Item 1.
Business
Overview
Wireless Telecom Group,
Inc., a New Jersey corporation, together with its subsidiaries (“we”, “us”, “our” or the “Company”),
designs and manufactures radio frequency (“RF”) and microwave-based products for wireless and advanced communications
industries and currently markets its products and services worldwide under the Boonton, Microlab and Noisecom brands. The Company’s
complementary suite of high performance instruments and components includes peak power meters, signal analyzers, RF passive components
and integrated subsystems, noise modules and precision noise generators. The Company serves both commercial and government markets
with workflow-oriented, built-for-purpose solutions in distributed antenna systems (“DAS”), cellular/mobile, WiFi,
WiMAX, private mobile radio, satellite, cable, radar, avionics, medical, and computing applications. The consolidated financial
statements include the accounts of Wireless Telecom Group, Inc., doing business as, and operating under the trade name, Noise Com,
Inc., and its wholly owned subsidiaries including Boonton Electronics Corporation and Microlab/FXR.
The corporate website address is www.wtcom.com. Noise Com, Inc., Boonton Electronics Corporation and Microlab/FXR are hereinafter
referred to as “Noisecom”, “Boonton” and “Microlab”, respectively.
Reportable Segments
The Company presents
its operations in two reportable segments: (1) network solutions and (2) test and measurement. The network solutions segment is
comprised primarily of the operations of Microlab. The test and measurement segment is comprised of the operations of Boonton and
Noisecom.
Revenues by reportable
segment for the years ended December 31, 2016 and 2015 were as follows:
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2016
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2015
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Network solutions
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$
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20,198,377
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$
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21,534,831
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Test and measurement
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11,128,350
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11,574,275
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$
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31,326,727
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$
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33,109,106
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Additional financial
information on the Company’s reportable segments for each of the last two years is included in the Company’s Notes
to the consolidated financial statements (see Note 7, “Segment and Related Information”) included as part of this annual
report.
Subsequent Event
On February 17, 2017,
the Company acquired CommAgility Limited, a U.K. corporation (“CommAgility”) specializing in Long Term Evolution (“LTE”)
technology. CommAgility is a vital supplier of signal processing technology for network validation systems, supporting LTE and
emerging 5G networks, and its products and services solve unique solutions in LTE/4G. The acquisition of CommAgility expands our
product set, increases our addressable market and creates operating scale. For the fiscal year ended December 31, 2017, the Company
will report CommAgility as a third segment, “Embedded Solutions”, adjacent to our existing Network Solutions and Test
and Measurement Segments.
As
more fully described in the Liquidity and Capital Resources section, the acquisition of CommAgility
was funded through corporate cash and our new Loan and Security Agreement (the “Credit Facility”) with Bank of America
N.A. which provides for a term loan in the aggregate principal amount of $760,000 (the “Term Loan”) and an asset based
revolving loan (the “Revolver”), which is subject to a Borrowing Base Calculation (as defined in the Credit Facility)
of up to a maximum availability of $9,000,000. The Company entered into the Credit Facility on February 16, 2017 and the termination
date is November 19, 2019.
Market
Since the Company’s
incorporation in the State of New Jersey in 1985, it has been primarily engaged in supplying noise source products, electronic
testing and measurement instruments, and RF passive components to customers.
Approximately
85% and 89% of the Company’s consolidated revenues in fiscal years 2016 and 2015, respectively, were derived from commercial
customers. The remaining consolidated revenues (approximately 15% and 11%, respectively) were comprised of revenues made to the
United States government (particularly the armed forces) and prime defense contractors.
Products
The Company, through
its Microlab subsidiary, designs and manufactures a wide selection of RF passive components and integrated subsystems for signal
conditioning and distribution in the wireless infrastructure markets, particularly for DAS, the in-building wireless solutions
industry, radio base-station market and medical equipment sector. Microlab’s passive RF components share unique capabilities
in the area of broadband frequency coverage, minimal loss and low Passive Intermodulation (“PIM”).
Microlab product offerings include: neutral host DAS and co-siting combiner solutions, hybrid couplers and hybrid matrices, cross
band couplers, attenuators, RF terminations, RF power splitters and diplexers, as well as RF combiners and broadband combiner trays
for in-building DAS deployments.
The Company, through
its Boonton subsidiary, designs and produces electronic test and measurement equipment including power meters, voltmeters, audio
and modulation meters, portable passive intermodulation test equipment for field-based testing of cellular transmission signals
and accessory products. These products measure the power of RF and microwave systems used by the military and in commercial sectors
like telecommunications.
Boonton products are
also used to test terrestrial and satellite communications, radar and telemetry. Certain power meter products are designed for
measuring signals based on wideband modulation formats, allowing a variety of measurements to be made, including maximum power,
peak power, average power and minimum power.
The Company’s
noise components and instruments (noise source products) are used as a method to provide wide band signals for sophisticated telecommunication
and defense applications, and as a stable reference standard for instruments and systems, including radar and satellite communications.
Furthermore, noise sources can simulate challenging signaling conditions in data and RF transmission systems. Examples are jitter
testing for high speed data lines used in modern computer architecture and signal to noise measurements to optimize wireless receivers
and transmitters. Additionally, noise sources are used for jamming RF signals, and blocking or disturbing enemy radar and other
communications, as well as insulating and protecting friendly communications.
Noise sources also are
used in radar systems as part of built-in test equipment to continuously monitor the radar receiver and in
satellite communications where the use of back-up receivers are becoming more common as the demand for communication
availability and reliability is increasing. This test helps assure that the back-up receiver is functional and ready.
The Company’s
products consist of several models with varying degrees of capabilities, which can be customized to meet particular customer requirements.
They may be incorporated directly into the electronic equipment concerned or may be stand-alone components or devices that are
connected to, or used in conjunction with, such equipment operating from an external site, in the factory or in the field. Prices
of products range from approximately $100 to $100,000 per unit, with most revenues occurring between $2,000 and $35,000 per unit.
The Company may experience variations in gross profit based upon the mix of these products sold, as well as variations due to revenue
volume and economies of scale.
The Company’s
products have extended useful lives and the Company provides recalibration services for its instrument products to ensure their
accuracy, for a fee, to its domestic and international customers. Such services accounted for approximately 4% of consolidated
revenues for each of the years ended December 31, 2016 and 2015, respectively.
Management believes
that its products offer state-of-the-art performance combined with outstanding customer and technical support.
Marketing and Sales
The Company’s
products for both of its segments are sold globally through a small in-house sales force, by over one hundred manufacturers’
representatives and through a network of authorized distributors. The Company promotes the sale of its products through its web-site,
product literature, publication of articles, presentations at technical conferences, direct mailings, trade advertisements and
trade show exhibitions.
The Company’s
relationship with its manufacturers’ representatives and distributors is governed by written contracts that either run for
one-year renewable periods terminable by either party on 60 days prior notice or have indefinite lives terminable by either party
on 60 days prior notice. The contracts generally provide for territorial and product representation. The Company does not believe
that the loss of any single manufacturers’ representative or distributor would have a material adverse effect on its business.
Customers and Sales by Geographic
Areas
The Company currently
sells the majority of its products from both of its segments to commercial users in the communications industry. Other sales are
made to large defense contractors, which incorporate the Company’s products into their products for sale to the U.S. and
foreign governments, multi-national companies and Fortune 500 companies, and directly to the U.S. government.
For the years ended
December 31, 2016 and 2015, no one single customer accounted for 10% or more of total consolidated revenues. The Company’s
largest customers vary from year to year.
Regional consolidated
revenues from operations for fiscal year 2016 were made to customers in the Americas ($24,155,154 or 77% of total consolidated
revenues), Europe, Middle East and Africa ($5,497,826 or 18% of total consolidated revenues) and Asia Pacific ($1,673,747 or 5%
of total consolidated revenues). Regional consolidated revenues from operations for fiscal year 2015 were made to customers
in the Americas ($24,946,340 or 75% of total consolidated revenues), Europe, Middle East and Africa ($5,885,975 or 18% of total
consolidated revenues) and Asia Pacific ($2,276,791 or 7%
of total consolidated revenues).
Research and Development
The Company currently
maintains an engineering staff responsible for the improvement of existing products, design and modification of existing products
and custom products with unique specifications to meet customer needs, and engineering, research and development of new products
and applications. Research and development costs were approximately $4,046,000 and $3,957,000 for the years ended December 31,
2016 and 2015, respectively.
Competition
We compete against many
companies which utilize similar technology, some of which are larger and have substantially greater resources and expertise in
financial, technical and marketing areas than us. Some of these companies include Keysight Technologies, Inc., Rohde & Schwarz
GmbH & Co. KG, Anritsu Corporation, Kathrein, Commscope and Westell Technologies, Inc. The Company competes by having a niche
in several product areas where it capitalizes on its expertise in manufacturing products with unique specifications.
The Company designs
its products with special attention to making them user-friendly and re-evaluates its products for the purpose of enhancing
and improving them. The Company believes that these efforts coupled with its willingness to adapt its products to the particular
needs of its customers and its intensive efforts in customer and technical support are factors that add to the competitiveness
of our products.
Backlog
The Company’s
consolidated backlog of firm orders to be shipped in the next twelve months was approximately $4,000,000 at December 31, 2016,
compared to approximately $2,500,000 at December 31, 2015. It is anticipated that the majority of the backlog orders at December
31, 2016 will be filled during the current year. The stated backlog is not necessarily indicative of Company revenues for any future
period nor is a backlog any assurance that the Company will realize a profit from the orders.
Inventory, Supplies and Manufacturing
The Company purchases
components, devices and subassemblies from a wide variety of sources. The Company’s procurement policy requires maintaining
adequate levels of raw materials inventory to minimize the Company’s production lead times with third-party suppliers and
to improve the Company’s capacity to expedite fulfillment of customer orders. Although the procurement team focuses its efforts
to work closely with its suppliers to avoid adverse effects of shortages or delays in delivery of inventories, delays in the future
may have an adverse impact on the Company’s operations. For the year ended December 31, 2016, no one single third-party supplier
accounted for 10% or more of the Company’s total consolidated inventory purchases. For the year ended December 31, 2015,
two third-party suppliers each accounted for approximately 10% of the Company’s total consolidated inventory purchases. No
other third-party supplier accounted for 10% or more of the Company’s total consolidated inventory purchases for the year
ended December 31, 2015.
The Company is not party
to any long term contracts regarding the deliveries of its supplies and components. It generally purchases such items pursuant
to written purchase orders of both the individual and blanket variety. Blanket purchase orders usually cover the purchase of a
larger amount of items at fixed prices for delivery and payment on specific dates.
The Company develops,
designs, manufactures, assembles, calibrates and tests our products at our facility in Parsippany, New Jersey. Testing of products
is generally accomplished at the end of the manufacturing process and is performed in-house, as are all quality control processes.
The Company utilizes modern equipment for the design, engineering, manufacture, assembly and testing of its products.
Warranty and Service
The Company typically
provides one-year warranties on all of its products covering both parts and labor. The Company, at its option, repairs or replaces
products that are defective during the warranty period if the proper preventive maintenance procedures have been followed by its
customers.
In cases of defective
products the customer typically returns them to the Company’s facility. The Company’s service personnel replace or
repair the defective items and ships them back to the customer. Generally, all servicing is done at the Company’s facility,
and the Company charges its customers a fee for those service items that are not covered by warranty. The Company’s Noisecom
and Microlab divisions typically do not offer their customers any formal written service contracts. However, the Company’s
Boonton division does offer its customers formal written service contracts for a fee.
Product Liability Coverage
The testing of electronic
communications equipment and the accurate transmission of information entail a risk of product liability to the Company. Product
liability claims could be asserted against the Company by end-users of any of the Company’s products.
The Company maintains
product liability insurance coverage and no claims have been asserted for product liability due to a defective or malfunctioning
device in the past 5 years.
Intellectual Property
We believe that our
intellectual property, including its methodologies, is critical to our success and competitive position. We rely on a combination
of U.S. and foreign patents, copyrights, trademarks and trade secrets, as well as confidentiality agreements to establish and protect
our proprietary rights. Key employees have signed confidentiality and non-competition agreements regarding the Company’s
proprietary information.
Regulation
Environmental
The Company’s
operations are subject to various federal, state and local environmental laws, ordinances and regulations that limit discharges
into the environment, establish standards for the handling, generation, use, emission, release, discharge, treatment, storage and
disposal of, or exposure to, hazardous materials, substances and waste, and require cleanup of contaminated soil and groundwater.
The New Jersey Department
of Environmental Protection (the “NJDEP”) conducted an investigation in 1982
concerning
disposal at a facility previously leased by the Company’s Boonton operations. The focus of the investigation involved certain
materials formerly used by Boonton’s manufacturing operations at that site and the possible effect of such disposal on the
aquifer underlying the property. The disposal practices and the use of the materials in question were discontinued in 1978. The
Company has cooperated with the NJDEP investigation and has been diligently pursuing the matter in an attempt to resolve it in
accordance with applicable NJDEP operating procedures. The above referenced activities were conducted by Boonton prior to our acquisition
of that entity in 2000.
In 1982, Boonton and
the NJDEP agreed upon a plan to correct ground water contamination at the site, located in the township of Parsippany-Troy Hills,
pursuant to which wells have been installed by Boonton. The plan contemplates that the wells will be operated and that soil and
water samples will be taken and analyzed until such time that contamination levels are satisfactory to the NJDEP. In 2014, the
Company received approval for a groundwater permit from the NJDEP to carry out the final remedial action work plan and report.
Under the final phase of the plan, there will be limited and reduced monitoring and testing as long as concentrations at the site
continue on a decreasing trend.
Expenditures incurred
by the Company during the year ended December 31, 2016 and 2015 in connection with the site amounted to approximately $18,000 and
$22,000, respectively. While management anticipates that the expenditures in connection with this site will not be substantial
in future years, the Company could be subject to significant future liabilities and may incur significant future expenditures if
further contaminants from Boonton’s testing are identified and the NJDEP requires additional remediation activities. Management
is unable to estimate future remediation costs, if any, at this time. The Company will continue to be liable under the plan, in
all future years, until such time as the NJDEP releases the Company from all obligations.
In December 2016, the
Company and its subsidiary, Boonton, entered into an agreement with an insurance company to settle prior disputes between the parties
related to whether insurance policies were issued by a former insurer and whether they provided coverage for expenses arising from
the NJDEP environmental matter. Under the terms of the settlement agreement, the Company received a payment in the amount of $485,000
for full and final settlement of any and all further insurance claims.
At this time, the Company
believes that it is in material compliance with all environmental laws, does not anticipate any material expenditure to meet current
or pending environmental requirements, and generally believes that its processes and products do not present any unusual environmental
concerns. Besides the matter
referred to above with
the NJDEP, the Company is unaware of any existing, pending or threatened contingent environmental liability that may have a material
adverse effect on its ongoing business operations.
Workplace Safety
The Company’s
operations are also governed by laws and regulations relating to workplace safety and worker health. The Company believes it is
in material compliance with these laws and regulations and does not believe that future compliance with such laws and regulations
will have a material adverse effect on its results of operations or financial condition.
ITAR and Export Controls
The Company is subject
to International Traffic in Arms Regulation, or ITAR. ITAR requires export licenses from the U.S. Department of State for products
shipped outside the U.S. that have military or strategic applications. Because some of the Company’s products could have
military or strategic applications, it must ensure its compliance with ITAR.
In addition, the Company
is subject to the Export Administration Regulations, or EAR, which regulates the export of certain “dual use” items
and technologies and, in some instances, requires a license from the U.S. Department of Commerce in connection with sales of the
Company’s products.
Government Contracting Regulations
Because the Company
has contracts with the federal government and its agencies, it may be subject to audit from time to time of our compliance with
government regulations by various agencies, including the Defense Contract Audit Agency, or DCAA. The DCAA reviews the adequacy
of, and a contractor’s compliance with, its internal control systems and policies, including the contractor’s purchasing,
property, estimating, compensation and management information systems. The DCAA has the right to perform audits on our incurred
costs on all contracts on a yearly basis. The Company has not been subject to a DCAA audit in the past 5 years.
Other governmental agencies,
including the Defense Securities Service and the Defense Logistics Agency, may also, from time to time, conduct inquiries or investigations
regarding a broad range of our activities.
Employees
As of March 3, 2017,
the Company has 111 full time employees. The Company is not subject to collective bargaining agreements in the United States or
internationally and considers its relationship with its employees to be good.
Investor Information
The Company is subject
to the disclosure requirements of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Therefore, the
Company files periodic reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”).
Such reports, proxy statements and other information may be read and copied by visiting the Public Reference Room of the SEC at
100 F Street N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding issuers that file electronically.
You
can access financial and other information, including copies of our SEC filings, at the Company’s Investor Relations page
on its website. The address of the website is www.wtcom.com. The Company makes
available,free of charge, copies of its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after
filing such material electronically or otherwise furnishing it to the SEC.
Item 1A.
Risk Factors
Our business is dependent on capital
spending on data and communication networks by customers or end users of our products and reductions in such capital spending could
adversely affect our business.
Our performance is dependent
on customers’ or end users’ capital spending for constructing, rebuilding, maintaining or upgrading data and communication
networks, which can be volatile or hard to forecast. Capital spending in the communications industry is cyclical and can be curtailed
or deferred on short notice. A variety of factors affect the amount of capital spending, and, therefore, our revenues and profits,
including:
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competing technologies;
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timing and adoption of global rollout of new technologies, including 4G/LTE;
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customer specific financial or market conditions;
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governmental regulation;
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demands for network services; and
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acceptance of new services offered by our customers.
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Our customers or the
end users of our products may not purchase new equipment at levels we have seen in the past or expect in the future. If our product
portfolio and product development plans do not position us well to capture an increased portion of the capital spending of customers,
our revenue may decline. As a result of these issues, we may not be able to maintain or increase our revenue in the future, and
our business, financial condition, results of operations and cash flows could be materially adversely affected.
Our industry is highly competitive and
if we are not able to successfully compete, we could lose market share and our revenues could decline.
We operate in industries
characterized by aggressive competition, rapid technological change, evolving technology standards and short product life cycles.
Current and prospective customers for our products evaluate our capabilities against the merits of our direct competitors. We compete
primarily on the basis of technology and performance. We also compete on price. Many of our competitors utilize similar technologies
to ours and have substantially greater resources and expertise in financial, technical and marketing areas than we have. Our competitors
may introduce products that are competitively priced, have increased performance or functionality or incorporate technological
advances that we have not yet developed or implemented.
To remain competitive,
we must continue to develop, market and sell new and enhanced products at competitive prices, which will require significant research
and development expenditures. If we do not develop new and enhanced products or if we are not able to invest adequately in our
research and development activities, our business, financial condition and results of operations could be negatively impacted.
Many of our competitors
are substantially larger than we are, and have greater financial, technical, marketing and other resources than we have. Many of
these large enterprises are in a better position to withstand any significant reduction in capital spending by customers in our
markets. They often have broader product lines and market focus, and may not be as susceptible to downturns in a single market.
These competitors may also be able to bundle their products together to meet the needs of a particular customer, and may be capable of delivering more complete
solutions than we are able to provide. To the extent large
enterprises that currently do not compete directly with us choose to
enter our markets by acquisition or otherwise, competition would likely intensify.
Our future success depends on our ability
to anticipate and to adapt to technological changes and develop, implement and market product innovations.
Many of our markets
are characterized by advances in information processing and communications capabilities that require increased transmission speeds
and greater bandwidth. These advances require ongoing improvements in the capabilities of our products. However, we may not be
successful in our ongoing improvement efforts if, among other things, our products:
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are not cost effective;
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are not brought to market in a timely manner;
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are not in accordance with evolving industry standards; or
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fail to achieve market acceptance or meet customer requirements.
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There are various competitive
wireless technologies that could be a substitute for the products we sell. The failure to successfully introduce new or enhanced
products on a timely and cost-competitive basis or the inability to continue to market existing products on a cost-competitive
basis could have a material adverse effect on our results of operations and financial condition. In addition, revenues from new
products may replace revenues from some of our existing products, mitigating the benefits of new product introductions and possibly
resulting in excess levels of inventory.
Furthermore, we must
make long-term investments and commit significant resources before knowing whether our investments will eventually result in products
that the market will accept. We must accurately forecast volumes, mix of products and configurations that meet customer requirements,
and we may not succeed. If we do not succeed, we may be left with inventories of obsolete products or we may not have enough of
some products available to meet customer demand, which could lead to reduced revenues and higher expenses.
Our revenues are dependent
in part on commercial upgrades of 4G wireless communications equipment, products and services. Our business may be harmed, and
our investments in our technologies may not provide us an adequate return if:
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LTE, a wireless standard, is not widely deployed or commercial deployment is delayed;
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wireless operators delay moving customers to 4G devices;
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wireless operators delay 4G deployments, expansions or upgrades;
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government regulators delay the reallocation of spectrum to allow wireless operators to upgrade to 4G, which will restrict the
expansion of 4G wireless connectivity;
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wireless operators are unable to drive improvements in 4G network performance and/or
capacity;
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wireless operators and other industries using these technologies deploy other technologies;
or
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wireless operators choose to spend their capital on their core network or limit their
expenditures on radio access network (RAN).
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Our business is dependent
on our ability to increase our share of components sold and to continue to drive the adoption of our products and services into
LTE and 4G wireless networks. If commercial deployment of our technologies, and upgrade of subscribers to 4G wireless communications
equipment, products and services using our technologies do not continue or are delayed, our revenues could be negatively impacted,
and our business could suffer.
Further, if we do
not have competitively priced, market accepted products available to meet the wireless operators planned roll-out of 5G wireless
communications systems, we may miss a significant opportunity and our business, financial condition and results of operations could
be materially and adversely impacted.
Our future research and development
projects may not be successful.
The successful development
of telecommunications products can be affected by many factors. Products that appear to be promising at their early phases of research
and development may fail to be commercialized for various reasons, including the failure to obtain the necessary regulatory approvals.
There is no assurance that any of our future research and development projects will be successful or completed within the anticipated
time frame or budget or that we will receive the necessary approvals from relevant authorities, customers, or prospective customers,
for the production of these newly developed products, or that these newly developed products will achieve commercial success. Even
if such products can be successfully commercialized, they may not achieve the level of market acceptance that we expect.
The cyclicality of our end-user markets
could harm our financial results.
Many of the end markets
we serve, including but not limited to the commercial wireless market, have historically been cyclical and have experienced periodic
downturns. The factors leading to and the severity and length of a downturn are very difficult to predict and there can be no assurance
that we will appropriately anticipate changes in the underlying end markets we serve or that any increased levels of business activity
will continue as a trend into the future. If we fail to anticipate changes in the end markets we serve, our business, results of
operations and financial condition could be materially adversely affected. We are subject to fluctuations in technology spending
by existing and potential customers.
Dependence on contract manufacturing
and outsourcing other portions of our supply chain may adversely affect our ability to bring products to market and damage our
reputation.
As part of our efforts
to streamline operations and to minimize costs, we outsource aspects of our manufacturing processes and other functions and continue
to evaluate additional outsourcing. If our contract manufacturers or other outsourcers fail to perform their obligations in a timely
manner or at satisfactory quality levels, our ability to bring products to market and our reputation could suffer. For example,
during a market upturn, our contract manufacturers may be unable to meet our demand requirements, which may preclude us from fulfilling
our customers’ orders on a timely basis. The ability of these manufacturers to perform is largely outside of our control.
Additionally, changing or replacing our contract manufacturers or other outsourcers could cause disruptions or delays.
If our products do not perform as promised,
we could experience increased costs, lower margins and harm to our reputation.
The failure of our products
to perform as promised could result in increased costs, lower margins and harm to our reputation. We may not be able to anticipate
all of the possible performance or reliability problems that could arise with our existing or new products, which could result
in significant product liability or warranty claims. In addition, any defects found in our products could result in a loss of revenues
or market share, failure to achieve market acceptance, injury to our reputation, indemnification claims, litigation, increased
insurance costs and increased service costs, any of which could discourage customers from purchasing our products and materially
harm our business.
Shortages or delays of supplies for
component parts may adversely affect our operating results until alternate sources can be developed.
Our operations are dependent on the ability
of suppliers to deliver quality components, devices and subassemblies in time to meet critical manufacturing and distribution schedules.
If we experience any constrained supply of any such component parts, such constraints, if persistent, may adversely affect operating
results until alternate sourcing can be developed. There may be an increased risk of supplier constraints in periods where we are
increasing production volume to meet customer demands. Volatility in the prices of these component parts, an inability to secure
enough components at reasonable prices to build new products in a timely manner in the quantities and configurations demanded or,
conversely, a temporary oversupply of these parts, could adversely affect our future operating results.
The testing and use of electronic communications
equipment and the accurate transmission of information entail a risk of product liability claims being asserted by customers and
third parties.
Claims may be asserted
against us by end-users of any of our products for liability due to a defective or malfunctioning device made by us, and we may
be subject to corresponding litigation should one or more of our products fail to perform or meet certain minimum requirements.
Such a claim and corresponding litigation
could result in substantial
costs, diversion of resources and management attention, termination of customer contracts and harm to our reputation.
We are subject to laws and regulations
governing government contracts, and failure to address these laws and regulations or comply with such government contracts could
harm our business by leading to a reduction in revenue associated with these customers and subjecting us to civil and criminal
penalties.
We have agreements relating
to the sale of our products to government entities and, as a result, we are subject to various statutes and regulations that apply
to companies doing business with the U.S. government. The laws governing government contracts differ from the laws governing private
contracts. For example, many government contracts contain pricing terms and conditions that are not applicable to private contracts.
We are also subject to investigation for compliance with the regulations governing government contracts. A failure to comply with
these regulations might result in suspension of these contracts, or civil and criminal penalties.
We could be subject to significant costs
related to environmental contamination from past operations, and environmental contamination caused by ongoing operations could
subject us to substantial liabilities in the future.
The Company’s
operations are subject to various federal, state, local, and foreign environmental laws, ordinances and regulations that limit
discharges into the environment, establish standards for the handling, generation, use, emission, release, discharge, treatment,
storage and disposal of, or exposure to, hazardous materials, substances and waste, and require cleanup of contaminated soil and
groundwater.
In 1982, Boonton and
the NJDEP agreed upon a plan to correct ground water contamination at a site previously leased by the Company’s Boonton operations,
pursuant to which wells have been installed by Boonton. The plan contemplates that the wells will be operated and that soil and
water samples will be taken and analyzed until such time that contamination levels are satisfactory to the NJDEP. In 2014, the
Company received approval for a groundwater permit from the NJDEP to carry out the final remedial action work plan and report.
Under the final phase of the plan, there will be monitoring and testing at the site. We cannot be assured that concentrations of
contaminants at the site will decrease.
The Company could be
subject to significant future liabilities and may incur significant future expenditures if further contaminants from Boonton’s
testing are identified and the NJDEP requires additional remediation activities. Management is unable to estimate future remediation
costs at this time. The Company will continue to be liable under the plan, in all future years, until such time as the NJDEP releases
the Company from all obligations.
Certain of our products and international
revenues may be subject to ITAR, Export Administration Regulations, Foreign Corrupt Practices Act and other U.S. and foreign government
laws, regulations, policies and practices, and our failure to comply with such regulations could adversely affect our business,
results of operations and financial condition.
Our international revenues,
for which we also use foreign representatives and consultants, are subject to U.S. laws, regulations and policies, including the
ITAR and the U.S. Foreign Corrupt Practices Act, or the FCPA, and other export laws and regulations, as well as foreign government
laws, regulations and procurement policies and practices which may differ from the U.S. government regulations in this regard.
Compliance with the
directives of the U.S. Department of State may result in substantial legal and other expenses and the diversion of management time.
In the event that a determination is made that we or any entity we have acquired has violated the ITAR with respect to any matters,
we may be subject to substantial monetary penalties that we are unable to quantify at this time, and/or suspension or revocation
of our export privileges and criminal sanctions, which may have a material adverse effect on our business, results of operations
and financial condition.
We can give no assurance
that under either the ITAR or the EAR we will continue to be successful in obtaining the necessary licenses and authorizations
or that certain revenues will not be prevented or delayed due to compliance issues related to the ITAR or the EAR.
We are also subject
to, and must comply with, the FCPA and similar world-wide anti-corruption laws, including the U.K. Bribery Act of 2010. These acts
generally prohibit both us and our third party intermediaries from making improper payments to foreign officials for the purpose
of acquiring or retaining business or otherwise obtaining favorable treatment. We are required as well to maintain adequate record-keeping
and internal accounting practices to fully and accurately reflect our transactions. We operate in many parts of the world that
have experienced government corruption. In certain circumstances, the FCPA and our programs and policies may conflict with local
customs and practices. If we or any of our local intermediaries have failed to comply with the requirements of the FCPA, governmental
authorities in the United States could seek to impose severe criminal and civil penalties. The assertion of violations of the FCPA
or other anti-corruption laws could disrupt our business and have a material adverse effect on our results of operations and financial
condition.
We are subject to various other governmental
regulations, compliance with which may cause us to incur significant expenses, and if we fail to maintain satisfactory compliance
with certain regulations, we may be forced to recall products and cease their distribution, and we could be subject to civil or
criminal penalties.
Our business is subject
to various other significant international, federal, state and local regulations, including but not limited to health and safety,
packaging, product content and labor regulations. These regulations are complex, change frequently and have tended to become more
stringent over time. We may be required to incur significant expenses to comply with these regulations or to remedy violations
of these regulations. Any failure by us to comply with applicable government regulations could also result in cessation of our
operations or portions of our operations, product recalls or impositions of fines and restrictions on our ability to carry on or
expand our operations.
The loss of key personnel
could adversely affect our ability to remain competitive; our development of new and upgraded products could be adversely impacted
by our inability to hire or retain personnel with appropriate technical abilities.
We believe that the
continued service of our executive officers will be important to our future growth and competitiveness. However, other than the
employment agreement we entered into with Mr. Whelan, Chief Executive Officer, and the severance agreements we entered into with
Mr. Genova, Chief Operating Officer, Mr. Debold, Vice President of Global Sales and Marketing, and Mr. Kandell, Chief Financial
Officer, we currently do not have any other employment agreements with any of our executive officers. We cannot provide assurance
that any named executive officer, or any of our other executive officers, will remain employed by us. Moreover, the design and
manufacture of our products require substantial technical capabilities in many disparate disciplines, from engineering, mechanics
and computer science to electronics and mathematics. We believe that the continued employment of key members of our technical and
sales staffs will be important to us but, as with our executive officers, we cannot assure you that they will remain employed by
us.
Furthermore, our ability
to research and develop new technologies and products, or upgraded versions of existing products, will depend, in part, on our
ability to hire personnel with knowledge and skills that our current personnel do not have. If we are unable to hire or retain
such qualified personnel, our revenues could be negatively impacted, and our business could suffer.
Third parties could claim that we are
infringing on their intellectual property rights which could result in substantial costs, diversion of significant managerial resources
and significant harm to our reputation.
The industries in which
our company operates are characterized by the existence of a large number of patents and frequent litigation based on allegations
of patent infringement. From time to time, third parties may assert patent, copyright, trademark and other intellectual property
rights to technologies in various jurisdictions that are important to our business. Defending claims, including claims without
merit, requires allocation of resources, including personnel and capital, which could adversely impact our results of operations.
A successful claim of infringement against us could result in our being required to pay significant damages, enter into costly
license agreements, or stop the sale of certain products, which could adversely affect our net revenues, gross margins and expenses
and harm our future prospects.
We use specialized technologies and
know-how to design, develop and manufacture our products. Our inability to protect our intellectual property could hurt our competitive
position, harm our reputation and adversely affect our results of operations.
We believe that our
intellectual property, including its methodologies, is critical to our success and competitive position. We rely on a combination
of U.S. and foreign patent, copyright, trademark and trade secret laws, as well as confidentiality agreements to establish and
protect our proprietary rights. If we are unable to protect our intellectual property against unauthorized use by third parties,
our reputation among existing and potential customers could be damaged and our competitive position adversely affected.
Attempts may be made
to copy aspects of our products or to obtain and use information that we regard as proprietary. Accordingly, we may not be able
to prevent misappropriation of our technology or deter others from developing similar technology. Our strategies to deter misappropriation
could be undermined if:
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the proprietary nature or protection of our methodologies is not recognized in the
United States or foreign countries;
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third parties misappropriate our proprietary methodologies and such misappropriation
is not detected; and
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competitors create applications similar to ours but which do not technically infringe
on our legally protected rights.
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If these risks materialize,
we could be required to spend significant amounts to defend our rights and divert critical managerial resources. In addition, our
proprietary methodologies may decline in value or our rights to them may become unenforceable. If any of the foregoing were to
occur, our business could be materially adversely affected.
Our business and operations could suffer
in the event of security breaches.
Attempts by others to
gain unauthorized access to information technology systems are becoming more sophisticated and are sometimes successful. These
attempts, which might be related to industrial or other espionage, include covertly introducing malware to our computers and networks
and impersonating authorized users, among others. We seek to detect and investigate all security incidents and to prevent their
recurrence, but in some cases, we might be unaware of an incident or its magnitude and effects. The theft, unauthorized use or
publication of our intellectual property and/or confidential business information could harm our competitive position, reduce the
value of our investment in research and development and other strategic initiatives or otherwise adversely affect
our business. To the extent that any security breach results in inappropriate disclosure of our customers’ or licensees’
confidential information, we may incur liability as a
result. In addition,
we may be required to devote additional resources to the security of our information technology systems.
We rely on our information
technology systems to manage numerous aspects of our business and a disruption of these systems could adversely affect our business.
Our information technology,
or IT, systems are an integral part of our business. We depend on our IT systems for scheduling, sales order entry, purchasing,
materials management, accounting, and production functions. Our IT systems also allow us to ship products to our customers on a
timely basis, maintain cost-effective operations and provide a high level of customer service. Some of our systems are not fully
redundant, and our disaster recovery planning does not account for all eventualities. A serious disruption to our IT systems could
significantly limit our ability to manage and operate our business efficiently, which in turn could have a material adverse effect
on our business, results of operations and financial condition.
Environmental and other disasters, such
as flooding, large earthquakes, hurricanes, volcanic eruptions or nuclear or other disasters, or a combination thereof, may negatively
impact our business.
Although we manufacture
our products in New Jersey, we both source and ship our products globally. Environmental and other disasters may cause disruption
to our supply chain or impede our ability to ship product to certain regions of the world. There can be no assurance that environmental
and/or other such natural disasters will not have an adverse impact on our business in the future.
Our
operating results may suffer because of our exposure to foreign currency exchange rate fluctuations.
Substantially all of
our sales contracts with our U.S. and international based customers provide for payment in U.S. dollars. A strengthening of the
U.S. dollar relative to other foreign currencies could increase the effective cost of our products to our international customers
as their functional currency is typically not the U.S. dollar. This could have a potential adverse effect on our ability to increase
or maintain average selling prices of our products to our foreign-based customers.
Our exposure to the
currency fluctuations increased as a result of the acquisition of CommAgility. Our future revenue and expenses may be subject to
volatility due to exchange rate fluctuations that could result in foreign exchange gains and losses associated with foreign currency
transactions and the translation of assets and liabilities denominated in foreign currencies.
The success of our ability to grow revenues
and develop relationships in Europe and Asia may be limited by risks related to conducting business in European and Asian markets.
Part of our strategy
is to increase revenues and build our relationships in European and Asian markets. Risks inherent in marketing, selling and developing
relationships in European and Asian markets include those associated with:
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economic conditions in European and Asian markets, including the impact of recessions in European
and Asian economies and fluctuations in the relative values of the U.S. dollar, the Euro and Asian currencies;
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taxes and fees imposed by European and Asian governments that may increase the cost of products
and services;
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greater difficulty in accounts receivable collection and longer collection periods;
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seasonal reductions in business activities in some parts of the world;
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laws and regulations imposed by individual countries and by the European Union, particularly with
respect to intellectual property, license requirements and environmental requirements; and
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political and economic instability, terrorism and war.
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In addition, European
and Asian intellectual property laws are different than and may not protect our proprietary rights to the same extent as do U.S.
intellectual property laws, and we will have to ensure that our intellectual property is adequately protected in foreign jurisdictions
and in the United States. If we do not adequately protect our intellectual property rights, competitors could use our proprietary
technologies in non-protected jurisdictions and put us at a competitive disadvantage.
As a result of the acquisition
of CommAgility, the Company increased its exposure to foreign markets and currencies specifically in the United Kingdom (U.K.)
and European Union (E.U.). Uncertainty related to the withdrawal of the U.K. from the E.U. could negatively impact the global economy,
particularly many important European economies. Given the lack of comparable precedent, it is unclear what financial, trade and
legal implications the withdrawal of the U.K. from the E.U. would have and how such withdrawal would affect us.
We are exposed to risks associated with
acquisitions, investments and divestitures.
In February 2017, we
acquired all of the outstanding equity interests of CommAgility an award winning provider of LTE solutions. In the future we may
make acquisitions of, or significant investments in, businesses with complementary products, services and/or technologies. Acquisitions
and investments involve numerous risks, including, but not limited to:
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difficulties and increased costs
in connection with integration of the personnel, operations, technologies and products of acquired businesses;
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diversion of management’s
attention from other operational matters;
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the potential loss of key employees
of acquired businesses;
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lack of synergy, or the inability
to realize expected synergies, resulting from the acquisition;
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implementation or remediation
of controls, procedures and policies of the acquired company;
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failure to commercialize purchased
technology;
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liability for activities of the acquired company
prior to the acquisition, including violations of law, commercial disputes, escheat and tax and other known and unknown liabilities;
and
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the impairment of acquired intangible assets
and goodwill that could result in significant charges to operating results in future periods.
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If we are unable to
address these difficulties and challenges or other problems encountered in connection with our acquisition in 2017 or any future
acquisition or investment, we might not realize the anticipated benefits of that acquisition or investment and we might incur unanticipated
costs, liabilities or otherwise suffer harm to our business generally. The difficulties and challenges of successful integration
of any acquired company are increased when the integration involves companies with operations or material vendors outside the United
States. Consequently, we may not be able to integrate successfully our recent acquisition or to achieve anticipated financial performance.
To the extent that we
pay the consideration for any future acquisitions or investments in cash or any potential earn outs, it would reduce the amount
of cash available to us for other purposes. Such payments also may increase our cash flow and liquidity risk and could result in
increased borrowings under our Credit Facility. See the Risk Factor titled “We have incurred indebtedness and may incur additional
indebtedness.” Future acquisitions or investments could also result in dilutive issuances of our equity securities or the
incurrence of debt, contingent liabilities, amortization expenses or impairment charges against goodwill or intangible assets on
our balance sheet, any of which could have a material adverse effect on our business, results of operations and financial condition.
We have incurred indebtedness and may
incur additional indebtedness.
As of February 16, 2017,
we maintain a senior credit facility and an asset-based lending agreement with a bank. We may incur additional indebtedness in
the future.
The incurrence of this indebtedness, among other things, could:
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make
it difficult to make payments on this indebtedness and our other obligations;
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make
it difficult to obtain any necessary future financing for working capital, capital expenditures, debt service requirements
or other purposes;
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require
the dedication of a substantial portion of any cash flow from operations to service for indebtedness, thereby reducing the
amount of cash flow available for other purposes, including capital expenditures; and
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limit
our flexibility in planning for, or reacting to, changes in our business and the industries in which we compete.
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The Company believes
that its financial resources from working capital provided by operations are adequate to meet its current needs. However, should
current global economic conditions deteriorate, additional working capital financing may be required which may be difficult to
obtain due to restrictive credit markets.
Restrictive covenants in the agreement
governing our credit facility may restrict our ability to pursue business strategies.
The agreement governing
our current credit facility limits our ability, among other things, to: incur additional secured indebtedness; incur liens; pay
dividends; enter into transactions with our affiliates; and sell assets. In addition, our credit facility contains financial and
other restrictive covenants that limit our ability to engage in activities that may be in our long term best interest, such as,
subject to permitted exceptions, making capital expenditures in excess of certain thresholds, investments and acquisitions, and
loans and other advances to affiliates. Our failure to comply with financial and other restrictive covenants could result in an
event of default, which if not cured or waived, could result in the lenders requiring immediate payment of all outstanding borrowings
or foreclosing on collateral pledged to them to secure the indebtedness.
Our stock price is volatile and the
trading volume in our common stock is less than that of other larger companies in the wireless and advanced communications industries.
The market price of
our common stock has experienced significant volatility and may continue to be subject to rapid swings in the future. From January
1, 2015 to March 3, 2017, the trading prices of our stock have ranged from $1.30 to $3.21 per share. There are several factors
which could affect the price of our common stock, including announcements of technological innovations for new commercial products
by us or our competitors, developments concerning propriety rights, new or revised governmental regulation or general conditions
in the market for our products, and the entrance of additional competitors into our markets.
Although our common
stock is listed for trading on the NYSE MKT, the trading volume in our common stock is less than that of other, larger companies
in the wireless and advanced communications industries. Traditionally, the trading volume of our common stock has been limited.
For example, for the 90 trading days ending on February 28, 2017, the average daily trading volume was approximately 28,000 shares
per day and ranged from between 0 shares per day and approximately 238,000 shares per day. Furthermore, we only have 22,238,874
shares of common stock outstanding as of the date of this report. A public trading market having the desired characteristics of
depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at
any given time. Because of our limited trading volume, holders of our common stock may not be able to sell quickly any significant
number of such shares, and any attempted sales of a large
number of our shares will likely have a material adverse impact on the price of our common stock.
New Jersey corporate law may delay or
prevent a transaction that stockholders would view as favorable.
We are subject to the
New Jersey Shareholders’ Protection Act, which could delay or prevent a change of control of us. In general, that Act prevents
a shareholder owning 10% or more of a New Jersey public corporation’s outstanding voting stock from engaging in business
combinations with that corporation for five years following the date the shareholder acquired 10% or more of the corporation’s
outstanding voting stock, unless board approval is obtained prior to the time that the shareholder reaches the 10% threshold.
The Company is subject to compliance
with the policies & procedures of the NYSE MKT with respect to continued listing on the stock exchange.
In considering whether
a security warrants continued trading and/or listing on the NYSE MKT Exchange, many factors are taken into account, such as the
degree of investor interest in the company, its prospects for growth, the reputation of its management, the degree of commercial
acceptance of its products, and whether its securities have suitable characteristics for auction market trading. Thus, any developments
which substantially reduce the size of a company, the nature and scope of its operations, the value or amount of its securities
available for the market, or the number of holders of its securities, may occasion a review of continued listing by the Exchange.
Moreover, events such as the sale, destruction, loss or abandonment of a substantial portion of its business, the inability to
continue its business, steps towards liquidation, or repurchase or redemption of its securities, may also give rise to such a review.
We incur significant costs as a result
of operating as a public company, and our management devotes substantial time to compliance initiatives.
We have incurred and
will continue to incur significant legal, accounting and other expenses as a public company, including costs resulting from public
company reporting obligations under the Exchange Act and regulations regarding corporate governance practices. The listing requirements
of the NYSE MKT require that we satisfy certain corporate governance requirements relating to director independence, distributing
annual and interim reports, stockholder meetings, approvals and voting, soliciting proxies, conflicts of interest and a code of
conduct. Our management and other personnel will need to devote a substantial amount of time to all of these requirements.
If securities or industry analysts do
not publish research or reports about our business or if they issue an adverse or misleading opinion regarding our stock, our stock
price and trading volume could decline.
The trading market
for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our
business. If any of the analysts who cover us issue an adverse or misleading opinion regarding us, our business model, products
or stock performance, our stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish
reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading
volume to decline. Moreover, the unpredictability of our financial results likely reduces the certainty, and therefore reliability,
of the forecasts by securities or industry analysts of our future financial results, adding to the potential volatility of our
stock price.
Forward-Looking Statements
The statements contained
in this Annual Report on Form 10-K that are not historical facts, including, without limitation, the statements under “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” are forward-looking statements as defined in the
Private Securities Litigation Reform Act of 1995. Such forward-looking statements may be identified by, among other things, the
use of forward-looking terminology such as “believes,” “expects,” “intends,” “plans,”
“may,” “will,” “should,” “anticipates” or “continues” or the negative thereof of other variations thereon or comparable terminology, or by discussions of strategy that involves risks and uncertainties. These statements are based on the Company’s current
expectations of future events and are subject to a number of risks and
uncertainties that may cause the Company’s actual results to differ materially from those described in the forward-looking
statements. These risks and uncertainties are set forth above in this Item 1A and elsewhere in this annual report on Form 10-K.
Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, estimated or projected. The Company assumes no obligation to update any forward-looking
statements as a result of new information or future events or developments.