Item 2. Management’s Discussion and Analysis
Item 2. 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 .
Overview
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. In recent years we have devoted significant resources to the development of our new APU product. However, with no debt and substantial liquidity, we believe we are in a better financial position than many other companies of our size.
The COVID-19 pandemic has affected many of the countries in which we, our customers, our suppliers and our 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 our employees, are taking additional steps to avoid or reduce infection, including limiting travel and working from home. These measures have disrupted normal business operations both in and outside of affected areas and have had significant negative impacts on businesses and financial markets worldwide. While expected to
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be temporary, these disruptions negatively impacted our revenue, results of operations, financial condition, and liquidity in fiscal year 2021, and are expected to continue to negatively impact us in fiscal 2022 and into fiscal 2023.
We continue to monitor our operations and government recommendations and has made modifications to our normal operations because of the COVID-19 global pandemic. We have instituted many preventative measures and are regularly evaluating those measures and others as we continue to better understand our current and future operating environment. Since March 2020, except for our employees located in Taiwan, the majority of our employees have worked from home around the world. In May 2021, with the surge in COVID-19 infections in Taiwan, our employees in Taiwan have begun working from home under alternating schedules. We have maintained a substantial portion of our manufacturing operational capacity at our primary manufacturing support facility located in Hsin Chu, Taiwan where our suppliers are located and all of our products are manufactured. Supply chain shortages and the impact of rising COVID infections in Taiwan that have recently impacted the operations of our manufacturing partners are expected to impact our fulfillment of sales in the near term, and possibly for the remainder of the calendar year. Final testing of our product is conducted in house. 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 COVID-19 restrictions that require a significant number of our customer contacts to work from home. Our results for the fiscal year ended March 31, 2021 demonstrated 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 to sell our new APU product. Industry conferences and on-site training workshops, which are typically used for building a sales pipeline, have been unavailable due to COVID-19 related restrictions. We have adapted 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 disruption to the marketplace resulting from the COVID-19 global pandemic that we are currently experiencing is unlike anything we have ever had to deal with. 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, 2021, we had cash, cash equivalents, and short-term and long-term investments of $55.8 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. We have a strong balance sheet and liquidity position that we anticipate will provide financial flexibility and security in the current environment of economic uncertainty with no current expectations of additional cash infusions required. Generally, our primary source of liquidity is cash equivalents and short-term investments. Our level of cash equivalents and short-term investments has historically been sufficient to meet our operating and capital needs. We believe that during the next 12 months, the COVID-19 global pandemic could continue to impact general economic activity and demand in our end markets. Although it is difficult to estimate the length or gravity of the impact of the COVID-19 outbreak, if the pandemic continues, it may have an adverse effect on our results of operations, financial position, including potential impairments, and liquidity for the remainder of fiscal year 2022
On March 27, 2020, the CARES Act was enacted to provide emergency economic stimulus in response to the COVID-19 global pandemic. The CARES Act includes aid to small businesses in the form of loans and grants, and other efforts to stabilize the U.S. economy. The CAA Act which was signed into law in 2020 extended some of the CARES Act programs along with adding new stimulus provisions. In March 2021, the ARPA Act of 2021 was also passed which further extended several CARES Act relief programs and other assistance. We have not filed, and do not intend to file, for funding related to the CARES Act, CAA or ARPA due to our strong balance sheet and liquidity position with $55.8 million in cash and cash equivalents, short-term investments and long-term investments and no debt outstanding. We currently have no plans to defer payroll taxes, to layoff or furlough employees or to modify leases and stock compensation plans. Also included in the CARES Act are numerous income tax provisions including changes to the net operating loss. During fiscal year 2021, we recorded a $378,000 tax benefit resulting from the carryback of our fiscal year 2020 federal net operating loss to fiscal year 2018 due to the five-year net operating loss carryback provision from the CARES Act. We believe that the CAA and ARPA will not have a significant impact on us.
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Revenues. Our revenues are derived primarily from sales of our Very Fast SRAM products. 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.
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, and to a lesser extent, recent price increases to our customers due to supply constraints. 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 TSMC, our wafer supplier, 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. Our revenues have been and are expected to continue to be impacted by changes in customer buying patterns and communication limitations related to COVID-19 restrictions that require a significant number of our customer contacts to work from home. 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 2021, 2020 and 2019. 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 43%, 39%, 38% and 45% of our net revenues in the three months ended June 30, 2021 and in fiscal 2021, 2020 and 2019, 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, 2021 and in fiscal 2021, 2020 or 2019.
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 and independent assembly and test houses. Because we do not have long-term, fixed-
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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 June 30,
2021
2020
Net revenues
100.0
%
100.0
%
Cost of revenues
45.6
53.9
Gross profit
54.4
46.1
Operating expenses:
Research and development
69.4
88.0
Selling, general and administrative
34.6
44.1
Total operating expenses
104.0
132.1
Loss from operations
(49.6)
(86.0)
Interest and other income (expense), net
(0.3)
1.6
Loss before income taxes
(49.9)
(84.4)
Provision (benefit) for income taxes
(2.0)
7.4
Net loss
(47.9)
(91.8)
Net Revenues . Net revenues increased by 32.8% from $6.6 million in the three months ended June 30, 2020 to $8.8 million in the three months ended June 30, 2021.
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Net revenues in both periods were impacted by the COVID-19 global pandemic. Our net revenues continue to 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 continue to impact 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, have been unavailable due to COVID-19 related restrictions. We have adapted 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 June 30, 2021 increased by 23.0% compared to the quarter ended June 30, 2020 and the number of units shipped increased 5.8% in the quarter ended June 30, 2021 compared to the quarter ended June 30, 2020. The changes in the average selling price were due to changes in product mix, as we sold more higher density, higher average selling price products in the fiscal 2022 period compared to the prior fiscal year period. Direct and indirect sales to Nokia, currently our largest customer, increased from $1.8 million in the three months ended June 30, 2020 to $3.8 million in the three months June 30, 2021. Shipments to Nokia in the quarter ended June 30, 2021 included approximately $1.1 million of buffer stock in anticipation of perceived market tightness. Shipments of our SigmaQuad product line accounted for 46.3% of total shipments in the three months ended June 30, 2020 and compared to 63.6% of total shipments in the three months ended June 30, 2021. The changes in SigmaQuad shipments were primarily due to the changes in sales to Nokia discussed above.
Cost of Revenues. Cost of revenues increased by 12.3% from $3.6 million in the three months ended June 30, 2020 to $4.0 million in the three months ended June 30, 2021. Cost of revenues included a provision for excess and obsolete inventories of $159,000 in the three months ended June 30, 2020 compared to $160,000 in the three months ended June 30, 2021. Cost of revenues included stock-based compensation expense of $88,000 and $70,000 for the three months June 30, 2020 and 2021, respectively.
Gross Profit. Gross profit increased by 56.8% from $3.1 million in the three months ended June 30, 2020 to $4.8 million in the three months ended June 30, 2021. Gross margin increased from 46.1% in the three months ended June 30, 2020 to 54.4% in the three months ended June 30, 2021. The change in gross profit is primarily related to the change in net revenues discussed above. The change in gross margin is primarily related to changes in the mix of products and customers.
Research and Development Expenses. Research and development expenses increased by 4.8% from $5.8 million in the three months ended June 30, 2020 to $6.1 million in the three months ended June 30, 2021. The increase in research and development spending was primarily related to an increase of $352,000 in payroll related expenses partially offset by lesser decreases in patent related legal fees and outside consulting expenses. Research and development expenses included stock-based compensation expense of $413,000 and $470,000 for the three months ended June 30, 2020 and 2021, respectively.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by 4.1% from $2.9 million in the three months ended June 30, 2020 to $3.0 million in the three months ended June 30, 2021. An increase of $121,000 for independent sales representatives commissions was partially offset by decreases in payroll related expenses and professional fees. Selling, general and administrative expenses included stock-based compensation expense of $254,000 and $283,000 for the three months ended June 30, 2020 and 2021, respectively.
Interest Income and Other Income, Net. Interest and other income, net decreased by $126,000 from income of $106,000 in the three months ended June 30, 2020 to an expense of $20,000 in the three months ended June 30, 2021. Interest income decreased by $91,000 primarily due to lower interest rates received on our cash and short-term and long-term investments and a lesser amount of investments. Foreign exchange losses were $8,000 for the three months ended June 30, 2020 compared to $43,000 for the three months ended June 30, 2021. The exchange losses in each period were related to our Taiwan branch operations and our operations in Israel.
Provision (benefit) for Income Taxes. The provision (benefit) for income taxes decreased from a provision of $487,000 in the three months ended June 30, 2020 to a benefit of ($172,000) in the three months June 30, 2021.
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The provision for (benefit from) income taxes for the three months ended June 30, 2020 included a settlement of an income tax audit in Israel during for fiscal years 2016 through fiscal 2019 which resulted in a discrete tax provision of $479,000. The provision (benefit) for income taxes for the three months ended June 30, 2021 included a benefit of ($220,000) related to the approval by the Israel tax authorities of a “Preferred Company” tax rate that was retroactively applied to fiscal 2018 and subsequent fiscal years.
Net Loss . Net loss was $6.1 million in the three months ended June 30, 2020 compared $4.2 million in the three months ended June 30, 2021. This fluctuation was primarily due to the changes in net revenues, gross profit and operating expenses discussed above.
Liquidity and Capital Resources
As of June 30, 2021, our principal sources of liquidity were cash, cash equivalents and short-term investments of $51.5 million compared to $54.0 million as of March 31, 2021.
Net cash used in operating activities was $4.6 million for the three months ended June 30, 2021 compared to $3.6 million for the three months ended June 30, 2020. The primary uses of cash in the three months ended June 30, 2021 was the net loss of $4.2 million, an increase in accounts receivable of $885,000, and a reduction in accrued expenses and other liabilities of $813,000. The increase in accounts receivable was related to the increased net revenues in the three months ended June 30, 2021 compared to the three months ended June 30, 2020. The reduction in accrued expenses and other liabilities was primarily related to the payment of fiscal 2021 year-end accruals for incentive compensation. The primary sources of cash in the three months ended June 30, 2021 were non-cash items including stock-based compensation of $823,000 and depreciation and amortization expenses of $246,000 and a decrease in inventory of $252,000.
The primary uses of cash in the three months ended June 30, 2020 were 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, 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.
Net cash provided by investing activities was $4.1 million in the three months ended June 30, 2021 compared to $700,000 in the three months ended June 30, 2020. Investment activities in the three months ended June 30, 2021 primarily consisted of the maturity of certificates of deposit and agency bonds of $4.1 million. 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.
Net cash provided by financing activities in the three months ended June 30, 2021 consisted of the net proceeds from the sale of common stock pursuant to our employee stock plans of $783,000. 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.
Our estimated annual effective income tax rate was approximately 0.05% as of June 30, 2021.
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. 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.
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Contractual Obligations
The following table describes our contractual obligations as of June 30, 2021:
Payments due by period (in thousands)
Up to 1 year
1 - 3 years
3 - 5 years
More than 5 years
Total
Facilities and software leases
$
269
$
355
$
—
$
—
$
624
Wafer, software and test purchase obligations
2,003
—
—
—
2,003
$
2,272
$
355
$
—
$
—
$
2,627
As June 30, 2021, the current portion of our unrecognized tax benefits was $0, and the long-term portion was $0.
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, 2021, the accrual for potential contingent consideration was $4.2 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, 2021.
Off-Balance Sheet Arrangements
At June 30, 2021, 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.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.