Item 7. Management’s Discussion and Analysis
ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and related notes included in this Annual Report on Form 10-K. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties including those discussed under Part I, Item 1A, “Risk Factors.” These risks and uncertainties may cause actual results to differ materially from those discussed in the forward-looking statements.
Overview
We historically delivered comprehensive
WiFi as a Service platform to make everyone’s connected home safe and supportive for life and work.
Generally, our gross margin for a given product depends on a number
of factors, including the type of customer to whom we were selling. The gross margin for products sold to retailers tended to be higher
than for some of our other customers; but the sales, support, returns, and overhead costs associated with products sold to retailers also
tended to be higher.
Our cash and cash equivalents balance on December 31, 2023 was $709 thousand compared to $530 thousand on December 31, 2022. On December 31, 2023, we had no outstanding borrowings. Our working capital was $(0.8) million as of December 31, 2023.
The major changes in cash and cash equivalents during fiscal 2023 was a decrease of approximately $1.9 million in accounts receivables, a decrease of $15.5 million in inventory, an increase of $8.3 million in accounts payable, and a decrease of $3.2 million in accrued expenses. In fiscal 2023, the Company also had a net loss of $17.6 million, which contributed to a decrease in cash and cash equivalents.
The Company’s ability
to maintain adequate levels of liquidity depends in part on our ability to sell inventory on hand and collect related receivables. The
Company is evaluating options related to its liquidity. The Company will continue to monitor its costs in relation to its sales and adjust
its cost structure accordingly.
In the years ended December 31, 2023 and 2022, we generated net sales of $26.1 million and $50.6 million, respectively.
Recent Accounting Standards
Please refer to Note 2 of the Notes to the Consolidated Financial Statements, which is incorporated herein by reference.
Critical Accounting Policies and Estimates
Following is a discussion of what we view as our more significant accounting policies and estimates. As described below, management judgments and estimates must be made and used in connection with the preparation of our consolidated financial statements. We have identified areas where material differences could result in the amount and timing of our net sales, costs, and expenses for any period if we had made different judgments or used different estimates.
Revenue Recognition. We
primarily sell hardware products to computer peripherals retailers, computer product distributors, OEMs, and direct to consumers and other
channel partners via the Internet. The hardware products include cable modems and gateways, mobile broadband modems, wireless routers,
MoCA adapters and mesh home networking devices. We also sell the Minim subscription service that enables and secures a better-connected
home using the Minim AI-driven smart home WiFi management and security platform.
38
The SaaS was offered over a defined contract period, generally one year. These services were available as an on-demand application over the defined term. The agreements included service offerings, which deliver applications and technologies via cloud-based deployment models that we develop functionality for, provide unspecified updates and enhancements for, and host, manage, provide upgrades and support for the customers’ access by entering into solution agreements for a stated period. The monthly fees charged to the customers are based on the number of subscribers utilizing the services each month, and the revenue recognized generally corresponds to the monthly billing amounts as the services are delivered. Customers do not have the contractual right or ability to take possession of the hosted software.
We consider each product and each service contract to be a distinct performance obligation. Revenue is recognized when a performance obligation is satisfied, which occurs when control of the promised products or services is transferred to the customer in an amount that reflects the consideration we expect to receive in exchange for those products or services. Revenue from product sales is recognized at a point in time when management has determined that control has transferred to the customer, which is generally when legal title has transferred to the customer. Revenue from SaaS contracts is recognized as the output of the service is transferred to the customer over time, typically evenly over the contract term. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.
Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Judgment is also required to determine the stand-alone selling price (“SSP”) for each distinct performance obligation. We use an observable price to estimate SSP for items that are sold separately. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs.
Product Returns . Products are returned by retail stores and distributors for inventory balancing and warranty repair or replacements. Analyses of actual returned product are compared to analyses of the product return estimates. We have concluded that the current process of estimating the return reserve represents a fair measure with which to adjust revenue. Returned goods are variable and under ASC Topic 606, Revenue from Contracts with Customers, are estimated and recognized as a reduction of revenue as performance obligations are satisfied (e.g., upon shipment of goods). Under ASC Topic 606, the Company monitors pending authorized returns of goods and, if deemed appropriate, records the right of return asset accordingly.
Inventory Valuation and Cost of Goods Sold. Inventory is valued at the lower of cost, determined by the first-in, first-out method, or its net realizable value. We review inventories for obsolete and slow-moving products and make provisions based on our estimate of the probability that the material will not be consumed or that it will be sold below cost. Additionally, material product certification costs on new products are capitalized and amortized over the expected period of value of the respective products.
Valuation of Deferred Tax Assets. We estimate our income tax expense and deferred income tax position. This process involves the estimation of our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our balance sheet. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income. To the extent we believe that recovery is not likely, we establish a valuation allowance. Changes in the valuation allowance are reflected in the statement of operations.
Significant management judgment is required in determining our provision for income taxes and any valuation allowances. We have recorded a 100% valuation allowance against our deferred income tax assets. It is management’s estimate that, after considering all available objective evidence, historical and prospective, with greater weight given to historical evidence, it is more likely than not that these assets will not be realized. If we establish a record of continuing profitability, at some point we will be required to reduce the valuation allowance and recognize an equal income tax benefit which will increase net income in that period.
39
Results of Operations
The following table sets forth certain financial data derived from our consolidated statements of operations for the years ended December 31, 2023 and 2022 presented in absolute dollars and as a percentage of net sales, with dollars and percentage change year over year.
Years ended December 31,
Change
2023
2022
$
%
Net sales
$
26,106,271
100.0
%
$
50,622,143
100.0
%
$
(24,515,873
)
(48.4
)%
Cost of goods sold
25,635,383
98.2
38,695,605
76.4
(13,060,222
)
(33.8
)
Gross profit
470,888
1.8
11,926,538
23.6
(11,455,651
)
(96.1
)
Operating expenses:
Selling and marketing
9,472,527
36.3
15,022,638
29.7
(5,550,111
)
(36.9
)
General and administrative
4,758,357
18.2
6,124,034
12.1
(1,365,677
)
(22.3
)
Research and development
3,446,595
13.2
5,824,906
11.5
(2,378,311
)
(40.8
)
Total operating expenses
17,677,479
67.7
26,971,578
53.3
(9,294,099
)
(34.5
)
Operating loss
(17,206,591
)
(65.9
)
(15,045,040
)
(29.7
)
(2,161,552
)
(14.4
)
Total other income (expense)
(384,715
)
(1.5
)
(391,856
)
(0.8
)
7,141
1.8
Loss before income taxes
(17,591,305
)
(67.4
)
(15,436,896
)
(30.5
)
(2,154,410
)
(14.0
)
Income tax provision
42,619
0.2
112,348
0.2
(69,729
)
62.1
Net loss
$
(17,633,924
)
(67.5
)%
$
(15,549,244
)
(30.7
)%
$
(2,084,681
)
(13.4
)%
Comparison of Fiscal Years 2023 and 2022
The following table sets forth our revenues by product and the changes in revenues for fiscal year ended December 31, 2023, as compared to fiscal year ended December 31, 2022:
Years ended December 31,
2023
2022
Change $
Change %
Cable Modems & gateways
$
23,972,003
$
48,433,757
$
(24,461,754
)
(50.5
)%
Other networking products
571,517
1,276,849
(705,332
)
(55.2
)
Software as a Service
1,562,751
911,537
651,213
71.4
Total
$
26,106,271
$
50,622,143
$
(24,515,873
)
(48.4
)%
Net Sales
Our total net sales decreased year-over-year by $24.5 million or 48.4%. The decline in net sales is directly attributable to decreased sales of Motorola branded cable modems and gateways. In both 2023 and 2022, we primarily generated our sales by selling cable modems and gateways. Sales related to SaaS offerings were $1.6 million and $912 thousand in the years ended December 31, 2023 and 2022, respectively. The decrease in other networking products of $700 thousand in 2023 compared to 2022 is primarily due to a reduction in MoCA products and a refocus on new products introductions.
40
Cost of Goods Sold and Gross Margin
Cost of goods sold consists primarily of the following: the cost of finished products from our third-party manufacturers; overhead costs, including purchasing, product planning, inventory control, warehousing and distribution logistics; third-party software licensing fees; inbound freight; import duties/tariffs; warranty costs associated with returned goods; write-downs for excess and obsolete inventory; amortization of certain acquired intangibles and software development costs; and costs attributable to the provision of service offerings.
The decrease in gross profit was attributable to sales decline of Motorola branded cable modems and gateways, an inventory reserve on a single product, and increased freight and component costs. We outsource our manufacturing, warehousing, and distribution logistics. We believe this outsourcing strategy allows us to better manage our product costs and gross margin. Our gross margin can be affected by a number of factors, including fluctuation in foreign exchange rates, sales returns, changes in average selling prices, end-user customer rebates and other channel sales incentives, changes in our cost of goods sold due to fluctuations and increases in prices paid for components, overhead costs, inbound freight and duty/tariffs, conversion costs, and charges for excess or obsolete inventory.
The following table presents net sales, cost of goods sold, and gross margin, for the periods indicated:
Years ended December 31,
2023
2022
$ Change
% Change
Net sales
$
26,106,271
$
50,622,143
$
(24,515,873
)
(48.4
)%
Cost of goods sold
$
25,635,383
$
38,695,605
$
(13,060,222
)
(33.8
)%
Gross margin
1.8
%
23.6
%
Gross profit and gross margin decreased in fiscal 2023 compared to the prior fiscal year, primarily due to the decline in net sales.
We expect fiscal 2024 gross
margins to increase. Our cost of goods sold as a percentage of net sales can vary significantly based upon factors such as: uncertainties
surrounding revenue volumes, including future pricing and/or potential discounts as a result of the economy, competition, the timing of
sales, and related production level variances; import customs duties and imposed tariffs; changes in technology; changes in product mix;
expenses associated with writing off excessive or obsolete inventory; fluctuations in freight costs; manufacturing and purchase price
variances; and changes in prices on commodity components.
Selling and Marketing
Selling and marketing expenses consist primarily of advertising, trade shows, corporate communications and other marketing expenses, product marketing expenses, outbound freight costs, personnel expenses for sales and marketing staff, technical support expenses, and facility allocations. The following table presents sales and marketing expenses, for the periods indicated:
Years ended December 31,
2023
2022
$ Change
% Change
Selling and marketing
$
9,472,527
$
15,022,638
$
(5,550,111
)
(36.9
)%
Sales and marketing expenses decreased in fiscal 2023, as compared to the prior year, primarily due to a decrease in marketing program campaigns of $2.0 million, personnel costs of $1.5 million, and Motorola royalty fees of $1.5 million.
We expect our selling and marketing expenses as a percentage of net sales in fiscal 2024 to decrease compared to fiscal 2023 levels. Expenses may fluctuate depending on sales levels achieved as certain expenses, such as commissions, are determined based upon the net sales achieved. Forecasting selling and marketing expenses is highly dependent on expected net sales levels and could vary significantly depending on actual net sales achieved in any given quarter. Marketing expenses may also fluctuate depending upon the timing, extent and nature of marketing programs.
41
General and Administrative
General and administrative expenses consist of salaries and related expenses for executives, finance and accounting, human resources, information technology, professional fees, including legal costs associated with defending claims against us, allowance for doubtful accounts, facility allocations, and other general corporate expenses. The following table presents general and administrative expenses, for the periods indicated:
Years ended December 31,
2023
2022
$ Change
% Change
General and administrative
$
4,758,357
$
6,124,034
$
(1,365,677
)
(22.3
)%
General and administrative expenses decreased $1.4 million primarily due to a decrease of $1.4 million in personnel costs and $0.5 million in professional services fees, partially offset by an increase in insurance costs of $0.4 million.
Future general and administrative expense increases or decreases in absolute dollars are difficult to predict due to the lack of visibility of certain costs, including legal costs associated with defending claims against us, and other factors.
Research and Development
Research and development expenses consist primarily of personnel expenses, payments to suppliers for design services, safety and regulatory testing, product certification expenditures to qualify our products for sale into specific markets, prototypes, IT, and other consulting fees. Research and development expenses are recognized as they are incurred. Our research and development organization is focused on enhancing our ability to introduce innovative and easy-to-use products and services. The following table presents research and development expenses, for the periods indicated:
Years ended December 31,
2023
2022
$ Change
% Change
Research and development
$
3,446,595
$
5,824,906
$
(2,378,311
)
(40.8
)%
The decrease of $2.4 million was primarily due to personnel costs of $1.7 million, $0.2 million software licenses, and $0.2 million professional services fees.
We believe that innovation and technological leadership is critical to our future success, and we are committed to continuing a significant level of research and development to develop new technologies, products and services. We continue to invest in research and development to expand our hardware product offerings focused on premium WiFi 6E, WiFi 6, and software solutions. We expect research and development expenses as a percentage of net sales in fiscal 2024 to be below fiscal 2023 levels. Research and development expenses may fluctuate depending on the timing and number of development activities and could vary significantly as a percentage of net sales, depending on actual net sales achieved in any given year.
Other Income (Expense)
Years ended December 31,
2023
2022
$ Change
% Change
Other income (expense)
$
(384,715
)
$
(391,856
)
$
7,141
1.8
%
Other income (expense), net was an expense of $385 thousand in fiscal 2023 and expense of $392 thousand in fiscal 2022, primarily due to increased borrowing interest rates related to the SVB Loan Agreement.
42
Income Tax Expense. We recorded minimum state income tax for a few states and tax related to our operations in Mexico, which was $43 thousand and $112 thousand in fiscal 2023 and fiscal 2022, respectively.
Years ended December 31,
2023
2022
$ Change
% Change
Income taxes
$
42,619
$
112,348
$
(69,729
)
(62.1
)%
Liquidity and Capital Resources
Our principal sources of
liquidity are cash and cash equivalents, sales of inventory, borrowing under our line of credit, prior to repayment and termination,
at December 31, 2023. As of December 31, 2023, we had cash and cash equivalents of $709 thousand and $0 in restricted cash
as compared to $530 thousand in cash and cash equivalents and $500 thousand in restricted cash on December 31, 2022. On
December 31, 2023, we had no outstanding borrowings and working capital of $(0.8) million. We have funded our operations.
Our historical cash outflows have primarily been associated with: (1) cash used for operating activities such as the purchase and growth of inventory, expansion of our sales and marketing and research and development and other working capital needs; (2) capital expenditures related to the acquisition of equipment; and (4) cash used to repay our debt obligations and related interest expense. Fluctuations in our working capital due to timing differences of our cash receipts and cash disbursements also impact our cash inflows and outflows.
Our consolidated financial statements as of December 31, 2023 were prepared under the assumption that we will continue as a going concern. The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. However, substantial doubt exists about our ability to continue as a going concern, and we will require additional liquidity to continue operations beyond the next 12 months.
Our consolidated financial statements as of December 31, 2023, do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that may be necessary if we were unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our financial statements, and it is likely that investors will lose all or part of their investment.
Cash Flows
The following table presents our cash flows for the periods presented:
Years ended
December 31,
2023
2022
Cash provided by (used in) operating activities
$
4,849,555
$
(12,170,073
)
Cash used in investing activities
(381,865
)
(695,017
)
Cash provided by (used in) financing activities
(4,788,478
)
824,755
Net (decrease) increase in cash and cash equivalents
$
(320,788
)
$
12,040,335
43
Cash Flows from Operating Activities.
Cash provided by operating activities of $4.9 million for 2023 reflected our net loss of $17.6 million, adjusted for non-cash expenses, consisting primarily of $0.6 million of depreciation and amortization, $0.3 million of stock-based compensation expense, and a $0.2 million provision for accounts receivable allowance. Uses of cash included a reduction in accrued expenses of $3.3 million and decrease in deferred revenue of $1.4 million. Sources of cash included a decrease of accounts receivable of $1.9 million, a decrease in inventory of $15.5 million, and decrease in prepaid expenses and other current assets of $0.3 million.
Cash used in operating activities of $12.2 million for 2022 reflected our net loss of $15.5 million, adjusted for non-cash expenses, consisting primarily of $0.8 million of depreciation and amortization, $1.2 million of stock-based compensation expense, and a $0.1 million write-off of goodwill and intangible assets. Uses of cash included a reduction in accounts payable of $9.6 million and a decrease in accrued expenses of $0.8 million. Sources of cash included a decrease of accounts receivable of $2.2 million, a decrease in inventory of $6.7 million, and increase in deferred revenue of $671 thousand.
Cash Flows from Investing Activities.
In 2023, $162 thousand was used to purchase equipment and $219 thousand was used for certification costs.
In 2022, $277 thousand was used to purchase equipment and $418 thousand was used for certification costs.
Cash Flows from Financing Activities. Cash used in financing activities in 2023 consisted of $4.8 million in borrowing repayments under our SVB line-of-credit.
Cash provided by financing activities in 2022 consisted of proceeds from a bridge loan of $1 million, proceeds from stock option exercises of $0.2 million. Use of cash in 2022 included $0.4 million in borrowing reductions under our SVB line-of-credit.
Future Liquidity Needs
Our primary short-term needs for capital, which are subject to change, include expenditures related to:
●
the acquisition of equipment and other fixed assets for use in our current and future manufacturing and research and development facilities;
●
upgrades to our information technology infrastructure to enhance our capabilities and improve overall productivity;
●
support of our commercialization efforts related to our current and future products, including expansion of our direct sales force and field support resources;
●
the continued advancement of research and development activities.
Our capital expenditures are largely discretionary and within our control. We expect that our product sales and the resulting operating loss as well as the status of each of our product development programs, will significantly impact our cash management decisions.
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At December 31, 2023,
we believe our current cash and cash equivalents may not be sufficient to fund working capital requirements, capital expenditures and
operations during the next twelve months. Our ability to continue as a going concern will depend on our ability to obtain additional equity
or debt financing, attain further operating efficiencies, reduce or contain expenditures and increase revenues. Based on these factors,
management determined that there is substantial doubt regarding our ability to continue as a going concern. The Company will continue
to monitor its costs in relation to its sales and adjust accordingly.
Our future liquidity and capital requirements will be influenced by numerous factors, including the extent and duration of any future operating losses, the level and timing of future sales and expenditures, the results and scope of ongoing research and product development programs, working capital required to support our sales growth, funds required to service our debt, the receipt of and time required to obtain regulatory clearances and approvals, our sales and marketing programs, our need for infrastructure to support our sales growth, the continuing acceptance of our products in the marketplace, competing technologies and changes in the market and regulatory environment.
Our ability to fund our longer-term cash needs is subject to various risks, many of which are beyond our control—See “Risk Factors—We may require significant additional capital to pursue our growth strategy, and our failure to raise capital when needed could prevent us from executing our growth strategy.” Should we require additional funding, such as additional capital investments, we may need to raise the required additional funds through bank borrowings or public or private sales of debt or equity securities. We cannot assure that such funding will be available in needed quantities or on terms favorable to us, if at all.
At December 31, 2023, we have Federal and state net operating loss carry forwards of approximately $76.9 million and $44.9 million, respectively, available to reduce future taxable income. A valuation allowance has been established for the full amount of deferred income tax assets as management has concluded that it is more likely than-not that the benefits from such assets will not be realized.
Contractual Obligations
For a description of our operating leases, refer to Note 6 and for a description of our bank credit line and bridge loan agreement, license agreement and purchase commitments, refer to Note 5 in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
In 2006, the Company entered into a maquiladora agreement with North American Production Sharing, Inc. (“NAPS”). This agreement provides that NAPS provide certain personnel and other services for a production facility in Mexico on our behalf. Although the maquiladora agreement expired on September 25, 2019, the agreement automatically renews annually unless otherwise cancelled per provisions in the agreement. Any related assets, liabilities, or expenses are reported in the accompanying financial statements. Additionally, the Company is obligated to pay future minimum required royalty payments associated with certain licensing agreements which are not included in our consolidated balance sheet.