences in corporate culture, operating systems and other integration issues;
challenges supporting and transitioning the customers of acquired companies
and the loss of any acquired customers will adversely impact our revenues and operating results;
assumption of known and unknown operating problems and our potential
inability to address them in a timely and efficient manner;
risks of entering new geographic markets where we have no prior experience
and are required to gain an understanding of the legal, regulatory, labor and business laws of these new markets;
In
addition, there are many financial risks associated with the cost of acquisitions. If we finance the cost of an acquisition using common
stock, then our existing shareholders will be diluted and our stock price could decrease. If we finance the cost of an acquisition using
debt, such financing could include restrictive covenants that restrict our operating and financial flexibility. If the stock market perceives
that we overpaid for the acquisition, then our stock price could decrease.
Our failure
to effectively manage growth could harm our business.
We
intend to expand the number and types of products we sell. We will need to replace and regularly introduce on a timely basis new products
and technologies, enhance existing products, and effectively stimulate customer demand for new products and upgraded or enhanced versions
of our existing products.
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The
replacement and expansion of our products places a significant strain on our management, operations and engineering resources. Specifically,
the areas that are strained most by these activities include the following:
New Product
Launches: With the changes in and growth of our product portfolio, we will experience increased complexity in coordinating
product development, manufacturing, and shipping. As this complexity increases, it places a strain on our ability to accurately coordinate
the commercial launch of our products with adequate supply to meet anticipated customer demand and effectively market to stimulate
demand and market acceptance. We have experienced delays in the past. If we are unable to scale and improve our product launch coordination,
we could frustrate our customers and lose possible retail shelf space and product sales;
Existing
Products Impacted by New Introductions : The introduction of new products or product enhancements may shorten the life
cycle of our existing products, or replace sales of some of our current products, thereby offsetting the benefit of a successful
product introduction and may cause customers to defer purchasing our existing products in anticipation of the new products. These
occurrences could potentially lead to challenges in managing inventory of existing products. We may also provide price protection
to some of our retailers as a result of new product introductions and reduce the prices of existing products. If we fail to effectively
manage new product introductions, our revenue and profitability may be harmed; and
Forecasting,
Planning and Supply Chain Logistics : With the changes in and growth of our product portfolio, we will experience increased
complexity in forecasting customer demand, in planning for production, and in transportation and logistics management. If we are
unable to scale and improve our forecasting, planning, production, and logistics management, we could frustrate our customers, lose
product sales or accumulate excess inventory.
Our
products are subject to lengthy development cycles.
Our
products are subject to lengthy product development cycles. The time elapsed between initial sampling of our products, the custom design
of our products to meet specific product requirements, and the ultimate incorporation of our products into salable products is significant,
often with a duration of more than one year. If our products fail to meet our customers’ cost, performance, or technical requirements
or if unexpected technical challenges arise in the integration of our products into enterprise markets, then our operating results could
be significantly and adversely affected. Long delays in achieving customer qualification and incorporation of our products also could
adversely affect our business. Many head-mounted display companies are introducing digital head-mounted displays which could create shortages
of components and provide an opportunity for companies with significantly greater resources than us to accelerate migration to digital
products in a manner or timeline which we cannot meet, which could cause us to lose market share and harm our business and prospects.
These same risks exist in our Enterprise sector where our competitors include some of the largest defense companies in the world.
We expect
to incur substantial research and development costs related to identifying and commercializing new products and services which may never
result in revenues.
Our future growth
depends on expanding into new markets, adapting existing products to new applications, and introducing new products and services that
achieve market acceptance. We plan to incur substantial research and development costs as part of these efforts. We spent $5,896,037
million, or 33% of our revenue, in our fiscal year ended April 30, 2024, on internal research and development activities. We believe
that there are significant investment opportunities in a number of business areas. Because we account for internal research and development
as an operating expense, these expenditures will adversely affect our earnings in the future. Further, our research and development programs
may not produce successful results, and our new products and services may not achieve market acceptance, generate revenue or cash flow,
which could adversely impact our financial results and liquidity.
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Risks Related
to our Operations
Our
operations may be adversely affected if we lose our rights under third-party technology licenses.
Our
business relies on technology rights and software licensed from third parties. We could lose our exclusivity or other rights to use the
technology if we fail to comply with the terms and performance requirements of the licenses. In addition, certain licensors may terminate
a license upon our breach and have the right to consent to sublicense arrangements. If we were to lose our rights under any of these
licenses, or if we were unable to obtain required consents to future sublicenses, we could lose a competitive advantage in the market,
and may even lose the ability to commercialize certain products or technologies.
If
our customers are not satisfied with our technical support, firmware or software updates, they may choose not to purchase our products
which would adversely impact business and operating results.
Our
business relies on our customers’ satisfaction with the technical support, firmware, software and security updates we provide to
support our products. If we fail to provide technical support services and necessary updates that are (i) responsive, (ii) satisfy our
customers’ expectations and (iii) resolve issues that they encounter with our products, then customers may choose not to purchase
additional products and we may face brand and reputational harm which could adversely affect our operating results.
Our
use of open-source software could negatively affect our ability to sell our products and could subject us to possible litigation.
We
incorporate open-source software into our products. Open-source software is generally licensed by its authors or other third parties
under open-source licenses. Some of these licenses contain requirements that we make available source code for modifications or derivative
works we create based upon the open-source software, and that we license such modifications or derivative works under the terms of a
particular open-source license or other license granting third parties certain rights of further use. Additionally, if a third-party
software provider has incorporated open-source software into software that we license from such provider, we could be required to disclose
any of our source code that incorporates or is a modification of our licensed software. If an author or other third-party that distributes
open-source software that we use or license were to allege that we had not complied with the conditions of the applicable license, we
could incur significant legal expenses defending against those allegations and could be subject to significant damages, enjoined from
offering or selling our products that contained the open-source software and be required to comply with the foregoing conditions. Any
of the foregoing could disrupt and harm our business and financial condition.
We
must recruit and retain highly trained and experienced employees, especially engineers, in order to succeed in our business.
We
will need to hire and retain highly skilled technical personnel as employees and as independent contractors in order to develop our products
and grow our business. The competition for highly skilled technical, managerial, and other personnel can be intense. Our recruiting and
retention success is substantially dependent upon our ability to offer competitive salaries and benefits to our employees. We must compete
with companies that possess greater financial and other resources than we do and that may be more attractive to potential employees and
contractors. To be competitive, we may have to increase the compensation, bonuses, stock options and other fringe benefits we offer to
employees in order to attract and retain such personnel. The costs of retaining or attracting new personnel may have a material adverse
effect on our business and operating results. If we fail to attract and retain the technical and managerial personnel required to be
successful, our business, operating results and financial condition could be materially adversely affected.
Our
facilities and information systems and those of our key suppliers could be damaged as a result of disasters or unpredictable events which
could have an adverse effect on our business operations.
Our
manufacturing facility is located in Salt Lake City, Utah. We also rely on third-party manufacturing plants in the US, Asia and other
parts of the world to provide key components for our products and services. If major disasters such as earthquakes, hurricanes, tropical
storms pandemics, fires, floods, wars, terrorist attacks, computer viruses, transportation disasters or other events occur in any of
these locations, or the effect of climate change on any of these factors or our locations, or our information systems or communications
network or those of any of our key component suppliers breaks down or operates improperly as a result of such events, our facilities
or those of our key suppliers may be seriously damaged, and we may have to stop or delay production and shipment of our products. We
may also incur expenses relating to such damages. If production or shipment of our products or components is stopped or delayed or if
we incur any increased expenses as a result of damage to our facilities, our business, operating results and financial condition could
be materially adversely affected.
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We
rely on third-party suppliers, some of which are sole-source suppliers, to provide components for our products which may lead to supply
shortages, long lead times for components, and supply changes, any of which could disrupt our supply chain, increase our costs, and adversely
impact our operating results
Our
ability to meet customer demand depends on our ability to obtain timely and adequate delivery of components for our products. All of
the components that go into our products are sourced from third-party suppliers. Some of the key components used to manufacture our products
come from a limited or single source of supply or by a supplier that could potentially become a competitor. Our contract manufacturers
generally purchase these components on our behalf from approved suppliers. We are subject to the risk of shortages and long lead times
in the supply of these components and the risk that our suppliers discontinue or modify components used in our products. In addition,
the lead times associated with certain components are lengthy and preclude rapid changes in quantities and delivery schedules. We have
experienced component shortages and the availability of these components may be unpredictable in the future.
If
we lose access to or experience a significant disruption in the supply of products and components from a supplier, we may be unable to
locate alternative suppliers of comparable quality at an acceptable price, or at all, and our business could be materially and adversely
affected. In addition, if we experience a significant increase in demand for our products, our suppliers might not have the capacity
or elect not to meet our needs as they allocate components to other customers. Developing suitable alternate sources of supply for these
components may be time-consuming, difficult and costly, and we may not be able to source these components on terms that are acceptable
to us, or at all, which may adversely affect our ability to fulfill our orders in a timely or cost-effective manner. Identifying a suitable
supplier is an involved process that requires us to become satisfied with the supplier’s quality control, responsiveness and service,
financial stability, labor and other ethical practices. If we seek to source materials from new suppliers, there can be no assurance
that we could do so in a manner that does not disrupt the manufacture and sale of our products.
Our
reliance on single source, or a small number of suppliers involves a number of additional risks, including risks related to supplier
capacity constraints, price increases, timely delivery, component quality, failure of a key supplier to remain in business and adjust
to market conditions, as well as natural disasters, fire, acts of terrorism or other catastrophic events, including global pandemics.
Several
steps of our manufacturing processes are dependent upon certain critical machines and tools which could result in delivery interruptions
and foregone revenues.
We
currently have little equipment redundancy in manufacturing locales. If we experience any significant disruption in manufacturing or
a serious failure of a critical piece of equipment, we may be unable to supply products to our customers in a timely manner. Interruptions
in our manufacturing could be caused by equipment problems, the introduction of new equipment into the manufacturing process or delays
in the delivery of new manufacturing equipment. Lead-time for delivery, installation, testing, repair and maintenance of manufacturing
equipment can be extensive. We have experienced production interruptions in the past and no assurance can be given that we will not lose
potential sales or be able to meet production orders due to future production interruptions in our manufacturing lines.
We
depend on third parties to provide integrated circuit chip sets and other critical components for use in our products.
We
do not manufacture the integrated circuit chip sets, optics, micro-displays, backlights, projection engines, printed circuit boards or
other electronic components which are used in our products. Instead, we purchase them from third-party suppliers or rely on third-party
independent contractors for these integrated circuit chip sets and other critical components, some of which are customized, or custom
made for us. We also may use third parties to assemble all or portions of our products. Some of these third-party contractors and suppliers
are small companies with limited financial resources. If any of these third-party contractors or suppliers were unable or unwilling to
supply these components, our sales and operating results would be adversely impacted. As the availability of components decreases, the
cost of acquiring those components ordinarily increases. High growth product categories have experienced chronic shortages of components
during periods of exceptionally high demand. If we do not properly anticipate the need for or procure critical components, we may pay
higher prices for those components, our gross profits may decrease and we may be unable to meet the demands of our customers and end-users
which could reduce our competitiveness, cause a decline in our market share and have a material adverse effect on our results of operations.
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Risks Related to
our Industry
We operate in an emerging
and rapidly growing industry which makes it difficult to evaluate our current business and prospects.
The drone industry is relatively
new and is growing rapidly. As a result, it is difficult to evaluate our business and prospects. We cannot accurately predict whether,
and even when, demand for our products will increase, if at all. The risks, uncertainties and challenges encountered by companies operating
in emerging and rapidly growing industries include:
Generating sufficient
revenue to cover operating costs and sustain operations;
Acquiring and
maintaining market share;
Attracting and
retaining qualified personnel, especially engineers with the requisite technical skills;
Successfully
developing and commercially marketing new products:
Accessing the
capital markets to raise additional capital, on reasonable terms, if and when required to sustain operations or to grow the business.
We
face competition from larger companies that have substantially greater resources which challenges our ability to establish market share,
grow our business segments, and reach profitability.
The
drone industry is attracting a wide range of significantly larger companies which have substantially greater financial, management, research
and marketing resources than us. Competitors in the Enterprise segment include transportation companies like United Parcel Service, Federal
Express and Amazon, as well as defense companies such as Lockheed Martin Corporation, Northrop Grumman Corporation, and AeroVironment.
Our competitors may be able to provide customers with different or greater capabilities than we can provide, including technical qualifications,
pricing, and key technical support. Many of our competitors may utilize their greater resources to (i) develop competing products and
technologies, (ii) leverage their financial strength to utilize economies of scale and offer lower pricing, and (iii) hire more qualified
personnel by offering more generous compensation packages. In order to secure orders and contracts, we may have to offer comparable products
and services at lower pricing which could adversely affect our operating margins. Our inability to compete effectively against these
larger companies could have a material adverse effect on our business, financial condition, and operating results.
We
may not be able to keep pace with technological advances in the drone industry.
The
drone industry continues to undergo significant changes, primarily related to technological developments. The rapid growth of technology
makes it impossible to predict the overall effect these factors could have on the drone industry. If we are not able to keep pace with
these technological advances, then our revenues, profitability and results from operations may be materially adversely affected.
Cybersecurity
risks could adversely affect our business and disrupt our operations.
The
threats to network and data security are increasingly diverse and sophisticated. Despite our efforts and processes to prevent breaches,
our devices, as well as our servers, computer systems, and those of third parties that we use in our operations are vulnerable to cybersecurity
risks. These risks include cyber-attacks such as viruses and worms, phishing attacks, denial-of-service attacks, physical or electronic
break-ins, employee theft or misuse, and similar disruptions from unauthorized tampering with our servers and computer systems or those
of third parties that we use in our operations. The occurrence of any of these events could lead to interruptions, delays, loss of critical
data, unauthorized access to user data, and loss of consumer confidence. In addition, we may be the target of email scams that attempt
to acquire personal information or company assets. Despite our efforts to create security barriers to such threats, we may not be able
to entirely mitigate these risks. Any cyber-attack that attempts to obtain our data and assets, disrupt our service, or otherwise access
our systems, or those of third parties we use, if successful, could adversely affect our business, operating results, and financial condition.
A cyber attack would be expensive to remedy and could damage our reputation. In addition, any such breaches may result in negative publicity,
adversely affect our brand, decrease demand for our products and services, and adversely affect our operating results and financial condition.
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Risks Related to
Our Enterprise Segment
U.S. government
contracts are generally not fully funded at inception and may include provisions that are not favorable to us which could adversely impact
our cash flows and results of operations.
US government contracts
often have long lead times for design and development and can be subject to significant changes in delivery timelines. Congress normally
appropriates funds on its fiscal year basis, and it may not fully fund a program in the same fiscal year. Depending upon the results
of political elections, the actions of Congress can change from one fiscal year to the next. As a result, we may be required to expend
funds to fulfill existing orders, but subsequently have the delivery timeline extended or the order cancelled. Such results would have
an adverse impact on our financial position and results of operations.
A decline
in U.S. government budgets, changes in spending priorities, or delays in contract awards could adversely affect the revenues of our Teal
subsidiary.
We presently expect
that much of our future revenue growth will be generated by our wholly owned subsidiary, Teal Drones, and that their primary customer
is likely to be the U.S. government and its agencies. As a result, our business may be adversely impacted due to changes in the political
environment, including those related to changes in the leadership of the current and or future administrations. We cannot provide assurance
that the current levels of congressional funding, for defense in general, and for drones specifically, will continue at their current
levels or decrease in the future. If annual budget appropriations are not enacted on a timely basis, we could encounter government shutdowns
which could adversely impact any existing programs including the timely payment of prior shipments, as well as the receipt of future
orders.
Our
work for the U.S. government could expose us to security risks.
We
expect that an increasing percentage of our revenues will come from the U.S. government and its agencies. This may expose us to numerous
security threats, including cyber security attacks on our information technology infrastructure as well as threats to the physical safety
of our facilities and our employees. We utilize numerous controls and procedures to monitor and prevent these threats, however, we can
provide no assurance that they will be effective. Any improper use of our data, information technology systems or facilities could adversely
impact our operations and operating results.
We
are subject to extensive government regulation and our failure to comply with these regulations could subject us to penalties that may
adversely impact our ability to operate our business.
As
a vendor to the U.S. government and other state and local agencies, we are subject to and must comply with numerous government regulations
which impact how we operate our business. These regulations could adversely affect our revenues, operating costs and profit margins.
Some of the regulations to which we are subject, and the federal agencies which administer these regulations, include:
Federal Aviation
Administration, which regulates the use of airspace for all aircraft, including UAS such as drones
The Truth in
Negotiations Act, which requires certification and disclosure of all factual pricing and cost data in contract negotiations
The Federal
Acquisition Regulations, which govern the formation and administration, as well as the performance, under government contracts
The False Statements
Act and The False Claims Act which imposes penalties on payments made on the basis of facts provided to the government
The Federal
Communications Commission which regulates the wireless spectrum upon which drones depend for data transmission
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It
is expensive and time consuming to comply with the regulations and requirements of these federal government agencies. The costs incurred
to maintain compliance will adversely impact our operating costs and could delay our ability to operate profitably in the future, if
at all.
Risks Related to
Our Common Stock
Our management
has voting control of the Company .
Jeffrey Thompson, our Chairman and Chief Executive
Officer, owns approximately 17% of our common stock, and our current officers and directors currently own approximately 21% of our common
stock. If they act together, they will be able to influence the outcome of all corporate actions requiring approval of our shareholders,
including the election of directors and approval of significant corporate transactions which may result in corporate actions that other
stockholders do not agree with. This concentration of ownership may have the effect of delaying or preventing a change in control and
may adversely affect the market price of our common stock.
Our failure to maintain effective internal
controls over financial reporting could have an adverse impact on the Company .
We are required to establish and maintain appropriate
internal controls over financial reporting. Failure to establish and maintain those controls could adversely impact public disclosures
regarding our business, financial condition or results of operations. In addition, management’s assessment of internal controls
over financial reporting may identify weaknesses and conditions that need to be addressed which may raise concerns for investors. Any
actual or perceived weaknesses and conditions that need to be addressed in our internal controls over financial reporting, disclosure
of management’s assessment of our internal controls, or disclosure of our public accounting firm’s attestation to our internal
controls over financial reporting may have an adverse impact on the price of our common stock.
We have never
paid dividends and we do not expect to pay dividends for the foreseeable future.
We have reported net
losses every year since inception. We intend to retain future earnings, if any, to finance the growth and development of our business.
If we ever become profitable, we do not expect to pay cash dividends on shares of our common stock in the foreseeable future. The payment
of future cash dividends, if any, depend upon, among other things, conditions then existing including earnings, financial condition and
capital requirements, restrictions in financing agreements, business opportunities and other factors. As a result, capital appreciation,
if any, of our common stock, will be the sole source of gain for investors for the foreseeable future.
The listing of our
securities on Nasdaq subjects us to additional regulations and compliance requirements.
We are required to maintain compliance with the continued
listing standards of Nasdaq. These include certain financial and liquidity criteria to maintain such listing. If we fail to meet any of
Nasdaq’s listing standards, our securities may be delisted. Nasdaq requires that the trading price of its listed stocks remain above
one dollar for the stock to remain listed. If a listed stock trades below one dollar for more than 30 consecutive trading days, then it
is subject to delisting from Nasdaq.
While our stock has
been trading above $1 per share, the stock price may trade below $1 per share in the future. In addition, we must satisfy minimum
financial and other continued listing requirements and standards, including those regarding director and committee independence requirements,
minimum stockholders’ equity, and certain corporate governance requirements. If we are unable to satisfy these requirements or
standards, we could be subject to delisting which would have a negative effect on the price of our common stock and would impair an investor’s
ability to sell or purchase our common stock. In the event of a delisting, we would expect to take actions to restore our compliance
with the listing requirements, but we can provide no assurance that any such action would allow our common stock to become listed again,
stabilize the market price, improve the liquidity of our common stock, or prevent future non-compliance with the listing requirements.
A delisting of our securities from Nasdaq may materially impair our stockholders’ ability to buy and sell our securities and could
have an adverse effect on the market price of, and the efficiency of the trading market for, our securities.
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Our Board of
Directors may authorize and issue shares of new classes of stock that could adversely affect current holders of our common stock.
Our Board of Directors
has the power to authorize and issue shares of classes of stock, including preferred stock that have voting powers, designations, preferences,
limitations and special rights, including preferred distribution rights, conversion rights, redemption rights and liquidation rights
without further shareholder approval. These powers could adversely affect the rights of the holders of our common stock. In addition,
our board could authorize the issuance of a series of preferred stock that has greater voting power than our common stock or that is
convertible into our common stock, which could decrease the relative voting power of our common stock or result in dilution to our existing
common stockholders.
Any of these actions
could significantly adversely affect the investment made by holders of our common stock. In addition, holders of our common stock could
receive less proceeds in connection with any future sale of the Company, in liquidation or on any other basis.
Our shares will
be subordinate to all of our debts and liabilities which increases the risk that investors could lose their entire investment.
Our shares of common
stock are equity interests that will be subordinate to all of our current and future indebtedness with respect to claims on our assets.
In any liquidation, all of our debts and liabilities must be paid before any payment is made to our shareholders.
The market price
of our shares of common stock is subject to fluctuation.
The market prices of
our shares may fluctuate significantly in response to a wide range of factors, many of which are beyond our control, including:
The announcement
and release of new products by our competitors
Developments in our industry
or target markets
General market conditions
including factors unrelated to our operating performance
National or international
economic or political events which result in a material effect on the stock market
The stock market has,
from time to time, experienced extreme price and volume fluctuations. Continued market fluctuations could result in extreme market volatility
in the price of our shares of common stock which could cause a decline in the value of our shares.
Future capital
raises may dilute our existing stockholders’ ownership and adversely impact the fair value of their investment.
If we raise additional
capital by issuing equity securities, our existing stockholders’ percentage ownership may decrease, and these stockholders may
experience substantial dilution. If we raise additional funds by issuing debt instruments, these debt instruments could impose significant
restrictions on our operations including liens on our assets. If we raise additional funds through collaborations and licensing arrangements,
we may be required to relinquish some rights to our technologies or products, or to grant licenses on terms that are not favorable to
us or could diminish the rights of our stockholders. Any of these developments could adversely impact our stock price.
Risks
Related to Regulatory Matters
The
drone industry is subject to various laws and government regulations which could complicate and delay our ability to introduce products,
maintain compliance, and avoid violations which could negatively impact our financial condition and results of operations.
We
operate in the drone industry which is a highly regulated environment in the US and international markets. Federal, state, and local
governmental entities and foreign governments may regulate aspects of the industry, including the production or distribution of our products,
software or services. These regulations may include accounting standards, taxation requirements, product safety, trade restrictions,
environmental regulations, products directed toward children or hobbyists, and other administrative and regulatory restrictions. While
we endeavor to take all the steps necessary to comply with these laws and regulations, there can be no assurance that we can maintain
compliance on a continuing basis. Failure to comply could result in monetary liabilities and other sanctions which could increase our
costs or decrease our revenue resulting in a negative impact on our business, financial condition and results of operations.
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Our
business and products are subject to government regulation, and we may incur additional compliance costs or be forced to suspend or cease
operations if we fail to comply.
We
must comply with a wide variety of laws, regulations, standards and other requirements governing, among other things, electrical safety,
wireless emissions, health and safety, e-commerce, consumer protection, export and import requirements, hazardous materials usage, product-related
energy consumption, packaging, recycling and environmental matters. Compliance with these laws, regulations, standards, and other requirements
may be onerous and expensive, and they may be inconsistent from jurisdiction to jurisdiction (including from country to country), further
increasing the cost of compliance and doing business. Our products may require regulatory approvals or satisfaction of other regulatory
concerns in the various jurisdictions in which they are manufactured, sold or both. These requirements create procurement and design
challenges that require us to incur additional costs identifying suppliers and manufacturers who can obtain and produce compliant materials,
parts and products. Failure to comply with such requirements can subject us to liability, additional costs, and reputational harm and,
in extreme cases, force us to recall products or prevent us from selling our products in certain jurisdictions. If there is a new regulation,
or change to an existing regulation that significantly increases our costs of manufacturing or causes us to significantly alter the way
that we manufacture our products, this would have a material adverse effect on our business, financial condition and results of operations.
Additionally, while we have implemented policies and procedures designed to ensure compliance with applicable laws and regulations, there
can be no assurance that our employees, contractors, and agents will not violate such laws and regulations or our policies and procedures.
Our
products must comply with certain requirements of the U.S. Federal Communications Commission (“FCC”) regulating
electromagnetic radiation in order to be sold in the United States and with comparable requirements of the regulatory authorities of
the European Union (“EU”), Japan, China and other jurisdictions. Our first-person view products include wireless radios
and receivers which require additional emission testing. We are also subject to various environmental laws and governmental
regulations related to toxic, volatile, and other hazardous chemicals used in the third-party components incorporated into our
products, including the Restriction of Certain Hazardous Substances Directive (the “RoHS Directive”) and the EU Waste Electrical
and Electronic Equipment Directive (the “WEEE Directive”), as well as the implementing legislation of the EU member
states. This directive restricts the distribution of products within the EU that exceed very low maximum concentration amounts of
certain substances, including lead. Similar laws and regulations have been passed or are pending in China, Japan, and numerous
countries around the world and may be enacted in other regions, including in the United States. We are, or may in the future be,
subject to these laws and regulations.
Our
products may be subject to new domestic and international requirements. Compliance with regulations enacted in the future could substantially
increase our cost of doing business or otherwise have a material adverse effect on our results of operations and our business. Failure
to comply with regulations in the future could result in the imposition of fines or in the suspension or cessation of our operations
or sales in the applicable jurisdictions. Any such failure to comply with regulations may also result in our not being permitted, or
limit our ability, to ship our products which would adversely affect our revenue and ability to achieve or maintain profitability.
Although
we encourage our contract manufacturers and major component suppliers to comply with the supply chain transparency requirements, such
as the RoHS Directive, we cannot provide assurance that our manufacturers and suppliers consistently comply with these requirements.
In addition, if there are changes to these or other laws or if new related laws are passed in other jurisdictions, we may be required
to re-engineer our products to use components compatible with these regulations. This re-engineering and component substitution could
result in additional costs or disrupt our operations or logistics.
The
WEEE Directive requires electronic goods producers to be responsible for the collection, recycling and treatment of such products. Changes
in interpretation of the directive may cause us to incur costs or have additional regulatory requirements to meet in the future in order
to comply with this directive, or with any similar laws adopted in other jurisdictions. Our failure to comply with past, present, and
future similar laws could result in reduced sales of our products, substantial product inventory write-offs, reputational damage, penalties
and other sanctions which could harm our business and financial condition. We also expect that our products will be affected by new environmental
laws and regulations on an ongoing basis. To date, our expenditures for environmental compliance have not had a material impact on our
results of operations or cash flows. Although we cannot predict the future impact of such laws or regulations, they will likely result
in additional costs and may require us to change the content of our products or how they are manufactured. These developments could have
a material adverse effect on our business and financial condition.
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Our
results of operations may suffer if we are not able to successfully manage our exposure to foreign exchange rate risks.
A
substantial majority of our sales and cost of components are denominated in U.S. dollars. As our business grows, more of our sales and
production costs may be denominated in other currencies. Where such sales or production costs are denominated in other currencies, they
are converted to U.S. dollars for the purpose of calculating any sales or costs to us. Our sales may decrease as a result of any appreciation
of the U.S. dollar against these other currencies.
Most
of our current expenditures are incurred in U.S. dollars and many of our components come from countries that currently base their currency
against the U.S. dollar. If the exchange rates change adversely or are allowed to increase, then additional U.S. dollars will be required
to fund our purchases of these components.
Although
we do not currently enter into currency option contracts or engage in other hedging activities, we may do so in the future. There is
no assurance that we will undertake any such hedging activities or that, if we do so, they will be successful in reducing the risks associated
with our exposure to foreign currency fluctuations.
Our
international operations, including the use of foreign contract manufacturers, subjects us to international operational, financial, legal,
political and public health risks which could harm our operating results.
A
substantial part of our operations, including manufacturing of certain components used in our products, are outside of the United States
and many of our customers and suppliers have some or all of their operations in countries other than the United States. Risks associated
with conducting business outside of the United States include:
compliance burdens
and costs associated with a wide variety of foreign laws and regulations, particularly labor and environmental, that govern our operations
in those countries;
legal uncertainties
regarding foreign taxes, tariffs, border taxes, quotas, and export controls,
export licenses,
import controls and other trade barriers;
economic instability
and high levels of inflation in certain countries where our suppliers are located and
customers, particularly
in the Asia-Pacific region, causing delays or reductions in orders for their products and therefore our sales;
political or
public health instability, including global pandemics, in the countries in which our suppliers operate;
changes or volatility
in currency exchange rates;
difficulties
in collecting accounts receivable and longer accounts receivable payment cycles; and
Any of these
factors could harm our own, our suppliers’ and our customers’ international operations and businesses and impair our
and/or their ability to continue expanding into international markets.
We
could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act or similar anti-bribery laws in other jurisdictions
in which we operate.
The
global nature of our business creates various domestic and local regulatory challenges and subject us to risks associated with our international
operations. We operate in areas of the world that experience corruption by government officials to some degree and, in certain circumstances,
compliance with anti-bribery and anticorruption laws may conflict with local customs and practices. Our global operations require us
to import from several countries which geographically expands our compliance obligations. In addition, changes in such laws could result
in increased regulatory requirements and compliance costs which could adversely affect our business, financial condition, and results
of operations.
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The
U.S. Foreign Corrupt Practices Act (FCPA) and similar anti-bribery and anticorruption laws in other jurisdictions prohibit U.S.-based
companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business,
directing business to another, or securing an advantage. In addition, U.S. public companies are required to maintain records that accurately
and fairly represent their transactions and have an adequate system of internal accounting controls. Under the FCPA, U.S. companies may
be held liable for the corrupt actions taken by directors, officers, employees, agents, or other strategic or local partners or representatives.
As a result, if we or our intermediaries fail to comply with the requirements of the FCPA or similar legislation, governmental authorities
in the United States and elsewhere could seek to impose substantial civil and/or criminal fines and penalties which could have a material
adverse effect on our business, reputation, operating results and financial condition.
We
are subject to governmental export and import controls, and economic sanctions laws that could subject us to liability and impair our
ability to compete in international markets.
The
U.S. and various foreign governments have imposed controls, export license requirements and restrictions on the import or export of some
technologies. Our products are subject to U.S. export controls, including the Commerce Department’s Export Administration Regulations
and various economic and trade sanction regulations established by the Treasury Department’s Office of Foreign Assets Controls.
Exports of our products must be made in compliance with these laws. Furthermore, U.S. export control laws and economic sanctions prohibit
the provision of products and services to countries, governments, and persons targeted by U.S. sanctions. Even though we take precautions
to prevent our products from being provided to targets of U.S. sanctions, our products could be provided to those targets or provided
by our customers despite such precautions. Any such provision could have negative consequences, including government investigations,
penalties, and reputational harm. Our failure to obtain required import or export approval for our products could harm our international
and domestic sales and adversely affect our revenue.
Changes
in trade policy in the United States and other countries may have adverse impacts on our business, results of operations and financial
condition.
The
U.S. government has indicated its intent to alter its approach to international trade policy through the renegotiation, and potential
termination, of certain trade agreements and treaties with China, countries in EMEA and other countries. These changes could include
the imposition of additional tariffs on a wide range of products. Policy changes in the United States or other countries, such as the
tariffs already proposed, implemented, and threatened, present risks for us. Tariffs already announced and implemented are having an
adverse effect on certain of our products, tariffs announced but not yet implemented may have an adverse effect on many of our products,
and threatened tariffs could adversely affect more or all of our products. There are also risks associated with retaliatory tariffs and
resulting trade wars. We cannot predict future trade policy, the terms of any renegotiated trade agreements or treaties, or tariffs and
their impact on our business. A trade war could have a significant adverse effect on world trade and the world economy. To the extent
that trade tariffs and other restrictions imposed by the United States or other countries increase the price of, or limit the amount
of, our products or components or materials used in our products imported into the United States or other countries, or create adverse
tax consequences, the sales, cost or gross profit of our products may be adversely affected and the demand from our customers for products
and services may be diminished. Uncertainty surrounding international trade policy and disputes and protectionist measures could also
have an adverse effect on consumer confidence and spending. If we deem it necessary to alter all or a portion of our activities or operations
in response to such policies, agreements or tariffs, our capital and operating costs may increase. Our ongoing efforts to address these
risks may not be effective and may have long-term adverse effects on our operations and operating results that we may not be able to
reverse. Such efforts may also take time to implement or to have an effect, and may result in adverse quarterly financial results or
fluctuations in our quarterly financial results. As a result, changes in international trade policy, changes in trade agreements and
tariffs could adversely affect our business, results of operations and financial condition.
We
may collect, store, process and use the personal information of our customers which subjects us to governmental regulation related to
privacy, information security and data protection. Any cybersecurity breaches or our failure to comply with such legal obligations by
us, or by our third-party service providers or partners, could harm our business.
We
may collect, store, process and use the personally identifiable information of our customers and other data in our transactions with
them. We also rely on third parties that are not directly under our control to do so as well. While we take reasonable measures to protect
the security, integrity and confidentiality of the personal information and other sensitive information we collect, store or transmit,
we cannot guarantee that inadvertent or unauthorized use or disclosure will not occur, or that third parties will not gain unauthorized
access to this information. While our privacy policies currently prohibit such activities, our third-party service providers or partners
may engage in such activity without our knowledge or consent. If we or our third- party service providers were to experience a breach,
disruption or failure of systems compromising our customers’ data, or if one of our third-party service providers or partners were
to access our customers’ personal data without our authorization, our brand and reputation could be adversely affected, use of
our products could decrease, and we could be exposed to a risk of loss, litigation and regulatory proceedings.
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Regulatory
scrutiny of privacy, data collection, use of data and data protection is intensifying globally, and the personal information and other
data we collect, store, process and use is increasingly subject to legislation and regulations in numerous jurisdictions around the world,
especially in Europe. These laws often develop in ways we cannot predict and may materially increase our cost of doing business, particularly
as we expand the nature and types of products we offer.
Data
protection legislation is becoming increasingly common in the United States at both the federal and state level. For example, in 2020,
the State of California implemented the California Consumer Privacy Act of 2018 (the "CCPA"). The CCPA requires companies that
process information on California residents to make new disclosures to consumers about their data collection, use and sharing practices,
allows consumers to opt out of certain data sharing with third parties and provides a new cause of action for data breaches. Additionally,
the Federal Trade Commission and many state attorneys general are interpreting federal and state consumer protection laws to impose standards
for the online collection, use, dissemination and security of data. The burdens of compliance imposed by the CCPA (and other similar
laws that may be enacted at the federal and state level) may require us to modify our data processing practices and policies and/or to
incur substantial expenditures.
Risks
Related to Intellectual Property
Our
products could infringe on the intellectual property rights of others.
Companies
in the electronics, wireless communications, semiconductor, IT, and display industries steadfastly pursue and protect intellectual property
rights, often resulting in considerable and costly litigation to determine the validity of patents and claims by third parties of infringement
of patents or other intellectual property rights. Our products could be found to infringe on the intellectual property rights of others.
Other companies may hold or obtain patents or inventions or other proprietary rights in technology necessary for our business. Periodically,
other companies inquire about our products and technology in their attempts to assess whether we violate their intellectual property
rights. If we are forced to defend against infringement claims, we may face costly litigation, diversion of technical and management
personnel, and product shipment delays, even if the allegations of infringement are unwarranted. If there is a successful claim of infringement
against us and we are unable to develop non-infringing technology or license the infringed or similar technology on a timely basis, or
if we are required to cease using one or more of our business or product names due to a successful trademark infringement claim against
us, it could adversely affect our business.
Our
intellectual property rights and proprietary rights may not adequately protect our products.
Our
commercial success will depend substantially on the ability to obtain patents and other intellectual property rights and maintain adequate
legal protection for products in the United States and other countries. We will be able to protect our intellectual property from unauthorized
use by third parties only to the extent that these assets are covered by valid and enforceable patents, trademarks, copyrights or other
intellectual property rights, or are effectively maintained as trade secrets. As of the date of this filing, we own 36 granted United
States and foreign patents and 16 pending United States and foreign patent applications. The U.S. patents and patent applications include
claims to, among other things, a drone, a printed circuit board, and head-mounted display technology. We apply for patents covering
our products, services, technologies, and designs as we deem appropriate. We may fail to apply for patents on important products, services,
technologies or designs in a timely fashion, or at all. We do not know whether any of our patent applications will result in the issuance
of any patents. Even if patents are issued, they may not be sufficient to protect our products, services, technologies, or designs. Our
existing and future patents may not be sufficiently broad to prevent others from developing competing products, services technologies,
or designs. Intellectual property protection and patent rights outside of the United States are even less predictable. As a result, the
validity and enforceability of patents cannot be predicted with certainty. Moreover, we cannot be certain whether:
we were the
first to conceive, reduce to practice, invent, or file the inventions covered by each of our issued patents and pending patent applications;
others will
independently develop similar or alternative products, technologies, services or designs or duplicate any of our products, technologies,
services or designs;
any patents
issued to us will provide us with any competitive advantages, or will be challenged by third parties;
we will develop
additional proprietary products, services, technologies or designs that are patentable; or
the patents
of others will have an adverse effect on our business.
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