What changed in this filing

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Item 1A. Risk Factors

2020-08-31 compared with 2019-12-19 · 223 added, 214 removed, 348 unchanged (56% of the section changed)

Risks Related to Our Material Weaknesses in Internal Control Over Financial Reporting and Related Matters

We face risks related to being delinquent in our SEC reporting obligations.

Primarily due to the matters that led to our restatement of prior financial statements and the material weaknesses identified in connection therewith, which are more fully detailed in our 2017 10-K, immediately prior to the filing of this Annual Report, our SEC filings, including our Annual Reports on Form 10-K for the fiscal years ended June 30, 2018 and 2019 and our Quarterly Reports on Form 10-Q for the quarterly periods ended September 30, 2017, December 31, 2017, March 31, 2018, September 30, 2018, December 31, 2018, March 31, 2019 and September 30, 2019, were delinquent.

Following this filing, our only delinquent report will be our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019.

While we cannot give assurance as to when we will file this outstanding quarterly report, our current intention is to file it in or before January 2020, and thereafter resume a timely filing schedule with respect to our future SEC reports.

We expect to continue to face many of the risks and challenges related to the matters that led to the delay in the filing of our 2017 10-K, including the following:

We may fail to remediate material weaknesses in our internal control over financial reporting and other material weaknesses may be identified in the future, which would adversely affect the accuracy and timing of our financial reporting;

Failure to timely file our SEC reports and make our current financial information available, has placed, and will continue to place, downward pressure on our stock price and result in the continued inability of our employees to sell the shares of our common stock underlying their awards granted pursuant to our equity compensation plans, which has adversely affected, and may continue to adversely affect, hiring and employee retention;

Further delay in the filing of our SEC reports will delay our ability to seek the relisting of our common stock on a national securities exchange, and as a result, may continue to reduce the liquidity of our common stock;

Litigation and claims as well as regulatory examinations, investigations, proceedings and orders arising out of our failure to file SEC reports on a timely basis, including the reasons and causes for such failure to file, will continue to divert management attention and resources from the operation of our business;

We may not be able to recapture lost business or business opportunities due to ongoing reputational harm;

Negative reports or actions on our commercial credit ratings would increase our costs of, or reduce our access to, future commercial credit arrangements and limit our ability to refinance existing indebtedness.

If one or more of the foregoing risks or challenges persist, our business, operations and financial condition are likely to be materially and adversely affected.

We have identified material weaknesses in our internal control over financial reporting, which could, if not remediated, adversely affect our ability to report our financial condition and results of operations in a timely and accurate manner.

We have concluded that our internal control over financial reporting was not effective as of June 30, 2019 due to the existence of material weaknesses in such controls, and we have also concluded that our disclosure controls and procedures were not effective as of June 30, 2019 due to material weaknesses in our internal control over financial reporting, all as described in Part II, Item 9A, “Controls and Procedures” of this Annual Report.

While we have initiated remediation measures to address the identified material weaknesses, we cannot provide assurance that our remediation efforts will be adequate to allow us to conclude that such controls will be effective in the future.

We also cannot assure you that additional material weaknesses in our internal control over financial reporting will not arise or be identified in the future.

We intend to continue our control remediation activities and to continue to improve our overall control environment and our operational, information technology, financial systems, and infrastructure procedures and controls, as well as to continue to train, retain and manage our personnel who are essential to effective internal controls.

In doing so, we will continue to incur expenses and expend management time on compliance-related issues.

If we are unable to successfully complete our remediation efforts or favorably assess the effectiveness of our internal control over financial reporting, our operating results, financial position, ability to accurately report our financial results and timely file our SEC reports, and stock price could be adversely affected.

Moreover, because of the inherent limitations of any control system, material misstatements due to error or fraud may not be prevented or detected on a timely basis, or at all.

If we are unable to provide reliable and timely financial reports in the future, our business and reputation may be further harmed.

our common stock, subject us to further regulatory investigations, potential penalties or stockholder litigation, and have a material adverse impact on our business and financial condition.

The circumstances that led to the delay in the filing of our 2017 10-K, and our efforts to investigate, assess and remediate those matters have also caused substantial delays in the preparation and filing of our annual and quarterly reports for periods after June 30, 2017, including this Annual Report.

Our ability to resume a timely filing schedule with respect to our SEC reporting is subject to a number of contingencies, including whether and how quickly we are able to effectively remediate the identified material weaknesses in our internal control over financial reporting.

We cannot give assurances as to when we will file our Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, our current intention is to file it in or before January 2020 , and thereafter resume a timely filing schedule with respect to our future SEC reports.

Investors will need to evaluate certain decisions with respect to our common stock in light of our lack of current financial information due to our inability to file our Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, on a timely basis.

Accordingly, any investment in our common stock involves a greater degree of risk.

Our lack of current public information may have an adverse impact on investor confidence, which could lead to a reduction in our stock price.

In addition, for so long as we are not current in our SEC filings, we are precluded from registering our securities with the SEC for offer and sale.

This precludes us from raising debt or equity financing in the public markets, limits our access to the private markets and also limits our ability to use stock options and other equity-based awards to attract, retain and provide incentives to our employees.

The delisting of our common stock may continue to have a material adverse effect on the trading and price of our common stock, and we cannot assure you that our common stock will be relisted, or that once relisted, it will remain listed.

As a result of the delay in the filing of our periodic reports with the SEC, we were unable to comply with Nasdaq’s listing standards and our common stock was suspended from trading on The Nasdaq Global Select Market effective August 23, 2018 and formally delisted effective March 22, 2019.

The delisting of our common stock from Nasdaq has had and may continue to have a material adverse effect on us by, among other things, causing investors to dispose of our shares and limiting:

The liquidity of our common stock;

The market price of our common stock;

The number of institutional and other investors that will consider investing in our common stock;

The availability of information concerning the trading prices and volume of our common stock;

The number of broker-dealers willing to execute trades in shares of our common stock;

Our ability to obtain equity or debt financing for the continuation of our operations.

Following the filing of our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019 and any other required filings with the SEC, and compliance with any other prerequisite requirements, we intend to apply to relist our common stock on a national securities exchange.

However, while we are working expeditiously to relist our common stock, no assurances can be provided that we will be able to do so in a timely manner or at all.

If we are unable to relist our common stock, or even if our common stock is relisted, no assurance can be provided that an active trading market will develop or, if one develops, that it will continue.

The lack of an active trading market may limit the liquidity of an investment in our common stock, meaning you may not be able to sell any shares of common stock you own at times, or at prices, attractive to you.

Any of these factors may materially adversely affect the price of our common stock.

The outcome of litigation and other claims as well as regulatory examinations, investigations, proceedings and orders arising out of the matters that led to the delay in the filing of our 2017 10-K and our other SEC reports are unpredictable, and any orders, actions or rulings not in our favor could have a material adverse effect on our business, results of operations and financial condition.

Our company and certain of our current and former executive officers are defendants in certain legal proceedings and putative class actions.

Please see Part I, Item 3, “Legal Proceedings.” These proceedings have resulted in significant expenses and the diversion of management attention from our business.

In addition, the circumstances that led to the delay in the filing of our 2017 10-K and our continued SEC filing delays have created the risk of additional litigation and claims by investors and examinations, investigations, proceedings and orders by regulatory authorities.

These include a broad range of potential actions that may be taken against us by the SEC or other regulatory agencies, including a cease and desist order, suspension of trading

of our securities, deregistration of our securities, sanctioning of our officers and directors and/or the assessment of possible civil monetary penalties.

Any such further actions could be expensive and damaging to our business, results of operations and financial condition.

We have incurred significant expenses related to the matters that led to the delay in the filing of our 2017 10-K and expect to continue to incur significant expenses related to the remediation of deficiencies in our internal control over financial reporting and disclosure controls and procedures, and any resulting litigation.

We have devoted substantial internal and external resources towards investigating, discovering, understanding and remediating the matters that led to the delay in the filing of our 2017 10-K (all as described in the 2017 10-K).

As a result of these efforts, we have incurred substantial incremental fees and expenses for additional accounting, financial and other consulting and professional services, as well as the implementation and maintenance of systems and processes that will need to be updated, supplemented or replaced.

Specifically, in connection with these efforts, we incurred professional fees of approximately $67 million in fiscal year 2019 and $42 million in fiscal year 2018, and we continue to incur additional fees in the current fiscal year.

We have taken a number of steps in order to strengthen our corporate culture, sales processes, and accounting function so as to allow us to be able to provide timely and accurate financial reporting.

To the extent these steps are not successful, we could be required to devote significant additional time and incur significant additional expenses.

Even if these steps are successful, we expect to continue to incur significant legal fees in future periods as we address litigation and regulatory action arising from the matters that led to the delay in the filing our 2017 10-K.

The expenses we are incurring in this regard, as well as the substantial time devoted by our management to identify and address the internal control deficiencies, could have a material adverse effect on our business, results of operations and financial condition.

If we are unable to become current in our SEC reports by June 30, 2020, we may lose the right to convert our existing credit facility into a five-year revolving credit facility, and may be unable to access outside financing.

Under the terms of the credit agreement with Bank of America, N.A.

(“Bank of America”), dated April 19, 2018, as amended in June 2019, we are required to deliver our audited financial statements for the fiscal years ended June 30, 2018 and 2019 by March 31, 2020.

With the filing of this Annual Report, we have satisfied that requirement.

The credit facility expires on June 30, 2020, although we have the right to convert it to a five-year revolving credit facility if we are current in all SEC filing obligations and meet certain other conditions.

If we are unable to become current in our SEC filing obligations by that date, we may lose the ability to elect for such a conversion, and any amounts then outstanding under the existing credit facility could become due and payable.

As of November 30, 2019, we did not have any outstanding principal obligations under the Bank of America credit facility.

We may be unable to secure other outside financing, if needed, to fund ongoing operations and other capital needs.

Any sources of financing that may be available to us could also be at higher costs and require us to satisfy more restrictive covenants, which could limit or restrict our operations, cash flows and earnings.

We cannot ensure that additional financing would be available to us, or be sufficient or available on satisfactory terms.

In addition, unless and until we have filed all required reports with the SEC, we will be precluded from registering our securities with the SEC for offer and sale, and the failure to timely file our SEC reports will limit our ability to use “short-form” Form S-3 registration statements for registering our securities for sale with the SEC until we again meet the filing requirements of Form S-3 including having timely filed all Exchange Act reports required to be filed during the twelve calendar months prior to the filing of the registration statement on Form S-3.

The matters leading to the delay in the filing of our 2017 10-K and our lack of effective internal control over financial reporting, including adverse publicity and potential concerns from our customers, have had and could continue to have an adverse effect on our business and financial condition.

We have been and could continue to be the subject of negative publicity focused on the matters that led to the delay in the filing of our 2017 10-K.

We may be adversely impacted by negative reactions to this publicity from our customers or others with whom we do business.

Concerns include the time and effort required to address our accounting and control environment and our ability to be a long-term provider to our customers.

The continued occurrence of any of the foregoing could harm our business and have an adverse effect on our financial condition.

If we are unable to maintain the effectiveness of our internal control over financial reporting, our operating results, financial position and stock price could be adversely affected.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, our management is required to report on the effectiveness of our internal control over financial reporting in our annual reports, and annually our independent auditors must attest to and

report on the effectiveness of our internal control over financial reporting.

It is necessary for us to maintain effective internal control over financial reporting to prevent fraud and errors and to maintain effective disclosure controls and procedures so that we can provide timely and reliable financial and other information.

A failure to maintain adequate internal controls may adversely affect our ability to provide financial statements that accurately reflect our financial condition and report information on a timely basis.

As described in Part II, Item 9A, “Controls and Procedures” of this Annual Report, we have concluded that there are material weaknesses in our internal control over financial reporting and that our disclosure controls and procedures were ineffective as of June 30, 2019 .

This adversely affected our ability to timely and accurately report our results of operations and financial condition.

We cannot ensure that other errors or material weaknesses will not be identified in the future.

If we fail to maintain an effective system of internal control over financial reporting, the accuracy and timeliness of our financial reporting may be adversely affected.

Although we are working to remediate our material weaknesses, and are focused on re-establishing effective internal controls over financial reporting in order to prevent and detect material misstatements in our annual and quarterly financial statements and prevent fraud, we cannot ensure that such efforts will be effective.

If we fail to maintain effective internal controls in future periods, this could further cause investors to lose confidence in our reported financial and other information, and our operating results, financial position and stock price could be adversely affected.

Risks Related to Our Business and Industry

Our quarterly operating results will likely fluctuate in the future, which could cause rapid declines in our stock price.

The effects of the COVID-19 pandemic has, and will continue to an increasing degree, adversely affect our business operations, financial condition and results of operations, the severity of which remains uncertain.

The novel strain of the coronavirus identified in Wuhan, China in late 2019 (COVID-19) has spread throughout the world and has resulted in authorities imposing, and businesses and individuals implementing, numerous unprecedented measures to try to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place/stay-at-home and social distancing orders, and shutdowns.

These measures have impacted and may further impact our workforce and operations, the operations of our customers, and those of our respective vendors, suppliers, and partners.

We have taken steps to protect our employees, including temporarily closing our offices in the United States, the Netherlands and to a lesser extent in Taiwan.

We continue our manufacturing operations and customers’ orders processing and services at each location, although our productivity at times slowed especially in the United States and in the Netherlands.

Travel restrictions and logistics challenges have impacted our supply chain, shipments to our customers, and our ability to provide services and support to our customers.

We have invested capital to procure key components so we can maintain reasonable lead times to fulfill orders for our customers.

The extent to which the effects of the COVID-19 pandemic will continue to impact our business, operations, financial condition and results of operations is uncertain, rapidly changing and hard to predict, and will depend on numerous evolving factors that we may not be able to control or predict, including:

the duration and scope of the COVID-19 pandemic;

the extent and effectiveness of responsive actions by authorities and the impact of these and other factors on our employees, customers and vendors;

difficulty in adding new customers due to inability to gain direct access;

the rate of spending on server and storage solutions, including delays in prospective customers’ purchasing decisions and delays in the provisioning of our products;

the rate at which our suppliers develop and release new components such as microprocessors and memory;

the rate at which our customers can perform acceptance testing or qualify our products, particularly if they contain new technologies;

the length of heightened unemployment and economic recession pressures;

the health impact of the pandemic on our employees, including key personnel;

the impact on the liquidity of our sales partners and end customers, including lengthening of customers payment terms and potential bankruptcies;

our continued ability to execute on business continuity plans for the maintenance of our critical business processes and managing our liquidity and access to credit facilities on terms acceptable to us;

availability of and fluctuations in the cost of materials, logistics and labor;

erosion of economic activity by small and medium size business or sectors to which we are exposed through OEMs and indirect sales channels.

The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions and the impact of these and other factors on our employees, customers, partners and suppliers.

If we are not able to respond to and manage the impact of such events effectively, our business may be harmed.

Our quarterly operating results have fluctuated and will likely fluctuate in the future, which could cause rapid declines in our stock price.

We believe that our quarterly operating results will continue to be subject to fluctuation due to various factors, many of which are beyond our control.

Factors that may affect quarterly operating results include:

Fluctuations in demand for our products, in part due to changes in the global economic environment;

Fluctuations based upon seasonality, with the quarters ending March 31 and September 30 typically being weaker;

Fluctuations in the timing and size of large customer orders;

The occurrence of global pandemics, including COVID-19, and other events that impact the global economy or one or more sectors of the global economy;

The ability of our customers and suppliers to obtain financing or fund capital expenditures, especially during a period of global credit market disruption, and, in particular, the impact of the extended duration of the COVID-19 pandemic on our smaller customers' ability to access financing and the related disruption of the demand from these customers;

Fluctuations in the timing and size of large customer orders, including with respect to changes in sales and implementation cycles of our products into our customers’ spending plans and associated revenue;

Variability of our margins based on the mix of server and storage systems, subsystems and accessories we sell and the percentage of our sales to internet data center, cloud computing customers or certain geographical regions;

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The timing of the introduction of new products by leading microprocessor vendors and other suppliers;

The introduction and market acceptance of new technologies and products, and our success in new and evolving markets, and incorporating emerging technologies in our products, as well as the adoption of new standards;

Changes in our product pricing policies, including those made in response to new product announcements;

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Impact of regulatory changes on our cost of doing business;

Costs associated with the circumstances leading to the restatement of our previously issued financial statements, and our efforts to investigate, assess and remediate those matters, as well as related legal proceedings.

In addition, customers may hesitate to purchase, or not continue to purchase, our products based upon our delay in the filing of our reports with the SEC and/or past unwarranted reports about security risks associated with the use of our products.

Accordingly, it is difficult to accurately forecast our growth and results of operations on a quarterly basis.

Costs associated with remediation of our material weaknesses and preparation of our restated financial statements, as well as related legal proceedings.

In addition, customers may hesitate to purchase, or not continue to purchase, our products based upon past unwarranted reports about security risks associated with the use of our products.

Accordingly, our growth and results of operations may fluctuate on a quarterly basis.

If we fail to meet expectations of investors or analysts, our stock price may fall rapidly and without notice.

Furthermore, the fluctuation of quarterly operating results may render less meaningful period-to-period comparisons of our operating results, and you should not rely upon them as an indication of future performance.

Our revenue and margins for a particular period are difficult to predict, and a shortfall in revenue or decline in margins may harm our operating results.

As a result of a variety of factors discussed in this Annual Report, our revenue and margins for a particular quarter are difficult to predict, especially in light of a challenging and inconsistent global macroeconomic environment, the significant impacts of the COVID-19 pandemic, steps we are taking in response to the COVID-19 pandemic, increased competition, the effects of the ongoing trade disputes between the United States and China and related market uncertainty.

Our revenue may grow at a slower rate than in past periods or decline.

Our ability to meet financial expectations could also be adversely affected if the nonlinear sales pattern seen in some of our past quarters recurs in future periods.

The timing of large orders can also have a significant effect on our business and operating results from quarter to quarter.

From time to time, we receive large orders that have a significant effect on our operating results in the period in which the order is recognized as revenue.

For instance, our larger customers may seek to fulfill all or substantially all of their requirements in a single or a few orders, and not make another significant purchase for a substantial period of time.

The timing of such orders is difficult to predict, and the timing of revenue recognition from such orders may affect period to period changes in revenue.

As a result, our operating results could vary materially from quarter to quarter based on the receipt of such orders and their ultimate recognition as revenue.

We plan our operating expense levels based primarily on forecasted revenue levels.

These expenses and the impact of long-term commitments are relatively fixed in the short term.

A shortfall in revenue could lead to operating results being below expectations because we may not be able to quickly reduce these fixed expenses in response to short-term business changes.

Any of the above factors could have a material adverse impact on our operations and financial results.

As we increasingly target larger customers and larger sales opportunities, our customer base may become more concentrated, our cost of sales may increase, our margins may be lower and our sales may be less predictable.

We have become increasingly dependent upon larger sales to grow our business.

In particular, in recent years, we have completed larger sales to leading internet data center and cloud customers and large enterprise customers.

In particular, in recent years, we have completed larger sales to leading internet data center and cloud customers, large enterprise customers and OEMs.

No single customer accounted for 10% or more of net sales in fiscal years 2020 , 2019 or 2018 .

If customers buy our products in greater volumes and their business becomes a larger percentage of our net sales, we may grow increasingly dependent on those customers to maintain our growth.

If our largest customers do not purchase our products at the levels, in the timeframes or within the geographies that we expect, our ability to maintain or grow our net sales will be adversely affected.

If customers buy our products in greater volumes and their business becomes a larger percentage of our net sales, we may grow increasingly dependent on those

customers to maintain our growth.

If our largest customers do not purchase our products, or we are unable to supply such customers with products, at the levels, in the timeframes or within the geographies that we expect, including as a result of the impact of COVID-19 on their businesses, our ability to maintain or grow our net sales will be adversely affected.

Increased sales to larger customers may also cause fluctuations in results of operations.

Large orders are generally subject to intense competition and pricing pressure which can have an adverse impact on our margins and results of operations.

Likewise, larger customers may seek to fulfill all or substantially all of their requirements in a single or a few orders, and not make another significant purchase for a substantial period of time.

Accordingly, a significant increase in revenue during the period in which we recognize the revenue from a large customer may be followed by a period of time during which the customer either does not purchase any products or only a small number of our products.

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Our sales cycle may become longer and more expensive, as larger customers typically spend more time negotiating contracts than smaller customers.

Larger customers often seek greater levels of support in the implementation and use of our server solutions.

Larger customers also often seek greater levels of support in the implementation and use of our server solutions.

Our ability to provide such support may be further affected by the COVID-19 pandemic, including challenges in obtaining site access, increased reliance on remote communications to diagnose and address support issues, and the need to increase responsiveness to customer needs.

An actual or perceived inability to meet customer support demands may adversely affect our relationship with such customers, which may affect the likelihood of future purchases of our products.

As a result of the above factors, our quarter-to-quarter results of operations may be subject to greater fluctuation and our stock price may be adversely affected.

We may fail to meet publicly announced financial guidance or other expectations about our business, which would cause our stock to decline in value.

We typically provide forward looking financial guidance when we announce our financial results from the prior quarter.

We undertake no obligation to update such guidance at any time.

Frequently in the past, our financial results have failed to meet the guidance we provided.

If we fail to meet any publicly announced financial guidance or other expectations about our business, it could cause our stock to decline in value.

We provided forward looking financial guidance when we announced our financial results for the prior quarter.

New developments related to the COVID-19 pandemic or other events that impact global economies may continue to contribute to decisions to not provide forward looking financial guidance, and if we do issue forward looking guidance, the uncertainties related to these items could cause us to revise such guidance.

If issued, we undertake no obligation to update any forward looking guidance at any time.

In the past, our financial results have failed to meet the guidance we provided.

There are a number of reasons why we have failed to meet guidance in the past and might fail again in the future, including, but not limited to, the factors described in these Risk Factors.

Increases in average selling prices for our server solutions have significantly contributed to increases in net sales in some of the periods covered by this Annual Report.

Such prices are subject to decline if customers do not continue to purchase our latest generation products or additional components, which could harm our results of operations.

Increases in average selling prices for our server solutions have significantly contributed to increases in net sales in some of the periods covered by this Annual Report.

Increases in average selling prices for our server solutions have historically significantly contributed to increases in net sales in some of the periods covered by this Annual Report.

Such prices are subject to decline if customers do not continue to purchase our latest generation products or additional components or as a result of factors related to the COVID-19 pandemic, which could harm our results of operations.

Increases in average selling prices for our server solutions have significantly contributed to increases in net sales in some of the periods covered by this Annual Report, although recently such prices have declined due in part to the market prices for key components.

Recently, the market for key components has become more volatile during the COVID-19 pandemic.

As with most electronics based products, average selling prices of server and storage products are typically highest at the time of introduction of new products, which utilize the latest technology, and tend to decrease over time as such products become commoditized and are ultimately replaced by even newer generation products.

We cannot predict the timing or amount of any decline in the average selling prices of our server solutions that we may experience in the future.

We cannot predict the timing or amount of any decline in the average selling prices of our server solutions that we may experience in the future, which may be exacerbated by continued customer uncertainty related to the COVID-19 pandemic.

In some instances, our agreements with our indirect sales channel partners limit our ability to reduce prices unless we make such price reductions available to them, or price protect their inventory.

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Prices of certain materials and core components utilized in the manufacture of our server and storage solutions, such as serverboards, chassis, CPUs, memory, hard drives and SSDs, represent a significant portion of our cost of sales.

We generally do not enter into long-term supply contracts for these materials and core components, but instead purchase these materials and components on a purchase order basis.

While we have increased our purchases of certain critical materials and core components in response to the demand uncertainties associated with the COVID-19 pandemic, we generally do not enter into long-term supply contracts for these materials and core components, but instead purchase these materials and components on a purchase order basis.

Prices of these core components and materials are volatile, and, as a result, it is difficult to predict expense levels and operating results.

In addition, if our business growth renders it necessary or appropriate to transition to longer term contracts with materials and core component suppliers, our costs may increase and our gross margins could correspondingly decrease.

In addition, if our

business growth renders it necessary or appropriate to transition to longer term contracts with materials and core component suppliers, our costs may increase and our gross margins could correspondingly decrease.

Because we often acquire materials and key components on an as needed basis, we may be limited in our ability to effectively and efficiently respond to customer orders because of the then-current availability or the terms and pricing of these materials and key components.

Our industry has experienced materials shortages and delivery delays in the past, and we may experience shortages or delays of critical materials in the future.

Our industry has experienced materials shortages and delivery delays in the past, including as a result of the negative impact of COVID-19 on global supply chains, and we may experience shortages or delays of critical materials or increased logistics costs to obtain necessary materials in a timely manner in the future.

From time to time, we have been forced to delay the introduction of certain of our products or the fulfillment of customer orders as a result of shortages of materials and key components, which can adversely impact our revenue.

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In the event of shortages, some of our larger competitors may have greater abilities to obtain materials and key components due to their larger purchasing power.

We may not be able to secure enough key components or materials at reasonable prices or of acceptable quality to build new products to meet customer demand, which could adversely affect our business, results of

operations and financial condition.

In addition, from time to time, we have accepted customer orders with various types of component pricing protection.

Such arrangements have increased our exposure to component pricing fluctuations and have adversely affected our financial results in certain quarters.

If we were to lose any of our current supply or contract manufacturing relationships, the process of identifying and qualifying a new supplier or contract manufacturer who will meet our quality and delivery requirements, and who will appropriately safeguard our intellectual property, may require a significant investment of time and resources, adversely affecting our ability to satisfy customer purchase orders and delaying our ability to rapidly introduce new products to market.

If we were to lose any of our current supply or contract manufacturing relationships, the process of identifying and qualifying a new supplier or contract manufacturer who meets our quality and delivery requirements, and who will appropriately safeguard our intellectual property, may require a significant investment of time and resources, adversely affecting our ability to satisfy customer purchase orders and delaying our ability to rapidly introduce new products to market.

Similarly, if any of our suppliers were to cancel, materially change contracts or commitments to us or fail to meet the quality or delivery requirements needed to satisfy customer demand for our products, whether due to shortages or other reasons, our reputation and relationships with customers could be damaged.

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We market and sell our products both domestically and in international markets.

If economic conditions, including currency exchange rates, in the areas in which we market and sell our products and other key potential markets for our products continue to remain uncertain or deteriorate, our customers may delay or reduce their spending on our products.

COVID-19 has had a material adverse impact on the global economy, and it remains uncertain as to the extent or duration of such impacts in the future.

In addition, the United States has recently added further prohibitions on conducting business with certain entities in China and continued to impose additional tariffs.

If economic conditions or trade disputes, including trade restrictions and tariffs such as those between the United States and China, in the areas in which we market and sell our products and other key potential markets for our products continue to remain uncertain or deteriorate, our customers may delay or reduce their spending on our products.

If our customers or potential customers experience economic hardship, this could reduce the demand for our products, delay and lengthen sales cycles, lower prices for our products, and lead to slower growth or even a decline in our revenues, operating results and cash flows.

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In addition, from time to time we assume greater inventory risk in connection with the purchase or manufacture of more specialized components in connection with higher volume sales opportunities.

There are uncertainties and risks related to COVID-19, for which we have taken certain actions including our increased purchase of certain critical materials and components as a part of our pandemic response planning.

Specifically, we sought to actively manage our supply chain for potential risks of shortage by first building inventories of critical components required for our motherboards and other system printed circuit boards in response to the early outbreak of COVID-19 in China.

Since that time we have continued to add to our inventories of key components such as CPUs, memory, SSDs and to a lesser extent GPUs such that customer orders can be fulfilled as they are received.

Nevertheless, no assurances can be given that such efforts will be successful to manage inventory, and we could be exposed to risks of insufficient, excess, or obsolete inventory.

We have from time to time experienced inventory write downs associated with higher volume sales that were not completed as anticipated.

We expect that we will experience such write downs from time to time in the future related to existing and future commitments.

Excess or obsolete inventory levels for these or other reasons could result in unexpected expenses or increases in our reserves against potential future charges which would adversely affect our business, results of operations and financial condition.

We may encounter difficulties with our ERP systems.

Many companies have experienced delays and difficulties with the implementation of new or changed ERP systems that have had a negative effect on their business.

We have incurred and expect to continue to incur additional expenses related to our ERP systems, as we continue to further enhance and develop them, including by automating certain internal controls.

See Part II, Item 9A, "Controls and Procedures" of this Annual Report for a more fulsome description of our material weaknesses and remediation efforts surrounding our ERP systems.

Any future disruptions, delays or deficiencies in the design and further enhancement of our ERP system could result in potentially much higher costs than we currently anticipate and could adversely affect our ability to provide services, fulfill contractual obligations, file reports with the SEC in a timely manner and/or otherwise operate our business, or otherwise impact our controls environment.

We expect that we will experience such write downs from time to time in the future related to existing and future commitments, and potentially related to our proactive purchase of certain critical materials and components as part of our planning in light of COVID-19.

obsolete inventory levels for these or other reasons could result in unexpected expenses or increases in our reserves against potential future charges which would adversely affect our business, results of operations and financial condition.

Difficulties we encounter relating to automating internal controls utilizing our ERP systems or integrating processes that occur in other IT applications could adversely impact our controls environment.

Many companies have experienced challenges with their ERP systems that have had a negative effect on their business.

We have incurred and expect to continue to incur additional expenses related to our ERP systems, particularly as we continue to further enhance and develop them including by automating certain internal controls.

See Part II, Item 9A, "Controls and Procedures" of this Annual Report for a more fulsome description of our material weakness and remediation efforts surrounding our ERP systems.

Any future disruptions, delays or deficiencies relating to automating internal controls utilizing our ERP systems or integrating processes that occur in other IT applications could adversely affect our ability to file reports with the SEC in a timely manner, deliver accurate financial statements and otherwise impact our controls environment.

Any of these consequences could have an adverse effect on our business, results of operations and financial condition.

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We experienced unauthorized intrusions into our network between 2011 and 2018.

these intrusions, individually or in the aggregate, has had a material adverse effect on our business, operations, or products.

None of these intrusions, individually or in the aggregate, had a material adverse effect on our business, operations, or products.

We have taken steps to enhance the security of our network and computer systems but, despite these efforts, we may experience future intrusions, which could adversely affect our business, operations, or products.

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In addition, the application and interpretation of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which we operate.

Because our products and services store, process and use data, some of which contains personal information, we are subject to complex and evolving federal, state and foreign laws and regulations regarding privacy, data protection and other matters.

Because our products and services store, process and use data, some of which contains personal information,

we are subject to complex and evolving federal, state and foreign laws and regulations regarding privacy, data protection and other matters.

Many of these laws and regulations are subject to change and uncertain interpretation and even our inadvertent failure to comply with such laws and regulations could result in investigations, claims, damages to our reputation, changes to our business practices, increased cost of operations and declines in user growth, retention or engagement, any of which could materially adversely affect our business, results of operations and financial condition.

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are also expanding data protection through legislation.

For example, in June 2018, California enacted the California Consumer Privacy Act, which takes effect on January 1, 2020, and will give California residents expanded privacy rights and protections and provide for civil penalties for violations and a private right of action for data breaches.

For example, in June 2018, California enacted the California Consumer Privacy Act, which took effect on January 1, 2020, and gives California residents expanded privacy rights and protections and provide for civil penalties for violations and a private right of action for data breaches.

At the same time, certain developing countries in which we do business have already or are also currently considering adopting privacy and data protection laws and regulations.

While we have implemented policies and procedures to address GDPR and other data privacy requirements, failure to comply or concerns about our practices or compliance with GDPR or other privacy-related laws and regulations could materially adversely affect our business, results of operations and financial condition.

If we do not successfully manage the expansion of our international manufacturing capacity, our business could be harmed.

Since inception, we have conducted a substantial majority of our manufacturing operations in San Jose, California.

We continue to increase our manufacturing capacity in Taiwan and in the Netherlands.

If we are unable to successfully ramp up our international manufacturing capacity, we may incur unanticipated costs, difficulties in making timely delivery of products or suffer other business disruptions which could adversely impact our results of operations.

If we do not successfully manage the expansion of our international manufacturing capacity and business operations, our business could be harmed.

Since inception, we have conducted a majority of our manufacturing operations in San Jose, California.

We continue to increase our manufacturing capacity in Taiwan and in the Netherlands, and as a result of the COVID-19 pandemic have sought to accelerate manufacturing in Taiwan in order to better diversify our geographical manufacturing concentration.

In order to continue to successfully increase our operations in Taiwan, we must efficiently manage our Taiwan operations from our headquarters in San Jose, California and continue to develop a strong local management team.

If we are unable to successfully ramp up our international manufacturing capacity, including the associated increased logistics and warehousing, we may incur unanticipated costs, difficulties in making timely delivery of products or suffer other business disruptions which could adversely impact our results of operations.

We may not be able to successfully manage our business for growth and expansion.

Over time we expect to continue to make investments to pursue new customers and expand our product offerings to grow our business.

We expect that our annual operating expenses will continue to increase as we invest in sales and marketing, research and development, manufacturing and production infrastructure, and strengthen customer service and support resources for our customers.

We also expect that our annual operating expenses will continue to increase as we invest in sales and marketing, research and development, manufacturing and production infrastructure, and strengthen customer service and support resources for our customers.

Our failure to expand operational and financial or internal control systems timely or efficiently could result in additional operating inefficiencies, which could increase our costs and expenses more than we had planned and prevent us from successfully executing our business plan.

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If we are not able to predict market trends accurately, we may not benefit from such research and development activities, and our results of operations may suffer.

Managing our business for long-term growth also requires us to successfully manage a substantial increase in our number of employees.

Managing our business for long-term growth also requires us to successfully manage our employee headcount.

We must continue to hire, train and manage new employees as needed.

Our failure to timely file our SEC reports and the delisting of our common stock on Nasdaq has adversely impacted our ability to attract new employees and retain existing employees and will likely continue to adversely impact us as long as these circumstances persist.

If our new hires perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees, or if we are not successful in retaining our existing employees, our business may be harmed.

The additional headcount we have added and may continue to add has increased and will continue to increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by offsetting expense reductions in the short term.

If our new hires perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees, or if we are not successful in retaining our employees, our

business may be harmed.

While in the past we have had significant growth in headcount, particularly during periods of rapid growth, our headcount has remained relatively flat in recent periods.

A growth in headcount would continue to increase our cost base, which would make it more difficult for us to offset any future revenue shortfalls by offsetting expense reductions in the short term.

If we fail to successfully manage our growth, we will be unable to execute our business plan.

We depend upon the development of new products and enhancements to our existing products, and if we fail to predict or respond to emerging technological trends and our customers’ changing needs, our operating results and market share may suffer.

The markets for our products are characterized by rapidly changing technology, evolving industry standards, new product introductions, and evolving methods of operations.

Our operating results depend on our ability to develop and introduce new products into existing and emerging markets and to reduce the production costs of existing products.

If our customers do not purchase our products, our business will be harmed.

The COVID-19 pandemic may also result in long-term changes in customer needs for our products in various sectors, along with capital spending reductions or shifts in spending focus, that could materially adversely affect us if we are unable to adjust our product offerings to match customer needs.

The process of developing products incorporating new technologies is complex and uncertain, and if we fail to accurately predict customers’ changing needs and emerging technological trends our business could be harmed.

We must commit significant resources, including the investments we have been making in our strategic priorities to developing new products before knowing whether our investments will result in products and services the market will accept.

If the industry does not evolve as we believe it will, or if our strategy for addressing this evolution is not successful, many of our strategic initiatives and investments may be of no or limited value.

Also, suppliers of our key components may introduce new technologies that are critical to the functionality of our products at a slower rate than their competition, which could adversely impact our ability to timely develop and provide competitive offerings to our customers.

Similarly, our business could be harmed if we fail to develop, or fail to develop in a timely fashion, offerings to address other transitions, or if the offerings addressing these other transitions that ultimately succeed are based on technology, or an approach to technology, different from ours.

In addition, our business could be adversely affected in periods surrounding our new product introductions if customers delay purchasing decisions to qualify or otherwise evaluate the new product offerings.

Furthermore, we may not execute successfully on our vision or strategy because of challenges with regard to product planning and timing, technical hurdles that we fail to overcome in a timely fashion, or a lack of appropriate resources.

This could result in competitors, some of which may also be our suppliers, providing those solutions before we do and loss of market share, revenue, and earnings.

The success of new products depends on several factors, including proper new product and service definition, component costs, timely completion and introduction of these products, differentiation of new products from those of our competitors, and market acceptance of these products.

There can be no assurance that we will successfully identify new product opportunities, develop and bring new products to market in a timely manner, or achieve market acceptance of our products or that products and technologies developed by others will not render our products or technologies obsolete or noncompetitive.

The products and technologies in our other product categories and key priority and growth areas may not prove to have the market success we anticipate, and we may not successfully identify and invest in other emerging or new products.

Our future effective income tax rates could be affected by changes in the relative mix of our operations and income among different geographic regions and by changes in domestic and foreign income tax laws, which could affect our future operating results, financial condition and cash flows.

We seek to structure our worldwide operations to take advantage of certain international tax planning opportunities and incentives.

Our future effective income tax rates could be adversely affected if tax authorities challenge our international tax structure or if the relative mix of our United States and international income changes for any reason, or due to changes in U.S.

or international tax laws.

In particular, a substantial portion of our revenue is generated from customers located outside the United States.

Prior to December 22, 2017, foreign withholding taxes and United States income taxes were not provided on undistributed earnings for certain non-United States subsidiaries, because such earnings were intended to be indefinitely reinvested in the operations of those subsidiaries.

On December 22, 2017, the U.S.

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federal corporate income tax rate decrease from 35% to 21%, and a one-time transition tax, in our income tax provision for the fiscal year ended June 30, 2018.

We expect further guidance may be forthcoming from federal and state tax agencies, which could result in additional impacts.

See Part II, Item 8, Note 14, “Income Taxes” to the consolidated financial statements in this Annual Report for further discussion of the impact of the 2017 Tax Reform Act.

Subsequent to the implementation of the 2017 Tax Reform Act, in December 2019, we realigned our international business operations and group structure to take advantage of certain international tax planning opportunities and incentives.

or international tax laws.

In particular, a substantial portion of our revenue is generated from customers located outside the United States.

The effectiveness of our tax planning activities is based upon certain assumptions that we make regarding our future operating performance and tax laws.

We continue to optimize our tax structure to align with our business operations and growth

We continue to optimize our tax structure to align with our business operations and growth strategy.

We cannot assure you that we will be able to lower our effective tax rate as a result of our current or future tax planning activities nor that such rate will not increase in the future.

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However, despite repeated denials of any tampering by our customers and us, and the announcement of the results of this independent investigation, this false allegation had a substantial negative impact on the trading price of our common stock and our reputation and it may continue to have a negative impact in the future.

Harm to our reputation can also arise from many other sources, including employee misconduct, as has been experienced in the past, and misconduct by our partners and outsourced service providers.

Harm to our reputation can also arise from many other sources, including employee misconduct, which we have experienced in the past, and misconduct by our partners and outsourced service providers.

Additionally, negative publicity with respect to our partners or service providers could also affect our business and operating results to the extent that we rely on these partners or if our customers or prospective customers associate our company with these partners.

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In addition, pricing pressures and increased competition generally may also result in reduced sales, less efficient utilization of our manufacturing operations, lower margins or the failure of our products to achieve or maintain widespread market acceptance, any of which could have a material adverse effect on our business, results of operations and financial condition.

Our principal competitors include global technology companies such as Cisco, Dell, Hewlett-Packard Enterprise, Huawei, IBM, and Lenovo.

Our principal competitors include global technology companies such as Cisco, Dell, Hewlett-Packard Enterprise, Huawei, and Lenovo.

In addition, we also compete with a number of other vendors who also sell application optimized servers, contract manufacturers and original design manufacturers (“ODMs”), such as Inspur, Quanta Computer, and Wiwynn Corporation.

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Some of our current or potential ODM competitors are also currently or have in the past been suppliers to us.

As a result, they may possess sensitive knowledge or experience which may be used against us competitively and/or which may

require us to alter our supply arrangements or sources in a way which could adversely impact our cost of sales or results of operations.

As a result, they may possess sensitive knowledge or experience which may be used against us competitively and/or which may require us to alter our supply arrangements or sources in a way which could adversely impact our cost of sales or results of operations.

Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements.

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For all of these reasons, we may not be able to compete successfully against our current or future competitors, and if we do not compete effectively, our ability to increase our net sales may be impaired.

Industry consolidation may lead to increased competition and may harm our operating results.

There has been a trend toward consolidation in our industry.

We expect this trend to continue as companies attempt to strengthen or hold their market positions in an evolving industry and as companies are acquired or are unable to continue operations.

Companies that are suppliers in some areas of our business may acquire or form alliances with our competitors, thereby reducing their business with us.

We believe that industry consolidation may result in stronger competitors that are more likely to compete as sole-source vendors for customers.

Additionally, at times in the past, our competitors have acquired certain customers of ours and terminated our business relationships with such customers.

As such, acquisitions by our competitors could also lead to more variability in our operating results and could have a material adverse effect on our business, operating results, and financial condition.

Any failure to adequately expand or retain our sales force will impede our growth.

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Our ability to grow our revenue in the future will depend, in large part, on our success in recruiting, training, retaining and successfully managing sufficient qualified direct sales personnel.

We have experienced much greater turnover in our sales and marketing personnel as compared to other departments and other companies, which we believe has been due in part to our employees' inability to exercise their stock options since our registration statement on Form S-8 lost its effectiveness due to our delinquent filings.

New hires require significant training and may take six months or longer before they reach full productivity.

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We rely on our close working relationships with our suppliers, including Intel, AMD and Nvidia, to anticipate and deliver new products on a timely basis when new generation materials and key components are made available.

Intel, AMD and Nvidia are the only suppliers of the microprocessors we use in our server and storage systems.

If we are not able to maintain our relationships with our suppliers or continue to leverage their research and development capabilities to develop new technologies desired by our customers, our ability to quickly offer advanced technology and product innovations to our customers would be impaired.

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Certain raw materials used in the manufacture of our products are available from a limited number of suppliers.

Shortages could occur in these essential materials due to an interruption of supply or increased demand in the industry.

Shortages could occur in these essential materials due to an interruption of supply, including interruptions on the global supply chain in connection with COVID-19, or increased demand in the industry.

One of our suppliers accounted for 26.8% , 21.8% and 26.0% of total purchases of raw materials for the fiscal years ended June 30, 2020 , 2019 and 2018 , respectively.

Ablecom and Compuware, related parties, accounted for 9.2% , 9.0% and 11.1% of our total

cost of sales for the fiscal years ended June 30, 2019 , 2018 and 2017 , respectively.

Ablecom and Compuware, related parties, accounted for 10.1% , 9.2% and 9.0% of our total cost of sales for the fiscal years ended June 30, 2020 , 2019 and 2018 , respectively.

If any of our largest suppliers discontinue their operations or if our relationships with them are adversely impacted, we could experience a material adverse effect on our business, results of operations and financial condition.

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Our research and development expenditures, as a percentage of our net sales, are considerably higher than many of our competitors and our earnings will depend upon maintaining revenues and margins that offset these expenditures.

Our strategy is to focus on being consistently rapid-to-market with flexible and application optimized server and storage systems that take advantage of our own internal development and the latest technologies offered by microprocessor manufacturers and other component vendors.

Our strategy is to focus on being consistently first-to-market with flexible and application optimized server and storage systems that take advantage of our own internal development and the latest technologies offered by microprocessor manufacturers and other component vendors.

Consistent with this strategy, we spend higher amounts, as a percentage of revenues, on research and development costs than many of our competitors.

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Occasionally, our design or manufacturing processes may fail to deliver products of the quality that our customers require.

For example, in the past certain vendors have provided us with defective components that failed under

certain applications.

For example, in the past certain vendors have provided us with defective components that failed under certain applications.

As a result, our products needed to be repaired and we incurred costs in connection with the recall and diverted resources from other projects.

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Steve Liang, Ablecom’s Chief Executive Officer and largest shareholder, is the brother of Charles Liang, our President, Chief Executive Officer and Chairman of our board of directors (“the Board”).

Steve Liang owned approximately 0.4% of our common stock as of June 30, 2017, but owned no shares as of June 30, 2018 and thereafter.

Charles Liang and his spouse, Sara Liu, our Co-Founder, Senior Vice President and director, jointly own approximately 10.5% of Ablecom’s capital stock, while Mr.

Steve Liang and other family members own approximately 28.8% of Ablecom’s outstanding common stock.

Bill Liang, a brother of both Charles Liang and Steve Liang, also is a member of the Board of Directors of Ablecom.

Certain family members of Yih-Shyan (Wally) Liaw, who until January 2018 was our Senior Vice President of International Sales and director, own approximately 11.7% of Ablecom’s capital stock.

Steve Liang owned no shares of our common stock as of June 30, 2020, 2019 or 2018.

Charles Liang and his spouse, Sara Liu, our Co-Founder, Senior Vice President and director, jointly owned approximately 10.5% of Ablecom’s capital stock, while Mr.

Steve Liang and other family members owned approximately 28.8% of Ablecom’s outstanding common stock as of June 30, 2020.

Bill Liang, a brother of both Charles Liang and Steve Liang, is a member of the Board of Directors of Ablecom as well.

In October 2018, our Chief Executive Officer, Charles Liang, personally borrowed approximately $12.9 million from Chien-Tsun Chang, the spouse of Steve Liang.

The loan is unsecured, has no maturity date and bore interest at 0.8% per month for the first six months, increased to 0.85% per month through February 28, 2020, and reduced to 0.25% effective March 1, 2020.

The loan was originally made at Mr.

Liang's request to provide funds to repay margin loans to two financial institutions, which loans had been secured by shares of the company's common stock that he held.

The lenders called the loans in October 2018, following the suspension of the company's common stock from trading on NASDAQ in August 2018 and the decline in the market price of the company's common stock in October 2018.

As of June 30, 2020, the amount due on the unsecured loan (including principal and accrued interest) was approximately $14.9 million.

Bill Liang is also the Chief Executive Officer of Compuware, a member of Compuware’s Board of Directors and a holder of a significant equity interest in Compuware.

Steve Liang is also a member of Compuware’s Board of Directors and is an equity holder of Compuware.

Charles Liang as our Chief Executive Officer and Chairman of the Board and as a significant stockholder of our company, has considerable influence over the management of our business relationships.

Charles Liang is our Chief Executive Officer and Chairman of the Board and is a significant stockholder of our company, and has considerable influence over the management of our business relationships.

Accordingly, we may be disadvantaged by the economic interests of Mr.

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Sara Liu as stockholders of Ablecom and Mr.

Charles Liang's personal relationship with Ablecom’s Chief Executive Officer.

Liang's personal relationship with Ablecom’s Chief Executive Officer.

We may not negotiate or enforce contractual terms as aggressively with Ablecom or Compuware as we might with an unrelated party, and the commercial terms of our agreements may be less favorable than we might obtain in negotiations with third parties.

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We plan to continue to maintain our manufacturing relationship with Ablecom in Asia.

In order to provide a larger volume of contract manufacturing services for us, we anticipate that Ablecom will continue to warehouse for us an increasing

number of components and subassemblies manufactured by multiple suppliers prior to shipment to our facilities in the United States and Europe.

In order to provide a larger volume of contract manufacturing services for us, we anticipate that Ablecom will continue to warehouse for us an increasing number of components and subassemblies manufactured by multiple suppliers prior to shipment to our facilities in the United States and Europe.

We also anticipate that we will continue to lease office space from Ablecom in Taiwan to support our research and development efforts.

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We market and sell our systems and subsystems and accessories both inside and outside the United States.

We intend to expand our international sales efforts, especially into Asia, and we are expanding our business operations in Europe and Asia, particularly in China, Taiwan, the Netherlands and Japan.

We intend to expand our international sales efforts, especially into Asia, and we are expanding our business operations in Europe and Asia, particularly in Taiwan, the Netherlands and Japan.

In particular, we have made, and continue to make, substantial investments for the purchase of land and the development of new facilities in Taiwan to accommodate our expected growth and the migration of a substantial portion of our contract manufacturing operations from China to Taiwan.

Our international expansion efforts may not be successful.

While effects of the COVID-19 pandemic have been less severe in Taiwan than other geographic regions to date, no assurances can be given that significant adverse effects will not emerge that could substantially affect our efforts in Taiwan.

See also “—The effects of the COVID-19 pandemic has, and will continue to an increasing degree, adversely affect our business operations, financial condition and results of operations, the severity of which remains uncertain.”

Beyond risks associated with the COVID-19 pandemic, our international expansion efforts may not be successful.

Our international operations expose us to risks and challenges that we would otherwise not face if we conducted our business only in the United States, such as:

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Weaker legal protections of intellectual property rights and mechanisms for enforcing those rights;

Market disruptions created by public health crises in regions outside the United States, such as Avian flu, SARS and other diseases;

Market disruptions created by other public health crises in regions outside the United States, such as avian flu, SARS and other diseases;

Import and export tariffs;

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We have a 30% minority interest in a China corporate venture that was established to market and sell corporate venture branded systems in China based upon products and technology we supply.

We record earnings and losses from the

corporate venture using the equity method of accounting.

We record earnings and losses from the corporate venture using the equity method of accounting.

Our loss exposure is limited to the remainder of our equity investment in the corporate venture which as of June 30, 2020 and 2019 was $2.7 million and $1.7 million , respectively.

Although we currently do not intend to make any additional investment in this corporate venture, if we were to do so in the future, our exposure to potential losses would increase.

In June 2020, the third-party parent company that controls our corporate venture was placed on a U.S.

government export control list, along with several related entities.

We currently do not intend to make any additional investment in this corporate venture.

See Part II, Item 8, Note 8, “Investment in a Corporate Venture” to the consolidated financial statements in this Annual Report.

We may make investments in other corporate ventures.

We do not control this corporate venture and any fluctuation in the results of operations of the corporate venture or any other similar transaction that we may enter into in the future could adversely impact, or result in fluctuations in, our results of operations.

The United States could withdraw from or materially modify certain international trade agreements, or change tariff, trade, or tax provisions related to the global manufacturing and sales of our products in ways that we currently cannot predict.

A portion of our business activities are conducted in foreign countries, including the Netherlands, Taiwan, China, United Kingdom and Japan.

Our business benefits from free trade agreements, and we also rely on various U.S.

corporate tax provisions related to international commerce as we manufacture, market and sell our products globally.

Starting in July 2018, the U.S.

announced a series of lists covering thousands of categories of Chinese origin products subject to potential special tariffs of 10% to 25% of import value, in addition to the regular tariffs that have historically applied to such products.

Many categories of Chinese imports became subject to the 10% additional tariff in September 2018, including certain components in our products.

This 10% additional tariff was increased to 25% effective May 10, 2019.

In addition, on August 1, 2019, President Trump announced that a special 15% tariff will be imposed on the approximately $300 billion of inbound trade from China not already subject to a special tariff.

Based on prior announcements by the Trump Administration, it is possible that the special 15% tariff could be increased to 25% in the future.

The precise impact of the special tariffs on Chinese products is impossible to predict at this time.

As a result of these tariffs and the uncertainty surrounding the impact of any future special tariffs on Chinese products, we have begun to migrate a substantial portion of our subcontracted business operations from China to Taiwan.

We are continuing to evaluate the impact of the announced and other proposed tariffs on products and components that we import from China, and we may experience a material increase in the cost of our products, which may result in our products becoming less attractive relative to products offered by our competitors.

These developments, or the perception that any of them could occur, may have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global trade and, in particular, trade between the impacted nations and the United States.

Any of these factors, or any changes to U.S.

corporate tax policies related to international commerce, could depress economic activity and have a material adverse effect on our business, financial condition and results of operations.

Despite following previously issued SEC Staff guidance, the filing of our Annual Report Form 10-K for our fiscal year ended June 30, 2019 (the “2019 10-K”) may not make us “current” in our Exchange Act filing obligations, which means we may not be eligible to use certain forms or rely on certain rules of the SEC.

On December 19, 2019, we filed the 2019 10-K, which constituted a “comprehensive” Annual Report on Form 10-K, or “Super 10-K,” and which contained our audited consolidated balance sheets as of June 30, 2019 and 2018 and the related audited consolidated statements of operations loss, stockholders’ equity and cash flows for the years ended June 30, 2019, 2018 and 2017, along with selected unaudited condensed consolidated financial data for the years ended June 30, 2017 and 2016 Concurrently with filing our 2019 10-K, we filed unaudited quarterly and year to date condensed consolidated financial statements and Quarterly Reports on Form 10-Q for the quarterly periods ended September 30, 2018, December 31, 2018, and March 31, 2019.

On December 20, 2019, we filed our Quarterly report on Form 10-Q for the quarterly period ended September 30, 2019 (the “Q1 2020 10-Q”).

We followed previously issued guidance from the staff of the SEC's Division of Corporation Finance (the “Staff”) with respect to filing a comprehensive annual report on Form 10-K where issuers have been delinquent in meeting their periodic reporting requirements with the SEC.

In accordance with such guidance, our filing of the 2019 10-K does not necessarily mean that the Staff will conclude that we have complied with all applicable financial statement requirements or complied with all reporting requirements of the Securities Exchange Act of 1934 (“Exchange Act”), nor does it foreclose any enforcement action by the SEC with respect to our disclosure, filings or failures to file reports under the Exchange Act.

We do not intend to file a separate Annual Report on Form 10-K for the fiscal year ended June 30, 2018 or Quarterly Reports on Form 10-Q for the quarterly periods ended September 30, 2017, December 31, 2017 and March 31, 2018.

Without the missing reports, investors may not be able to review certain financial and other disclosures that would have been contained in those reports.

We have identified a material weakness in our internal control over financial reporting, which could, if not remediated, adversely affect our ability to report our financial condition and results of operations in a timely and accurate manner.

It is necessary for us to maintain effective internal

control over financial reporting to prevent fraud and errors and to maintain effective disclosure controls and procedures so that we can provide timely and reliable financial and other information.

We have concluded that our internal control over financial reporting was not effective as of June 30, 2020 due to the existence of a material weakness in such controls, and we have also concluded that our disclosure controls and procedures were not effective as of June 30, 2020 due to a material weakness in our internal control over financial reporting, all as described in Part II, Item 9A, “Controls and Procedures” of this Annual Report.

While we have initiated remediation measures to address the identified material weakness, we cannot provide assurance that our remediation efforts will be adequate to allow us to conclude that such controls will be effective in the future.

We also cannot assure you that additional material weaknesses in our internal control over financial reporting will not arise or be identified in the future.

In doing so, we will continue to incur expenses and expend management time on compliance-related issues.

If we are unable to successfully complete our remediation efforts in a timely manner and are, therefore, not able to favorably assess the effectiveness of our internal control over financial reporting, this could further cause investors to lose confidence, and our operating results, financial position, ability to accurately report our financial results and timely file our SEC reports, and stock price could be adversely affected.

Moreover, because of the inherent limitations of any control system, material misstatements due to error or fraud may not be prevented or detected on a timely basis, or at all.

If we are unable to provide reliable and timely financial reports in the future, our business and reputation may be further harmed.

Restated financial statements and failures in internal controls may also cause us to fail to meet reporting obligations, negatively affect investor and customer confidence in our management or result in adverse publicity and concerns from investors and customers, any of which could have a negative effect on the price of our common stock, subject us to further regulatory investigations, potential penalties or stockholder litigation, and have a material adverse impact on our business and financial condition.

The outcome of litigation arising out of the matters that led to the delay in the filing of our 2017 10-K and our other SEC reports are unpredictable, and any orders, actions or rulings not in our favor could have a material adverse effect on our business, results of operations and financial condition.

Our company and certain of our current and former executive officers are defendants in certain legal proceedings and putative class actions.

Please see Part I, Item 3, “Legal Proceedings.” These proceedings have resulted in significant expenses and the diversion of management attention from our business.

In addition, the circumstances that led to the delay in the filing of our 2017 10-K have created, and any additional future delay in making our SEC filing may create, the risk of additional litigation and claims by investors and examinations, investigations, proceedings and orders by regulatory authorities.

These include a broad range of potential actions that may be taken against us by the SEC or other regulatory agencies, including a cease and desist order, suspension of trading of our securities, deregistration of our securities, sanctioning of our officers and directors and/or the assessment of possible civil monetary penalties.

Any such further actions could be expensive and damaging to our business, results of operations and financial condition.

We incurred significant expenses related to the matters that led to the delay in the filing of our 2017 10-K and may incur expenses related to the remediation of remaining deficiencies in our internal control over financial reporting and disclosure controls and procedures, and any resulting litigation.

We devoted substantial internal and external resources towards investigating, discovering, understanding and remediating the matters that led to the delay in the filing of our 2017 10-K (all as described in the 2017 10-K).

As a result of these efforts, we incurred substantial incremental fees and expenses for additional accounting, financial and other consulting and professional services, as well as the implementation and maintenance of systems and processes that will need to be updated, supplemented or replaced.

Specifically, in connection with these efforts, we incurred professional fees of approximately $14 million in fiscal year 2020, $67 million in fiscal year 2019 and $42 million in fiscal year 2018, and we continue to incur additional fees related to remediation in the current fiscal year.

In addition, as of and for the year ended June 30, 2020, we recorded a liability of $17.5 million for our SEC settlement of the investigation into our Company's financial accounting for fiscal years 2014 to 2017.

We have taken a number of steps in order to strengthen our corporate culture, sales processes, and accounting function so as to allow us to be able to provide timely and accurate financial reporting.

To the extent these steps are not successful, we could be required to devote significant additional time and incur significant additional expenses.

Even if these steps are successful, we may incur significant legal fees in future periods as we address litigation and regulatory action arising from the matters that led to the delay in the filing our 2017 10-K.

The expenses we are incurring in this regard, as well

as the substantial time devoted by our management to identify and address the internal control deficiencies, could have a material adverse effect on our business, results of operations and financial condition.

We have been and could continue to be the subject of negative publicity focused on the matters that led to the delay in the filing of our 2017 10-K.

We may be adversely impacted by negative reactions to this publicity from our customers or others with whom we do business.

Concerns include the time and effort required to address our accounting and control environment and our ability to be a long-term provider to our customers.

The continued occurrence of any of the foregoing could harm our business and have an adverse effect on our financial condition.

Failure to comply with the U.S.

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Treasury, Office of Foreign Assets Control.

If we fail to comply with laws and regulations restricting dealings with sanctioned countries, we may be subject to civil or criminal penalties.

If we fail to comply with laws and regulations restricting dealings with sanctioned countries or companies and/or persons on restricted lists, we may be subject to civil or criminal penalties.

Any future violations could have an adverse impact on our ability to sell our products to United States federal, state and local government and related entities.

We have business relationships with companies in China who have been, or may in the future be, added to the restricted party list.

We take steps to minimize business disruption when these situations arise;

however, we may be required to terminate or modify such relationships if our activities are prohibited by U.S.

Further, our association with these parties could subject us to greater scrutiny or reputational harm among current or prospective customers, partners, suppliers, investors, other parties doing business with us or using our products, or the general public. The United States and other countries continually update their lists of export-controlled items and technologies, and may impose new or more-restrictive export requirements on our products in the future.

As a result of regulatory changes, we may be required to obtain licenses or other authorizations to continue supporting existing customers or to supply existing products to new customers in China and elsewhere. Further escalations in trade restrictions, particularly between the United States and China, could impede our ability to sell or support our products.

In addition, while we have implemented policies, internal controls and other measures reasonably designed to promote compliance with applicable anti-corruption and anti-bribery laws and regulations, and certain safeguards designed to ensure compliance with U.S.

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If we, or our employees or agents acting on our behalf, are found to have engaged in practices that violate these laws and regulations, we could suffer severe fines and penalties, profit disgorgement, injunctions on future conduct, securities litigation, bans on transacting government business and other consequences that may have a material adverse effect on our business, results of operations and financial condition.

our brand and reputation, our sales activities or our stock price could be adversely affected if we become the subject of any negative publicity related to actual or potential violations of anti-corruption, anti-bribery or trade control laws and regulations.

In addition, our brand and reputation, our sales activities or our stock price could be adversely affected if we become the subject of any negative publicity related to actual or potential violations of anti-corruption, anti-bribery or trade control laws and regulations.

Any failure to protect our intellectual property rights, trade secrets and technical know-how could impair our brand and our competitiveness.

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If we fail to protect our intellectual property rights adequately, we may lose an important advantage in the markets in which we compete.

Trademark, patent, copyright and trade secret laws in the United States and other jurisdictions as well as our internal confidentiality procedures and contractual provisions are the core of our efforts to protect our proprietary technology and our brand.

Our patents and other intellectual property rights may be challenged by others or invalidated through administrative process or litigation, and we may initiate claims or litigation against third parties for infringement of our proprietary rights.

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Competition for qualified personnel is intense, especially in Silicon Valley, where we are headquartered.

We have experienced in the past and may continue to experience difficulty in hiring and retaining highly skilled employees with appropriate qualifications.

The delay in the filing of our required Exchange Act period reports with the SEC precludes us from registering our securities with the SEC for offer and sale and limits our ability to use stock options and other equity-based awards to attract, retain and provide incentives to employees.

Since September 2017, our employees have been unable to sell their holdings of our common stock, which has contributed to the loss of experienced engineering and sales personnel.

If we are unable to attract and integrate additional key employees in a manner that enables us to scale our business and operations effectively, or if we do not maintain competitive compensation policies to retain our employees, our ability to operate effectively and efficiently could be limited.

We have experienced and may continue to experience difficulty in hiring and retaining highly skilled employees with appropriate qualifications.

If we are unable to attract and integrate additional key employees in a manner that enables us to scale our

business and operations effectively, or if we do not maintain competitive compensation policies to retain our employees, our ability to operate effectively and efficiently could be limited.

Backlog does not provide a substantial portion of our net sales in any quarter.

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We have also established significant manufacturing and research and development operations in Taiwan which is also subject to seismic activity risks.

We do not currently have a comprehensive disaster recovery program and as a result, a significant natural disaster, such as an earthquake, could have a material adverse impact on our business, operating results, and financial condition.

Although we are in the process of preparing such a program, there is no assurance that it will be effective in the event of such a disaster.

Our operations involve the use of hazardous and toxic materials, and we must comply with environmental laws and regulations, which can be expensive, and may affect our business, results of operations and financial condition.

We are subject to federal, state and local regulations relating to the use, handling, storage, disposal and human exposure to hazardous and toxic materials.

While we have adopted a business continuity plan, no assurances can be given that our business continuity plan will be effective or we would be able to successfully recover from a significant natural disaster, such as an earthquake, which could have a material adverse impact on our business, operating results, and financial condition.

In addition, climate change and natural disasters present operational and business risks to all companies on a global scale.

Our operations could involve the use of regulated materials, and we must comply with environmental, health and safety laws and regulations, which can be expensive, and may affect our business, results of operations and financial condition.

We are subject to federal, state and local regulations relating to the use, handling, storage, disposal and human exposure to materials, including hazardous and toxic materials.

If we were to violate or become liable under environmental laws in the future as a result of our inability to obtain permits, human error, accident, equipment failure or other causes, we could be subject to fines, costs or civil or criminal sanctions, face third-party property damage or personal injury claims or be required to incur substantial investigation or remediation costs, which could be material, or experience disruptions in our operations, any of which could have a material adverse effect on our business, results of operations and financial condition.

In addition, environmental laws could become more stringent over time imposing greater compliance costs and increasing risks and penalties associated with violations, which could harm our business, results of operations and financial condition.

We also face increasing complexity in our product design as we adjust to new and future requirements relating to the materials composition of our products, including the restrictions on lead and other hazardous substances applicable to specified electronic products placed on the market in the European Union (Restriction on the Use of Hazardous Substances Directive 2002/95/EC, also known as the RoHS Directive).

We also face increasing complexity in our product design as we adjust to new and future requirements relating to the materials composition, energy efficiency and recyclability of our products, including EU eco-design requirements for servers and data storage products (Commission Regulation (EU) 2019/424).

We are also subject to laws and regulations such as California’s “Proposition 65” which requires that clear and reasonable warnings be given to consumers who are exposed to certain chemicals deemed by the State of California to be dangerous, such as lead.

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We are also subject to the Section 1502 of the Dodd Frank Act concerning the supply of certain minerals coming from the conflict zones in and around the Democratic Republic of Congo.

This United States legislation includes disclosure requirements regarding the use of conflict minerals mined from the Democratic Republic of Congo and adjoining countries and

procedures regarding a manufacturer’s efforts to prevent the sourcing of such conflict minerals.

These requirements could affect the sourcing and availability of minerals used in the manufacture of semiconductor or other devices.

As a result, there may only be a limited pool of suppliers who provide conflict-free metals, and we cannot assure you that we will be able to obtain products in sufficient quantities or at competitive prices.

This United States legislation includes disclosure requirements regarding the use of conflict minerals mined from the Democratic Republic of Congo and adjoining countries and procedures regarding a manufacturer’s efforts to prevent the sourcing of such conflict minerals.

These requirements could affect the cost and ease of sourcing minerals used in the manufacture of semiconductor or other devices.

There may only be a limited pool of suppliers who provide conflict-free metals, and we cannot assure you that we will be able to obtain products in sufficient quantities or at competitive prices.

Risks Related to Owning Our Stock

The trading price of our common stock is likely to be volatile, and you might not be able to sell your shares at or above the price at which you purchased the shares.

The trading prices of technology company securities historically have been highly volatile and the trading price of our common stock has been and is likely to continue to be subject to wide fluctuations.

The trading prices of technology company securities historically have been highly volatile.

In addition, the global markets have experienced increased volatility as a result of the COVID-19 pandemic.

The trading price of our common stock

has been and is likely to continue to be subject to wide fluctuations.

Factors, in addition to those outlined elsewhere in this filing, that may affect the trading price of our common stock include:

The risk that we are not able to relist our common stock on a national securities exchange;

The outcome of litigation and claims as well as regulatory examinations, investigations, proceedings and orders arising out of our failure to file SEC reports on a timely basis, the circumstances leading to the need to restate certain of our previously issued financial statements, and our efforts to investigate, assess and remediate related matters;

The impact of COVID-19 on our business, the global economy and trading markets;

The outcome of litigation and claims as well as regulatory examinations, investigations, proceedings and orders to which we are subject;

Actual or anticipated variations in our operating results, including failure to achieve previously provided guidance;

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If these additional shares are sold, or if it is perceived that they will be sold in the public market, the trading price of our common stock could decline.

If securities analysts do not resume research or reporting about our business or if they downgrade our stock, the price of our stock could decline.

There is currently only one industry analyst covering our common stock as of the date of this Annual Report.

The research and reports that industry or financial analysts publish about us or our business likely have an effect on the trading price of our common stock.

If an industry analyst decides not to cover our company, or if an industry analyst decides to cease covering our company at some point in the future, we could lose visibility in the market, which in turn could cause our stock price to decline.

If industry analysts do not resume research reports on our business or downgrade our stock, our stock price would likely decline rapidly in response.

The concentration of our capital stock ownership with insiders will likely limit your ability to influence corporate matters.

As of November 30, 2019, our executive officers, directors, current five percent or greater stockholders and affiliated entities together beneficially owned 24.2% of our common stock, net of treasury stock.

As of July 31, 2020, our executive officers, directors, current five percent or greater stockholders and affiliated entities together beneficially owned 34.8% of our common stock, net of treasury stock.

As a result, these stockholders, acting together, have significant influence over all matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions.

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These provisions:

Establish a classified Board of Directors so that not all members of our Board are generally elected at one time, provided that in our next annual meeting we will elect all of the members of our Board due to our inability to hold annual meetings for the preceding two fiscal years;

Establish a classified Board of Directors so that not all members of our Board are generally elected at one time

Require super-majority voting to amend some provisions in our certificate of incorporation and bylaws;

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These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and cause us to take corporate actions other than those stockholders desire.

Our common stock is currently quoted on the OTC Market, which may have an unfavorable impact on our stock price and liquidity.

Effective at the open of business on August 23, 2018, our common stock was suspended from trading on the Nasdaq Global Select Market, and our common stock was subsequently delisted on March 22, 2019.

Since the date our common stock was suspended from trading on the Nasdaq Global Select Market, our common stock has been quoted on the OTC Market.

The OTC Market is a significantly more limited market than Nasdaq.

The quotation of our shares on the OTC Market may result in a less liquid market available for existing and potential stockholders to trade shares of our common stock, could depress the trading price of our common stock and could have a long-term adverse impact on our ability to raise capital in the future.

We do not expect to pay any cash dividends for the foreseeable future.

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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-K

Item 1A. Risk Factors