Item 1A. Risk Factors
Item 1A. Risk Factors
Investing in our securities involves a high degree of risk. Before investing in our securities, you should consider carefully the information contained in this report and in our 2021 Annual Report contained in our Form 10-K for our fiscal year ended July 31, 2021, including the risk factors identified in Item 1A of Part I thereof (Risk Factors).
This report contains forward-looking statements that involve risks and uncertainties. See “Cautionary Statement Regarding Forward-Looking Statements” in “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” above. Our actual results could differ materially from those contained in the forward-looking statements. Any of the risks discussed in our 2021 Annual Report, in this report, in other reports we file with the SEC, and other risks we have not anticipated or discussed, could have a material adverse impact on our business, financial condition or results of operations. Except as set forth below, there has been no material change to our Risk Factors from those presented in our 2021 Annual Report.
New and ongoing challenges relating to current supply chain constraints, including for satellite ground station and troposcatter components, could adversely impact our revenue, gross margins and financial results.
The global supply chain for certain raw materials and components, including those used in our satellite ground station and troposcatter equipment, has experienced significant strain in recent periods. This constrained supply environment has adversely affected, and could further affect, availability, lead times and cost of components, and could impact our ability to meet customer demand in circumstances where we cannot timely secure supply of components that meet our quality standards.
In December 2021 and January 2022, the Omicron COVID-19 strain surged across Europe and the U.S. causing further delays in the supply chain. Despite our attempts to mitigate the impact on our business, constrained supply conditions have and are expected to continue to adversely impact our costs of goods sold and may impact the timing and amount of revenue we realize. During the second quarter of fiscal 2022, we experienced disruptions in our supply chain relating to later-than-expected delivery of certain key components from several suppliers that adversely impacted our revenue for the second quarter of fiscal 2022. In addition, certain parts did not meet our quality specifications and we were unable to use them.
We obtain certain components and subsystems from a single source or a limited number of sources. Some of our single source suppliers, particularly those that provide satellite ground station and troposcatter components, have reported to us that they are having disruptions in their respective supply chains. These single source components, which includes items such as cooling fans and power supplies, are in limited supply. In some cases, we have now depleted our stock inventory and we are on waiting lists to obtain additional components. Although we have reduced our 2022 financial targets to consider supply chain risks, in order to ship certain items during our second half of fiscal 2022, we must obtain additional components to produce certain finished goods. We continue to seek new suppliers and inventory elsewhere. Although we had been successful in the past in qualifying alternate suppliers, when necessary, in light of current challenges in the supply chain, we may not be able to do so.
In February 2022, Russia’s military incursion into Ukraine has also exacerbated supply chain issues. In response to Russia’s actions, many governments around the world have imposed sanctions on Russia and many businesses have suspended or stopped doing business with Russia. Limits on manufacturing availability or capacity, or delays in production or delivery of components or raw materials due to these sanctions or suspension of business could further delay or inhibit our ability to obtain supply of components and produce finished goods.
Heading into the third quarter of our fiscal 2022, we have a significant portion of our Q3 and Q4 targeted revenues in our backlog. However, if shipments from our backlog are delayed or we are unable to obtain expected orders or components, our business outlook will prove to be inaccurate. These aforementioned supply chain constraints, and their related challenges could result in future shortages, increased material costs or use of cash, engineering design changes, and delays in new product introductions, each of which could adversely impact our revenue, gross margins and financial results. There can be no assurance that the impacts of all the aforementioned conditions will not continue, or worsen, in the future.
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The military conflict between Russia and Ukraine, and the global response to it could adversely impact our revenues, gross margins and financial results.
The U.S. government and other nations have imposed significant restrictions on most companies’ ability to do business in Russia. It is not possible to predict the broader or longer-term consequences of this conflict, which could include further sanctions, embargoes, regional instability, geopolitical shifts and adverse effects on macroeconomic conditions, security conditions, currency exchange rates and financial markets. Such geo-political instability and uncertainty could have a negative impact on our ability to sell to, ship products to, collect payments from, and support customers in certain regions based on trade restrictions, embargoes and export control law restrictions, and logistics restrictions including closures of air space, and could increase the costs, risks and adverse impacts from these new challenges. We may also be the subject of increased cyber-attacks.
To date, Russia’s military incursion into Ukraine has impacted our sales pipeline. Although sales into Russia represented less than 1.0% of our consolidated net sales in both fiscal 2021 and in the six months ended January 31, 2022, respectively, certain customers (including the U.S. and Ukrainian government) have paused procurement and deployment of satellite and troposcatter communication systems, and instead began purchasing war-fighting equipment. As a result of the economic sanctions against Russia, we are assuming no new sales in Russia for the remainder of fiscal 2022. In addition, the U.S. defense budget, and defense budgets worldwide, are now being adjusted in real-time to reflect spending plans materially different from those of just three months ago. This has impacted our original fiscal 2022 financial targets.
For example, we had several opportunities to provide wireless communication systems (including troposcatter systems) to Ukraine for a variety of both defense and communications uses. Funding for these systems was expected to be provided by Ukraine and by the U.S. government and these items were expected to be awarded and shipped in the second half of fiscal 2022. As result of the conflict in Ukraine, it has now become impossible for us to predict the timing or dollar amount of these awards. Additionally, funding for opportunities with other customers that we expected to book and ship has also been shifted to other programs and/or temporarily delayed as a result of a change in defense spending priorities.
Prior to this conflict, we maintained a small group of employees in Moscow, Russia who supported certain UHP-branded satellite communications products. We are actively hiring new employees and expanding our Canadian operations to replace certain support activities previously conducted in Russia. We may not be able to timely ramp up our operations in Canada on a sufficient scale to support anticipated growth of our UHP products, which could adversely impact future revenues, gross margins and operations.
Although we have lowered our expected second half fiscal 2022 targets as a result of the aforementioned conditions, additional risks still remain and reliable forecasting continues to be a challenge. The success of our operations will depend, in large part, on our ability to anticipate and manage these risks effectively. Our failure to manage any of these risks could harm our operations, reduce our sales, and could give rise to liabilities, costs or other business difficulties that could adversely affect our operations and financial results.
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