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Item 1A. Risk Factors

2022-10-27 compared with 2022-05-05 · 158 added, 156 removed, 331 unchanged (49% of the section changed)

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Risk categories:

– Risks related to the effects of COVID-19 and other potential future public health crises, pandemics or similar events

– Risks related to our global operations, including global macroeconomic and market risks

– Risks related to sales, product development and manufacturing

– Risks related to our global operations

– Risks associated with our strategic transactions

– Risks associated with cybersecurity, intellectual property and litigation

– Risks related to the effects of COVID-19 and other potential future public health crises, pandemics or similar events

– Risks related to legal, regulatory, accounting, tax and compliance matters

– General risk factors

Risks related to the effects of COVID-19 and other potential future public health crises, pandemics or similar events.

Our financial condition and results of operations for fiscal 2022 and future periods may be adversely affected by the COVID-19 pandemic or other outbreak of infectious disease or similar public health threat.

We have significant manufacturing operations in the United States and contract manufacturing agreements in Asia, which were affected by the COVID-19 pandemic and the measures to try to contain it.

We initially experienced some limited disruptions in supply from some of our suppliers, although the disruptions to date have not been significant.

At some of our contract manufacturers in Asia, which include captive lines and contract packaging facilities, we have experienced, and may experience in the future, some disruptions in supply from containment measures.

Vaccine resistance, coupled with the emergence of fast-spreading variants and the potential waning effectiveness of vaccines, have introduced renewed uncertainty into whether additional measures will be implemented to combat the spread of COVID-19.

There is considerable uncertainty regarding such measures and potential future measures.

Restrictions on access to our manufacturing facilities or on our support operations or workforce, or similar limitations for our vendors and suppliers, and restrictions or disruptions of transportation, such as reduced availability of air transport, port closures, and increased border controls or closures, could limit our ability to meet customer demand, lead to increased costs and have a material adverse effect on our financial condition and results of operations.

The COVID-19 pandemic has significantly increased economic and demand uncertainty.

These uncertainties also make it more difficult for us to assess the quality of our product order backlog and to estimate future financial results.

The COVID-19 pandemic initially caused an economic slowdown, and the continued spread of COVID-19 and its variants could lead to a global recession, which could have a material adverse effect on demand for our products and on our financial condition and results of operations.

The spread of COVID-19 and its variants has caused us to modify our business practices (including employee travel, employee work locations, and cancellation of physical participation in meetings, events, and conferences), and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, partners, and suppliers.

There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus and its variants, and our ability to perform critical functions could be harmed.

In addition, in light of concerns about the spread of COVID-19 and its variants, our workforce has at times been operating at reduced levels at our manufacturing facilities and at the facilities of some of our contract manufacturers, which may continue to have an adverse impact on our ability to timely meet future customer orders.

The duration of the business disruption and related financial impact of the COVID-19 pandemic cannot be reasonably estimated at this time.

However, it may materially affect our ability to obtain raw materials, manage prices, manage customer credit risk, manufacture products or deliver inventory in a timely manner, and it also may impair our ability to meet customer demand for products, result in lost sales, additional costs, or penalties, or damage our reputation.

The extent to which COVID-19, its variants or any other health epidemic will further impact our operations and results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and its variants, the efficacy and effectiveness of vaccines, and the actions to contain the virus or treat its impact, among others.

Risks related to our global operations, including global macroeconomic and market risks

Our business may be adversely affected by the state of the global economy, uncertainties in global financial markets, our ability to access funding, and possible trade tariffs and trade restrictions.

Our operations and performance depend significantly on worldwide economic and geopolitical conditions.

Uncertainty about global economic conditions could result in customers postponing purchases of our products and services in response to tighter credit, unemployment, negative financial news and/or declines in income or asset values and other macroeconomic factors, which could have a material negative effect on demand for our products and services and, accordingly, on our business, results of operations or financial condition.

For example, current global financial markets continue to reflect uncertainty, which has been heightened by the COVID-19 pandemic and the ongoing military conflict between Russia and Ukraine.

Given these uncertainties, there could be further disruptions to the global economy, financial markets and consumer confidence.

If economic conditions deteriorate unexpectedly, our business and results of operations could be materially and adversely affected.

For example, our customers, including our distributors and their customers, may experience difficulty obtaining the working capital and other financing necessary to support historical or projected purchasing patterns, which could negatively affect our results of operations.

Recent global economic slowdowns could continue and potentially result in certain economies dipping into economic recessions, including in the United States.

Additionally, increased inflation around the world, including in the United States, applies pressure to our costs.

Continued economic slowdowns or recessions and inflationary pressures could have a negative impact on our business, including decreased demand, increased costs, and other challenges.

Government actions to address economic slowdowns and increased inflation, including increased interest rates, also could result in negative impacts to our growth.

General trade tensions between the United States and China have been escalating, and any economic and political uncertainty caused by the United States tariffs imposed on goods from China, among other potential countries, and any corresponding tariffs or currency devaluations from China or such other countries in response, has negatively impacted, and may in the future, negatively impact, demand and/or increase the cost for our products.

Additionally, Russia’s invasion of Ukraine in early 2022 triggered significant sanctions from the U.S.

and European countries.

Resulting changes in U.S.

trade policy could trigger retaliatory actions by Russia, its allies and other affected countries, including China, resulting in a potential trade war.

Furthermore, if the conflict between Russia and Ukraine continues for a prolonged period of time, or if other countries, including the U.S., become involved in the conflict, we could face significant adverse effects to our business and financial condition.

For example, if our supply or customer arrangements are disrupted due to expanded sanctions or involvement of countries where we have operations or relationships, our business could be materially disrupted.

Further, the use of cyberattacks could expand as part of the conflict, which could adversely affect our ability to maintain or enhance our cyber-security and data protection measures.

Although we believe we have adequate liquidity and capital resources to fund our operations for at least the next 12 months, we expect to need additional funding to fully complete our intended expansion initiatives, which we may seek to obtain through, among other avenues, public or private equity offerings and debt financings.

If unfavorable capital market conditions exist, we may not be able to raise sufficient capital on favorable terms and on a timely basis, if at all.

If we issue equity or convertible debt securities to raise additional funds, our existing shareholders may experience dilution and the new equity or debt securities may have rights, preferences and privileges senior to those of our then existing shareholders.

If we incur additional debt, it may

impose financial and operating covenants that could restrict the operations of our business.

In a rising interest rate environment, debt financing will become more expensive and may have higher transactional and servicing costs.

In addition, our existing indebtedness may limit our ability to obtain additional financing in the future.

The potential inability to obtain adequate funding from debt or capital sources in the future could force us to self-fund strategic initiatives or even forego certain opportunities, which in turn could potentially harm our performance.

We are subject to risks related to international sales and purchases.

We expect that revenue from international sales will continue to represent a significant portion of our total revenue.

As such, a significant slowdown or instability in relevant foreign economies or lower investments in new infrastructure, could have a negative impact on our sales.

We also purchase a portion of the materials included in our products from overseas sources.

Our international sales and purchases are subject to numerous United States and foreign laws and regulations, including, without limitation, tariffs, trade sanctions, trade barriers, trade embargoes, regulations relating to import-export control, technology transfer restrictions, the International Traffic in Arms Regulation promulgated under the Arms Export Control Act, the Foreign Corrupt Practices Act and the anti-boycott provisions of the U.S.

Export Administration Act.

Government has imposed, and in the future may impose, restrictions on shipments to some of our current customers.

Government restrictions on sales to certain foreign customers will reduce company revenue and profit related to those customers in the short term and could have a potential long-term impact.

Our international sales are subject to variability as our selling prices become less competitive in countries with currencies that are declining in value against the U.S.

Dollar and more competitive in countries with currencies that are increasing in value against the U.S.

In addition, our international purchases can become more expensive if the U.S.

Dollar weakens against the foreign currencies in which we are billed.

We may in the future enter into foreign currency derivative financial instruments in an effort to manage or hedge some of our foreign exchange rate risk.

We may not be able to engage in hedging transactions in the future, and, even if we do, foreign currency fluctuations may still have a material adverse effect on our results of operations.

Our operations in foreign countries expose us to certain risks inherent in doing business internationally, which may adversely affect our business, results of operations or financial condition.

We have revenue, operations and contract manufacturing arrangements in foreign countries that expose us to certain risks.

For example, fluctuations in exchange rates may affect our revenue, expenses and results of operations as well as the value of our assets and liabilities as reflected in our financial statements.

We are also subject to other types of risks, including the following:

• protection of intellectual property and trade secrets;

• tariffs, customs, trade sanctions, trade embargoes and other barriers to importing/exporting materials and products in a cost-effective and timely manner, or changes in applicable tariffs or custom rules;

• the burden of complying with and changes in United States or international taxation policies;

• timing and availability of export licenses;

• rising labor costs;

• disruptions in or inadequate infrastructure of the countries where we operate;

• the impact of public health epidemics on employees and the global economy, such as COVID-19;

• difficulties in collecting accounts receivable;

• difficulties in staffing and managing international operations;

• the burden of complying with foreign and international laws and treaties.

For example, the United States has imposed significant tariffs on Chinese-made goods, which the Biden administration has previously indicated will largely remain in place.

The tariffs imposed on Chinese goods, among other potential countries and any corresponding tariffs from China or such other countries in response has, and may in the future, negatively impact demand and/or increase the costs for our products.

In some instances, we have received and may continue to receive incentives from foreign governments to encourage our investment in certain countries, regions or areas outside of the United States.

Government incentives may include tax rebates, reduced tax rates, favorable lending policies and other measures, some or all of which may be available to us due to our foreign operations.

Any of these incentives could be reduced or eliminated by governmental authorities at any time or as a result of our inability to maintain minimum operations necessary to earn the incentives.

Any reduction or elimination of incentives currently provided for our operations could adversely affect our business and results of operations.

These same governments also may provide increased incentives to or require production processes that favor local companies, which could further negatively impact our business and results of operations.

Changes in regulatory, geopolitical, social, economic, or monetary policies and other factors, including those which may result from the Biden administration and Democratic control of Congress, if any, may have a material adverse effect on our business in the future, or may require us to exit a particular market or significantly modify our current business practices.

For example, President Biden has proposed, among other changes to the tax code, an increase in the U.S.

corporate income tax rate from 21% to 28% and an increase of the U.S.

tax rate on foreign income from 10% to 21%.

In addition, the U.S.

Treasury Department supports the adoption of a global minimum corporate tax rate of at least 15%, which is under consideration in the U.S.

Congress following approval by the leaders of the G-20 in October 2021.

The plan, if enacted by the U.S.

and other nations, could result in a higher effective tax rate than is currently enacted.

Abrupt political change, terrorist activity and armed conflict pose a risk of general economic disruption in affected countries, which could also result in an adverse effect on our business and results of operations.

Risks related to sales, product development and manufacturing

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In order to manage our growth and business strategy effectively relative to the uncertain pace of adoption, we must continue to:

• maintain, expand, construct and purchase adequate manufacturing facilities and equipment, as well as secure sufficient third-party manufacturing resources, to meet customer demand, including specifically the expansion of our Silicon Carbide capacity with the opening of a state-of-the-art, automated 200mm capable Silicon Carbide device fabrication facility and an expansion of our materials factory;

• manage an increasingly complex supply chain (including managing the impacts of ongoing supply constraints in the semiconductor industry) that has the ability to supply an increasing number of raw materials, subsystems and finished products with the required specifications and quality, and deliver on time to our manufacturing facilities, our third-party manufacturing facilities, our logistics operations, or our customers;

• expand the capability of our information systems to support a more complex business, such as our current initiative to implement a new company-wide enterprise resource planning (ERP) system;

• access capital markets to fund our growth initiatives, including our ongoing and planned capacity expansions;

• expand the capability of our information systems to support a more complex business, such as our current implementation of a new company-wide enterprise resource planning (ERP) system;

• be successful in securing design-ins across our end markets, including automotive applications;

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There are also inherent execution risks in starting up a new factory or expanding production capacity, whether one of our own factories or that of our contract manufacturers, as well as risks to moving production to different contract manufacturers, that could increase costs and reduce our operating results.

In the fourth quarter of fiscal 2020, we started construction on a new Silicon Carbide device fabrication facility in Marcy, New York to complement the factory expansion underway at our United States campus headquarters in Durham, North Carolina.

In the fourth quarter of fiscal 2022, we opened a new Silicon Carbide device fabrication facility in Marcy, New York to complement the materials factory expansion underway at our United States campus headquarters in Durham, North Carolina.

We also commenced work on our new materials manufacturing facility in Siler City, North Carolina in the first quarter of fiscal 2023.

The establishment and operation of a new manufacturing facility or expansion of an existing facility involves significant risks and challenges, including, but not limited to, the following:

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Additionally, we face these same risks if we fail to allocate and effectively manage the resources necessary to build, implement, upgrade, integrate and sustain appropriate technology infrastructure over the longer term.

Variations in our production could impact our ability to reduce costs and could cause our margins to decline and our operating results to suffer.

All of our products are manufactured using technologies that are highly complex.

The number of usable items, or yield, from our production processes may fluctuate as a result of many factors, including but not limited to the following:

• variability in our process repeatability and control;

• contamination of the manufacturing environment;

• equipment failure, power outages, fires, flooding, information or other system failures or variations in the manufacturing process;

• lack of consistency and adequate quality and quantity of piece parts, other raw materials and other bill of materials items;

• inventory shrinkage or human errors;

• defects in production processes (including system assembly) either within our facilities or at our suppliers;

• any transitions or changes in our production process, planned or unplanned.

In the past, we have experienced difficulties in achieving acceptable yields on certain products, which has adversely affected our operating results.

We may experience similar problems in the future, and we cannot predict when they may occur or their severity.

In some instances, we may offer products for future delivery at prices based on planned yield improvements or increased cost efficiencies from other production advances.

Failure to achieve these planned improvements or advances could have a significant impact on our margins and operating results.

In addition, our ability to convert volume manufacturing to larger diameter substrates can be an important factor in providing a more cost-effective manufacturing process.

We continue to prepare for production using 200mm substrates and if we are unable to make this transition in a timely or cost-effective manner, our results could be negatively impacted.

Our operating results are substantially dependent on the acceptance of new products.

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• achievement of technology breakthroughs required to make commercially viable products;

• our ability to convert customer design-ins to sales of significant volume, and, if customer design-in activity does result in such sales, when such sales will ultimately occur and what the amount of such sales will be;

• the accuracy of our predictions for market requirements;

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If any of these or other similar factors becomes problematic, we may not be able to deliver and introduce new products in a timely or cost-effective manner.