Item 1A. Risk Factors
Investing in our common stock involves a high
degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information
in this Annual Report, before deciding to invest in our common stock. The risks and uncertainties described below may not be the only
ones we face. If any of the risks actually occur, our business, results of operations, financial condition and prospects could be harmed.
In that event, the trading price of our common stock could decline, and you could lose part or all of your investment. Additional risks
and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.
Summary Risk Factors
Our business is subject to
numerous risks and uncertainties that you should consider before investing in our company. You should carefully consider all of the risks
described more fully in the section titled “Risk Factors” in this Annual Report on page 19, before deciding to invest in
our common stock. If any of these risks actually occurs, our business, financial condition and results of operations would likely be materially
adversely affected. These key risks, include, but are not limited to, the following:
Risks Related to Our Business
16
● We may have ineffective sales and marketing efforts.
● Demand for our products and solutions may not grow or may decline.
● Our gross margins may not increase or may deteriorate.
● We depend on key information systems and third-party service providers.
17
Risks Related to Protecting Our Technology
and Intellectual Property
● Our patents and proprietary technology may be challenged or disputed.
Risks Related to Managing Our Business
Operations in Israel
Risks Related to our Common Stock
18
RISK FACTORS
Investing in our common
stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of
the other information in this Annual Report, before deciding to invest in our common stock. The risks and uncertainties described below
may not be the only ones we face. If any of the risks actually occur, our business, results of operations, financial condition and prospects
could be harmed. In that event, the trading price of our common stock could decline, and you could lose part or all of your investment.
Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.
Risks Related to Our Business
We have a history of net losses, may incur
substantial net losses in the future, and may not achieve or sustain profitability or growth in future periods. If we cannot achieve and
sustain profitability, our business, financial condition, and operating results will be adversely affected.
We
have incurred net losses in recent years, and we may not achieve or maintain profitability in the future. We experienced a net loss
of $6.3 million and $11.0 million in the years ended December 31,
2023 and 2022, respectively. As a result, we had an accumulated deficit of $39.7 million as of December 31, 2023. We cannot predict
when or whether we will reach or maintain profitability.
We may also increase our operating
expenses in the future as we continue to invest for our future growth, including expanding our research and development function to drive
further development of our platform, expanding our sales and marketing activities, developing the functionality to expand into adjacent
markets, and reaching customers in new geographic locations, which will negatively affect our operating results if our total revenues
do not increase. In addition to the anticipated costs to grow our business, we also expect to incur significant additional legal, accounting,
and other expenses as a newly public company. These efforts and additional expenses may be more costly than we expect, and we cannot guarantee
that we will be able to increase our revenues to offset our operating expenses. Any failure to increase our revenues or to manage our
costs as we invest in our business would prevent us from achieving or maintaining profitability.
There is no guaranty that we will be able
to generate the revenue necessary to support our cost structure or obtain the level of financing necessary for our operations.
We
have incurred significant losses and negative cash flows from operations and incurred losses of $6.3 million
and $11.0 million for the years ended December 31, 2023 and 2022, respectively. During the years ended December 31,
2023 and 2022, we had negative cash flows from operations of $6.6 million and $7.8 million, respectively. As of December 31,
2023, our accumulated deficit was $39.7 million. We have funded our
operations to date through equity financing and have cash on hand (including short term bank deposits and restricted cash equivalents)
of $2.4 million and long-term restricted cash and cash equivalents and
restricted bank deposits of $3.4 million as of December 31, 2023. We monitor our cash flow projections on a current basis and
take active measures to obtain the funding it requires to continue our operations. However, these cash flow projections are subject to
various uncertainties concerning their fulfilment such as the ability to increase revenues by attracting and expanding its customer base
or reducing cost structure. If we will not succeed in generating sufficient cash flow or completing additional financing, then it will
need to execute a cost reduction plan that has been prepared. Our transition to profitable operations is dependent on generating a level
of revenue adequate to support our cost structure. We expect to fund operations using cash on hand, through operational cash flows and
raising additional proceeds. There are no assurances, however, we will be able to generate the revenue necessary to support our cost structure
or that we will be successful in obtaining the level of financing necessary for its operations.
Furthermore, we may continue
to incur negative cash flow from operating and investing activities for the foreseeable future as we expect to incur research and development,
sales and marketing, and general and administrative expenses and make capital expenditures in our efforts to increase our sales. Our business
also will at times require significant amounts of working capital to support our growth of additional platforms. An inability to generate
positive cash flow from operating activities for the near term may adversely affect our ability to raise needed capital for our business
on reasonable terms, or at all, diminish supplier or customer willingness to enter into transactions with us, and have other adverse effects
that may decrease our long-term viability. There can be no assurance that we will achieve positive cash flow in the near future or at
all.
19
Our financial condition raises substantial
doubt as to our ability to continue as a going concern.
Our consolidated financial
statements have been prepared assuming that we will continue to operate as a going concern. These events and conditions, along with other
matters, indicate that a material uncertainty exists that may cast significant doubt on our ability to continue as a going concern. This
going concern determination could materially limit our ability to raise additional funds through the issuance of equity or debt securities
or otherwise. Further financial statements may include an explanatory paragraph with respect to our ability to continue as a going concern.
There can be no assurance that we will succeed in generating sufficient revenues from our product sales to continue our operations as
a going concern. If funds are not available to us, we may be required to delay, reduce the scope of, or eliminate research or development
plans for, or commercialization efforts with respect to our products. This may raise substantial doubts about our ability to continue
as a going concern.
Our shares of common
stock could be delisted from the Nasdaq Capital Market if we fail to regain compliance with the Nasdaq’s stockholders’ equity
continued listing standards. Our ability to publicly or privately sell equity securities and the liquidity of our shares of common stock
could be adversely affected if we are delisted from the Nasdaq Capital Market.
On August 25, 2023, we received
a notification letter from the Nasdaq Staff indicating that we are not in compliance with Nasdaq Listing Rule 5550(b)(1) due to our failure
to meet the Minimum Shareholders’ Equity Requirement or any alternatives to such requirement. In order to maintain our listing on
the Nasdaq Capital Market, we submitted a plan of compliance addressing how we intended to regain compliance. We had until February 21,
2024 to evidence compliance with the Minimum Shareholders’ Equity Requirement. As of the date of this Annual Report, we have not
provided such evidence. In the event that our shares of common stock would be subject to delisting, we intend to timely request a hearing
before the Panel.
We have in the past, and may
in the future, be unable to comply with certain of the listing standards that we are required to meet to maintain the listing of our ordinary
shares on Nasdaq. For instance, on November 3, 2022, we received notification from the Nasdaq Staff that we were not in compliance with
the minimum bid price requirement set forth in Nasdaq Listing Rule 5550(a)(2). Nasdaq Listing Rule 5550(a)(2) requires listed securities
to maintain a minimum bid price of $1.00 per share and Nasdaq Listing Rule 5810(c)(3)(A) provides that a failure to meet the minimum bid
price requirement exists if the deficiency continues for a period of 30 consecutive business days. In accordance with Nasdaq Listing Rule
5810(c)(3)(A), we had an initial grace period of 180 calendar days, or until May 2, 2023 (the “Minimum Bid Price Compliance Period”),
to regain compliance with the minimum bid price requirement. On April 19, 2023, we implemented a 1-for-10 reverse stock split. One of
the primary intents for the consolidation was that the anticipated increase in the price of our shares of common stock immediately following
and resulting from a reverse stock split due to the reduction in the number of issued and outstanding shares of ordinary shares would
help us meet the price criteria for continued listing on the Nasdaq Capital Market. On May 3, 2023, we received a notification from the
Nasdaq Staff that we had regained compliance with the Nasdaq Listing Rule 5550(a)(2).
If we fail to satisfy the continued listing requirements
of Nasdaq, such as minimum stockholders’ equity requirements or minimum bid price requirements, Nasdaq may take steps to delist
our shares of common stock. Such a delisting would have a negative effect on the price of our shares of common stock, impair the ability
to sell or purchase our shares of common stock when persons wish to do so, and any delisting materially adversely affect our ability to
raise capital or pursue strategic restructuring, refinancing or other transactions on acceptable terms, or at all. Delisting from Nasdaq
could also have other negative results, including the potential loss of institutional investor interest and fewer business development
opportunities, as well as a limited amount of news and analyst coverage of us. Delisting could also result in a determination that our
shares of common stock are a “penny stock,” which would require brokers trading in our shares of common stock to adhere to
more stringent rules, possibly resulting in a reduced level of trading activity in the secondary market for our shares of common stock.
In the event of a delisting, we would attempt to take actions to restore our compliance with Nasdaq’s listing requirements, but
we can provide no assurance that any such action taken by us would allow our shares of common stock to become listed again, stabilize
the market price or improve the liquidity of our securities, prevent our shares of common stock from dropping below the Nasdaq minimum
bid price requirement or prevent future non-compliance with Nasdaq’s listing requirements.
20
Unfavorable global economic or political
conditions could adversely affect our business, financial condition or results of operations.
Our business is susceptible
to general conditions in the global economy and in the global financial markets. A global financial crisis or a global or regional political
disruption has caused, and could in the future cause, extreme volatility in the capital and credit markets. A severe or prolonged economic
downturn, including a recession, the currently prolonged inflationary economic environment, continued rising interest rates, debt and
equity market fluctuations, diminished liquidity and credit availability, increased unemployment rates, decreased investor and consumer
confidence, supply chain challenges, natural catastrophes, the effects of climate change, regional and global conflicts and terrorist
attacks or political disruption or turmoil could result in a variety of risks to our business, including weakened demand for our product
candidates or any future product candidates, if approved, and our ability to raise additional capital when needed on acceptable terms,
if at all. A weak or declining economy or political disruption could also strain our manufacturers or suppliers, possibly resulting in
supply disruption, or cause our customers to delay making payments for our potential products. Any of the foregoing could materially and
adversely affect our business, financial condition, results of operations and prospects, and we cannot anticipate all of the ways in which
the political or economic climate and financial market conditions could adversely impact our business.
Prolonged inflation rates could negatively
impact our revenues and profitability if increases in the prices of our products or a decrease in customer spending results in lower sales
which would adversely affect our business, results of operations and financial condition.
Inflation rates, particularly
in the United States and Israel, have increased in 2023 and are prolonged in the past months, at levels not seen in years
in many countries where our customers reside. Continued and increased inflation may result in decreased demand for our products and services,
increased operating costs (including our labor costs), reduced liquidity, and limitations on our ability to access credit or otherwise
raise debt and equity capital. In addition, the United States Federal Reserve has raised, and may again raise, interest rates in
response to concerns about inflation. Increases in interest rates, especially if coupled with reduced government spending and volatility
in financial markets, may have the effect of further increasing economic uncertainty and heightening these risks. In an inflationary environment,
we may be unable to raise the sales prices of our products at or above the rate at which our costs increase, which could have a material
and adverse effect on our business, results of operations and financial condition. Accordingly, the U.S. dollar has strengthened
against foreign currencies as a result of the United States Federal Reserve’s actions to lower inflation, which is affecting
our business partners, where they sell local currency to the end-user of our products and services.
We may need to raise additional capital
to meet our business requirements in the future, and such capital raising may be costly or difficult to obtain and could dilute our stockholders’
ownership interests.
In order for us to pursue our
business objectives, we may need to raise additional capital, which additional capital may not be available on reasonable terms or at
all. Any additional capital raised through the sale of equity or equity-backed securities may dilute our shareholders’ ownership
percentages and could also result in a decrease in the market value of our equity securities. The terms of any securities issued by us
in future capital transactions may be more favorable to new investors, and may include preferences, superior voting rights and the issuance
of warrants or other derivative securities, which may have a further dilutive effect on the holders of any of our securities then outstanding.
In addition, we may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting
fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash
expenses in connection with certain securities we issue, such as convertible notes and warrants, which may adversely impact our financial
condition.
21
Our indebtedness could adversely affect
our ability to raise additional capital to fund operations, limit our ability to react to changes in the economy or our industry and prevent
us from meeting our financial obligations.
We currently have two outstanding
loans, with Migdalor, in the original principal amount of approximately $6 million, of which approximately $4.0 million remains
outstanding as of December 31, 2023, and with Hamizrahi-Tefahot Bank with which we signed a credit line agreement in February 2024,
off of which we have used approximately $552,000 to-date, and which are secured by all our assets (where our accounts receivable asset
is carved out from Migdalor’s senior security for Mizrahi-Tefahot Bank). If we cannot generate sufficient cash flow from operations
to service our debt, we may need to further refinance our debt, dispose of assets or issue equity to obtain necessary funds.
Furthermore, on December 21,
2022, pursuant to the terms of the Senior Loan Agreement between Migdalor and our wholly owned subsidiary, Actelis Networks Israel, Ltd.,
dated December 2, 2020, as amended (the “Loan Agreement”), to satisfy our obligation associated with the cover/debt ratio
(as defined in the Loan Agreement), we deposited $2 million to a Company-owned interest bearing bank account, or the “designated
account” (as defined in the Loan Agreement). An additional $2.0 million was deposited in the designated account on or about
February 28, 2023, as agreed between Migdalor and us. As of the date of this Annual Report on Form 10-K, our designated account has
a balance covering the loan principal balance at approximately 100%.
In February 2024, we entered
into a new credit line facility from an Israeli bank of up to $1.5 million that increases the Company’s operating liquidity while
not increasing the Company’s total debt, as the Company will perform an early repayment of its existing debt using its restricted
cash in a similar amount. The new credit line will be secured by customer invoices and will incur interest at a Federal SOFR rate plus
5.5% and is available until the end of 2024, with possible extension. At the same time, the Company plans to perform a partial early repayment
of its existing debt facility with Migdalor under the Loan Agreement using its restricted cash at an amount equal to the amount of funding
from the new credit line, therefore leaving the total debt amount at a similar level.
We do not know whether we will
be able to generate sufficient cash flow from operations or raise additional capital to fund operating activities on a timely basis, on
terms satisfactory to us, or at all. Our indebtedness could have important consequences, including:
To support our business growth, in the past years
we increased our focus on serving certain IoT verticals, while continuing to serve our existing Telco customers. This change in our strategy
may make it more difficult to evaluate our business growth and future prospects, and may increase the risk that we will not be successful
in our plans.
Since our inception, our business
was focused on serving Telcos for enterprises and residential customers. Our products and solutions have been deployed with more than
100 telecommunication service providers worldwide, in enterprise, residential and mobile base station connectivity applications. In recent years,
as we have further developed our technology and rolled out additional products, we turned our focus on serving the IoT markets. Our operations
are focused on our fast-growing IoT business, while maintaining our commitment to our existing Telco customers. A portion of our revenue
continues to be derived from our existing Telco customers. For the years ended December 31, 2023 and December 31, 2022,
our Telco customers in the aggregate decreased from approximately 35% of our revenues in the year ended December 31, 2022, to 27% in the
year ended December 31, 2023.
22
Our change in strategy and
our efforts to serve the IoT verticals that we have focused on may prove more expensive than we currently anticipate, or may require longer
development and deployment times, and we may not succeed in fully penetrating such IoT verticals, or at all.
We may have ineffective sales and marketing
efforts.
Our sales and marketing efforts
to drive growth may be ineffective as we try to win new deals either directly with end-user customers, or indirectly through business
partners, distributors, system integrators or value-add resellers. These ineffective efforts may cause us to miss our planned growth and
harm our financial results.
We outsource our product manufacturing and
are dependent on our key manufacturers, and on our component and OEM suppliers. We are susceptible to problems, and have encountered problems
in the past, in connection with procurement, decreasing quality, reliability, and protectability.
Our devices are assembled by
using fully manufactured parts, the manufacturing of which has been fully outsourced, and we have no direct control over the manufacturing
processes of our products. We outsource procurement and manufacturing activities to certain key manufacturers and certain component and
OEM suppliers.
We also purchase unique components
and products from suppliers who are exclusively able to fulfill such supply. We may lose some or all of these relationships, or have a
material weakness in negotiating favorable terms, or such unique components have or may be declared end-of-life which may require product
design changes. Such circumstances have hurt our profitability in the past, and may hurt our profitability in the future, and negatively
affect our ability to deliver our product on time to customers.
Our lack of control in our
manufacturing process due to the fact that we outsource our product manufacturing may increase quality or reliability risks and could
limit our ability to quickly increase or decrease production rates. If necessary, switching production to other or additional subcontractors
will entail a material cost and a temporary decrease in our productivity. Our manufacturing process has been disrupted in the past, and
may be disrupted in the future, by various factors, including but not limited to shipping delays, bottlenecks resulting from raw materials
specific shortages, quality problems or a decrease in quality, manpower shortages by the manufacturers or political unease that would
trigger the closure of a facility or financial insolvency.
Furthermore, a supplier may
discontinue production of a particular part for any number of reasons, which may require us to purchase a large inventory of such discontinued
parts in order to ensure that a continuous supply of such parts remains available to our customers. Such “end-of-life” parts
purchases could result in significant expenditures by us in a particular period, and ultimately any unused parts may result in a significant
inventory write-off, either of which could have an adverse impact on our financial condition and results of operations for the applicable
periods. Additionally, in case any part embedded in our products is no longer available, we may be required to redesign such product in
order to enable usage of alternative parts, or be forced to announce end-of-life of such product. Refer to “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” for additional information on supply constraints related to the
COVID-19 pandemic.
Demand for our products and solutions may
not grow or may decline.
We may experience a reduction
in customer demand as a result of either of competition from other companies, technological changes required by our target markets, or
disruptions of existing and new customer relationships. Such demand reduction will prevent us from realizing our planned growth.
Our gross margins may not increase or may
deteriorate.
If our gross margins do not
increase as planned or deteriorate, it will be harder for us to achieve profitability, which could substantially impact our business and
ability to carry on operations if other financing sources are not secured on satisfactory terms. Our gross margins may deteriorate as
a result of either reductions of customers price points, increases in product component and manufacturing costs, or unfavorable changes
in the mix between more and less profitable customers and/or products.
23
Changes in the price and availability of
our raw materials and shipping could be detrimental to our profitability.
Chipsets, electronic and mechanical
components are significant components of our products. Over the past two years, the prices and availability of electronic and mechanical
components have been constantly increasing.
Furthermore, our products are
assembled with various contract manufacturers located in Israel and in Taiwan. As a result of the of COVID-19 pandemic, the world is experiencing
shortages of electronic components. We have already experienced instances of limited supply of certain raw materials and shipping delays,
which resulted in extended lead times, increased shipping costs and higher-than-usual backlogs. If the prices of such components and shipping
were to continue to increase, or if shipping delays continue to occur, such price changes and shipping delays could have a negative effect
on our gross margin and have a negative effect on revenues and earnings.
We may have previously agreed
to set prices with our customers and any changes in supply costs may decrease our margin and directly affect profitability. If prices
increase, supply interruptions, shipping delays, or shortages of materials continue to occur, it could have a negative effect on revenues
and earnings.
Expanding our operations and marketing efforts
to meet expected growth may impact profitability if actual growth is less than expected.
To meet expected growth, we
plan to expand operations, including additional hiring, advertising, and promotion. If actual growth is less than expected, it would negatively
impact our ability to become profitable, which would require we raise additional capital if required, which may not be available on favorable
terms, or at all, which would impact our ability to carry on operations.
If our internal company cyber-security measures
are breached or fail and unauthorized access is obtained to our IT environment, we may incur significant losses of data, which we may
not be able to recover and may experience a delay in our ability to conduct our day-to-day business.
As cybersecurity attacks continue
to evolve and increase, our cyber-security measures and our IT environment could be penetrated or compromised by internal and external
parties’ intent on extracting confidential information, disrupting business processes, corrupting information, or looking to force
the Company to pay a ransom. These risks could arise from external parties or from acts or omissions of internal or service provider personnel.
Such unauthorized access could disrupt our business and could result in the loss of assets, litigation, remediation costs, damage to our
reputation and failure to retain or attract customers following such an event, which could adversely affect our business.
Cyber attackers update their
methods frequently. Sometimes cyberattacks are unrecognizable at the time of their occurrence and even long after. In addition, cyber
incidents can occur as a result of non-technological failures, like human error or malicious acts. In some cases, information security
incidents at our customers or suppliers can also lead to information security incidents in our information systems. For these reasons,
we cannot guarantee that the safeguards taken by us and the safeguards we will take in the future will completely prevent information
security incidents or damages that may result from them as detailed above.
We provide cyber security features as part
of our products that may not completely prevent information security breaches, and our products are installed in live customer environments
and may be compromised by cyber-attacks and damage customer assets.
Our products include cyber-security
features such as data-traffic encryption that are engineered to protect our customers’ data and environment. Cyber-attacks become
more sophisticated and evolve quickly, and these features may fail to protect our customers as intended and fail at preventing information
security breaches. We plan to offer new cyber security products and features which we will either develop internally, obtain from partnerships
with third-parties, or through acquisitions in the future. These planned new cyber-security products and features may fail to protect
our customers as intended and not prevent information security breaches.
Our products are installed
in live customer network environments, and may be subject to cyber-attacks seeking access to our customers networks through our products.
Those cyber-attack attempts may take advantage of vulnerabilities of our products within the networks, vulnerabilities that may be known
or unknown to us.
24
Our products and services include
information systems and digital data of various types, including data kept by our employees, suppliers, and customers (and their own customers).
In recent years there has been an increase in the frequency and severity of cyber incidents (including cybercrime). This trend is
expected to continue in the future and even worsen, despite all the defense mechanisms employed against it. Cyber events can lead to unauthorized
access, unauthorized disclosure, misuse, disruption, deletion, or modification of the Company and its customer assets, data, and processing,
as well as disrupting day-to-day operations, computing services, and significantly slowing them down and even disabling information
systems.
In the event of damage caused
by such cyber-attacks, we may suffer negative consequences, such as disruption of the Company’s and/or our customers’ activities,
disruption of or disabling information systems, theft of our and/or our customers’ data, or damage to its reputation thus affecting
clients’ trust in the Company, and potentially exposing it to lawsuits. In such cases, our business results may be severely harmed.
We depend on key information systems and
third-party service providers.
We depend on key information
systems to transact our business accurately and efficiently. These systems and services are vulnerable to interruptions or other failures
resulting from, among other things, natural disasters, terrorist attacks, software, equipment or digital failures, processing errors,
computer viruses, other security issues or supplier defaults. Security, backup, and disaster recovery measures may not be adequate or
implemented properly to avoid such disruptions or failures. Any disruption or failure of these systems or services could cause substantial
errors, processing inefficiencies, security breaches, inability to use the systems or process transactions, loss of customers or other
business disruptions, all of which could negatively affect our business and financial performance.
We depend on our management team and other
key employees, and the loss of one or more of these employees or an inability to attract and retain highly skilled employees could adversely
affect our business.
Our future success depends,
in part, on our ability to continue to attract and retain highly skilled personnel. The loss of the services of any of our key personnel,
the inability to attract or retain qualified personnel, or delays in hiring required personnel, particularly in engineering and sales,
may seriously and adversely affect our business, financial condition and results of operations. Although we have entered into employment
or consulting agreements with our personnel, their employment is generally for no specific duration.
Our future performance also
depends on the continued services and continuing contributions of our senior management team, which includes Tuvia Barlev, our Chief Executive
Officer, to execute on our business plan and to identify and pursue new opportunities and product innovations. The loss of services of
our senior management team, particularly our Chief Executive Officer, could significantly delay or prevent the achievement of our development
and strategic objectives, which could adversely affect our business, financial condition and results of operations.
We may face the effects of increased competition
and rapid technological changes.
The industry in which we are
engaged is subject to rapid and significant technological change. There can be no assurance that our systems can be upgraded to meet future
innovations which will be required to meet our customer’s requirements, or that new technologies will be adopted successfully by
us, or existing technologies will not be improved, which would render the offerings obsolete or non-competitive. Companies we compete
with enjoy significant competitive advantages, including greater name recognition; greater financial, technical, and service resources;
established networks; additional product offerings; and greater resources for product development and sales and marketing.
There can be no assurance that
other established networking technology companies, any of which would likely have greater resources than us, will not enter the market.
In addition, new competitors may enter the marketplace and/or begin offering networking technology products and solutions and in channels
similar to or competing with ours. Such competition may reduce demand for our products and impact the growth prospects and ability to
achieve profitability, which may require us to raise new capital, which may not be available on favorable terms, or at all, and that would
impair our ability to carry on operations.
We cannot assure you that we
will be able to compete successfully against any of these competitors. Our failure to compete successfully with our competitors could
harm our business.
25
We are dependent on skilled human capital.
Our ability to innovate and
execute its business plans is dependent on the ability to hire, replace, and train skilled personnel. The employment market suffers from
shortages of candidates, and such shortages may continue in future years, causing delays and preventing us from executing our plans.
Our results of operations are likely to
fluctuate from quarter to quarter and year to year, which could adversely affect the trading price of our common stock.
Our results of operations,
including our revenue, cost of revenue, gross margin, operating expenses, cash flow, and deferred revenue, have fluctuated from quarter
to quarter and year to year in the past and may continue to vary significantly in the future so that period-to-period comparisons of our
results of operations may not be meaningful. Accordingly, our financial results in any one quarter should not be relied upon as indicative
of future performance. Our quarterly financial results may fluctuate as a result of a variety of factors, many of which are outside of
our control, may be difficult to predict, and may not fully reflect the underlying performance of our business. Factors that may cause
fluctuations in our quarterly financial results include:
● the loss of existing customers;
● mix of our revenue;
● our ability to gain new partners and retain existing partners;
● fluctuations in share-based compensation expense;
● changes in the spending patterns of our customers;
● network outages;
● general economic, industry, and market conditions;
● the impact of political uncertainty or unrest;
● changes in our pricing policies or those of our competitors;
● fluctuations in the growth rate of the markets that our offerings address;
26
● the business strengths or weakness of our customers;
● our ability to collect timely on invoices or receivables;
● the cost and potential outcomes of future litigation or other disputes;
● future accounting pronouncements or changes in our accounting policies;
● fluctuations in foreign currency exchange rates; and
The impact of one or more of
the foregoing or other factors may cause our results of operations to vary significantly. Such fluctuations make forecasting more difficult
and could cause us to fail to meet the expectations of investors and securities analysts, which could cause the trading price of our common
stock to fall substantially, resulting in the loss of all or part of your investment, and subject us to costly lawsuits, including securities
class action suits.
The loss of one or more of our significant
customers, or any other reduction in the amount of revenue we derive from any such customer, would adversely affect our business, financial
condition, results of operations and growth prospects.
Our future success is dependent
on our ability to establish and maintain successful relationships with a diverse set of customers.
We currently derive a significant
portion of our revenue from a limited number of our customers. For the years ended December 31, 2023 and December 31, 2022,
our top ten customers in the aggregate accounted for approximately 66% and 82% of our revenues.
We expect to continue to derive
a significant portion of our revenue from a limited number of customers in the future and, in some cases, the portion of our revenue attributable
to individual customers may increase. The loss of one or more significant customers or a reduction in the amount of revenue we derive
from any such customer could significantly and adversely affect our business, financial condition and results of operations. Customers
may choose not to renew their contracts or may otherwise reduce the breadth of the offerings which they purchase for any number of reasons.
We are also subject to the risk that any such customer will experience financial difficulties that prevent them from making payments to
us on a timely basis or at all.
We are currently operating in a period of
economic uncertainty and capital markets disruption, which has been significantly impacted by geopolitical instability due to the ongoing
military conflict between Russia and Ukraine and between Israel and Hamas and Hezbollah. Our business, financial condition and results
of operations may be materially adversely affected by any negative impact on the global economy and capital markets resulting from the
conflict in Ukraine and Israel or any other geopolitical tensions.
U.S. and global markets
are experiencing volatility and disruption following the escalation of geopolitical tensions and the start of the military conflict between
Russia and Ukraine. On February 24, 2022, a full-scale military invasion of Ukraine by Russian troops was reported. Although the
length and impact of the ongoing military conflict is highly unpredictable, and although we currently have no operations or sales in either
Russia or Ukraine, the conflict in Ukraine could lead to market disruptions, including significant volatility in commodity prices, credit
and capital markets, as well as supply chain interruptions for some of our components. Additionally, this conflict could lead to sanctions,
embargoes, regional instability, geopolitical shifts, cyberattacks, other retaliatory actions, and adverse effects on macroeconomic conditions,
currency exchange rates, and financial markets, which could adversely impact our operations and financial results, as well as those of
third parties with whom we conduct business. Our operations would be particularly vulnerable to potential interruptions in the supply
of certain critical materials and metals, such as neon gas and palladium, which are used in semiconductor manufacturing. Any interruption
to semiconductor chip supply could significantly impact our ability to receive the components and timely roll-out of our operations. Furthermore,
any potential increase in geopolitical tensions in Asia, particularly in the Taiwan Strait, could also significantly disrupt existing
semiconductor chip manufacturing and increase the prospect of an interruption to the semiconductor chip supply across the world. A significant
portion of the world’s semiconductor manufacturing is in Taiwan, and similar geopolitical tensions there could create further supply
chain disruptions, which could result in further delays for our products’ components.
27
The world’s largest semiconductor
chip manufacturer is located in Taiwan and a large part of equipment and materials, is manufactured in, and imported from, Taiwan. A setback
to the current state of relative peace and stability in the region could compromise existing semiconductor chip production and have downstream
implications for our company. We are continuing to monitor the situation in Ukraine and globally and assessing its potential impact on
our business.
Governments in the United States
and many other countries, or the Sanctioning Bodies, have imposed economic sanctions on certain Russian individuals, including politicians,
and Russian corporate and banking entities. The Sanctioning Bodies, or others, could also institute broader sanctions on Russia, including
banning Russia from global payments systems that facilitate cross-border payments. These sanctions, or even the threat of further sanctions,
may result in the decline of the value and liquidity of Russian securities, a weakening of the ruble or other adverse consequences to
the global economy.
The current war in Ukraine
and Israel, and geopolitical events stemming from such conflicts, could cause consumer confidence and spending to decrease or result in
increased volatility in the United States and worldwide financial markets and economy. The extent and duration of the military action,
resulting sanctions and resulting future market disruptions in the region are impossible to predict, but could be significant and have
a severe adverse effect worldwide financial markets and economy.
The effects of health pandemics, such as
the ongoing global COVID-19 pandemic, have had, and could in the future have, an adverse impact on our business, financial condition and
results of operations.
In December 2019, a novel
coronavirus disease, or COVID-19, was first reported and on March 11, 2020, the World Health Organization characterized COVID-19
as a pandemic. The widespread health crisis is adversely affecting the broader economies, financial markets and overall demand environment
for many of our products.
Our operations and the operations
of our suppliers, channel partners and customers were disrupted to varying degrees by a range of external factors related to the COVID-19
pandemic, some of which are not within our control. Many governments imposed, and may yet impose, a wide range of restrictions on the
physical movement of people in order to limit the spread of COVID-19. The COVID-19 pandemic has had, and likely will continue to have,
an impact on the attendance and productivity of our employees, and those of our channel partners or customers, resulting in negative impacts
to our results of operations and overall financial performance. We suffered delays in realization of certain new orders from our customers,
delay in testing of some of our new technologies in customer premises and difficulty conducting business development activities in an
effective way (face-to-face). In addition, we had to increase our credit lines by $2.0 million to support the loss of revenue and
profit. Additionally, COVID-19 has resulted, and likely will continue to result, in delays in non-residential construction, non-crisis-related
IT purchases and project completion schedules in general, all of which can negatively impact our results in both current and future periods.
The duration and extent of
the impact from the COVID-19 pandemic or any future epidemic or pandemic depends on future developments that cannot be accurately predicted
at this time, such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions, the effects
of measures enacted by policy makers and central banks around the globe, and the impact of these and other factors on our employees, customers,
channel partners and suppliers. If we are not able to respond to and manage the impact of such events effectively, our business will be
affected.
28
Our performance is affected by general economic
and political conditions and taxation policies.
The success of our activities
may be affected by general economic and market conditions, like interest rates, currency exchange rate fluctuations, availability of credit,
inflation rates, economic uncertainty, changes in laws, and United States and international political circumstances. Unexpected volatility
or illiquidity could impair profitability or result in losses.
We may be adversely affected by the political
and economic situation in the U.S., Europe and a number of countries in Asia.
The U.S. communications
market is directly affected by economic developments in the U.S. economy. The European and Asian communications market is similarly
reliant on political and economic stability in those regions. Changing trends in these markets may lead to a decrease in investments and
a delay in projects, which could harm our business. To reduce our sensitivity to market changes, we operate in a large number of different
vertical markets and territories.
Our business could be adversely impacted
by changes in laws and regulations related to government contracts.
Federal or state government
bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the Internet as a commercial
medium. Legislators, regulators, or government bodies or agencies may also make legal or regulatory changes or interpret or apply existing
laws or regulations that relate to government contracts. Changes in these laws, regulations or interpretations could require us to modify
our platform in order to comply with these changes, to incur substantial additional costs or divert resources that could otherwise be
deployed to grow our business, or expose us to unanticipated civil or criminal liability, among other things.
We are subject to laws and regulations worldwide,
changes to which could increase our costs and individually or in the aggregate adversely affect our business.
We are subject to laws and
regulations affecting our domestic and international operations in a number of areas. These U.S. and foreign laws and regulations
affect our activities including, but not limited to, in areas of labor, health and safety, tax, import and export requirements, foreign
exchange controls and cash repatriation restrictions, data privacy requirements, anti-competition, and environmental.
Compliance with these laws,
regulations and similar requirements may be onerous and expensive, and they may be inconsistent from jurisdiction to jurisdiction, further
increasing the cost of compliance and doing business. Any such costs, which may rise in the future as a result of changes in these laws
and regulations or in their interpretation, could individually or in the aggregate make our products and services less attractive to our
customers, delay the introduction of new products in one or more regions, or cause us to change or limit our business practices. We have
implemented policies and procedures designed to ensure compliance with applicable laws and regulations, but there can be no assurance
that our employees, contractors, or agents will not violate such laws and regulations or our policies and procedures.
Risks Related to Protecting Our Technology
and Intellectual Property
Claims by others that we infringe their
intellectual property could force us to incur significant costs or revise the way we conduct our business.
Our competitors protect their
proprietary rights by means of patents, trade secrets, copyrights, trademarks and other intellectual property. We have not conducted an
independent review of patents and other intellectual property issued to third parties, who may have patents or patent applications relating
to our proprietary technology. We may receive letters from third parties alleging, or inquiring about, possible infringement, misappropriation,
or violation of their intellectual property rights. Any party asserting that we infringe, misappropriate, or violate proprietary rights
may force us to defend ourselves, and potentially our customers, against the alleged claim. These claims and any resulting lawsuit, if
successful, could subject us to significant liability for damages or interruption or cessation of our operations. Any such claims or lawsuit
could:
● be time-consuming and expensive to defend, whether meritorious or not;
29
● divert the attention of our technical and managerial resources;
● require us to indemnify our customers.
Furthermore, during the course
of litigation, confidential information may be disclosed in the form of documents or testimony in connection with discovery requests,
depositions or trial testimony. Disclosure of our confidential information and our involvement in intellectual property litigation could
materially adversely affect our business. Some of our competitors may be able to sustain the costs of intellectual property litigation
more effectively than we can because they have substantially greater resources. In addition, any litigation could significantly harm our
relationships with current and prospective customers. Any of the foregoing could disrupt our business and have a material adverse effect
on our business, operating results and financial condition.
Our patents and proprietary technology may
be challenged or disputed.
We hold certain patent and
trade secret rights relating to various aspects of our technologies, which are of material importance to the Company and its future prospects.
Any patents we have obtained or do obtain may be challenged by re-examination or otherwise invalidated or eventually found unenforceable.
Both the patent application process and the process of managing patent disputes can be time consuming and expensive. Competitors may attempt
to challenge or invalidate our patents or may be able to design alternative techniques or devices that avoid infringement of our patents
or develop products with functionalities that are comparable to ours. In the event a competitor infringes upon our patent or other intellectual
property rights, litigation to enforce our intellectual property rights or to defend our patents against challenge, even if successful,
could be expensive and time consuming and could require significant time and attention from our management. We may not have sufficient
resources to enforce our intellectual property rights or to defend our patents against challenges from others.
Any failure to protect our intellectual
property rights could impair our ability to protect our proprietary technology and our brand.
Our success and ability to
compete depend largely upon our intellectual property. To date, we have 17 registered patents in the United States; 5 registered patents
in Europe, one registered patent in Mexico, , one registered patent in Indonesia, and one patent application pending in WIPO, all of which
in the general area of high-speed carrier class Ethernet service and transport over bonded VDSL2, G.SHDSL as well as Fiber. We take reasonable
steps to protect our intellectual property, especially when working with third parties. However, the steps we take to protect our intellectual
property rights may be inadequate. For example, other parties, including our competitors, may independently develop similar technology,
duplicate our services, or design around our intellectual property and, in such cases, we may not be able to assert our intellectual property
rights against such parties. Further, our contractual arrangements may not effectively prevent disclosure of our confidential information
or provide an adequate remedy in the event of unauthorized disclosure of our confidential information, and we may be unable to detect
the unauthorized use of, or take appropriate steps to enforce, our intellectual property rights.
We make business decisions
about when to seek patent protection for a particular technology and when to rely upon trade secret protection, and the approach we select
may ultimately prove to be inadequate. Even in cases where we seek patent protection, there is no assurance that the resulting patents
will effectively protect every significant feature of our technology or provide us with any competitive advantages. Moreover, we cannot
guarantee that any of our pending patent application will issue or be approved. The United States Patent and Trademark Office and
various foreign governmental patent agencies also require compliance with a number of procedurals, documentary, fee payment, and other
similar provisions during the patent application process and after a patent has issued. There are situations in which noncompliance can
result in abandonment or lapse of the patent, or patent application, resulting in partial or complete loss of patent rights in the relevant
jurisdiction. If this occurs, our competitors might be able to enter the market, which would have a material adverse effect on our business.
Effective trademark, copyright, patent, and trade secret protection may not be available in every country in which we conduct business.
Further, intellectual property law, including statutory and case law, in the United States and other countries, is constantly developing,
and any changes in the law could make it harder for us to enforce our rights.
30
In order to protect our intellectual
property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation brought to protect
and enforce our intellectual property rights could be costly, time-consuming, and distracting to management and could result in the impairment
or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with
defenses, counterclaims, and countersuits attacking the validity and enforceability of our intellectual property rights. An adverse determination
of any litigation proceedings could put our intellectual property at risk of being invalidated or interpreted narrowly and could put our
related pending patent applications at risk of not issuing. Furthermore, because of the substantial amount of discovery required in connection
with intellectual property litigation particularly in the US, there is a risk that some of our confidential or sensitive information could
be compromised by disclosure in the event of litigation. In addition, during the course of litigation, there could be public announcements
of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results
to be negative, it could have a substantial adverse effect on the price of our common stock. Negative publicity related to a decision
by us to initiate such enforcement actions against a client or former client, regardless of its accuracy, may adversely impact our other
client relationships or prospective client relationships, harm our brand and business, and could cause the market price of our common
stock to decline. Our failure to secure, protect, and enforce our intellectual property rights could adversely affect our brand and our
business.
The lives of our patents may not be sufficient
to effectively protect our products and business.
Patents have a limited lifespan.
In the United States, if all maintenance fees are paid timely, the natural expiration of a patent is generally 20 years after its first
effective nonprovisional filing date. Although various extensions may be available, the life of a patent, and the protection it affords,
is limited. Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting
such candidates might expire before or shortly after such product candidates are commercialized. Even if patents covering our product
candidates are obtained, once the patent life has expired for a product, we may be open to competition from biosimilar or generic medications.
As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing product candidates
similar or identical to ours. Our patents issued as of March 20, 2024 will expire on dates ranging from September 25, 2024 to October
31, 2038, subject to any patent extensions that may be available for such patents. More specifically, the following patents will expire
over the next three years: EP02250273.6, US7606315, US7613235, EP1943827, EP1964377, GB2556826, MX279453, US7587042, IDP0030744.
In addition, although upon
issuance in the United States a patent’s life can be increased based on certain delays caused by the USPTO, this increase can
be reduced or eliminated based on certain delays caused by the patent applicant during patent prosecution. A patent term extension based
on regulatory delay may be available in the United States. However, only a single patent can be extended for each marketing approval,
and any patent can be extended only once, for a single product. Moreover, the scope of protection during the period of the patent term
extension does not extend to the full scope of the claim, but instead only to the scope of the product as approved. Laws governing analogous
patent term extensions in foreign jurisdictions vary widely, as do laws governing the ability to obtain multiple patents from a single
patent family. Additionally, we may not receive an extension if we fail to exercise due diligence during the testing phase or regulatory
review process, apply within applicable deadlines, fail to apply prior to expiration of relevant patents or otherwise fail to satisfy
applicable requirements. If we are unable to obtain patent term extension or restoration, or the term of any such extension is less than
we request, the period during which we will have the right to exclusively market our product will be shortened and our competitors may
obtain approval of competing products following our patent expiration and may take advantage of our investment in development and clinical
trials by referencing our clinical and preclinical data to launch their product earlier than might otherwise be the case, and our revenue