What changed in this filing

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Item 1. Financial Statements

2020-08-07 compared with 2020-02-07 · 176 added, 406 removed, 319 unchanged (65% of the section changed)

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Intangible assets, net

LIABILITIES AND STOCKHOLDERS’

LIABILITIES AND STOCKHOLDERS’ EQUITY

Accounts payable

7 unchanged sentences

Commitments and contingencies (Note 9)

Stockholders’

Stockholders’ equity:

Preferred stock:

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Additional paid-in capital

Accumulated other comprehensive income (loss)

Accumulated other comprehensive income

Retained earnings

Total stockholders’

Total liabilities and stockholders’

Total stockholders’ equity

Total liabilities and stockholders’ equity

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATION S

Three Months Ended December 31,

Nine Months Ended December 31,

Three Months Ended June 30,

(In thousands, except per share amounts)

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Total operating expenses

Income (loss) from operations

Loss from operations

Interest income, net

Other income (expense), net

Income (loss) before income taxes

Other expense, net

Loss before income taxes

Provision for income taxes

Net income (loss)

Net income (loss) per share:

Net loss per share:

Weighted average shares used in per share calculations:

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GSI TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Three Months Ended December 31,

Nine Months Ended December 31,

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

Three Months Ended June 30,

(In thousands)

Net income (loss)

Net unrealized gain (loss) on available-for-sale investments

Total comprehensive income (loss)

The accompanying notes are an integral part of these condensed consolidated financial statements.

GSI TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Comprehensive

Stockholders'

Income (Loss)

Three months ended December 31, 2019

(In thousands, except share amounts)

Balance, September 30, 2019

Issuance of common stock under employee stock option plans

Stock-based compensation expense

Net unrealized loss on available-for-sale investments

Balance, December 31, 2019

Three months ended December 31, 2018

Balance, September 30, 2018

Issuance of common stock under employee stock option plans

Repurchase of common stock

Stock-based compensation expense

Net unrealized gain on available-for-sale investments

Balance, December 31, 2018

Total comprehensive loss

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

GSI TECHNOLOGY, INC.

Comprehensive

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Income (Loss)

Nine months ended December 31, 2019

Three months ended June 30, 2020

(In thousands, except share amounts)

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Net unrealized gain on available-for-sale investments

Balance, December 31, 2019

Nine months ended December 31, 2018

Balance, June 30, 2020

Three months ended June 30, 2019

Balance, March 31, 2019

Issuance of common stock under employee stock option plans

Repurchase of common stock

Stock-based compensation expense

Net unrealized gain on available-for-sale investments

Balance, December 31, 2018

Balance, June 30, 2019

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW S

Nine Months Ended December 31,

Three Months Ended June 30,

(In thousands)

Cash flows from operating activities:

Net income (loss)

Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:

Adjustments to reconcile net loss to net cash used in operating activities:

Allowance for doubtful accounts and other

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Stock-based compensation

Amortization of premium on investments

Amortization of premium (discount) on investments

Changes in assets and liabilities:

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Accrued expenses and other liabilities

Net cash provided by (used in) operating activities

Net cash used in operating activities

Cash flows from investing activities:

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Maturities of short-term investments

Decrease in MikaMonu escrow deposit

Purchases of property and equipment

Net cash provided by (used in) investing activities

Net cash provided by investing activities

Cash flows from financing activities:

Payment of contingent consideration

Payment of MikaMonu escrow deposit

Repurchase of common stock

Proceeds from issuance of common stock under employee stock plans

Net cash provided by financing activities

Net increase in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of the period

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The accompanying unaudited condensed consolidated financial statements of GSI Technology, Inc.

and its subsidiaries (“GSI”

or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission.

and its subsidiaries (“GSI” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission.

Accordingly, the interim financial statements do not include all of the information and footnotes required by GAAP for annual financial statements.

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The Company believes that the disclosures are adequate to make the information not misleading.

However, these financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2019.

The consolidated results of operations for the nine months ended December 31, 2019 are not necessarily indicative of the results to be expected for the entire fiscal year.

The consolidated results of operations for the three months ended June 30, 2020 are not necessarily indicative of the results to be expected for the entire fiscal year.

Significant accounting policies

Except for the accounting policy for leases, which was updated as a result of adopting a new accounting standard related to leases, there have been no material changes to our significant accounting policies that were disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2019.

See “Recent accounting pronouncements”

below for additional information on the impact of the adoption of the new accounting standard for leases on the Company’s consolidated financial statements.

Except for the changes in disclosure requirements for recurring and nonrecurring fair value measurements and changes in goodwill impairment testing, which were updated as a result of adopting new accounting standards, there have been no material changes to our significant accounting policies that were disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2020.

Risk and uncertainties

On March 11, 2020, the World Health Organization announced that COVID-19, a respiratory illness, caused by a novel coronavirus is a pandemic.

COVID-19 has spread to many of the countries in which the Company, its customers, suppliers and other business partners conduct business.

Governments in affected regions have implemented, and may continue to implement, safety precautions which include quarantines, travel restrictions, business closures, cancellations of public gatherings and other measures as they deem necessary.

Many organizations and individuals, including the Company and its employees, are taking additional steps to avoid or reduce infection, including limiting travel and working from home.

These measures are disrupting normal business operations both in and outside of affected areas and have had significant negative impacts on businesses and financial markets worldwide.

The Company continues to monitor its operations and government recommendations and have made modifications to its normal operations because of the COVID-19 global pandemic.

The Company has instituted many preventative measures and is regularly evaluating those measures and others as it continues to better understand its current and future operating environment.

Except for the Company’s employees located in Taiwan, the majority of its employees are working from home around the world, and productivity remains high.

The Company has maintained a substantial portion of its manufacturing operational capacity at its primary manufacturing support facility located in Hsin Chu, Taiwan where the Company’s suppliers are located and where all of the Company’s products are manufactured.

Since the outbreak of COVID-19, aside from the lengthening of lead times for wafers and assembly services, the Company has experienced minimal impact on its manufacturing operations in Taiwan.

Final testing of the Company’s products is conducted in house.

Shipping and receiving operations are being maintained by a skeleton crew with minimal impact.

The Company’s revenues have been and are expected to continue to be impacted by changes in customer buying patterns and communication limitations

related to shelter in place restrictions that require a significant number of its customer contacts to work from home.

The Company’s results for the quarter ended June 30, 2020 demonstrate the challenges that the Company is facing during the COVID-19 global pandemic, which has restricted the activities of the Company’s sales force and distributors, reduced customer demand and caused the postponement of investment in certain customer sectors.

These challenges are also impacting the Company as it enters new markets and engages with target customers.

Industry conferences and on-site training workshops, which are typically used for building a sales pipeline, are unavailable due to COVID-19 related restrictions.

The Company is adapting its sales strategies for the COVID-19 environment, where it cannot do face-to-face meetings and conduct secure meetings with government and defense customers, but the Company is still not operating at an optimal level.

The disruption to the marketplace resulting from the COVID-19 global pandemic that the Company continues to experience is unlike anything the Company has ever had to deal with.

While the Company continues to monitor the business metrics that it has historically used to predict its financial performance, the Company is uncertain as to whether these metrics will operate consistently with its historical experience.

The Company believes that during the next 12 months the COVID-19 pandemic could impact general economic activity and demand in its end markets.

Although the Company cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it is expected to have an adverse effect on the Company’s results of operations, financial position, and liquidity during fiscal year 2021.

This includes results from new information that may emerge concerning COVID-19 and any actions taken to contain or treat COVID-19, as well as the economic impact on local, regional, national and international customers and markets.

The Company has made estimates of the impact of COVID-19 within its financial statements and there may be changes to those estimates in future periods.

Recent accounting pronouncements

In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU No.

2019-12, “Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes.”

as part of its initiative to reduce complexity in the accounting standards.

In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU No.

2019-12, “Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes” as part of its initiative to reduce complexity in the accounting standards.

The standard eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences.

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In August 2018, FASB issued ASU No.

2018-13, “Fair Value Measurement (Topic 820):

Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.”

The standard amends the disclosure requirements for recurring and nonrecurring fair value measurements by removing, modifying, and adding certain disclosures.

The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

Early adoption is permitted.

The Company does not anticipate the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.

In August 2018, the SEC adopted the final rule under SEC Release No.

33-10532, “Disclosure Update and Simplification,”

amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded.

In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements.

Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement.

The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed.

The Company’s first presentation of changes in stockholders' equity was included in the Form 10-Q for the quarter ended June 30, 2019.

2018-13, “Fair Value Measurement (Topic 820):

Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” The standard amends the disclosure requirements for recurring and nonrecurring fair value measurements by removing, modifying, and adding certain disclosures.

The Company adopted ASU No.

2018-13 in the quarter ended June 30, 2020.

Implementation of this guidance did not have a material impact on the Company’s consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU No.

2017-04, " Intangibles—Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment." The standard eliminates the second step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill.

2017-04, "

Intangibles—Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment."

The standard eliminates the second step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill.

Instead, an entity should recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit.

The standard is effective for annual and interim goodwill impairment tests conducted in fiscal years beginning after December 15, 2019, with early adoption permitted.

The Company does not anticipate the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU 2016-13 , “Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments,”

ASU 2016-13 replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

The Company adopted ASU No.

2017-04 in the quarter ended June 30, 2020.

Implementation of this guidance did not have a material impact on the Company’s consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU No.

2016-13, “Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

For trade and other receivables, loans, and other financial instruments, the Company will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable.

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The Company is currently evaluating the impact of this standard on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842) .”

The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases.

All leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No.

Elements of Financial Statements ,”

and, therefore, recognition of those lease assets and lease liabilities represents a change of previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases.

In July 2018, the FASB issued ASU 2018-11, "Leases (Topic 842):

Targeted Improvements," which provides clarifications and improvements to ASU 2016-02 including allowing entities to elect an additional transition method, a modified retrospective approach, that permits changes to be applied by means of a cumulative-effect adjustment recorded in retained earnings as of the beginning of the fiscal year of adoption.

Consequently, an entity’s reporting for the comparative periods presented in the year of adoption would continue to be in accordance with Leases (Topic 840) ("ASC 840"), including the disclosure requirements of ASC 840.

The Company adopted Topic 842 as of April 1, 2019 and applied the modified retrospective approach to all leases existing at, or entered into on or after, the date of adoption of April 1, 2019.

The Company did not restate comparative periods, as permitted by ASU 2018-11, and elected the package of practical expedients permitted under the transition guidance within the new standard and did not reassess whether any contracts that existed prior to adoption have or contain leases or the classification of existing leases.

Further, the Company made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet.

The Company will recognize those lease payments in the Consolidated Statements of Operations on a straight-line basis over the lease term.

As a result of adoption of this standard and election of the transition practical expedients, the Company recognized right-of-use (“ROU”) assets and lease liabilities for those leases classified as operating leases under ASC Topic 840 that continued to be classified as operating leases under ASC Topic 842 at the date of initial application.

The Company does not have any leases classified as a capital lease under ASC 840 and therefore has no leases classified as a “finance lease”

under the new standard.

In applying the alternative modified retrospective transition method, the Company measured lease liabilities at the present value of the sum of remaining minimum rental payments (as defined under ASC Topic 840).

The present value of lease liabilities has been measured using the Company’s incremental borrowing rates as of April 1, 2019 (the date of initial application).

Additionally, ROU assets for these operating leases have been measured as the initial measurement of applicable lease liabilities adjusted for any prepaid or accrued rent.

Upon adoption of Topic 842, the Company recognized ROU assets of approximately $1.1 million and lease liabilities of approximately $1.1 million on the Company’s Condensed Consolidated Balance Sheets as of April 1, 2019, with no material impact to its Condensed Consolidated Statements of Operations.

NOTE 2—REVENUE RECOGNITION

The Company determines revenue recognition through the following steps:

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and (5) recognition of revenue when, or as, we satisfy a performance obligation.

The majority of the Company’s customer contracts, which may be in the form of purchase orders, contracts or purchase agreements, contain performance obligations for delivery of agreed upon products.

Delivery of all performance obligations contained within a contract with a customer typically occurs at the same time (or within the same accounting period).

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Thus, the Company will generally recognize revenue upon shipment of the product.

Because all of the Company’s performance obligations relate to contracts with a duration of less than one year, the Company has elected to apply the optional exemption practical expedient provided in ASC 606 and, therefore, is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period.

The Company adjusts the transaction price for variable consideration.

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Additionally, the Company has adopted an accounting policy to recognize shipping costs that occur after control transfers to the customer as a fulfillment activity.

The Company’s contracts with customers do not typically include extended payment terms.

Payment terms vary by contract type and type of customer and generally range from 30 to 60 days from shipment.

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The Company estimates its warranty costs based on historical warranty claim experience and includes such costs in cost of revenues.

Warranty costs and the accrued warranty liability were not material as of December 31, 2019.

The majority of the Company’s revenue is derived from sales of SRAM products which represent approximately 99% of total revenues in the nine months ended December 31, 2019.

Nokia, the Company’s largest customer, purchases products directly from the Company and through contract manufacturers and distributors.

Based on information provided to the Company by its contract manufacturers and distributors, purchases by Nokia represented approximately 40% of the Company’s net revenues in the nine months ended December 31, 2019.

See “Note 12 —

Segment and Geographic Information”

for revenue by shipment destination.

The following table presents the Company’s revenue disaggregated by customer type.

Three Months Ended December 31,

Nine Months Ended December 31,

(In thousands)

Warranty costs and the accrued warranty liability were not material as of June 30, 2020.

The majority of the Company’s revenue is derived from sales of SRAM products which represent approximately 98% of total revenues in the three months ended June 30, 2020.

Nokia, the Company’s largest customer, purchases products directly from the Company and through contract manufacturers and distributors.

Based on information provided to the Company by its contract manufacturers and distributors, purchases by Nokia represented approximately 27% of the Company’s net revenues in the three months ended June 30, 2020.

See “Note 12 — Segment and Geographic Information” for revenue by shipment destination.

The following table presents the Company’s revenue disaggregated by customer type.

Three Months Ended June 30,

Contract manufacturers

NOTE 3—NET INCOME (LOSS) PER COMMON SHARE

The Company uses the treasury stock method to calculate the weighted average shares used in computing diluted net income (loss) per share.

The following table sets forth the computation of basic and diluted net income (loss) per share:

Three Months Ended December 31,

Nine Months Ended December 31,

(In thousands, except per share amounts)

Net income (loss)

NOTE 3—NET LOSS PER COMMON SHARE

The Company uses the treasury stock method to calculate the weighted average shares used in computing diluted net loss per share.

The following table sets forth the computation of basic and diluted net loss per share:

Three Months Ended June 30,

Denominators:

Weighted average shares—Basic

Dilutive effect of employee stock options

Dilutive effect of employee stock purchase plan options

Weighted average shares—Dilutive

Net income (loss) per common share—Basic

Net income (loss) per common share—Diluted

The following shares of common stock underlying outstanding stock options, determined on a weighted average basis, were excluded from the computation of diluted net income (loss) per share as they had an anti-dilutive effect:

Three Months Ended December 31,

Nine Months Ended December 31,

(In thousands)

Weighted average shares—Dilutive

Net loss per common share—Basic

Net loss per common share—Diluted

The following shares of common stock underlying outstanding stock options, determined on a weighted average basis, were excluded from the computation of diluted net loss per share as they had an anti-dilutive effect:

Three Months Ended June 30,

Shares underlying options and ESPP shares

NOTE 4—BALANCE SHEET DETAIL

December 31, 2019

NOTE 4—BALANCE SHEET DETAIL

June 30, 2020

March 31, 2020

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Inventory at distributors

December 31, 2019

June 30, 2020

March 31, 2020

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Allowances for doubtful accounts and other

December 31, 2019

June 30, 2020

March 31, 2020

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Prepaid income taxes

Escrow deposit

Other receivables

Other prepaid expenses and other current assets

December 31, 2019

June 30, 2020

March 31, 2020

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Accumulated depreciation

Depreciation expense was $293,000 and $317,000 for the three months ended December 31, 2019 and 2018, respectively, and $904,000 and $865,000 for the nine months ended December 31, 2019 and 2018, respectively.

December 31, 2019

Depreciation expense was $296,000 and $306,000 for the three months ended June 30, 2020 and 2019, respectively.

June 30, 2020

March 31, 2020

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Other assets:

Non-current deferred income taxes

The following tables summarize the components of intangible assets and related accumulated amortization balances at December 31, 2019 and March 31, 2019 (in thousands):

As of December 31, 2019

The following tables summarize the components of intangible assets and related accumulated amortization balances at June 30, 2020 and March 31, 2020 (in thousands):

As of June 30, 2020

Intangible assets:

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Product designs

Amortization of intangible assets included in cost of revenues was $58,000 and $58,000 for the three months ended December 31, 2019 and 2018, respectively, and $175,000 and $208,000 for the nine months ended December 31, 2019 and 2018, respectively.

As of December 31, 2019, the estimated future amortization expense of intangible assets in the table above is as follows (in thousands):

Amortization of intangible assets included in cost of revenues was $58,000 and $58,000 for the three months ended June 30, 2020 and 2019, respectively.

As of June 30, 2020, the estimated future amortization expense of intangible assets in the table above is as follows (in thousands):

Fiscal year ending March 31,

2020 (3 months remaining)

December 31, 2019

2021 (Remaining nine months)

June 30, 2020

March 31, 2020

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Purchased intellectual property

Accrued professional fees

Accrued commissions

Contingent consideration

Accrued retention payment

Income taxes payable

Miscellaneous accrued expenses

NOTE 5—GOODWILL

Goodwill represents the difference between the purchase price and the estimated fair value of the identifiable assets acquired and liabilities assumed in a business combination.

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The Company assesses goodwill for impairment on an annual basis on the last day of February in the fourth quarter of its fiscal year.

The Company had a goodwill balance of $8.0 million as of both March 31, 2019 and December 31, 2019.

The Company had a goodwill balance of $8.0 million as of both March 31, 2020 and June 31, 2020.

The goodwill resulted from the acquisition of MikaMonu Group Ltd.

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The Company determined that the second step of the impairment test was not necessary.

No triggering event took place subsequent to the fiscal 2019 annual assessment that necessitated a quantitative impairment analysis for the Company’s one reporting unit.

NOTE 6—INCOME TAXES

The current portion of the Company’s unrecognized tax benefits was $0 at both December 31, 2019 and March 31, 2019.

The long-term portion at December 31, 2019 and March 31, 2019 was $627,000 and $622,000, respectively, of which the timing of the resolution is uncertain.

As of December 31, 2019, $2.5 million of unrecognized tax benefits had been recorded as a reduction to net deferred tax assets.

As of December 31, 2019, the Company’s net deferred tax assets of $8.3 million were subject to a valuation allowance of $8.2 million.

As of March 31, 2019, the Company’s net deferred tax assets of $6.7 million were subject to a valuation allowance of $6.7 million.

No triggering event took place subsequent to the fiscal 2020 annual assessment that necessitated a quantitative impairment analysis for the Company’s one reporting unit.

NOTE 6—INCOME TAXES

The current portion of the Company’s unrecognized tax benefits was $0 at both June 30, 2020 and March 31, 2020.

The long-term portion at June 30, 2020 and March 31, 2020 was $326,000 and $613,000, respectively, of which the timing of the resolution is uncertain.

As of June 30, 2020, $2.8 million of unrecognized tax benefits had been recorded as a reduction to net deferred tax assets.

As of June 30, 2020, the Company’s net deferred tax assets of $9.9 million were subject to a valuation allowance of $9.9 million.

As of March 31, 2020, the Company’s net deferred tax assets of $9.4 million were subject to a valuation allowance of $9.4 million.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted.

The CARES Act is an approximate $2 trillion emergency economic stimulus package passed in response to the COVID-19 global pandemic.

The CARES Act contains numerous income tax provisions including changes to the net operating loss rules that the Company believes will not have a significant impact.

Management believes that within the next twelve months the Company will not have a significant reduction in uncertain tax benefits, including interest and penalties, related to positions taken with respect to credits and loss carryforwards on previously filed tax returns.

The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the provision for income taxes in the Condensed Consolidated Statements of Operations.

The Company is subject to taxation in the United States and various state and foreign jurisdictions.

Fiscal years 2013 through 2020 remain open to examination by federal tax authorities, and fiscal years 2012 through 2020 remain open to examination by California tax authorities.

The Company’s estimated annual effective income tax rate, excluding discrete items, was approximately (2.2%) and (22.6%) as of December 31, 2019 and 2018, respectively.

The annual effective tax rates as of December

31, 2019 and 2018 vary from the United States statutory income tax rate primarily due to valuation allowances in the United States, whereby pre-tax losses do not result in the recognition of corresponding income tax benefits and expenses and the foreign tax differential.

NOTE 7—FINANCIAL INSTRUMENTS

During the quarter ended June 30, 2020, the Company settled an income tax audit in Israel for fiscal years 2016 through 2019 that resulted in a discrete tax provision of

$479,000 and a tax liability of $713,000 that is included in accrued expenses and other liabilities on the condensed consolidated balance sheets as of June 30, 2020.

The Company’s estimated annual effective income tax rate, including discrete items, was approximately (4.0%) and (8.7%) as of June 30, 2020 and 2019, respectively.

The annual effective tax rates as of June 30, 2020 and 2019 vary from the United States statutory income tax rate primarily due to valuation allowances in the United States, whereby pre-tax losses do not result in the recognition of corresponding income tax benefits and expenses and the foreign tax differential.

NOTE 7—FINANCIAL INSTRUMENTS

Fair value measurements

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The fair value of available-for-sale securities included in the Level 1 category is based on quoted prices that are readily and regularly available in an active market.

As of December 31, 2019, the Level 1 category included money market funds of $7.4 million, which were included in cash and cash equivalents on the Condensed Consolidated Balance Sheets.

As of June 30, 2020, the Level 1 category included money market funds of $29.0 million, which were included in cash and cash equivalents on the Condensed Consolidated Balance Sheets.

Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement date;

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The fair value of available-for-sale securities included in the Level 2 category is based on the market values obtained from an independent pricing service that were evaluated using pricing models that vary by asset class and may incorporate available trade, bid and other market information and price quotes from well-established independent pricing vendors and broker-dealers.

As of December 31, 2019, the Level 2 category included short-term investments $20.3 million and long-term investments of $5.3 million, which were comprised of certificates of deposit, government and agency securities.

Valuations based on inputs that are unobservable and involve management judgment and the reporting entity’s own assumptions about market participants and pricing.

As of December 31, 2019, the Company’s Level 3 financial instruments measured at fair value on the Condensed Consolidated Balance Sheets consisted of the contingent consideration liability related to the acquisition of MikaMonu.

As of June 30, 2020, the Level 2 category included short-term investments $13.6 million and long-term investments of $4.9 million, which were comprised of certificates of deposit, government and agency securities.

Valuations based on inputs that are unobservable and involve management judgment and the reporting entity’s own assumptions about market participants and pricing.

As of June 30, 2020, the Company’s Level 3 financial instruments measured at fair value on the Condensed Consolidated Balance Sheets consisted of the contingent consideration liability related to the acquisition of MikaMonu.

The fair value of the contingent consideration liability was initially determined as of the acquisition date using unobservable inputs.

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Subsequent to the acquisition date, at each reporting period, the contingent consideration liability is re-measured to fair value with changes recorded in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.

The contingent consideration liability is included in contingent consideration, non-current on the Consolidated Balance Sheet at December 31, 2019 and March 31, 2019 in the amount of $3.8 million and $3.7 million, respectively, and is included in accrued expenses and other liabilities at March 31, 2019 in the amount of $492,000.

During the most recent re-measurement of the contingent consideration liability as of March 31, 2020, the Company used a risk-adjusted discount rate of approximately 14.5% to adjust the probability-weighted cash flows to their present value using probabilities ranging from 0% to 10% for the remaining contingent events.

The contingent consideration liability is included in contingent consideration, non-current on the Consolidated Balance Sheet at June 30, 2020 and March 31, 2020 in the amount of $3.9 million and $3.9 million, respectively.

The fair value of financial assets measured on a recurring basis is as follows (in thousands):

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and Liabilities

December 31, 2019

June 30, 2020

Money market funds

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Contingent consideration

The following table sets forth the changes in fair value of contingent consideration for the nine months ended December 31, 2019 or December 31, 2018:

Nine Months Ended December 31,

The following table sets forth the changes in fair value of contingent consideration for the three months ended June 30, 2020 and June 30, 2019:

Three Months Ended June 30,

(In thousands)

1 unchanged sentence

Change due to accretion

Payment of contingent consideration

Contingent consideration, end of period

Short-term and long-term investments

All of the Company’s short-term and long-term investments are classified as available-for-sale.

Available-for-sale debt securities with maturities greater than twelve months are classified as long-term investments when they are not intended for use in current operations.

Investments in available-for-sale securities are reported at fair value with unrecognized gains (losses), net of tax, as a component of accumulated other comprehensive income (loss) in the Condensed Consolidated Balance Sheets.

The Company had money market funds of $7.4 million and $4.1 million at December 31, 2019 and March 31, 2019, respectively, included in cash and cash equivalents on the Condensed Consolidated Balance Sheets.

Investments in available-for-sale securities are reported at fair value with unrecognized gains (losses), net of tax, as a component of accumulated other comprehensive loss in the Condensed Consolidated Balance Sheets.

The Company had money market funds of $29.0 million and $14.1 million at June 30, 2020 and March 31, 2020, respectively, included in cash and cash equivalents on the Condensed Consolidated Balance Sheets.

The Company monitors its investments for impairment periodically and records appropriate reductions in carrying values when declines are determined to be other-than-temporary.

The following table summarizes the Company’s available-for-sale investments:

December 31, 2019

The following table summarizes the Company’s available-for-sale investments:

June 30, 2020

(In thousands)

1 unchanged sentence

Certificates of deposit

Supranational obligations

Total short-term investments

1 unchanged sentence

Certificates of deposit

Supranational obligations

Total long-term investments

3 unchanged sentences

Certificates of deposit

Supranational obligations

Total short-term investments

1 unchanged sentence

Certificates of deposit

Total long-term investments

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position as of December 31, 2019 and March 31, 2019, respectively.

December 31, 2019

Less Than 12 Months

12 Months or Greater

(In thousands)

Certificates of deposit

Supranational obligations

Total long-term investments

There were no gross unrealized losses on the Company’s investments as of June 30, 2020.

March 31, 2020

3 unchanged sentences

Certificates of deposit

Supranational obligations

The Company’s investment portfolio consists of both corporate and governmental securities that have a maximum maturity of three years.

All unrealized gains and losses are due to changes in interest rates and bond yields.

Subject to normal credit risks, the Company has the ability to realize the full value of all these investments upon maturity.

The deferred tax liability related to unrecognized gains and losses on short-term and long-term investments was $(17,000) and $(2,000) at December 31, 2019 and March 31, 2019, respectively.

As of December 31, 2019, contractual maturities of the Company’s available-for-sale investments were as follows:

The deferred tax liability related to unrecognized gains and losses on short-term and long-term investments was $(39,000) and $(30,000) at June 30, 2020 and March 31, 2020, respectively.

As of June 30, 2020, contractual maturities of the Company’s available-for-sale investments were as follows:

(In thousands)

1 unchanged sentence

Maturing in one to three years

The Company classifies its short-term investments as “available-for-sale”

as they are intended to be available for use in current operations.

NOTE 8—LEASES

The Company classifies its short-term investments as “available-for-sale” as they are intended to be available for use in current operations.

NOTE 8—LEASES

The Company has operating leases for corporate offices, research and development facilities, certain equipment and software.

The Company’s leases have remaining lease terms of 8 months to 28 months, some of which include options to extend for up to 5 years.

The Company’s leases have remaining lease terms of 2 months to 22 months, some of which include options to extend for up to 5 years.

Supplemental balance sheet information related to leases was as follows:

December 31, 2019

June 30, 2020

March 31, 2020

(In thousands)

5 unchanged sentences

The following table provides the details of lease costs:

Three months ended

Nine months ended

December 31, 2019

(In thousands)

Three Months Ended June 30,

(In thousands)

2 unchanged sentences

The following table provides other information related to leases:

Nine months ended

December 31, 2019

(Amounts in thousands)

Three Months Ended June 30,

(In thousands)

Cash paid for amounts included in the measurement of lease liabilities

6 unchanged sentences

Operating leases

The following table provides the maturities of the Company’s operating lease liabilities as of December 31, 2019:

The following table provides the maturities of the Company’s operating lease liabilities as of June 30, 2020:

Operating Lease

(In thousands)

2020 (Remaining three months)

2021 (Remaining nine months)

Total undiscounted future cash flows

2 unchanged sentences

Presentation on statement of financial position

The following table provides the future minimum lease payments under noncancelable operating leases with lease terms in excess of one year at March 31, 2019 in accordance with ASC 840:

Fiscal Year Ending March 31,

(In thousands)

Rent expense for the three months and nine months ended December 31, 2018 was $154,000 and $415,000, respectively.

The terms of the facility leases provide for rental payments on a graduated scale.

The Company recognizes rent expense on a straight-line basis over the lease period.

NOTE 9—COMMITMENTS AND CONTINGENCIES

Indemnification obligations

1 unchanged sentence

Typically, these obligations arise in the context of contracts entered into by the Company, under which the Company agrees to hold the other party harmless against losses arising from a breach of representations and covenants related to such matters as title to assets sold and certain intellectual property rights.

In each of these circumstances, payment by the Company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the other party’s claims.

Further, the Company’s obligations under these agreements may be limited in terms of time and/or amount, and in some instances, the Company may have recourse against third parties for certain payments made by it under these agreements.

It is not possible to predict the maximum potential amount of future payments that may be required under these or similar agreements due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement.

Historically, payments made by the Company under these agreements have not had a material effect on its business, financial condition, cash flows or results of operations.

2 unchanged sentences

The Company estimates its warranty costs based on historical warranty claim experience and includes such costs in cost of revenues.

Warranty costs and the accrued warranty liability were not material as of December 31, 2019 and March 31, 2019 and for the three and nine months ended December 31, 2019 or 2018.

NOTE 10—STOCK-BASED COMPENSATION

As of December 31, 2019, 2,647,724 shares of common stock were available for grant under the Company’s 2016 Equity Incentive Plan.

The following table summarizes the Company’s stock option activities for the nine months ended December 31, 2019:

Warranty costs and the accrued warranty liability were not material as of June 30, 2020 and March 31, 2020 and for the three months ended June 30, 2020 or 2019.

NOTE 10—STOCK-BASED COMPENSATION

As of June 30, 2020, 2,417,454 shares of common stock were available for grant under the Company’s 2016 Equity Incentive Plan.

The following table summarizes the Company’s stock option activities for the three months ended June 30, 2020:

Number of Shares

1 unchanged sentence

Balance at March 31, 2020

Balance at December 31, 2019

Balance at June 30, 2020

Options vested and exercisable

Options vested and expected to vest

The weighted average fair value per underlying share of options granted during the three months ended December 31, 2019 and 2018 was $2.66 and $2.16, respectively, and $2.84 and $2.39 for the nine months ended December 31, 2019 and 2018, respectively.

Options outstanding by exercise price at December 31, 2019 were as follows:

The weighted average fair value per underlying share of options granted during the three months ended June 30, 2020 and 2019 was $2.80 and $2.70, respectively.

Options outstanding by exercise price at June 30, 2020 were as follows:

Options Outstanding

3 unchanged sentences

The following table summarizes stock-based compensation expense by line item in the Condensed Consolidated Statements of Operations, all relating to employee stock plans:

Three Months Ended December 31,

Nine Months Ended December 31,

(In Thousands)

Three Months Ended June 30,

Cost of revenues

3 unchanged sentences

The Company estimates forfeitures at the time of grant and revises the original estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

No tax benefit related to stock-based compensation was recognized in the nine months ended December 31, 2019 due to a full valuation allowance.

No tax benefit related to stock-based compensation was recognized in the three months ended June 30, 2020 due to a full valuation allowance.

There were no windfall tax benefits realized from exercised stock options in either of these periods.

Compensation cost capitalized within inventory at December 31, 2019 was immaterial.

As of December 31, 2019, the Company’s total unrecognized compensation cost was $5.1 million, which will be recognized over a weighted average period of 2.03 years.

Compensation cost capitalized within inventory at June 30, 2020 was immaterial.

As of June 30, 2020, the Company’s total unrecognized compensation cost was $4.5 million, which will be recognized over a weighted average period of 2.03 years.

The Company calculated the fair value of stock-based awards in the periods presented using the Black-Scholes option pricing model and the following weighted average assumptions:

Three Months Ended December 31,

Nine Months Ended December 31,

Three Months Ended June 30,

Stock Option Plans:

6 unchanged sentences

Dividend yield

NOTE 11—RELATED PARTY TRANSACTION

The Company incurred non-recurring engineering service expense of approximately $16,000 and $243,000, respectively, during the three months and nine months ended December 31, 2019 from Wistron Neweb Corp (“WNC”) in connection with the design and development and delivery of prototypes of a 167mm single-APU PCIe board, Gemini I™, to be used in the Company’s in-place associative computing product, Haydn Hsieh, a member of the Company’s board of directors, is the Chairman and Chief Strategy Officer of WNC.

NOTE 12—SEGMENT AND GEOGRAPHIC INFORMATION

NOTE 11—RELATED PARTY TRANSACTION

The Company incurred non-recurring engineering service expense of approximately $54,000 during the three months ended June 30, 2020 from Wistron Neweb Corp (“WNC”) in connection with the manufacture of single-APU PCIe boards, Gemini I™, to be used in the Company’s in-place associative computing product, Haydn Hsieh, a member of the Company’s board of directors, is the Chairman and Chief Strategy Officer of WNC.

NOTE 12—SEGMENT AND GEOGRAPHIC INFORMATION

Based on its operating management and financial reporting structure, the Company has determined that it has one reportable business segment:

1 unchanged sentence

The following is a summary of net revenues by geographic area based on the location to which product is shipped:

Three Months Ended December 31,

Nine Months Ended December 31,

(In thousands)

Three Months Ended June 30,

United States

1 unchanged sentence

All sales are denominated in United States dollars.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q, and in particular the following Management’s Discussion and Analysis of Financial Condition and Results of Operations, includes “forward-looking statements”

within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

These forward-looking statements involve risks and uncertainties.

Forward-looking statements are identified by words such as “anticipates,”

“believes,”

“expects,”

“intends,”

“may,”

“will,”

and other similar expressions.

In addition, any statements which refer to expectations, projections, or other characterizations of future events or circumstances are forward-looking statements.

Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, including those set forth in this report under “Risk Factors,”

those described elsewhere in this report, and those described in our other reports filed with the Securities and Exchange Commission (“SEC”).

We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report, and we undertake no obligation to update these forward-looking statements after the filing of this report.

You are urged to review carefully and consider our various disclosures in this report and in our other reports publicly disclosed or filed with the SEC that attempt to advise you of the risks and factors that may affect our business .

We are a fabless semiconductor company that designs, develops and markets static random access memories, or SRAMs, that operate at speeds of less than 10 nanoseconds, which we refer to as Very Fast SRAMs, primarily for the networking and telecommunications markets.

We are subject to the highly cyclical nature of the semiconductor industry, which has experienced significant fluctuations, often in connection with fluctuations in

demand for the products in which semiconductor devices are used.

Our revenues have been substantially impacted by significant fluctuations in sales to our largest customer, Nokia.

We expect that future direct and indirect sales to Nokia will continue to fluctuate significantly on a quarterly basis.

The networking and telecommunications market has accounted for a significant portion of our net revenues in the past and has declined during the past several years and is expected to continue to decline.

However, with no debt, substantial liquidity and a history of positive cash flows from operations, we believe we are in a better financial position than many other companies of our size.

Our revenues are derived primarily from sales of our Very Fast SRAM products.

Sales to networking and telecommunications OEMs accounted for 55% to 66% of our net revenues during our last three fiscal years.

We also sell our products to OEMs that manufacture products for military and aerospace applications such as radar and guidance systems, missiles and satellites, for professional audio applications such as sound mixing systems, for test and measurement applications such as high-speed testers, for automotive applications such as smart cruise control and voice recognition systems, and for medical applications such as ultrasound and CAT scan equipment.

As is typical in the semiconductor industry, the selling prices of our products generally decline over the life of the product.

Our ability to increase net revenues, therefore, is dependent upon our ability to increase unit sales volumes of existing products and to introduce and sell new products with higher average selling prices in quantities sufficient to compensate for the anticipated declines in selling prices of our more mature products.

Although we expect the average selling prices of individual products to decline over time, we believe that, over the next several quarters, our overall average selling prices will increase due to a continuing shift in product mix to a higher percentage of higher price, higher density products.

Our ability to increase unit sales volumes is dependent primarily upon increases in customer demand but, particularly in periods of increasing demand, can also be affected by our ability to increase production through the availability of increased wafer fabrication capacity from Taiwan Semiconductor Manufacturing Company, or TSMC, and Powerchip, our wafer suppliers, and our ability to increase the number of good integrated circuit die produced from each wafer through die size reductions and yield enhancement activities.

We may experience fluctuations in quarterly net revenues for a number of reasons.

Historically, orders on hand at the beginning of each quarter are insufficient to meet our revenue objectives for that quarter and are generally cancelable up to 30 days prior to scheduled delivery.

Accordingly, we depend on obtaining and shipping orders in the same quarter to achieve our revenue objectives.

In addition, the timing of product releases, purchase orders and product availability could result in significant product shipments at the end of a quarter.

Failure to ship these products by the end of the quarter may adversely affect our operating results.

Furthermore, our customers may delay scheduled delivery dates and/or cancel orders within specified timeframes without significant penalty.

We sell our products through our direct sales force, international and domestic sales representatives and distributors.

The majority of our customer contracts, which may be in the form of purchase orders, contracts or purchase agreements, contain performance obligations for delivery of agreed upon products.

Delivery of all performance obligations contained within a contract with a customer typically occurs at the same time (or within the same accounting period).

Transfer of control typically occurs at the time of shipment or at the time the product is pulled from consignment as that is the point at which delivery has occurred, title and the risks and rewards of ownership have passed to the customer, and we have a right to payment.

Thus, we will generally recognize revenue upon shipment of the product.

Sales to consignment warehouses, who purchase products from us for use by contract manufacturers, are recorded upon delivery to the contract manufacturer.

Nokia was our largest customer in fiscal 2019, 2018 and 2017.

Nokia purchases products directly from us and through contract manufacturers and distributors.

Based on information provided to us by its contract manufacturers and our distributors, purchases by Nokia represented approximately 40%, 45%, 36% and 41% of our net revenues in the nine months ended December 31, 2019 and in fiscal 2019, 2018 and 2017, respectively.

Our revenues have been substantially impacted by significant fluctuations in sales to Nokia, and we expect that future direct and indirect sales to Nokia will continue to fluctuate substantially on a quarterly basis and that such fluctuations may significantly affect our operating results in future periods.

To our knowledge, none of our other OEM customers accounted for more than 10% of our net revenues in the nine months ended December 31, 2019 and in fiscal 2019 , 2018 or 2017 .

Cost of Revenues.

Our cost of revenues consists primarily of wafer fabrication costs, wafer sort, assembly, test and burn-in expenses, the amortized cost of production mask sets, stock-based compensation and the cost of materials and overhead from operations.

All of our wafer manufacturing and assembly operations, and a significant portion of our wafer sort testing operations, are outsourced.

Accordingly, most of our cost of revenues consists of payments to TSMC, Powerchip and independent assembly and test houses.

Because we do not have long-term, fixed-price supply contracts, our wafer fabrication and other outsourced manufacturing costs are subject to the cyclical fluctuations in demand for semiconductors.

Cost of revenues also includes expenses related to supply chain management, quality assurance, and final product testing and documentation control activities conducted at our headquarters in Sunnyvale, California and our branch operations in Taiwan.

Gross Profit.

Our gross profit margins vary among our products and are generally greater on our higher density products and, within a particular density, greater on our higher speed and industrial temperature products.

We expect that our overall gross margins will fluctuate from period to period as a result of shifts in product mix, changes in average selling prices and our ability to control our cost of revenues, including costs associated with outsourced wafer fabrication and product assembly and testing.

Research and Development Expenses.

Research and development expenses consist primarily of salaries and related expenses for design engineers and other technical personnel, the cost of developing prototypes, stock-based compensation and fees paid to consultants.

We charge all research and development expenses to operations as incurred.

We charge mask costs used in production to cost of revenues over a 12-month period.

However, we charge costs related to pre-production mask sets, which are not used in production, to research and development expenses at the time they are incurred.

These charges often arise as we transition to new process technologies and, accordingly, can cause research and development expenses to fluctuate on a quarterly basis.

We believe that continued investment in research and development is critical to our long-term success, and we expect to continue to devote significant resources to product development activities.

In particular, we are devoting substantial resources to the development of a new category of in-place associative computing products.

Accordingly, we expect that our research and development expenses will continue to be substantial in future periods and may lead to operating losses in some periods.

Such expenses as a percentage of net revenues may fluctuate from period to period.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses consist primarily of commissions paid to independent sales representatives, salaries, stock-based compensation and related expenses for personnel engaged in sales, marketing, administrative, finance and human resources activities, professional fees, costs associated with the promotion of our products and other corporate expenses.

We expect that our sales and marketing expenses will increase in absolute dollars in future periods if we are able to grow and expand our sales force but that, to the extent our revenues increase in future periods, these expenses will generally decline as a percentage of net revenues.

We also expect that, in support of any future growth that we are able to achieve, general and administrative expenses will generally increase in absolute dollars.

Results of Operations

The following table sets forth statement of operations data as a percentage of net revenues for the periods indicated:

Three Months Ended December 31,

Nine Months Ended December 31,

Cost of revenues

Operating expenses:

Research and development

Selling, general and administrative

Total operating expenses

Income (loss) from operations

Interest and other income, net

Income (loss) before income taxes

Provision for income taxes

Net income (loss)

Net Revenues .

Net revenues decreased by 31.6% from $14.7 million in the three months ended December 31, 2018 to $10.0 million in the three months ended December 31, 2019 and decreased by 10.3% from $38.8 million in the nine months ended December 31, 2018 to $34.8 million in the nine months ended December 31, 2019.

The overall average selling price of all units shipped in the quarter ended December 31, 2019 decreased by 17.7% compared to the quarter ended December 31, 2018 and increased by 3.7% in the nine months ended December 31, 2019 compared to the nine months ended December 31, 2018.

The changes in the average selling price in each fiscal 2020 period were due to changes in product mix, as we sold more or less higher density, higher average selling price products in the fiscal 2020 periods compared to the prior fiscal year periods.

Direct and indirect sales to Nokia, currently our largest customer, decreased from $6.6 million in the three months ended December 31, 2018 to $2.6 million in the three months ended December 31, 2019 and decreased from $17.9 million in the nine months ended December 31, 2018 to $13.9 million in the nine months ended December 31, 2019.

Shipments of our SigmaQuad product line accounted for 62.0% of total shipments in the three months ended December 31, 2019 compared to 69.7% of total shipments in the three months ended December 31, 2018 and 64.7% of total shipments in the nine months ended December 31, 2019 compared to 65.7% of total shipments in the nine months ended December 31, 2018.

The changes in SigmaQuad shipments were primarily due to the changes in sales to Nokia discussed above.

Cost of Revenues.

Cost of revenues decreased by 14.2% from $4.7 million in the three months ended December 31, 2018 to $4.0 million in the three months ended December 31, 2019 and by 6.7% from $14.9 million in the nine months ended December 31, 2018 to $13.9 million in the nine months ended December 31, 2019.

Cost of revenues included a provision for excess and obsolete inventories of $260,000 in the nine months ended December 31, 2019 compared to $874,000 in the nine months ended December 31, 2018.

Cost of revenues included stock-based compensation expense of $77,000 and $71,000 for the three months ended December 31, 2019 and 2018, respectively, and $184,000 and $185,000 for the nine months ended December 31, 2019 and 2018, respectively.

Gross Profit.

Gross profit decreased by 39.7% from $10.0 million in the three months ended December 31, 2018 to $6.0 million in the three months ended December 31, 2019 and by 12.6% from $23.9 million in the nine months ended December 31, 2018 to $20.9 million in the nine months ended December 31, 2019.

Gross margin decreased from 68.3% in the three months ended December 31, 2018 to 60.2% in the three months ended December 31, 2019 and from 61.5% in the nine months ended December 31, 2018 to 59.9% in the nine months ended December 31, 2019.

The change in gross profit in each period is primarily related to the changes in net revenues discussed above.

The changes in gross margin are primarily related to changes in the mix of products and customers and changes in the level of charges for inventory reserves booked in each period.

Research and Development Expenses.

Research and development expenses increased by 58.7% from $5.2 million in the three months ended December 31, 2018 to $8.2 million in the three months ended December 31, 2019.

The increase in research and development spending was primarily related to an increase of $2.7 million for purchased intellectual property with no alternative future use and a lesser increase in payroll related expenses.

Research and development expenses included stock-based compensation expense of $347,000 and $330,000 for the three months ended December 31, 2019 and 2018, respectively.

Research and development expenses increased 24.5% from $15.8 million in the nine months ended December 31, 2018 to $19.6 million in the nine months ended December 31, 2019.

The increase was primarily due to increases of $2.7 million for purchased intellectual property with no alternative future use, $857,000 in consulting and prototype development fees, $838,000 in payroll related expenses and $169,000 in stock-based compensation expense that were primarily offset by a decrease of $986,000 in non-production mask sets.

Research and development expenses included stock-based compensation expense of $1.1 million and $974,000 for the nine months ended December 31, 2019 and 2018, respectively.

The increases in research and development spending in both periods were primarily related to the development of our associative computing devices.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses were unchanged at $2.6 million in the three months ended December 31, 2018 and in the three months ended December 31, 2019.

A decrease of $83,000 for independent sales representatives commissions and a lesser decrease in payroll related expenses was primarily offset by an increase in professional fees.

Selling, general and administrative expenses included stock-based compensation expense of $205,000 and $191,000 for the three months ended December 31, 2019 and 2018, respectively.

Selling, general and administrative expenses increased by 2.7% from $7.9 million in the nine months ended December 31, 2018 to $8.1 million in the nine months ended December 31, 2019.

Increases in professional fees of $173,000 and a lesser increase in payroll related expenses were primarily offset by a decrease of $148,000 in independent sales representative commissions.

Selling, general and administrative expenses included stock-based compensation expense of $595,000 and $527,000 for the nine months ended December 31, 2019 and 2018, respectively.

Interest Income, Net.

Interest and other income, net increased 115.6% from income of $96,000 in the three months ended December 31, 2018 to $207,000 in the three months ended December 31, 2019.

Interest income increased by $5,000 due to lower interest rates received on our cash and short-term and long-term investments.

Foreign exchange losses were $99,000 for the three months ended December 31, 2018 compared to a foreign exchange gain of $17,000 for the three months ended December 31, 2019.

The exchange gain and loss in each period were related to our Taiwan branch operations and our operations in Israel.

Interest and other income, net increased 113.6% from income of $264,000 in the nine months ended December 31, 2018 to $564,000 in the nine months ended December 31, 2019.

Interest income increased by $122,000 due to higher interest rates received on our cash and short-term and long-term investments.

We had a foreign exchange loss of $224,000 for the nine months ended December 31, 2018 compared to $46,000 for the nine months ended December 31, 2019.

The exchange losses in each period were related to our Taiwan branch operations and our operations in Israel.

Provision for Income Taxes.

The provision for income taxes increased 20.0% from $70,000 in the three months ended December 31, 2018 to $84,000 in the three months ended December 31, 2019 and was unchanged at $182,000 in the nine months ended December 31, 2018 and December 31, 2019.

These changes were primarily due to fluctuations in the relative mix of income among our operating jurisdictions.

Net Income (Loss) .

Net income was $2.3 million in the three months ended December 31, 2018 compared to a net loss of $4.6 million in the three months ended December 31, 2019 and net income of $265,000 in the nine months ended December 31, 2018 compared to a net loss of $6.5 million in the nine months ended December 31, 2019.

These fluctuations were primarily due to the changes in net revenues, gross profit and operating expenses discussed above.

Liquidity and Capital Resources

As of December 31, 2019, our principal sources of liquidity were cash, cash equivalents and short-term investments of $68.3 million compared to $61.8 million as of March 31, 2019.

Net cash used in operating activities was $1.2 million for the nine months ended December 31, 2019 compared to net cash provided by operating activities of $797,000 for the nine months ended December 31, 2018.

The primary uses of cash in the nine months ended December 31, 2019 was the net loss of $6.5 million, an increase

of $1.1 million in prepaid expenses and other assets and a reduction in accounts payable of $728,000.

Primary sources of cash in the nine months ended December 31, 2019 were a decrease of $2.0 million in accounts receivable and non-cash items including stock-based compensation of $1.9 million and depreciation and amortization expenses of $1.1 million.

The decrease in accounts receivable was primarily due to the decrease in net revenues in the quarter ended December 31, 2019 compared to the quarter ended December 31, 2018.

Primary sources of cash in the nine months ended December 31, 2018 were net income and non-cash items including stock-based compensation of $1.7 million, depreciation and amortization expenses of $1.1 million and a provision for excess and obsolete inventories of $874,000.

Additional sources of cash in the nine months ended December 31, 2018 were lesser increases in accrued expenses and other liabilities and accounts payable.

The primary uses of cash in the nine months ended December 31, 2018 were increases in accounts receivable of $2.9 million and inventory of $1.3 million.

The increase in accounts receivable was primarily due to the timing of payments received from customers and the increased level of shipments to Nokia, our largest customer, during the three months ended December 31, 2018.

Net cash provided by investing activities was $3.5 million in the nine months ended December 31, 2019 compared to net cash used by investing activities of $1.8 million in the nine months ended December 31, 2018.

Investment activities in the nine months ended December 31, 2019 primarily consisted of the maturity of certificates of deposit and supranational obligations of $18.6 million, partially offset by the purchase of certificates of deposit and agency bonds of $15.9 million.

Investment activities in the nine months ended December 31, 2018 primarily consisted of the purchase of agency bonds and certificates of deposit of $16.1 million, partially offset by the maturity of agency bonds and certificates of deposit of $15.4 million and the purchase of property and equipment of $1.9 million.

Net cash provided by financing activities in the nine months ended December 31, 2019 primarily consisted of the net proceeds from the sale of common stock pursuant to our employee stock plans of $3.6 million partially offset by the release of an escrow deposit related to our acquisition of MikaMonu in the amount of $428,000.

Net cash provided by financing activities in the nine months ended December 31, 2018 consisted of the net proceeds from the sale of common stock pursuant to our employee stock plans of $2.5 million partially offset by a payment of contingent consideration related to our acquisition of MikaMonu in November 2015 in the amount of $720,000 and the release of an escrow deposit related to our acquisition of MikaMonu in the amount of $364,000.

Our estimated annual effective income tax rate was approximately (2.2%) as of December 31, 2019.

We believe that our existing balances of cash, cash equivalents and short-term investments, and cash flow expected to be generated from our future operations will be sufficient to meet our cash needs for working capital and capital expenditures for at least the next 12 months, although we could be required, or could elect, to seek additional funding prior to that time.

Our future capital requirements will depend on many factors, including revenue growth, if any, that we experience, the extent to which we utilize subcontractors, the levels of inventory and accounts receivable that we maintain, the timing and extent of spending to support our product development efforts and the expansion of our sales and marketing.

Additional capital may also be required for the consummation of any acquisition of businesses, products or technologies that we may undertake.

We cannot assure that additional equity or debt financing, if required, will be available on terms that are acceptable or at all.

Contractual Obligations

The following table describes our contractual obligations as of December 31, 2019:

Payments due by period

More than 5 years

Facilities and software leases

Wafer, software and test purchase obligations

As of December 31, 2019 , the current portion of our unrecognized tax benefits was $0, and the long-term portion was $627,000.

In connection with the acquisition of MikaMonu on November 23, 2015, we are required to make contingent consideration payments to the former MikaMonu shareholders conditioned upon revenue targets for products based on the MikaMonu technology.

As of December 31, 2019, the accrual for potential contingent consideration was $3.8 million and is payable at various dates through December 31, 2025.

Critical Accounting Policies and Estimates

Our critical accounting policies and estimates are disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2019.

Off-Balance Sheet Arrangements

At December 31, 2019, we did not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Accordingly, we are not exposed to the type of financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Recent Accounting Pronouncements

Please refer to Note 1 to our condensed consolidated financial statements appearing under Part I, Item 1 for a discussion of recent accounting pronouncements that may impact the Company.

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 1. Financial Statements