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Item 1A. Risk Factors

2022-08-19 compared with 2021-08-23 · 150 added, 174 removed, 220 unchanged (60% 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 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.

The majority of our global workforce is working from home, and we have canceled participation in trade shows and marketing events and restricted business travel, resulting in the limitation of normal sales and business development activity.

The COVID-19 pandemic has and may continue to adversely affect how we and our customers are operating our businesses.

The ongoing COVID-19 pandemic has resulted in a widespread health crisis that adversely affected 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 prioritized employee, customer and partner safety and 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.

As we transition to a hybrid work model, we have resumed the majority of our normal business operations with certain continued limitations on business travel, participation in trade shows, marketing activities, sales and development activities.

We have experienced and may continue to experience disruption of our facilities, suppliers and contract manufacturers, which has and may continue to negatively impact our sales and operating results.

In addition, we have experienced and may continue to experience shipping and logistics challenges as our customers have also closed their facilities and are operating under similar restrictions.

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 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.

Even after shelter-in-place restrictions have been lifted by governmental authorities, there could be additional waves or spikes in infection, again causing widespread social, economic and operational impacts.

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

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.

In addition, we have experienced and may continue to experience shipping and logistics challenges and higher than expected supply chain and commodity costs, including manufacturing, logistics and procurement costs, due to inflationary pressure, among other factors.

NSE has experienced some impact to customer demand.

Customer demand will continue to be challenging to calibrate, due to the nature and timing of the COVID-19 pandemic.

As normal business operations resume and we transition to a hybrid work model, we are expanding 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.

There could be additional waves or spikes in infection, again causing widespread social, economic and operational impacts.

We intend to comply with governmental vaccine and/or quarantine mandates.

Such mandates, could, in some circumstances, result in skilled labor impacts including voluntary attrition or difficulty finding labor, or otherwise adversely affect our ability to operate our manufacturing facilities, obtain supplies, or deliver our products in a timely manner.

Some laws and directives may also hinder our ability to move certain products across borders.

Economic conditions can also influence order patterns.

These factors could negatively impact our consolidated results of operations and cash flow.

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

In December 2021, we entered into a $300 million asset-based secured credit facility.

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.

There can be no assurance that we will be able to obtain financing on favorable terms or at all.

Due to the evolving and highly uncertain nature of this event, it is currently not possible to estimate the ultimate direct or indirect impacts the COVID-19 pandemic may have on our business.

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.

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 or quarantines, emergence of new and potentially more contagious variants of the virus and staffing and labor supply challenges may impact our suppliers and our ability to source materials in a timely manner.

Further, ongoing supply chain constraints and inflationary pressure could have a negative impact on our results.

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 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.

We refer you to “Management’s Discussion and Analysis of Financial Position and Results of Operations” under Item 7 of this Annual Report on Form 10-K for a more detailed discussion of the actual operational and financial impacts that we have experienced to date.

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Risks Related to Our Business Strategy and Industry

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

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 will be impacted by revenue, product mix and operational costs that vary significantly across our product portfolio and business segments.

Our future profitability is not assured.

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:

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• 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 and to a highly concentrated customer base for many of our product lines, which may offset some of the cost improvements;

• Pricing pressure across our NSE product lines due to competitive forces, advanced chip component shortages, and 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;

• Resource rationing, including rationing of utilities like electricity by governments and/or service providers;

• Increasing commoditization of previously differentiated products, and the attendant negative effect on average selling prices and profit margins;

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• Cyclical demand for our currency products;

• 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;

• Changing market and economic conditions, including the impacts due to tariffs, the COVID-19 pandemic, the ongoing conflict between Russia and Ukraine, supply chain constraints, pricing and inflationary pressures;

• Ability of our customers, partners, manufacturers and suppliers to purchase, market, sell, manufacture and/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 and statutory authority for government customers to purchase goods and services;

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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.

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.

The manufacture, quality and distribution of our products, as well as our customer relations, may be affected by several factors, including the rapidly changing market for our products, supply issues and internal restructuring efforts.

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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.

We expect the impact of these issues will become more pronounced as we continue to introduce new product offerings and when overall demand increases.

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.

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

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

We also rely on contract manufacturers around the world to manufacture certain of our products.

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

We also rely on contract manufacturers around the world to manufacture certain products.

Our business 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.

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If we do not improve our performance in all of these areas, our operating results will be harmed, the commercial viability of new products may be challenged, and our customers may choose to reduce or terminate their purchases of our products and purchase additional products from our competitors.

Unfavorable, uncertain or unexpected conditions in the transition to 5G may cause fluctuations in our rate of revenue growth or financial results.

Markets for 5G infrastructure may not develop in the manner or in the time periods we anticipate.

If domestic and global economic conditions worsen, including as a result of the COVID-19 pandemic, overall spending on 5G infrastructure may be reduced, which would adversely impact demand for our products in these markets.

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, 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.

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

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Unfavorable, uncertain or unexpected conditions in the transition to new technologies may cause our growth forecasts to be inaccurate and/or cause fluctuations in our financial results.

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

Our estimate of the market opportunity related to 3D sensing is subject to significant uncertainty and is based on assumptions and estimates, including our internal analysis, industry experience and third-party data.

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.

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.

Our estimates of the market opportunities related to 5G infrastructure, 3D sensing and other developing technologies are subject to significant uncertainty and are based on assumptions and estimates, including our internal analysis, industry experience and third-party data.

Accordingly, these markets may not develop in the manner or in the time periods we anticipate and our estimated market opportunities may prove to be materially inaccurate.

If domestic and global economic conditions worsen, including as a result of the COVID-19 pandemic, pricing and inflationary pressures, overall spending on 5G infrastructure, 3D sensing and other developing technologies may be reduced, which would adversely impact demand for our products in these markets.

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

Our growth and ability to serve a significant portion of these markets is subject to many factors, including our success in implementing our business strategy and market adoption and expansion of 5G infrastructure, 3D sensing and other applications for consumer electronics.

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

Even if the markets and rates 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, 3D sensing products and other technologies, we may miss a significant opportunity and our business, financial condition, results of operations and cash flows could be materially and adversely affected.

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.

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Customer consolidation activity and periodic manufacturing and inventory initiatives could also create the potential for disruptions in demand for our products as a consequence of such customers streamlining, reducing or delaying purchasing decisions.

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.

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

If SICPA fails to purchase these quantities, as and when required by the agreement, our business and operating results (including among other things, our revenue and gross margin) will be harmed as we may be unable to find a substitute marketing and sales partner or develop these capabilities ourselves.

We have a strategic alliance with SICPA to market and sell our OVP and OVMP product lines for banknote anti-counterfeiting applications worldwide.

A material reduction in sales, or loss of the relationship with SICPA, may harm our business and operating results as we may be unable to find a substitute marketing and sales partner or develop these capabilities ourselves in a timely manner.

Movement towards virtualized networks and software solutions may result in lower demand for our hardware products and increased competition.

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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 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;

• Diversion of management’s attention from normal daily operations of the business;

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• Difficulties in entering markets in which we have no or limited prior experience and where competitors have stronger market positions;

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• Difficulties in obtaining or providing sufficient transition services and accurately projecting the time and cost associated with providing these services;

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• Difficulty in forecasting revenues and margins;

• The impact of the 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;

Acquisitions may also cause us to:

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

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 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.

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Operational Risks

Restructuring

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

We have from time to time engaged in restructuring activities to 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.

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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 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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• Political, legal and economic instability in foreign markets, particularly in those markets in which we maintain manufacturing and product development facilities;

• Strained or worsening relations between the United States and China or other countries;

• Strained or worsening relations between the United States, Russia and China and related impacts on other countries;

• Difficulties in staffing and management;

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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.

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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 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., 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.

Given the lack of comparable precedent, it is unclear how Brexit may negatively impact the economies of the U.K., the E.U.

countries and other nations, as well as our operations in these locations.

However, any of these effects of Brexit, among others, could adversely affect our financial position, results of operations or cash flows.

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

Legal, Regulatory and Compliance Risks

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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.

For example, 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.

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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.

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.

For example, the United States has increased tariffs on certain categories of high-tech and consumer goods imported from China pursuant to Section 301 of the Trade Act of 1974, including a current 25% tariff on List 1, List 2 and List 3 goods, which lists cover certain materials and/or products that we import from China.

On May 16, 2019, Huawei Technologies Co.

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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.

Furthermore, the geopolitical and economic uncertainty and/or instability that may result from changes in the relationship among the United States, Taiwan and China, may, directly or indirectly, materially harm our business, financial condition and results of operations.

For example, certain of our suppliers are dependent on products sourced from Taiwan which has been distinguished in its prevalence in certain global markets, most specifically semiconductor manufacturing.

Hence, greater restrictions and/or disruptions of our suppliers’ ability to operate facilities and/or do business in and with Taiwan may increase the cost of certain materials and/or limit the supply of products sourced from Taiwan and may result in deterioration of our profit margins, a potential need to increase our pricing and, in so doing, may decrease demand for our products and thereby adversely impact our revenue or profitability.

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Due to the ongoing conflict between Russia and Ukraine, the U.S., E.U.

have broadened restrictions on exports to Russia, thereby blocking shipments of technology, telecommunications and consumer electronics products to Russia.

This caused us to suspend transactions in the region effective February 2022 and has negatively impacted our business in the region.

Sales in the region are not material to our total consolidated revenues or net income and we are not aware of any specific event or circumstances that would require an update to the estimates or judgments or a revision of the carrying value of assets or liabilities at this time.

However, these estimates may change, as new events occur and additional information becomes available.

Actual results may differ materially from these estimates assumptions or conditions due to risks and uncertainties, including the ongoing situation in Ukraine as well as the potential for additional trade actions or retaliatory cyber-attacks aimed at infrastructure or supply chains, the impact on our future operations and results in the region remains uncertain.

Failure to maintain satisfactory compliance with certain privacy and data protections laws and regulations may harm our business.

Complex local, state, national, foreign, and international laws and regulations apply to the collection, use, retention, protection, disclosure, transfer, and other processing of personal data.

These privacy laws and regulations are quickly evolving, with new or modified laws and regulations proposed and implemented frequently and existing laws and regulations subject to new or different interpretations.

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 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 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.

Further, there are five new state privacy laws that will go into effect in 2023, the California Privacy Rights Act, the Virginia Consumer Data Protection Act, the Utah Consumer Privacy Act, the Colorado Privacy Act and the Connecticut Data Privacy Act, and a number of other states are considering similar laws.

In addition, a federal privacy bill, called the American Data Privacy and Protection Act was recently published.

The new state privacy laws and proposed federal law 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.

The new and proposed privacy laws may result in further uncertainty and would require us to incur additional expenditures to comply.

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.

Information Security, Technology and Intellectual Property Risks

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

The internet has experienced an increase in cyber threats in the form of phishing emails, malware attachments and malicious websites.

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.

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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.

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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.

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, loss of customers or business, 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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No assurances can be given that our efforts to reduce the risk of such attacks will be successful.

The COVID-19 pandemic may adversely affect our systems, and the health of members of our internal IT team who monitor and address the cyber threats and attacks against VIAVI.

In particular, the internet is currently experiencing an increase in cyber threats during the COVID-19 pandemic in the form of phishing emails, malware attachments and malicious websites which seemingly offer information regarding COVID-19.

We have employed efforts to mitigate any potential impact that could result from increased cyber threats and the loss of members of our internal IT team and by providing our employees with enhanced awareness materials and training, updating our business continuity plans, and cross training staff.

Failure to maintain satisfactory compliance with certain privacy and data protections laws and regulations may subject us to substantial negative financial consequences and civil or criminal penalties.

Complex local, state, national, foreign, and international laws and regulations apply to the collection, use, retention, protection, disclosure, transfer, and other processing of personal data.

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

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 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.

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.

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

Our intellectual property rights may not be adequate to protect our products or product roadmaps.

We seek to protect our products and our product roadmaps in part by developing and/or securing proprietary rights relating to those products, including patents, trade secrets, know-how and continuing technological innovation.

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In the future licenses to third-party technology may not be available on commercially reasonable terms, if at all.

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Our products may be subject to claims that they infringe the intellectual property rights of others.

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If we fail to comply with such laws, we could face sanctions for such noncompliance, and our customers may refuse to purchase our products, which would have a materially adverse effect on our business, financial condition and results of operations.

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With respect to compliance with environmental laws and regulations in general, we have incurred, and in the future could incur, substantial costs for the cleanup of contaminated properties, either those we own or operate or to which we have sent wastes in the past, or to comply with such environmental laws and regulations.

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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.

Natural Disasters and Catastrophic Events

Our disclosures, initiatives and goals related to ESG matters expose us to numerous risks.

There is an increasing focus from U.S.

and foreign government agencies, certain investors, customers, consumers, employees, and other stakeholders concerning environmental, social and governance (“ESG”) matters.

We may communicate certain initiatives and goals, regarding environmental matters, diversity, responsible sourcing and social investments and other ESG matters, in our ESG Report, on our website, in our SEC filings, and elsewhere.

These initiatives and goals could be difficult and expensive to implement, and we could be criticized for the accuracy, adequacy, or completeness of the disclosure of our ESG initiatives.

Further, statements about our ESG initiatives and goals, and progress against those goals, may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change in the future.

In addition, we could be criticized for the scope or nature of such initiatives or goals, or for any revisions to these goals.

If our ESG-related data, processes and reporting are incomplete or inaccurate, or if we fail to achieve progress with respect to our ESG goals on a timely basis, or at all, our reputation, business, financial performance and growth could be adversely affected.

We may be subject to risks related to climate change, 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.

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

The geographic location of our Northern California offices and production facilities subject them to drought, 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.

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.

Moreover, Pacific Gas and Electric (PG&E), the public electric utility in our Northern California region, has previously implemented and may continue to implement 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.

We have recently and could continue to experience changes in our leadership team.

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.

Moreover, we may face new and unanticipated difficulties in attracting, retaining and motivating employees in connection with the change of our headquarters to Chandler, Arizona.

As remote work has become more available the competition for highly qualified talent has intensified.

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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Risks Related to our Liquidity and Indebtedness

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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.

For example, in December 2021, we entered into a $300 million asset-based secured credit facility which has certain limitations based on our borrowing capacity.

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.

Our notes increased our overall leverage and our convertible notes could dilute our existing stockholders and lower our reported earnings per share.

The issuance of our 1.00% Senior Convertible Notes due 2024, our 1.75% Senior Convertible Notes due 2023, and our 3.75% Senior Notes due 2029 (together 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.

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.

In addition, the holders of the 2023 and 2024 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.

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.

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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.

Our outstanding indebtedness may limit our operational and financial flexibility.

Our level of indebtedness could have important consequences, including:

• Impairing our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes;

• Requiring us to dedicate a substantial portion of our operating cash flow to paying principal and interest on our indebtedness, thereby reducing the funds available for operations;

• Limiting our ability to grow and make capital expenditures due to the financial covenants contained in our debt arrangements;

• Impairing our ability to adjust rapidly to changing market conditions, invest in new or developing technologies, or take advantage of significant business opportunities that may arise;

• Making us more vulnerable if a general economic downturn occurs or if our business experiences difficulties;

• Resulting in an event of default if we fail to satisfy our obligations under the Notes or our other debt or fail to comply with the financial and other restrictive covenants contained in the indentures governing the Notes, or any other debt instruments, which event of default could result in all of our debt becoming immediately due and payable and could permit certain of our lenders to foreclose on our assets securing such debt.

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We may not generate sufficient cash flow to meet our debt service and working capital requirements, which may expose us to the risk of default under our debt obligations.

We will need to implement our business strategy successfully on a timely basis to meet our debt service and working capital needs.

We may not successfully implement our business strategy, and even if we do, we may not realize the anticipated results of our strategy and generate sufficient operating cash flow to meet our debt service obligations and working capital needs.

In addition, our ability to make scheduled payments on our indebtedness, including the notes, is affected by general and regional economic, financial, competitive, business and other factors beyond our control, including the COVID-19 pandemic.

In the event our cash flow is inadequate to meet our debt service and working capital requirements, we may be required, to the extent permitted under the indentures covering the Notes and any other debt agreements, to seek additional financing in the debt or equity markets, refinance or restructure all or a portion of our indebtedness, sell selected assets or reduce or delay planned capital or operating expenditures.

Any insufficient cash flow may make it more difficult for us to obtain financing on terms that are acceptable to us, or at all.

Despite our current level of indebtedness, we and our subsidiaries may still be able to incur substantially more debt.

We and our subsidiaries may be able to incur significant additional indebtedness in the future.

Although the indentures that govern the Notes and the agreement that governs our secured credit facility contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial.

These restrictions also will not prevent us from incurring obligations that do not constitute indebtedness under the agreements governing our existing debt.

The terms of the indentures that govern the Notes and the agreement that governs our secured credit facility restrict our current and future operations.

The indentures governing the Notes and the agreement governing the secured credit facility contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including restrictions on our ability to:

• Incur or guarantee additional indebtedness;

• Incur or suffer to exist liens securing indebtedness;

• Make investments;

• Consolidate, merge or transfer all or substantially all of our assets;

• Sell assets;

• Pay dividends or other distributions on, redeem or repurchase capital stock;

• Enter into transactions with affiliates;

• Amend, modify, prepay or redeem subordinated indebtedness;

• Enter into certain restrictive agreements;

• Engage in a new line of business;

• Amend certain material agreements, including material leases and debt agreements;

• Enter into sale leaseback transactions.

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Our ability to use our net operating loss carryforwards to offset future taxable income may be subject to certain limitations and/or changes in regulations.

Changes in U.S.

federal income or other tax laws or the interpretation of tax laws, including the Inflation Reduction Act of 2022, as recently passed by Congress, may impact our tax liabilities.

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.

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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 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.

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.

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.

Our actual operating results may differ significantly from our guidance.

We release guidance in our quarterly earnings conference calls, quarterly earnings releases, or otherwise, regarding our future performance that represents our management’s estimates as of the date of release.

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

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.

Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release.

Actual results may vary from our guidance and the variations may be material.

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.

Certain provisions in our charter and under Delaware laws could hinder a takeover attempt.

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

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 “Legal Proceedings” in Note 18.

Commitments and Contingencies in the Notes to the Consolidated Financial Statements in Item 8.

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UNRESOLVED STAFF COMMENTS

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Not applicable.

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

What changed 10-K

Item 1A. Risk Factors