What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-02-10 compared with 2021-11-10 · 110 added, 56 removed, 337 unchanged (33% of the section changed)

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Executive Summary

For the first quarter of fiscal year 2022, the Company reported total revenue of $132.8 million, up 7.8% from $123.2 million in the same period of fiscal year 2021.

While demand has remained strong from both new and existing customers, revenue for the first quarter of fiscal year 2022 continued to be significantly constrained by challenges related to the global materials supply chain, transportation, logistics and the pandemic.

The concentration of our top three customers’ net sales decreased to 33.0 percent of total sales in the first quarter of fiscal year 2022 from 34.7 percent in the same period of the prior fiscal year.

For the second quarter of fiscal year 2022, the Company reported total revenue of $134.5 million, up 4.8% from $128.3 million in the same period of fiscal year 2021.

Revenue for the second quarter of fiscal year 2022 included a benefit from customer one-time reimbursements for tooling, equipment and other expenses of approximately $10 million more when compared to the previous year.

While demand has remained strong from both new and existing customers, revenue for the second quarter of fiscal year 2022 continued to be constrained by challenges related to the global supply chain, the pandemic, transportation and logistics.

The concentration of our top three customers’ net sales decreased to 33.3 percent of total sales in the second quarter of fiscal year 2022 from 35.9 percent in the same period of the prior fiscal year.

Net sales to our largest customers may vary significantly from quarter to quarter depending on the size and timing of customer program commencement, forecasts, delays, and design modifications.

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In addition, our capacity and core competencies for printed circuit board assemblies, precision molding, sheet metal fabrication, tool making, assembly, and engineering can be applied to a wide variety of products.

Gross profit as a percent of net sales was 7.6 percent for the first quarter of fiscal year 2022 as compared to 8.1 percent for the same quarter of the prior fiscal year.

The global supply chain, transportation and logistics issues and the pandemic continued to disrupt production during the quarter.

Intermittent parts supply required both factory downtime and overtime expenses, which had an adverse impact on the Company’s margins.

Operating income as a percentage of net sales was 1.6 percent for the first quarter of fiscal year 2022 compared to 2.3 percent of operating income as a percentage of net sales for the first quarter of fiscal year 2021.

Gross profit as a percent of net sales was 7.3 percent for the second quarter of fiscal year 2022 as compared to 8.3 percent for the same quarter of the prior fiscal year.

The global supply chain, pandemic and transportation issues continued to disrupt production, including intermittent parts supply, factory downtime and overtime expenses.

In addition, the Company had a seasonal closure for two weeks at the end of December, and revenue attributed to customer reimbursements did not contribute to its gross margin.

Legal costs related specifically to the SEC’s review of last year’s whistleblower complaint totaled approximately $0.7 million during the quarter.

Operating income as a percentage of net sales was 1.2 percent for the second quarter of fiscal year 2022 compared to 2.1 percent of operating income as a percentage of net sales for the second quarter of fiscal year 2021.

The decrease in operating income as a percentage of net sales was primarily driven by the decrease in gross profit as discussed above.

Net income for the first quarter of fiscal year 2022 was $0.8 million or $0.07 per diluted share, as compared to net income of $1.7 million or $0.16 per diluted share for the first quarter of fiscal year 2021.

Net income for the first quarter of fiscal 2022 was also impacted by legal and other professional service expenses related to the subject of the previously disclosed internal investigation and related matters of approximately $0.4 million during the quarter.

During the first quarter of fiscal 2022, we won new programs involving industrial testing equipment, medical diagnostic products, and pharmaceutical water treatment.

Moving into the second quarter of fiscal 2022, component shortages, logistic delays and the COVID-19 crisis continue to present multiple business challenges, but we continue to see the favorable trend of contract manufacturing returning to North America.

With our recent investments in new capacity in both North America and Vietnam, the Company is well-prepared for long term growth when supply chains improve.

Net income for the second quarter of fiscal year 2022 was $0.6 million or $0.05 per diluted share, as compared to net income of $1.6 million or $0.14 per diluted share for the second quarter of fiscal year 2021.

Net income for the second quarter of fiscal 2022 was also impacted by legal costs related specifically to the Securities and Exchange Commission’s (the “SEC”) review of last year’s whistleblower complaint, which totaled approximately $0.7 million during the quarter.

During the second quarter of fiscal year 2022, we won new programs involving industrial robots, lighting control, disinfection, food production and energy management systems.

We also announced a significant new program win with one of the world’s leading power equipment companies, for which we expect to begin manufacturing in the first quarter of fiscal year 2023 and, once fully ramped, could contribute approximately $80 million in annual revenue.

Moving into the third quarter of fiscal 2022, the global supply chain and COVID-19 pandemic continue to present uncertainty and multiple business challenges, including industry-wide electronic component shortages, workforce disruptions and higher labor costs, but we continue to see the favorable trend of contract manufacturing returning to North America.

With our recent investments in new capacity in both North America and Vietnam, we believe the Company is well-prepared for long term growth when supply chains improve.

To protect the health of its employees, the Company has implemented the recommendations of WHO and the CDC including wearing of face masks and shields, workstation arrangements to provide social distancing, temperature monitoring, enhanced worksite disinfection, spacing in cafeterias and break areas, contact management and other precautions.

The Company is also in compliance with government regulations related to COVID-19.

From time to time, we have experienced shortages in electronic components.

We have experienced shortages in electronic components used in our products.

These shortages can result from strong demand for those components or from problems experienced by suppliers, such as shortages of raw materials.

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We are carefully monitoring potential supply chain disruptions due to ongoing tightness in the overall component environment and are working to mitigate supply chain constraint risks.

We maintain a strong balance sheet with a current ratio of 2.3 and a debt to equity ratio of 0.9 as of October 2, 2021.

Total cash used in operating activities as defined on our cash flow statement was $14.6 million for the three months ended October 2, 2021.

We maintain sufficient liquidity for our expected future operations and had $101.3 million in borrowings on our revolving credit facility of which $12.0 million remained available at October 2, 2021.

We maintain a strong balance sheet with a current ratio of 2.1 and a debt to equity ratio of 0.9 as of January 1, 2022.

Total cash used in operating activities as defined on our cash flow statement was $10.5 million for the six months ended January 1, 2022.

We maintain sufficient liquidity for our expected future operations and had $97.0 million in borrowings on our revolving credit facility and $17.3 million remained available at January 1, 2022.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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RESULTS OF OPERATIONS

Comparison of the Three Months Ended October 2, 2021 with the Three Months Ended September 26, 2020

Comparison of the Three Months Ended January 1, 2022 with the Three Months Ended December 26, 2020

The financial information and discussion below should be read in conjunction with the Consolidated Financial Statements and Notes.

The following table sets forth certain information regarding the components of our condensed consolidated statements of income for the three months ended October 2, 2021 as compared to the three months ended September 26, 2020.

The following table sets forth certain information regarding the components of our condensed consolidated statements of income for the three months ended January 1, 2022 as compared to the three months ended December 26, 2020.

It is provided to assist in assessing differences in our overall performance (in thousands):

Three Months Ended

October 2, 2021 % of

net sales September 26, 2020 % of

January 1, 2022 % of

net sales December 26, 2020 % of

net sales $ change % point

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Net income $ 587 0.4 % $ 1,580 1.2 % $ (993) (0.8) %

Net sales of $132.8 million for the first quarter of fiscal year 2022 increased by 7.8 percent as compared to net sales of $123.2 million for the first quarter of fiscal year 2021.

The $9.6 million increase in net sales from the prior year period was driven by an increase in new program wins and demand for current programs.

However, partially offsetting the increase in revenue during the first quarter of fiscal year 2022, the Company’s revenue was constrained by tightening worldwide supply chain and transportation and logistics issues which delayed the arrival of key components, causing factory downtime.

Gross profit as a percentage of net sales for the three months ended October 2, 2021 was 7.6 percent compared to 8.1 percent for the three months ended September 26, 2020.

Net sales of $134.5 million for the second quarter of fiscal year 2022 increased by 4.8 percent as compared to net sales of $128.3 million for the second quarter of fiscal year 2021.

The $6.2 million increase in net sales from the prior year period was primarily driven by an increase in customer one-time reimbursements for tooling, equipment and other expenses of approximately $10 million when compared to the previous year.

The Company also saw an increase in new program wins and demand for current programs.

However, the Company’s revenue was constrained by tightening worldwide supply chain and transportation and logistics issues which delayed the arrival of key components, causing factory downtime and overtime expenses.

Gross profit as a percentage of net sales for the three months ended January 1, 2022 was 7.3 percent compared to 8.3 percent for the three months ended December 26, 2020.

This 1.0 percentage point decrease was primarily a result of supply chain constraints and continued but lessening expenses related to COVID-19.

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Included in gross profit are charges related to reductions in the carrying value of our inventory due to obsolescence.

We recorded a provision of approximately $138,000 and $178,000 for obsolete inventory during the three months ended October 2, 2021 and September 26, 2020, respectively.

We recorded a provision of approximately $227,000 and $268,000 for obsolete inventory during the three months ended January 1, 2022 and December 26, 2020, respectively.

We adjust the carrying value for estimated obsolescence as necessary in an amount equal to the difference between the cost of inventory and its net realizable value based on assumptions as to future demand and market conditions.

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Operating Expenses

Total research, development, and engineering (RD&E) expenses were $2.4 million during the three months ended October 2, 2021 and $2.2 million during the three months ended September 26, 2020, respectively.

Total research, development, and engineering (RD&E) expenses were $2.5 million during the three months ended January 1, 2022 and $2.4 million during the three months ended December 26, 2020, respectively.

The increase in RD&E expenses relate to an increase in engineering payroll expenses.

Total RD&E expenses as a percent of net sales were 1.8 percent during the three months ended October 2, 2021 and the three months ended September 26, 2020.

Total selling, general and administrative (SG&A) expenses were $5.6 million during the three months ended October 2, 2021 compared to $5.0 million for the three months ended September 26, 2020.

Total RD&E expenses as a percent of net sales were 1.9 percent during the three months ended January 1, 2022 and the three months ended December 26, 2020.

Total selling, general and administrative (SG&A) expenses were $5.7 million during the three months ended January 1, 2022 compared to $5.5 million for the three months ended December 26, 2020.

The increase in SG&A expenses relate to an increase in legal expenses related to the subject of the previously disclosed internal investigation and related matters.

Total SG&A expenses as a percentage of net sales were 4.2 percent for the three months ended October 2, 2021 and 4.0 percent for the three months ended September 26, 2020.

Interest expense was $1.0 million during the three months ended October 2, 2021 and $0.7 million during the three months ended September 26, 2020.

Total SG&A expenses as a percentage of net sales were 4.2 percent for the three months ended January 1, 2022 and 4.3 percent for the three months ended December 26, 2020.

Interest expense was $1.1 million during the three months ended January 1, 2022 and $0.8 million during the three months ended December 26, 2020.

The increase in interest expense is primarily related to an increase in the average balance outstanding on our line of credit and increased interest rates.

The effective tax rate for the three months ended October 2, 2021 was 26.0 percent compared to 18.7 percent for the three months ended September 26, 2020.

The increase was primarily due to the non-cash tax expense impact of expired stock appreciation rights in the first quarter of fiscal year 2022.

The effective tax rate for the three months ended January 1, 2022 was (5.6) percent compared to 15.6 percent for the three months ended December 26, 2020.

The decrease was primarily due to federal research and development tax credits constituting a higher percentage of income before income taxes.

For further information on taxes see Note 6 of the “Notes to Consolidated Financial Statements.”

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If assumptions and estimates change in the future the deferred tax assets and liability will be adjusted accordingly and any increase or decrease will result in an additional deferred income tax expense or benefit in subsequent periods.

On October 2, 2021, we had an order backlog of approximately $320.9 million.

This compares with a backlog of approximately $201.9 million on September 26, 2020.

The increase in order backlog was related to the Company’s increases in demand from programs for home-consumer products, healthcare and home exercise equipment and increasing supply chain issues that have delayed production.

RESULTS OF OPERATIONS

Comparison of the Six Months Ended January 1, 2022 with the Six Months Ended December 26, 2020

The financial information and discussion below should be read in conjunction with the Consolidated Financial Statements and Notes.

The following table sets forth certain information regarding the components of our condensed consolidated statements of income for the six months ended January 1, 2022 as compared to the six months ended December 26, 2020.

It is provided to assist in assessing differences in our overall performance (in thousands):

Six Months Ended

January 1, 2022 % of

net sales December 26, 2020 % of

net sales $ change % point

Net sales $ 267,218 100.0 % $ 251,469 100.0 % $ 15,749 — %

Cost of sales 247,272 92.5 % 230,832 91.8 % 16,440 0.7 %

Gross profit 19,946 7.5 % 20,637 8.2 % (691) (0.7) %

Research, development and engineering 4,947 1.9 % 4,637 1.8 % 310 0.1 %

Selling, general and administrative 11,254 4.2 % 10,484 4.2 % 770 — %

Total operating expenses 16,201 6.1 % 15,121 6.0 % 1,080 0.1 %

Operating income 3,745 1.4 % 5,516 2.2 % (1,771) (0.8) %

Interest expense, net 2,087 0.8 % 1,529 0.6 % 558 0.2 %

Income before income taxes 1,658 0.6 % 3,987 1.6 % (2,329) (1.0) %

Income tax provision 256 0.1 % 688 0.3 % (432) (0.2) %

Net income $ 1,402 0.5 % $ 3,299 1.3 % $ (1,897) (0.8) %

Effective income tax rate 15.4 % 17.3 %

Net sales of $267.2 million for the six months ended January 1, 2022 increased by 6.3 percent as compared to net sales of $251.5 million for the six months ended December 26, 2020.

The $15.7 million increase in net sales from the prior year period was due to the successful ramp of new customer programs and increased demand from existing customers.

At the same time, the Company’s revenue was constrained by tightening worldwide supply chain and transportation and logistics issues which delayed the arrival of key components, causing factory downtime.

Gross profit as a percentage of net sales for the six months ended January 1, 2022 was 7.5 percent compared to 8.2 percent for the six months ended December 26, 2020.

This 0.7 percentage point decrease was primarily a result of supply chain constraints and continued but lessening expenses related to COVID-19.

The level of gross margin is impacted by facility utilization, product mix, timing, severity and steepness of new program ramps, pricing within the electronics industry and material costs, which can fluctuate significantly from quarter to quarter.

Included in gross profit are charges related to reductions in the carrying value of our inventory due to obsolescence.

We recorded a provision of approximately $365,000 and $446,000 for obsolete inventory during the six months ended January 1, 2022 and six months ended December 26, 2020, respectively.

The provisions are established for inventory that we have determined customers are not contractually responsible for and for inventory that we believe customers will be unable to purchase.

Operating Expenses

Total research, development, and engineering (RD&E) expenses were $4.9 million and $4.6 million during the six months ended January 1, 2022 and six months ended December 26, 2020, respectively.

The increase in RD&E expenses relate to an increase in engineering payroll expenses.

Total RD&E expenses as a percent of net sales were 1.9 percent during the six months ended January 1, 2022 and 1.8 percent during the six months ended December 26, 2020.

Total selling, general and administrative (SG&A) expenses were $11.3 million during the six months ended January 1, 2022 compare to $10.5 million for the six months ended January 1, 2022.

The increase in SG&A expenses relate to an increase in legal expenses related to the subject of the previously disclosed internal investigation and related matters.

Total SG&A expenses as a percentage of net sales were 4.2 percent during the six months ended January 1, 2022 compared to 4.2 percent during the six months ended December 26, 2020.

Interest expense was $2.1 million during the six months ended January 1, 2022 compared to $1.5 million during the six months ended December 26, 2020.

The increase in interest expense is primarily related to an increase in the average balance outstanding on our line of credit and increased interest rates.

The effective tax rate for the six months ended January 1, 2022 was 15.4 percent compared to 17.3 percent for the same period in fiscal year 2021.

The effective tax rate decreased from the prior year primarily due to federal research and development tax credits constituting a higher percentage of income before income taxes.

For further information on taxes see Note 6 of the “Notes to Consolidated Financial Statements.”

Our judgments regarding deferred tax assets and liabilities may change due to changes in market conditions, changes in estimates, changes in tax laws or other factors.

Considering the ongoing economic impacts of the COVID-19 pandemic, management assessed the realizability of all deferred tax assets at January 1, 2022, and determined that it is more likely than not that the deferred tax assets will be realized, other than the Vietnam net operating loss carryover.

Due to the Tax Holiday and net operating loss utilization ordering rules, we expect our Vietnam net operating losses will be used against Tax Holiday qualified income subject to tax at a zero rate, resulting in no benefit for these net operating losses.

Therefore, we have established a valuation allowance against the full amount of the Vietnam net operating loss carryover at January 1, 2022.

For further information, see Note 5 of the “Notes to Consolidated Financial Statements.”

On January 1, 2022, we had an order backlog of approximately $333.1 million.

This compares with a backlog of approximately $218.7 million on December 26, 2020.

The increase in order backlog is related to increases in demand and increasing supply chain issues that have delayed production.

Order backlog consists of purchase orders received for products expected to be shipped within the next 12 months, although shipment dates are subject to change due to design modifications or changes in other customer requirements.

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Operating Cash Flow

Net cash used in operating activities for the three months ended October 2, 2021 was $14.6 million, compared to $9.4 million during the same period of the prior fiscal year.

The $14.6 million of net cash used in operating activities for the three months ended October 2, 2021 is primarily related to $0.8 million in net income for the period adjusted for $1.3 million of depreciation and amortization, a $16.2 million increase in accounts receivable, a $7.0 million increase in other assets, a $5.9 million increase in inventory, a $3.0 million decrease in accrued compensation and vacation partially offset by a $18.8 million increase in accounts payable and a $1.1 million decrease in contract assets.

The $9.4 million of net cash used in operating activities for the three months ended September 26, 2020 is primarily related to $1.7 million in net income for the period adjusted for $1.8 million of depreciation and amortization, a $5.4 million increase in accounts receivable, a $4.9 million increase in inventory, a $2.8 million decrease in accrued compensation and vacation, a $1.1 million decrease in accounts payable, and $0.7 million increase in contract assets.

The $5.4 million increase in accounts receivable is a direct result of the Company not factoring receivables during the first quarter fiscal year 2021.

Net cash used in operating activities for the six months ended January 1, 2022 was $10.5 million, compared to $16.8 million during the same period of the prior fiscal year.

The $10.5 million of net cash used in operating activities for the six months ended January 1, 2022 is primarily related to $1.4 million in net income for the period adjusted for $2.6 million of depreciation and amortization, a $20.8 million increase in inventory, a $13.5 million increase in other assets, a $13.1 million increase in accounts receivable, a $4.1 million decrease in accrued compensation and vacation, a $1.2 million increase in contract assets partially offset by a $39.0 million increase in accounts payable.

The $16.8 million of net cash used in operating activities for the six months ended December 26, 2020 is primarily related to $3.3 million in net income for the period adjusted for $3.4 million of depreciation and amortization, a $14.0 million increase in accounts receivable, a $10.3 million decrease in accounts payable, a $4.9 million increase in inventory, a $1.4 million decrease in accrued compensation and vacation, and a $1.1 million decrease in contract assets.

The $14.0 million increase in accounts receivable is a result of the Company not factoring receivables during the first quarter fiscal year 2021.

Accounts receivable fluctuates based on the timing of shipments, terms offered and collections that occurred during the quarter.

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Investing Cash Flow

Cash provided by investing activities was $1.8 million during the three months ended October 2, 2021 as compared to cash used in investing activities of $3.2 million during the three months ended September 26, 2020.

Our primary investing activity during the three months ended October 2, 2021 and September 26, 2020, was purchasing equipment to support increased production levels for new programs.

Cash provided by investing activities was $2.8 million during the six months ended January 1, 2022 as compared to cash used in investing activities of $7.0 million during the six months ended December 26, 2020.

Our primary investing activity during the six months ended January 1, 2022 and December 26, 2020, was purchasing equipment to support increased production levels for new programs.

Leases are often utilized when potential technical obsolescence and funding requirement advantages outweigh the benefits of equipment ownership.

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Financing Cash Flow

Cash provided by financing activities was $14.5 million during the three months ended October 2, 2021 as compared to $13.5 million in the same period of the previous fiscal year.

Our primary financing activities during the three months ended October 2, 2021 and three months ended September 26, 2020, were borrowings and repayments under our revolving line of credit facility and term loans.

As of October 2, 2021, approximately $12.0 million was available under the asset-based revolving credit facility.

Cash provided by financing activities was $10.9 million during the six months ended January 1, 2022 as compared to $28.2 million in the same period of the previous fiscal year.

Our primary financing activities during the six months ended January 1, 2022 and six months ended December 26, 2020, were borrowings and repayments under our revolving line of credit facility and term loans.

As of January 1, 2022, approximately $17.3 million was available under the asset-based revolving credit facility.

Our cash requirements are affected by the level of current operations and new programs.

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The Company further notes projected cash from operations from increased demand from certain customers will be partially offset by an anticipated slowdown in collections from other customers and increasing inventory levels in efforts to mitigate supply chain constraint risks.

As of October 2, 2021, we had approximately $1.5 million of cash held by foreign subsidiaries.

As of January 1, 2022, we had approximately $1.0 million of cash held by foreign subsidiaries.

If cash is to be repatriated in the future from these foreign subsidiaries, the Company would be subject to certain withholding taxes in the foreign jurisdictions.

The total amount of tax payments required for the amount of foreign subsidiary cash on hand as of October 2, 2021 would approximate $16,000.

The total amount of tax payments required for the amount of foreign subsidiary cash on hand as of January 1, 2022 would approximate $18,000.

We have accrued withholding taxes for expected future repatriation of foreign earnings as discussed in Note 6 of the “Notes to Consolidated Financial Statements.”

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Refer to the discussion in note 4, “Long-Term Debt” to the consolidated financial statements for further details of our debt obligations.

In addition, the U.K.’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021, though the ICE Benchmark Administration, the administrator of LIBOR, announced that it would consider ceasing the publication of the one-week and two-month U.S.

dollar LIBOR settings at the end of 2021 and phase out the remaining U.S.

dollar LIBOR settings by June 30, 2023.

The transition from LIBOR to a new replacement benchmark is uncertain at this time and the consequences of such developments cannot be entirely predicted but could result in an increase in the cost of our borrowings, which could adversely affect our financial condition.

In addition, the U.K.’s Financial Conduct Authority, which regulates LIBOR, has formally announced that the publication of LIBOR is ending and confirmed that LIBOR-indexed rates will cease after June 30, 2023, with the remaining IBOR-indexed rates ceasing on December 31, 2021.

The Federal Reserve Board and the Federal Reserve Bank of New York identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate for LIBOR for debt and derivative financial instruments.

Our credit facility and debt agreements contains provisions that contemplate alternative methods to determine the base rate applicable to our LIBOR-indexed debt to the extent LIBOR-indexed rates are not available.

However, if our loan agreement is not transitioned to SOFR and LIBOR-indexed rates are discontinued, or if the methods of calculating the rates change, interest rates on our current or future borrowings may be adversely affected.

While we currently expect LIBOR-indexed rates to be available until June 30, 2023, it is possible that they will become unavailable prior to that tim e.

Our stock price is volatile.

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If we fail to properly remediate any future deficiencies or material weaknesses or to maintain proper and effective internal controls, our business and financial condition could be materially adversely impacted.

As described in Item 4, “Controls and Procedures,” of this Quarterly Report on Form 10-Q, we concluded that our disclosure controls and procedures were not effective as of December 26, 2020 and April 3, 2021, due to the existence of a material weakness in our internal control over financial reporting.

As previously disclosed, we concluded that our disclosure controls and procedures were not effective as of December 26, 2020 and April 3, 2021, due to the existence of a material weakness in our internal control over financial reporting.

While we have undertaken remediation efforts to address the identified deficiencies and have concluded that the material weakness was remediated as of July 3, 2021, we cannot provide assurance that we will be able to conclude that our controls will be effective in the future.

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We have incurred, and may continue to incur, significant expenses related to legal, accounting and other professional services in connection with matters relating to or arising from the subject of the Audit Committee’s internal investigation.

As described in Item 4, “Controls and Procedures,” of this Quarterly Report on Form 10-Q, we have taken and continue to take a number of steps in order to remediate identified deficiencies in our internal control over financial reporting and attempt to reduce the risk of future recurrence.

The validation of the efficacy of these remedial steps will result in us incurring additional near term expenses, and to the extent these steps are not successful, we may incur significant additional time and expense.

In addition, we are cooperating with the Securities and Exchange Commission (the “SEC”) regarding matters related to the internal investigation.

As a result of the internal investigation, we have taken and continue to take a number of steps in order to remediate identified deficiencies in our internal control over financial reporting and attempt to reduce the risk of future recurrence.

The validation of the efficacy of these remedial steps have resulted in us incurring additional near term expenses, and to the extent these steps are not successful, we may incur significant additional time and expense.

In addition, we are cooperating with the SEC regarding matters related to the internal investigation.

The completion of the internal investigation will not automatically resolve the SEC’s inquiries.

If the SEC or any other regulator were to commence legal action against us, we could be required to pay significant penalties and become subject to injunctions, cease and desist orders or other remedies.

If the SEC or any other regulator were to commence legal action against us, we could be required to pay significant additional legal fees, as well as penalties and become subject to injunctions, cease and desist orders or other remedies.

We can provide no assurances as to the outcome of any governmental inquiry or investigation.

Further, we, our officers and members of our board of directors could be named as defendants in lawsuits asserting claims arising out of the subject matter of the Audit Committee’s internal investigation.

As a result of any legal proceedings and any related indemnification requirements to our officers and directors, we could be required to pay monetary damages that may be in excess of our insurance coverage or may have additional penalties or other remedies imposed against us or our officers and directors.

As a result of any legal proceedings and any related indemnification requirements to our officers and directors, we could be required to pay additional legal fees and/or monetary damages that may be in excess of our insurance coverage or may have additional penalties or other remedies imposed against us or our officers and directors.

All of these expenses, the delay in timely filing our periodic reports and the diversion of the attention of management and other personnel that has occurred and is expected to continue, could adversely affect our business, financial condition, results of operations and cash flows.

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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 2. Management’s Discussion and Analysis