ITEM 1A. RISK FACTORS
We operate in a rapidly changing environment that involves numerous
risks and uncertainties. Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described
in this section, as well as other information contained in this Report and in our other filings with the SEC. This section should be read
in conjunction with the consolidated financial statements and accompanying notes thereto included in Item 8 of this Report, and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of this Report. If any of these risks
or uncertainties actually occurs, our business, financial condition, results of operations or prospects could be materially harmed. In
that event, the market price for our common stock could decline and you could lose all or part of your investment. In addition, risks
and uncertainties not presently known to us or that we currently deem immaterial may also adversely affect our business.
Risks Related to Our Operations and Industry
We have experienced and may in the future experience constraints
in the supply of certain materials and components that could affect our operating results.
Some of our integrated circuits are only available from a single source
and in some cases, are no longer being manufactured. From time to time, integrated circuits, and potentially other components used in
our products, will be phased out of production by the manufacturer. When this happens, we attempt to purchase sufficient inventory to
meet our needs until a substitute component can be incorporated into our products. Nonetheless, we may be unable to purchase sufficient
components to meet our demands, or we may incorrectly forecast our demands, and purchase too many or too few components. In addition,
our products use components that have been in the past and may in the future be subject to market shortages and substantial price fluctuations,
whether due to the COVID-19 pandemic, the war between Ukraine and Russia, recent tensions between China and Taiwan or otherwise. From
time to time, we have been unable to meet customer orders because we were unable to purchase necessary components for our products. We
do not have long-term supply arrangements with most of our vendors to obtain necessary components, including semiconductor chips, or technology
for our products and instead purchase components on a purchase order basis. If we are unable to purchase components from these suppliers,
our product shipments could be prevented or delayed, which could result in a loss of sales. If we are unable to meet existing orders or
to enter into new orders because of a shortage in components, we will likely lose net revenue, risk losing customers and risk harm to
our reputation in the marketplace, which could adversely affect our business, financial condition or results of operations. For instance,
we continue to experience long lead times and delays in shipments of semiconductor chips. As a result, we have sought alternate sources
of certain components, which have been at a higher cost. Because semiconductor chips continue to be subject to an ongoing significant
shortage, our ability to source components that use semiconductor chips has been adversely affected. These supply interruptions have resulted
in increased component delivery lead times and increased costs to obtain components with available semiconductor chips. To the extent
this semiconductor chip shortage or other shortages continue, the production of our products may be impacted.
Future operating results depend upon our ability to timely obtain
components in sufficient quantities and on acceptable terms.
We and our contract manufacturers are responsible for procuring raw materials
for our products. Our products incorporate some components and technologies that are only available from single or limited sources of
supply. Depending on a limited number of suppliers exposes us to risks, including limited control over pricing, availability, quality
and delivery schedules. Moreover, due to our limited sales, we may not be able to convince suppliers to continue to make components available
to us unless there is demand for these components from their other customers. If any one or more of our suppliers cease to provide us
with sufficient quantities of components in a timely manner or on terms acceptable to us, we would have to seek alternative sources of
supply and we may have difficulty identifying additional or replacement suppliers for some of our components.
We outsource substantially all of our manufacturing to contract manufacturers
in Asia. If our contract manufacturers are unable or unwilling to manufacture our products at the quality and quantity we request, our
business could be harmed.
We use contract manufacturers based in Asia to manufacture substantially
all of our products. Generally, we do not have guaranteed supply agreements with our contract manufacturers or suppliers. If any of these
subcontractors or suppliers were to cease doing business with us, we might not be able to obtain alternative sources in a timely or cost-effective
manner. Our reliance on third-party manufacturers, especially in countries outside of the U.S., exposes us to a number of significant
risks, including:
· lack of guaranteed production capacity or product supply;
· effects of terrorist attacks or geopolitical conflicts abroad;
· unexpected changes in regulatory requirements, taxes, trade laws and tariffs;
· reduced protection for intellectual property rights in some countries;
· differing labor regulations;
· compliance with a wide variety of complex regulatory requirements;
· fluctuations in currency exchange rates;
· changes in a country’s or region’s political or economic conditions;
· greater difficulty in staffing and managing foreign operations; and
· increased financial accounting and reporting burdens and complexities.
Any problems that we may encounter with the delivery, quality or cost of
our products from our contract manufacturers or suppliers could cause us to lose net revenue, damage our customer relationships and harm
our reputation in the marketplace, each of which could materially and adversely affect our business, financial condition or results of
operations.
From time to time, we may transition the manufacturing of certain products
from one contract manufacturer to another. When we do this, we may incur substantial expenses, risk material delays or encounter other
unexpected issues.
The effect of COVID-19 and other possible pandemics
and similar outbreaks could result in material adverse effects on our business, financial position, results of operations and cash flows.
The COVID-19 pandemic or another pandemic or similar outbreak has had,
and may continue to have, an adverse impact on the economy generally, our business and the businesses of our suppliers, and our results
of operations and financial condition. In addition, the COVID-19 pandemic resulted in industry events, trade shows and business travel
being suspended, cancelled and/or significantly curtailed. While most industry events, trade shows and business travel have resumed, if
these activities are suspended, cancelled and/or significantly curtailed in the future, whether due to surges of COVID-19 or other possible
pandemics and similar outbreaks, our sales may continue to be negatively impacted in the future.
In addition, the impact of the COVID-19 pandemic or other possible pandemics
subject us to various risks and uncertainties that could materially adversely affect our business, results of operations and financial
condition, including the following:
The duration and extent of the COVID-19 pandemic or another pandemic’s
effect on our operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted
at this time. The adverse impact of the COVID-19 pandemic or another pandemic or similar outbreak on our business, results of operations
and financial condition have been and could continue to be material.
Certain of our products are sold into mature markets, which could
limit our ability to continue to generate revenue from these products. Our ability to sustain and grow our business depends on our ability
to develop, market, and sell new products.
Certain of our products are sold into mature markets that are characterized
by a trend of declining demand. As the overall market for these products decreases due to the adoption of new technologies, we expect
that our revenues from these products will continue to decline. As a result, our future prospects will depend on our ability to develop
and successfully market new products that address new and growing markets. Our failure to develop new products or failure to achieve widespread
customer acceptance of any new products could cause us to lose market share and cause our revenues to decline. There can be no assurance
that we will not experience difficulties that could delay or prevent the successful development, introduction, marketing and sale of new
products or product enhancements. Factors that could cause delays include regulatory and/or industry approvals, product design cycle and
failure to identify products or features that customers demand. In addition, the introduction and sale of new products often involves
a significant technical evaluation, and we often face delays because of our customers’ internal procedures for evaluating, approving
and deploying new technologies. For these and other reasons, the sales cycle associated with new products is typically lengthy, often
lasting six to 24 months and sometimes longer. Therefore, there can be no assurance that our introduction or announcement of new product
offerings will achieve any significant or sustainable degree of market acceptance or result in increased revenue in the near term.
Our software offerings are subject to risks that differ from those
facing our hardware products.
We continue to dedicate significant engineering resources to our management
software platform, applications, and SaaS offerings, including ConsoleFlowTM. These product and service offerings are subject to
significant additional risks that are not necessarily related to our hardware products. Our ability to succeed with these offerings will
depend in large part on our ability to provide customers with software products and services that offer features and functionality that
address the specific needs of businesses. We may face challenges and delays in the development of this product line as the marketplace
for products and services evolves to meet the needs and desires of customers. We cannot provide assurances that we will be successful
in operating and growing this product line.
In light of these risks and uncertainties, we may not be able to establish
or maintain market share for our software and SaaS offerings. As we develop new product lines, we must adapt to market conditions that
are unfamiliar to us, such as competitors and distribution channels that are different from those we have known in the past. We have and
will encounter competition from other solutions providers, many of whom may have more significant resources than us with which to compete.
There can be no assurance that we will recover our investments in this product line, that we will receive meaningful revenue from or realize
a profit from this new product line.
We may experience significant fluctuation in our revenue because
the timing of large orders placed by some of our customers is often project-based.
Our operating results fluctuate because we often receive large orders from
customers that coincide with the timing of the customer’s project. Sales of our products and services may be delayed if customers
delay approval or commencement of projects due to budgetary constraints, internal acceptance review procedures, timing of budget cycles
or timing of competitive evaluation processes. In addition, sometimes our customers make significant one-time hardware purchases for projects
which are not repeated. We sell primarily on a purchase order basis rather than pursuant to long-term contracts, and we expect fluctuations
in our revenues as a result of one-time project-based purchases to continue in the future. In addition, our sales may be subject to significant
fluctuations based on the acceleration, delay or cancellation of customer projects, or our failure to complete one or a series of significant
potential sales. Because a significant portion of our operating expenses are fixed, even a single order can have a disproportionate effect
on our quarterly revenues and operating results. As a result of the factors discussed above, and due to the complexities of the industry
in which we operate, it is difficult for us to forecast demand for our current or future products with any degree of certainty, which
means it is difficult for us to forecast our sales. If our quarterly or annual operating results fall below the expectations of investors
or securities analysts, the price of our common stock could decline substantially.
The lengthy sales cycle for our products and services, along with
delays in customer completion of projects, make the timing of our revenues difficult to predict.
We have a lengthy sales cycle for many of our products that generally extends
between six and 24 months and sometimes longer due to a lengthy customer evaluation and approval process. The length of this process can
be affected by factors over which we have little or no control, including the customer’s budgetary constraints, timing of the customer’s
budget cycles, and concerns by the customer about the introduction of new products by us or by our competitors. As a result, sales cycles
for customer orders vary substantially among different customers. The lengthy sales cycle is one of the factors that has caused, and may
continue to cause, our revenues and operating results to vary significantly from quarter to quarter. In addition, we may incur substantial
expenses and devote significant management effort and expense to develop potential relationships that do not result in agreements or revenues,
which may prevent us from pursuing other opportunities. Accordingly, excessive delays in sales could be material and adversely affect
our business, financial condition or results of operations.
The nature of our products, customer base and sales channels causes
us to lack visibility into future demand for our products, which makes it difficult for us to forecast our manufacturing and inventory
requirements.
We use forecasts based on anticipated product orders to manage our manufacturing
and inventory levels and other aspects of our business. However, several factors contribute to a lack of visibility with respect to future
orders, including:
· the project-driven nature of many of our customers’ requirements;
· we primarily sell our products indirectly through distributors;
· the lack of long-term contracts with our customers;
· we have some customers who make single, non-recurring purchases; and
· a large number of our customers typically purchase in small quantities.
This lack of visibility impacts our ability to forecast our inventory requirements.
If we overestimate our customers’ future requirements for products, we may have excess inventory, which would increase our costs
and potentially require us to write-off inventory that becomes obsolete. Additionally, if we underestimate our customers’ future
requirements, we may have inadequate inventory, which could interrupt and delay delivery of our products to our customers, harm our reputation,
and cause our revenues to decline. If any of these events occur, they could prevent us from achieving or sustaining profitability and
the value of our common stock may decline.
Delays in qualifying revisions of existing products for certain of
our customers could result in the delay or loss of sales to those customers, which could negatively impact our business and financial
results.
Our industry is characterized by intense competition, rapidly evolving
technology and continually changing customer preferences and requirements. As a result, we frequently develop and introduce new versions
of our existing products, which we refer to as revisions.
Prior to purchasing our products, some of our customers require that products
undergo a qualification process, which may involve testing of the products in the customer’s system. A subsequent revision to a
product’s hardware or firmware, changes in the manufacturing process or our selection of a new supplier may require a new qualification
process, which may result in delays in sales to customers, loss of sales, or us holding excess or obsolete inventory.
After products are qualified, it can take additional time before the customer
commences volume production of components or devices that incorporate our products. If we are unsuccessful or delayed in qualifying any
new or revised products with a customer, that failure or delay would preclude or delay sales of these products to the customer, and could
negatively impact our financial results. In addition, new revisions to our products could cause our customers to alter the timing of their
purchases, by either accelerating or delaying purchases, which could result in fluctuations of our net revenue from quarter to quarter.
We depend upon a relatively small number of
distributor and end-user customers for a large portion of our revenue, and a decline in sales to these major customers would materially
adversely affect our business, financial condition, and results of operations.
Historically, we have relied upon a small number of distributors and end-user
customers for a significant portion of our net revenue. Additionally, we expect an increased customer concentration from end-users in
the near future based on existing customer supply agreements and order backlog. Our customer concentration could fluctuate, depending
on future customer requirements, which will depend on market conditions in the industry segments in which our customers participate. The
loss of one or more significant customers or a decline in sales to our significant customers could result in a material loss of sales
and possible increase in excess inventories which would adversely affect our business, financial condition, and results of operations.
We depend on distributors for a majority of our sales and to complete
order fulfillment.
We depend on the resale of products through distributor accounts for a
substantial majority of our worldwide net revenue. In addition, sales through our top five distributors accounted for approximately 35%
of our net revenue in fiscal 2023. A significant reduction of effort by one or more distributors to sell our products or a material change
in our relationship with one or more distributors may reduce our access to certain end customers and adversely affect our ability to sell
our products. Furthermore, if a key distributor materially defaults on a contract or otherwise fails to perform, our business and financial
results would suffer.
In addition, the financial health of our distributors and our continuing
relationships with them are important to our success. Our business could be harmed if the financial health of these distributors impairs
their performance and we are unable to secure alternate distributors.
Our ability to sustain and grow our business depends in part on the
success of our distributors and resellers.
A substantial part of our revenues is generated through sales by distributors
and resellers. To the extent they are unsuccessful in selling our products, or if we are unable to obtain and retain a sufficient number
of high-quality distributors and resellers, our operating results could be materially and adversely affected. In addition, our distributors
and resellers may devote more resources to marketing, selling and supporting products and services that are competitive with ours, than
to our products. They also may have incentives to promote our competitors' products over our products, particularly for our competitors
with larger volumes of orders, more diverse product offerings and a longer relationship with our distributors and resellers. In these
cases, one or more of our important distributors or resellers may stop selling our products completely or may significantly decrease the
volume of products they sell on our behalf. This sales structure also could subject us to lawsuits, potential liability and reputational
harm if, for example, any of our distributors or resellers misrepresents the functionality of our products or services to customers, violates
laws or our corporate policies. If we fail to effectively manage our existing or future distributors and resellers effectively, our business
and operating results could be materially and adversely affected.
Changes to the average selling prices of our products could affect
our net revenue and gross margins and adversely affect results of operations.
In the past, we have experienced reductions in the average selling prices
and gross margins of our products. We expect competition to continue to increase, and we anticipate this could result in additional downward
pressure on our pricing. Our average selling prices for our products might also decline as a result of other reasons, including promotional
programs introduced by us or our competitors and customers who negotiate price concessions. To the extent we are able to increase prices,
we may experience a decline in sales volumes if customers decide to purchase competitive products. If any of these were to occur, our
gross margins could decline and we might not be able to reduce the cost to manufacture our products enough or at all to keep up with the
decline in prices.
If we are unable to sell our inventory in a timely manner, it could
become obsolete, which could require us to write-down or write off obsolete inventory, which could harm our operating results.
At any time, competitive products may be introduced with more attractive
features or at lower prices than ours. If this occurs, and for other reasons, we may not be able to accurately forecast demand for our
products and our inventory levels may increase. There is a risk that we may be unable to sell our inventory in a timely manner to avoid
it becoming obsolete. If we are required to substantially discount our inventory or are unable to sell our inventory in a timely manner,
we would be required to increase our inventory reserves or write off obsolete inventory and our operating results could be substantially
harmed.
Our failure to compete successfully in our highly competitive market
could result in reduced prices and loss of market share.
The market in which we operate is intensely competitive, subject to rapid
technological advances and highly sensitive to evolving industry standards. The market can also be affected significantly by new product
and technology introductions and marketing and pricing activities of industry participants. Our products compete directly with products
produced by a number of our competitors. Many of our competitors and potential competitors have greater financial and human resources
for marketing and product development, more experience conducting research and development activities, greater experience obtaining regulatory
approval for new products, larger distribution and customer networks, more established relationships with contract manufacturers and suppliers,
and more established reputations and name recognition. For these and other reasons, we may not be able to compete successfully against
our current or potential future competitors. In addition, the amount of competition we face in the marketplace may change and grow as
the market for IoT and M2M networking solutions grows and new companies enter the marketplace. Present and future competitors may be able
to identify new markets, adapt new technologies, develop and commercialize products more quickly and gain market acceptance of products
with greater success. As a result of these competitive factors, we may fail to meet our business objectives and our business, financial
condition and operating results could be materially and adversely affected.
Acquisitions, strategic partnerships, joint ventures or investments
may impair our capital and equity resources, divert our management’s attention or otherwise negatively impact our operating results.
We may pursue acquisitions, strategic partnerships and joint ventures that
we believe would allow us to complement our growth strategy, increase market share in our current markets and expand into adjacent markets,
broaden our technology and intellectual property and strengthen our relationships with distributors, OEMs and ODMs. For instance, we acquired
Maestro, Intrinsyc, the Transition Networks and Net2Edge businesses of CSI, and Uplogix in 2019, 2020, 2021 and 2022 respectively. Our
previous acquisitions have required, and any future acquisition, partnership, joint venture or investment may also require, that we pay
significant cash, issue equity and/or incur substantial debt. Acquisitions, partnerships or joint ventures may also result in the loss
of key personnel and the dilution of existing stockholders to the extent we are required to issue equity securities. In addition, acquisitions,
partnerships or joint ventures require significant managerial attention, which may be diverted from our other operations. These capital,
equity and managerial commitments may impair the operation of our business. Furthermore, acquired businesses may not be effectively integrated,
may be unable to maintain key pre-acquisition business relationships, may not result in expected synergies, an increase in revenues or
earnings or the delivery of new products, may contribute to increased fixed costs, and may expose us to unanticipated liabilities. If
any of these occur, we may fail to meet our business objectives and our business, financial condition and operating results could be materially
and adversely affected.
We may experience difficulties associated with utilizing third-party
logistics providers.
A majority of our physical inventory management process, as well as the
shipping and receiving of our inventory, is performed by third-party logistics providers in Los Angeles, California and Hong Kong. There
is a possibility that these third-party logistics providers will not perform as expected and we could experience delays in our ability
to ship, receive, and process the related data in a timely manner. This could adversely affect our financial position, results of operations,
cash flows and the market price of our common stock.
Relying on third-party logistics providers could increase the risk of the
following: failing to receive accurate and timely inventory data, theft or poor physical security of our inventory, inventory damage,
ineffective internal controls over inventory processes or other similar business risks out of our immediate control.
Risks Related to Technology, Cybersecurity and Intellectual Property
Cybersecurity breaches and other disruptions could compromise our
information and expose us to liability, which could cause our business and reputation to suffer.
In the ordinary course of our business, we collect and store sensitive
data, including intellectual property, our proprietary business information and that of our customers, suppliers and business partners,
and personally identifiable information of our employees, on our networks and third-party cloud software providers. Increased global information
technology (“IT”) security threats and more sophisticated and targeted computer crime pose a risk to the security of our systems
and networks and the confidentiality, availability and integrity of our data. There have been several recent, highly publicized cases
in which organizations of various types and sizes have reported the unauthorized disclosure of customer or other confidential information,
as well as cyberattacks involving the dissemination, theft and destruction of corporate information, intellectual property, cash or other
valuable assets. There have also been several highly publicized cases in which hackers have requested “ransom” payments in
exchange for not disclosing customer or other confidential information or for not disabling the target company’s computer or other
systems. The secure processing, maintenance and transmission of the information that we collect and store on our systems is critical to
our operations and implementing security measures designed to prevent, detect, mitigate or correct these or other IT security threats
involves significant costs. Although we have taken steps to protect the security of our information systems, we have, from time to time,
experienced threats to our data and systems, including malware, phishing and computer virus attacks, and it is possible that in the future
our safety and security measures will not prevent the systems’ improper functioning or damage, or the improper access or disclosure
of personally identifiable information such as in the event of cyber-attacks. In addition, due to the fast pace and unpredictability of
cyber threats, long-term implementation plans designed to address cybersecurity risks become obsolete quickly and, in some cases, it may
be difficult to anticipate or immediately detect such incidents and the damage they cause. Any unauthorized access, disclosure or other
loss of information could result in legal claims or proceedings, disrupt our operations, damage our reputation, and cause a loss of confidence
in our products and services, which could adversely affect our business.
If our products become subject to cybersecurity breaches, or if public
perception is that they are vulnerable to cyberattacks, our reputation and business could suffer.
We could be subject to liability or our reputation could be harmed if technologies
integrated into our products, or our products, fail to prevent cyberattacks, or if our partners or customers fail to safeguard the systems
with security policies that conform to industry best practices. In addition, any cyberattack or security breach that affects a competitor’s
products could lead to the negative perception that our solutions are or could be subject to similar attacks or breaches.
Some of our software offerings may be subject to various cybersecurity
risks, which are particularly acute in the cloud-based technologies operated by us and other third parties that form a part of our solutions.
In connection with certain implementations of our management software platform,
application, and SaaS offering, ConsoleFlow, we expect to store, convey and process data produced by devices. This data may include confidential
or proprietary information, intellectual property or personally identifiable information of our customers or other third parties with
whom they do business. It is important for us to maintain solutions and related infrastructure that are perceived by our customers and
other parties with whom we do business to provide a reasonable level of reliability and security. Despite available security measures
and other precautions, the infrastructure and transmission methods used by our products and services may be vulnerable to interception,
attack or other disruptive problems.
If a cyberattack or other security incident were to allow unauthorized
access to or modification of our customers’ data or our own data, whether due to a failure with our systems or related systems operated
by third parties, we could suffer damage to our brand and reputation. The costs we would incur to address and fix these incidents could
significantly increase our expenses. These types of security incidents could also lead to lawsuits, regulatory investigations and increased
legal liability, including in some cases contractual costs related to customer notification and fraud monitoring. Further, as regulatory
focus on privacy and data security issues continues to increase and worldwide laws and regulations concerning the protection of information
become more complex, the potential risks and costs of compliance to our business will intensify.
If software that we incorporate into our products were to become
unavailable or no longer available on commercially reasonable terms, it could adversely affect sales of our products, which could disrupt
our business and harm our financial results.
Certain of our products contain software developed and maintained by third-party
software vendors or which are available through the “open source” software community. We also expect that we may incorporate
software from third-party vendors and open source software in our future products. Our business would be disrupted if this software, or
functional equivalents of this software, were either no longer available to us or no longer offered to us on commercially reasonable terms.
In either case, we would be required to either redesign our products to function with alternate third-party software or open source software,
or develop these components ourselves, which would result in increased costs and could result in delays in our product shipments. Furthermore,
we might be forced to limit the features available in our current or future product offerings.
Our products may contain undetected software or hardware errors or
defects that could lead to an increase in our costs, reduce our net revenue or damage our reputation.
We currently offer warranties ranging from one to five years on each of
our products. Our products could contain undetected software or hardware errors or defects. If there is a product failure, we might have
to replace all affected products, or we might have to refund the purchase price for the units. Regardless of the amount of testing we
undertake, some errors might be discovered only after a product has been installed and used by customers. Any errors discovered after
commercial release could result in financial losses and claims against us. Significant product warranty claims against us could harm our
business, reputation and financial results and cause the market price of our common stock to decline.
We may not be able to adequately protect or enforce our intellectual
property rights, which could harm our competitive position or require us to incur significant expenses to enforce our rights.
We rely primarily on a combination of laws, such as patent, copyright,
trademark and trade secret laws, and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect
our proprietary rights. Despite any precautions that we have taken:
Also, the laws of some of the countries in which we market and manufacture
our products offer little or no effective protection of our proprietary technology. Reverse engineering, unauthorized copying or other
misappropriation of our proprietary technology could enable third parties to benefit from our technology without paying us for it. Consequently,
we may be unable to prevent our proprietary technology from being exploited by others in the U.S. or abroad, which could require costly
efforts to protect our technology. Policing the unauthorized use of our technology, trademarks and other proprietary rights is expensive,
difficult and, in some cases, impracticable. Litigation may be necessary in the future to enforce or defend our intellectual property
rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation could
result in substantial costs and diversion of management resources, either of which could harm our business. Accordingly, despite our efforts,
we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property, which may harm our business,
financial condition and results of operations.
The impact of natural disasters and other business interruptions
could negatively impact our supply chain and customers resulting in an adverse impact to our revenues and profitability.
Certain of our components and other materials used in producing our products
are from regions susceptible to natural disasters. A natural disaster could damage equipment and inventory at our suppliers’ facilities,
adversely affecting our supply chain. If we are unable to obtain these materials, we could experience a disruption to our supply chain
that would hinder our ability to produce our products in a timely manner, or cause us to seek other sources of supply, which may be more
costly or which we may not be able to procure on a timely basis. In addition, our customers may not follow their normal purchasing patterns
or temporarily cease purchasing from us due to impacts to their businesses in the region, creating unexpected fluctuations or decreases
in our revenues and profitability. Natural disasters in other parts of the world on which our operations are reliant also could have material
adverse impacts on our business.
In addition, our operations and those of our suppliers are vulnerable to
interruption by fire, earthquake, power loss, telecommunications failure, cybersecurity breaches, IT systems failure, terrorist attacks
and other events beyond our control, including the effects of climate change. A substantial portion of our facilities, including our corporate
headquarters and other critical business operations, are located near major earthquake faults and, therefore, may be more susceptible
to damage if an earthquake occurs. We do not carry earthquake insurance for direct earthquake-related losses. If a business interruption
occurs, whether due to a natural disaster or otherwise, our business could be materially and adversely affected.
Risk Related to Liquidity and Capital Resources
We maintain cash deposits in excess of federally insured limits.
Adverse developments affecting financial institutions, including bank failures, could adversely affect our liquidity and financial performance.
We regularly maintain domestic cash deposits in the Federal Deposit Insurance
Corporation (“FDIC”) insured banks, which exceed the FDIC insurance limits. Bank failures, events involving limited liquidity,
defaults, non-performance or other adverse developments that affect financial institutions, or concerns or rumors about such events, may
lead to widespread demands for customer withdrawals and liquidity constraints that may result in market-wide liquidity problems. For example,
on March 10, 2023, SVB failed and was taken into receivership by the FDIC. At that time, we maintained deposits amounting to approximately
85% of our total cash at SVB. On March 12, 2023, federal regulators announced that the FDIC would complete its resolution of SVB in a
manner that fully protects all depositors, and on March 26, 2023, the assets, deposits and loans of SVB were acquired by First Citizens
Bank. While we were able to regain full access to our deposits with SVB and have taken steps to diversify our banking relationships since
then, our Loan Agreement with SVB currently requires us to hold 50% of our company-wide cash balances at SVB, and consequently any future
failure of that bank could simultaneously prevent access to both a substantial portion of our cash holdings and to our credit line for
funds needed to meet our working capital requirements and other financial commitments. Our cash balances are concentrated at a small number
of financial institutions. In addition, current macroeconomic conditions have continued to cause turmoil in the banking sector since the
failure of SVB. For example, on March 12, 2023, Signature Bank Corp. and Silvergate Capital Corp. were each swept into receivership,
and on May 1, 2023, the FDIC took control of First Republic Bank and brokered its sale to JPMorgan Chase. Further bank failures, or other
adverse conditions in the financial or credit markets impacting financial institutions at which we maintain balances, including disruptions
that may cause delays in our ability to transfer funds, make payments, or withdraw funds whether held with SVB or other banks, could adversely
impact our liquidity and financial performance. A failure to timely access our cash on deposit with SVB or other banks could require the
scaling back of our operations and production, negatively affect our credit, and prevent us from fulfilling contractual obligations. Moreover,
there can be no assurance that our deposits in excess of the FDIC or other comparable insurance limits will be backstopped by the U.S.
or any applicable foreign government in the future or that any bank or financial institution with which we do business will be able to
obtain needed liquidity from other banks, government institutions or by acquisition in the event of a future failure or liquidity crisis,
and such uninsured deposits may ultimately be lost. In addition, if any of the parties with whom we conduct business are unable to access
funds due to the status of their financial institution, such parties’ ability to pay their obligations to us or to enter into new
commercial arrangements requiring additional payments to us could be adversely affected.
We have a history of losses.
We have historically incurred net losses. There can be no assurance that
we will generate net profits in future periods. Further, there can be no assurance that we will be cash flow positive in future periods. In
the event that we fail to achieve profitability in future periods, the value of our common stock may decline. In addition, if we
are unable to achieve or maintain positive cash flows, we would be required to seek additional funding, which may not be available on
favorable terms, if at all.
We may need additional capital and it may not be available on acceptable
terms, or at all.
To remain competitive, we must continue to make significant investments
to operate our business and develop our products. Our future capital requirements will depend on many factors, including the timing and
amount of our net revenue, research and development expenditures, expenses associated with any strategic partnerships or acquisitions
and infrastructure investments, and expenses related to litigation, each of which could negatively affect our ability to generate additional
cash from operations. If cash generated from operations is insufficient to satisfy our working capital requirements, we may need to raise
additional capital. Looking ahead at long-term needs, we may need to raise additional funds for a number of purposes, including, but not
limited to:
· to fund working capital requirements;
· to update, enhance or expand the range of products we offer;
· to refinance existing indebtedness;
· to increase our sales and marketing activities;
· to acquire additional businesses
We may seek additional capital from public or private offerings of our
capital stock, borrowings under our existing or future credit lines or other sources. If we issue equity or debt securities to raise additional
funds, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges
senior to those of our existing stockholders. In addition, if we raise additional funds through collaborations, licensing, joint ventures,
or other similar arrangements, it may be necessary to relinquish valuable rights to our potential future products or proprietary technologies,
or grant licenses on terms that are not favorable to us. There can be no assurance that we will be able to raise any needed capital on
terms acceptable to us, if at all. If we are unable to secure additional financing in sufficient amounts or on favorable terms, we may
not be able to develop or enhance our products, take advantage of future opportunities, respond to competition or continue to operate
our business.
The terms of our Senior Credit Facilities may restrict our financial
and operational flexibility and, in certain cases, our ability to operate.
The terms of our Senior Credit Facilities restrict, among other things,
our ability to incur liens, incur indebtedness, dispose of assets, make investments, make certain restricted payments, merge or consolidate
and enter into certain speculative hedging arrangements. Further, we are currently and may in the future be required to maintain specified
financial ratios, including pursuant to a maximum leverage ratio, a minimum fixed charge coverage ratio or a minimum liquidity test. Our
ability to meet those financial ratios and tests can be affected by events beyond our control, and there can be no assurance that we will
meet those tests. Pursuant to our amended credit agreement and the related loan and security agreement, we have pledged substantially
all of our assets to our senior lender, SVB. In addition, the Loan Agreement with SVB currently requires us to hold 50% of our company-wide
cash balances at SVB, which may limit our ability to manage our cash holdings effectively and could put a substantial portion of those
holdings at risk in the event of a bank failure.
Risks Related to International Operations
Rising concern regarding international tariffs could materially and
adversely affect our business and results of operations.
The current political landscape has introduced significant uncertainty
with respect to future trade regulations and existing international trade agreements, as shown by the U.S.-initiated renegotiation of
the North America Free Trade Agreement, Brexit in Europe, and the current war between Ukraine and Russia. This uncertainty includes the
possibility of imposing tariffs or penalties on products manufactured outside the U.S., including the U.S. government’s institution
of a 25% tariff on a range of products from China and subsequent tariffs imposed by the U.S. as well as tariffs imposed by trading partners
on U.S. goods, the potential for increased trade barriers between the U.K. and the European Union, and export controls or other retaliatory
actions against, or restrictions on doing business with Russia, as well as any resulting disruption, instability or volatility in the
global markets and industries resulting from such conflict. The institution of trade tariffs both globally and between the U.S. and China
specifically, carries the risk of negatively affecting the overall economic conditions of both China and the U.S., which could have a
negative impact on us.
We cannot predict whether, and to what extent, there may be changes to
international trade agreements or whether quotas, duties, tariffs, exchange controls or other restrictions on our products will be changed
or imposed. If we are unable to source our products from the countries where we wish to purchase them, either because of regulatory changes
or for any other reason, or if the cost of doing so increases, it could have a material adverse effect on our business, financial condition
and results of operations. Furthermore, imposition of tariffs may result in local sourcing initiatives, or other developments that make
it more difficult to sell our products in foreign countries, which would negatively impact our business and operating results.
We face risks associated with our international operations that could
impair our ability to grow our revenues abroad as well as our overall financial condition.
We believe that our future growth is dependent in part upon our ability
to increase sales in international markets. These sales are subject to a variety of risks, including geopolitical events, fluctuations
in currency exchange rates, tariffs, import restrictions and other trade barriers, unexpected changes in regulatory requirements, longer
accounts receivable payment cycles, potentially adverse tax consequences, and export license requirements. In addition, we are subject
to the risks inherent in conducting business internationally, including political and economic instability and unexpected changes in diplomatic
and trade relationships. In many markets where we operate, business and cultural norms are different than those in the U.S., and practices
that may violate laws and regulations applicable to us such as the Foreign Corrupt Practices Act (the “FCPA”) unfortunately
are more commonplace. Although we have implemented policies and procedures with the intention of ensuring compliance with these laws and
regulations, our employees, contractors and agents, as well as distributors and resellers involved in our international sales, may take
actions in violation of our policies. Many of our vendors and strategic business allies also have international operations and are subject
to the risks described above. Even if we are able to successfully manage the risks of international operations, our business may be adversely
affected if one or more of our business partners are not able to successfully manage these risks. There can be no assurance that one or
more of these factors will not have a material adverse effect on our business strategy and financial condition.
Foreign currency exchange rates may adversely affect our results.
We are exposed to market risk primarily related to foreign currencies and
interest rates. In particular, we are exposed to changes in the value of the U.S. dollar versus the local currency in which our products
are sold and our services are purchased, including devaluation and revaluation of local currencies. Accordingly, fluctuations in foreign
currency rates could adversely affect our revenues and operating results.
Risks Related to Regulatory Compliance and Legal Matters
Our inability to obtain appropriate industry certifications or approvals
from governmental regulatory bodies could impede our ability to grow revenues in our wireless products.
The sale of our wireless products in some geographical markets is
sometimes dependent on the ability to gain certifications and/or approvals by relevant governmental bodies. In addition, many of our products
are certified as meeting various industry quality and/or compatibility standards. Failure to obtain these certifications or approvals,
or delays in receiving any needed certifications or approvals, could impact our ability to compete effectively or at all in these markets
and could have an adverse impact on our revenues.
Our failure to comply effectively with regulatory laws pertaining
to our foreign operations could have a material adverse effect on our revenues and profitability.
We are required to comply with U.S. government export regulations in the
sale of our products to foreign customers, including requirements to properly classify and screen our products against a denied parties
list prior to shipment. We are also required to comply with the provisions of the FCPA and all other anti-corruption laws, such as the
U.K. Anti-Bribery Act, of all other countries in which we do business, directly or indirectly, including compliance with the anti-bribery
prohibitions and the accounting and recordkeeping requirements of these laws. Violations of the FCPA or other similar laws could trigger
sanctions, including ineligibility for U.S. government insurance and financing, as well as large fines. Failure to comply with the aforementioned
regulations could also affect our decision to sell our products in international jurisdictions, which could have a material adverse effect
on our revenues and profitability.
Our failure to comply effectively with the requirements of applicable
environmental legislation and regulation could have a material adverse effect on our revenues and profitability.
Certain states and countries have passed regulations relating to chemical
substances in electronic products and requiring electronic products to use environmentally friendly components. For example, the European
Union has the Waste Electrical and Electronic Equipment Directive, the Restrictions of Hazardous Substances Directive, and the Regulation
on Registration, Evaluation, Authorization and Restriction of Chemicals. In the future, China and other countries including the U.S. are
expected to adopt further environmental compliance programs. In order to comply with these regulations, we may need to redesign our products
to use different components, which may be more expensive, if they are available at all. If we fail to comply with these regulations, we
may not be able to sell our products in jurisdictions where these regulations apply, which could have a material adverse effect on our
revenues and profitability.
Increasing attention on environmental, social and governance matters
may have a negative impact on our business, impose additional costs on us, and expose us to additional risks.
Increasingly regulators (including the SEC),
customers, investors, employees and other stakeholders are focusing on environmental, social and governance (“ESG”) matters.
While we have, or are developing, certain ESG initiatives, there can be no assurance that regulators, customers, investors, and employees
will determine that these programs are sufficiently robust. Actual or perceived shortcomings with respect to our ESG initiatives and reporting
can impact our ability to hire and retain employees, increase our customer base, or attract and retain certain types of investors. In
addition, these parties are increasingly focused on specific disclosures and frameworks related to ESG matters. Collecting, measuring,
and reporting ESG information and metrics can be costly, difficult and time consuming, is subject to evolving reporting standards, and
can present numerous operational, reputational, financial, legal and other risks, any of which could have a material impact on us, including
on our reputation and stock price. Inadequate processes to collect and review this information prior to disclosure could subject us to
potential liability related to such information.
Current or future litigation could adversely affect us.
We are subject to a wide range of claims and lawsuits in the course of
our business. Any lawsuit may involve complex questions of fact and law and may require the expenditure of significant funds and the diversion
of other resources. The results of litigation are inherently uncertain, and adverse outcomes are possible.
In particular, litigation regarding intellectual property rights occurs
frequently in our industry. The results of litigation are inherently uncertain, and adverse outcomes are possible. Adverse outcomes may
have a material adverse effect on our business, financial condition or results of operations.
There is a risk that other third parties could claim that our products,
or our customers’ products, infringe on their intellectual property rights or that we have misappropriated their intellectual property.
In addition, software, business processes and other property rights in our industry might be increasingly subject to third-party infringement
claims as the number of competitors grows and the functionality of products in different industry segments overlaps. Other parties might
currently have, or might eventually be issued, patents that pertain to the proprietary rights we use. Any of these third parties might
make a claim of infringement against us. The results of litigation are inherently uncertain, and adverse outcomes are possible.
Responding to any infringement claim, regardless of its validity, could:
· be time-consuming, costly and/or result in litigation;
· divert management’s time and attention from developing our business;
· require us to stop selling or to redesign certain of our products; or
· require us to satisfy indemnification obligations to our customers.
If any of these occur, our business, financial condition or results of
operations could be adversely affected.
General Risk Factors
Rising interest rates may negatively impact our results of operations
and financing costs.
Interest rates are highly sensitive to many factors that are beyond our
control, including general economic conditions and policies of various governmental and regulatory agencies. In an effort to combat inflation,
a number of central banks around the world, including the U.S., have raised interest rates and are expected to keep increasing interest
rates. Increased interest rates may hinder the economic growth in markets where we do business, and has and may continue to have negative
impacts on the global economy. Rising interest rates may lead customers to decrease or delay spending on products and projects, including
on products that we sell, which may have a material adverse effect on our business, financial condition and results of operations. In
addition, higher interest rates impact the amount of interest we pay for our debt obligations and leases and continue and sustained increases
in interest rates could negatively impact our financing costs or cash flow.
Risks generally associated with a company-wide implementation of
an enterprise resource planning (ERP) system may adversely affect our business and results of operations or the effectiveness of our internal
controls over financial reporting.
In October 2022 we implemented a company-wide ERP system to
upgrade certain existing business, operational, and financial processes, and continue to refine the system on an ongoing basis. Our
ERP implementation is a complex and time-consuming project. This project has required and may continue to require investment of
capital and human resources, the re-engineering of processes of our business, and the attention of many employees who would
otherwise be focused on other aspects of our business. Any deficiencies in the design and implementation of the new ERP
system could result in higher costs than we had anticipated and could adversely affect our ability to develop and launch
solutions, provide services, fulfill contractual obligations, file reports with the SEC in a timely manner, operate our business or
otherwise affect our controls environment. Any of these consequences could have an adverse effect on our results of operations and
financial condition. In addition, because the ERP is a new system that we have limited prior experience with, there is an increased
risk that one or more of our financial controls may fail. Any failure to maintain internal control over financial reporting could
severely inhibit our ability to accurately report our financial condition, results of operations or cash flows. If we determine that
we have a material weakness in our internal control over financial reporting, we could lose investor confidence in the accuracy and
completeness of our financial reports, the market price of our common stock could decline, and we could be subject to sanctions or
investigations by the Nasdaq Stock Market, the SEC, or other regulatory authorities. Failure to remedy any material weakness in our
internal control over financial reporting, or to implement or maintain other effective control systems required of public companies,
could also restrict our future access to the capital markets.
We identified a material weakness in our internal
control related to ineffective information technology general controls which, if not remediated appropriately or timely, could result
in loss of investor confidence and adversely impact our stock price.
Internal controls related to the operation of technology
systems are critical to maintaining adequate internal control over financial reporting. As disclosed in Part II, Item 9A, during the fourth
quarter of fiscal 2023, management identified a material weakness related to the design and implementation of information technology general
controls related to the Company’s information systems that are relevant to the preparation of consolidated financial statements.
Specifically, we did not design and maintain user access controls to adequately restrict user access to the financial application and
data to appropriate Company personnel. As a result, management concluded that our internal control over financial reporting was not effective
as of June 30, 2023. We are implementing remedial measures and, while there can be no assurance that our efforts will be successful, we
plan to remediate the material weakness prior to the end of fiscal 2024. These measures will result in additional technology and other
expenses. If we are unable to remediate the material weakness, or are otherwise unable to maintain effective internal control over financial
reporting or disclosure controls and procedures, our ability to record, process and report financial information accurately, and to prepare
financial statements within required time periods, could be adversely affected, which could subject us to litigation or investigations
requiring management resources and payment of legal and other expenses, negatively affect investor confidence in our financial statements
and adversely impact our stock price.
If we are unable to attract, retain or motivate key senior management
and technical personnel, it could seriously harm our business.
Our financial performance depends substantially on the performance of our
executive officers and of key engineers, marketing and sales employees. We are particularly dependent upon our technical personnel, due
to the specialized technical nature of our business. If we were to lose the services of our executive officers or any of our key personnel
and were not able to find replacements in a timely manner, our business could be disrupted, other key personnel might decide to leave,
and we might incur increased operating expenses associated with finding and compensating replacements.
Our quarterly operating results may fluctuate, which could cause
the market price of our common stock to decline.
We have experienced, and expect to continue to experience, significant
fluctuations in net revenue, expenses and operating results from quarter to quarter. We therefore believe that quarter to quarter comparisons
of our operating results are not a good indication of our future performance, and you should not rely on them to predict our future operating
or financial performance or the future performance of the market price of our common stock. A high percentage of our operating expenses
are relatively fixed and are based on our forecast of future revenue. If we were to experience an unexpected reduction in net revenue
in a quarter, we would likely be unable to adjust our short-term expenditures significantly. If this were to occur, our operating results
for that fiscal quarter would be harmed. In addition, if our operating results in future fiscal quarters were to fall below the expectations
of equity analysts and investors, the market price of our common stock would likely fall.
The market price of our common stock may be volatile based on a number
of factors, many of which are not under our control.
The market price of our common stock has been highly volatile. The market
price of our common stock could be subject to wide fluctuations in response to a variety of factors, many of which are out of our control,
including:
· adverse changes in domestic or global economic, market and other conditions;
· new products or services offered by our competitors;
· actual or anticipated variations in quarterly operating results;
· changes in financial estimates by securities analysts;
· announcements of technological innovations;
· conditions or trends in the industry;
· additions or departures of key personnel;
· increased competition from industry consolidation;
· mergers and acquisitions; and
In addition, the Nasdaq Capital Market often experiences price and volume
fluctuations. These fluctuations often have been unrelated or disproportionate to the operating performance of companies listed on the
Nasdaq Capital Market.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The following table presents details regarding our leased facilities:
Locations Primary Use Approximate Square Footage
Vancouver, British Columbia, Canada Engineering 8,500