ITEM
1A. Risk Factors
Before
deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below in addition to the
other information contained in this Quarterly Report on Form 10-Q and in our other filings with the SEC, including subsequent
reports on Forms 10-Q and 8-K. The risks and uncertainties described below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known
or unknown risks or uncertainties actually occurs with material adverse effects on Polar Power, our business, financial condition,
results of operations and/or liquidity could be seriously harmed. In that event, the market price for our common stock will likely
decline, and you may lose all or part of your investment.
Risks
Related to Our Business and Industry
The
COVID-19 pandemic will likely have a significant negative impact on our business, sales, results of operations and financial condition.
The
COVID-19 pandemic has led to severe disruptions in general economic activities, as businesses and federal, state, and local governments
continue to implement broad actions to mitigate this public health crisis. We have experienced significant disruption to our business,
both in terms of disruption of our operations and the adverse effect on overall economic conditions. We closed our manufacturing
facilities when the California “stay at home” order was implemented by the governor of California in March 2020 and
slowly reopened operations in phases as permitted by the governor. Although California modified its “stay at home”
order by permitting certain retail, manufacturing and other businesses to gradually reopen in phases, spikes in new coronavirus
cases during the month of August 2020 have led government authorities to reinstate “stay at home” orders for certain
businesses. Ultimately, the scope and duration of business restrictions is not known at this time. We have 35 employees on furlough
status as of August 2020 in the U.S. and a combination of 80 part-time and full-time employees supporting essential business operations.
These conditions will significantly negatively impact all aspects of our business. Our business is also dependent on the continued
health and productivity of our employees, including our manufacturing employees, sales staff and corporate management team. Individually
and collectively, the consequences of the COVID-19 pandemic could continue to have a material adverse effect on our business,
sales, results of operations and financial condition during the remainder of 2020 and perhaps beyond.
Additionally,
our liquidity has and could continue to be negatively impacted if these conditions continue for a significant period of time and
we may be required to pursue additional sources of financing to obtain working capital, maintain appropriate inventory levels,
and meet our financial obligations. Currently capital and credit markets have been disrupted by the crisis and our ability to
obtain any required financing is not guaranteed and largely dependent upon evolving market conditions and other factors. Depending
on the continued impact of the crisis, further actions may be required to improve our cash position and capital structure.
The
extent to which the COVID-19 pandemic ultimately impacts our business, sales, results of operations and financial condition will
depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration
and spread of the pandemic, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent
normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, we may continue to experience
significant impacts to our business as a result of its global economic impact, including any economic downturn or recession that
has occurred or may occur in the future.
Our
independent registered public accounting firm’s reports for the years ended December 31, 2019 and 2018 have raised substantial
doubt as to our ability to continue as a “going concern.”
Our
independent registered public accounting firm indicated in its report on our audited consolidated financial statements as of and
for the years ended December 31, 2019 and 2018 that there is substantial doubt about our ability to continue as a going concern.
A “going concern” opinion indicates that the financial statements have been prepared assuming we will continue as
a going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification
of assets, or the amounts and classification of liabilities that may result if we do not continue as a going concern. Therefore,
you should not rely on our consolidated balance sheet as an indication of the amount of proceeds that would be available to satisfy
claims of creditors, and potentially be available for distribution to stockholders, in the event of liquidation. The presence
of the going concern note to our financial statements may have an adverse impact on the relationships we are developing and plan
to develop with third parties as we continue the commercialization of our products and could make it challenging and difficult
for us to raise additional financing, all of which could have a material adverse impact on our business and prospects and result
in a significant or complete loss of your investment.
In
addition, we estimate that the current funds on hand will be sufficient to continue operations through approximately December
31, 2020. Our continuation as a going concern is dependent upon our ability to obtain necessary debt or equity financing to continue
operations until sales increase and we begin generating positive cash flow. No assurance can be given that any future financing
will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional
financing, such financing may contain undue restrictions on our operations, in the case of debt financing or cause substantial
dilution for our stockholders, in the case of equity financing. We continue to review operations in order to identify additional
strategies designed to generate cash flow, improve our financial position, and enable the timely discharge of our obligations.
If we are unable to identify sources of additional cash flow in the short term, we may be required to further reduce or limit
operations.
We
are dependent on, and derive substantially all of our revenue from, sales of our DC base power systems to two customers within
the U.S. telecommunications market. Our efforts to expand our customer base, our product portfolio or markets within which we
operate may not succeed and may reduce our revenue growth rate.
We
derive substantially all our revenues from sales of our DC base power systems to two customers within the telecommunications market,
AT&T, and Verizon Wireless. Any factor adversely affecting sales of these power systems to these customers or to other customers
within this market, including market acceptance, product competition, performance and reliability, reputation, price competition
and economic and market conditions, could adversely affect our business and results of operations. For example, during the fourth
quarter of 2019, and extending into the first quarter of 2020, our U.S. Tier-1 telecommunications customers postponed orders and
shipments to the latter part of 2020 which resulted in an 87% decline in net revenues during the fourth quarter of 2019 as compared
to the third quarter of 2019. Although net revenues from our Tier-1 telecommunications customers increased over 300% in each of
the first two quarters of 2020 as compared to the fourth quarter of 2019, we believe net sales have been negatively impacted by
the COVID-19 pandemic as a result of certain restrictions imposed by our customers which have effectively prevented them
from operating their businesses in the ordinary course.
In
addition, any unfavorable change in our business relationship with our Tier-1 telecommunications wireless carrier customers, or
delays in customer implementation and deployment of our products, could have a material adverse effect on our results of operation
and financial condition. Our plan to invest in the development of higher capacity DC hybrid solar systems to address data centers
and other applications within the telecommunications market may not result in an anticipated growth in sales and may reduce our
revenue growth rate.
Many
of our DC power systems involve long design and sales cycles, which could have an adverse impact on our results of operations
and financial performance.
The
design and sales cycle for our DC power systems, from initial contact with our potential customer to the shipments of our product,
may be lengthy. Customers generally consider a wide range of factors before making a purchase decision. Prior to purchasing our
products, our customers often require a significant technical review, tests and evaluations over long periods of time, assessments
of competitive products and approval at a number of management levels within their organization. During the time our customers
are evaluating our products, we may incur substantial sales and service, engineering and research and development expenses to
customize our products to meet customer’s application needs. We may also expend significant management efforts, increase
manufacturing capacity, order long-lead-time components or purchase significant amounts of components and other inventory prior
to receiving an order. Even after this evaluation process, a potential customer may not purchase our products.
The
product development time before our customer agrees to purchase our DC power systems can be considerable. Our process for developing
an integrated solution may require use of significant engineering resources, including design, prototyping, modeling, testing
and application engineering. The length of this cycle is influenced by many factors, including the difficulty of the technical
specification and complexity of the design and the customer’s procurement processes. A significant period may elapse between
our investment of time and resources in designing and developing a product for our customer and revenue from sales of that product.
The length of this process combined with unanticipated delays in the development cycle could materially affect results of operations
and financial conditions.
We
do not have long-term commitments for significant revenues with most of our customers and may be unable to retain existing customers,
attract new customers or replace departing customers with new customers that can provide comparable revenues and profits.
Because
we generally do not obtain firm, long-term volume purchase commitments from our customers, most of our sales are derived from
individual purchase orders. We remain dependent upon securing new purchase orders in the future in order to sustain and grow our
revenues. Accordingly, there is no assurance that our revenues and business will grow in the future. Our failure to maintain and
expand our customer relationships could materially and adversely affect our business and results of operations.
The
high concentration of our sales within the telecommunications market could result in a significant reduction in sales and negatively
affect our profitability if demand for our DC power systems declines within this market.
We
expect to be predominately focused on the manufacturing, marketing and sales of DC power systems to telecommunications companies
for the foreseeable future. We may be unable to shift our business focus away from these activities. Accordingly, the emergence
of new competing DC power products or lower-cost alternative technologies may reduce the demand for our products. A downturn in
the demand for our DC power systems within the telecommunications market would likely materially and adversely affect our sales
and profitability.
The
markets within which we compete are highly competitive. Many of our competitors have greater financial and other resources than
we do and one or more of these competitors could use their greater financial and other resources to gain market share at our expense.
If
our business continues to develop as expected, we anticipate that we will continue to grow in the near future. If, due to capital
constraints or otherwise, we are unable to fulfill our existing backlog in a timely manner and/or procure and timely fulfill our
anticipated future backlog, our customers and potential customers may decide to use competing DC power systems or continue the
use of alternating current, or AC, power systems. If we are unable to fulfill the growing demand for products and services in
a timely manner, our customers and potential customers may choose to purchase products from our competitors. Some of our larger
competitors may be willing to reduce prices and accept lower margins in order to compete with us. In addition, we could face new
competition from large international or domestic companies with established industrial brands and distribution networks that enter
our end markets. Demand for our products may also be affected by our ability to respond to changes in design and functionality,
to respond to downward pricing pressure, and to provide shorter lead times for our products than our competitors. If we are unable
to respond successfully to these competitive pressures, we could lose market share, which could have an adverse impact on our
results. We cannot assure that we will be able to compete successfully in our markets or compete effectively against current and
new competitors as our industry continues to evolve.
Rapid
technological changes may prevent us from remaining current with our technological resources and maintaining competitive product
and service offerings.
The
markets in which we and our customers operate are characterized by rapid technological change, especially within the telecommunications
market. Significant technological changes could render our existing and potential new products, services and technology obsolete.
Our future success will depend, in large part, upon our ability to:
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effectively
identify and develop leading energy efficient technologies;
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continue
to develop our technical expertise;
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enhance
our current products and services with new, improved and competitive technology; and
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respond
to technological changes in a cost-effective and timely manner.
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If
we are unable to successfully respond to technological change or if we do not respond to it in a cost-effective and timely manner,
then our business will be materially and adversely affected. We cannot assure you that we will be successful in responding to
changing technology. In addition, technologies developed by others may render our products, services and technology uncompetitive
or obsolete. Even if we do successfully respond to technological advances, the integration of new technology may require substantial
time and expense, and we cannot assure you that we will succeed in adapting our products, services and technology in a timely
and cost-effective manner.
If
we are unable to continue to develop new and enhanced products and services that achieve market acceptance in a timely manner,
our competitive position and operating results could be harmed.
Our
future success will depend on our ability to continue to develop new and enhanced DC power systems and related products and services
that achieve market acceptance in a timely and cost-effective manner. The markets in which we and our customers operate are characterized
by frequent introductions of new and enhanced products and services, evolving industry standards and regulatory requirements,
government incentives and changes in customer needs. The successful development and market acceptance of our products and services
depends on a number of factors, including:
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the
impact of the COVID-19 pandemic on the global markets;
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the
changing requirements and preferences of the potential customers in our markets;
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the
accurate prediction of market requirements, including regulatory issues;
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the
timely completion and introduction of new products and services to avoid obsolescence;
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the
quality, price and performance of new products and services;
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the
availability, quality, price and performance of competing products and services;
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our
customer service and support capabilities and responsiveness;
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the
successful development of our relationships with existing and potential customers; and
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changes
in industry standards.
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We
may experience financial or technical difficulties or limitations that could prevent us from introducing new or enhanced products
or services. Furthermore, any of these new or enhanced products and services could contain problems that are discovered after
they are introduced. We may need to significantly modify the design of these products and services to correct problems. Rapidly
changing industry standards and customer preferences and requirements may impede market acceptance of our products and services.
Development
and enhancement of our products and services will require significant additional investment and could strain our management, financial
and operational resources. The lack of market acceptance of our products or services or our inability to generate sufficient revenues
from this development or enhancement to offset their development costs could have a material adverse effect on our business. In
addition, we may experience delays or other problems in releasing new products and services and enhancements, and any such delays
or problems may cause customers to forego purchases of our products and services and to purchase those of our competitors.
We
cannot provide assurance that products and services that we have recently developed or that we develop in the future will achieve
market acceptance. If our new products and services fail to achieve market acceptance, or if we fail to develop new or enhanced
products and services s that achieve market acceptance, our growth prospects, operating results and competitive position could
be adversely affected.
Natural
disasters and other events beyond our control could materially adversely affect us.
Natural
disasters or other catastrophic events, including the COVID-19 pandemic, may cause damage or disruption to our operations, international
commerce and the global economy, and thus could have a strong negative effect on us. Our business operations are subject to interruption
by natural disasters, fire, power shortages, pandemics and other events beyond our control. Although we maintain crisis management
and disaster response plans, such events could make it difficult or impossible for us to deliver our services to our customers
and could decrease demand for our services.
We
are dependent on relationships with our key material suppliers, and the partial or complete loss of one of these key suppliers,
or the failure to find replacement suppliers or manufacturers in a timely manner, could adversely affect our business.
We have established relationships
with third party engine suppliers and other key suppliers from which we source components for our power systems. We purchase standard
configurations of engines for our DC power systems and are substantially dependent on timely supply from our two key engine suppliers,
Yanmar Engines Company and Perkins Company. Purchases from Yanmar and Perkins represented approximately 22% and nil% of our total
cost of sales for the three months ended June 30, 2020, respectively, and represented approximately 42% and 14% of our total cost
of sales for the same period in 2019, respectively. Purchases from Yanmar, and Perkins represented approximately 33% and nil of
our total cost of sales for the six months ended June 30, 2020, respectively, and represented approximately 40% and 16% of our
total cost of sales for the same period in 2019, respectively. In the fourth quarter of 2019, we received our certificate of conformity
from the U.S. Environmental Protection Agency on small spark-ignition Toyota engines which will be used in our new LPG / propane
generators. We do not have any long-term contracts or commitments with any of these suppliers. If any of these engine suppliers
were to fail to provide emissions certified engines in a timely manner or fail to supply engines that meet our quality, quantity
or cost requirements, or were to discontinue manufacturing any engines we source from them or discontinue providing any of these
engines to us, or the supply chain is interrupted or delayed as a result of the COVID-19 pandemic or unprecedented event, and we
were unable to obtain substitute sources in a timely manner or on terms acceptable to us, our ability to manufacture our products
could be materially adversely affected.
Price
increases in some of the key components in our DC power systems could materially and adversely affect our operating results and
cash flows.
The
prices of some of the key components of our DC power systems are subject to fluctuation due to market forces beyond our control,
including changes in the costs of raw materials incorporated into these components. Such price increases occur from time to time
due to spot shortages of commodities, increases in labor costs or longer-term shortages due to market forces. In particular, the
prices of engines can fluctuate frequently and often significantly. We do not have any long-term contracts or commitments with
our two key engine suppliers. Substantial increases in the prices of raw materials used in components which we source from our
suppliers may result in increased prices charged by our suppliers. If we incur price increases from our suppliers for key components
in our DC power systems, our production costs will increase. Given competitive market conditions, we may not be able to pass all
or any of those cost increases on to our customers in the form of higher sales prices. To the extent our competitors do not suffer
comparable component cost increases, we may have even greater difficulty passing along price increases and our competitive position
may be harmed. As a result, increases in costs of key components may adversely affect our margins and otherwise adversely affect
our operating results and cash flows.
A
portion of our key components are sourced in foreign countries, exposing us to additional risks that may not exist in the U.S.
A
portion of our key components, such as engines, magnets and cooling systems, are purchased from suppliers located overseas, primarily
in Asia. Our international sourcing subjects us to a number of potential risks in addition to the risks associated with third-party
sourcing generally. These risks include:
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inflation
or changes in political and economic conditions;
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unstable
regulatory environments;
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changes
in import and export duties;
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currency
rate fluctuations;
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trade
restrictions;
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labor
unrest;
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logistical
and communications challenges; and
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other
restraints and burdensome taxes.
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These
factors may have an adverse effect on our ability to source our purchased components overseas. In particular, if the U.S. dollar
were to depreciate significantly against the currencies in which we purchase raw materials from foreign suppliers, our cost of
goods sold could increase materially, which would adversely affect our results of operations.
The
unavailability or shortage, or increase in the cost, of raw materials and components could have an adverse effect on our sales
and profitability.
Our
operations require raw materials, such as aluminum, copper and permanent magnets. Commodities such as aluminum and copper are
known to have significant price volatility based on global economic conditions including the COVID-19 pandemic. An increase in
global economic outlook may result in significant price increases in the cost of our raw materials. In addition, we use Neodymium
permanent magnets in our alternators, for which there are a limited number of global suppliers that can meet our standards. Increase
in manufacturing of electric vehicles worldwide can have an adverse effect on the cost or supply of these magnets. At our current
production volumes, we are unable to secure large quantities of these commodities at fixed prices; however, we do have multiple
sources of supply for our raw materials to meet our near term forecasted needs. Various factors could reduce the availability
of raw materials and components and shortages may occur from time to time in the future. An increase in lead times for the supply
of raw materials due to a global increase in demand for commodities outlined may significantly increase material costs of our
products. If production was interrupted due to unavailability or shortage of raw materials and we were not able to find alternate
third-party suppliers or re-engineer our products to accommodate different components or materials, we could experience disruptions
in manufacturing and operations including product shortages, higher freight costs and re-engineering costs. If our supply of raw
materials or components is disrupted or our lead times extended, our business, results of operations or financial condition could
be materially adversely affected.
We
manufacture and assemble a majority of our products at two facilities. Any prolonged disruption in the operations of this facility
would result in a decline in our sales and profitability.
We
manufacture and assemble our DC power systems at our facilities located in Gardena, California. Any prolonged disruption in the
operations of our manufacturing and assembly facilities, whether due to the COVID-19 pandemic, equipment or information technology
infrastructure failure, labor difficulties, destruction of or damage to this facility as a result of an earthquake, fire, flood,
other catastrophes, and other operational problems would result in a decline in our sales and profitability. In the event of a
business interruption at our facilities, we may be unable to shift manufacturing and assembly capabilities to alternate locations,
accept materials from suppliers or meet customer shipment needs, among other severe consequences. Such an event could have a material
and adverse impact on our financial condition and results of our operations.
Our
business operations are subject to substantial government regulation.
Our
business operations are subject to certain federal, state, local and foreign laws and regulations. For example, our products,
services and technologies are subject to regulations relating to building codes, public safety, electrical connections, security
protocols, and local and state licensing requirements. The regulations to which we are subject may change, additional regulations
may be imposed, or existing regulations may be applied in a manner that creates special requirements for the implementation and
operation of our products or services that may significantly impact or even eliminate some of our revenues or markets. In addition,
we may incur material costs or liabilities in complying with any such regulations. Furthermore, some of our customers must comply
with numerous laws and regulations, which may affect their willingness and ability to purchase our products, services and technologies.
Additionally,
we are subject to laws, regulations and other governmental actions instituted in response to the COVID-19 pandemic.
The
modification of existing laws and regulations or interpretations thereof or the adoption of future laws and regulations could
adversely affect our business, cause us to modify or alter our methods of operations and increase our costs and the price of our
products, services and technology. In addition, we cannot provide any assurance that we will be able, for financial or other reasons,
to comply with all applicable laws and regulations. If we fail to comply with these laws and regulations, we could become subject
to substantial penalties or restrictions that could materially and adversely affect our business.
Certain
of our products are used in critical communications networks which may subject us to significant liability claims.
Because
certain of our products for customers in the telecommunications industry are used in critical communications networks, we may
be subject to significant liability claims if our products do not work properly. We warrant to our current customers that our
products will operate in accordance with our product specifications. If our products fail to conform to these specifications,
our customers could require us to remedy the failure or could assert claims for damages. The provisions in our agreements with
customers that are intended to limit our exposure to liability claims may not preclude all potential claims. In addition, any
insurance policies we have may not adequately limit our exposure with respect to such claims. Liability claims could require us
to spend significant time and money in litigation or to pay significant damages. Any such claims, whether or not successful, would
be costly and time-consuming to defend, and could divert management’s attention and seriously damage our reputation and
our business.
We
could be adversely affected by our failure to comply with the laws applicable to our foreign activities, including the U.S. Foreign
Corrupt Practices Act and other similar worldwide anti-bribery laws.
The
U.S. Foreign Corrupt Practices Act, or the FCPA, and similar anti-bribery laws in other jurisdictions prohibit U.S.-based companies
and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business.
We may pursue opportunities in certain parts of the world that experience government corruption, and in certain circumstances,
compliance with anti-bribery laws may conflict with local customs and practices. Our policies mandate compliance with all applicable
anti-bribery laws. Further, we require our partners, subcontractors, agents and others who work for us or on our behalf to comply
with the FCPA and other anti-bribery laws. Although we have policies and procedures, and have conducted training, designed to
ensure that we, our employees, our agents and others who work with us in foreign countries comply with the FCPA and other anti-bribery
laws, there is no assurance that such policies, procedures or training will protect us against liability under the FCPA or other
laws for actions taken by our agents, employees and intermediaries. If we are found to be liable for FCPA violations (either due
to our own acts or inadvertence, or due to the acts or inadvertence of others), we could suffer from severe criminal or civil
penalties or other sanctions, which could have a material adverse effect on our reputation, business, results of operations or
cash flows. In addition, detecting, investigating and resolving actual or alleged FCPA violations is expensive and could consume
significant time and attention of our senior management.
We
are exposed to risks related to our international sales, and the failure to manage these risks could harm our business. If we
fail to expand our business into international markets, our revenues and results of operations may be adversely affected.
In
addition to our sales to customers within the U.S., we may become increasingly dependent on sales to customers outside the U.S.
as we pursue expanding our business with current and potential customers worldwide. In 2017, we established full-time sales executives
and support staff in: Australia, Dubai, Singapore, Romania, Poland, Africa and the Dominican Republic. During the three and six
months ended June 30, 2020, and 2019, our sales to international customers accounted for 7% and 3%, and 7% and 3%, respectively,
of total revenue. We expect that international sales will increase over time and that a significant portion of our future international
sales will be from less developed or developing countries. As a result, the occurrence of any international, political, economic,
or geographic event could result in a significant decline in revenue. There are significant risks associated with conducting operations
internationally, requiring significant financial commitments to support such operations. These operations present a number of
challenges including oversight of daily operating practices in each location, handling employee benefits and employee behavior.
In addition, compliance with complex foreign and U.S. laws and regulations that apply to our international operations increases
our cost of doing business in international jurisdictions. These numerous and sometimes conflicting laws and regulations include
internal control and disclosure rules, data privacy and filtering requirements, anti-corruption laws, such as the FCPA, and other
local laws prohibiting corrupt payments to governmental officials, and anti-competition regulations, among others. Violations
of these laws and regulations could result in fines and penalties, criminal sanctions against us, our officers, or our employees,
prohibitions on the conduct of our business and on our ability to offer our products and services in one or more countries, and
could also materially affect our brand, our international expansion efforts, our ability to attract and retain employees, our
business, and our operating results. Although we have implemented policies and procedures designed to ensure compliance with these
laws and regulations, there can be no assurance that our employees, contractors, or agents will not violate our policies.
Some
of the risks and challenges of doing business internationally include:
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the
impact of the COVID-19 pandemic on the global markets and the power generation market with the international telecommunications
markets;
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requirements
or preferences for domestic products or solutions, which could reduce demand for our products;
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unexpected
changes in regulatory requirements;
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imposition
of tariffs and other barriers and restrictions;
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restrictions
on the import or export of critical technology;
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management
communication and integration problems resulting from cultural and geographic dispersion;
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the
burden of complying with a variety of laws and regulations in various countries;
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difficulties
in enforcing contracts;
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the
uncertainty of protection for intellectual property rights in some countries;
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application
of the income tax laws and regulations of multiple jurisdictions, including relatively low-rate and relatively high-rate jurisdictions,
to our sales and other transactions, which results in additional complexity and uncertainty;
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tariffs
and trade barriers, export regulations and other regulatory and contractual limitations on our ability to sell products;
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greater
risk of a failure of foreign employees to comply with both U.S. and foreign laws, including export and antitrust regulations,
the FCPA and any trade regulations ensuring fair trade practices;
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heightened
risk of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that
may impact financial results and result in restatements of, or irregularities in, financial statements;
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potentially
adverse tax consequences, including multiple and possibly overlapping tax structures;
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general
economic and geopolitical conditions, including war and acts of terrorism;
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lack
of the availability of qualified third-party financing; and
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currency
exchange controls.
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While
these factors and the impacts of these factors are difficult to predict, any one or more of them could adversely affect our business,
financial condition and results of operations in the future.
Failures
or security breaches of our networks or information technology systems could have an adverse effect on our business.
We
rely heavily on information technology, or IT, both in our products and services for customers and in our IT systems. Further,
we collect and store sensitive information in our data centers and on our networks. Government agencies and security experts have
warned about growing risks of hackers, cyber-criminals, malicious insiders and other actors targeting confidential information
and all types of IT systems. These actors may engage in fraudulent activities, theft of confidential or proprietary information
and sabotage.
Our
IT systems and our confidential information may be vulnerable to damage or intrusion from a variety of attacks including computer
viruses, worms or other malicious software programs. These attacks pose a risk to the security of the products, systems and networks
of our customers, suppliers and third-party service providers, as well to the confidentiality of our information and the integrity
and availability of our data. While we attempt to mitigate these risks through controls, due diligence, training, surveillance
and other measures, we remain vulnerable to information security threats.
Despite
the precautions we take, an intrusion or infection of our systems could result in the disruption of our business, loss of proprietary
or confidential information, or injuries to people or property. Similarly, an attack on our IT systems could result in theft or
disclosure of trade secrets or other intellectual property or a breach of confidential customer or employee information. Any such
events could have an adverse impact on sales, harm our reputation and cause us to incur legal liability and increased costs to
address such events and related security concerns. As the threats evolve and become more potent, we may incur additional costs
to secure the products that we sell, as well as our data and infrastructure of networks and devices.
Risks
Related to Our Intellectual Property
If
we fail to adequately protect our intellectual property rights, we could lose important proprietary technology, which could materially
and adversely affect our business.
Our
success and ability to compete depends, in substantial part, upon our ability to develop and protect our proprietary technology
and intellectual property rights to distinguish our products, services and technology from those of our competitors. The unauthorized
use of our intellectual property rights and proprietary technology by others could materially harm our business.
Historically,
we have relied primarily on a combination of trademark, copyright and trade secret laws, along with non-competition and confidentiality
agreements, contractual provisions, licensing arrangements and proprietary software and manufacturing processes, to establish
and protect our intellectual property rights. Although we hold several unregistered copyrights in our business, we believe that
the success of our business depends more upon our proprietary technology, information, processes and know-how than on patents
or trademark registrations. In addition, much of our proprietary information and technology may not be patentable; if we decided
to apply for patents and/or trademarks in the future, we might not be successful in obtaining any such future patents or in registering
any marks.
Despite
our efforts to protect our intellectual property rights, existing laws afford only limited protection, and our actions may be
inadequate to protect our rights or to prevent others from claiming violations of their proprietary rights. Unauthorized third
parties may attempt to copy, reverse engineer or otherwise obtain, use or exploit aspects of our products and services, develop
similar technology independently, or otherwise obtain and use information that we regard as proprietary. We cannot assure you
that our competitors will not independently develop technology similar or superior to our technology or design around our intellectual
property. In addition, the laws of some foreign countries may not protect our proprietary rights as fully or in the same manner
as the laws of the U.S.
We
may need to resort to litigation to enforce our intellectual property rights, to protect our trade secrets, and to determine the
validity and scope of other companies’ proprietary rights in the future. However, litigation could result in significant
costs and in the diversion of management and financial resources. We cannot assure you that any such litigation will be successful
or that we will prevail over counterclaims against us. Our failure to protect any of our important intellectual property rights
or any litigation that we resort to in order to enforce those rights could materially and adversely affect our business.
If
we face claims of intellectual property infringement by third parties, we could encounter expensive litigation, be liable for
significant damages or incur restrictions on our ability to sell our products and services.
Although
we are not aware of any present infringement of our products, services or technology on the intellectual property rights of others,
we cannot be certain that our products, services and technologies do not or in the future will not infringe on the valid intellectual
property rights held by third parties. In addition, we cannot assure you that third parties will not claim that we have infringed
their intellectual property rights.
In
recent years, there has been a significant amount of litigation in the U.S. involving patents and other intellectual property
rights. In the future, we may be a party to litigation as a result of an alleged infringement of others’ intellectual property.
Successful infringement claims against us could result in substantial monetary liability, require us to enter into royalty or
licensing arrangements, or otherwise materially disrupt the conduct of our business. In addition, even if we prevail on these
claims, this litigation could be time-consuming and expensive to defend or settle and could result in the diversion of our time
and attention and of operational resources, which could materially and adversely affect our business. Any potential intellectual
property litigation also could force us to do one or more of the following:
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stop
selling, incorporating or using our products and services that use the infringed intellectual property;
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obtain
from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which license
may not be available on commercially reasonable terms, or at all; or
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redesign
the products and services that use the technology.
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If
we are forced to take any of these actions, our business may be seriously harmed. Although we carry general liability insurance,
our insurance may not cover potential claims of this type or may not be adequate to indemnify us for all liability that may be
imposed.
Risks
Related to Our Common Stock
Our
operating results can fluctuate significantly from period to period, which makes our operating results difficult to predict and
can cause our operating results in any particular period to be less than comparable periods and expectations from time to time.
Our
operating results have fluctuated significantly from quarter-to-quarter, period-to-period and year-to-year during our operating
history and are likely to continue to fluctuate in the future due to a variety of factors, many of which are outside of our control.
Certain factors that may affect our operating results include, without limitation, those set forth under “Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” in this Quarterly
Report on Form 10-Q.
Because
we have little or no control over many of these factors, our operating results are difficult to predict. Any adverse change in
any of these factors could negatively affect our business and results of operations.
Our
revenues, net income and other operating results are heavily dependent upon the size and timing of customer orders and projects,
and the timing of the completion of those projects. The timing of our receipt of large individual orders, and of project completion,
is difficult for us to predict. Because our operating expenses are based on anticipated revenues over the mid- and long-term and
because a high percentage of our operating expenses are relatively fixed, a shortfall or delay in recognizing revenues can cause
our operating results to vary significantly from quarter-to-quarter and can result in significant operating losses or declines
in profit margins in any particular quarter. If our revenues fall below our expectations in any particular quarter, we may not
be able, or it may not be prudent for us, to reduce our expenses rapidly in response to the revenue shortfall, which can result
in us suffering significant operating losses or declines in profit margins in that quarter.
Due
to these factors and the other risks discussed in this Quarterly Report on Form 10-Q, you should not rely on quarter-to-quarter,
period-to-period or year-to-year comparisons of our results of operations as an indication of our future performance. Quarterly,
period and annual comparisons of our operating results are not necessarily meaningful or indicative of future performance. As
a result, it is likely that, from time to time, our results of operations or our revenue backlog could fall below historical levels
or the expectations of public market analysts and investors, which could cause the trading price of our common stock to decline
significantly.
Our
Chairman, President and Chief Executive Officer owns a significant percentage of our common stock and will exercise significant
influence over matters requiring stockholder approval, regardless of the wishes of other stockholders.
Our
Chairman, President, Chief Executive Officer and Secretary, Arthur D. Sams, beneficially owns approximately 49% of our outstanding
shares of common stock. Mr. Sams therefore has significant influence over management and significant control over matters requiring
stockholder approval, including the annual election of directors and significant corporate transactions, such as a merger or other
sale of our company or our assets, for the foreseeable future. This concentrated control will limit stockholders’ ability
to influence corporate matters and, as a result, we may take actions that our stockholders do not view as beneficial. As a result,
the market price of our common stock could be adversely affected.
The
price of our shares of common stock is volatile, and you could lose all or part of your investment.
The
trading price of our shares of common stock is volatile and could be subject to wide fluctuations in response to various factors,
some of which are beyond our control, including limited trading volume. In addition to the factors discussed in the “Risk
Factors” section and elsewhere in this Quarterly Report on Form 10-Q, these factors include, without limitation:
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competition
from existing technologies and products or new technologies and products that may emerge;
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the
loss of significant customers, including AT&T and Verizon Wireless;
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actual
or anticipated variations in our quarterly operating results;
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failure
to meet the estimates and projections of the investment community or that we may otherwise provide to the public;
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our
cash position;
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announcement
or expectation of additional financing efforts;
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issuances
of debt or equity securities;
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our
inability to successfully enter new markets or develop additional products;
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actual
or anticipated fluctuations in our competitors’ operating results or changes in their respective growth rates;
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sales
of our shares of common stock by us, or our stockholders in the future;
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trading
volume of our shares of common stock on the Nasdaq Capital Market;
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market
conditions in our industry;
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overall
performance of the equity markets and general political and economic conditions;
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introduction
of new products or services by us or our competitors;
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additions
or departures of key management, engineering or other personnel;
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publication
of research reports about us or our industry or positive or negative recommendations or withdrawal of research coverage by
securities or industry analysts;
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changes
in the market valuation of similar companies;
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disputes
or other developments related to intellectual property and other proprietary rights;
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changes
in accounting practices;
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significant
lawsuits, including stockholder litigation; and
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other
events or factors, many of which are beyond our control.
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Furthermore,
the public equity markets have experienced extreme price and volume fluctuations that have affected and continue to affect the
market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the
operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political
and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact
the market price of our shares of common stock.
A
decline in the price of our common stock could affect our ability to raise further working capital, which could adversely impact
our ability to continue operations.
A
prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction
in our ability to raise capital. We may attempt to acquire a significant portion of the funds we need in order to conduct our
planned operations through the sale of equity securities; thus, a decline in the price of our common stock could be detrimental
to our liquidity and our operations because the decline may adversely affect investors’ desire to invest in our securities.
If we are unable to raise the funds we require for all of our planned operations, we may be forced to reallocate funds from other
planned uses and may suffer a significant negative effect on our business plan and operations, including our ability to develop
new products or services and continue our current operations. As a result, our business may suffer, and we may be forced to reduce
or discontinue operations. We also might not be able to meet our financial obligations if we cannot raise enough funds through
the sale of our common stock and we may be forced to reduce or discontinue operations.
Currently,
our common stock is categorized as “penny stock,” which may make it more difficult for investors to sell their shares
of common stock due to suitability requirements.
Currently,
our common stock is categorized as “penny stock.” The SEC adopted Rule 15g-9, which generally defines “penny
stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of
less than $5.00 per share, subject to certain exceptions. This designation imposes additional sales practice requirements on broker-dealers
who sell to persons other than established customers and “accredited investors”. The term “accredited investor”
refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or
annual income exceeding $200,000, or $300,000 jointly with his or her spouse. The penny stock rules require a broker-dealer buying
our securities, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure
document in a form prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny
stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value
of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson
compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given
to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that,
prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction.
These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock
that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability and/or willingness of
broker-dealers to trade our securities, either directly or on behalf of their clients, may discourage potential investor’s
from purchasing our securities, or may adversely affect the ability of our stockholders to sell their shares.
The
Financial Industry Regulatory Authority, Inc., or FINRA, has adopted sales practice requirements that historically may have limited
a stockholder’s ability to buy and sell our common stock, which could depress the price of our common stock.
In
addition to the “penny stock” rules described above, FINRA has adopted rules that require that, in recommending an
investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that
customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make
reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives, and other
information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced
securities will not be suitable for at least some customers. Thus, the FINRA requirements historically has made it more difficult
for broker-dealers to recommend that their customers buy our common stock, which could limit your ability to buy and sell our
common stock, have an adverse effect on the market for our shares, and thereby depress our price per share of common stock.
We
do not anticipate paying cash dividends, and accordingly, stockholders must rely on stock appreciation for any return on their
investment.
We
have never declared or paid cash dividends on our capital stock. We intend to retain a significant portion of our future earnings,
if any, to finance the operations, development and growth of our business. Any future determination to declare dividends will
be made at the discretion of our board of directors, subject to applicable laws, and will depend on number of factors, including
our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions and
other factors that our board of directors may deem relevant. As a result, only appreciation of the price of our common stock,
which may never occur, will provide a return to stockholders.
If
securities or industry analysts do not publish research or reports or publish inaccurate or unfavorable research or reports about
our business, our share price and trading volume could decline.
The
trading market for our shares of common stock depends, in part, on the research and reports that securities or industry analysts
publish about us or our business. We do not have any control over these analysts. If no securities or industry analysts undertake
coverage of our company, the trading price for our shares of common stock may be negatively impacted. If we obtain securities
or industry analyst coverage and if one or more of the analysts who covers us downgrades our shares of common stock, changes their
opinion of our shares or publishes inaccurate or unfavorable research about our business, our share price would likely decline.
If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our shares of common
stock could decrease and we could lose visibility in the financial markets, which could cause our share price and trading volume
to decline.
We
are not subject to the provisions of Section 203 of the Delaware General Corporation Law, which could negatively affect your investment.
We
elected in our certificate of incorporation to not be subject to the provisions of Section 203 of the Delaware General Corporation
Law, or Section 203. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business
combination” with an “interested stockholder” for a period of three years after the date of the transaction
in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A “business
combination” includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder.
An “interested stockholder” is a person who, together with affiliates and associates, owns (or, in certain cases,
within three years prior, did own) 15% or more of the corporation’s voting stock. Our decision not to be subject to Section
203 will allow, for example, Arthur D. Sams, our Chairman, President, Chief Executive Officer and Secretary (who beneficially
owns approximately 55% of our common stock) to transfer shares in excess of 15% of our voting stock to a third-party free of the
restrictions imposed by Section 203. This may make us more vulnerable to takeovers that are completed without the approval of
our board of directors and/or without giving us the ability to prohibit or delay such takeovers as effectively.
Some
provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us
by others, even if an acquisition would be beneficial to our stockholders, and may prevent attempts by our stockholders to replace
or remove our current management.
Provisions
in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third
party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders. These provisions include:
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a
requirement that special meetings of stockholders be called only by the board of directors, the president or the chief executive
officer;
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advance
notice requirements for stockholder proposals and nominations for election to our board of directors; and
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the
authority of the board of directors to issue preferred stock on terms determined by the board of directors without stockholder
approval and which preferred stock may include rights superior to the rights of the holders of common stock.
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These
anti-takeover provisions and other provisions in our certificate of incorporation and bylaws could make it more difficult for
stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by the then-current
board of directors and could also delay or impede a merger, tender offer or proxy contest involving our Company. These provisions
could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing
or cause us to take other corporate actions you desire. Any delay or prevention of a change of control transaction or changes
in our board of directors could cause the market price of our common stock to decline.
Our
certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain
types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability
to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.
Our
certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of
Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on
our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees
to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation
Law, our certificate of incorporation or our bylaws, or (iv) any action asserting a claim against us governed by the internal
affairs doctrine.
For
the avoidance of doubt, the exclusive forum provision described above does not apply to any claims arising under the Securities
Act or Exchange Act. Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any
duty or liability created by the Exchange Act or the rules and regulations thereunder, and Section 22 of the Securities Act creates
concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities
Act or the rules and regulations thereunder.
The
choice of forum provision in our certificate of incorporation may limit our stockholders’ ability to bring a claim in a
judicial forum that they find favorable for disputes with us or our directors, officers, employees or agents, which may discourage
such lawsuits against us and our directors, officers, employees and agents even though an action, if successful, might benefit
our stockholders. The applicable courts may also reach different judgments or results than would other courts, including courts
where a stockholder considering an action may be located or would otherwise choose to bring the action, and such judgments or
results may be more favorable to us than to our stockholders. With respect to the provision making the Court of Chancery the sole
and exclusive forum for certain types of actions, stockholders who do bring a claim in the Court of Chancery could face additional
litigation costs in pursuing any such claim, particularly if they do not reside in or near Delaware. Finally, if a court were
to find this provision of our bylaws inapplicable to, or unenforceable in respect of, one or more of the specified types of actions
or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could have
a material adverse effect on us.
We
are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging
growth companies will make our shares of common stock less attractive to investors.
We
are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an emerging growth
company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies
that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section
404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation
in this report, our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory
vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be
an emerging growth company until December 31, 2021, although circumstances could cause us to lose that status earlier, including
if the market value of our shares of common stock held by non-affiliates exceeds $700 million as of any March 30 before that time
or if we have total annual gross revenue of $1.0 billion or more during any fiscal year before that time, in which cases we would
no longer be an emerging growth company as of the following December 31, or if we issue more than $1.0 billion in non-convertible
debt during any three-year period before that time, in which case we would no longer be an emerging growth company immediately.
We cannot predict if investors will find our shares of common stock less attractive because we may rely on these exemptions. If
some investors find our shares of common stock less attractive as a result, there may be a less active trading market for our
shares of common stock and our share price may be more volatile.
Under
the JOBS Act, emerging growth companies also can delay adopting new or revised accounting standards until such time as those standards
apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting
standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not
emerging growth companies.
If
we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report
our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting,
which would harm our business and the trading price of our common stock.
Effective
internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate
disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls,
or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In addition, any
testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act, or any subsequent testing by our independent
registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to
be material weaknesses or that may require prospective or retroactive changes to our financial statements or identify other areas
for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our reported
financial information, which could have a negative effect on the trading price of our common stock.
We
are required to disclose changes made in our internal controls and procedures on a quarterly basis and our management is required
to assess the effectiveness of these controls annually. However, for as long as we are an “emerging growth company”
under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our
internal controls over financial reporting pursuant to Section 404. We could be an “emerging growth company” for up
to five years. An independent assessment of the effectiveness of our internal controls could detect problems that our management’s
assessment might not. Undetected material weaknesses in our internal controls could lead to financial statement restatements and
require us to incur the expense of remediation.
We
incur significant costs as a result of operating as a public company and our management expects to devote substantial time to
public company compliance programs.
As
a public company, we incur significant legal, accounting and other expenses due to our compliance with regulations and disclosure
obligations applicable to us, including compliance with the Sarbanes-Oxley Act as well as rules implemented by the SEC and Nasdaq.
The SEC and other regulators have continued to adopt new rules and regulations and make additional changes to existing regulations
that require our compliance. In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act,
was enacted. There are significant corporate governance and executive compensation related provisions in the Dodd-Frank Act that
have required the SEC to adopt additional rules and regulations in these areas. Stockholder activism, the current political environment,
and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure
obligations, which may lead to additional compliance costs and impact, in ways we cannot currently anticipate, the manner in which
we operate our business. Our management and other personnel devote a substantial amount of time to these compliance programs and
monitoring of public company reporting obligations and, as a result of the new corporate governance and executive compensation
related rules, regulations, and guidelines prompted by the Dodd-Frank Act and further regulations and disclosure obligations expected
in the future, we will likely need to devote additional time and costs to comply with such compliance programs and rules. These
rules and regulations cause us to incur significant legal and financial compliance costs and make some activities more time-consuming
and costly.
To
comply with the requirements of being a public company, we may need to undertake various activities, including implementing new
internal controls and procedures and hiring new accounting or internal audit staff. The Sarbanes-Oxley Act requires that we maintain
effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine
our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the
reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules
and forms, and that information required to be disclosed in reports under the Exchange Act, is accumulated and communicated to
our principal executive and financial officers. Our current controls and any new controls that we develop may become inadequate
and weaknesses in our internal control over financial reporting may be discovered in the future.
Any
failure to develop or maintain effective controls could adversely affect the results of periodic management evaluations and annual
independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial
reporting which we may be required to include in our periodic reports we will file with the SEC under Section 404 of the Sarbanes-Oxley
Act, harm our operating results, cause us to fail to meet our reporting obligations, or result in a restatement of our prior period
financial statements. In the event that we are not able to demonstrate compliance with the Sarbanes-Oxley Act, that our internal
control over financial reporting is perceived as inadequate or that we are unable to produce timely or accurate financial statements,
investors may lose confidence in our operating results and the price of our common stock could decline. In addition, if we are
unable to continue to meet these requirements, we may not be able to remain listed on the Nasdaq Capital Market.
We
are not currently required to comply with the SEC rules that implement Section 404 of the Sarbanes-Oxley Act, and are therefore
not yet required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose.
However, we are required to comply with certain of these rules, which require management to certify financial and other information
in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over
financial reporting commencing with our next annual report. This assessment will need to include the disclosure of any material
weaknesses in our internal control over financial reporting identified by our management or our independent registered public
accounting firm. We are just beginning the costly and challenging process of compiling the system and processing documentation
needed to comply with such requirements. We may not be able to complete our evaluation, testing and any required remediation in
a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control
over financial reporting, we will be unable to assert that our internal control over financial reporting is effective.
Raising
additional capital, including through future sales and issuances of our common stock, the exercise of warrants or the exercise
of rights to purchase common stock pursuant to our equity incentive plan could result in additional dilution of the percentage
ownership of our stockholders, could cause our share price to fall and could restrict our operations.
We
expect that significant additional capital will be needed in the future to continue our planned operations, including any potential
acquisitions, purchasing of capital equipment, hiring new personnel, and continuing activities as an operating public company.
To the extent we seek additional capital through a combination of public and private equity offerings and debt financings, our
stockholders may experience substantial dilution. To the extent that we raise additional capital through the sale of equity or
convertible debt securities, the ownership interest of our existing stockholders may be diluted, and the terms may include liquidation
or other preferences that adversely affect the rights of our stockholders. Debt and receivables financings may be coupled with
an equity component, such as warrants to purchase shares of our common stock, which could also result in dilution of our existing
stockholders’ ownership. The incurrence of indebtedness would result in increased fixed payment obligations and could also
result in certain restrictive covenants, such as limitations on our ability to incur additional debt and other operating restrictions
that could adversely impact our ability to conduct our business. A failure to obtain adequate funds may cause us to curtail certain
operational activities, including sales and marketing, in order to reduce costs and sustain the business, and would have a material
adverse effect on our business and financial condition.
Under
our 2016 Plan, we may grant equity awards covering up to 1,754,385 shares of our common stock. As of the date of this Quarterly
Report on Form 10-Q, we had granted options to purchase an aggregate of 140,000 shares of our common stock under the 2016 Plan.
We have registered 1,754,385 shares of common stock available for issuance under our 2016 Plan. Sales of shares issued upon exercise
of options or granted under our 2016 Plan may result in dilution to our existing stockholders, which could cause our share price
to fall.
Our
issuance of shares of preferred stock could adversely affect the market value of our common stock, dilute the voting power of
common stockholders and delay or prevent a change of control.
Our
board of directors has the authority to cause us to issue, without any further vote or action by the stockholders, up to 5,000,000
shares of preferred stock in one or more series, to designate the number of shares constituting any series, and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights, voting rights, rights and terms of redemption, redemption
price or prices and liquidation preferences of such series.
The
issuance of shares of preferred stock with dividend or conversion rights, liquidation preferences or other economic terms favorable
to the holders of preferred stock could adversely affect the market price for our common stock by making an investment in the
common stock less attractive. For example, investors in the common stock may not wish to purchase common stock at a price above
the conversion price of a series of convertible preferred stock because the holders of the preferred stock would effectively be
entitled to purchase common stock at the lower conversion price causing economic dilution to the holders of common stock.
Further,
the issuance of shares of preferred stock with voting rights may adversely affect the voting power of the holders of our other
classes of voting stock either by diluting the voting power of our other classes of voting stock if they vote together as a single
class, or by giving the holders of any such preferred stock the right to block an action on which they have a separate class vote
even if the action were approved by the holders of our other classes of voting stock. The issuance of shares of preferred stock
may also have the effect of delaying, deferring or preventing a change in control of our company without further action by the
stockholders, even where stockholders are offered a premium for their shares.
Claims
for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against
us and may reduce the amount of money available to us.
Our
certificate of incorporation and bylaws provide that we will indemnify our directors and officers, in each case to the fullest
extent permitted by Delaware law. In addition, as permitted by Section 145 of the Delaware General Corporation Law, our bylaws
and the indemnification agreements that we have entered into with our directors and officers provide that:
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We
will indemnify our directors and officers for serving us in those capacities or for serving other business enterprises at
our request, to the fullest extent permitted by Delaware law. Delaware law provides that a corporation may indemnify such
person if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best
interests of the registrant and, with respect to any criminal proceeding, had no reasonable cause to believe such person’s
conduct was unlawful.
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We
may, in our discretion, indemnify employees and agents in those circumstances where indemnification is permitted by applicable
law.
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We
are required to advance expenses, as incurred, to our directors and officers in connection with defending a proceeding, except
that such directors or officers shall undertake to repay such advances if it is ultimately determined that such person is
not entitled to indemnification.
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We
will not be obligated pursuant to our bylaws to indemnify a person with respect to proceedings initiated by that person against
us or our other indemnitees, except with respect to proceedings authorized by our board of directors or brought to enforce
a right to indemnification.
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The
rights conferred in our bylaws are not exclusive, and we are authorized to enter into indemnification agreements with our
directors, officers, employees and agents and to obtain insurance to indemnify such persons.
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We
may not retroactively amend our bylaw provisions to reduce our indemnification obligations to directors, officers, employees
and agents.
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To
the extent that a claim for indemnification is brought by any of our directors or officers, it would reduce the amount of funds
available for use in our business.
Our
ability to attract and retain qualified members of our board of directors may be impacted due to new state laws, including recently
enacted gender quotas.
In
September 2018, California enacted SB 826 requiring public companies headquartered in California to maintain minimum female representation
on their boards of directors as follows: by the end of 2019, at least one woman on its board, by the end of 2021, public company
boards with five members will be required to have at least two female directors, and public company boards with six or more members
will be required to have at least three female directors. Failure to achieve designated minimum levels in a timely manner exposes
such companies to costly financial penalties and reputational harm. Although we currently comply with the requirements of SB 826,
we cannot assure that we can recruit, attract and/or retain qualified members of the board and meet gender quotas as a result
of the California law (should is not be repealed before the compliance deadlines), which may cause certain investors to divert
their holdings in our stock and expose us to penalties and/or reputational harm.