What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-06-08 compared with 2020-12-09 · 106 added, 128 removed, 188 unchanged (55% of the section changed)

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We make these forward-looking statements based upon information available on the date of this Quarterly Report on Form 10-Q, and we have no obligation (and expressly disclaim any such obligation) to update or alter any forward-looking statements, whether as a result of new information or otherwise except as otherwise required by securities regulations.

We are a leading developer of semiconductor solutions for video that enable high-definition, or HD, video capture, analysis, sharing and display.

In the last ten years, we have primarily focused on providing video and image processors for professional and consumer camera devices, such as internet protocol, or IP, security cameras, wearable sports cameras, drones and aftermarket automotive video recorders.

Over the last several years, our development efforts focused on creating advanced artificial intelligence, or AI, computer vision, or CV, algorithms and high-performance, low-power hardware platforms to enhance processing acceleration, which we refer to as our CVflow™ architecture.

The CVflow architecture supports a variety of computer vision algorithms, including stereovision, object identification and motion detection, obstacle detection and avoidance, terrain mapping technology, and face recognition, and allows customers to differentiate their products by porting their own algorithms and neural networks to our CVflow-based chips.

Our system-on-a-chip, or SoC, designs fully integrate HD video processing, image processing, AI, computer vision functionality, audio processing, and system functions onto a single chip, delivering exceptional video and image quality at high compression rates, differentiated functionality and low power consumption.

These computer vision-based technologies are allowing us to address a broader range of markets and applications requiring AI video features, including IP security cameras, automotive cameras, consumer cameras, and industrial and robotic markets and applications.

Our revenue over the last three years has been generated primarily from sales of our SoC solutions for incorporation into specialized video and image capture devices such as wearable sports cameras, automotive aftermarket cameras, IP security cameras and cameras incorporated into drones.

Our revenue from several of these markets, however, has recently exp erienced significant declines.

As a result, we believe that our future revenue growth, if any, will significantly depend upon our ability to expand within camera markets, particularly in the professional IP security and home security and monitoring camera markets, as well as emerging markets such as AI-enabled security cameras, AI-based driving applications, including auto-parking, driver monitoring systems, advanced blind spot detection, object detection, and deep learning algorithms for HD mapping solutions, OEM automotive advanced driver assistance systems , or ADAS, applications , and industrial and robotics markets.

We are a leading developer of low-power system-on-a-chip, or SoC, semiconductors providing powerful artificial intelligence, or AI, processing, advanced image signal processing and high-resolution video compression.

Since inception, we have primarily served human viewing applications with video and image processors for enterprise, public infrastructure and home applications, such as internet protocol, or IP, security cameras, sports cameras, wearables, aerial drones, and aftermarket automotive video recorders.

In the last several years, our development efforts have focused on creating advanced AI technology that enables edge devices to visually perceive the environment and make decisions based on the data collected from cameras and, most recently, other types of sensors.

This category of AI technology is known as computer vision, or CV, and our CV SoCs integrate our state-of-the-art video processor technology together with our recently developed deep learning neural network processing technology, which we refer to as CVflow™.

The CVflow-architecture supports a variety of CV algorithms, including object detection, classification and tracking, semantic and instance segmentation, image processing, stereo object detection, terrain mapping, and face recognition.

CVflow can process other sensor modalities including lidar and radar, and allows customers to differentiate their products by porting their own, or third party, neural networks and/or classical CV algorithms to our CVflow-based SoCs.

Our SoC designs fully integrate AI, computer vision functionality, HD video processing, image processing, audio processing, and system functions onto a single chip, delivering exceptional video and image quality at high compression rates, differentiated functionality and low power consumption.

These CV-based technologies are allowing us to address a broader range of markets and applications requiring AI video features, including IP security cameras, a variety of automotive cameras, consumer cameras, and industrial and robotic markets and applications.

We anticipate that our CV technology will also enable us to capture more content per electronic system.

O ur development efforts are focused on SoCs that provide both human viewing and computer vision functionality.

As a result, we believe that our future revenue growth, if any, will significantly depend upon our ability to expand within camera markets with our AI and computer vision technology, particularly in the professional IP security and home security and monitoring camera markets, as well as emerging markets such as AI-enabled security cameras, AI-based driving applications, including driver monitoring systems, advanced blind spot detection, object detection, and deep learning algorithms for HD mapping solutions, OEM automotive advanced driver assistance systems , or ADAS, applications, and industrial and robotics markets.

We expect our research and development expenditures to increase in comparison to prior periods as we devote additional resources to the development of innovative video and image processing solutions with increased functionality, such as AI and CV capabilities, and as we target new markets .

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Our sales efforts are typically directed to the OEM of the product that will incorporate our video and image processing solution, but the eventual design and incorporation of our SoC into the product may be handled by an ODM or Tier-1 supplier on behalf of the OEM.

Volume production may begin within six to 18 months after a design win, depending on the complexity of our customer’s product and other factors upon which we may have little or no influence.

Volume production may begin within 9 to 18 months after a design win, depending on the complexity of our customer’s product and other factors upon which we may have little or no influence.

In general, design cycles will be longer in the OEM automotive and industrial and robotics markets than in the IP security and consumer device markets.

Once our solutions have been incorporated into a customer’s design, they are likely to be used for the life cycle of the customer’s product.

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Even if we obtain a design win and our SoC remains a component through the life cycle of a customer’s product, the volume and timing of actual sales of our SoCs to the customer depend upon the production, release and market acceptance of that product, none of which are within our control.

A portable consumer device typically has a product life cycle of six to 18 months, while an IP security camera typically has a product life cycle of 12 to 24 months.

A portable consumer device typically has a product life cycle of 6 to 18 months, while an IP security camera typically has a product life cycle of 12 to 24 months.

We anticipate that product lifecycles will typically be longer than 24 months in the OEM automotive and industrial and robotics markets, as new product introductions occur less frequently in these markets.

F inancial Highlights and Trends

We recorded revenue of $56.1 million and $160.8 million for the three and nine months ended October 31, 2020, respectively.

This represented a decrease of 17.4% and 6.2% for the three and nine months ended October 31, 2020, respectively, as compared to the same periods in the prior fiscal year.

The decreases in revenue were primarily attributable to lower revenue from the professional IP security camera and automotive markets.

In the professional IP security camera market, despite continued growth in the North America and Asia regions in fiscal year 2021, lower demand from our two largest China customers caused by higher inventory build-up in fiscal year 2020 and escalated trade tensions between the United States and China, together with less demand from the Europe region, resulted in a significant revenue decrease in this market.

The decreased revenue in the automotive markets was primarily due to an overall slowdown in the automotive industry.

The decreased revenue was partially offset by increased revenue in the consumer IP security camera and consumer markets, including drone and wearable camera markets.

In the consumer IP security camera market, revenue growth continued to be led by the home security and monitoring market in the North America region.

In the consumer markets, incorporation of our solutions into newly launched products from Dajiang Innovation Technology Inc., or DJI, resulted in a ramp of SoC shipments in the third quarter of fiscal year 2021, partially offset by decreased revenue in the sports camera market.

While revenue declined in the three and nine months ended October 31, 2020, respectively, we experienced sustained demand for our new CV-based solutions in the professional IP security camera market, generated revenue from CV-based solutions in the automotive OEM sensing market and made initial shipments of our CV-based solutions into the consumer IP security camera and automotive aftermarket in fiscal year 2021.

We recorded operating losses of $16.2 million and $47.2 million for the three and nine months ended October 31, 2020, respectively, as compared to operating losses of $7.2 million and $35.8 million for the three and nine months ended October 31, 2019, respectively.

In addition to the declines in revenue, the increased operating losses were also attributable to increased operating expenses, partially offset by increased gross margin.

The increase in expenses primarily related to increased employee benefit expense, SoC development cost as well as research and development grants from a foreign government in fiscal year 2020 that did not recur in fiscal year 2021.

The increased expenses were partially offset by decreased travel expense, consulting services and a COVID-19-related foreign subsidy granted in the second quarter of fiscal year 2021.

We generated cash flows from operating activities of $18.3 million for the nine months ended October 31, 2020, as compared to $35.3 million for the nine months ended October 31, 2019.

The decreased cash flows from operating activities were primarily due to increased net loss adjusted by non-cash expenses and decreased cash receipts associated with the timing of payments from customers.

The decreased cash flows from operating activities were partially offset by decreased cash payments for other operating asset purchases and increased liabilities associated with the timing of payments to suppliers and authorities.

On March 16, 2020, we repurchased a total of 25,719 of our ordinary shares for approximately $1.0 million in cash.

On May 29, 2020, our Board of Directors approved an extension of the repurchase program for an additional twelve months ending June 30, 2021.

There were no shares repurchased for the three months ended October 31, 2020.

As of October 31, 2020, there was approximately $49.0 million available for repurchases through June 30, 2021.

Financial Highlights and Trends

We recorded revenue of $70.1 million for the three months ended April 30, 2021, an increase of 28% as compared to the same period in the prior fiscal year.

The increase in revenue was primarily attributable to higher revenue from the IP security, automotive and wearable camera markets.

In the professional IP security camera market, despite lower demand from one of our largest China customers, continued growth elsewhere in the Asia and North America regions, together with increased demand from the Europe region, resulted in a significant revenue increase in this market.

In the home IP security camera market, revenue growth continued to be led by the North America region.

The increased revenue in the automotive markets, including both automotive OEM and aftermarket applications, was primarily due to a recovery in the automotive industry in the Asia region.

For the three months ended April 30, 2021, demand for our CV-based solutions in the IP security camera and automotive OEM markets continued to grow.

The increased revenue from the IP security, automotive and wearable camera markets was partially offset by decreased revenue in the consumer device markets, including aerial drone and sports camera markets.

We recorded an operating loss of $10.1 million for the three months ended April 30, 2021, as compared to an operating loss of $15.6 million for the three months ended April 30, 2020.

The decreased operating loss was primarily due to increases in revenue and gross profit, partially offset by increased operating expenses.

The increased operating expenses, mainly in support of new applications for the automotive markets as well as the development of computer vision-based solutions, related primarily to increased engineering headcount and stock-based compensation expenses, partially offset by decreased chip tape-out costs due to the timing, complexity and number of chips in development.

We incurred cash outflows from operating activities of $4.5 million for the three months ended April 30, 2021, as compared to cash inflows from operating activities of $7.6 million for the three months ended April 30, 2020.

The decreased cash flows from operating activities were primarily due to increased inventory purchases associated with longer supply chain lead times, increased accounts receivable associated with the timing of sales and decreased liabilities due to the timing of payments to our suppliers.

The decreased cash flows were partially offset by decreased net loss.

Factors Affecting Our Performance

COVID-19 Could Adversely Affect our Business in a Material Way.

Spread of COVID-19 Could Adversely Affect our Business in a Material Way.

The COVID-19 pandemic has resulted in significant governmental measures being implemented to control the spread of the virus, including, among others, restrictions on travel and the imposition of remote or work from home conditions in many of the locations where we have offices.

While we have not yet experienced a significant disruption of our operations as a result of the COVID-19 pandemic, if the remote or work from home conditions in any of our offices continues for an extended period of time, we may experience delays in product development, a decreased ability to support our customers, reduced design win activity, and overall lack of productivity.

Similarly, while we have not yet experienced a major disruption in our supply chain as a result of the COVID-19 pandemic, we are experiencing longer manufacturing times that, if they persist or worsen, could impact our ability to meet our customers’ demand for our solutions and negatively impact our revenue.

Moreover, if there is a significant outbreak that impacts Samsung Electronic Corporation’s ability to manufacture our SoCs or our third-party contractors’ ability to assemble, test and ship our products, we could experience delays or reductions in our ability to ship products to our customers.

The pandemic may also impact our customers’ ability to manufacture their products, support their customers or reduce or delay demand for their products, which could, in turn, reduce such customers’ demand for our solutions.

For example, in the nine months ended October 31, 2020, we saw an overall slowdown in the automotive industry which negatively impacted our revenue related to our computer vision-based solutions in the OEM video recorder market.

Similarly, while we have not yet experienced a major disruption in our supply chain as a result of the COVID-19 pandemic, we are experiencing significantly longer manufacturing times that, if they persist or worsen, could impact our ability to meet our customers’ demand for our solutions and negatively impact our revenue.

Moreover, if there is a significant COVID-19 outbreak that impacts Samsung Electronic Corporation’s ability to manufacture our SoCs or our third-party contractors’ ability to assemble, test and ship our products, we could experience delays or reductions in our ability to ship products to our customers.

For example, Taiwan has recently experienced a significant rise in cases of COVID-19 that, if such conditions persist or worsen, could impact our third-party contractors’ ability to assemble, test and ship our products and negatively impair our operations and financial results.

While we cannot quantify specific impacts of the COVID-19 pandemic or actions taken by governments and businesses in response thereto, our results of operations and financial condition may be negatively affected if we encounter significant supply chain problems, reductions in demand due to our customers or end customers having problems, or other unexpected COVID-19 ramifications.

Political and Trade Relations Between the United States and China Could Adversely Affect our Business in a Material Way.

Trade tensions between the United States and China have been escalating, which has, in our view, created and will continue to create an uncertain business environment.

If additional tariffs or trade restrictions are imposed on our SoC solutions or the products of our customers, or trade restrictions are imposed on our ability to conduct business with certain customers, there could be a negative impact on our operations and financial performance.

For instance, during the nine months ended October 31, 2020, lower demand from our two largest China customers r esulted in our revenue decreasing in the professional IP security camera market.

Even in the absence of new tariffs or trade restrictions, it is possible that China customers or potential customers could take actions to reduce dependence on the supply of components subject to United States trade laws, including our solutions.

There are also risks that the Chinese government may, among other things, require the use of local suppliers, compel companies that do business in China to partner with local companies to conduct business and provide incentives to government-backed local customers to buy from local suppliers.

In addition, the escalating social and political tensions in Hong Kong could, in the future, impact the operation of our warehouse facility in Hong Kong, through which a substantial majority of our finished SoCs are shipped to customers or logistic partners.

C ontinued deterioration in political, social or economic conditions in Hong Kong or future actions by the Chinese or U.S.

governments , could possibly result in business interruptions, substantially delayed or lost sales, loss of inventory, or increased expenses .

The materialization of these risks could have a material adverse effect on our business.

Ability to Capitalize on Computer Vision Trends .

We expect that computer vision functionality will become an increasingly important requirement in many of our current and future markets, including IP security, automotive, and industrial and robotics, and certain consumer markets.

As a result, we believe that our ability to develop advanced AI computer vision technology, enable and support customer product development in emerging applications, such as ADAS, advanced blind spot detection, object detection, people recognition, retail analytics, and machine learning, and gain customer acceptance of our technology platform and solutions, will be critical to our future success.

Moreover, achieving design wins, particularly for computer vision-centric applications in the IP security, automotive, and industrial and robotics markets, is vital to our ability to generate revenue growth.

Ability to Capitalize on AI and Computer Vision Trends .

We expect that AI and computer vision functionality will become an increasingly important requirement in many of our current and future markets, including IP security, automotive, industrial and robotics, and certain consumer markets.

As a result, we believe that our ability to develop advanced AI computer vision technology, enable and support customer product development in emerging applications, such as ADAS, advanced blind spot detection, object detection, classification and tracking, people recognition, retail analytics, and machine learning, and gain customer acceptance of our technology platform and solutions will be critical to our future success.

Moreover, achieving design wins, particularly for computer vision-centric applications in the IP security, automotive, industrial and robotics markets, is vital to our ability to generate revenue growth.

As such, we closely monitor design wins by customer and end market.

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To compete successfully, we must design, develop, market and sell enhanced solutions with increased levels of performance and functionality that meet the expectations of our customers.

As such, we continuously invest in our research and development projects, especially CV technologies.

As such, we continuously invest in our research and development projects, especially AI and computer vision technologies.

However, failure to anticipate or timely develop new or enhanced solutions in response to technology shifts and trends could result in decreased revenue and our competitors achieving design wins we sought.

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For example, improved smartphone video capture capabilities led to the decline of video cameras aimed at the video and image capture market.

The current video and image capture market is now characterized by a greater volume of more specialized video and image capture devices that are less likely to be replaced with smartphones, such as wearable, IP security, drone and automotive cameras.

This increasing specialization of video capture devices has changed our customer base and end markets and has impacted our revenue.

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Continued Concentration of Revenue by End Market .

Historically, our revenue has been significantly concentrated in a small number of end markets and we developed technologies to provide solutions for new markets as they emerged, such as the sports camera, IP security, drone and automotive video recorder camera markets.

Historically, our revenue has been significantly concentrated in a small number of end markets and we developed technologies to provide solutions for new markets as they emerged, such as the sports camera, IP security, aerial drone and automotive video recorder camera markets.

Since fiscal year 2018, the professional and consumer IP security camera markets and automotive markets, including the OEM and aftermarket video recorder market, have been our largest end markets and sales into these markets collectively generated the majority of our revenue.

We believe, however, that continued expansion into new markets is required to facilitate revenue growth and customer diversification.

We have recently introduced solutions to address emerging applications and markets, such as the incorporation of CV functionalities for AI-enabled security cameras, AI-based driving applications and industrial and robotics markets.

We have recently introduced solutions to address emerging applications and markets, such as the incorporation of AI and computer vision functionalities for AI-enabled security cameras, AI-based driving applications and industrial and robotics markets.

While we will continue to seek to expand our end market exposure, we anticipate that sales to a limited number of end markets will continue to account for a significant percentage of our total revenue for the foreseeable future.

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Our ability to capitalize on these trends by supporting our end customers in the development of connected peripherals that seamlessly cooperate with other connected devices and allow consumers to distribute and share video and images with online media platforms is critical for our success.

We have added wireless communication functionality into our solutions for wearable, IP security, drone and automotive video recorder cameras.

We have added wireless communication functionality into our solutions for wearable, IP security, aerial drone and automotive video recorder cameras.

The combination of our compression technology with wireless connectivity enables wireless video streaming and uploading of videos and images to the Internet.

Our solutions enable IP security camera systems to stream video content to either cloud infrastructure or connected mobile devices, and our solutions for wearable and drone cameras allow consumers to quickly stream or upload video and images to social media platforms.

Our solutions enable IP security camera systems to stream video content to either cloud infrastructure or connected mobile devices, and our solutions for wearable and aerial drone cameras allow consumers to quickly stream or upload video and images to social media platforms.

Sales Volume .

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We estimate our customers’ product life cycles based on the customer, type of product and end market.

We typically commence commercial shipments from six to 18 months following a design win;

We typically commence commercial shipments from 9 to 18 months following a design win;

however, in some markets, lengthier product and development cycles are possible, depending on the scope and nature of the project, such as in the automotive OEM market.

A portable consumer device typically has a product life cycle of six to 18 months, and an IP security camera typically has a product life cycle of 12 to 24 months.

A portable consumer device typically has a product life cycle of 6 to 18 months, and an IP security camera typically has a product life cycle of 12 to 24 months.

We anticipate that product development and product life cycles will typically be longer than 24 months in the OEM automotive, Tier-1 automotive suppliers and robotics markets, as new product introductions typically occur less frequently in these markets.

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The following table sets forth a summary of our statement of operations for the periods indicated:

Three Months Ended October 31,

Nine Months Ended October 31,

Three Months Ended April 30,

(dollars in thousands)

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Loss before income taxes

Provision (benefit) for income taxes

Provision for income taxes

The following table sets forth operating results as a percentage of revenue of each line item for the periods indicated:

Three Months Ended October 31,

Nine Months Ended October 31,

Three Months Ended April 30,

Cost of revenue

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Loss before income taxes

Provision (benefit) for income taxes

We derive substantially all of our revenue from the sale of HD and Ultra HD video and image processing SoC solutions to IP security camera OEMs, IP security camera ODMs, OEM automotive or Tier-1 automotive suppliers, either directly or through our distributors.

Provision for income taxes

In recent years, our SoC solutions have been primarily used in camera markets, such as IP security, automotive video recorder, drone and wearable cameras.

Although we expect these camera markets, in particular the IP security and automotive video recorder markets, to continue to generate revenue for the foreseeable future, we have recently introduced new SoCs targeting emerging CV applications in the IP security camera, OEM automotive and industrial and robotics markets.

We derive a substantial portion of our revenue from sales made indirectly through one of our distributors, Wintech Microelectronics Co., Ltd., or Wintech, and directly to one of our ODM customers, Chicony Electronics Co., Ltd., or Chicony.

We have historically experienced seasonal fluctuations in our quarterly revenue with our third fiscal quarter normally being the highest revenue quarter.

Although we expect these camera markets, in particular the IP security and automotive video recorder markets, to continue to generate revenue for the foreseeable future, we have recently introduced new SoCs targeting emerging AI and computer vision applications in the IP security camera, OEM automotive, industrial and robotics markets.

We derive a substantial portion of our revenue from sales made indirectly through one of our distributors, WT Microelectronics Co., Ltd., formerly Wintech Microelectronics Co., Ltd., or Wintech, and directly to one of our ODM customers, Chicony Electronics Co., Ltd., or Chicony.

We have historically experienced seasonal fluctuations in our quarterly revenue with our third fiscal quarter normally being the higher revenue quarter.

This fluctuation has been driven primarily by increased sales in IP security and consumer camera markets as our customers build inventories in preparation for the holiday shopping season.

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As a result, the composition and timing of our revenue may differ meaningfully during periods of technology or consumer preference changes.

We expect shifts in consumer use of video capture to continue to change over time, as AI and CV specialized use cases emerge and video capture continues to proliferate.

We expect shifts in consumer use of video capture to continue to change over time, as AI and computer vision specialized use cases emerge and video capture continues to proliferate .

Cost of Revenue and Gross Margin

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Other income, net, consists primarily of interest and other income from debt security investments and cash deposits with financial institutions.

Provision (Benefit) for Income Taxes

Provision for Income Taxes

We are incorporated and domiciled in the Cayman Islands and also conduct business in several countries such as the United States, China, Taiwan, Hong Kong, Italy, South Korea and Japan, and we are subject to taxation in those jurisdictions.

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In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.

Comparison of the Three and Nine Months Ended October 31, 2020 and 2019

Three Months Ended October 31,

Nine Months Ended October 31,

Comparison of the Three Months Ended April 30, 2021 and 2020

Three Months Ended April 30,

(dollars in thousands)

The decreased revenue for the three and nine months ended October 31, 2020, as compared to the same periods in the prior fiscal year, was primarily attributable to lower revenue from the professional IP security camera and automotive markets.

The decreased revenue in the automotive markets was primarily due to an overall slowdown in the automotive industry.

The decreased revenue was partially offset by increased revenue in the consumer IP security camera and consumer markets, including drone and wearable camera markets.

In the consumer IP security camera market, revenue growth continued to be led by the home security and monitoring market in the North America region.

In the consumer markets, incorporation of our solutions into newly launched products from DJI resulted in a ramp of SoC shipments in the third quarter of fiscal year 2021, partially offset by decreased revenue in the sports camera market.

The increased revenue for the three months ended April 30, 2021, as compared to the same period in the prior fiscal year, was primarily attributable to higher revenue from the IP security, automotive and wearable camera markets.

In the professional IP security camera market, despite lower demand from one of our largest China customers, continued growth elsewhere in the Asia and North America regions together with increased demand from the Europe region, resulted in a significant revenue increase in this market.

In the home IP security camera market, revenue growth continued to be led by the North America region.

The increased revenue in the automotive markets, including both automotive OEM and aftermarket applications, was primarily due to a recovery in the automotive industry in the Asia region.

For the three months ended April 30, 2021, demand for our CV-based solutions in the IP security camera and automotive OEM markets continued to grow.

Incorporation of our solutions into newly launched products from Shenzhen Dajiang Baiwang Technology Co., Ltd., or DJI, resulted in higher demand in the prior fiscal year but did not recur in the current fiscal period.

Cost of Revenue and Gross Margin

Three Months Ended October 31,

Nine Months Ended October 31,

Three Months Ended April 30,

(dollars in thousands)

Cost of revenue

Cost of revenue decreased for the three and nine months ended October 31, 2020, as compared to the same periods in the prior fiscal year, primarily due to lower SoC shipments in the professional IP security camera market, partially offset by increased shipments in the consumer IP security camera and consumer markets.

Gross margin increased for the three and nine months ended October 31, 2020, as compared to the same periods in the prior fiscal year, primarily due to gross margin improvement in the professional IP security camera market as a result of customer concentration shift from the China region to the North America and Asia regions other than China.

Cost of revenue increased for the three months ended April 30, 2021, as compared to the same period in the prior fiscal year, primarily due to increased revenue, partially offset by favorable product mix and sales from previously reserved inventory.

Gross margin increased for the three months ended April 30, 2021, as compared to the same period in the prior fiscal year, primarily due to gross margin improvement in the professional IP security camera market as a result of a customer concentration shift from the China region to the North America and Asia regions other than China.

Research and Development

Three Months Ended October 31,

Nine Months Ended October 31,

Three Months Ended April 30,

(dollars in thousands)

Research and development

Research and development expense increased for the three and nine months ended October 31, 2020, as compared to the same periods in the prior fiscal year, primarily due to increased employee benefit expense and SoC development cost.

For the three and nine months ended October 31, 2020, employee benefit expense increased by approximately $1.3 million and $1.9 million, respectively, as a result of issuance of stock awards, employee benefit programs and an increase in headcount.

Our engineering headcount was 568 at October 31, 2020 compared to 560 at October 31, 2019.

SoC development cost increased by $2.7 million and $4.2 million for the three and nine months ended October 31, 2020, respectively, due to project timing and the number of chips in development.

The increased expense was also attributable to approximately $0.5 million and $3.7 million of research and development grants from a foreign government during the three and nine months ended October 31, 2019, respectively, that did not recur in the current fiscal year.

The increased expense was partially offset by decreased travel expense and contractor services caused by COVID-19 pandemic restrictions.

For the three and nine months ended October 31, 2020, travel expense and contractor services decreased by an aggregate of $0.4 million and $1.4 million, respectively .

For the nine months ended October 31, 2020, approximately $0.7 million of a COVID-19-related subsidy was granted by a foreign government.

Research and development expense increased for the three months ended April 30, 2021, as compared to the same period in the prior fiscal year, primarily due to increased employee benefit expense.

For the three months ended April 30, 2021, employee benefit expense increased by approximately $3.8 million as a result of issuance of stock awards, employee benefit programs and an increase in headcount.

Our engineering headcount was 598 at April 30, 2021 compared to 564 at April 30, 2020.

SoC development related cost was flat for the three months ended April 30, 2021 due to the timing, complexity and number of chips in development.

Selling, General and Administrative

Three Months Ended October 31,

Nine Months Ended October 31,

Three Months Ended April 30,

(dollars in thousands)

Selling, general and administrative

Selling, general and administrative expense increased for the three and nine months ended October 31, 2020, as compared to the same periods in the prior fiscal year, primarily due to approximately $1.0 million and $1.6 million of additional employee benefit expense, respectively, as a result of issuance of stock awards and employee benefit programs.

For the nine months ended October 31, 2020, the increase was also attributable to approximately $1.6 million of additional professional services and facility related cost.

The increased expense was partially offset by approximately $0.4 million and $1.2 million of less expenditures on travel and marketing activities for the three and nine months ended October 31, 2020, respectively, caused by COVID-19 pandemic restrictions.

Selling, general and administrative expense increased for the three months ended April 30, 2021, as compared to the same period in the prior fiscal year, primarily due to approximately $2.7 million of additional employee benefit expense as a result of issuance of stock awards, employee benefit programs and an increase in headcount.

Our selling, general and administrative headcount increased from 175 at April 30, 2020 to 187 at April 30, 2021 to support our business development in IP security, automotive OEM and robotics markets .

Other Income, Net

Three Months Ended October 31,

Nine Months Ended October 31,

Three Months Ended April 30,

(dollars in thousands)

Other income, net

The decrease in other income, net, for the three and nine months ended October 31, 2020, as compared to the same periods in the prior fiscal year, was primarily due to decreases of approximately $1.3 million and $3.2 million, respectively, in interest and other income from our deposits and debt security investments as a result of lower interest rates and a higher number of debt securities purchased at a premium in the current fiscal year.

Provision (Benefit) for Income Taxes

Three Months Ended October 31,

Nine Months Ended October 31,

The decrease in other income, net, for the three months ended April 30, 2021, as compared to the same period in the prior fiscal year, was primarily due to lower interest from our cash deposits and lower yields from our debt security investments.

Provision for Income Taxes

Three Months Ended April 30,

(dollars in thousands)

Provision (benefit) for income taxes

Provision for income taxes

Effective tax rate

The quarterly income taxes reflect an estimate of the corresponding fiscal year’s annual effective tax rate and include, when applicable, adjustments from discrete tax items arising in that quarter.

The increase in income tax expense for the three and nine months ended October 31, 2020, as compared to the same periods in the prior fiscal year, was primarily due to a decrease in the proportion of profits generated in lower tax jurisdictions, as well as an increase in non-deductible stock-based compensation.

The increase in income tax expense for the three months ended April 30, 2021, as compared to the same period in the prior fiscal year, was primarily due to a decrease in the proportion of profits generated in lower-tax jurisdictions, partially offset by a $3.4 million increase in the U.S.

federal research tax credit as well as an increase in tax benefits from excess stock-based compensation deductions.

Liquidity and Capital Resources

As of October 31, 2020 and January 31, 2020, we had cash, cash equivalents and marketable debt securities of approximately $423.6 million and $404.7 million, respectively.

As of April 30, 2021 and January 31, 2021, we had cash, cash equivalents and marketable debt securities of approximately $435.5 million and $440.7 million, respectively.

We invest in highly liquid, short-term marketable debt securities and hold these investments as available-for-sale securities.

As of October 31, 2020, these securities had a fair value of approximately $214.4 million with immaterial unrealized losses caused by market fluctuations.

As of April 30, 2021, these securities had a fair value of approximately $214.9 million with immaterial unrealized losses caused by market fluctuations.

The following table summarizes our cash flows for the periods indicated:

Nine Months Ended October 31,

Three Months Ended April 30,

(in thousands)

Net cash provided by operating activities

Net cash provided by (used in) investing activities

Net cash provided by financing activities

Net cash provided by (used in) operating activities

Net cash used in investing activities

Net cash provided by (used in) financing activities

Net increase (decrease) in cash, cash equivalents and restricted cash

Net Cash Provided by Operating Activities

Net cash provided by operating activities decreased for the nine months ended October 31, 2020, as compared to the same period in the prior fiscal year, primarily due to increased net loss adjusted by non-cash expenses and decreased cash receipts associated with the timing of payments from customers.

Net Cash Provided by (Used in) Investing Activities

Net cash used in investing activities increased for the nine months ended October 31, 2020, as compared to the same period in the prior fiscal year, primarily due to approximately $14.3 million of additional investments in debt securities, as well as approximately $27.9 million less cash receipts from the sale and maturity of debt securities.

Net Cash Provided by Financing Activities

Net cash provided by financing activities decreased for the nine months ended October 31, 2020, as compared to the same period in the prior fiscal year, primarily due to approximately $3.0 million of less cash proceeds from option exercises and employee stock purchase withholdings, $1.0 million of cash used for the repurchasing of our ordinary shares under the stock repurchase program, as well as an additional $0.8 million of payment for intangible asset purchases.

Net Cash Provided by (Used in) Operating Activities

Net cash used in operating activities increased for the three months ended April 30, 2021, as compared to the same period in the prior fiscal year, primarily due to increased inventory purchases associated with longer supply chain lead times, increased accounts receivable associated with the timing of sales and decreased liabilities due to the timing of payments to our suppliers.

The decreased cash flows were partially offset by decreased net loss.

Net Cash Used in Investing Activities

Net cash used in investing activities increased for the three months ended April 30, 2021, as compared to the same period in the prior fiscal year, primarily due to approximately $8.0 million of additional investments in debt securities, as well as approximately $1.5 million of additional payments for tangible and intangible assets purchase, partially offset by approximately $0.5 million of net cash receipts from the sale and maturity of debt securities.

Net Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities increased for the three months ended April 30, 2021, as compared to the same period in the prior fiscal year, primarily due to approximately $2.0 million of additional cash proceeds from option exercises and employee stock purchase withholding and $1.0 million of cash used for repurchasing our ordinary shares under the stock repurchase program for the three months ended April 30, 2020 but which did not recur in the current fiscal period.

The increase was partially offset by approximately $0.7 million of additional payments for intangible assets.

Stock Repurchase Program

Since the inception of the stock repurchase programs in June 2016, a total of $275.0 million has been authorized for repurchase, and to date, we have repurchased a total of 4,011,595 shares for approximately $175.8 million in cash under the programs.

As of October 31, 2020, $49.0 million remained available for repurchases under the current repurchase program through June 30, 2021.

No ordinary shares were repurchased in the three months ended April 30, 2021.

As of April 30, 2021, $49.0 million remained available for repurchases under the current repurchase program through June 30, 2021.

Repurchases under the program may be made from time-to-time through open market purchases, 10b5-1 plans or privately negotiated transactions subject to market conditions, applicable legal requirements and other relevant factors.

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Operating and Capital Expenditure Requirements

As of October 31, 2020, we had cash, cash equivalents and marketable debt securities of approximately $423.6 million.

As of April 30, 2021, we had cash, cash equivalents and marketable debt securities of approximately $435.5 million.

We believe that our existing cash balances will be sufficient to meet our anticipated cash requirements through at least the next 12 months.

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Manufacturing Purchase Obligations

As of October 31, 2020, we had purchase obligations with our independent contract manufacturers of $37.1 million.

Except as described above with respect to the manufacturing purchase obligations, there were no other material changes in our contractual obligations, commitments and contingencies from those disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2020.

As of April 30, 2021, we had purchase obligations with our independent contract manufacturers of $67.6 million.

We signed a separate lease for additional space for our Shanghai office for a period of 40 months starting from August 1, 2021 through November 30, 2024.

The lease will be recorded as an operating right-of-use asset and corresponding operating lease liability in the balance sheet upon lease commencement on August 1, 2021.

T he total estimated future undiscounted cash payments for this additional lease are approximately $1.7 million.

Except as described above with respect to the manufacturing purchase obligations and lease, there were no other material changes in our contractual obligations, commitments and contingencies from those disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021.

Please see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations, Commitments and Contingencies” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021 for a description of our contractual obligations.

Off-Balance Sheet Arrangements

As of October 31, 2020, we did not engage in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.

As of April 30, 2021, we did not engage in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.

Recent Authoritative Accounting Guidance

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Critical Accounting Policies and Significant Management Estimates

There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the 2020 fiscal year filed with the SEC on March 27, 2020, except for the recently adopted accounting guidance on measurement of credit losses on financial instruments as discussed in Notes 1 and 2 of Notes to Condensed Consolidated Financial Statements.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis