What changed in this filing

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Item 1A. Risk Factors

2021-02-09 compared with 2020-11-10 · 54 added, 42 removed, 347 unchanged (22% of the section changed)

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NE revenue declined as the COVID-19 pandemic resulted in certain customer operation and logistic shutdowns that resulted in shipment or acceptance delays, which resulted in a demand slowdown in Field Instruments with orders pushed out into future periods, and SE revenue declined as customers were unable to provide on-site verification and acceptance due to facility closures and other restrictions.

There is currently no vaccine for COVID-19 and therapeutic medications to date have had limited efficacy in alleviating symptoms.

While distribution of the vaccines commenced in the UK and U.S.

in late 2020, there have been logistical and operational challenges with the rollout, demand for the vaccine has far exceeded supply, and it will take some time for the global population to receive vaccines and for widespread immunity to develop.

At the same time, new and potentially more contagious variants of the virus are developing in several countries and regions in which we operate.

When and as normal business operations resume, we will need to expand globally the safety measures we have already undertaken at sites conducting essential business, such as enhanced sanitation procedures, health checks and social distancing protocols, none of which can completely eliminate the risk of exposure or spread of COVID-19.

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Current economic conditions have already led to a tightening of credit markets.

We entered into a $300 million dollar secured credit facility to strengthen our liquidity position but have not drawn on this facility to date.

We entered into a $300 million secured credit facility to strengthen our liquidity position but have not drawn on this facility to date.

If there is a long-term economic downturn or a prolonged recession as a result of the pandemic, we could face additional liquidity needs and challenges.

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demand for our products could materially and adversely affect our results of operations and financial conditions.

Surges in infection rate, new shutdowns, emergence of new and potentially more contagious variants of the virus and the slow pace of vaccine rollout may impact our suppliers and our ability to source materials in a timely manner.

To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section, such as those relating to our quarterly revenue and operating results as well as on our liquidity and on our ability to satisfy our indebtedness obligations, including the compliance with the covenants that apply to our indebtedness.

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These difficulties can reduce yields or disrupt production and thereby increase our manufacturing costs and adversely affect our margin.

We may incur significant costs to correct defective products (despite rigorous testing for quality both by our customers and by us), which could include lost future sales of the affected product and other products, and potentially severe customer relations problems, litigation and damage to our reputation.

• We may incur significant costs to correct defective products (despite rigorous testing for quality both by our customers and by us), which could include lost future sales of the affected product and other products, and potentially sever customer relations problems, litigation and damage to our reputation.

• We are dependent on a limited number of vendors, who are often small and specialized, for raw materials, packages and standard components.

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Our business and results of operations have been, and could continue to be, adversely affected by this dependency.

Specific concerns we periodically encounter with our suppliers include stoppages

or delays of supply, insufficient vendor resources to supply our requirements, substitution of more expensive or less reliable products, receipt of defective parts or contaminated materials, increases in the price of supplies and an inability to obtain reduced pricing from our suppliers in response to competitive pressures.

Specific concerns we periodically encounter with our suppliers include stoppages or delays of supply, insufficient vendor resources to supply our requirements, substitution of more expensive or less reliable products, receipt of defective parts or contaminated materials, increases in the price of supplies and an inability to obtain reduced pricing from our suppliers in response to competitive pressures.

Additionally, the ability of our contract manufacturers to fulfill their obligations may be affected by economic, political or other forces that are beyond our control, including the COVID-19 pandemic.

Any such failure could have a material impact on our ability to meet customers’ expectations and may materially impact our operating results.

New product programs and introductions involve changing product specifications and customer requirements, unanticipated engineering complexities, difficulties in reallocating resources and overcoming resource limitations and with their increased complexity, which expose us to yield and product risk internally and with our suppliers.

• New product programs and introductions involve changing product specifications and customer requirements, unanticipated engineering complexities, difficulties in reallocating resources and overcoming resource limitations and increased complexity, which expose us to yield and product risk internally and with our suppliers.

These factors have caused considerable strain on our execution capabilities and customer relations.

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In addition, unfavorable developments with evolving laws and regulations worldwide related to 5G may limit or slow the rate of global adoption, impede our strategy, and negatively impact our long-term expectations in this area.

Further, the COVID-19 pandemic resulted in global work-office shut down and Work-From-Home policies among network service providers, network equipment manufacturers and its related supply chain.

Further, the COVID-19 pandemic resulted in global work-office shut down and Work-From-Home policies among network service providers, network equipment manufacturers and the related supply chain.

This in turn disrupted and delayed new network construction build out, general network maintenance and new technology development.

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Accordingly, our estimated market opportunity may prove to be materially inaccurate.

In addition, our growth and ability to serve a significant portion of this estimated market is subject to many factors, including our success in implementing our business strategy and expansion of 3D sensing and other applications for consumer electronics.

our growth and ability to serve a significant portion of this estimated market is subject to many factors, including our success in implementing our business strategy and expansion of 3D Sensing and other applications for consumer electronics.

We cannot assure you that we will be able to serve a significant portion of this market and the growth forecasts should not be taken as indicative of our future growth.

Natural Disasters and Catastrophic Events

In October 2017 and again in October 2019, we temporarily closed our Santa Rosa, California facility, which resulted in production stoppage due to wildfires in the region and the facility’s close proximity to the wildfire evacuation

The location of our production facility could subject us to production delays and/or equipment and property damage.

The geographic location of our Northern California headquarters and production facilities subject them to earthquake and wildfire risks.

We operate in geographic regions which face a number of climate and environmental challenges.

Our new corporate headquarters are located in Scottsdale, Arizona, a desert climate, subject to extreme heat and drought..

The geographic location of our Northern California offices and production facilities subject them to earthquake and wildfire risks.

It is impossible to predict the timing, magnitude or location of such natural disasters or their impacts on the local economy and on our operations.

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The location of our production facility could subject us to production delays and/or equipment and property damage.

The geographic location of our Northern California headquarters and production facilities subject them to earthquake and wildfire risks.

It is impossible to predict the timing, magnitude or location of such natural disasters or their impacts on the local economy and on our operations.

If a major earthquake, wildfire or other natural disaster were to damage or destroy our facilities or manufacturing equipment, we may experience potential impacts ranging from production and shipping delays to lost profits and revenues.

Moreover, in October 2019, Pacific Gas and Electric (PG&E), the public electric utility in our Northern California region commenced planned widespread blackouts during the peak wildfire season to avoid and contain wildfires sparked during strong wind events by downed power lines or equipment failure.

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Further, other states are considering expanding or passing privacy laws in the near term.

Our failure to comply with applicable laws and regulations or other obligations to which we may be subject relating to personal data, or to protect personal data from unauthorized access, use, or other processing, could result in enforcement actions and regulatory investigations against us, claims for damages by customers and other affected individuals, fines, damage to our reputation, and loss of goodwill, any of which could have a material adverse effect on our operations, financial performance, and business.

affected individuals, fines, damage to our reputation, and loss of goodwill, any of which could have a material adverse effect on our operations, financial performance, and business.

We face risks related to our international operations and revenue.

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In addition, the revenues we derive from many of our customers depend on international sales and further expose us to the risks associated with such international sales.

Economic conditions and regulatory changes that may result from the United Kingdom’s pending exit from the European Union could adversely affect our business, financial condition and results of operations.

In June 2016, the United Kingdom (the U.K.) held a referendum in which voters narrowly approved an exit from the European Union (the E.U.), commonly referred to as “Brexit.” The announcement of Brexit caused significant

volatility in global stock markets and currency exchange rate fluctuations that resulted in the strengthening of the U.S.

Economic conditions and regulatory changes that may result from the United Kingdom’s exit from the European Union could adversely affect our business, financial condition and results of operations.

In June 2016, the U.K.

held a referendum in which voters narrowly approved an exit from the European Union (the E.U.), commonly referred to as “Brexit.” The announcement of Brexit caused significant volatility in global stock markets and currency exchange rate fluctuations that resulted in the strengthening of the U.S.

dollar against foreign currencies in which we conduct business.

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from the E.U.

in January 2020 and the current transition period may also contribute to further global economic uncertainty, which may cause our current and future customers to closely monitor their costs and reduce their spending on our products and services.

The withdrawal and transition period could significantly disrupt the free movement of goods, services, and people between the U.K.

in January 2020 and the end of the transition period in December 2020 may also contribute to further global economic uncertainty, which may cause our current and future customers to closely monitor their costs and reduce their spending on our products and services.

The withdrawal and end of the transition period could significantly disrupt and delay the free movement of goods, services, and people between ports in the U.K.

and the E.U., and result in increased legal and regulatory complexities, as well as potential higher costs of conducting business in Europe.

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US Government trade actions could have an adverse impact on our business, financial position, and results of operation.

The United States and China have been engaged in protracted negotiations over the Chinese government’s acts, policies, and practices related to technology transfer, intellectual property, and innovation that the Trump Administration has found to be unreasonable and burdensome to US commerce.

To date, the President has used his authority under Section 301 of the Trade Act of 1974 three times to levy a 25% retaliatory tariff on 6,830 subheading categories of imported Chinese high-tech and consumer goods valued at $250 billion per year.

Although List 3, alone valued at $200 billion, had originally set an additional duty rate at 10%, that rate was increased to 25% effective May 10, 2019.

Moreover, in August 2019, the President announced a 15% tariff on a fourth list of goods valued at nearly $300 billion.

Former President Trump used his authority under Section 301 of the Trade Act of 1974 three times to levy a 25% retaliatory tariff on 6,830 subheading categories of imported Chinese high-tech and consumer goods valued at $250 billion per year.

Although List 3 (under Section 301) valued at $200 billion, had originally set an additional duty rate at 10%, that rate was increased to 25% effective May 10, 2019.

Moreover, in August 2019, Former President Trump announced a 15% tariff on a fourth list of goods valued at nearly $300 billion.

Pursuant to a US-China trade deal signed in January 2020, the List 3 rate remains at 25% and the List 4 rate decreased to 7.5% on February 14, 2020.

These tariffs, along with any additional tariffs or other trade actions that may be implemented, may increase the cost of certain materials and/or products that we import from China, thereby adversely affecting our profitability.

On May 16, 2019, Huawei Technologies Co.

and 68 designated non-U.S.

affiliates (collectively, “Huawei”) were added to the Entity List of the Bureau of Industry and Security of the U.S.

Department of Commerce (“BIS”), which imposes limitations on the supply of certain U.S.

items and product support to Huawei.

On August 17, 2020, BIS issued final rules that further restrict access by Huawei to items produced domestically and abroad from U.S.

technology and software.

While the majority of our products were unaffected, the final rules prevent us from selling certain products to Huawei entities without a license issued subject to the Export Administration Regulations.

If we are unable to obtain such a license, our business, financial condition and results of operations could be negatively impacted.

These measures, along with any additional tariffs or other trade actions that may be implemented, may increase the cost of certain materials and/or products that we import from China, thereby adversely affecting our profitability.

These actions could require us to raise our prices, which could decrease demand for our products.

As a result, these actions, including potential retaliatory measures by China and further escalation into a potential “trade war”, may adversely impact our business.

In January 2021, President Biden commenced his new administration with a number of executive orders and actions, including a temporary halt of pending U.S.

defense transfers and sales to Saudi Arabia and the United Emirates.

This executive order could negatively impact certain products and equipment we deliver to military and defense clients.

Given the uncertainty regarding the scope and duration of these trade actions by the United States or other countries, as well as the potential for additional trade actions, the impact on our operations and results remains uncertain.

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Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change.

We will continue to state possible outcomes as high and low ranges which are

intended to provide a sensitivity analysis as variables are changed but are not intended to imply that actual results could not fall outside of the suggested ranges.

We will continue to state possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed but are not intended to imply that actual results could not fall outside of the suggested ranges.

The principal reason that we release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors.

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In light of the foregoing, investors are urged not to rely upon our guidance in making an investment decision regarding our common stock.

Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth in this “Risk Factors” section in this Annual Report on Form 10-K could result in the actual operating results being different from our guidance, and the differences may be adverse and material.

Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth in this “Risk Factors” section could result in the actual operating results being different from our guidance, and the differences may be adverse and material.

Failure to maintain effective internal controls may adversely affect our stock price.

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In addition, control procedures are designed to reduce rather than eliminate financial statement risk.

Additionally, if we or our independent registered public accounting firm are not satisfied with our internal control over financial reporting or the level at which these controls are documented, designed, operated or reviewed in the future, or if our independent registered public accounting firm interprets the requirements, rules and/or regulations differently from our interpretation, then they may issue a qualified report.

Additionally, if we or our independent registered public accounting firm are not satisfied with

our internal control over financial reporting or the level at which these controls are documented, designed, operated or reviewed in the future, or if our independent registered public accounting firm interprets the requirements, rules and/or regulations differently from our interpretation, then they may issue a qualified report.

Furthermore, we may discover that the internal controls of businesses we acquire are inadequate or changes to our existing businesses may impact the effectiveness of our internal controls.

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Certain of our indebtedness is made at variable interest rates that use the London Interbank Offered Rate, or LIBOR (or metrics derived from or related to LIBOR), as a benchmark for establishing the interest rate.

On July 27, 2017, the United Kingdom’s Financial Conduct Authority announced that it intends to stop persuading or compelling

banks to submit LIBOR rates after 2021.

On July 27, 2017, the United Kingdom’s Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021.

These reforms may cause LIBOR to cease to exist, new methods of calculating LIBOR to be established, or alternative reference rates to be established.

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We have a strategic alliance with SICPA, our principal customer for our anti-counterfeiting pigments that are used to, among other things, provide security features for banknotes.

Under a license and supply agreement, we rely exclusively on SICPA to market and sell one of these product lines, Optical Variable Pigment (OVP®) and Optical

Variable Magnetic Pigment (OVMP®), for document authentication applications worldwide.

Under a license and supply agreement, we rely exclusively on SICPA to market and sell Optical Variable Pigment (OVP®) and Optical Variable Magnetic Pigment (OVMP®) products for document authentication applications worldwide.

The agreement requires SICPA to purchase minimum quantities of these pigments over the term of the agreement.

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We also routinely monitor and develop our internal information technology systems to address risks to our information systems.

Despite our implementation of these and other security measures and those of our third-party vendors, our systems are vulnerable to damages from computer viruses, natural disasters, unauthorized access and other similar disruptions and intrusions that continue to emerge and evolve.

Any system failure, accident or security breach could result in disruptions to our business processes, network degradation, and system down time, along with the potential that a third party will exploit our critical assets such as intellectual property, proprietary business information, and data related to our customers, suppliers, and business partners.

To the extent that any disruption, degradation, downtime or other security breach results in a loss or damage to our data or systems, or in inappropriate disclosure of confidential information, it could adversely impact us and our clients, potentially resulting in, among other things, financial losses;

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First, large technology companies, including some of our customers and competitors, are seeking to monetize their patent portfolios and have developed large internal organizations that have approached us with demands to enter into license agreements.

Second, patent-holding companies, entities that do not make or sell products (often referred to as “patent trolls”), have claimed that our products infringe upon their proprietary rights.

Second, patent-holding companies, entities that do not make or sell products (often referred to as “patent trolls”), have claimed that our products infringe upon their proprietary

We will continue to respond to these claims in the course of our business operations.

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The use of open source software in our products, as well as those of our suppliers, manufacturers and customers, may expose us to additional risks and harm our intellectual property position.

Certain of the software and/or firmware that we use and distribute (as well as that of our suppliers, manufacturers and customers) may be, be derived from, or contain, “open source” software, which is software that is generally made available to the public by its authors and/or other third parties.

Certain of the software and/or firmware that we use and distribute (as well as that of our suppliers, manufacturers and customers) may be derived from, or contain, “open source” software, which is software that is generally made available to the public by its authors and/or other third parties.

Such open source software is often made available under licenses which impose obligations in the event the software or derivative works thereof are distributed or re-distributed.

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The costs of defending these lawsuits have been significant, will continue to be costly and may not be covered by our insurance policies.

The defense of these lawsuits could also result in continued diversion

of our management’s time and attention away from business operations, which could harm our business.

For additional discussion regarding litigation, see the “Legal Proceedings” portion of this Annual Report on Form 10-K.

The defense of these lawsuits could also result in continued diversion of our management’s time and attention away from business operations, which could harm our business.

For additional discussion regarding litigation, see the “Legal Proceedings” portion of our Annual Report on Form 10-K for the fiscal year ended June 27, 2020, filed with the SEC on August 24, 2020 .

We may be subject to environmental liabilities which could increase our expenses and harm our operating results.

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Oleg Khaykin became our President and Chief Executive Officer in February 2016 and Amar Maletira became our Chief Financial Officer in September 2015.

Maletira recently announced his resignation to pursue a new opportunity effective November 20, 2020 and the Company appointed an interim CFO while commencing a formal search for Mr.

Maletira announced his resignation effective November 20, 2020 to pursue a new opportunity and the Company appointed an interim CFO while commencing a formal search for Mr.

Maletira’s successor.

Management changes could adversely impact our results of operations and our customer relationships and may make recruiting for future management positions more difficult.

Moreover, we are headquartered in the San Francisco Bay Area and have a significant employee population located there and in other high expense locations.

Our executives and other key personnel are at-will employees and we generally do not have employment or non-compete agreements with our other employees, and we cannot assure you that we will be able to retain them.

Competition for people with the specific technical and other skills we require is significant.

We have a significant employee population in the San Francisco Bay Area and in other high expense locations.

Moreover, we may face new and unanticipated difficulties in attracting, retaining and motivating employees in connection with the recent change of our headquarters to Scottsdale, Arizona, effective January 1, 2021.

If we are unable to attract and retain qualified executives and employees, or to successfully integrate any newly-hired personnel within our organization, we may be unable to achieve our operating objectives, which could negatively impact our financial performance and results of operations.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1A. Risk Factors