What changed in this filing

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Item 1A. Risk Factors

2021-08-23 compared with 2020-08-24 · 194 added, 177 removed, 200 unchanged (65% of the section changed)

COVID-19 Risks

The effects of the COVID-19 pandemic have significantly affected how we and our customers are operating our businesses, and the duration and extent to which this will impact our future results of operations and overall financial performance remains uncertain.

The COVID-19 pandemic has resulted in a widespread health crisis that is adversely affecting the broader economies, financial markets and may affect the overall demand environment for our products and services.

The ongoing COVID-19 pandemic has resulted in a widespread health crisis that is adversely affecting the broader economies, financial markets and may affect the overall demand environment for our products and services.

In response to the COVID-19 pandemic, we have prioritized employee, customer and partner safety and have temporarily shut down, slowed or limited activity in certain locations, including limiting production in certain locations to essential business needs, all in conjunction with federal, state and local health and safety regulations and shelter-in-place orders.

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Both NE and SE net revenue declined in the second half of fiscal 2020.

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.

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

Worldwide distribution by central governments of the vaccines commenced in late 2020.

There have been logistical and operational challenges with the rollout and global demand for the vaccine has far exceeded supply.

It will take some time for the global population to receive vaccines, allowing 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.

We operate a shared services center in Pune, India that provides important finance and IT support services.

The recent substantial increase of reported COVID-19 transmission rates in that country due to the emergence of a more virulent variant of the virus has led to a significant spike in illness and death rates.

Hospitals and medical facilities are overwhelmed and there is a shortage of oxygen and other medical supplies.

If the situation in India does not improve, our operations and employees there could be negatively impacted.

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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Further, the COVID-19 pandemic has adversely affected, and may continue to adversely affect, the economies and financial markets in many countries.

On June 8, 2020, the National Bureau of Economic Research announced that the U.S.

was in a recession.

Deterioration of macro-economic conditions could further curtail or delay spending by our customers and decrease demand for our products as well as cause an increased risk of customer defaults or delays in payment.

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.

In fiscal 2020, 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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However, any prolonged disruption of manufacturing of our products, commerce and related activity caused by the pandemic or significant decrease in 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.

We refer you to “Management’s Discussion and Analysis of Financial Position and Results of Operations” for a more detailed discussions of the potential impact of the COVID-19 pandemic and associated economic disruptions, and the actual operational and financial impacts that we have experienced to date.

We refer you to “Management’s Discussion and Analysis of Financial Position and Results of Operations” for a more detailed discussion of the potential impact of the COVID-19 pandemic and associated economic disruptions, and the actual operational and financial impacts that we have experienced to date.

Risks Related to Our Business Strategy and Industry

We have a history of net losses, and our future profitability is not assured.

We earned net income of $28.7 million and $5.4 million in fiscal 2020 and fiscal 2019 , respectively.

In fiscal 2018 we incurred a net loss of $48.6 million .

Historically, we operated as a portfolio company comprised of many product lines, with diverse operating metrics and markets.

As a result, our profitability in a particular period was impacted by revenue, product mix and operational costs that varied significantly across our product portfolio and business segments.

These transitions are costly and may impair our profit objectives.

Specific factors that may undermine our financial objectives include, among others:

As a result, our profitability in a particular period will be impacted by revenue, product mix and operational costs that vary significantly across our product portfolio and business segments.

Specific factors that may undermine our profit and financial objectives include, among others:

• Uncertain future telecom carrier and cable operator capital and R&D spending levels, which particularly affects our NE and SE segments;

• Adverse changes to our product mix, both fundamentally (resulting from new product transitions, the declining profitability of certain legacy products and the termination of certain products with declining margins, among other things) and due to quarterly demand fluctuations;

pricing pressure across our NSE product lines due to competitive forces, increasingly from Asia, and to a highly concentrated customer base for many of our product lines, which may offset some of the cost improvements;

our OSP operating margin may experience some downward pressure as a result of higher mix of 3D sensing products and increased operating expenses;

• Pricing pressure across our NSE product lines due to competitive forces and to a highly concentrated customer base for many of our product lines, which may offset some of the cost improvements;

• Our OSP operating margin may experience some downward pressure as a result of a higher mix of 3D Sensing products and increased operating expenses;

• Limited availability of components and resources for our products which leads to higher component prices;

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• Ongoing costs associated with organizational transitions, consolidations and restructurings, which are expected to continue in the nearer term;

continuing high levels of selling, general and administrative, (SG&A) expenses;

• Cyclical demand for our currency products;

changing market and economic conditions, including the impacts due to tariffs and the COVID-19 pandemic;

• Changing market and economic conditions, including the impacts due to tariffs, the COVID-19 pandemic and inflationary pressures;

• Ability of our customers, partners, manufacturers and suppliers to purchase, market, sell, manufacture or supply our products and services, including as a result of disruptions arising from the COVID-19 pandemic;

financial stability of our customers, including the solvency of private sector customers, which may be impacted by the COVID-19 pandemic and statutory authority for government customers to purchase goods and services;

factors beyond our control resulting from public health epidemics, pandemics and similar outbreaks as well as the fear of exposure to a widespread health epidemic, such as the COVID-19 pandemic, manufacturing restrictions, travel restrictions and shelter-in-place orders to control the spread of a disease regionally and globally, and limitations on the ability of our employees and our suppliers’ and customers’ employees to work and travel.

• Financial stability of our customers, including the solvency of private sector customers and statutory authority for government customers to purchase goods and services;

• Factors beyond our control resulting from pandemics and similar outbreaks such as the COVID-19 pandemic, manufacturing restrictions, travel restrictions and shelter-in-place orders to control the spread of a disease regionally and globally, and limitations on the ability of our employees and our suppliers’ and customers’ employees to work and travel.

Taken together, these factors limit our ability to predict future profitability levels and to achieve our long-term profitability objectives.

If we fail to achieve profitability expectations, the price of our debt and equity securities, as well as our business and financial condition, may be materially adversely impacted.

Our operating results may be adversely affected by unfavorable economic and market conditions.

Global macroeconomic and geopolitical risks, including those resulting from the COVID-19 pandemic which are beyond our control, could adversely impact customer business conditions that could decrease or delay capital spending among communications service providers, enterprise budgets and consumer demand.

This could also result in increased price competition for our products, increase our risk of excess and obsolete inventories and higher overhead costs as a percentage of revenue.

Rapid technological change in our industry presents us with significant risks and challenges, and if we are unable to keep up with the rapid changes, our customers may purchase less of our products which could adversely affect our operating results.

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Our success depends upon our ability to deliver both our current product offerings and new products and technologies on time and at acceptable cost to our customers.

The markets for our products are characterized by rapid technological change, frequent

new product introductions, substantial capital investment, changes in customer requirements and a constantly evolving industry.

The markets for our products are characterized by rapid technological change, frequent new product introductions, substantial capital investment, changes in customer requirements and a constantly evolving industry.

Our future performance will depend on the successful development, introduction and market acceptance of new and enhanced products that address these issues and provide solutions that meet our customers’ current and future needs.

As a technology company, we also constantly encounter quality, volume and cost concerns such as:

Our continuing cost reduction programs, which include site and organization consolidations, asset divestitures, outsourcing the manufacture of certain products to contract manufacturers, other outsourcing initiatives, and reductions in employee headcount, require the re-establishment and re-qualification by our customers of complex manufacturing lines, as well as modifications to systems, planning and operational infrastructure.

• Our continuing cost reduction programs which include, site and organization consolidations, asset divestitures, outsourcing the manufacture of certain products to contract manufacturers, other outsourcing initiatives, and reductions in employee headcount, requirements related to re-establishment and re-qualification by our customers of complex manufacturing lines, and modifications to systems, planning and operational infrastructure.

During this process, we have experienced, and may continue to experience, additional costs, delays in re-establishing volume production levels, planning difficulties, inventory issues, factory absorption concerns and systems integration problems.

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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.

We have and could continue to see (a) periodic difficulty responding to customer delivery expectations for some of our products, (b) yield and quality problems, particularly with some of our new products and higher volume products and (c) additional funds and other resources required to respond to these execution challenges.

We have and could continue to see periodic difficulty responding to customer delivery expectations for some of our products, and yield and quality problems, particularly with some of our new products and higher volume products which could require additional funds and other resources required to respond to these execution challenges.

From time to time, we have had to divert resources from new product R&D and other functions to assist with resolving these matters.

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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, NEMs and its related supply chain.

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

Even if the 5G infrastructure market and rate of adoption develop in the manner or in the time periods we anticipate, if we do not have timely, competitively priced, market-accepted products available to meet our customers’ planned roll-out of 5G platforms and systems, we may miss a significant opportunity and our business, financial condition, results of operations and cash flows could be materially and adversely affected.

O ur forecasts related to our growth strategy in 3D sensing and other applications may prove to be inaccurate.

Our forecasts related to our growth strategy in 3D sensing and other applications may prove to be inaccurate.

Growth forecasts are subject to significant uncertainty and are based on assumptions and estimates which may not prove to be accurate.

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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 zone.

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.

Restructuring

We continue to restructure and realign our cost base with current and anticipated future market conditions.

Significant risks associated with these actions that may impair our ability to achieve the anticipated cost reductions or that may disrupt our business include delays in the implementation of anticipated workforce reductions in highly regulated locations outside of the U.S.

and the failure to meet operational targets due to the loss of key employees.

In addition, our ability to achieve the anticipated cost savings and other benefits from these actions within the expected timeframe is subject to many estimates and assumptions.

These estimates and assumptions are subject to significant economic, competitive and other uncertainties, some of which are beyond our control.

If these estimates and assumptions are incorrect, if we experience delays, or if other unforeseen events occur, our business and results of operations could be adversely affected.

Impairment in the carrying value of goodwill or other assets could negatively affect our results of operations or net worth.

We have significant long-lived assets recorded on our balance sheet.

We evaluate intangible assets and goodwill for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

We monitor factors or indicators, such as unfavorable variances from forecasted cash flows, established business plans or volatility inherent to external markets and industries that would require an impairment test.

The test for impairment of intangible assets requires a comparison of the carrying value of the asset or asset group with their estimated undiscounted future cash flows.

If the carrying value of the asset or asset group is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the asset or asset group exceeds its fair value.

We have in the past and may in the future experience impairment charges to goodwill.

The amount of any impairment charge could be significant and could have a material adverse impact on our financial condition and results of operations for the period in which the charge is taken.

In addition, the economic disruptions caused by the COVID-19 pandemic could also adversely impact the impairment risks for certain long-lived assets, equity method investments and goodwill.

Refer to Note 9 and Note 10 of the Notes to the Consolidated Financial Statements and “Critical Accounting Policies and Estimates” in Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion of the impairment testing of goodwill and long-lived assets.

We will continue to evaluate the recoverability of the carrying amount of our goodwill and long-lived assets on an ongoing basis, and we may incur substantial impairment charges, which would adversely affect our financial results.

There can be no assurance that the outcome of such reviews in the future will not result in substantial impairment charges.

Impairment assessment inherently involves judgment as to assumptions about expected future cash flows and the impact of market conditions on those assumptions.

Future events and changing market conditions may impact our assumptions as to prices, costs, holding periods or other factors that may result in changes in our estimates of future cash flows.

Although we believe the assumptions we used in testing for impairment are reasonable, significant changes in any one of our assumptions could produce a significantly different result.

If, in any period, our stock price decreases to the point where the fair value of the Company, as determined by our market capitalization, is less than our book value, this too could indicate a potential impairment and we may be required to record an impairment charge in that period.

We rely on a limited number of customers for a significant portion of our sales.

We may experience increased pressure on our pricing and contract terms due to our reliance on a limited number of customers for a significant portion of our sales.

We believe that we will continue to rely upon a limited number of customers for a significant portion of our revenues for the foreseeable future.

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Strategic transactions of this nature involve numerous risks, including the following:

the impact of the recent COVID-19 pandemic, and any other adverse public health developments, epidemic disease or other pandemic in the countries in which we operate or our customers are located, including regional quarantines restricting the movement of people or goods, reductions in labor supply or staffing, the closure of facilities to protect employees, including those of our customers, disruptions to global supply chains and our and our suppliers’ ability to deliver materials and products on a timely or cost-effective basis, shipment, acceptance or verification delays, the resulting overall significant volatility and disruption of financial markets, and economic instability affecting customer spending patterns;

• The impact of the recent COVID-19 pandemic, and any other adverse public health developments, epidemic disease or other pandemic in the countries in which we operate or our customers are located, including regional quarantines restricting the movement of people or goods, reductions in labor supply or staffing, the closure of facilities to protect employees, including those of our customers, disruptions to global supply chains and both our and our suppliers’ ability to deliver materials and products on a timely or cost-effective basis, shipment, acceptance or verification delays, the resulting overall significant volatility and disruption of financial markets, and economic instability affecting customer spending patterns;

• Inadequate internal control procedures and disclosure controls to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or poor integration of a target company’s or business’s procedures and controls;

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• Acquire, assume, or become subject to litigation related to the acquired businesses or assets.

Certain of our products are subject to governmental and industry regulations, certifications and approvals.

The commercialization of certain of the products we design, manufacture and distribute through our OSP segment may be more costly due to required government approval and industry acceptance processes.

Development of applications for our anti-counterfeiting and special effects pigments may require significant testing that could delay our sales.

For example, certain uses in cosmetics may be regulated by the U.S.

Food and Drug Administration, which has extensive and lengthy approval processes.

Durability testing by the automobile industry of our special effects pigments used with automotive paints can take up to three years.

If we change a product for any reason, including technological changes or changes in the manufacturing process, prior approvals or certifications may be invalid and we may need to go through the approval process again.

If we are unable to obtain these or other government or industry certifications in a timely manner, or at all, our operating results could be adversely affected.

Operational Risks

Restructuring

We continue to restructure and realign our cost base with current and anticipated future market conditions.

Significant risks associated with these types of actions that may impair our ability to achieve the anticipated cost reductions or disrupt our business include delays in the implementation of anticipated workforce reductions in highly regulated locations outside of the U.S.

and the failure to meet operational targets due to the loss of key employees.

In addition, our ability to achieve the anticipated cost savings and other benefits from these actions within the expected timeframe is subject to many estimates and assumptions.

These estimates and assumptions are subject to significant economic, competitive and other uncertainties, some of which are beyond our control.

If these estimates and assumptions are incorrect, if we experience delays, or if other unforeseen events occur, our business and results of operations could be adversely affected.

We may not generate positive returns on our research and development strategy.

Developing our products is expensive, and the investment in product development may involve a long payback cycle.

We expect to continue to invest heavily in R&D in order to expand the capabilities of 3D sensing and smart phone sensors, handheld spectrometer solution and portable test instruments, introduce new products and features and build upon our technology.

We believe one of our greatest strengths lies in our innovation and our product development efforts.

By investing in R&D including through our acquisitions, we believe we are well positioned to continue to execute on our strategy and take advantage of market opportunities.

We expect that our results of operations may be impacted by the timing and size of these investments.

In addition, these investments may take several years to generate positive returns, if ever.

We face risks related to our international operations and revenue.

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The spread of COVID-19 has and is likely to continue to affect the manufacturing and shipment of goods globally.

For example, while the Chinese government has lifted certain restrictions on movement of people and goods to limit the spread of COVID-19, it is continuing to take control measures and recently imposed certain restrictions to limit the spread of COVID-19

Further, most other countries have imposed or are imposing certain restrictions on the movement of people and goods and may continue to lift and reimpose such restrictions as needed.

Any delay in production or delivery of our products due to an extended closure of our suppliers’ plants as a result of efforts to limit the spread of COVID-19 could adversely impact our business.

Worldwide travel restrictions have been imposed by many countries, including air travel and transport, that have caused and are likely to continue to cause delays in shipment of our products as well as increased logistics costs and will restrict our ability to attract, develop, integrate and retain highly skilled employees with appropriate qualifications from other countries.

Net revenue from customers outside the Americas accounted for 63.5% , 62.3% and 52.4% of our total net revenue, for fiscal 2020 , 2019 and 2018 , respectively.

We expect that net revenue from customers outside North America will continue to account for a significant portion of our total net 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.

The withdrawal of the U.K.

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.

from the E.U., which was completed in January 2020 with the end of the transition period in December 2020, may 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.

Brexit may also 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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While we have not experienced any material financial impact from Brexit on our business to date, we cannot predict its future implications.

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.

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.

Legal, Regulatory and Compliance Risks

Certain of our products are subject to governmental and industry regulations, certifications and approvals.

Development of applications for our anti-counterfeiting and special effects pigments may require significant testing that could delay our sales.

For example, certain uses in cosmetics may be regulated by the U.S.

Food and Drug Administration, which has extensive and lengthy approval processes.

Durability testing by the automobile industry of our special effects pigments used with automotive paints can take up to three years.

If we are unable to obtain these or other government or industry certifications in a timely manner, or at all, our operating results could be adversely affected.

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

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 U.S.-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.

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.

Information Security, Technology and Intellectual Property Risks

Our business and operations could be adversely impacted in the event of a failure of our information technology infrastructure.

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In some cases, we rely upon third-party hosting and support services to meet these needs.

The growing and evolving cyber-risk environment means that individuals, companies, and organizations of all sizes, including ourselves and our hosting and support partners, are increasingly vulnerable to the threat of intrusions and disruptions on their networks and systems by a wide range of actors on an ongoing and regular basis.

The growing and evolving cyber-risk environment means that individuals, companies, and organizations of all sizes, including ourselves and our hosting and support partners, are increasingly vulnerable to attacks and disruptions on their networks and systems by a wide range of actors on an ongoing and regular basis.

We also design and manage IT systems and products that contain IT systems for various customers, and generally face the same threats for these systems as for our own internal systems.

We maintain information security staff, policies and procedures for managing risk to our networks and information systems, and conduct employee training on cyber-security to mitigate persistent and continuously evolving cyber-security threats.

network security measures include, but are not limit to, the implementation of firewalls, anti-virus protection, patches, log monitors, routine backups, off-site storage, network audits and other routine updates and modifications.

We maintain information security tools and technologies, staff, policies and procedures for managing risk to our networks and information systems, and conduct employee training on cyber-security to mitigate persistent and continuously evolving cyber-security threats.

Our network security controls are comprised of administrative, physical and technical controls, which include, but are not limited to, the implementation of firewalls, anti-virus protection, patches, log monitors, routine backups, off-site storage, network audits and other routine updates and modifications.

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;

our inability to transact business on behalf of our clients;

violations of applicable privacy and other laws;

regulatory fines, penalties, litigation, reputational damage, reimbursement or other compensation costs;

and/or additional compliance costs.

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 gain unauthorized access to, or acquire intellectual property, proprietary business information, and data related to our employees, customers, suppliers, and business partners, including personal data.

To the extent that any disruption, degradation, downtime or other security event results in a loss or damage to our data or systems, or in inappropriate disclosure of confidential or personal information, it could adversely impact us and our clients, potentially resulting in, among other things, financial losses, our inability to transact business on behalf of our clients, adverse impact on our brand and reputation, violations of applicable privacy and other laws, regulatory fines, penalties, litigation, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs.

We may also incur additional costs related to cyber-security risk management and remediation.

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In addition, our legal and regulatory obligations in jurisdictions outside of the U.S.

are subject to unexpected changes, including the potential for regulatory or other governmental entities to enact new or additional laws or regulations, to issues rulings that invalidate prior laws or regulations, or to increase penalties significantly.

Complying these laws and regulations can be costly and can impede the development and offering of new products and services.

are subject to unexpected changes, including the potential for regulatory or other governmental entities to enact new or additional laws or regulations, to issue rulings that invalidate prior laws or regulations, or to increase penalties significantly.

Complying with these laws and regulations can be costly and can impede the development and offering of new products and services.

For example, the E.U.

General Data Protection Regulation (GDPR), which became effective in May 2018, imposes stringent data protection requirements and provides for significant penalties for noncompliance.

Additionally, California recently enacted legislation, the California Consumer Privacy Act (CCPA), which became effective January 1, 2020.

Additionally, California enacted legislation, the California Consumer Privacy Act (CCPA), which became effective January 1, 2020.

The CCPA requires, among other things, covered companies to provide new disclosures to California consumers, and allow such consumers new abilities to opt-out of certain sales of personal data.

The CCPA also provides for civil penalties for violations, as well as a private right of action for data breaches that may increase data breach litigation.

We may also be subject to additional obligations relating to personal data by contract that industry standards apply to our practices.

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

Further, the California Privacy Rights Act (CPRA) recently passed in California.

The CPRA will impose additional data protection obligations on covered businesses, including additional consumer rights, limitations on data uses, new audit requirements for higher risk data, and opt outs for certain uses of sensitive data.

It will also create a new California data protection agency authorized to issue regulations and could result in increased privacy and information security enforcement.

The majority of the provisions will go into effect on January 1, 2023, and additional compliance investment and business process changes may be required.

The CPRA may result in further uncertainty and would require us to incur additional expenditures to comply.

Several other states have signed into law or are intending to enact laws relating to personal information.

federal government may also pass data privacy laws.

These regulations and legislative developments have potentially far-reaching consequences and may require us to modify our data management practices and incur substantial compliance expense.

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.

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

Effective internal controls are necessary for us to provide reliable financial reports and to effectively prevent fraud.

We are required to annually evaluate the effectiveness of the design and operation of our internal controls over financial reporting.

Based on these evaluations, we may conclude that enhancements, modifications, or changes to internal controls are necessary or desirable.

In addition, our independent registered public accounting firm must report on the effectiveness of our internal control over financial reporting.

While management evaluates the effectiveness of our internal controls on a regular basis, these controls may not always be effective.

A material weakness in our internal controls has been identified in the past, and we cannot assure you that we or our independent registered public accounting firm will not identify a material weakness in our internal controls in the future.

A material weakness in our internal controls over financial reporting would require management and our independent registered public accounting firm to evaluate our internal controls as ineffective.

If our internal controls over financial reporting are not considered

effective, we may experience a loss of public confidence, which could have an adverse effect on our business, financial condition and the market price of our common stock and other securities.

There are inherent limitations on the effectiveness of internal controls, including collusion, management override and failure in human judgment.

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.

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.

These situations could require us to make changes to our internal controls and could cause our independent registered public accounting firm to issue a qualified report, which could result in a loss of investor confidence in the reliability of our financial statements and could negatively impact our stock price.

In March 2017, we issued $460.0 million of 1.00% Senior Convertible Notes due 2024, and in May 2018 we issued $225.0 million of 1.75% Senior Convertible Notes due 2023.

The issuance of the Notes increases our overall leverage and could dilute our existing stockholders and lower our reported earnings per share.

We issued $460.0 million of indebtedness in March 2017 in the form of 1.00% Senior Convertible Notes due 2024 (the 2024 Notes).

In May 2018, we issued $225.0 million of indebtedness in the form of 1.75% Senior Convertible Notes due 2023 (the 2023 Notes, and, together with the 2024 Notes, the Notes) .

The issuance of the Notes substantially increased our principal payment obligations.

The degree to which we are leveraged could materially and adversely affect our ability to successfully obtain financing for working capital, acquisitions or other purposes and could make us more vulnerable to industry downturns and competitive pressures.

In addition, the holders of the Notes are entitled to convert the Notes into shares of our common stock or a combination of cash and shares of common stock under certain circumstances which would dilute our existing stockholders and lower our reported per share earnings.

If we have insufficient proprietary rights or if we fail to protect those we have, our business would be materially harmed.

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In the past, the resolution of these disputes has not had a material adverse impact on our business or financial condition;

however, this may not be the case in the

however, this may not be the case in the future.

Further, the litigation or settlement of these matters, regardless of the merit of the claims, could result in significant expense to us and divert the efforts of our technical and management personnel, whether or not we are successful.

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In the event future iterations of open-source software are made available under a revised license, such license revisions may adversely affect our ability to use such future iterations.

We face certain litigation risks that could harm our business.

We are and may become subject to various legal proceedings and claims that arise in or outside the ordinary course of business.

The results of complex legal proceedings are difficult to predict.

Moreover, many of the complaints filed against us do not specify the amount of damages that plaintiffs seek, and we therefore are unable to estimate the possible range of damages that might be incurred should these lawsuits be resolved against us.

While we are unable to estimate the potential damages arising from such lawsuits, certain of them assert types of claims that, if resolved against us, could give rise to substantial damages.

Thus, an unfavorable outcome or settlement of one or more of these lawsuits could have a material adverse effect on our financial condition, liquidity and results of operations.

Even if these lawsuits are not resolved against us, the uncertainty and expense associated with unresolved lawsuits could seriously harm our business, financial condition and reputation.

Litigation is costly, time-consuming and disruptive to normal business operations.

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.

Changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate, may adversely affect interest rates on our future indebtedness and may otherwise adversely affect our financial condition and results of operations.

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.

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

The potential consequences cannot be fully predicted and could have an adverse impact on the market value for or value of LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us.

Changes in market interest rates may influence our financing costs, returns on financial investments and the valuation of derivative contracts and could reduce our earnings and cash flows.

In addition, any transition process may involve, among other things, increased volatility or illiquidity in markets for instruments that rely on LIBOR, reductions in the value of certain instruments or the effectiveness of related transactions such as hedges, increased borrowing costs, uncertainty under applicable documentation, or difficult and costly consent processes.

This could materially and adversely affect our results of operations, cash flows, and liquidity.

We cannot predict the effect of the potential changes to LIBOR or the establishment and use of alternative rates or benchmarks.

Environmental, Social and Governance Risks

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

We are subject to various federal, state and foreign laws and regulations governing the environment, including those governing pollution and protection of human health and the environment and, recently, those restricting the presence of certain substances in electronic products and holding producers of those products financially responsible for the collection, treatment, recycling and

disposal of certain products.

Such laws and regulations have been passed in several jurisdictions in which we operate, are often complex and are subject to frequent changes.

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If we have to make significant capital expenditures to comply with environmental laws, or if we are subject to significant expenditures in connection with a violation of these laws, our financial condition or operating results could be materially adversely impacted.

We may not generate positive returns on our research and development strategy.

Developing our products is expensive, and the investment in product development may involve a long payback cycle.

For fiscal years 2019, 2018 and 2017, our research and development expenses were $187.0 million, or approximately 17.0 % of our revenue, $133.3 million, or approximately 16.5 % of our revenue, and $136.3 million, or approximately 15.2 % of our revenue, respectively.

We expect to continue to invest heavily in research and development in order to expand the capabilities of 3D sensing and smart phone sensors, handheld spectrometer solution and portable test instruments, introduce new products and features and build upon our technology.

We believe one of our greatest strengths lies in our innovation and our product development efforts.

By investing in research and development including through our acquisitions, we believe we are well positioned to continue to execute on our strategy and take advantage of market opportunities.

We expect that our results of operations may be impacted by the timing and size of these investments.

In addition, these investments may take several years to generate positive returns, if ever.

Natural Disasters and Catastrophic Events

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.

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

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

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.

While we have not experienced damage to our facilities or a material disruption to operations as a result of these power outages, ongoing blackouts, particularly if prolonged or frequent, could impact our operations going forward.

Management Transitions and Talent Retention Create Uncertainties and Could Harm our Business.

Amar Maletira became our Chief Financial Officer in September 2015.

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.

In March 2021, Henk Derksen joined the Company as CFO.

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

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.

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.

Risks Related to our Liquidity and Indebtedness

Any deterioration or disruption of the capital and credit markets may adversely affect our access to sources of funding.

Global economic conditions have caused and may cause volatility and disruptions in the capital and credit markets.

When the capital or credit markets deteriorate or are disrupted, our ability to incur additional indebtedness to fund a portion of our working capital needs and other general corporate purposes, or to refinance maturing obligations as they become due, may be constrained.

In the event that we were to seek to access the capital markets or other sources of financing, there can be no assurance that we will be able to obtain financing on acceptable terms or within an acceptable time, if at all.

We may seek to access the capital or credit markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time.

Our access to the financial markets and the pricing and terms we receive in the financial markets could be adversely impacted by various factors, including changes in financial markets and interest rates.

In addition, if we do access the capital or credit markets, agreements governing any borrowing arrangement could contain covenants restricting our operations .

In March 2017, we issued $460.0 million of 1.00% Senior Convertible Notes due 2024, and in May 2018 we issued $225.0 million of 1.75% Senior Convertible Notes due 2023.

The issuance of the Notes increases our overall leverage and could dilute our existing stockholders and lower our reported earnings per share.

We issued $460.0 million of indebtedness in March 2017 in the form of 1.00% Senior Convertible Notes due 2024 (the 2024 Notes).

In May 2018, we issued $225.0 million of indebtedness in the form of 1.75% Senior Convertible Notes due 2023 (the 2023 Notes, and, together with the 2024 Notes, the Notes).

The issuance of the Notes substantially increased our principal payment obligations.

During the fourth quarter of fiscal 2021, the closing price of our common stock exceeded 130% of the applicable conversion price of the 2024 Notes, on at least 20 of the last 30 consecutive trading days of the quarter, causing the 2024 Notes to be convertible by their holders for the period of July 1, 2021 to September 30, 2021, resulting in a reclassification of the 2024 Notes to short-term debt.

Settlement of conversion of the 2024 Notes is in cash for the principal amount and, if applicable, cash and/or shares of our common stock for any conversion premium at our election.

Our ability to make payments on our indebtedness when due, to make payments upon conversion with respect to our convertible senior notes or to refinance our indebtedness as we may need or desire, depends on our future performance and our ability to generate cash flow from operations, which is subject to economic, financial, competitive and other factors beyond our control.

If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying investments or capital expenditures, selling assets, refinancing or obtaining additional equity capital on terms that may be onerous or highly dilutive.

We may not be able to engage in these activities on desirable terms or at all, which may result in a default on our existing or future indebtedness and harm our financial condition and operating results.

The elimination of LIBOR after June 2023 may affect our financial results.

All LIBOR tenors relevant to us will cease to be published or will no longer be representative after June 30, 2023.

This means that any of our LIBOR-based borrowings that extend beyond June 30, 2023 will need to be converted to a replacement rate.

In the U.S., the Alternative Reference Rates Committee (AARC), a committee of private sector entities convened by the Federal Reserve Board and the Federal Reserve Bank of New York, has recommended the Secured Overnight Financing Rate (SOFR) plus a recommended spread adjustment as LIBOR's replacement.

There are significant differences between LIBOR and SOFR, such as LIBOR being an unsecured lending rate while SOFR is a secured lending rate, and SOFR is an overnight rate while LIBOR reflects term rates at different maturities.

If our LIBOR-based borrowings are converted to SOFR, the differences between LIBOR and SOFR, plus the recommended spread adjustment, could result in interest costs that are higher than if LIBOR remained available, which could have a material adverse effect on our operating results.

Although SOFR is the ARRC's recommended replacement rate, it is also possible that lenders may instead choose alternative replacement rates that may differ from LIBOR in ways similar to SOFR or in other ways that would result in higher interest costs for us.

It is not yet possible to predict the magnitude of LIBOR's end on our borrowing costs given the remaining uncertainty about which rates will replace LIBOR.

Our ability to use our net operating loss carryforwards to offset future taxable income may be subject to certain limitations.

Utilization of our NOLs and tax credit carryforwards may be subject to a substantial annual limitation if the ownership change limitations under Sections 382 and 383 of the Internal Revenue Code and similar state provisions are triggered by changes in the ownership of our capital stock.

In general, an ownership change occurs if there is a cumulative change in our ownership by “5-percent shareholders” that exceeds 50 percentage points over a rolling three-year period.

Similar rules may apply under state tax laws.

Accordingly, purchases of our capital stock by others could limit our ability to utilize our NOLs and tax credit carryforwards in the future.

Furthermore, we may not be able to generate sufficient taxable income to utilize our NOLs and tax credit carryforwards before they expire.

Due to uncertainty regarding the timing and extent of our future profitability, we continue to record a valuation allowance to offset our U.S.

and certain of our foreign deferred tax assets because of uncertainty related to our ability to utilize our NOLs and tax credit carryforwards before they expire.

If any of these events occur, we may not derive some or all of the expected benefits from our NOLs and tax credit carryforwards.

General Risks

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

Effective internal controls are necessary for us to provide reliable financial reports and to effectively prevent fraud.

We are required to annually evaluate the effectiveness of the design and operation of our internal controls over financial reporting.

Based on these evaluations, we may conclude that enhancements, modifications, or changes to internal controls are necessary or desirable.

In addition, our independent registered public accounting firm must report on the effectiveness of our internal control over financial reporting.

While management evaluates the effectiveness of our internal controls on a regular basis, these controls may not always be effective.

A material weakness in our internal controls over financial reporting would require management and our independent registered public accounting firm to evaluate our internal controls as ineffective.

If our internal controls over financial reporting are not considered effective, we may experience a loss of public confidence, which could have an adverse effect on our business, financial condition and the market price of our common stock and other securities.

Impairment in the carrying value of goodwill or other assets could negatively affect our results of operations or net worth.

We have significant long-lived assets recorded on our balance sheet.

We evaluate intangible assets and goodwill for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

We have in the past and may in the future experience impairment charges to goodwill.

The amount of any impairment charge could be significant and could have a material adverse impact on our financial condition and results of operations for the period in which the charge is taken.

In addition, the economic disruptions caused by the COVID-19 pandemic could also adversely impact the impairment risks for certain long-lived assets, equity method investments and goodwill.

Our actual operating results may differ significantly from our guidance.

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This guidance, which includes forward-looking statements, will be based on projections prepared by our management.

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.

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

We do not accept any responsibility for any projections or reports published by any such third parties.

Such 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.

Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the guidance furnished by us will not materialize or will vary significantly from actual results.

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In addition, such provisions could limit the price that some investors might be willing to pay in the future for shares of our common stock.

privileges of such shares (commonly known as “blank check preferred”) and providing that our stockholders can take action only at a duly called annual or special meeting of stockholders, which may only be called by the Chairman of the board, the Chief Executive Officer or the board of directors.

Our certificate of incorporation and bylaws contain provisions providing for the limitations of liability and indemnification of our directors and officers, allowing vacancies on our Board of Directors to be filled by the vote of a majority of the remaining directors, granting our Board of Directors the authority to establish additional series of preferred stock and to designate the rights, preferences and privileges of such shares (commonly known as “blank check preferred”) and providing that our stockholders can take action only at a duly called annual or special meeting of stockholders, which may only be called by the Chairman of the Board, the Chief Executive Officer or the Board of Directors.

These provisions may also have the effect of deterring hostile takeovers or delaying changes in control or change in our management.

Our ability to use our net operating loss carryforwards to offset future taxable income may be subject to certain limitations.

As of June 27, 2020 , we had U.S.

federal and state net operating losses, or NOLs, of $4,752.2 million and $575.8 million , respectively, and U.S.

federal and state tax credit carryforwards of $105.8 million and $52.6 million respectively, which may be utilized against future income taxes.

Utilization of these NOLs and tax credit carryforwards may be subject to a substantial annual limitation if the ownership change limitations under Sections 382 and 383 of the Internal Revenue Code and similar state provisions are triggered by changes in the ownership of our capital stock.