What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-05 compared with 2020-08-07 · 72 added, 62 removed, 124 unchanged (52% of the section changed)

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Final testing of our product is conducted in house.

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

Shipping and receiving operations at our United States headquarters are being maintained by a skeleton crew with minimal impact.

Our 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 our customer contacts to work from home.

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

Our results for the quarter and six month periods ended September 30, 2020 demonstrate the challenges that we are facing during the COVID-19 global pandemic, which has restricted the activities of our sales force and distributors, reduced customer demand and caused the postponement of investment in certain customer sectors.

These challenges are also impacting us as we enter new markets and engage with target customers.

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While we continue to monitor the business metrics that we have historically used to predict our financial performance, we are uncertain as to whether these metrics will operate consistently with our historical experience.

As of June 30, 2020, we had cash, cash equivalents, and short-term and long-term investments of $69.4 million, with no debt.

As of September 30, 2020, we had cash, cash equivalents, and short-term and long-term investments of $64.7 million, with no debt.

We have a team in-place with tremendous depth and breadth of experience and knowledge, with a legacy business that is providing an ongoing source of funding for the development of new product lines.

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economy and keep Americans employed.

We have not filed, and currently do not intend to file, for funding related to the CARES Act due to our strong balance sheet and liquidity position with $69.4 million in cash and cash equivalents, short-term investments and long-term investments and no debt outstanding as of June 30, 2020.

We have not filed, and currently do not intend to file, for funding related to the CARES Act due to our strong balance sheet and liquidity position with $64.7 million in cash and cash equivalents, short-term investments and long-term investments and no debt outstanding as of September 30, 2020.

Also included in the CARES Act are numerous income tax provisions including changes to the net operating loss rules that we believe will not have a significant impact on us.

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Sales to networking and telecommunications OEMs accounted for 50% to 55% 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.

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.

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.

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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 27%, 38%, 45% and 36% of our net revenues in the three months ended June 30, 2020 and in fiscal 2020, 2019 and 2018, respectively.

Based on information provided to us by its contract manufacturers and our distributors, purchases by Nokia represented approximately 39%, 38%, 45% and 36% of our net revenues in the six months ended September 30, 2020 and in fiscal 2020, 2019 and 2018, 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 three months ended June 30, 2020 and in fiscal 2020, 2019 or 2018.

To our knowledge, none of our other OEM customers accounted for more than 10% of our net revenues in the six months ended September 30, 2020 and in fiscal 2020, 2019 or 2018.

Cost of Revenues.

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

Three Months Ended June 30,

Three Months Ended September 30,

Six Months Ended September 30,

Cost of revenues

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Net Revenues .

Net revenues decreased by 49.1% from $13.0 million in the three months ended June 30, 2019 to $6.6 million in the three months ended June 30, 2020.

Net revenues in the quarter ended June 30, 2020 were impacted by the COVID-19 global.

Our net revenues in the quarter ended June 30, 2020 demonstrate the challenges that we are facing during the COVID-19 global pandemic, which has restricted the activities of our sales force and distributors, reduced customer demand and caused the postponement of investment in certain customer sectors.

Net revenues decreased by 43.3% from $11.7 million in the three months ended September 30, 2019 to $6.7 million in the three months ended September 30, 2020 and by 46.4% from $24.8 million in the six months ended September 30, 2019 to $13.3 million in the six months ended September 30, 2020.

Net revenues in the three and six month periods ended September 30, 2020 were impacted by the COVID-19 global pandemic.

Our net revenues in the current fiscal year demonstrate the challenges that we are facing during the COVID-19 global pandemic, which has restricted the activities of our sales force and distributors, reduced

customer demand and caused the postponement of investment in certain customer sectors.

These challenges are also impacting us as we enter new markets and engage 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.

We are adapting our sales strategies for the COVID-19 environment, where we cannot do face-to-face meetings and conduct secure meetings with government and defense customers, but we are still not operating at an optimal level.

The overall average selling price of all units shipped in the quarter ended June 30, 2020 decreased by 24.8% compared to the quarter ended June 30, 2019.

The change in the average selling price in the fiscal 2021 period was due to changes in product mix, as we sold fewer higher density, higher average selling price products in

the fiscal 2021 period compared to the prior fiscal year period.

Direct and indirect sales to Nokia, currently our largest customer, decreased from $6.0 million in the three months ended June 30, 2019 to $1.8 million in the three months ended June 30, 2020.

Shipments of our SigmaQuad product line accounted for 46.3% of total shipments in the three months ended June 30, 2020 compared to 67.9% of total shipments in the three months ended June 30, 2019.

We are adapting our sales strategies for the COVID-19 environment as there are limitations with both in-person and virtual meetings, particularly, government and defense customers with regards to secure teleconferencing.

However, we are still not operating at an optimal level.

The overall average selling price of all units shipped in the quarter ended September 30, 2020 increased by 8.1% compared to the quarter ended September 30, 2019 and decreased by 9.8% in the six months ended September 30, 2020 compared to the six months ended September 30, 2019.

The changes in the average selling price in each fiscal 2021 period were due to changes in product mix, as we sold more or less higher density, higher average selling price products in the fiscal 2021 periods compared to the prior fiscal year periods.

Direct and indirect sales to Nokia, currently our largest customer, decreased from $5.3 million in the three months ended September 30, 2019 to $3.4 million in the three months ended September 30, 2020 and from $11.3 million in the six months ended September 30, 2019 to $5.2 million in the six months ended September 30, 2020.

Shipments of our SigmaQuad product line accounted for 63.5% of total shipments in the three months ended September 30, 2019 compared to 65.4% of total shipments in the three months ended September 30, 2020 and 65.9% of total shipments in the six months ended September 30, 2019 compared to 56.1% of total shipments in the six months ended September 30, 2020.

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 25.2% from $4.8 million in the three months ended June 30, 2019 to $3.6 million in the three months ended June 30, 2020.

Cost of revenues included a provision for excess and obsolete inventories of $159,000 in the three months ended June 30, 2020 compared to $89,000 in the three months ended June 30, 2019.

Cost of revenues included stock-based compensation expense of $55,000 and $88,000 for the three months ended June 30, 2019 and 2020, respectively.

Cost of revenues decreased by 31.4% from $5.2 million in the three months ended September 30, 2019 to $3.5 million in the three months ended September 30, 2020 and by 28.4% from $9.9 million in the six months ended September 30, 2019 to $7.1 million in the six months ended September 30, 2020.

Cost of revenues included a provision for excess and obsolete inventories of $136,000 in the six months ended September 30, 2019 compared to $230,000 in the six months ended September 30, 2020.

Cost of revenues included stock-based compensation expense of $52,000 and $84,000 for the three months ended September 30, 2019 and 2020, respectively, and $107,000 and $172,000 for the six months ended September 30, 2019 and 2020, respectively.

Gross Profit.

Gross profit decreased by 63.0% from $8.2 million in the three months ended June 30, 2019 to $3.1 million in the three months ended June 30, 2020.

Gross margin decreased from 63.3% in the three months ended June 30, 2019 to 46.1% in the three months ended June 30, 2020.

The change in gross profit was primarily related to the changes in net revenues discussed above.

The change in gross margin was 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.

Gross profit decreased by 52.6% from $6.6 million in the three months ended September 30, 2019 to $3.1 million in the three months ended September 30, 2020 and by 58.4% from $14.8 million in the six months ended September 30, 2019 to $6.2 million in the six months ended September 30, 2020.

Gross margin decreased from 55.9% in the three months ended September 30, 2019 to 46.7% in the three months ended September 30, 2020 and from 59.8% in the six months ended September 30, 2019 to 46.4% in the six months ended September 30, 2020.

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 4.1% from $5.6 million in the three months ended June 30, 2019 to $5.8 million in the three months ended June 30, 2020.

The increase in research and development spending was primarily related to an increase of $109,000 for payroll related expenses, and lesser increases in software maintenance expenses, rent expense and professional fees.

Research and development expenses included stock-based compensation expense of $399,000 and $413,000 for the three months ended June 30, 2019 and 2020, respectively.

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

Research and development expenses decreased by 3.0% from $5.8 million in the three months ended September 30, 2019 to $5.7 million in the three months ended September 30, 2020.

A decrease of $193,000 in professional fees and lesser decreases in stock-based compensation expense, facilities related expenses and travel expenses were partially offset by increases in payroll related expenses and software maintenance expenses.

Research and development expenses included stock-based compensation expense of $397,000 and $353,000 for the three months ended September 30, 2019 and 2020, respectively.

Research and development expenses increased 0.5% from $11.4 million in the six months ended September 30, 2019 to $11.5 million in the six months ended September 30, 2020.

An increase of $173,000 in payroll related expenses and lesser increases software maintenance expenses and rent were partially offset by decreases in professional fees, travel related expenses, stock-based compensation expense and facilities related expenses.

Research and development expenses included stock-based compensation expense of $796,000 and $766,000 for the six months ended September 30, 2019 and 2020, respectively.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses were unchanged at $2.9 million in the three months ended June 30, 2019 and in the three months ended June 30, 2020.

A decrease of $200,000 for independent sales representatives commissions and a lesser decrease in travel related expenses was primarily offset by an increase in professional fees and payroll related expenses.

Selling, general and administrative expenses included stock-based compensation expense of $197,000 and $254,000 for the three months ended June 30, 2019 and 2020, respectively.

Selling, general and administrative expenses decreased by 2.0% from $2.7 million in the three months ended September 30, 2019 to $2.6 million in the three months ended September 30, 2020.

A decrease of $86,000 for independent sales representatives commissions and a lesser decrease in travel expenses was primarily offset by increases in payroll related expenses and professional fees.

Selling, general and administrative expenses included stock-based compensation expense of $193,000 and $216,000 for the

three months ended September 30, 2019 and 2020, respectively.

Selling, general and administrative expenses were unchanged at $5.5 million in the six months ended September 30, 2019 and in the six months ended September 30, 2020.

Decreases in independent sales representative commissions of $287,000 and $88,000 in travel expenses were primarily offset by increases in payroll expenses, professional fees and stock-based compensation expense.

Selling, general and administrative expenses included stock-based compensation expense of $390,000 and $470,000 for the six months ended September 30, 2019 and 2020, respectively.

Interest Income, Net.

Interest and other income, net decreased 27.9% from income of $147,000 in the three months ended June 30, 2019 to $106,000 in the three months ended June 30, 2020.

Interest income decreased by $91,000 due to lower interest rates received on our cash and short-term and long-term investments.

Foreign exchange losses were $58,000 for the three months ended June 30, 2019 compared to $8,000 for the three months ended June 30, 2020.

The exchange losses are related to our Taiwan branch operations and our operations in Israel.

Interest and other income, net decreased 107.6% from income of $210,000 in the three months ended September 30, 2019 to an expense of $16,000 in the three months ended September 30, 2020.

Interest income decreased by $136,000 primarily due to lower interest rates received on our cash and short-term and long-term investments.

Foreign exchange losses were $5,000 for the three months ended September 30, 2019 compared to $96,000 for the three months ended September 30, 2020.

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

Interest and other income, net decreased 74.8% from income of $357,000 in the six months ended September 30, 2019 to $90,000 in the six months ended September 30, 2020.

Interest income decreased by $226,000 primarily due to lower interest rates received on our cash and short-term and long-term investments.

We had a foreign exchange loss of $63,000 for the six months ended September 30, 2019 compared to $104,000 for the six months ended September 30, 2020.

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 1,032.6% from $43,000 in the three months ended June 30, 2019 to $487,000 in the three months ended June 30, 2020.

This change was primarily due to the settlement of an income tax audit in Israel during the quarter ended June 30, 2020 for fiscal years 2016 through fiscal 2019 which resulted in a discrete tax provision of $479,000, and to a lesser extent due to fluctuations in the relative mix of income among our operating jurisdictions.

Net Income (Loss) .

Net loss was $125,000 in the three months ended June 30, 2019 compared to $6.1 million in the three months ended June 30, 2020.

This fluctuation was primarily due to the changes in net revenues, gross profit and operating expenses discussed above.

The provision for income taxes increased 12.7% from $55,000 in the three months ended September 30, 2019 to $62,000 in the three months ended September 30, 2020 and increased 460.2% from $98,000 in the six months ended September 30, 2019 to $549,000 in the six months ended September 30, 2020.

This change for the six month period was primarily due to the settlement of an income tax audit in Israel during the quarter ended June 30, 2020 for fiscal years 2016 through fiscal 2019 which resulted in a discrete tax provision of $479,000, and to a lesser extent due to fluctuations in the relative mix of income among our operating jurisdictions.

Net loss was $1.8 million in the three months ended September 30, 2019 compared $5.2 million in the three months ended September 30, 2020 and was $1.9 million in the six months ended September 30, 2019 compared to $11.3 million in the six months ended September 30, 2020.

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

Liquidity and Capital Resources

As of June 30, 2020, our principal sources of liquidity were cash, cash equivalents and short-term investments of $64.6 million compared to $66.6 million as of March 31, 2020.

Net cash used in operating activities was $3.6 million for the three months ended June 30, 2020 compared to $1.2 million for the three months ended June 30, 2019.

The primary uses of cash in the three months ended June 30, 2020 was the net loss of $6.1 million, a reduction in accrued expenses and other liabilities of $931,000 and an increase of $580,000 in inventories.

The reduction in accrued expenses and other liabilities was primarily related to the payment of fiscal 2020 year-end compensation related accruals.

Primary sources of cash in the three months ended June 30, 2020 were a reduction in accounts receivable of $2.5 million and non-cash items including stock-based compensation of $755,000 and depreciation and amortization expenses of $354,000.

The decrease in accounts receivable was primarily due to the decrease in shipments in the quarter ended June 30, 2020 compared to the quarter ended March 31, 2020.

The primary uses of cash in the three months ended June 30, 2019 was a reduction in accrued expenses and other liabilities of $1.8 million and a lesser amount related to an increase in prepaid expenses and other assets.

As of September 30, 2020, our principal sources of liquidity were cash, cash equivalents and short-term investments of $56.1 million compared to $66.6 million as of March 31, 2020.

Net cash used in operating activities was $8.3 million for the six months ended September 30, 2020 compared to $1.1 million for the six months ended September 30, 2019.

The primary uses of cash in the six months ended September 30, 2020 was the net loss of $11.3 million and a reduction in accrued expenses and other liabilities of $1.9 million.

The reduction in accrued expenses and other liabilities was primarily related to the payment of fiscal 2020 year-end accruals for purchased intellectual property.

Primary sources of cash in the six months ended September 30, 2020 were a reduction in accounts receivable of $2.1 million and non-cash items including stock-based compensation of $1.4 million and depreciation and amortization expenses of $707,000.

The decrease in accounts receivable was primarily due to the decrease in shipments in the quarter ended September 30, 2020 compared to the quarter ended March 31, 2020.

The primary uses of cash in the six months ended September 30, 2019 was the net loss of $1.9 million, a reduction in accrued expenses and other liabilities of $1.4 million and a lesser amount related to an increase in prepaid expenses and other assets.

The reduction in accrued expenses and other liabilities was primarily related to the payment of fiscal 2019 year-end compensation related accruals.

Primary sources of cash in the three months ended June 30, 2019 were non-cash items including stock-based compensation of $651,000 and depreciation and amortization expenses of $365,000.

Net cash provided by investing activities was $700,000 in the three months ended June 30, 2020 compared to net cash provided by investing activities of $2.8 million in the three months ended June 30, 2019.

Investment activities in the three months ended June 30, 2020 primarily consisted of the maturity of agency bonds and certificates of deposit of $6.0 million, partially offset by the purchase of certificates of deposit of $5.3 million.

Investment activities in the three months ended June 30, 2019 primarily consisted of the maturity of supranational obligations and certificates of deposit of $4.9 million, partially offset by the purchase of certificates of deposit of $2.0 million.

Net cash provided by financing activities in the three months ended June 30, 2020 consisted of the net proceeds from the sale of common stock pursuant to our employee stock plans of $2.3 million.

Net cash provided by financing activities in the three months ended June 30, 2019 consisted of the net proceeds from the sale of common stock pursuant to our employee stock plans of $2.4 million.

Our estimated annual effective income tax rate was approximately (4.0%) as of June 30, 2020.

Primary sources of cash in the six months ended September 30, 2019 were non-cash items including stock-based compensation of $1.3 million and depreciation and amortization expenses of $727,000.

Net cash used in investing activities was $1.7 million in the six months ended September 30, 2020 compared to net cash provided by investing activities of $1.2 million in the six months ended September 30, 2019.

Investment activities in the six months ended September 30, 2020 primarily consisted of the purchase of certificates of deposit, agency bonds and supranational obligations of $11.3 million, partially offset by the maturity of certificates of deposit and agency bonds of $9.8 million.

Investment activities in the six months ended September 30, 2019 primarily consisted of the maturity of certificates of deposit of $10.1 million, partially offset by the purchase of certificates of deposit and agency bonds of $8.8 million.

Net cash provided by financing activities in the six months ended September 30, 2020 consisted of the net proceeds from the sale of common stock pursuant to our employee stock plans of $2.5 million.

Net cash provided by financing activities in the six months ended September 30, 2019 consisted of the net proceeds from the sale of common stock pursuant to our employee stock plans of $3.1 million.

Our estimated annual effective income tax rate was approximately (3.3%) as of September 30, 2020.

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.

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Contractual Obligations

The following table describes our contractual obligations as of June 30, 2020:

The following table describes our contractual obligations as of September 30, 2020:

Payments due by period (in thousands)

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Wafer, software and test purchase obligations

As of June 30, 2020, the current portion of our unrecognized tax benefits was $0, and the long-term portion was $326,000.

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 June 30, 2020, the accrual for potential contingent consideration was $3.9 million and is payable at various dates through December 31, 2025.

As of September 30, 2020, the current portion of our unrecognized tax benefits was $0, and the long-term portion was $327,000.

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 September 30, 2020, the accrual for potential contingent consideration was $3.9 million and is payable at various dates through December 31, 2025.

Critical Accounting Policies and Estimates

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Off-Balance Sheet Arrangements

At June 30, 2020, 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.

At September 30, 2020, 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.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis