What changed in this filing

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Item 1A. Risk Factors

2021-09-09 compared with 2021-03-10 · 15 added, 88 removed, 2 unchanged (98% of the section changed)

1 unchanged sentence

Please refer to that section for disclosures regarding the risks and uncertainties related to our business.

Acquisitions could be difficult to integrate, divert the attention of key personnel, disrupt our business, dilute stockholder value and impair our financial results.

In February 2021 we announced the acquisition of Arcturus UAV, Inc., which designs, engineers, tools, manufactures and provides unmanned UAS and related products and services, and ISG, which develops artificial intelligence-enabled computer vision, machine learning and perceptive autonomy technologies and provides related services.

Additionally, in December 2020, we announced the planned acquisition of Telerob Gesellschaft für Fernhantierungstechnik mbH, a German company ("Telerob") that develops, manufactures, sells, and services remote-controlled ground robots and transport vehicles for civil and defense applications.

We intend to consider additional acquisitions that could add to our customer base, technological capabilities or system offerings.

Acquisitions involve numerous risks, any of which could harm our business, including the following:

● difficulties in integrating the operations, technologies, products, existing contracts, accounting and personnel of each target company and realizing the anticipated synergies of the combined businesses;

● difficulties in supporting and transitioning customers, if any, of each target company;

● diversion of financial and management resources from existing operations;

● the price we pay or other resources that we devote may exceed the value we realize, or the value we could have realized if we had allocated the purchase price or other resources to another opportunity;

● risks of entering new markets in which we have limited or no experience (including the introduction of international operations upon the planned acquisition of Telerob);

● potential loss of key employees, customers and strategic alliances from either our current business or the target company’s business;

● assumption of unanticipated problems or latent liabilities, such as problems with the quality of the target company’s products or its regulatory compliance;

● expanded regulatory compliance complexity and risk;

● inability to generate sufficient revenue to offset acquisition costs.

Acquisitions also frequently result in the recording of goodwill and other intangible assets which are subject to potential impairments in the future that could harm our financial results.

In addition, if we finance acquisitions by issuing equity, or securities convertible into equity, such as the stock consideration issued in the Arcturus Closing, then our existing stockholders may be diluted, which could lower the market price of our common stock.

If we finance acquisitions through debt, such as the Credit Facilities we entered into in connection with the consummation of the Arcturus Acquisition, then such future debt financing may contain covenants or other provisions that limit our operational or financial flexibility.

If we fail to properly evaluate acquisitions or investments, then we may not achieve the anticipated benefits of any such acquisitions, and we may incur costs in excess of what we anticipate.

The failure to successfully evaluate and execute acquisitions or investments or otherwise adequately address these risks could materially harm our business and financial results.

Borrowings under our credit facilities could adversely affect our financial condition and restrict our operating flexibility.

On February 19, 2021, in connection with the consummation of the Arcturus Acquisition, we entered into the Credit Agreement, which, together with its associated Security and Pledge Agreement, sets forth the terms and conditions of the Term Loan Facility and Revolving Facility.

Upon execution of the Credit Agreement, we drew down $200.0 million, the full principal amount of the Term Loan Facility, to partially finance the acquisition of Arcturus UAV.

The Term Loan Facility has a five-year term expiring in February 2026 and bears interest, at our option, either at a LIBOR rate or a base rate plus a fixed applicable margin dependent on our consolidated leverage ratio under the terms of the agreement.

We are required to pay 5.0% of the outstanding obligations under the Term Loan Facility in each of the first four loan years, with the remaining 80.0% payable in the fifth loan year, consisting of three quarterly payments of 1.25% each, with the remaining outstanding principal amount of the Term Loan Facility due and payable on the maturity date.

The Revolving Facility as a term of 5 years.

As of February 19, 2021 we have only letters of credit issued pursuant to the Revolving Facility, totaling $3.6 million and replacing prior letters of credit outstanding.

In support of our obligations under the Credit Facilities, we have granted security interests in substantially all of our personal property and that of our domestic subsidiaries, including a pledge of the equity interests in our subsidiaries (limited to 65% of outstanding equity interests in the case of our foreign subsidiaries), subject to customary exclusions and exceptions.

In addition, our domestic subsidiaries, including Arcturus UAV, are required to be guarantors of the Credit Facilities .

In addition, our increased level of indebtedness may have important consequences to us, including:

● increasing our vulnerability to adverse general economic and industry conditions;

● requiring us to dedicate a portion of our cash flows to the payment of interest and when applicable, principal, on our indebtedness and other obligations thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts, execution of our business strategy, acquisitions and other general corporate purposes;

● limiting our flexibility in planning for, or reacting to, changes in the economy, the defense industry, and the markets in which we operate;

● subjecting us to maintenance of various financial covenants and adherence to certain other affirmative and negative covenants, requiring us to seek lender consent or waiver in relation to our financial performance or other potential strategic actions in the future;

● placing us at a competitive disadvantage compared to our competitors with less indebtedness;

● exposing us to substantial interest rate risk due to the variable interest rate under the Credit Facilities, such that, if interest rates were to increase substantially during the term of the Credit Facilities, the resulting increase in our interest payment obligations could adversely affect our operating results and our ability to service the indebtedness under the Credit Facilities;

● making it more difficult for us to borrow additional funds in the future to fund our growth, acquisitions, working capital, capital expenditures, and other purposes.

To the extent we incur additional indebtedness, the risks described above could increase.

If we do not have sufficient funds to repay the Term Loan Facility when it becomes due in 2026, it may be necessary to refinance our debt through additional debt or equity financings.

If, at the time of any such refinancing, prevailing interest rates or other factors result in higher interest rates on such refinanced debt, such increases in our interest expense could have an adverse effect on our business, results of operations and financial condition.

The Credit Agreement contain customary events of default, upon the occurrence and during the continuation of which, after any applicable grace period, the lenders would have the ability to declare the loans due and payable in whole or in part.

Among other things, if we fail to make required debt payments, or if we fail to comply with financial or other covenants in the Credit Agreement, we would be in default under the terms thereof.

The Credit Agreement contains customary negative covenants that include, subject to customary exclusions:

● Restrictions on additional liens on our assets.

● Restrictions on incurring additional indebtedness.

● Restrictions on new investments, including acquisitions, mergers, investments in subsidiaries that are not guarantors of the debt, and joint ventures.

● Restrictions on disposal of assets.

● Restrictions on payments of cash dividends.

● Restrictions on changing the nature of our business.

● A requirement to maintain a maximum consolidated leverage ratio and a minimum fixed charge coverage ratio.

● Restrictions on changes to our accounting policies.

● Restrictions on payments of any junior indebtedness.

To the extent we would wish to engage in any of the prohibited behaviors, we would need to obtain consent under the Credit Agreement, which may not be timely forthcoming or at all.

If a default event were to occur, we may not have sufficient available cash to repay such outstanding debt obligations at the time they become due, or be able to refinance such debt on acceptable terms or at all.

Any of the foregoing limitations or events could materially and adversely affect our financial condition and results of operations.

We are presently classified as a small business Defense contractor and the loss of our small business status may adversely affect our ability to compete for small business set-aside US government contracts.

Because we have fewer than 1,500 employees, we are presently classified as a small business Defense contractor under our primary North American Industry Classification Systems (NAICS) industry and product specific codes (336411 - Aircraft Manufacturing) which are regulated in the United States by the Small Business Administration (SBA).

Businesses that meet the small business size standard for the relevant NAICS code are able to bid on small business set-aside contracts.

While we do not presently derive a substantial portion of our business from contracts which are set-aside for small businesses, we are able to bid on small business set-aside contracts as well as contracts which are open to non-small business entities.

As we continue to grow and add employees, including through acquisitions, or if NAICS codes are revised, we could cease to qualify as a small business, which could adversely impact our eligibility for special small business programs and limit our ability to partner with other business entities that seek to team with small business entities as may be required under a specific contract.

If we out grow our small business classification, we would not be eligible to serve as the prime contractor on small business set aside programs and may need to implement a small business subcontracting plan with other companies that qualify as a small business, for SBA approval.

The loss of our small business classification could have a material adverse effect on our financial position and/or results of operations.

Additionally, if we are no longer eligible for the small business exemption from compliance with the full range of Cost Accounting Standards (“CAS”), we would be required to demonstrate compliance with such standards upon the award of a contract subject to the full range of CAS, which will impose additional administrative costs on our business, and may significantly affect the manner in which we conduct our business with our customers and adversely affect our results of operations.

We face various risks related to the COVID-19 novel coronavirus pandemic and similar public health crises which may adversely impact our business.

In December 2019, a novel strain of a virus named SARS-CoV-2 (severe acute respiratory syndrome coronavirus 2), or coronavirus, which causes coronavirus disease, or COVID-19, was reported to have surfaced in Wuhan, China, and has reached multiple other regions and countries, including the United States and, more specifically, Southern California, where our primary operations are located.

The coronavirus pandemic is evolving, and to date has led to the implementation of various responses, including government-imposed stay-at-home orders and quarantines, travel restrictions and other public health safety measures.

Although our operations have mostly continued uninterrupted during the COVID-19 outbreak, adoption of work from home protocols, social distancing measures in the workplace and other responsive actions have required certain changes to our operations.

If the current COVID-19 outbreak continues and results in additional periods of travel and other similar logistics restrictions, this may further reduce our and our customers’ capabilities to travel, domestically and internationally, which may impact our ability to perform certain contracts, develop and renew contracts, or market our products, or could otherwise disrupt portions of our business and have a material adverse effect on our results of operations.

Global health concerns, such as coronavirus, could result in social, economic and labor instability in the countries in which we or the third parties with whom we engage operate.

It is not currently possible to ascertain the overall impact of the COVID-19 outbreak, if any, on our business.

The extent to which COVID-19 impacts on our business, financial

condition and results of operations and those of our third party partners will depend on future developments as to the geographic presence of COVID-19 and government and healthcare responses to such spread including the duration of the outbreak, new information that may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others, which remain highly uncertain.

We cannot presently predict the scope and severity of any potential business disruptions, but if we or any of the third parties with whom we engage, including suppliers and other third parties with whom we conduct business, were to experience prolonged shutdowns or other business disruptions, including a slowdown in the effectiveness of our workforce due to illness or otherwise, our ability to conduct our business in the manner presently planned could be materially and negatively impacted.

The COVID-19 outbreak has caused delays in the timing of our customers’ awarding of contracts to us, and while such delays have not yet had a significant impact on our business, there can be no assurances that any such delays would not have a material adverse impact on our business and results of operations in the future.

The COVID-19 pandemic could also cause delays or limits in the ability of our customers to make timely payments to us.

Additionally, our government customers may have more limited resources available to purchase our products due to deteriorating economic conditions or due to the diversion of resources to other budget priorities, including efforts to address the COVID-19 pandemic.

The future progression of the COVID-19 outbreak and its resulting effects on our business, financial condition and results of operations are uncertain and are continuing to be assessed.

A decline in the U.S.

and other government budgets, changes in spending or budgetary priorities, or delays in contract awards may significantly and adversely affect our future revenue.

Because we generate a significant portion of our total sales and our small UAS and tactical missile systems sales from the U.S.

government and its agencies, our results of operations could be adversely affected by government spending caps or changes in government budgetary priorities, as well as by delays in the government budget process, program starts, or the award of contracts or orders under existing contracts.

As a result, our business may be impacted due to shifts in the political environment and changes in the government and agency leadership positions as a result of the 2020 presidential election, as well as future election cycles.

We cannot assure you that current levels of congressional funding for our products and services will continue and that our business will not decline.

If annual budget appropriations or continuing resolutions are not enacted timely, we could face U.S.

government shutdowns, which could adversely impact our programs and contracts with the U.S.

government, our ability to receive timely payment from U.S.

government entities and our ability to timely obtain export licenses for our products to fulfill contracts with our international customers.

Additionally, there is a possibility that political decisions following the 2020 presidential and congressional campaigns, or an impasse on policy issues, could impact future spending and program authorizations may not increase or may decrease or shift to programs in areas in which we do not provide services or are less likely to be awarded contracts.

Such changes in spending authorizations and budgetary priorities may occur as a result of shifts in spending priorities from defense-related and other programs as a result of competing demands for federal funds, including in response to the COVID-19 pandemic, and the number and intensity of military conflicts or other factors.

If critical components or raw materials used to manufacture our products or used in our development programs become scarce or unavailable, then we may incur delays in manufacturing and delivery of our products and in completing our development programs, which could damage our business.

We obtain hardware components, various subsystems and systems from a limited group of suppliers, some of which are sole source suppliers.

Although we hold long term non-binding contracts with certain key suppliers that establishes pricing, minimizes lead times and to some degree mitigates risk, we do not have long-term agreements with all suppliers that obligate them to continue to sell components, products required to build our systems or products to us.

Our reliance on suppliers without long term non-binding contracts involves significant risks and uncertainties, including whether our suppliers will provide an adequate supply of required components or products of sufficient quality, will increase prices for the components or products and will perform their obligations on a timely basis.

In addition, certain raw materials and components used in the manufacture of our products and in our development programs are periodically subject to supply shortages, and our business is subject to the risk of price increases and periodic delays in delivery.

Particularly, the market for electronic components is experiencing increased demand and a global shortage of semiconductors, creating substantial uncertainty regarding our suppliers’ ongoing timely delivery of these components to us.

In the quarter ended July 31, 2021, we continued to experience delays in receiving of certain electronic components for our TMS product line resulting from the global shortage, which caused short term delays in production and negatively affected our revenue for the period.

Should such shortages continue or additional shortages occur and we are unable to obtain components from third party suppliers in the quantities and of the quality that we require, on a timely basis and at acceptable prices, then we may be impaired in our ability to execute development programs on schedule or deliver products on a timely or cost effective basis to our customers.

Shortages in components for our products and delays in obtaining components for our products could cause customers to terminate their contracts with us, increase our costs and seriously harm our business, results of operations and financial condition.

Moreover, if any of our suppliers become financially unstable, or otherwise unable or unwilling to provide us with raw materials or components, then we may have to find new suppliers.

It may take several months to locate alternative suppliers, if required, or to redesign our products to accommodate components from different suppliers.

Even if we identify alternate suppliers, we may experience significant delays in manufacturing and shipping our products to customers and incur additional development, manufacturing and other costs to establish such alternative sources, are required to redesign our products and to complete additional quality control procedures.

We cannot predict if we will be able to obtain replacement components within the time frames that we require at an affordable cost, if at all.

In particular, governmental measures responsive to the global COVID-19 pandemic have disrupted manufacturing and some supply chains, including our supply chain, which has had, and is expected to continue to have, a significant impact, both direct and indirect, on businesses and commerce worldwide.

Although we have not yet seen significant delays from our suppliers generally, and we keep stock of all our raw materials and other product components with long lead times to assist in the event that our supply chain is disrupted, if the COVID-19 outbreak continues and results in a prolonged period of commercial and/or governmental restrictions, this may impact our ability to obtain certain raw materials and certain components used in the manufacture of our products and in our development programs.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1A. Risk Factors