Item 1A. Risk Factors
The risks described in this Quarterly Report
on Form 10-Q are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our business, financial condition, and operating results.
We may not maintain ongoing profitability.
To maintain ongoing profitability, we must
accomplish numerous objectives, including continued growth in our business, ongoing support to registered developers whose applications
support the use of our data capture products, and the development of successful new products. We cannot foresee with any certainty
whether we will be able to achieve these objectives in the future. Accordingly, we may not generate sufficient net revenue or manage
our expenses sufficiently to maintain ongoing profitability. If we cannot maintain ongoing profitability, we will not be able to
support our operations from positive cash flows, and we would use our existing cash to support operating losses. If we are unable
to secure the necessary capital to replace that cash, we may need to suspend some or all of our current operations.
We may require additional capital in the future, but that capital
may not be available on reasonable terms, if at all, or on terms that would not cause substantial dilution to investors’
stock holdings.
We may need to raise capital to fund our growth
or operating losses in future periods. Our forecasts are highly dependent on factors beyond our control, including market acceptance
of our products and delays in deployments by businesses of applications that use our data capture products. Even if we maintain
profitable operating levels, we may need to raise capital to provide sufficient working capital to fund our growth. If capital
requirements vary materially from those currently planned, we may require additional capital sooner than expected. There can be
no assurance that such capital will be available in sufficient amounts or on terms acceptable to us, if at all.
If application developers are not successful in their efforts
to develop, market and sell their applications into which our software and products are incorporated, we may not achieve our sales
projections.
We are dependent upon application developers
to integrate our scanning and software products into their applications designed for mobile workers using smartphones, tablets
and mobile computers, and to successfully market and sell those application products and solutions into the marketplace. We focus
on serving the needs of application developers as sales of our data capture products are application driven. However, these developers
may take considerable time to complete development of their applications, may experience delays in their development timelines,
may develop competing applications, may be unsuccessful in marketing and selling their application products and solutions to customers,
or may experience delays in customer deployments and implementations, which would adversely affect our ability to achieve our revenue
projections.
Failure to maintain effective internal controls could have a
material adverse effect on our business, operating results and stock price.
We have evaluated and will continue to evaluate
our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires an
annual management assessment of the design and effectiveness of our internal control over financial reporting. If we fail to maintain
the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be
able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance
with Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal controls, particularly those related to revenue recognition,
are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide
reliable financial reports or detect and prevent fraud, our business and operating results could be harmed, investors could lose
confidence in our reported financial information, and the trading price of our stock could drop significantly.
Despite security protections, our business records and information
system could be hacked by unauthorized personnel
We protect our business records and information
from access by unauthorized personnel. We maintain adequate segregation of duties in safeguarding our assets and related records
and monitor our systems to detect any attempts to bypass our controls and procedures which we evaluate and update from time to
time. We are aware that unauthorized efforts to access our business records and information system with sophisticated tools could
bypass our controls and procedures and we remain alert to that possibility.
Global economic conditions may have a negative impact on our
business and financial condition in ways that we currently cannot predict and may further limit our ability to raise additional
funds.
Global economic conditions may have an impact
on our business and our financial condition. We may face significant challenges if global economic growth slows down and conditions
in the financial markets worsen. In particular, should these conditions cause our revenues to be materially less than forecast,
we may find it necessary to initiate reductions in our expenses and defer product development programs. In addition, our ability
to access the capital markets and raise funds required for our operations may be severely restricted at a time when we would like,
or need, to do so, which could have an adverse effect on our ability to meet our current and future funding requirements and on
our flexibility to react to changing economic and business conditions.
The decision by British voters to exit the European Union (“Brexit”)
may negatively impact our financial results and cause realignment of our European and U.K. distribution channels.
Our products sold in Europe are primarily
sold online through third party distributors and resellers operating within the European Common Market, some of whom are based
in the U.K. and others whom are based outside of the U.K. All distributors within the European Common Market including the U.K.
prior to exit may sell our products anywhere within the common market. Our distributors’ customers may purchase our products
from any of these distributors. The outcome of Brexit negotiations remain uncertain, but the UK’s exit will likely change
the trading relationship between the U.K. and the European Union which could affect the cost of goods imported into and exported
from the U.K., could increase currency volatility that could drive a weaker British pound which could cause prices of our products
sold in the U.K. to increase or profit margins to decline, may affect the ability of our distributors operating within the U.K.
to sell our products into the European Common Market on competitive terms, and may affect the ability of our distributors operating
within the European Common Market but outside of the U.K. to sell our products into the U.K. on competitive terms. With a range
of outcomes still possible, the impact from Brexit remains uncertain and will depend, in part, on the final outcome of tariff,
trade, regulatory and other negotiations.
Our quarterly operating results may fluctuate in future periods,
which could cause our stock price to decline.
We expect to experience quarterly fluctuations
in operating results in the future. We generally ship orders as received, and as a result we may have little backlog. Quarterly
revenues and operating results therefore depend on the volume and timing of orders received during the quarter, which are difficult
to forecast. Historically, we have often recognized a substantial portion of our revenue in the last month of the quarter. This
subjects us to the risk that even modest delays in orders or in the manufacture of products relating to orders received, may adversely
affect our quarterly operating results. Our operating results may also fluctuate due to factors such as:
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the demand for our products;
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the size and timing of customer orders;
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unanticipated delays or problems in our introduction of new products
and product enhancements;
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the introduction of new products and product enhancements by our competitors;
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the timing of the introduction and deployments of new applications that
work with our products;
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changes in the revenues attributable to royalties and engineering development
services;
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timing of software enhancements;
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changes in the level of operating expenses;
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competitive conditions in the industry including competitive pressures
resulting in lower average selling prices;
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timing of distributors’ shipments to their customers;
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delays in supplies of key components used in the manufacturing of our
products, and
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general economic conditions and conditions specific to our customers’
industries.
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Because we base our staffing
and other operating expenses on anticipated revenues, unanticipated declines or delays in the receipt of orders can cause significant
variations in operating results from quarter to quarter. As a result of any of the foregoing factors, or a combination, our results
of operations in any given quarter may be below the expectations of public market analysts or investors, in which case the market
price of our common stock would be adversely affected.
To maintain the availability of our bank lines of credit we must
remain in compliance with the covenants as specified under the terms of the credit agreements and the bank may exercise discretion
in making advances to us.
Our credit agreements with our bank requires
us to maintain compliance with an asset coverage ratio of no less than 1.25 to 1.0, measured monthly. The agreement contains customary
affirmative and negative covenants, including covenants that limit or restrict our ability to, among other things, grant liens,
make investments, incur indebtedness, merge or consolidate, dispose of assets, make acquisitions, pay dividends or make distributions,
repurchase stock, enter into transactions with affiliates and enter into restrictive agreements, in each case subject to customary
exceptions for a credit facility of this size and type. The agreement also contains customary events of default including, among
others, payment defaults, breaches of covenants, bankruptcy and insolvency events, cross defaults with certain material indebtedness,
judgment defaults, and breaches of representations and warranties. Upon an event of default, our bank may declare all or a portion
of our outstanding obligations payable to be immediately due and payable and exercise other rights and remedies provided for under
the agreement. During the existence of an event of default, interest on the obligations could be increased. The agreement may be
terminated by us or by our bank at any time. Upon such termination, our bank would no longer make advances under the credit agreement
and outstanding advances would be repaid as receivables are collected. All advances are at our bank’s discretion and our
bank is not obligated to make advances.
Deferred tax assets comprise a significant portion of our assets
and are dependent upon future tax profitability to realize the benefits.
We have recorded deferred tax assets on our
balance sheet because we believe that it is more likely than not that we will generate sufficient tax profitability in the future
to realize the tax savings our deferred tax assets represent. If we do not achieve and maintain sufficient profitability, the tax
savings represented by our deferred tax assets may never be realized and we would need to recognize a loss for those deferred tax
assets.
Goodwill comprises a significant portion of our assets and may
be subject to impairment write-downs in future periods which would substantially increase our losses, make it more difficult to
achieve profitability, and could cause our stock price to decline.
We review our goodwill for impairment at least
annually as of September 30th, and more often if factors suggest potential impairment. Many factors are considered in evaluating
goodwill including our market capitalization, comparable companies within our industry, our estimates of our future performance,
and discounted cash flow analysis. Many of these factors are highly subjective and may be negatively impacted by our financial
results and market conditions in the future. We may incur goodwill impairment charges in the future and any future write-downs
of our goodwill would adversely affect our operating results, make it more difficult to maintain profitability, and as a result
the market price of our common stock could be adversely affected.
We may be unable to manufacture our products because we are dependent
on a limited number of qualified suppliers for our components.
Several of our component parts are produced
by one or a limited number of suppliers. Shortages or delays could occur in these essential components due to an interruption of
supply or increased demand in the industry. Suppliers may choose to restrict credit terms or require advance payment causing delays
in the procurement of essential materials. If we are unable to procure certain component parts, we could be required to reduce
our operations while we seek alternative sources for these components, which could have a material adverse effect on our financial
results. To the extent that we acquire extra inventory stocks to protect against possible shortages, we would be exposed to additional
risks associated with holding inventory, such as obsolescence, excess quantities, or loss.
If we fail to develop and introduce new products rapidly and
successfully, we will not be able to compete effectively, and our ability to generate sufficient revenues will be negatively affected.
The market for our products is prone to rapidly
changing technology, evolving industry standards and short product life cycles. If we are unsuccessful at developing and introducing
new products and services on a timely basis that include the latest technologies, conform to the newest standards and that are
appealing to end users, we will not be able to compete effectively, and our ability to generate significant revenues will be seriously
harmed.
The development of new products and services
can be very difficult and requires high levels of innovation. The development process is also lengthy and costly. Short product
life cycles for smartphones and tablets expose our products to the risk of obsolescence and require frequent new product upgrades
and introductions. We will be unable to introduce new products and services into the market on a timely basis and compete successfully,
if we fail to:
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invest significant resources in research and development, sales and
marketing, and customer support;
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identify emerging trends, demands and standards in the field of mobile
computing products;
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enhance our products by adding additional features;
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maintain superior or competitive performance in our products; and
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anticipate our end users’ needs and technological trends accurately.
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We cannot be sure that we will have sufficient
resources to make adequate investments in research and development or that we will be able to identify trends or make the technological
advances necessary to be competitive.
A significant portion of our revenue currently comes from a limited
number of distributors, and any decrease in revenue from these distributors could harm our business.
A significant portion of our revenue comes
from a limited number of distributors. In the first half year of 2019 and 2018, Ingram Micro Inc. and BlueStar, Inc. together represented
approximately 61% and 54%, respectively, of our worldwide revenues. We expect that a significant portion of our revenue will continue
to depend on sales to a limited number of distributors. We do not have long-term commitments from our distributors to carry our
products, and any of our distributors may from quarter to quarter comprise a significant concentration of our revenues. Any could
choose to stop selling some or all of our products at any time, and each of these companies also carries our competitors’
products. If we lose our relationship with any of our significant distributors, we would experience disruption and delays in marketing
our products.
We may not be able to collect receivables from customers who
experience financial difficulties
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Our accounts receivables are derived primarily
from distributors. We perform ongoing credit evaluations of our customers’ financial conditions but generally require no
collateral from our customers. Reserves are maintained for potential credit losses, and such losses have historically been within
such reserves. However, many of our customers may be thinly capitalized and may be prone to failure in adverse market conditions.
Although our collection history has been good, from time to time a customer may not pay us because of financial difficulty, bankruptcy
or liquidation. If global financial conditions have an impact on our customers’ ability to pay us in a timely manner, and
consequently, we may experience increased difficulty in collecting our accounts receivable, and we may have to increase our reserves
in anticipation of increased uncollectible accounts.
We could face increased competition in the future, which would
adversely affect our financial performance.
The market in which we operate is very competitive.
Our future financial performance is contingent on a number of unpredictable factors, including that:
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some of our competitors have greater financial, marketing, and technical
resources than we do;
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we periodically face intense price competition, particularly when our
competitors have excess inventories and discount their prices to clear their inventories; and
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certain manufacturers of tablets and mobile phones offer products with
built-in functions, such as Bluetooth wireless technology or barcode scanning, that compete with our products.
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Increased competition could result in price
reductions, fewer customer orders, reduced margins, and loss of market share. Our failure to compete successfully against current
or future competitors could harm our business, operating results and financial condition.
If we do not correctly anticipate demand for our products, our
operating results will suffer.
The demand for our products depends on many
factors and is difficult to forecast as we introduce and support more products, and as competition in the markets for our products
intensifies. If demand is lower than forecasted levels, we could have excess production resulting in higher inventories of finished
products and components, which could lead to write-downs or write-offs of some or all of the excess inventories, and reductions
in our cash balances. Lower than forecasted demand could also result in excess manufacturing capacity at our third-party manufacturers
and in our failure to meet minimum purchase commitments, each of which may lower our operating results.
If demand increases beyond forecasted levels,
we would have to rapidly increase production at our third-party manufacturers. We depend on suppliers to provide additional volumes
of components, and suppliers might not be able to increase production rapidly enough to meet unexpected demand. Even if we were
able to procure enough components, our third-party manufacturers might not be able to produce enough of our devices to meet our
customer demand. In addition, rapid increases in production levels to meet unanticipated demand could result in higher costs for
manufacturing and supply of components and other expenses. These higher costs could lower our profit margins. Further, if production
is increased rapidly, manufacturing yields could decline, which may also lower operating results.
We rely primarily on distributors to sell our products, and our
sales would suffer if any of these distributors stops selling our products effectively.
Because we sell our products primarily through
distributors, we are subject to risks associated with channel distribution, such as risks related to their inventory levels and
support for our products. Our distribution channels may build up inventories in anticipation of growth in their sales. If such
growth in their sales does not occur as anticipated, the inventory build-up could contribute to higher levels of product returns.
The lack of sales by any one significant participant in our distribution channels could result in excess inventories and adversely
affect our operating results and working capital liquidity.
Our agreements with distributors are generally
nonexclusive and may be terminated on short notice by them without cause. Our distributors are not within our control, are not
obligated to purchase products from us, and may offer competitive lines of products simultaneously. Sales growth is contingent
in part on our ability to enter into additional distribution relationships and expand our sales channels. We cannot predict whether
we will be successful in establishing new distribution relationships, expanding our sales channels or maintaining our existing
relationships. A failure to enter into new distribution relationships or to expand our sales channels could adversely impact our
ability to grow our sales.
We allow our distribution channels to return
a portion of their inventory to us for full credit against other purchases. In addition, in the event we reduce our prices, we
credit our distributors for the difference between the purchase price of products remaining in their inventory and our reduced
price for such products. Actual returns and price protection may adversely affect future operating results and working capital
liquidity by reducing our accounts receivable and increasing our inventory balances, particularly since we seek to continually
introduce new and enhanced products and are likely to face increasing price competition.
We depend on alliances and other business relationships with
third-parties, and a disruption in these relationships would hinder our ability to develop and sell our products.
We depend on strategic alliances and business
relationships with leading participants in various segments of the mobile applications market to help us develop and market our
products. Our strategic partners may revoke their commitment to our products or services at any time in the future or may develop
their own competitive products or services. Accordingly, our strategic relationships may not result in sustained business alliances,
successful product or service offerings, or the generation of significant revenues. Failure of one or more of such alliances could
result in delay or termination of product development projects, failure to win new customers, or loss of confidence by current
or potential customers.
We have devoted significant research and development
resources to design products to work with a number of operating systems used in mobile devices including Apple (iOS), Google (Android),
and Microsoft (Windows). Such design activities have diverted financial and personnel resources from other development projects.
These design activities are not undertaken pursuant to any agreement under which Apple, Google or Microsoft is obligated to collaborate
or to support the products produced from such collaboration. Consequently, these organizations may terminate their collaborations
with us for a variety of reasons, including our failure to meet agreed-upon standards or for reasons beyond our control, such as
changing market conditions, increased competition, discontinued product lines, and product obsolescence.
Our intellectual property and proprietary rights may be insufficient
to protect our competitive position.
Our business depends on our ability to protect
our intellectual property. We rely primarily on patent, copyright, trademark, trade secret laws, and other restrictions on disclosure
to protect our proprietary technologies. We cannot be sure that these measures will provide meaningful protection for our proprietary
technologies and processes. We cannot be sure that any patent issued to us will be sufficient to protect our technology. The failure
of any patents to provide protection to our technology would make it easier for our competitors to offer similar products. In connection
with our participation in the development of various industry standards, we may be required to license certain of our patents to
other parties, including our competitors that develop products based upon the adopted standards.
We also generally enter into confidentiality
agreements with our employees, distributors, and strategic partners, and generally control access to our documentation and other
proprietary information. Despite these precautions, it may be possible for a third-party to copy or otherwise obtain and use our
products, services, or technology without authorization, develop similar technology independently, or design around our patents.
Effective copyright, trademark, and trade secret
protection may be unavailable or limited in certain foreign countries.
We may become subject to claims of intellectual property rights
infringement, which could result in substantial liability.
In the course of operating our business, we
may receive claims of intellectual property infringement or otherwise become aware of potentially relevant patents or other intellectual
property rights held by other parties. Many of our competitors have large intellectual property portfolios, including patents that
may cover technologies that are relevant to our business. In addition, many smaller companies, universities, and individuals have
obtained or applied for patents in areas of technology that may relate to our business. The industry is moving towards aggressive
assertion, licensing, and litigation of patents and other intellectual property rights.
If we are unable to obtain and maintain licenses
on favorable terms for intellectual property rights required for the manufacture, sale, and use of our products, particularly those
products which must comply with industry standard protocols and specifications to be commercially viable, our results of operations
or financial condition could be adversely impacted.
In addition to disputes relating to the validity
or alleged infringement of other parties’ rights, we may become involved in disputes relating to our assertion of our own
intellectual property rights. Whether we are defending the assertion of intellectual property rights against us or asserting our
intellectual property rights against others, intellectual property litigation can be complex, costly, protracted, and highly disruptive
to business operations by diverting the attention and energies of management and key technical personnel. Plaintiffs in intellectual
property cases often seek injunctive relief, and the measures of damages in intellectual property litigation are complex and often
subjective or uncertain. Thus, any adverse determinations in this type of litigation could subject us to significant liabilities
and costs.
New industry standards may require us to redesign our products,
which could substantially increase our operating expenses.
Standards for the form and functionality of
our products are established by standards committees. These independent committees establish standards, which evolve and change
over time, for different categories of our products. We must continue to identify and ensure compliance with evolving industry
standards so that our products are interoperable, and we remain competitive. Unanticipated changes in industry standards could
render our products incompatible with products developed by major hardware manufacturers and software developers. Should any major
changes, even if anticipated, occur, we would be required to invest significant time and resources to redesign our products to
ensure compliance with relevant standards. If our products are not in compliance with prevailing industry standards for a significant
period of time, we would miss opportunities to sell our products for use with new hardware components from mobile computer manufacturers
and OEMs, thus affecting our business.
Undetected flaws and defects in our products may disrupt product
sales and result in expensive and time-consuming remedial action.
Our hardware and software products may contain
undetected flaws, which may not be discovered until customers have used the products. From time to time, we may temporarily suspend
or delay shipments or divert development resources from other projects to correct a particular product deficiency. Efforts to identify
and correct errors and make design changes may be expensive and time consuming. Failure to discover product deficiencies in the
future could delay product introductions or shipments, require us to recall previously shipped products to make design modifications,
or cause unfavorable publicity, any of which could adversely affect our business and operating results.
The loss of one or more of our senior personnel could harm our
existing business.
A number of our officers and senior managers
have been employed for more than twenty years by us. Our future success will depend upon the continued service of key officers
and senior managers. Competition for officers and senior managers is intense, and there can be no assurance that we will be able
to retain our existing senior personnel. The loss of one or more of our officers or key senior managers could adversely affect
our ability to compete.
The expensing of options will continue to reduce our operating
results such that we may find it necessary to change our business practices to attract and retain employees.
Historically, we have used stock options as
a key component of our employee compensation packages. We believe that stock options provide an incentive to our employees to maximize
long-term stockholder value and, through the use of vesting, encourage valued employees to remain with us. The expensing of employee
stock options adversely affects our net income and earnings per share, will continue to adversely affect future quarters, and will
make profitability harder to achieve. In addition, we may decide in response to the effects of expensing stock options on our operating
results to reduce the number of stock options granted to employees or to grant options to fewer employees. This could adversely
affect our ability to retain existing employees and attract qualified candidates, and also could increase the cash compensation
we would have to pay to them.
If we are unable to attract and retain highly skilled sales and
marketing and product development personnel, our ability to develop and market new products and product enhancements will be adversely
affected.
We believe our ability to achieve increased
revenues and to develop successful new products and product enhancements will depend in part upon our ability to attract and retain
highly skilled sales and marketing and product development personnel. Our products involve a number of new and evolving technologies,
and we frequently need to apply these technologies to the unique requirements of mobile products. Our personnel must be familiar
with both the technologies we support and the unique requirements of the products to which our products connect. Competition for
such personnel is intense, and we may not be able to attract and retain such key personnel. In addition, our ability to hire and
retain such key personnel will depend upon our ability to raise capital or achieve increased revenue levels to fund the costs associated
with such key personnel. Failure to attract and retain such key personnel will adversely affect our ability to develop and market
new products and product enhancements.
Our operating results could be harmed by economic, political,
regulatory and other risks associated with export sales.
Our operating results are subject to the risks
inherent in export sales, including:
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unexpected changes in regulatory requirements, import and export
restrictions and tariffs;
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difficulties in managing foreign operations;
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the burdens of complying with a variety of foreign laws;
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greater difficulty or delay in accounts receivable collection;
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potentially adverse tax consequences; and
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political and economic instability.
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Our export sales are primarily denominated
in Euros for our sales to European distributors. Accordingly, an increase in the value of the United States dollar relative to
Euros could make our products more expensive and therefore potentially less competitive in European market. Declines in the value
of the Euro relative to the United States dollar may result in foreign currency losses relating to collection of Euro denominated
receivables if left unhedged.
Our operations are vulnerable to interruption by fire, earthquake,
power loss, telecommunications failure, and other events beyond our control.
Our corporate headquarters is located near
an earthquake fault. The potential impact of a major earthquake on our facilities, infrastructure, and overall business is unknown.
Additionally, we may experience electrical power blackouts or natural disasters that could interrupt our business. Should a disaster
be widespread, such as a major earthquake, or result in the loss of key personnel, we may not be able to implement our disaster
recovery plan in a timely manner. Any losses or damages incurred by us as a result of these events could have a material adverse
effect on our business.
The sale of a substantial number of shares of our common stock
could cause the market price of our common stock to decline.
Sales of a substantial number of shares of
our common stock in the public market could adversely affect the market price for our common stock. The market price of our common
stock could also decline if one or more of our significant stockholders decided for any reason to sell substantial amounts of our
common stock in the public market.
As of August 6, 2019, we had 5,999,653 shares
of common stock outstanding. Substantially all of these shares are freely tradable in the public market, either without restriction
or subject, in some cases, only to S-3 prospectus delivery requirements and, in other cases, only to manner of sale, volume, and
notice requirements of Rule 144 under the Securities Act.
As of August 6, 2019, we had 2,457,205 shares
of common stock subject to outstanding options under our stock option plans, and 144,167 shares of common stock were available
for future issuance under the plans. We have registered the shares of common stock subject to outstanding options and reserved
for issuance under our stock option plans. Accordingly, the shares of common stock underlying vested options will be eligible for
resale in the public market as soon as the options are exercised.
Volatility in the trading price of our Common Stock could negatively
impact the price of our Common Stock.
During the period from January 1, 2018 through
August 6, 2019, our common stock price fluctuated between a high of $4.16 and a low of $1.35. We have experienced low trading volumes
in our stock, and thus relatively small purchases and sales can have a significant effect on our stock price. The trading price
of our common stock could be subject to wide fluctuations in response to many factors, some of which are beyond our control, including
general economic conditions and the outlook of securities analysts and investors on our industry. In addition, the stock markets
in general, and the markets for high technology stocks in particular, have experienced high volatility that has often been unrelated
to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of
our common stock.