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Item 1A. Risk Factors

2023-02-07 compared with 2022-02-07 · 76 added, 73 removed, 170 unchanged (47% of the section changed)

11 unchanged sentences

Some of the factors that could affect our operating results include the following:

● we face risks related to the Novel Coronavirus pandemic (COVID-19), which has disrupted and may again disrupt our operations, including our manufacturing, research and development, and sales and marketing activities, which could have a material adverse impact on our business, financial condition, operating results and cash flows;

● risks associated with our supply chain including, the volume, cost and timing of delivery of orders placed by us with our wafer foundries and assembly subcontractors, and their ability to procure materials;

● the demand for our products declining in the major end markets we serve, which may occur due to competitive factors, supply-chain fluctuations, rising inflation or other changes in macroeconomic conditions;

● reliance on international sales activities for a substantial portion of our net revenues;

● the volume and timing of orders received from customers;

● our products are sold through distributors, which limits our direct interaction with our end customers, which reduces our ability to forecast sales and increases the complexity of our business;

● reliance on international sales activities for a substantial portion of our net revenues;

● our ability to attract and retain qualified personnel;

● interruptions in our information technology systems;

● competitive pressures on selling prices;

● our ability to attract and retain qualified personnel;

● the ability of our products to penetrate additional markets;

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● the lengthy timing of our sales cycle;

● the demand for our products declining in the major end markets we serve, which may occur due to competitive factors, supply-chain fluctuations or changes in macroeconomic conditions;

● earthquakes, fire, pandemics or other disasters;

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● changes in environmental laws and regulations, including with respect to energy consumption and climate change;

● uncertainties arising out of economic consequences of current and potential military actions, such as Russia’s invasion of Ukraine, or terrorist activities and associated political instability;

● risks associated with acquisitions and strategic investments;

1 unchanged sentence

● continued impact of changes in securities laws and regulations, including potential risks resulting from our evaluation of our internal controls over financial reporting.

● uncertainties arising out of economic consequences of current and potential military actions or terrorist activities and associated political instability.

Risks Related to the Operation and Growth of Our Business

We face risks related to the Novel Coronavirus pandemic (COVID-19), which has disrupted and may again disrupt our operations, including our manufacturing, research and development, and sales and marketing activities, which could have a material adverse impact on our business, financial condition, operating results and cash flows .

Our business as well as the business of our suppliers, customers and distributors have been and may continue to be adversely impacted by the world-wide response to COVID-19 such as public health measures, travel restrictions, business shutdowns, border closures, delivery and freight delays and other disruptions.

These disruptions may adversely affect not only our sales and marketing activities, product development, manufacturing and product shipments which could negatively impact our ability to meet customer commitments but also our customers’ ability to manufacture their products, which could reduce their demand for our products.

The effects of the pandemic have resulted in a significant economic downturn in local and global economies, as well as a significant downturn in financial markets, and the continuing pandemic could result in further significant economic downturns which may result in reduced end-customer demand and materially impact our revenues.

All of these effects could have a material adverse effect on our customer relationships, operating results, cash flows, financial condition and have a negative impact on our stock price.

We depend on third-party suppliers to provide us with wafers for our products and if they fail to provide us sufficient quantities of wafers, our business may suffer .

Our primary supply arrangements for the production of wafers are with Epson, Lapis and X-FAB.

Our contracts with these suppliers expire on varying dates, with the earliest to expire in December 2025.

Although some aspects of our relationships with Lapis, X-FAB and Epson are contractual, many important aspects of these relationships depend on their continued cooperation.

We cannot assure that we will continue to work successfully with Epson, Lapis and X-FAB in the future, and that the wafer foundries’ capacity will meet our needs.

Additionally, one or more of these wafer foundries could seek an early termination of our wafer supply agreements.

Any serious disruption in the supply of wafers from Epson, Lapis and X-FAB could harm our business.

We estimate that it would take 12 to 24 months from the time we identified an alternate manufacturing source to produce wafers with acceptable manufacturing yields in sufficient quantities to meet our needs.

Although we provide our foundries with rolling forecasts of our production requirements, their ability to provide wafers to us is ultimately limited by the available capacity of the wafer foundry.

Any reduction in wafer foundry capacity available to us could require us to pay amounts in excess of contracted or anticipated amounts for wafer deliveries or require us to make other concessions to meet our customers’ requirements, or may limit our ability to meet demand for our products.

Further, to the extent demand for our products exceeds wafer foundry capacity, this could inhibit us from expanding our business and harm relationships with our customers.

Any of these concessions or limitations could harm our business.

If our third-party suppliers and independent subcontractors do not produce our wafers and assemble our finished products at acceptable yields, our net revenues may decline.

We depend on independent foundries to produce wafers, and independent subcontractors to assemble and test finished products, at acceptable yields and to deliver them to us in a timely manner.

The failure of the foundries to supply us wafers at acceptable yields could prevent us from selling our products to our customers and would likely cause a decline in our net revenues and gross margin.

In addition, our IC assembly process requires our manufacturers to use a high-voltage molding compound that has been available from only a few suppliers.

These compounds and their specified processing conditions require a more exacting level of process control than normally required for standard IC packages.

Unavailability of assembly materials or problems with the assembly process can materially and adversely affect yields, timely delivery and cost to manufacture.

We may not be able to maintain acceptable yields in the future.

In addition, if prices for commodities used in our products increase significantly, raw material costs would increase for our suppliers which could result in an increase in the prices our suppliers charge us.

To the extent we are not able to pass these costs on to our customers;

this would have an adverse effect on our gross margins.

If demand for our products continues to decline in our major end markets, our net revenues will continue to decline further.

When our customers are not successful in maintaining high levels of demand for their products, their demand for our ICs decreases, which adversely affects our operating results.

A limited number of applications of our products, such as cellphone chargers and consumer appliances, make up a significant percentage of our net revenues.

We expect that a significant level of our net revenues and operating results will continue to be dependent upon these applications in the near term.

Demand for end products incorporating our products has been highly cyclical over time and has been impacted by economic downturns;

our recent results have been impacted by economic conditions including

inflation and the effects of anti-COVID measures in China.

Any further economic slowdown in the end markets that we serve could cause a further slowdown in demand for our ICs, causing our net revenues to decline further and potentially result in write-offs of excess or obsolete inventory, which could cause the price of our stock to fall.

Our international sales activities account for a substantial portion of our net revenues, which subjects us to substantial risks.

Sales to customers outside of the United States of America account for, and have accounted for a large portion of our net revenues, including approximately 96% for the year ended December 31, 2022 and 98% of our net revenues for the years ended December 31, 2021 and 2020, respectively.

If our international sales declined and we were unable to increase domestic sales, our revenues would decline and our operating results would be harmed.

International sales involve a number of risks to us, including:

● tariffs, protectionist measures and other trade barriers and restrictions;

● potential insolvency of international distributors and representatives;

● reduced protection for intellectual property rights in some countries;

● the impact of recessionary environments and inflation in the United States and other economies where we do business;

● global, regional, and local economic and political conditions, including, but not limited to, social, economic, political, and supply chain instability related to the uncertainty regarding relationships among the international community as a whole, as well as related to armed conflicts that exist, or in the future could exist, in various parts of the world;

● the burdens of complying with a variety of foreign and applicable U.S.

Federal and state laws;

● foreign-currency exchange risk.

Our failure to adequately address these risks could reduce our international sales and materially and adversely affect our operating results.

Furthermore, because substantially all of our foreign sales are denominated in U.S.

dollars, increases in the value of the dollar cause the price of our products in foreign markets to rise, making our products more expensive relative to competing products priced in local currencies.

We do not have long-term contracts with any of our customers and if they fail to place, or if they cancel or reschedule orders for our products, our operating results and our business may suffer.

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Any failure to manage these complexities could disrupt or reduce sales of our products and unfavorably impact our financial results.

Our international sales activities account for a substantial portion of our net revenues, which subjects us to substantial risks.

Sales to customers outside of the United States of America account for, and have accounted for a large portion of our net revenues, including approximately 98% of our net revenues for the years ended December 31, 2021 and 2020, and 97% of our net revenue for the year ended December 31, 2019.

If our international sales declined and we were unable to increase domestic sales, our revenues would decline and our operating results would be harmed.

International sales involve a number of risks to us, including:

● tariffs, protectionist measures and other trade barriers and restrictions;

● potential insolvency of international distributors and representatives;

● reduced protection for intellectual property rights in some countries;

● the impact of recessionary environments in economies outside the United States;

● the burdens of complying with a variety of foreign and applicable U.S.

Federal and state laws;

● foreign-currency exchange risk.

Our failure to adequately address these risks could reduce our international sales and materially and adversely affect our operating results.

Furthermore, because substantially all of our foreign sales are denominated in U.S.

dollars, increases in the value of the dollar cause the price of our products in foreign markets to rise, making our products more expensive relative to competing products priced in local currencies.

We must attract and retain qualified personnel to be successful and competition for qualified personnel is intense in our market.

Our success depends to a significant extent upon the continued service of our executive officers and other key management and technical personnel, and on our ability to continue to attract, retain and motivate qualified personnel, such as experienced analog design engineers and systems applications engineers.

The competition for these employees is intense, particularly in Silicon Valley.

The loss of the services of one or more of our engineers, executive officers or other key personnel could harm our business.

In addition, if one or more of these individuals leaves our employ, and we are unable to quickly and efficiently replace those individuals with qualified personnel who can smoothly transition into their new roles, our business may suffer.

We do not have long-term employment contracts with, and we do not have in place key person life insurance policies on, any of our employees.

Interruptions in our information technology systems could adversely affect our business.

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We have implemented measures to manage our risks related to such disruptions, but such disruptions could still occur and negatively impact our operations and financial results.

Furthermore, the risk of state-supported and geopolitically motivated cybersecurity incidents may increase due to geopolitical instability.

In addition, we may incur additional costs to remedy any damages caused by these disruptions or security breaches.

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If power requirements for applications in which our products are currently utilized go outside the cost-effective range of our products, some of these alternative technologies can be used more cost effectively.

In addition, as our patents expire, our competitors could

legally begin using the technology covered by the expired patents in their products, potentially increasing the performance of their products and/or decreasing the cost of their products, which may enable our competitors to compete more effectively.

In addition, as our patents expire, our competitors could legally begin using the technology covered by the expired patents in their products, potentially increasing the performance of their products and/or decreasing the cost of their products, which may enable our competitors to compete more effectively.

Our current patents may or may not inhibit our competitors from getting any benefit from an expired patent.

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We believe our failure to compete successfully in the high-voltage power supply business, including our ability to introduce new products with higher average selling prices, would materially harm our operating results.

These disruptions may continue to adversely affect not only our sales and marketing activities, product development, manufacturing and product shipments which could negatively impact our ability to meet customer commitments but also our customers’ ability to manufacture their products, which could continue to reduce their demand for our products.