ITEM 1. BUSINESS
Overview
Akoustis® is an emerging commercial
company focused on developing, designing and manufacturing innovative RF filter products for the wireless industry, including
for products such as smartphones and tablets, network infrastructure equipment, WiFi Customer Premise Equipment (“CPE”)
and defense applications. Located between the device’s antenna and its digital backend, the RF front-end (“RFFE”)
is the circuitry that performs the analog signal processing and contains components such as amplifiers, filters and switches.
We have developed a new and proprietary microelectromechanical systems (“MEMS”) based bulk acoustic wave (“BAW”)
technology and unique manufacturing flow, which we have trademarked as XBAW. Our XBAWTM process incorporates optimized
high purity piezoelectric materials designed to achieve high power, high frequency and/or wide bandwidth filter performance. Filters
are critical in selecting and rejecting signals, and their performance enables differentiation in the hardware modules defining
the RFFE.
We believe owning the core resonator device
technology, manufacturing facility and intellectual property (“IP”) to produce our designs is the most direct and efficient
means of delivering our solutions to the market. Furthermore, our technology is based upon bulk-mode acoustic resonance, which
we believe is superior to surface-mode acoustic resonance for high-band applications that include 4G/LTE, 5G, WiFi, and defense
applications. Although some of our target customers utilize or make the RFFE module, they may lack access to critical ultra-high
band (UHB) filter technology needed to compete in high-frequency applications. We intend to design, manufacture, and market our
RF filter products to mobile phone original equipment manufacturers (“OEMs”), defense OEMs, network infrastructure
OEMs, and WiFi CPE OEM’s to enable broader competition among the front-end module manufacturers. We operate as a “pure-play”
RF filter supplier and align with the front-end module manufacturers who seek to acquire high performance filters to expand their
module business.
We currently build high performance RF
filter circuits, using our first generation XBAWTM wafer process, in our 120,000 square-foot wafer-manufacturing facility
located in Canandaigua, New York, which we acquired in June 2017. As of September 11, 2019, our (IP) portfolio included 24 patents,
including one blocking patent that we have licensed from Cornell University. Additionally, we have 52 active and pending patent
applications. These patents cover our XBAWTM RF filter technology from the substrate level through the system application
layer. Where possible, we leverage both federal and state level R&D grants to support development and commercialization of
our technology.
We are developing RF filters for 4G/LTE,
5G, WiFi and defense bands using our proprietary resonator device models and product design kits (PDK’s). As we qualify our
first RF filter products, we are engaging with target customers to evaluate our filter solutions. Our initial designs target UHB,
sub-7 GHz 4G/LTE, 5G, WiFi and defense bands. Since Akoustis owns its core technology and controls access to its intellectual property,
we expect to offer several ways to engage with potential customers. First, we intend to engage with multiple wireless markets,
providing standardized filters that we design and offer as standard catalog components. Second, we expect to deliver unique filters
to customer-supplied specifications, which we will design and fabricate on a customized basis. Finally, we may offer our models
and design kits for our customers to design their own filters utilizing our proprietary technology.
We have earned minimal revenue from operations since inception, and we have funded our operations primarily
with development contracts, RF filter prototype and initial production orders, government grants, MEMS foundry and engineering
services, sales of our equity securities, and issuance of debt. We have incurred losses totaling approximately $67.5 million from
inception through June 30, 2019. These losses are primarily the result of material and processing costs associated with developing
and commercializing our technology, as well as personnel costs, professional fees (primarily accounting and legal), and other general
and administrative (“G&A”) expenses. We expect to continue to incur substantial costs for commercialization of
our technology on a continuous basis because our business model involves materials and solid-state device technology development
and engineering of catalog and custom filter design solutions.
Plan of Operation
We plan to commercialize our technology
by designing and manufacturing single-band and multi-band BAW RF filter solutions in our New York wafer fabrication facility.
We expect our filter solutions will address problems (such as power loss, bandwidth, power handling, and isolation) created by
the growing number and convergence of frequency bands in the RFFE of mobile devices, infrastructure and premise equipment to support
4G/LTE, 5G, and WiFi. We have prototyped our first single-band BAW filter designs for 4G/LTE frequency bands, which are dominated
by competitive BAW solutions and historically cannot be addressed with low-band, lower power handling surface acoustic wave (“SAW”)
technology.
To succeed, we must convince mobile phone
OEMs, RFFE module manufacturers, network infrastructure OEMs, WiFi CPE OEMs and defense customers to use our XBAWTM
filter technology in their systems and modules. However, since there are two dominant BAW filter suppliers in the industry that
have high-band technology, and both utilize such technology as a competitive advantage at the module level, we expect customers
that lack access to high-band filter technology will be open to engage with our pure-play filter company.
We plan to pursue RF filter design and
R&D development agreements and potentially joint ventures with target customers and other strategic partners. These types of
arrangements may subsidize technology development costs and qualification, filter design costs, and offer complementary technology
and market intelligence and other avenues to revenue. However, we intend to retain ownership of our core technology, intellectual
property, designs, and related improvements. We expect to pursue development of catalog designs for multiple customers and to offer
such catalog products in one or more sales channels.
Recent Developments
Business Developments
In July 2018, we completed the qualification
of our high purity piezoelectric materials process and our XBAWTM manufacturing process to support an initial product
family of 4G/LTE, 5G mobile, WiFi and defense filter solutions. Now that we have stabilized our resonator process technology in
a manufacturing environment, we intend to complete a production release of our RF filter products in the frequency range from
1 to 7 GHz. The target frequency bands will be prioritized based upon customer priority. We expect this will require recruiting
and hiring additional personnel and capital investments.
We added our first 5G network infrastructure
customer for the Citizen’s Broadband Radio Service in August 2018 and announced first samples to our 5G customer in March
2019. We announced a second 5G network infrastructure customer in October 2018, and we provided initial samples of our 3.5 GHz
CBRS filter product in March 2019. In September 2018, we recorded our first XBAWTM filter revenue from our defense customer
for pre-production units and received multiple follow-on orders in addition to the original purchase order for production units.
In December 2018, we introduced the AKF-1256,
a 5.6 GHz BAW filter for the WiFi market and shipped samples to select partners for evaluation and testing. We are currently shipping
production units of the AKF-1938 to our defense customer and have shipped pre-production units of our AKF-1252 product to multiple
WiFi customers, including a new customer that signed a supply agreement with an initial order of more than 80,000 AK-1252 filters,
which were delivered in the quarter ended March 31, 2019.
In May 2019, we announced receipt of sub-6GHz
5G filter development order from tier one wireless telecommunication customer and successfully delivered our first 5G prototype
filter for mobile devices in June 2019. As we receive customer evaluations for our growing portfolio, we will do further iterations
on the designs and provide next generation samples for evaluation and characterization.
Financing Developments
On October 23, 2018, the Company completed
the offering of $10.0 million principal amount of the Company’s 6.5% Convertible Senior Notes due 2023. The notes are unsecured
and rank pari passu with the Company’s outstanding unsubordinated liabilities. As unsecured obligations, the notes effectively
rank junior in right of payment to our secured indebtedness, including our $15.0 million outstanding principal amount of convertible
senior secured notes issued in May 2018. The net proceeds of the offering after payment of offering costs were approximately $8.9
million. The notes will mature on November 30, 2023, unless earlier converted, redeemed or repurchased. Interest on the notes
accrues at the rate of 6.5% per year and is payable in cash on each February 28, May 31, August 31 and November 30, beginning
February 28, 2019. The notes are convertible into common stock at the option of the holder at any time prior to maturity at an
initial conversion price of $5.10 per share, subject to adjustment under certain circumstances.
Additionally, on October 23, 2018, the
Company sold a total of 7,250,000 shares of its common stock at a price to the public of $4.25 per share for aggregate gross proceeds
of $30.8 million, before deducting the underwriting discount and offering expenses payable by the Company of approximately $2.1
million.
Our Technology
Current RF acoustic wave filters utilize
technologies that are limited by the piezoelectric material physical properties, the resonator device structure and/or the manufacturing
process technology. Existing BAW filters use an “acoustic wave ladder” that is based on a monolithic topology approach
using lossy polycrystalline materials. By contrast, our XBAW technology uses high purity materials, which provides high performance
acoustic properties. We have fabricated resonators that demonstrate the feasibility of our approach and believe our technology
will yield a new generation of high frequency RF filter products.
XBAW technology consists of novel high
purity piezoelectric materials, which are fabricated into bulk-mode, acoustic wave resonators and RF filters. Our patented piezoelectric
materials contain high-purity Group III element nitride materials and possess a unique signature, which can be detected by conventional
material metrology tools. We utilize analytical modeling techniques to aid in the design and internal manufacturing of our materials,
whereby the raw substrate materials utilized in our XBAW process are sourced from a third party. Once our filter designs are simulated
and ready to manufacture, we supply our NY fabrication facility raw materials, a mask design file, and a unique process sequence
in order to fabricate our resonators and filters. Our wafer process flow is patented and compatible with wafer level packaging
(WLP) that allows for low profile, cost effective filters to be produced.
Challenges Facing the Mobile Device Industry
Rising consumer demand for always-on wireless
broadband connectivity is creating an unprecedented need for high performance RFFE for mobile devices. Mobile devices such as
smartphones and tablets are quickly becoming the primary means of accessing the Internet, driving the Internet of Things (IoT).
The rapid growth in mobile data traffic is testing the limits of existing wireless bandwidth. Carriers and regulators have responded
by opening new spectrums of RF frequencies, driving up the number of frequency bands in mobile devices. This substantial increase
in frequency bands has created a demand for more filters, as well as a demand for filters with higher selectivity. The global
transition to LTE and adoption of LTE-Advanced with more sophisticated carrier aggregation and multiple-input, multiple-output
(MIMO) techniques will continue to push the requirements for increased supply of high-performance filters. Furthermore, the introduction
of 5G mobile technologies and their associated frequencies over the next several years will create an even greater need for high-performance,
high-frequency filters as the bands being auctioned have primarily been in the 3-6 GHz range, well above current networks.
The new spectrum introduced by 4G/LTE
and 5G is driving spectrum licensing at higher frequencies than previous 3G smartphone models. For example, new TDD LTE frequencies
allocated for 5G wireless cover frequencies nearly twice as high as those covered in previous generation phones. As a result,
the demand for filters represents the single largest growth opportunity in the RFFE industry, according to a Mobile Experts 2018
report. For traditional “low band” frequencies, SAW filters have been the primary choice, while high band solutions
have utilized BAW filters due to their performance and yield. While there are multiple sources of supply for SAW technology, the
source of supply for BAW filters is more limited and essentially dominated by two manufacturers worldwide. See “Competition”
below.
In addition, signal loss of current generation
acoustic wave filters is excessively high, and up to half of the transmit power is wasted as heat, which ultimately constrains
battery life. Another challenge is that the allocated spectrum for mobile communication bands requires high bandwidth RF filters,
which, in turn, requires wide bandwidth core resonator technology. In addition, filters with inferior selectivity either reduce
the available operating bands the mobile device can support or increase the noise in the operating bands. Each of these problems
negatively impacts the end-user’s experience when using the mobile device.
The RFFE must meet growing data demands
while reducing cost and improving battery life. Our solution involves a new approach to RFFE component manufacturing, enabled
by XBAW technology. We expect our technology to produce filters that will reduce the overall system cost and improve performance
of the RFFE.
Our Solutions
Our immediate focus is on the commercialization
of wide bandwidth RF filters operating in the high frequency spectrum known as the sub 6 GHz bands. Using our XBAW technology,
we believe these filters enable new PAD module or RFFE competition for high band modules as well as performance-driven low band
applications. Initially, we expect to target select strategic RFFE market leaders as well as tier two mobile phone (“OEMs”)
and/or RFFE module suppliers. Longer term, our focus will be to expand our market share by engaging with additional mobile phone
OEMs and RFFE module manufacturers. We manufacture our wafer technology in our Canandaigua, NY fabrication facility where we continue
to focus on the commercialization of our filters using our XBAW technology We plan to develop a series of filter designs to be
used in the manufacturing of discrete filters, duplexers or more complex multiplexers targeting the 4G/LTE, 5G, WiFi and defense
frequency bands. We believe our filter designs will create an alternative for, and replace, filters currently manufactured using
materials with fundamentally inferior performance. Figure 1 below illustrates characterization plots that represent the high power,
high bandwidth and high frequency capability of our essential single crystal materials.
Figure
1-Characteristics of our essentially single crystal materials used to fabricate our BAW RF filters .
Single-Band Discrete Designs, Duplexers and Multiplexers
SAW filters have been preferred in modern
RFFE because of their high performance, small size and low cost. However, traditional SAW ladder designs do not perform well in
high frequency bands or bands with closely spaced receive and transmit channels, typical of many new bands. Therefore, BAW filters
are needed for these bands. We have demonstrated in our Canandaigua, NY wafer fabrication facility an ability to fabricate BAW
resonators, the building block of BAW filters, that offer high frequency, wide bandwidth and high power performance. Furthermore,
we believe the improved efficiency provided by BAW filters will reduce the total cost of RFFE, offer efficient use of shared frequency
spectrum as well as reduce the battery demand of mobile devices. Additionally, we believe that our XBAW technology will allow for
a single manufacturing method that will support all of the BAW filter band range and a significant portion of the SAW band range.
Figure 2 below illustrates what we believe will be the frequency range of our XBAW technology.
Figure
2- The potential range of our technology
Pure-Play Filter Provider Enables New Module Competition
Given the high sound velocity
in our piezoelectric materials, our technology allows for a wide range of frequency coverage, and we plan to supply filters that
will support 4G/LTE, 5G, WiFi and defense bands. We have successfully demonstrated resonators that will support the design and
fabrication of 4G/LTE filters, WiFi filters and defense filters, with frequencies adjacent to the emerging 5G mobile auctions.
We completed the development required to transition our XBAW technology to high volume manufacturing in June 2018. We aim to be
a pure-play filter supplier that will address the increasing RF complexity placed on RFFE manufacturers supporting 4G/LTE 5G,and
WiFi. Figure 3 illustrates historical and projected growth in RF complexity.
Figure 3- Increase in Filter content in Mobile Phone Front
End Modules (FEMs) from 2016 - 2021 (Source: Mobile Experts 2016)
Commercialization
Our immediate focus is on the
commercialization of wide bandwidth RF filters to address the WiFi, Infrastructure and defense bands with innovative single-band
designs using our XBAW sub 6 GHz RF filter technology. We are currently developing commercial single-band filters through our
wafer fabrication facility. We are focused on developing fixed-band filters because we believe these designs present the greatest
near-term potential for commercialization of our technology, and that once demonstrated, the facility can be more efficiently
readied for production compared to alternative technologies.
Our technology development process consists
of the following five phases:
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1.
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Pre-Alpha – Demonstrate basic feasibility/capabilities
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2.
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Alpha – Develop stable recipe (Process
freeze) with limited production development
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3.
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Beta – Complete technology qualification
(Process qualification) in factory to enable product design
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4.
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Pre-Production – Demonstrate lead product
production capabilities, release final design tools
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5.
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Production – Continual improvement of
process and parametric performance
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In March 2018, we announced the completion
of the alpha-phase for our first generation XBAW process technology called XB1. In July 2018 we announced the completion of the
beta-phase for both the XB1 and our materials process. This shortens the development cycle time for new catalog and custom components
as each new product will start in the pre-production phase and will not require end-to-end qualification.
Research and Development
Since
inception, the Company’s focus has been on developing an innovative mobile-wireless filter technology with a compelling
value proposition to our potential customers and a significant and noticeable impact to the end user. Whereas today’s polycrystalline
material (used to manufacture RF resonators and filters) is sputtered on a metal-coated carrier,
our patented XBAW technology employs high purity piezoelectric films in our resonators, which are used as the enabler to create
high performance BAW RF filters. Our high purity piezoelectric materials are a key differentiator when compared to the incumbent
amorphous thin-film technologies because it increases the acoustic velocity, the electromechanical coupling coefficient in the
resonator and/or high-power performance. These technology features allow Akoustis to engineer RF filter solutions for a broad
spectrum for multiple radio frequencies and thus multiple end markets. Research and development expense totaled $19.3 million
for the year ended June 30, 2019 and $13.3 million for the year ended June 30, 2018. These R&D activities focused on high
purity piezoelectric materials development and resonator demonstration. Current R&D investments include materials advancement,
resonator development, RF filter design and high yield wafer manufacturing.
As a result of our efforts, we have developed
and introduced several new filters which are currently sampling with multiple customers across multiple markets. Our focus remains
on improving the electromechanical coupling and quality factor of our resonator technology and the performance of our fabricated
filters through design improvements and process optimization experiments.
We announced our first filter in March
2018, the AKF-1252, a 5.2 GHz filter for the WiFi premise equipment market. The AKF-1252 is a wideband filter for the U-NII-1&2A
bands with typical insertion loss of less than 1dB, high rejection and a high-power rating in an ultra- small footprint module.
Offering our customers 23-times size reduction over current dielectric resonator technology, our product is the first BAW RF filter
targeting the 5.2 GHz WiFi band and achieved pre-production status in November 2018. In addition, we have announced the sister
part to the AKF-1252, called the AKF-1256, which allows the Company to bundle the 5.2 GHz and 5.6 GHz filter solutions to the CPE
market. The Company received its first pre-production order in May 2019. The tandem 5.2 GHz and 5.6 GHz filter solutions allow
coexistence of WiFi signals in the 5GHz spectrum as shown below.
Following the AKF-1252, we also announced
the AKF-1652, a 5.2 GHz filter for the WiFi device market, with lower insertion loss. We are currently working on the development
of a small footprint, wafer-level package (WLP) that will be required before the expected uptake of 5.2 GHz WiFi in cellular handsets
and other devices. We believe that handset makers are still several years away from including tri-band WiFi in smartphones, tablets
and other mobile devices, and expect to complete the packaging development ahead of the market.
In April 2018 we announced the AKF-1938
filter in the 3.8 GHz band, adjacent to emerging 5G mobile frequency auctions. In July 2018, we announced that we signed our first
customer, a large military OEM with annual revenue of over $1 billion. We received revenue from this product in the second quarter
of fiscal 2019, with follow-on new orders received in calendar 2019.
We
have also announced a 4G LTE infrastructure win for two adjacent filters, with engineering revenue attached and follow
on production filter revenue expected upon completion of the design. Moving forward, we expect to deliver new catalog components
based on the frequencies in highest demand from our customers and will announce additional products as we continue to benefit
from our research and development efforts.
Raw Materials
Within
its internal manufacturing operation, Akoustis sources raw materials, process gases, metals and other miscellaneous supplies to
fabricate its BAW RF filter circuits. Materials range from substrates (used to deposit key piezoelectric materials) to standard
dielectric-based laminates (used for packaging of the RF filter circuits). The Company
sources at least two types of substrate materials for its BAW process and we have more than one supplier for one material and
a single source for the other. Multiple process gases are used for material synthesis, process etching and wafer treatment. While
there is more than one supplier for most process gases, the purity levels of such gases may change by source. Hence, either purification
or process requalification may be required, as purchasing from a second source is required. Akoustis sources various high purity
metals for electrode formation and interconnect layers for its RF circuits. Such metals are available in various purity levels
and are available from more than one supplier. Other process handling hardware common to the semiconductor industry is available
in abundance from multiple suppliers. Consistent with other semiconductor manufacturers, the Company may have to work with all
its suppliers to ensure adequate supply of raw materials, process gases and metals as the Company ramps from R&D into high
volume manufacturing.
Intellectual Property
We rely on a combination of intellectual
property rights, including patents and trade secrets, along with copyrights, trademarks and contractual obligations and restrictions
to protect our core technology and business.
In the United States and internationally,
as of September 11, 2019, our IP portfolio included 24 patents, including one blocking patent that we have licensed from Cornell
University. Additionally, we have 52 active and pending patent applications. These patents cover our XBAWTM RF filter
technology from the substrate level through the system application layer. Where possible, we leverage both federal and state level
R&D grants to support development and commercialization of our technology. Our patents expire between 2031 and 2037.
We intend to continue to innovate and expand our patent portfolio, and when appropriate, we will look to purchase license(s) that
grant access to additional intellectual property that enables, enhances or further expands our technical capabilities and/or product.
We believe that Akoustis will have competitive
advantages from rights granted under our patent applications. Some applications, however, may not result in the issuance of any
patents. In addition, any future patent may be opposed, contested, circumvented or designed around by a third party or found to
be unenforceable or invalidated. Others may develop technologies that are similar or superior to our proprietary technologies,
duplicate our proprietary technologies or design around patents owned or licensed by us.
We generally control access to, and use
of, our confidential information through the use of internal and external controls, including contractual protections with employees,
contractors and customers. We rely in part on the United States and international copyright laws to protect our intellectual property.
All employees and consultants are required to execute confidentiality and intellectual property assignment agreements in connection
with their employment and consulting relationships with us. We also require them to agree to disclose and assign to us all inventions
conceived or made in connection with the employment or consulting relationship.
Competition
The RF filter market is controlled by
a relatively small number of RF component suppliers. These companies include, among others, Broadcom Corporation, Murata Manufacturing
Co., Ltd., Qorvo, Inc., Skyworks Solutions Inc., Taiyo Yuden Co. Ltd., and Qualcomm Incorporated. Broadcom Corporation and Qorvo,
Inc. dominate the high band BAW filter market, controlling a significant portion of the customer base and are increasing capacity
to meet the growing RF filter demand of the 4G/LTE market.
Upon completion of our product development,
we will compete directly with these companies to secure design slots inside RFFE module targeting companies that procure filters
or internally source filters. While many of our competitors have more resources than we have, we believe that our filter designs
will be superior in performance, and we will approach prospective customers as a pure-play filter supplier, offering advantages
in performance over the full frequency range at competitive costs. Our challenges will include convincing our customers that we
have a strong intellectual property position, that we will be able to deliver in volume, that we will meet their price targets,
and that we can satisfy reliability and other requirements. For a list of other competitive factors, see “Item 1A. Risk
Factors - We are still developing many of our products, and they may not be accepted in the market.”
Employees
We place an emphasis on hiring the best
talent at the right time to enable our core technology and business growth. This includes establishing a competitive compensation
and benefits package, thereby enhancing our ability to recruit experienced personnel and key technologists. As of June 30, 2019,
we had a total of 82 full-time employees plus 8 part-time employees. We will continue to hire specific and targeted positions
to further enable our technology and manufacturing capabilities as and when appropriate.
Government Regulations
Our business and products in development
are subject to regulation by various federal and state governmental agencies, including the radio frequency emission regulatory
activities of the Federal Communications Commission (the “FCC”), the consumer protection laws of the Federal Trade
Commission (the “FTC”), the import/export regulatory activities of the Department of Commerce, the product safety
regulatory activities of the Consumer Products Safety Commission, and the environmental regulatory activities of the Environmental
Protection Agency (the “EPA”).
The rules and regulations of the FCC limit
the RF used by, and level of power emitting from, electronic equipment. Our RF filters, as a key element enabling consumer electronic
smartphone equipment, are required to comply with these FCC rules and may require certification, verification or registration
of our RF filters with the FCC. Certification and verification of new equipment requires testing to ensure the equipment’s
compliance with the FCC’s rules. The equipment must be labeled according to the FCC’s rules to show compliance with
these rules. Testing, processing of the FCC’s equipment certificate or FCC registration and labeling may increase development
and production costs and could delay the implementation of our XBAW acoustic wave resonator technology for our RF filters and
the launch and commercial productions of our filters into the U.S. market. Electronic equipment permitted or authorized to be
used by us through FCC certification or verification procedures must not cause harmful interference to licensed FCC users, and
may be subject to RF interference from licensed FCC users. Selling, leasing or importing non-compliant equipment is considered
a violation of FCC rules and federal law, and violators may be subject to an enforcement action by the FCC. Any failure to comply
with the applicable rules and regulations of the FCC could have an adverse effect on our business, operating results and financial
condition by increasing our compliance costs and/or limiting our sales in the United States.
The semiconductor and electronics industries
also have been subject to increasing environmental regulations. A number of domestic and foreign jurisdictions seek to restrict
the use of various substances, a number of which have been used in our products in development or processes. While we have implemented
a compliance program to ensure our product offering meets these regulations, there may be instances where alternative substances
will not be available or commercially feasible, or may only be available from a single source, or may be significantly more expensive
than their restricted counterparts. Additionally, if we were found to be non-compliant with any such rule or regulation, we could
be subject to fines, penalties and/or restrictions imposed by government agencies that could adversely affect our operating results.
Our cost to maintain compliance with existing environmental regulations is expected to be nominal based on our structure in which
we outsource a majority of our operations to suppliers that are responsible for meeting environmental regulations. We will continue
to monitor our quality program and expand as required to maintain compliance and ability to audit our supply chain.
Noncompliance with applicable regulations
or requirements could subject us to investigations, sanctions, mandatory product recalls, enforcement actions, disgorgement of
profits, fines, damages, civil and criminal penalties, or injunctions. An adverse outcome in any such litigation could require
us to pay contractual damages, compensatory damages, punitive damages, attorneys’ fees and costs. These enforcement actions
could harm our business, financial condition and results of operations. If any governmental sanctions are imposed, or if we do
not prevail in any possible civil or criminal litigation, our business, financial condition and results of operations could be
materially adversely affected. In addition, responding to any action will likely result in a significant diversion of management’s
attention and resources and an increase in professional fees.
ITEM 1A. RISK FACTORS
This section is a summary of the risks
that we presently believe are material to the operations of the Company. Additional risks of which we are not presently aware
or which we presently deem immaterial may also impair the Company’s business, financial condition or results of operations.
Risks Related to our Business and the
Industry in which we Operate
We have a limited operating history
upon which investors can evaluate our business and future prospects.
We are an emerging commercial company
that recently began commercial operations selling advanced single-crystal BAW filter products for RFFEs for use in the mobile
wireless device industry. Historically, we have primarily focused on R&D of high efficiency acoustic wave resonator technology
utilizing single-crystal piezoelectric materials, and have earned minimal revenue from operations since inception.
Since our expectations of potential customers
and future demand for our products are based on only limited experience, it is difficult for our management and our investors
to accurately forecast and evaluate our future prospects and our revenues. Our proposed progression of our operations are therefore
subject to all of the risks inherent in light of the expenses, difficulties, complications and delays frequently encountered in
connection with the growth of any new business and the development of a product, as well as those risks that are specific to our
business in particular. The risks include, but are not limited to, our reliance on third parties to complete some processes for
the manufacturing of our products, the possibility that we will not be able to develop functional and scalable products, or that
although functional and scalable, our products and/or services will not be accepted in the market. To successfully introduce and
market our products at a profit, we must establish brand name recognition and competitive advantages for our products. There are
no assurances that the Company can successfully address these challenges. If it is unsuccessful, the Company and its business,
financial condition and operating results will be materially and adversely affected.
We may not generate sufficient revenues
to achieve profitability.
We have incurred operating losses since
our inception and expect to continue to have negative cash flow from operations. We have only generated minimal revenues from
shipment of product while our primary sources of funds have been R&D grants, MEMS foundry services, issuances of our equity,
and debt. We have experienced net losses of approximately $67.5 million for the period from May 12, 2014 (inception) to June 30,
2019. Our future profitability will depend on our ability to create a sustainable business model and generate sufficient revenues,
which is subject to a number of factors, including our ability to successfully implement our strategies and execute our R&D
plan, our ability to implement our improved design and cost reductions into manufacturing of our RF filters, the availability
of funding, market acceptance of our products, consumer demand for end products incorporating our products, our ability to compete
effectively in a crowded field, our ability to respond effectively to technological advances by timely introducing our new technologies
and products, and global economic and political conditions.
Our future profitability also depends
on our expense levels, which are influenced by a number of factors, including the resources we devote to developing and supporting
our projects and potential products, the continued progress of our research and development of potential products, our ability
to improve R&D efficiencies, license fees or royalties we may be required to pay, and the potential need to acquire licenses
to new technology, the availability of intellectual property for licensing or acquisition, or the use of our technology in new
markets, which could require us to pay unanticipated license fees and royalties in connection with these licenses.
Our development and commercialization
efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenues to offset higher
expenses. These expenses, among other things, may cause our net income and working capital to decrease. If we fail to generate
sufficient revenue and manage our expenses, we may never achieve profitability, which would adversely and materially affect our
ability to provide a return to our investors.
We have identified material weaknesses in our internal
control over financial reporting. If we are not able to remediate these material weaknesses appropriately and timely, or if we
are unable to implement and maintain effective internal control over financial reporting in the future, this could result in losses
from errors, harm our reputation or cause investors to lose confidence in the reported financial information, all or any of which
could have a material adverse effect on our results of operations and financial condition, which, in turn, could adversely affect
the market price of our Common Stock, our access to debt or other capital markets or other aspects of our business, prospects,
results of operations or financial condition.
As a public company, we are required to maintain internal
control over financial reporting and to report any material weaknesses in such internal control. A material weakness is a deficiency,
or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that
a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely
basis. Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) requires that we evaluate and determine the
effectiveness of our internal control over financial reporting and provide a management report on internal control over financial
reporting. In addition, as we are no longer an emerging growth company, Sarbanes-Oxley requires that our management report on internal
control over financial reporting be attested to by our independent registered public accounting firm.
As discussed further in Item 9A, “Controls and Procedures,” we
have identified certain material weaknesses in our internal control over financial reporting relating to (i) controls over
the operating effectiveness of information technology general controls relevant to the preparation of our financial statements
and (ii) management review controls designed to address risks associated with complex accounting matters that arise from significant
non-routine transactions. We describe the specific issues leading to these conclusions in Item 9A, “Controls and Procedures—Management’s
Annual Report on Internal Control over Financial Reporting.” We expect to remediate these material weaknesses in fiscal 2020.
The actions we are taking to remediate the material weaknesses,
however, may be insufficient and we may in the future discover other areas of our internal controls that need improvement. If we
have material weakness in our internal control over financial reporting, we may not detect errors on a timely basis and our financial
statements may be materially misstated. Additionally, if we are unable to assert that our internal control over financial reporting
is effective or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of
our internal control over financial reporting, we may not be able to access debt markets, equity investors may lose confidence
in the accuracy and completeness of our financial reports and the market price of our Common Stock could be adversely affected,
and we could become subject to investigations by Nasdaq, the SEC or other regulatory authorities, which could require additional
financial and management resources.
The industry and the markets in
which the Company operates are highly competitive and subject to rapid technological change. Therefore, in order for our RF filters
to be competitive and achieve market acceptance, we need to keep pace with rapid development of new process technologies.
The markets in which we compete are intensely
competitive. We operate primarily in the industry that designs and produces semiconductor components for wireless communications
and other wireless devices, which is subject to rapid changes in both product and process technologies based on demand and evolving
industry standards. The markets for our products are characterized by:
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rapid technological
developments and product evolution,
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rapid changes in
customer requirements,
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frequent new product
introductions and enhancements,
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continuous demand
for higher levels of integration, decreased size and decreased power consumption,
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short product life
cycles with declining prices over the life cycle of the product, and
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evolving industry
standards.
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The continuous evolutions of these technologies
and frequent introduction of new products and enhancements have generally resulted in short product life cycles for wireless semiconductor
products, in general, and for RFFEs, in particular. Our R&D activity and resulting products could become obsolete or less
competitive sooner than anticipated because of a faster than anticipated change in one or more of the above-noted factors. Therefore,
in order for our RF filters to be competitive and achieve market acceptance, we need to keep pace with rapid development of new
process technologies, which requires us to:
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respond effectively
to technological advances by timely introducing new technologies and products,
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successfully implement
our strategies and execute our R&D plan in practice,
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improve the efficiency
of our technology, and
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implement our improved
design and cost reductions into manufacturing of our RF filters.
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We are still developing many of
our products, and they may not be accepted in the market.
Although we believe that our XBAW acoustic
wave resonator technology, which can utilize single-crystal piezoelectric materials, provides material advantages over existing
RF filters, and we have developed and are currently developing various methods of integration suitable for implementation of this
technology into RF filters, we cannot be certain that our RF filters will be able to achieve or maintain market acceptance. While
we have fabricated R&D filters that demonstrate the performance of our XBAW technology, and this technology has been stabilized,
and it has been verified in small volumes both in practice and in commercial utilization, it has not yet been ramped in volumes
for commercial scale. There are also no records that can demonstrate our ability to successfully overcome many of the risks and
uncertainties frequently encountered by companies in new and rapidly evolving fields. In addition to our limited operating history,
we will depend on a limited number of manufacturers and customers for a significant portion of our revenue in the future and we
cannot guarantee their acceptance of our products. Each of these factors may adversely affect our ability to implement our business
strategy and achieve our business goals.
The successful development of our XBAW
technology and market acceptance of our RF filters will be highly complex and will depend on the following principal competitive
factors, including our ability to:
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comply with industry
standards and effectively compete against current technology for producing RF acoustic wave filters,
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differentiate our
products from offerings of our competitors by delivering RF filters that are higher in quality, reliability and technical
performance,
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anticipate customer
and market requirements, changes in technology and industry standards and timely develop improved technologies that meet high
levels of satisfaction of our potential customers,
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maintain, grow and
manage our internal teams to the extent we increase our operations and develop new segments of our business,
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develop and maintain
successful collaborative, strategic, and other relationships with manufacturers, customers and contractors,
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protect, develop
or otherwise obtain adequate intellectual property for our technology and our filters; and
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obtain strong financial,
sales, marketing, technical and other resources necessary to develop, test, manufacture, commercialize and market our filters.
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If we are unsuccessful in accomplishing
these objectives, we may not be able to compete successfully against current and potential competitors. As a result, our XBAW
technology and our RF filters may not be accepted in the market and we may never attain profitability.
We face risks associated with the
operation of our manufacturing facility.
We operate a wafer fabrication
facility in Canandaigua, NY that we acquired in June 2017. We currently use several international and domestic suppliers to
assemble and test our products, as well as our own test and tape and reel facilities located in the U.S.
A number of factors related to our facilities
will affect our business and financial results, including the following:
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our ability to adjust
production capacity in a timely fashion in response to changes in demand for our products;
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the significant
fixed costs of operating the facilities;
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factory utilization
rates;
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our ability to qualify
our facilities for new products and new technologies in a timely manner;
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the availability
of raw materials, the impact of the volatility of commodity pricing and tariffs imposed on raw materials, including substrates,
gold, platinum and high purity source materials such as gallium, aluminum, arsenic, indium, silicon, phosphorous and palladium;
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our manufacturing
cycle times;
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our manufacturing
yields;
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our ability to hire,
train and manage qualified production personnel;
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our compliance with
applicable environmental and other laws and regulations; and
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our ability to avoid
prolonged periods of down-time in our facilities for any reason.
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If we experience poor manufacturing
yields, our operating results may suffer.
Our products have unique designs and are
fabricated using multiple semiconductor process technologies that are highly complex. In many cases, our products are assembled
in customized packages. Many of our products consist of multiple components in a single module and feature enhanced levels of
integration and complexity. Our customers insist that our products be designed to meet their exact specifications for quality,
performance and reliability. Our manufacturing yield is a combination of yields across the entire supply chain, including wafer
fabrication, assembly and test yields. Defects in a single component in an assembled module product can impact the yield for the
entire module, which means the adverse economic impacts of an individual defect can be multiplied many times over if we fail to
discover the defect before the module is assembled. Due to the complexity of our products, we periodically experience difficulties
in achieving acceptable yields and other quality issues, particularly with respect to new products.
Our customers test our products once they
have been assembled into their products. The number of usable products that result from our production process can fluctuate as
a result of many factors, including:
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minute impurities
and variations in materials used;
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contamination of
the manufacturing environment;
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equipment failure
or variations in the manufacturing processes;
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losses from broken
wafers or other human error; and
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defects in substrates
and packaging.
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We constantly seek to improve our manufacturing
yields. Typically, for a given level of sales, when our yields improve, our gross margins improve, and when our yields decrease,
our unit costs are higher, our margins are lower, and our operating results are adversely affected.
Costs of product defects and deviations
from required specifications could include the following:
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scrapping products
that cannot be fixed;
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accepting returns
of products that have been shipped;
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providing product
replacements at no charge;
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reimbursement of
direct and indirect costs incurred by our customers in recalling or reworking their products due to defects in our products;
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travel and personnel
costs to investigate potential product quality issues and to identify or confirm the failure mechanism or root cause of product
defects; and
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defending against
litigation.
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These costs could be significant and could
reduce our gross margins. Our reputation with customers also could be damaged as a result of product defects and quality issues,
and product demand could be reduced, which could harm our business and financial results.
Industry overcapacity could cause
us to underutilize our manufacturing facilities and have a material adverse effect on our financial performance.
It is difficult to predict future demand
for our products, which makes it difficult to estimate future requirements for production capacity and avoid periods of overcapacity.
Fluctuations in the growth rate of industry capacity relative to the growth rate in demand for our products also can lead to overcapacity
and contribute to cyclicality in the semiconductor market.
Capacity expansion projects have long
lead times and require capital commitments based on forecasted product trends and demand well in advance of production orders
from customers. In recent years, we have made significant capital investments to expand our RF filter capacity to address forecasted
future demand patterns. In certain cases, these capacity additions may exceed the near-term demand requirements, leading to overcapacity
situations and underutilization of our manufacturing facilities.
As many of our manufacturing costs are
fixed, these costs cannot be reduced in proportion to the reduced revenues experienced during periods of underutilization. Underutilization
of our manufacturing facilities can adversely affect our gross margin and other operating results. If demand for our products
experiences a prolonged decrease, we may be required to close or idle facilities and write down our long-lived assets or shorten
the useful lives of underutilized assets and accelerate depreciation, which would increase our expenses.
We face intense competition, which
may cause pricing pressures, decreased gross margins and loss of potential market share and may materially and adversely affect
our business, financial condition and results of operations.
We compete with U.S. and international
semiconductor manufacturers and mobile semiconductor companies of all sizes in terms of resources and market share, some of whom
have significantly greater financial, technical, manufacturing and marketing resources than we do. We expect competition in our
markets to intensify as new competitors enter the RF component market, existing competitors merge or form alliances, and new technologies
emerge. Our competitors may introduce new solutions and technologies that are superior to our BAW technology, are verified on
a commercial scale, and have achieved widespread market acceptance. Certain of our competitors may be able to adapt more quickly
than we can to new or emerging technologies and changes in customer requirements or may be able to devote greater resources to
the development, promotion and sale of their products than we can. This implementation may require us to modify the manufacturing
process for our filters, design new products to more stringent standards, and redesign some existing products, which may prove
difficult for us and result in delays in product deliveries and increased expenses.
Increased competition could also result
in pricing pressures, declining average selling prices for our RF filters, decreased gross margins and loss of potential market
share. We will need to make substantial investments to develop these enhancements and technologies, and we cannot assure investors
that we will have funds available for these investments or that these enhancements and technologies will be successful. If a competing
technology emerges that is, or is perceived to be, superior to our existing technology and we are unable to adapt to these changes
and to compete effectively, our market share and financial condition could be materially and adversely affected, and our business,
revenue, and results of operations could be harmed.
We may be subject to risks related
to doing business in, and having counterparties based in, foreign countries.
We engage in operations, and enter into
agreements with counterparties, located outside the U.S., which exposes us to political, governmental and economic instability
and foreign currency exchange rate fluctuations.
Any disruption caused by these factors
could harm our business, results of operations, financial condition, liquidity and prospects. Risks associated with potential
operations, commitments and investments outside of the U.S. include but are not limited to risks of:
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global and local
economic, social and political conditions and uncertainty;
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currency exchange
restrictions and currency fluctuations;
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war or terrorist
attack;
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renegotiation or
nullification of existing contracts or international trade arrangements;
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labor market conditions
and workers’ rights affecting our manufacturing operations or those of our customers;
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macro-economic conditions
impacting key markets and sources of supply;
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changing laws and policies affecting
trade, taxation, financial regulation, immigration, and investment;
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compliance with laws and regulations that differ among jurisdictions, including those covering
taxes, intellectual property ownership and infringement, imports and exports, anti-corruption and anti-bribery, antitrust
and competition, data privacy, and environment, health, and safety; and
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general hazards
associated with the assertion of sovereignty over areas in which operations are conducted, transactions occur, or counterparties
are located.
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As our reporting currency is the U.S.
dollar, any operations conducted outside the U.S. or transactions denominated in foreign currencies would face additional risks
of fluctuating currency values and exchange rates, hard currency shortages and controls on currency exchange. In addition, we
would be subject to the impact of foreign currency fluctuations and exchange rate changes on our financial reports when translating
our assets, liabilities, revenues and expenses from operations or transactions outside of the U.S. into U.S. dollars at the then-applicable
exchange rates. These translations could result in changes to our results of operations from period to period.
Economic regulation in China could
adversely impact our business and results of operations.
A significant portion of our potential
customer base is in China. For many years, the Chinese economy has experienced periods of rapid growth and wide fluctuations in
the rate of inflation. In response to these factors, the Chinese government has, from time to time, adopted measures to regulate
growth and to contain inflation, including currency controls and measures designed to restrict credit, control prices or set currency
exchange rates. Such actions in the future, as well as other changes in Chinese laws and regulations, including actions in furtherance
of China’s stated policy of reducing its dependence on foreign semiconductor manufacturers, could increase the cost of doing
business in China, foster the emergence of Chinese-based competitors, decrease the demand for our products in China, or reduce
the supply of critical materials for our products, which could have a material adverse effect on our business and results of operations.
Changes in government trade policies,
including the imposition of tariffs and export restrictions, could limit our ability to sell our products to certain customers,
which may materially adversely affect our sales and results of operations.
The U.S. or foreign governments may take administrative,
legislative or regulatory action that could materially interfere with our ability to sell products in certain countries, particularly
in China. For example, between July 2018 and September 2019, the Office of the United States Trade Representative imposed 10% to
25% tariffs on specified product lists, including certain electronic components and equipment, totaling approximately $250 billion
in Chinese imports. In response, China imposed or proposed new or higher tariffs on U.S. products. At this time, the U.S. government
has announced it intends to increase the tariff rate on the approximately $250 billion in Chinese imports to 30%, effective October
1, 2019. The U.S. government also imposed a 15% tariff on an additional $325 billion of Chinese imports effective September 1,
2019 for certain specified products and December 15, 2019 for the remaining specified products. China has taken additional retaliatory
actions, including an increase in tariffs applied to U.S. products effective September 1, 2019. China has also threatened further
retaliatory actions, including additional tariff increases later in 2019. While the imposition of these tariffs did not have a
direct, material adverse impact on our business during fiscal year ended June 30, 2019, the direct and indirect effects of tariffs
and other restrictive trade policies are difficult to measure and are only one part of a larger U.S./China economic and trade policy
disagreement.
For example, U.S. government actions targeting
exports of certain technologies to China are becoming more pervasive. In 2018, the U.S. adopted new laws designed to address concerns
about the export of emerging and foundational technologies to China. In addition, in May 2019, President Trump issued an executive
order that invoked national emergency economic powers to implement a framework to regulate the acquisition or transfer of information
communications technology in transactions that imposed undue national security risks. These actions could lead to additional restrictions
on the export of products that include or enable certain technologies, including products we could potentially provide to China-based
customers.
Furthermore, the imposition of tariffs
on our potential customers’ products that are imported from China to the U.S. could harm sales of such products, which could
indirectly harm our business. We cannot predict what actions may ultimately be taken with respect to tariffs or trade relations
between the U.S. and China or other countries, what products may be subject to such actions, or what actions may be taken by the
other countries in retaliation.
The loss or temporary loss of potential
foreign customers or the imposition of restrictions on our ability to sell products to such customers as a result of tariffs,
export restrictions or other U.S. regulatory actions could materially adversely affect our sales, business and results of operations.
Changes in general economic conditions,
together with other factors, cause significant upturns and downturns in the industry, and our business, therefore, may also experience
cyclical fluctuations in the future.
From time to time, changes in general
economic conditions, together with other factors, may cause significant upturns and downturns in the semiconductor industry. These
fluctuations are due to a number of factors, many of which are beyond our control, including:
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levels of inventory
in our end markets,
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availability and
cost of supply for manufacturing of our RF filters using our design,
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changes in end-user
demand for the products manufactured with our technology and sold by our prospective customers,
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exposure to foreign
currency exchange rates, import duties and tariffs,
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industry production
capacity levels and fluctuations in industry manufacturing yields,
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market acceptance
of our current and future customers’ products that incorporate our RF filters,
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the gain or loss
of significant customers,
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the effects of competitive
pricing pressures, including decreases in average selling prices of our RF filters,
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new product and
technology introductions by competitors,
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changes in the mix
of products produced and sold, and
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intellectual property
disputes.
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As a result, the demand for our products
can change quickly and in ways we may not anticipate, and our business, therefore, may also experience cyclical fluctuations in
future operating results. In addition, future downturns in the electronic systems industry could adversely impact our revenue
and harm our business, financial condition and results of operations.
Security breaches and other disruptions
could compromise our proprietary information and expose us to liability, which would cause our business and reputation to suffer.
We rely on trade secrets, technical know-how
and other unpatented proprietary information relating to our product development and manufacturing activities to provide us with
competitive advantages. We protect this information by entering into confidentiality agreements with our employees, consultants,
strategic partners and other third parties. We also design our computer networks and implement various procedures to restrict
unauthorized access to dissemination of our proprietary information.
We face internal and external data security
threats. Current, departing or former employees or third parties could attempt to improperly use or access our computer systems
and networks to copy, obtain or misappropriate our proprietary information or otherwise interrupt our business. Like others, we
are also subject to significant system or network disruptions from numerous causes, including computer viruses and other cyber-attacks,
facility access issues, new system implementations and energy blackouts.
Security breaches, computer malware, phishing,
spoofing, and other cyber-attacks have become more prevalent and sophisticated in recent years. While we defend against these threats
on a daily basis, we do not believe that such attacks to date have caused us any material damage. Because the techniques used by
computer hackers and others to access or sabotage networks constantly evolve and generally are not recognized until launched against
a target, we may be unable to anticipate, counter or ameliorate all of these techniques. As a result, our and our customers’
proprietary information may be misappropriated, and the impact of any future incident cannot be predicted. Any loss of such information
could harm our competitive position, result in a loss of customer confidence in the adequacy of our threat mitigation and detection
processes and procedures, cause us to incur significant costs to remedy the damages caused by the incident, and divert management
and other resources. We routinely implement improvements to our network security safeguards and we are devoting increasing resources
to the security of our information technology systems. We cannot, however, assure that such system improvements will be sufficient
to prevent or limit the damage from any future cyber-attack or network disruption.
The costs related to cyber-attacks or
other security threats or computer systems disruptions typically would not be fully insured or indemnified by others. Occurrence
of any of the events described above could result in loss of competitive advantages derived from our R&D efforts or our intellectual
property. Moreover, these events may result in the early obsolescence of our products, product development delays, or diversion
of the attention of management and key information technology and other resources, or otherwise adversely affect our internal
operations and reputation or degrade our financial results and stock price.
We may be subject to theft, loss,
or misuse of personal data by or about our employees, customers or other third parties, which could increase our expenses, damage
our reputation, or result in legal or regulatory proceedings.
In the ordinary course of our business,
we have access to sensitive, confidential or personal data or information regarding our employees and others that is subject to
privacy and security laws and regulations. The theft, loss, or misuse of personal data collected, used, stored, or transferred
by us to run our business, or by our third party service providers, including business process software applications providers
and other vendors that have access to sensitive data, could result in damage to our reputation, disruption of our business activities,
significantly increased business and security costs or costs related to defending legal claims.
Global privacy legislation, enforcement,
and policy activity in this area are rapidly expanding and creating a complex regulatory compliance environment. For example,
the European Union has adopted the General Data Protection Regulation (“GDPR”), which requires companies to comply
with rules regarding the handling of personal data, including its use, protection and the ability of persons whose data is stored
to correct or delete such data about themselves. Failure to meet GDPR requirements could result in penalties of up to 4% of worldwide
revenue. In addition, the interpretation and application of consumer and data protection laws in the U.S., Europe and elsewhere
are often uncertain and fluid, and may be interpreted and applied in a manner that is inconsistent with our data practices. Complying
with these changing laws has caused, and could continue to cause, us to incur substantial costs, which could have an adverse effect
on our business and results of operations. Further, failure to comply with existing or new rules may result in significant penalties
or orders to stop the alleged non-compliant activity. Finally, even our inadvertent failure to comply with federal, state, or
international privacy-related or data protection laws and regulations could result in audits, regulatory inquiries or proceedings
against us by governmental entities or others.
Our business and operations would
suffer in the event of system failures, and our operations are vulnerable to interruption by natural disasters, terrorist activity,
power loss and other events beyond our control, the occurrence of which could materially harm our business.
Despite the implementation of security
measures, our internal computer systems and those of our contractors and consultants are vulnerable to damage from computer viruses,
unauthorized access as well as telecommunication and electrical failures. While we have not experienced any such system failure,
accident or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result
in a material disruption of our R&D. If any disruption or security breach resulted in a loss of or damage to our data or applications,
or inappropriate disclosure of confidential or proprietary information, we could incur liability and/or the further development
of our technology for RF filters could be delayed.
We are also vulnerable to accidents, electrical
blackouts, labor strikes, terrorist activities, war and other natural disasters and other events beyond our control, and we have
not undertaken a systematic analysis of the potential consequences to our business as a result of any such events and do not have
an applicable recovery plan in place. We carry business interruption insurance that would compensate us for certain actual losses
from interruptions of our business that may occur, however that may not fully cover all losses incurred, any losses or damages
incurred could cause our business to materially suffer.
If we are unable to attract and
retain qualified personnel to contribute to the development, manufacture and sale of our products, we may not be able to effectively
operate our business.
As the source of our technological and
product innovations, our key technical personnel represent a significant asset. We believe that our future success is highly dependent
on the continued services of our current key officers, employees, and Board members, as well as our ability to attract and retain
highly skilled and experienced technical personnel. The loss of their services could have a detrimental effect on our operations.
Specifically, the loss of the services of our President and Chief Executive Officer, our Interim Chief Financial Officer,
our Vice President of Business Development, our Chief Product Officer, any major changes in our Board or other senior management,
or our inability to attract, retain and motivate qualified personnel could have a material adverse effect on our ability to operate
our business. The competition for management and technical personnel is intense in the wireless semiconductor industry, and therefore,
we cannot assure you that we will be able to attract and retain qualified management and other personnel necessary for the design,
development, manufacture and sale of our products.
Litigation or legal proceedings, including
product liability claims, could expose us to significant liabilities, occupy a significant amount of our management’s
time and attention and damage our reputation.
We are from time to time party to various
litigation claims and legal proceedings. We evaluate these claims and proceedings to assess the likelihood of unfavorable outcomes
and estimate, if possible, the amount of potential losses. If we or any of our manufacturers fails to successfully manufacture
wafers that conform to our design specifications and the strict regulatory requirements of the FCC, it may result in substantial
risk of undetected flaws in components or other materials used by our manufacturers during fabrication of our filters and could
lead to product defects and costs to repair or replace these parts or materials, significantly impacting our ability to develop
and implement our technology and to improve performance of our RF filters. In addition, claims made or threatened by our suppliers,
customers or current or former employees could adversely affect our relationships, damage our reputation or otherwise adversely
affect our business, financial condition or results of operations. The costs associated with defending product liability and other
claims, and the payment of damages, could be substantial. Our reputation could also be adversely affected by such claims, whether
or not successful.
We may establish reserves as appropriate
based upon assessments and estimates in accordance with our accounting policies in accordance with U.S. GAAP. We base our assessments,
estimates and disclosures on the information available to us at the time and rely on legal and management judgment. Actual outcomes
or losses may differ materially from assessments and estimates. Actual settlements, judgments or resolutions of these claims or
proceedings may negatively affect our business and financial performance. A successful claim against us that is not covered by
insurance or is in excess of our available insurance limits could require us to make significant payments of damages and could
materially adversely affect our financial condition, results of operations and cash flows.
If we are unable to establish effective
marketing and sales capabilities or enter into additional agreements with third parties to market and sell our RF filters, we
may not be able to effectively generate and sustain or increase product revenues.
We have limited experience selling, marketing
or distributing products and currently have a small internal marketing and sales force. To progress the launch and commercialization
of our technology and our RF filters, we must build on a territory-by-territory basis marketing, sales, distribution, managerial
and other non-technical capabilities or make arrangements with third parties to perform these services, and we may not be successful
in doing so. Therefore, we may choose to collaborate, either globally or on a territory-by-territory basis, with third parties
that have direct sales forces and established distribution systems, either to augment our own sales force and distribution systems
or in lieu of our own sales force and distribution systems. If so, our success will depend, in part, on our ability to enter into
and maintain collaborative relationships for such capabilities, such collaborator’s strategic interest in the products under
development and such collaborator’s ability to successfully market and sell any such products.
If we are unable to enter into such arrangements
when needed on acceptable terms or at all, we may not be able to successfully commercialize our filters. Further, to the extent
that we depend on third parties for marketing and distribution, any revenues we receive will depend upon the efforts of such third
parties, and there can be no assurance that such efforts will be successful. If we decide in the future to establish an internal
sales and marketing team with technical expertise and supporting distribution capabilities to commercialize our RF filters, it
could be expensive and time consuming and would require significant attention of our executive officers to manage. We may also
not have sufficient resources to allocate to the sales and marketing of our filters. Any failure or delay in the development of
sales, marketing and distribution capabilities, either through collaboration with one or more third parties or through internal
efforts, would adversely impact the commercialization of any of our products that we obtain approval to market. As a result, our
future product revenue would suffer, and we may incur significant additional losses.
Problems in scaling our manufacturing
operations could have a material adverse effect on our business.
Future customer demand may require us
to significantly increase our manufacturing capacity. There are substantial technical challenges to increasing manufacturing capacity,
including equipment acquisition lead times, materials procurement, scaling our manufacturing process, manufacturing site expansion,
and the need to significantly increase production yields while maintaining or improving quality control and assurance. Developing
commercial-scale manufacturing facilities will require the investment of substantial additional funds and the hiring and retention
of additional management, quality assurance, quality control and technical personnel who have the necessary manufacturing experience.
The scaling of manufacturing capacity is subject to numerous risks and uncertainties and may lead to variability in product quality
or reliability, increased construction timelines, as well as resources required to acquire, install and maintain manufacturing
equipment, among others, all of which can lead to unexpected delays in manufacturing output. Additionally, the production of our
products must occur in a highly controlled and clean environment to minimize particles and other yield- and quality-limiting contaminants.
Weaknesses in process control or minute impurities in materials may cause a substantial percentage of defective products. We may
not be able to maintain stringent quality controls and contamination problems could arise. Material defects in our products could
result in loss or delay of revenues, delayed market acceptance, damage to our reputation, lost customers, legal claims, increased
insurance costs or increased service and warranty costs. If we are unable to successfully scale up our manufacturing operations
to meet customer demand, our business growth could be materially adversely affected.
We may engage in future acquisitions
that could disrupt our business, cause dilution to our shareholders and harm our financial condition and operating results.
While we currently have no specific plans
to acquire any other businesses, we may, in the future, make acquisitions of, or investments in, companies that we believe have
products or capabilities that are a strategic or commercial fit with our current business or otherwise offer opportunities for
our company. In connection with these acquisitions or investments, we may:
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issue Common Stock
or other forms of equity that would dilute our existing shareholders’ percentage of ownership,
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incur debt and assume
liabilities, and
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incur amortization
expenses related to intangible assets or incur large and immediate write-offs.
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We may not be able to complete acquisitions
on favorable terms, if at all. If we do complete an acquisition, we cannot assure you that it will ultimately strengthen our competitive
position or that it will be viewed positively by customers, financial markets or investors. Furthermore, future acquisitions could
pose numerous additional risks to our expected operations, including:
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problems integrating
the purchased business, products or technologies,
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challenges in achieving
strategic objectives, cost savings and other anticipated benefits,
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increases to our
expenses,
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the assumption of
significant liabilities that exceed the limitations of any applicable indemnification provisions or the financial resources
of any indemnifying party,
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inability to maintain
relationships with prospective key customers, vendors and other business partners of the acquired businesses,
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diversion of management’s
attention from its day-to-day responsibilities,
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difficulty in maintaining
controls, procedures and policies during the transition and integration,
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entrance into marketplaces
where we have no or limited prior experience and where competitors have stronger marketplace positions,
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potential loss of
key employees, particularly those of the acquired entity, and
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historical financial
information may not be representative or indicative of our results as a combined company.
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Risks Related to Our Intellectual Property
If we fail to obtain, maintain and
enforce our intellectual property rights, we may not be able to prevent third parties from using our proprietary technologies.
Our long-term success largely depends
on our ability to market technologically competitive products which, in turn, largely depends on our ability to obtain and maintain
adequate intellectual property protection and to enforce our proprietary rights without infringing the proprietary rights of third
parties. While we rely upon a combination of our patent applications currently pending with the United State Patent and Trademark
Office (“USPTO”), our trademarks, copyrights, trade secret protection and confidentiality agreements to protect the
intellectual property related to our technologies, there can be no assurance that:
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our currently pending
or future patent applications will result in issued patents,
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our limited patent
portfolio will provide adequate protection to our core technology,
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we will succeed
in protecting our technology adequately in all key jurisdictions,
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we will be able
to finalize negotiations to enter into agreements pursuant to which we will license certain patents, or
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we can prevent third
parties from disclosure or misappropriation of our proprietary information which could enable competitors to quickly duplicate
or surpass our technological achievements, thus eroding any competitive advantage we may derive from the proprietary information.
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In addition, we intend to expand our international
presence, and effective patent, copyright, trademark and trade secret protection may not be available or may be limited in foreign
countries.
We have a limited number of patent
applications, which may not result in issued patents or patents that fully protect our intellectual property.
In the United States and internationally
we had fifty-two pending patent applications as of September 11, 2019; however, there is no assurance that any of the pending applications
or our future patent applications will result in patents being issued, or that any patents that may be issued as a result of existing
or future applications will provide meaningful protection or commercial advantage to us.
The process of seeking patent protection
in the United States and abroad can be long and expensive. Since patent applications in the United States and most other countries
are confidential for a period of time after filing, we cannot be certain at the time of filing that we are the first to file any
patent application related to our single-crystal acoustic wave filter technology. In addition, patent applications are often published
as part of the patent application process, even if such applications do not issue as patents. When published, such applications
will become publicly available, and proprietary information disclosed in the application will become available to others. While
at present we are unaware of competing patent applications, competing applications could potentially surface.
Even if all of our pending patent applications
are granted and result in registration of our patents, we cannot predict the breadth of claims that may be allowed or enforced,
or that the scope of any patent rights could provide a sufficient degree of protection that could permit us to gain or keep our
competitive advantage with respect to these products and technologies. For example, we cannot predict:
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the degree and range
of protection any patents will afford us against competitors, including whether third parties will find ways to make, use,
sell, offer to sell or import competitive products without infringing our patents;
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if and when patents
will be issued;
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if third parties
will obtain patents claiming inventions similar to those covered by our patents and patent applications;
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if third parties
have blocking patents that could be used to prevent us from marketing our own patented products and practicing our own technology;
or
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whether we will
need to initiate litigation or administrative proceedings (e.g. at the USPTO) in connection with patent rights, which may
be costly whether we win or lose.
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As a result, the patent applications we
own may fail to result in issued patents in the United States. Third parties may challenge the validity, enforceability or scope
of any issued patents or patents issued to us in the future, which may result in those patents being narrowed, invalidated or
held unenforceable. Even if they are unchallenged, our patents and patent applications may not adequately protect our intellectual
property or prevent others from developing similar products that do not infringe the claims made in our patents. If the breadth
or strength of protection provided by the patents we hold or pursue is threatened, we may not be able to prevent others from offering
similar technology and products in the RFFE mobile market and our ability to commercialize our RF filters with technology protected
by those patents could be threatened.
If we fail to obtain issued patents outside
of the United States, our ability to prevent misappropriation of our proprietary information or infringement of our intellectual
property rights in countries outside of the United States where our filters may be sold in the future may be significantly limited.
If we file foreign patent applications related to our pending U.S. patent applications or to our issued patents in the United
States, these applications may be contested and fail to result in issued patents outside of the United States or we may be required
to narrow our claims. Even if some or all of our patent applications are granted outside of the United States and result in issued
patents, effective enforcement of rights granted by these patents in some countries may not be available due to the differences
in foreign patent and other laws concerning intellectual property rights, a relatively weak legal regime protecting intellectual
property rights in these countries, and because it is difficult, expensive and time-consuming to police unauthorized use of our
intellectual property when infringers are overseas. This failure to obtain or maintain adequate protection of our intellectual
property rights outside of the United States could have a materially adverse effect on our business, results of operations and
financial conditions.
We may be involved in lawsuits to
protect or enforce our patents, which could be expensive, time-consuming and unsuccessful.
Competitors may infringe our patents or
the patents of our potential licensors. To attempt to stop infringement or unauthorized use, we may need to file infringement
claims, which can be expensive and time consuming and distract management.
If we pursue any infringement proceeding,
a court may decide that a patent of ours or our licensors is not valid or is unenforceable or may refuse to stop the other party
from using the relevant technology on the grounds that our patents do not cover the technology in question. Additionally, any
enforcement of our patents may provoke third parties to assert counterclaims against us. Some of our current and potential competitors
have the ability to dedicate substantially greater resources to enforcing their intellectual property rights than we have. Moreover,
the legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, which
could reduce the likelihood of success of, or the amount of damages that could be awarded resulting from, any infringement proceeding
we pursue in any such jurisdiction. An adverse result in any infringement litigation or defense proceedings could put one or more
of our patents at risk of being invalidated, held unenforceable, or interpreted narrowly and could put our patent applications
at risk of not issuing, which could limit the ability of our filters to compete in those jurisdictions.
Interference proceedings could be provoked
by third parties or brought by the USPTO to determine the priority of inventions with respect to our patents or patent applications.
An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to use it from the
prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable
terms, or at all.
We need to protect our trademark
rights and disclosure of our trade secrets to prevent competitors from taking advantage of our goodwill.
We believe that the protection of our
trademark rights is an important factor in product recognition, protecting our brand, maintaining goodwill, and maintaining or
increasing market share. We currently have four trademarks that we have filed to register with the USPTO - the Akoustis,
XBAW and BulkONE marks and the XBAW logo - and we may expend substantial cost and effort in an attempt to register new trademarks
and maintain and enforce our trademark rights. If we do not adequately protect our rights in our trademarks from infringement,
any goodwill that we have developed in those trademarks could be lost or impaired.
Third parties may claim that the sale
or promotion of our products, when and if we have any, may infringe on the trademark rights of others. Trademark infringement
problems occur frequently in connection with the sale and marketing of products in the RFFE mobile industry. If we become involved
in any dispute regarding our trademark rights, regardless of whether we prevail, we could be required to engage in costly, distracting
and time-consuming litigation that could harm our business. If the trademarks we use are found to infringe upon the trademark
of another company, we could be liable for damages and be forced to stop using those trademarks, and as result, we could lose
all the goodwill that has been developed in those trademarks.
In addition to the protection afforded
by patents and trademarks, we seek to rely on copyright, trade secret protection and confidentiality agreements to protect proprietary
know-how that is not patentable, processes for which patents are difficult to enforce and any other elements of our processes
that involve proprietary know-how, information or technology that is not covered by patents. For Akoustis, this includes chip
layouts, circuit designs, resonator layouts and implementation, and membrane definition. Although we require all of our employees
and certain consultants and advisors to assign inventions to us, and all of our employees, consultants, advisors and any third
parties who have access to our proprietary know-how, information or technology to enter into confidentiality agreements, our trade
secrets and other proprietary information may be disclosed, or competitors may otherwise gain access to such information or independently
develop substantially equivalent information. If we are unable to prevent material disclosure of the intellectual property related
to our technologies to third parties, we will not be able to establish or maintain the competitive advantage that we believe is
provided by such intellectual property, which would weaken our competitive market position, and materially adversely affect our
business and operational results.
Development of certain technologies
with our manufacturers may result in restrictions on jointly-developed intellectual property.
In order to maintain and expand our strategic
relationship with manufacturers of our filters, we may, from time to time, develop certain technologies jointly with these manufacturers
and file for further intellectual property protection and/or seek to commercialize such technologies. We may enter into joint
development agreements with manufacturers to provide for joint development works and joint intellectual property rights by us
and by such manufacturer. Such agreements may restrict our commercial use of such intellectual property, or may require written
consent from, or a separate agreement with, that manufacturer. In other cases, we may not have any rights to use intellectual
property solely developed and owned by such manufacturer or another third party. If we cannot obtain commercial use rights for
such jointly-owned intellectual property or intellectual property solely owned by these manufacturers, our future product development
and commercialization plans may be adversely affected.
We may be subject to claims of infringement,
misappropriation or misuse of third party intellectual property that, regardless of merit, could result in significant expense
and loss of our intellectual property rights.
The semiconductor industry is characterized
by the vigorous pursuit and protection of intellectual property rights. We have not undertaken a comprehensive review of the rights
of third parties in our field. From time to time, we may receive notices or inquiries from third parties regarding our products
or the manner in which we conduct our business suggesting that we may be infringing, misappropriating or otherwise misusing patent,
copyright, trademark, trade secret and other intellectual property rights. Any claims that our technology infringes, misappropriates
or otherwise misuses the rights of third parties, regardless of their merit or resolution, could be expensive to litigate or settle
and could divert the efforts and attention of our management and technical personnel, cause significant delays and materially
disrupt the conduct of our business. We may not prevail in such proceedings given the complex technical issues and inherent uncertainties
in intellectual property litigation. If such proceedings result in an adverse outcome, we could be required to:
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pay substantial
damages, including treble damages if we were held to have willfully infringed;
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cease the manufacture,
offering for sale or sale of the infringing technology or processes;
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expend significant
resources to develop non-infringing technology or processes;
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obtain a license
from a third party, which may not be available on commercially reasonable terms, or may not be available at all; or
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lose the opportunity
to license our technology to others or to collect royalty payments based upon successful protection and assertion of our intellectual
property against others.
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In addition, our agreements with prospective
customers and manufacturing partners may require us to indemnify such customers and manufacturing partners for third party intellectual
property infringement claims. Pursuant to such agreements, we may be required to defend such customers and manufacturing partners
against certain claims that could cause us to incur additional costs. While we endeavor to include as part of such indemnification
obligations a provision permitting us to assume the defense of any indemnification claim, not all of our current agreements contain
such a provision and we cannot provide any assurance that our future agreements will contain such a provision, which could result
in increased exposure to us in the case of an indemnification claim.
Defense of any intellectual property infringement
claims against us, regardless of their merit, would involve substantial litigation expense and would be a significant diversion
of resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial
damages, obtain one or more licenses from third parties, limit our business to avoid the infringing activities, pay royalties
and/or redesign our infringing technology or alter related formulations, processes, methods or other technologies, any or all
of which may be impossible or require substantial time and monetary expenditure. The occurrence of any of the above events could
prevent us from continuing to develop and commercialize our filters and our business could materially suffer.
Risks Related to our Financial Condition
We have a history of losses, will
need substantial additional funding to continue our operations and may not achieve or sustain profitability in the future.
Our operations have consumed substantial
amounts of cash since inception. We have incurred losses since our incorporation and formation in 2014. We anticipate that our
operating expenses will increase in the foreseeable future as we continue to pursue the development of our patent-pending high
purity single crystal acoustic wave filter technology, invest in marketing, sales and distribution of our RF filters to grow our
business, acquire customers, commercialize our technology in the mobile wireless market and continue to invest in our manufacturing
facility in Canandaigua, NY. These efforts may prove more expensive than we currently anticipate, and we may not succeed in generating
sufficient revenues to offset these higher expenses. In addition, we expect to incur significant expenses related to regulatory
requirements and our ability to obtain, protect, and defend our intellectual property rights.
We may also encounter unforeseen expenses,
difficulties, complications, delays and other unknown factors that may increase our capital needs and/or cause us to spend our
cash resources faster than we expect. Accordingly, we will need to obtain substantial additional funding in order to continue
our operations.
To date, we have financed our operations
through a mix of investments from private investors, public offerings of Common Stock, the incurrence of debt, foundry services
revenue, RF filter revenue, and grant funding, and we expect to continue to utilize such means of financing for the foreseeable
future. Additional funding from those or other sources may not be available when or in the amounts needed, on acceptable terms,
or at all. If we raise additional capital through the sale of equity, or securities convertible into equity, it would result in
dilution to our then existing stockholders, which could be significant depending on the price at which we may be able to sell
our securities. If we raise additional capital through the incurrence of indebtedness, such as our issuance of senior convertible
notes in May and October 2018, we may become subject to additional covenants restricting our business activities, and holders
of debt instruments may have rights and privileges senior to those of our equity investors. In addition, servicing the interest
and principal repayment obligations under debt facilities could divert funds that would otherwise be available to support research
and development, or commercialization activities. If we are unable to raise capital when needed or on attractive terms, we could
be forced to delay, reduce or eliminate the production and sale of our RF filter products, our R&D programs for our acoustic
wave filter technology or any future commercialization efforts. Any of these events could materially and adversely affect our
business, financial condition and prospects, and could cause our business to fail.
Servicing our debt requires a significant
amount of cash or Common Stock, and we may not have sufficient cash flow from our business or have the ability to issue the necessary
number of shares of Common Stock to pay our substantial debt.
Pursuant to the convertible note offerings
we completed in the calendar year 2018, we incurred $25.0 million of indebtedness. This level of debt could have significant consequences
on future operations, including:
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increasing our vulnerability
to adverse economic and industry conditions;
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making it more difficult
for us to meet our payment and other obligations;
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making it more difficult
to obtain any necessary future financing for working capital, capital expenditures, debt service requirements or other purposes;
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requiring the dedication
of a substantial portion of any cash flow from operations to service our indebtedness, thereby reducing the amount of cash
flow available for other purposes, including capital expenditures;
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placing us at a
possible competitive disadvantage with competitors that are less leveraged than us or have better access to capital than we
have; and
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limiting our flexibility
in planning for, or reacting to, changes in our business and the markets in which we compete.
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Accrued interest on our October
2018 6.5% Convertible Senior Notes due 2023 is payable quarterly in cash and we have the ability, at our option, to pay
accrued interest on our May 2018 6.5% Convertible Senior Secured Notes due 2023 in cash or freely tradable shares of Common
Stock. Our ability to make scheduled payments of interest depends on our future performance, which is subject to economic,
financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the
future sufficient to service our debt in cash and make necessary capital expenditures. Furthermore, we may not issue Common
Stock to make payments of interest to the extent such issuance would violate Nasdaq Marketplace Rule 5635(d), which limits
the amount of Common Stock that we may privately issue without prior stockholder approval. Therefore, our ability to repay
debt with Common Stock will depend on the capital markets and whether we have obtained stockholder approval for such
issuances of Common Stock.
If we are unable to generate sufficient
cash flow or issue Common Stock to satisfy payment obligations under our convertible notes, we may be required to adopt one or
more alternatives, such as selling assets or obtaining additional equity capital on terms that may be onerous or highly dilutive.
We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in
a default on our debt obligations.
Furthermore, our $15.0 million principal
amount of 6.5% Convertible Senior Secured Notes due 2023 are secured by a first priority lien on substantially all of the Company’s
and the Company’s existing and future subsidiaries’ assets. Therefore, if we default on any of our debt obligations,
it could result in our noteholders foreclosing on our assets. In such an event, the noteholders’ rights to such assets would
likely be superior to those of our stockholders.
We are subject to a number of restrictive covenants,
relating to our indebtedness, which may restrict our business and financing activities. Additionally, certain of our indebtedness
is secured by a first priority lien on our and our subsidiaries assets’, which may limit our ability to obtain additional
financing.
The indentures governing our
convertible notes imposes operating and other restrictions on us. Such restrictions may affect, and in many respects limit or
prohibit, among other things, our ability to:
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incur or guarantee additional indebtedness;
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issue preferred stock or stock of any subsidiary;
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make investments or acquisitions;
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merge, consolidate, dissolve or liquidate;
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engage in certain asset sales (including the
sale of stock of our subsidiary);
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grant liens (except permitted liens);
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engage in transactions with our affiliates;
and
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enter into a new line of business.
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The restrictions in the indentures governing
the convertible notes may prevent us from taking actions that we believe would be in the best interests of our business, and may
make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly
restricted. We also may incur future debt obligations that might subject us to additional restrictive covenants that could affect
our financial and operational flexibility. Our ability to comply with these covenants in future periods will largely depend on
the pricing of our products and services, and our ability to successfully implement our overall business strategy. We cannot assure
you that we will be granted waivers or amendments to these agreements if for any reason we are unable to comply with these agreements.
The breach of any of these covenants and restrictions could result in a default under the indenture governing
the promissory notes, which could result in an acceleration of our indebtedness.
Additionally, potential lenders or other
sources of capital may be less likely to extend financing to us due to their interests’ potential subordination to the first
priority lien on substantially all of the Company’s and the Company’s existing and future subsidiaries’ assets
securing the Company’s $15.0 million principal amount of convertible notes issued in May 2018.
Risks Related to Regulatory Requirements
Government regulation may adversely
affect our business.
The effects of regulation may materially
and adversely impact our business. For example, regulatory policies of the FCC relating to radio frequency emissions, consumer
protection laws of the FTC, product safety regulatory activities of the Consumer Products Safety Commission, and environmental
regulatory activities of the EPA could impede sales of our products in the United States. We and our customers are also subject
to various import and export laws and regulations. If we fail to continue to comply with these regulations, we may be unable to
manufacture the affected products or ship these products to certain customers and be subject to investigations, sanctions, mandatory
product recalls, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties, or injunctions.
As described above under the risk factor
entitled “We may be subject to risks related to doing business in, and having counterparties based in, foreign countries,”
our business is also increasingly subject to complex foreign and U.S. laws and regulations, including but not limited to, anti-corruption
laws, such as the Foreign Corrupt Practices Act and equivalent laws in other jurisdictions, antitrust or competition laws, and
data privacy laws, among others. Foreign governments may also impose tariffs, duties and other import restrictions on components
that we obtain from non-domestic suppliers and may impose export restrictions on products that we sell internationally. These
tariffs, duties or restrictions could materially and adversely affect our business, financial condition and results of operations.
Our product or manufacturing standards
could also be impacted by new or revised environmental rules and regulations or other social initiatives. Those rules, or similar
rules that may be adopted in other jurisdictions, could adversely affect our costs, the availability of minerals used in our products
and our relationships with customers and suppliers.
We may incur substantial expenses
in connection with regulatory requirements, and any regulatory compliance failure could cause our business to suffer.
The wireless communications industry is
subject to ongoing regulatory obligations and review. See “Business - Government Regulations” above. Maintaining compliance
with these requirements may result in significant additional expense to us, and any failure to maintain such compliance could
cause our business to suffer.
Noncompliance with applicable regulations
or requirements could also subject us to investigations, sanctions, mandatory product recalls, enforcement actions, disgorgement
of profits, fines, damages, civil and criminal penalties, or injunctions. An adverse outcome in any such litigation could require
us to pay contractual damages, compensatory damages, punitive damages, attorneys’ fees and costs. These enforcement actions
could harm our business, financial condition and results of operations. If any governmental sanctions are imposed, or if we do
not prevail in any possible civil or criminal litigation, our business, financial condition and results of operations could be
materially adversely affected. In addition, responding to any action will likely result in a significant diversion of management’s
attention and resources and an increase in professional fees.
Compliance with regulations regarding
the use of “conflict minerals” could limit the supply and increase the cost of certain metals used in manufacturing
our products.
Regulations in the United States require
that we determine whether certain materials used in our products, referred to as conflict minerals, originated in the Democratic
Republic of the Congo or adjoining countries, or originated from recycled or scrap sources. We incur costs associated with our
policies and procedures to comply with the applicable rules and due diligence procedures. In addition, verification and reporting
requirements could affect the sourcing and availability of minerals that are used in the manufacture of our products, and we may
face reputational and competitive challenges if we are unable to sufficiently verify the origins of all conflict minerals used
in our products. We may also face challenges with government regulators, potential customers, suppliers and manufacturers if we
are unable to sufficiently verify that the metals used in our products are conflict free.
There could be an adverse change
or increase in the laws and/or regulations governing our business.
We and our operating subsidiary are subject
to various laws and regulations in different jurisdictions, and the interpretation and enforcement of laws and regulations are
subject to change. We are also subject to different tax regulations in each of the jurisdictions where we conduct our business
or where our management or the management of our operating subsidiary is located. We expect that the scope and extent of regulation
in these jurisdictions, as well as regulatory oversight and supervision, will generally continue to increase. There can be no
assurance that future regulatory, judicial and legislative changes in any jurisdiction will not have a material adverse effect
on us or hinder us in the operation of our business. In addition, we may incur substantial costs in order to comply with current
or future environmental, health and safety laws and regulations applicable to us.
These current or future laws and regulations
may impair our research, development or production efforts or impact the research activities we pursue. Our failure to comply
with these laws and regulations also may result in substantial fines, penalties or other sanctions, which could cause our financial
condition to suffer.
Investment Risks
You could lose all of your investment.
An investment in our securities is speculative
and involves a high degree of risk. Potential investors should be aware that the value of an investment in the Company may go
down as well as up. In addition, there can be no certainty that the market value of an investment in the Company will fully reflect
its underlying value.
The value of our Common Stock could
be volatile.
The overall market and the price of our
Common Stock may fluctuate greatly. During the fiscal year ended June 30, 2019, our Common Stock traded on the Nasdaq Capital
Market as high as $9.50 and as low as $3.40 per share. An active, liquid and orderly market for our Common Stock may not be sustained,
which could depress the trading price of our Common Stock. The trading price of our Common Stock may be significantly affected
by various factors, including quarterly fluctuations in our operating results, changes in investors’ and analysts’
perception of the business risks and conditions of our business, issuance of additional shares in connections with strategic transactions
or acquisitions we may make, our ability to meet the earnings estimates and other performance expectations of financial analysts
or investors, unfavorable commentary or downgrades of our stock by equity research analysts, and general economic or political
conditions.
Our stock trades in low volumes,
which may make it more difficult for investors to sell their shares quickly.
Our Common Stock trades on the Nasdaq
Capital Market, but it trades in low volumes, which may make it more difficult for investors to sell their shares quickly. This
situation may be attributable to a number of factors, including but not limited to the fact that we are an emerging commercial
company that is relatively unknown to stock analysts, stockbrokers, institutional investors, and others in the investor community.
In addition, investors may be risk averse to investments in emerging commercial companies. As a consequence, it may be more difficult
for investors to sell their shares quickly and our stock price may be more sensitive to sales of our Common Stock in the market.
The low trading volume is outside of our control and may not increase or, if it increases, may not be maintained.
Stockholders may experience dilution
of their ownership interests because of the future issuance of additional shares of our Common Stock or preferred stock or other
securities that are convertible into or exercisable for our Common Stock or preferred stock.
In the future, we may issue our authorized
but previously unissued equity securities, resulting in the dilution of the ownership interests of our stockholders. The Company
is authorized to issue an aggregate of 45,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. We may issue
additional shares of our Common Stock or other securities that are convertible into or exercisable for our Common Stock in connection
with hiring or retaining employees, future acquisitions, future sales of our securities for capital raising purposes, or for other
business purposes. In addition, as of September 06, 2019, warrants and options to purchase 633,343 and 2,080,665 shares, respectively,
of our Common Stock remained outstanding. Additionally, our outstanding convertible senior notes were convertible into approximately
4.96 million shares of Common Stock on such date. The future issuance of additional shares of our Common Stock may create downward
pressure on the trading price of the Common Stock. We will need to raise additional capital in the near future to meet our working
capital needs, and there can be no assurance that we will not be required to issue additional shares, warrants or other convertible
securities in the future in conjunction with these capital raising efforts, including at a price (or exercise prices) below the
price you paid for your stock.
Delaware law, our charter documents,
the ability of our Board of Directors to issue additional stock, and certain provisions of our convertible notes could
impede or discourage a takeover or change of control that stockholders may consider favorable.
As a Delaware corporation, we are subject
to certain anti-takeover provisions. Under Delaware law, a corporation may not engage in a business combination with any holder
of 15 percent or more of its capital stock unless the holder has held the stock for three years or, among other things, the board
of directors has approved the transaction. Accordingly, our Board of Directors could rely on Delaware law to prevent or delay
an acquisition of our company. In addition, certain provisions of our certificate of incorporation and bylaws may have the effect
of delaying or preventing a change of control or changes in our management. These provisions include only our Board of Directors
being able to fill vacancies on the Board and various limitations in our bylaws on stockholder meeting, including advance notice
requirements for stockholders to make nominations of candidates for election as directors or to bring matters before an annual
meeting of stockholders and our stockholders not having the ability to call a special meeting.
Our Board of Directors is authorized to
issue up to 5,000,000 shares of preferred stock with powers, rights and preferences designated by it. Shares of voting or convertible
preferred stock could be issued, or rights to purchase such shares could be issued, to create voting impediments or to frustrate
persons seeking to effect a takeover or otherwise gain control of the Company. The ability of the Board to issue such additional
shares of preferred stock, with rights and preferences it deems advisable, could discourage an attempt by a party to acquire control
of the Company by tender offer or other means. Such issuances could therefore deprive stockholders of benefits that could result
from such an attempt, such as the realization of a premium over the market price for their shares in a tender offer or the temporary
increase in market price that such an attempt could cause. Moreover, the issuance of such additional shares of preferred stock
to persons friendly to the Board of Directors could make it more difficult to remove incumbent managers and directors from office
even if such change were to be favorable to stockholders generally.
Certain provisions of the $15.0 million
and $10.0 million principal amounts of convertible notes we issued in May 2018 and October 2018, respectively, could make it more
difficult or more expensive for a third party to acquire us. If the Company undergoes a “qualifying fundamental change,”
as such term is defined in the respective indentures for the notes, under certain circumstances holders who convert their notes
in connection with such a qualifying fundamental change will be entitled to a “qualifying fundamental change payment”
equal to $130 per $1,000 of aggregate principal of notes converted. In addition, the indentures and the convertible
notes prohibit us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our
obligations under the convertible notes and the indenture. These and other provisions in the indentures could deter
or prevent a third party from acquiring the Company.
These types of provisions could make it
more difficult for a third party to acquire control of us, even if the acquisition would be beneficial to our stockholders.
Our bylaws provide, subject to certain
exceptions, that a state or federal court in the State of North Carolina will be the sole and exclusive forum for certain stockholder
litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us
or our directors, officers, employees or stockholders.
Our bylaws provide, subject to limited
exceptions, that a state or federal court located within the State of North Carolina will be the sole and exclusive forum for
(i) any derivative action or proceedings brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty
owed by any director, officer or other employee of the Company to the Company or the our stockholders, (iii) any action asserting
a claim arising pursuant to any provision of the Delaware General Corporation Law or (iv) any action asserting a claim governed
by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our Common
Stock shall be deemed to have notice of and to have consented to the provisions of our bylaws described above. This choice of
forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes
with us or any of our directors, officers, other employees or stockholders which may discourage lawsuits with respect to such
claims. Alternatively, if a court were to find the choice of forum provision that is contained in our bylaws to be inapplicable
or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which
could materially adversely affect our business, financial condition and results of operations.
We do not anticipate paying dividends
on our Common Stock.
Cash dividends have never been declared
or paid on our Common Stock, and we do not anticipate such a declaration or payment for the foreseeable future. We expect to use
future earnings, if any, to fund business growth. Therefore, stockholders will not receive any funds absent a sale of their shares
of Common Stock. If we do not pay dividends, our Common Stock may be less valuable because a return on your investment will only
occur if our stock price appreciates. We cannot assure stockholders that our stock price will appreciate or that they will receive
a positive return on their investment if and when they sell their shares.
As a smaller reporting company,
we are subject to scaled disclosure requirements that may make it more challenging for investors to analyze our results of operations
and financial prospects.
As a smaller reporting company, we
are subject to scaled disclosure requirements that may make it more challenging for investors to analyze our results of operations
and financial prospects. As a “smaller reporting company,” we may elect to provide simplified executive compensation
disclosures in our filings and take advantage of other decreased disclosure obligations in our filings with the SEC, including
being required to provide only two years of audited financial statements in our annual reports. Consequently, it may be more challenging
for investors to analyze our results of operations and financial prospects. We will remain a smaller reporting company until
the beginning of a fiscal year in which we have a public float of $250 million held by non-affiliates as of the last business
day of the second quarter of the prior fiscal year, assuming our common stock is registered under Section 12 of the Exchange Act
on the applicable evaluation date.
Being a public company is expensive
and administratively burdensome.
As a public reporting company, we are
subject to the information and reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), and other federal securities laws, rules and regulations related thereto, including compliance with the Sarbanes-Oxley
Act. Complying with these laws and regulations requires the time and attention of our Board of Directors and management and increases
our expenses. Among other things, we are required to:
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maintain and evaluate
a system of internal control over financial reporting in compliance with the requirements of Section 404 of the Sarbanes-Oxley
Act and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board;
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maintain policies
relating to disclosure controls and procedures;
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prepare and distribute
periodic reports in compliance with our obligations under federal securities laws;
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institute a more
comprehensive compliance function, including with respect to corporate governance; and
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involve, to a greater degree, our outside legal
counsel and accountants in the above activities.
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The costs of preparing and filing annual
and quarterly reports, proxy statements and other information with the SEC and furnishing audited reports to stockholders is expensive
and much greater than that of a privately-held company, and compliance with these rules and regulations may require us to hire
additional financial reporting, internal controls and other finance personnel, and will involve a material increase in regulatory,
legal and accounting expenses and the attention of management. There can be no assurance that we will be able to comply with the
applicable regulations in a timely manner, if at all. In addition, being a public company makes it more expensive for us to obtain
director and officer liability insurance. In the future, we may be required to accept reduced coverage or incur substantially
higher costs to obtain this coverage. These factors could also make it more difficult for us to attract and retain qualified executives
and members of our Board of Directors, particularly directors willing to serve on the Audit Committee of our Board of Directors.