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Item 1A. Risk Factors

2023-02-22 compared with 2022-02-18 · 259 added, 253 removed, 153 unchanged (77% of the section changed)

Key Risk Factors That May Impact Future Results

Stockholders should carefully consider the risk factors described below, many of which have been, and could be further, exacerbated by the COVID-19 pandemic and any further impact to the global business and economic environment which may result.

Stockholders should carefully consider the risk factors described below when evaluating the Company.

Any of these factors, many of which are beyond our control, could materially and adversely affect our business, financial condition, operating results, cash flow, and stock price.

Risks Related to Our Business, Finance and Operations

The effects of the COVID-19 pandemic have strained and have negatively impacted our businesses and operations, and the duration and extent to which COVID-19 may impact our future results of operations and overall financial performance remains uncertain.

The outbreak and continuing spread of COVID-19 and its variants have resulted in a substantial curtailment of business activities worldwide and has caused and is likely to continue to cause weakened economic conditions, both domestically and abroad, including in markets in Asia and Europe from which we derive the majority of our revenue.

Government restrictions (such as stay-at-home orders), quarantines and worker absenteeism as a result of COVID-19 have led to a significant number of business closures and other slowdowns.

These slowdowns have adversely impacted and will likely continue to adversely impact Veeco directly, as well as our customers, suppliers and other partners.

While all of our global sites are currently operational, any local pandemic outbreaks could require us to temporarily curtail production levels or temporarily cease operations based on government mandates.

Furthermore, the COVID-19 conditions have adversely impacted, and may continue to adversely impact, our ability to timely source critical parts and materials and to provide on-site services to our customers.

Supply chain shortages, which have been and may continue to be exacerbated by shipping delays caused by transportation interruptions (associated with matters such as reduced availability of air transport, port closures, and increased border controls), could require us to purchase excess inventory with longer lead times, which could increase inventory obsolescence risk while negatively impacting our working capital.

Shortages of critical parts have strained and may continue to strain our manufacturing capacity, threatening to adversely impact our ability to meet customer needs, which may negatively impact our revenues, results of operations and financial condition.

While we have been able to successfully mitigate these risks thus far, without material negative impact to our financial performance, our continued ability to do so remains uncertain.

In addition, the conditions caused by COVID-19 could adversely affect our customers’ ability or willingness to purchase our products or services or otherwise delay prospective customers’ purchasing decisions.

These conditions may delay the provisioning of our offerings, or lengthen payment terms, all of which could adversely affect our future sales, operating results and overall financial performance.

In addition, adverse impacts on the creditworthiness of our customers and other counterparties may negatively affect their ability to pay amounts owed to us, which could materially and adversely affect our results of operations and financial condition.

The COVID-19 pandemic has resulted in significant disruption of global financial markets and could negatively impact our stock price, our access to capital, and our business and results of operations in the near and long-term.

Risks Related to Our Business and Industry

Unfavorable market conditions have adversely affected, and may continue to adversely affect, our operating results.

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● disruptions in our supply chain;

● higher operating costs, caused by matters including but not limited to macroeconomic inflationary pressures, which the Company is currently beginning to experience;

● higher operating costs, caused by matters such as rising inflation and interest rates in various regions, which the Company is currently experiencing;

● an increase in uncollectable amounts due from our customers resulting in increased reserves for doubtful accounts and write-offs of accounts receivable.

If the markets in which we participate experience deteriorations or downturns, this could negatively impact our sales and revenue generation, margins, operating expenses, and profitability.

We face significant competition.

We face significant competition throughout the world, which may increase as certain markets in which we operate continue to evolve.

Some of our competitors have greater financial, engineering, manufacturing, and marketing resources than us.

Other competitors are located in regions with lower labor costs and other reduced costs of operation.

In addition, our ability to compete in foreign countries against local manufacturers may be hampered by nationalism, social attitudes, laws, regulations, and policies within such countries that favor local companies over U.S.

companies or that are otherwise designed to promote the development and growth of local competitors.

Furthermore, we face competition from smaller emerging equipment companies whose strategy is to provide a portion of the products and services we offer, with a focused approach on innovative technology for specialized markets.

New product introductions or enhancements by us or our competitors could cause a decline in sales or loss of market acceptance of our existing or prior generation products.

Increased competitive pressure could also lead to intensified price competition resulting in lower profit margins.

We operate in industries characterized by rapid technological change.

Each of the industries in which we operate is subject to rapid technological change.

Our ability to remain competitive depends on our ability to enhance existing products and develop and manufacture new products in a timely and cost effective manner and to accurately predict technology transitions.

Our performance may be adversely affected if we are unable to accurately predict evolving market trends and related customer needs and to effectively allocate our resources among new and existing products and technologies.

The semiconductor industry, characterized by a high frequency and complexity of technology transitions and inflections (commonly referred to as “Moore’s Law”), poses unique risks and challenges.

Our ability to successfully compete in this market will depend on our ability to address and manage a number of industry-specific risks, including and without limitation to the following:

● the heightened cost of research and development, associated with matters such as shrinking geometries, complex device structures, multiple applications and process steps, and the use of new materials;

● customer demands for shorter cycle times between order placements and product shipments, which will necessitate accurate forecasting of customer investment;

● customer demands for continuous reductions in the total cost of manufacturing system ownership, together with challenging equipment service demands and the resulting need for us to properly allocate our service resources;

● the number of types and varieties of semiconductors and number of applications across multiple substrate sizes;

● the need to reduce product development time, despite increasingly difficult technical challenges;

● our customers’ ability to reconfigure and re-use our equipment, resulting in reduced demand for new equipment or services from us;

● the importance of establishing market positions in segments with growing demand.

If we fail to properly allocate appropriate resources, successfully develop and commercialize products to meet customer demand, and effectively anticipate industry trends, our business and results of operations may be adversely impacted.

In addition, the semiconductor industry has experienced, and may continue to experience, significant consolidation, among both semiconductor manufacturers and manufacturing equipment suppliers.

Larger competitors resulting from consolidations may have certain advantages over us, including but not limited to more efficient cost structures, substantially greater financial and other resources, greater presence in key markets, and greater name recognition.

Consolidation among our competitors and integration among our customers could erode our market share, negatively impact our ability to compete, and have a material adverse effect on our business.

Whether in connection with the semiconductor industry or otherwise, we are also exposed to potential risks associated with unexpected product performance issues.

Our product designs and manufacturing processes are complex and could contain unexpected product defects, especially when products are first introduced.

Unexpected product performance issues could result in significant costs and damages, including increased service and warranty expenses, the need to provide product replacements or modifications, reimbursement for damages caused by our products, product recalls, related litigation, product write-offs, and disposal costs.

Product defects could also result in personal injury or property damage, claims for which may exceed our existing insurance coverages.

These and other costs could be substantial and our reputation could be harmed, resulting in a reduced demand for our products and a negative effect on our business, financial condition, and results of operations.

Certain of our sales are dependent on the demand for consumer electronic products and automobiles, which can experience significant volatility.

The demand for semiconductors, HDDs and other devices is highly dependent on sales of consumer electronic products, such as tablets, smartphones, laptops and wearable devices.

In addition, as a result of the growing automotive semiconductor market, semiconductor demand is also heavily influenced by the demand for automobiles.

Factors that could affect the levels of spending on consumer electronic products and automobiles include consumer confidence, access to credit, volatility in fuel and other energy costs, conditions in the residential real estate and mortgage markets, labor and healthcare costs, and other macroeconomic factors affecting consumer spending behavior.

The emergence of new or competing technologies may also affect demand for consumer electronic products.

These and other factors have had and could continue to have an adverse effect on the demand for our customers’ products and, in turn, on our customers’ demand for our products and services.

Furthermore, in the past, some of our customers have overestimated their potential for market share growth.

If this growth is overestimated, we may experience cancellations of orders in backlog, rescheduling of customer deliveries, obsolete inventory, and liabilities to our suppliers for products no longer needed.

Alternatively, changes that result in sudden increases in demand for consumer electronic products and automobiles may result in a shortage of parts and materials needed to manufacture our products, and attendant shipping delays (both to us and to our customers) and/or the cancellation of orders placed by our customers.

Government restrictions (such as the China government lockdowns in 2022 of Shenzhen and Shanghai), quarantines and worker absenteeism as a result of COVID-19 have led to a significant number of business closures and other slowdowns.

These slowdowns have adversely impacted and will likely continue to adversely impact Veeco directly, as well as our customers, suppliers and other partners.

Although there has been recent improvement in the global economy since the most severe effects of COVID-19, many macroeconomic variables remain dynamic.

While all of our global sites are currently operational, any local pandemic

outbreaks could require us to temporarily curtail production levels or temporarily cease operations based on government mandates.

While we have been able to successfully mitigate these risks thus far, without material negative impact to our financial performance, our continued ability to do so remains uncertain.

These conditions may delay the provisioning of our offerings, or lengthen payment terms, all of which could adversely affect our future sales, operating results and overall financial performance.

We have a concentrated customer base, located primarily in a limited number of regions, which operates in highly concentrated industries.

Our customer base continues to be highly concentrated.

Orders from a relatively limited number of customers have accounted for, and likely will continue to account for, a substantial portion of our net sales, which may allow customers to demand pricing and other terms less favorable to us (including extended warranties, indemnification commitments, and the obligation to continue production of older products).

Customer consolidation activity involving some of our largest customers could result in an even greater concentration of our sales in the future.

Management changes at key customer accounts could result in a loss of future sales due to vendor preferences or other reasons and may introduce new challenges in managing customer relationships.

If a principal customer discontinues its relationship with us or suffers economic setbacks, our business, financial condition, and operating results could be materially and adversely affected.

Our ability to increase sales in the future will depend in part upon our ability to obtain orders from new customers and we cannot be certain that we will be successful in these efforts.

In addition, because a relatively small number of large manufacturers, many of whom are our customers, dominate the industries in which they operate, it may be especially difficult for us to replace these customers if we lose their business.

A significant portion of orders in our backlog are orders from our principal customers.

In addition, a substantial investment is required by customers to install and integrate capital equipment into a production line.

As a result, once a manufacturer has selected a particular vendor to supply capital equipment, the manufacturer will often attempt to consolidate its other capital equipment requirements with the same vendor.

Accordingly, if a customer selects a competitor’s product over ours, we could experience difficulty selling to that customer for a significant period of time.

Furthermore, we typically do not have long-term contracts with our customers.

As a result, our agreements with our customers do not provide assurance of future sales, and we are exposed to competitive price pressures on new orders we attempt to obtain.

Our customer base is also highly concentrated in terms of geography, and the majority of our sales are to customers located in a limited number of countries.

Dependence upon sales emanating from a limited number of regions increases our risk of exposure to local difficulties and challenges, such as those associated with regional economic downturns, political instability, trade wars and other trade disruptions, fluctuating currency exchange rates, natural disasters, social unrest, pandemics, terrorism, and acts of war.

Our reliance upon customer demand arising primarily from a limited number of countries could materially and adversely impact our future results of operations.

The cyclicality of the industries we serve directly affects our business.

Our business depends in large part upon the capital expenditures of manufacturers in our four end-markets:

Semiconductor;

Compound Semiconductor;

Data Storage;

and Scientific & Other.

We are subject to the business cycles of these industries, the timing, length, and volatility of which are difficult to predict.

These industries have historically been highly cyclical and have experienced significant economic downturns in the last decade.

As a capital equipment provider, our revenue depends in large part on the spending patterns of these customers, who often delay expenditures or cancel or reschedule orders in reaction to variations in their businesses or general economic conditions.

In downturns, we must be able to quickly and effectively align our costs with prevailing market conditions, as well as motivate and retain key employees.

However, because a portion of our costs are fixed, our ability to reduce expenses quickly in response to revenue shortfalls may be limited.

Downturns in one or more of these industries have had, and will likely have, a material adverse effect on our business, financial condition, and operating results.

Alternatively, during periods of rapid growth, we must be able to acquire and develop sufficient manufacturing capacity to meet customer demand and attract, hire, assimilate, and retain a sufficient number of qualified people.

Our net sales and operating results may be negatively affected if we fail to predict and effectively respond.

Our failure to estimate customer demand accurately could result in inventory obsolescence, liabilities to our suppliers for products no longer needed, and manufacturing interruptions or delays which could affect our ability to meet customer demand.

The success of our business depends in part on our ability to accurately forecast and supply equipment and services that meet the rapidly changing technical and volume requirements of our customers.

To meet these demands, we depend on the timely delivery of parts, components, and subassemblies from our suppliers.

Uncertain worldwide economic conditions and market instabilities make it difficult for us (and our customers) to accurately forecast future product demand.

If actual demand for our products is different than expected, we may purchase more or fewer parts than necessary or incur costs for canceling, postponing, or expediting delivery of parts.

If we overestimate the demand for our products, excess inventory could result which could be subject to heavy price discounting, which could become obsolete, and which could subject us to liabilities to our suppliers for products no longer needed.

Similarly, we may be harmed in the event that our competitors overestimate the demand for their products and engage in heavy price discounting practices as a result.

In addition, the volatility of demand for capital equipment poses risks for companies in our supply chain, including challenges associated with inventory management and fluctuating working capital requirements.

Furthermore, certain key parts may be subject to long lead-times or may be obtainable only from a single supplier or limited group of suppliers, and some sourcing and assembly is provided by suppliers located in countries other than the United States.

We may experience significant interruptions in our manufacturing operations, delays in our ability to timely deliver products or services, increased costs, or customer order cancellations as a result of:

● the failure or inability of our suppliers to timely deliver quality parts;

● volatility in the availability and cost of materials;

● difficulties or delays in obtaining required import or export approvals;

● information technology or infrastructure failures;

● natural disasters such as earthquakes, tsunamis, fires, floods, or storms;

● other causes such as regional or global economic downturns or recessions, international trade disruptions, pandemics, political instability, terrorism, or acts of war, which could result in delayed deliveries, manufacturing inefficiencies, increased costs, or order cancellations.

In addition, in the event of an unanticipated increase in demand for our products, our need to rapidly increase our business and manufacturing capacity may be limited by our working capital constraints and those of our suppliers, which may cause or exacerbate interruptions in our manufacturing and supply chain operations.

Any or all of these factors could materially and adversely affect our business, financial condition, and results of operations.

We rely on a limited number of suppliers, some of whom are our sole source for particular components.

Certain of the parts, components, and sub-assemblies included in our products are obtained from a single source or a limited group of suppliers.

Our inability to develop alternative sources, as necessary, could result in a prolonged interruption in our ability to supply related products, a failure on our part to meet the demands our customers, and a significant increase in the price of related products, which could adversely affect our business, financial condition, and results of operations.

Our failure to successfully manage our outsourcing activities or failure of our outsourcing partners to perform as anticipated could adversely affect our results of operations.

To better align our costs with market conditions, increase the percentage of variable costs relative to total costs, and to increase productivity and operational efficiency, we have outsourced certain functions to third parties, including the manufacture of several of our systems.

While we maintain some level of internal manufacturing capability for these systems, we rely on our outsourcing partners to perform their contracted functions to allow us flexibility to adapt to changing market conditions, including periods of significantly diminished order volumes.

If our outsourcing partners do not perform as required, or if our outsourcing efforts do not allow us to realize the intended cost savings and flexibility, our results of operations (and those of our third-party providers) may be adversely affected.

Disputes and possibly litigation involving third party providers could result and we could suffer damage to our reputation.

Dependence on contract manufacturing and outsourcing may also adversely affect our ability to bring new products to market.

Although we attempt to select reputable providers, one or more of these providers could fail to perform as we expect.

If we do not effectively manage our outsourcing efforts or if third party providers do not perform as anticipated, we may not realize the benefits of productivity improvements and we may experience operational difficulties, increased costs, manufacturing and installation interruptions or delays, inefficiencies in the structure and operation of our supply chain, loss of intellectual property rights, quality issues, increased product time-to-market, and an inefficient allocation of our human resources, any or all of which could materially and adversely affect our business, financial condition, and results of operations.

The timing of our orders, shipments, and revenue recognition may cause our quarterly operating results to fluctuate significantly.

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In addition, the time it takes us to procure and build a product to customer specifications typically ranges from three to twelve months.

When coupled with the fluctuating amount of time required for shipment, installation, and final acceptance, our sales cycles often vary widely, and these variations can cause fluctuations in our operating results.

When coupled with the fluctuating amount of time required for shipment and installation, our sales cycles often vary widely, and these variations can cause fluctuations in our operating results.

As a result of our lengthy sales cycles, we may incur significant research and development, selling, general, and administrative expenses before we generate revenue for these products.

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Once qualified, the ramp to volume production can take an additional extended period of time, often twelve to twenty-four months.

During these periods, little to no revenue will be recognized by us, while we will continue to incur research and development costs.

Despite our efforts, our products may never be qualified and may never achieve design-tool-of-record (“DTOR”) or production-tool-of-record (“PTOR”) status, and our business, financial condition, and results of operations may be materially and adversely affected.

During these periods, little to no revenue will be recognized by us, while we will continue to incur research and

development costs.

Despite our efforts, our products may never be qualified and may never achieve design-tool-of-record (“DTOR”) or production-tool-of-record (“PTOR”) status, and our financial condition and results of operations may be materially and adversely affected.

Our backlog is subject to customer cancellation or modification which could result in decreased sales, increased inventory obsolescence, and liabilities to our suppliers for products no longer needed.

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Resulting charges could have a material adverse effect on our results of operations and financial condition.

We may be required to take impairment charges on assets.

We are required to assess goodwill and indefinite-lived intangible assets annually for impairment, or on an interim basis whenever certain events occur or circumstances change, such as an adverse change in business climate or a decline in the overall industry, that would more likely than not reduce the fair value below its carrying amount.

As part of our long term strategy, we may pursue future acquisitions of, or investments in, other companies or assets which could potentially increase our assets.

We are required to test certain of our assets, including acquired intangible assets, property, plant, and equipment, and equity investments without readily observable market prices, for recoverability and impairment whenever there are indicators of impairment such as an adverse change in business climate.

Adverse changes in business conditions or worse-than-expected performance by these acquired companies could negatively impact our estimates of future operations and result in impairment charges to these assets.

For example, in the fourth quarters of 2019 and 2021 we recorded non-cash impairment charges of $25.0 million and $1.0 million, respectively, primarily related to our equity investments without readily observable market prices.

If our assets are further impaired, our financial condition and results of operations could be materially and adversely affected.

We are exposed to risks associated with business combinations, acquisitions, strategic investments and divestitures.

We have completed several significant acquisitions and investments in the past and we will consider new opportunities in the future.

We have completed several significant acquisitions and investments in the past, including our recent acquisition of Epiluvac AB, and we will consider new opportunities in the future.

Acquisitions and investments involve numerous risks, many of which are unpredictable and beyond our control, including the following:

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Divestitures involve significant risks and uncertainties, including the ability to sell such businesses at satisfactory prices, on acceptable terms, and in a timely manner.

Divestitures may also disrupt other parts of our businesses, distract the attention of our management, result in a loss of key employees or customers, and require that we allocate internal resources that would otherwise be devoted to operating our existing

Divestitures may expose us to unanticipated liabilities (including those arising from representations and warranties made to a buyer regarding the businesses) and to ongoing obligations to support the businesses following such divestitures, any and all of which could adversely affect our business, financial condition, and results of operations.

We have adopted certain measures that may have anti-takeover effects which may make an acquisition of our Company by another company more difficult.

We have adopted, and may in the future adopt, certain measures that may have the effect of delaying, deferring, or preventing a takeover or other change in control of our Company, which a holder of our common stock might not consider to be in the holder’s best interest.

For example, our board of directors has the authority to issue up to 500,000 shares of preferred stock and to fix the rights (including voting rights), preferences and privileges of these shares (“blank check” preferred stock).

Such preferred stock may have rights, including economic rights, senior to our common stock.

As a result, the issuance of the preferred stock could have a material adverse effect on the price of our common stock and could make it more difficult for a third party to acquire a majority of our outstanding common stock.

In addition, our board of directors is divided into three classes with each class serving a staggered three-year term.

The existence of a classified board makes it more difficult for our shareholders to change the composition of our board of directors, and therefore the Company’s policies, in a relatively short period of time.

Furthermore, we have adopted certain certificate of incorporation and bylaws provisions which have anti-takeover effects.

These include:

(a) requiring certain actions to be taken at a meeting of shareholders rather than by written consent, (b) requiring a super-majority of shareholders to approve certain amendments to our bylaws, (c) limiting the maximum number of directors, and (d) providing that directors may be removed only for cause.

These measures and those described above may have the effect of delaying, deferring, or preventing a takeover or other change in control of our Company that a holder of our common stock may not consider to be in the holder’s best interest.

In addition, we are subject to the provisions of Section 203 of the General Corporation Law of the State of Delaware, which prohibits a Delaware corporation from engaging in any business combination, including mergers and asset sales, with an interested stockholder (generally, a 15% or greater stockholder) for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.

The operation of Section 203 may have anti-takeover effects, which could delay, defer, or prevent a takeover attempt that a holder of our common stock may not consider to be in the holder’s best interest.

Despite the above measures, an activist shareholder could undertake action to implement governance, strategic, or other changes to the Company which a holder of our common stock may not consider to be in the holder’s best interest.

Such activities could interfere with our ability to execute our strategic plans, be costly and time consuming, disrupt our operations, and divert the attention of management and our employees.

Our current debt facilities, including our 2.70% Convertible Senior Notes due 2023 (the “2023 Notes”), our 3.50% Convertible Senior Notes due 2025 (the “2025 Notes”), or our 3.75% Convertible Senior Notes due 2027 (the “2027 Notes”) (the 2023 Notes, 2025 Notes, and 2027 Notes, together, the “Notes”), and our revolving credit facility (the “Credit Facility”), may contain certain restrictions, covenants and repurchase provisions that may limit our ability to raise the funds necessary to meet our working capital needs, which may include the cash conversion of the Notes or repurchase of the Notes for cash upon a fundamental change.

As of December 31, 2021, we had $20.2 million in principal amounts outstanding in 2023 Notes, $132.5 million in principal amounts outstanding in 2025 Notes, and $125.0 million in principal amounts outstanding in 2027 Notes.

In addition, as of December 31, 2021, we had an undrawn senior secured revolving credit facility in an aggregate principal amount of $150.0 million, including a $15.0 million letter of credit sublimit.

These debt facilities contain certain covenant and other restrictions that may limit our ability to, among other things, incur additional debt or create liens, sell certain assets, and merge or consolidate with third parties, which may, in turn, preclude us from responding to changes in business and economic conditions, engaging in transactions that might otherwise be beneficial to us, or obtaining additional financing.

Our ability to comply with some of these covenants is dependent on our future performance, which will be subject to many factors, some of which are beyond our control such

as prevailing economic conditions.

In addition, our failure to comply with these covenants could result in a default under the Notes or Credit Facility, which could accelerate the debt.

If any of our debt is accelerated, we may not have sufficient funds available to repay such debt, which could materially and negatively affect our financial condition and results of operation.

In addition, our ability to repurchase or to pay cash upon conversion of the Notes, or maturity of the Credit Facility, may be limited by law, by regulatory authority or by agreements governing our indebtedness that exist at the time of repurchase, conversion, or maturity.

Our failure to settle the debt as required would constitute a default under the applicable debt facility and could also lead to a default under the other debt facilities.

If the payment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness.

Finally, holders of the Notes will have the right to require us to repurchase all or any portion of their Notes upon the occurrence of a fundamental change before the maturity date at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date, as described in the applicable Notes and indenture.

Additionally, upon conversion of the Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the Notes being converted.

However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of the Notes surrendered therefor or pay cash with respect to the Notes being converted.

The conditional conversion features of the 2023 Notes, 2025 Notes, and 2027 Notes, if triggered, may materially and adversely affect our financial condition and operating results.

In the event the conditional conversion features of the 2023 Notes, 2025 Notes, and 2027 Notes are triggered, holders of Notes will be entitled to convert the Notes at any time during specified periods at their option.

If one or more holders elect to convert the Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity.

In addition, even if holders do not elect to convert the Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-term liability, which could result in a material reduction of our net working capital.

The accounting method for convertible debt securities that may be settled in cash, such as the Notes, could have a material effect on our reported financial results.

In August 2020, the FASB issued ASU 2020-06:

Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity .

Under the standard, which will be effective for our fiscal year 2022, an entity is no longer required to separately account for the liability and equity components of certain convertible debt instruments that may be settled entirely or partially in cash upon conversion, such as the Notes.

As a result, entities will account for a convertible debt instrument wholly as debt, unless certain other conditions are met.

The elimination of these separation models will reduce our non-cash interest expense, and thereby increasing net income (or reducing net loss).

Additionally, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share, and precludes the use of the treasury stock method for certain debt instruments, which will adversely affect our diluted shares outstanding.

We cannot be sure whether other changes may be made to the current accounting standards related to the Notes, or otherwise, that could have an adverse impact on our financial statements.

Issuance of our common stock, if any, upon conversion of the Notes, as well as the capped call transactions and the hedging activities of the option counterparties, may impair or reduce our ability to utilize our net operating loss carryforwards or our research and development credits carryforwards in the future.

Pursuant to U.S.

federal and state tax rules, a corporation is generally permitted to deduct from taxable income in any year net operating losses (“NOLs”) carried forward from prior years and to reduce from tax liabilities in any year R&D

credits carried forward from prior years.

As of December 31, 2021, we had U.S.

federal NOL carryforwards of approximately $165.8 million, of which $6.9 million have an indefinite carryforward period, with the remaining expiring in 2036, if not utilized.

We also had U.S.

federal R&D credits carryforwards of approximately $32.1 million expiring in varying amounts between 2022 and 2041.

If we were to experience a “change in ownership” under Section 382 of the Internal Revenue Code (“Section 382”), the NOL carry forward limitations under Section 382 would impose an annual limit on the amount of the future taxable income that may be offset by our NOLs generated prior to the change in ownership.

The R&D credits carry forward limitation under Section 383 of the Internal Revenue Code would impose an annual limit on the amount of tax liabilities that may be offset by R&D credits generated prior to the change in ownership.

If an ownership change were to occur, we may be unable to use a significant portion of our NOLs to offset future taxable income and/or a significant portion of R&D credits to offset future tax liabilities.

The shares of common stock, if any, issued upon conversion of the Notes will, upon such issuance, be taken into account when determining the cumulative change in our ownership for Section 382 purposes.

As a result, any conversion of the Notes that we elect to settle in shares may materially increase the risk that we could experience an ownership change for these purposes in the future.

The capped call transactions may affect the value of the 2027 Notes and our common stock.

With respect to the 2027 Notes, we have entered into capped call transactions with certain option counterparties.

The capped call transactions were expected generally to reduce the potential dilution upon conversion of the 2027 Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted 2027 Notes, as the case may be, with such reduction and/or offset subject to a cap.

The option counterparties or their affiliates may enter into or modify hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the 2027 Notes (and are likely to do so during any observation period related to a conversion of the 2027 Notes).

This activity could also cause or avoid an increase or a decrease in the market price of our common stock and the 2027 Notes, which could affect the ability of the noteholders to convert the 2027 Notes and, to the extent the activity occurs during any observation period related to a conversion of the 2027 Notes, it could affect the number of shares and value of the consideration that noteholders will receive upon conversion of the 2027 Notes.

Risks Associated with Operating a Global Business

We are exposed to risks of operating businesses outside the United States.

A majority of our sales are to customers located outside of the United States, which we expect to continue in the future.

A majority of our sales are to customers, and significant elements of our supply chain are from suppliers, who are located outside of the United States, which we expect to continue.

sales and operations are subject to risks inherent in conducting business outside the United States, many of which are beyond our control including:

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● reliance on various information systems and information technology to conduct our business, making us vulnerable to cyberattacks by third parties or breaches due to employee error, misuse, or other causes, that could result in business disruptions, loss of or damage to our intellectual property and confidential information (and that of our customers and other business partners), reputational harm, transaction errors, processing inefficiencies, or other adverse consequences;

● regional economic downturns, varying foreign government support, unstable political environments, and other changes in foreign economic conditions;

● regional or global economic downturns or recessions, varying foreign government support, unstable political environments, and other changes in foreign economic conditions;

● the impact of public health epidemics, such as the COVID-19 pandemic, on employees, suppliers, customers and the global economy;

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● different customs and ways of doing business.

These challenges, many of which are associated with sales into the Asia-Pacific region, have had and may continue to have a material adverse effect on our business.

Global conditions and other factors, such as the COVID-19 pandemic, the current conflict in Ukraine, and attendant transportation and freight cost challenges, have resulted in, and may continue to result in, a shortage of parts, materials and services needed to manufacture and timely deliver our products.

These conditions have negatively impacted our suppliers’ ability to meet our demand requirements and, in turn, our ability to satisfy our customer demand.

Parts shortages have required, and may continue to require, that we plan ahead further than usual, and increase our purchase commitments to secure critical components in a timely manner.

These challenges, together with other challenges associated with operating an international business, may adversely affect our ability to recognize revenue, our gross margins on the revenue we do recognize, and our other operating results.

Changes in U.S.

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and China have adversely affected, and may continue to adversely affect, our business, results of operations, and financial condition.

government has enacted several changes in trade policy which have adversely affected the Company’s ability to sell and service its products to and for customers located in China and in certain other countries.

These changes have included, without limitation, the elimination of license exception CIV, the implementation of new regulations governing the sale of equipment to defined “Military End Users” and for defined “Military End Uses”, and the addition of several companies to the U.S.

Commerce Department’s Entity List (including Semiconductor Manufacturing International Corporation and its related entities).

government has implemented, and may continue to implement, several changes in trade policy which have adversely affected and could continue to adversely affect the Company’s ability to sell and service its products to and for customers located in China and in certain other countries.

On October 7, 2022, the U.S.

Commerce Department, Bureau of Industry and Security (“BIS”) announced new rules aimed in part at restricting China’s ability to obtain advanced computing chips and manufacture advanced semiconductors.

Previous changes in trade policy by BIS have included, without limitation, the elimination of license exception CIV, the implementation of new regulations governing the sale of equipment to defined “Military End Users” and for defined “Military End Uses”, the addition of several companies to the U.S.

Commerce Department’s Unverified List and Entity List (including Semiconductor Manufacturing International Corporation and certain related entities), and the expansion of the

“foreign direct product rule” to restrict the sale of certain products if Huawei Technologies Co., Ltd.

or its affiliates are parties to a transaction involving the products.

The effect of these changes, among others, is that U.S.

companies are now required to obtain export licenses before providing commodities, software, and technology (which are subject to the regulations) to customers for whom licensing requirements did not previously apply.

These heightened export restrictions may also inhibit technical discussions with existing or prospective customers, negatively impacting our ability to pursue sales opportunities.

companies are now required to obtain export licenses – now at times with a presumption of denial -- before providing commodities, software, and technology (which are subject to the regulations) to customers for whom licensing requirements did not previously apply.

These changes have had, and will likely continue to have, a negative effect on our ability to sell and service certain equipment in China.

The heightened export restrictions may also result in shipping delays, as the new regulations are interpreted and applied, and may inhibit technical discussions with existing or prospective customers, negatively impacting our ability to pursue sales opportunities.

The administrative processing, attendant delays and risk of ultimately not obtaining required export approvals pose a particular disadvantage to the Company relative to our non-U.S.

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government sanctions or threats of sanctions may respond by developing their own solutions to replace our products or by utilizing our foreign competitors’ products.

This “trade war” with China, together with the prospect of additional governmental action related to international sanctions and tariffs, has adversely affected, and is likely to continue to adversely affect, demand for our products and the results of our operations and financial condition.

This “trade war” with China, together with the prospect of additional governmental action related to export controls restrictions, international sanctions, and/or tariffs, has adversely affected, and is likely to continue to adversely affect, demand for our products and the results of our operations.

The changes in U.S.

trade policy and export controls, as well as sanctions imposed by the U.S.

against certain Chinese companies, have triggered retaliatory action by China and could trigger further retaliation.

against certain Chinese companies, have triggered retaliatory action by China and could trigger further retaliation (including the possible escalation of geopolitical tensions between China and Taiwan).

In addition, China has provided, and is expected to continue to provide, significant assistance, financial and otherwise, to its domestic industries, including some of our competitors.

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Obtaining an export license or determining whether an export license exception exists often requires considerable effort by us and cooperation from the customer, which can add time to the order fulfillment process.

We may be unable to obtain required export licenses or qualify for export license exceptions and, as a result, we may be unable to export products to our customers and/or meet their servicing needs.

We may be unable to obtain required export licenses or qualify for export license exceptions and, as a result, we may be unable to export products to our customers and/or meet their servicing needs (requiring us to refund customer prepayments for products we are unable to ship).

Non-compliance with the EAR or other applicable export regulations could result in a wide range of penalties including the denial of export privileges, fines, criminal penalties, and the seizure of commodities.

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As a public company with global operations, we are subject to the laws of the United States and multiple foreign jurisdictions, and the rules and regulations of various governing bodies, which may differ among jurisdictions.

We are required to comply with legal and regulatory requirements pertaining to such matters as data privacy (including, for example, the European Union General Data Protection Regulation and similar laws), labor laws, immigration, customs, trade, taxes, corporate governance, conflict minerals and other social responsibility legislation, and antitrust regulations, among others.

required to comply with legal and regulatory requirements pertaining to such matters as data privacy (including the European Union General Data Protection Regulation and similar laws), anti-corruption (such as the Foreign Corrupt Practices Act and other local laws prohibiting improper payments to governmental officials), labor laws, immigration, customs, trade, taxes, corporate governance, conflict minerals, and antitrust regulations, among others.

In addition, we are required to comply with laws and regulations pertaining to carbon emissions, and other regulatory requirements addressing climate change concerns.

These laws and regulations, which are ever-evolving and at times complex and inconsistent, impose costs on our business and divert management time and attention from revenue-generating activities.

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While we intend to comply with these regulatory requirements, if we are found by a court or regulatory agency to have failed in these efforts, our business, financial condition, and results of operations could be adversely affected.

We may be exposed to liabilities under the Foreign Corrupt Practices Act and other similar laws.

We are subject to the Foreign Corrupt Practices Act of 1977 (“FCPA”) and other laws that prohibit improper payments or offers of payments to foreign government officials, as defined by the statute, for the purpose of obtaining or retaining business.

Violations of the FCPA or similar laws or similar customer policies may result in severe criminal or civil sanctions or the loss of supplier privileges to a customer and we may be subject to other liabilities, which could negatively affect our business, financial condition, and results of operations.

Our operating results may be adversely affected by tightening credit markets.

As a global company with worldwide operations, we are subject to volatility and adverse consequences associated with economic downturns in different parts of the world.

In the event of a downturn, many of our customers may delay or reduce their purchases of our products and services.

If negative conditions in the credit markets prevent our customers from obtaining credit or necessary financing, product orders in these channels may decrease, which could result in lower revenue.

In addition, we may experience cancellations of orders in backlog, rescheduling of customer deliveries, and attendant pricing pressures.

If our suppliers face challenges in obtaining credit, in selling their products, or otherwise in operating their businesses, their ability to continue to supply materials to us may be negatively affected.

In addition, we finance some of our sales through trade credit.

In addition to ongoing credit evaluations of our customers’ financial condition, we seek to mitigate our credit risk by obtaining deposits and letters of credit on certain of our sales arrangements.

We could suffer significant losses if a customer whose accounts receivable we have not secured fails or is otherwise unable to pay us, or if financial institutions providing letters of credit become insolvent.

A loss in collections on our accounts receivable would have a negative impact on our financial condition and results of operations.

We are subject to foreign currency exchange risks.

We are exposed to foreign currency exchange rate risks that are inherent in our anticipated sales, purchase commitments, and assets and liabilities that are denominated in currencies other than the U.S.

Although we attempt to mitigate our exposure to fluctuations in currency exchange rates, hedging activities may not always be available or adequate to mitigate the impact of our exchange rate exposure.

Failure to sufficiently hedge or otherwise manage foreign currency risks properly could materially and adversely affect our financial condition, results of operations, and liquidity.

Risks Related to Intellectual Property and Cybersecurity

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We have also outsourced elements of our operations (including elements of our information technology infrastructure) to third parties, and as a result, we manage a number of third-party vendors who have access to our computer networks and our confidential information.

All information systems are subject to disruption, breach, or failure.

All information systems are subject to breach and disruption.

Potential vulnerabilities can be exploited from inadvertent or intentional actions of our employees, third-party vendors, business partners, or by malicious third parties.

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In addition to the extraction of sensitive information, attacks could include the deployment of harmful malware, ransomware, or other means which could affect service reliability and threaten the confidentiality, integrity, and availability of information.

Significant disruptions in our information technology systems (or those of our key suppliers, contract manufacturers, distributors, sales agents and other partners) or other data security incidents could adversely affect our business operations and result in the loss or misappropriation of, and unauthorized access to, sensitive information, which could result in financial, legal, regulatory, business, and reputational harm to us.

On November 1, 2018, we announced the discovery of an attack on our computer system by a highly-sophisticated actor.

We notified law enforcement of the attack and retained forensic experts to assist with the investigation.

We were not able to definitively determine the extent of the breach or the potential impact on our operations.

We also were not able to definitively identify who was responsible for the attack.

While we have engaged in remediation and implemented, and are continuing to implement, security measures intended to protect our information technology systems and infrastructure, there can be no assurance that such remediation and security measures will successfully prevent further security incidents.

Additional information technology system disruptions, whether from attacks on our technology environment or from computer viruses, natural disasters, terrorism, war or other causes, could result in a material disruption in our business operations, force us to incur significant costs and engage in litigation, harm our reputation, and subject us to liability under laws, regulations, and contractual obligations.

We have experienced, and our third-party providers have experienced, cybersecurity attacks, some of which have been, and may continue to be, successful.

Future or ongoing disruptions or incidents, whether from attacks on our technology environment or from computer viruses, natural disasters, terrorism, war or other causes, could result in a material disruption in our business operations, force us to incur significant costs and engage in litigation, harm our reputation, and subject us to liability under laws, regulations, and contractual obligations.

We may be unable to effectively enforce and protect our intellectual property rights.

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The process of seeking patent protection is lengthy and expensive, and we cannot be certain that pending or future applications will result in issued patents or in patents which provide meaningful protection or commercial advantage.

In addition, our intellectual property rights may be circumvented, invalidated, or rendered obsolete by the rapid pace of

technological change, or through efforts by others to reverse engineer our products or design around patents that we own.

In addition, our intellectual property rights may be circumvented, invalidated, or rendered obsolete by the rapid pace of technological change, or through efforts by others to reverse engineer our products or design around patents that we own.

Policing unauthorized use of our products and technologies is difficult and time consuming and the laws of other countries may not protect our proprietary rights as fully or as readily as U.S.

Given these limitations, our success will depend in part upon our ability to innovate ahead of our competitors.

Given these limitations, our success

will depend in part upon our ability to innovate ahead of our competitors.

In addition, our outsourcing efforts require that we share certain portions of our technology with our outsourcing partners, which poses additional risks of infringement and trade secret misappropriation.

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If we are not able to resolve a claim, negotiate a settlement of the matter, obtain necessary licenses on commercially reasonable terms, or successfully prosecute and defend our position, our business, financial condition, and results of operations could be materially and adversely affected.

Risks Associated with Our Industry