What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-11-05 compared with 2020-08-06 · 249 added, 218 removed, 538 unchanged (46% of the section changed)

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Forward-Looking Statements

This discussion contains certain 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.

This discussion contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act).

Forward-looking statements are identified by words such as “believe,” “will,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “could,” “potentially” or the negative of these terms or similar expressions.

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These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements.

Factors that might cause such a difference include, but are not limited to, those discussed in this report in Part II, Item 1A — “Risk Factors,” and elsewhere in this report.

Factors that might cause such a difference include, but are not limited to, those discussed in this report in Part II, Item 1A — “Risk Factors,” and elsewhere in this report, as well as in our other filings with the Securities and Exchange Commission (SEC).

Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management.

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With over 10 years of MRAM technology and manufacturing leadership, our memory solutions deliver significant value to our customers in key markets such as industrial, medical, automotive/transportation, aerospace and data center.

We are the leading supplier of discrete MRAM components and a successful licensor of our broad portfolio of related technology IP.

We sell our products directly and through our established distribution channel to industry-leading original equipment manufacturers (OEMs) and original design manufacturers (ODMs).

We are the leading supplier of discrete MRAM components and a successful licensor of our broad portfolio of related technology intellectual property.

We sell our products directly and through our established distribution channels to industry-leading original equipment manufacturers (OEMs) and original design manufacturers (ODMs).

We manufacture our MRAM products using both captive and third-party manufacturing capabilities.

We purchase industry-standard complementary metal-oxide semiconductor (CMOS) wafers from semiconductor foundries and perform back end of line (BEOL) processing that includes our magnetic-bit technology at our 200mm fabrication facility in Chandler, Arizona.

We also manufacture full-flow 300mm STT-MRAM products as part of our strategic relationship with GLOBALFOUNDRIES.

We also manufacture full-flow 300mm CMOS wafers with our STT-MRAM magnetic-bit technology integrated in BEOL as part of our strategic relationship with GLOBALFOUNDRIES.

We monitor a variety of key financial metrics to help us evaluate trends, establish budgets, measure the effectiveness of our business strategies and assess operational efficiencies.

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We also monitor Adjusted EBITDA, a non-GAAP financial measure, and design wins.

We define Adjusted EBITDA as net income or loss adjusted for interest expense, tax, depreciation and amortization, stock-based compensation expense, and restructuring costs.

We define Adjusted EBITDA as net income or loss adjusted for interest expense, taxes, depreciation and amortization, stock-based compensation expense, and restructuring costs, if any.

ADJUSTED EBITDA.

Our management and board of directors use Adjusted EBITDA to understand and evaluate our operating performance and trends, to prepare and approve our annual budget and to develop short-term and long-term operating and financing plans.

Accordingly, we believe that Adjusted EBITDA provides useful information for investors in understanding and evaluating our operating results in the same manner as our management and our board of

Adjusted EBITDA was $0.2 million and $(2.2) million for the three months ended June 30, 2020 and 2019, respectively.

Adjusted EBIDTA was $(0.1) million and $(5.2) million for the six months ended June 30, 2020 and 2019, respectively.

Accordingly, we believe that Adjusted EBITDA provides useful information for

investors in understanding and evaluating our operating results in the same manner as our management and our board of directors.

Adjusted EBITDA was $(2.0) million and $(2.2) million for the three months ended September 30, 2020 and 2019, respectively.

Adjusted EBIDTA was $(2.2) million and $(7.3) million for the nine months ended September 30, 2020 and 2019, respectively.

Adjusted EBITDA is a non-GAAP financial measure and should be considered in addition to, not as superior to, or as a substitute for, net income (loss) reported in accordance with GAAP.

The following table presents a reconciliation of net loss, the most directly comparable GAAP measure, to Adjusted EBIDTA for the periods indicated:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Adjusted EBITDA reconciliation:

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Because the life cycles for our customers’ products can last for many years, if these products have successful commercial introductions, we expect to continue to generate revenues over an extended period of time for each successful design win.

New design wins in the first and second quarters of 2020 were 37 and 43, respectively, compared to 14 and 13 in the first and second quarter of 2019, respectively.

New design wins in the first three quarters of 2020 were 37, 43, and 52, respectively, compared to 14, 13, and 22 in the first three quarters of 2019, respectively.

Effect of the COVID-19 Pandemic on our Business

We currently remain unable to fully predict the long-term impact of the coronavirus 2019 (COVID-19) on our business.

Recent impacts have included electronics supply chain and demand disruptions from extended factory shutdowns, particularly in some Asian countries, which created unusual order patterns, and has subsequently slowed Toggle demand, particularly from our industrial customers.

The recent novel coronavirus (COVID-19) outbreak has resulted in government authorities around the world implementing numerous measures to try to reduce the spread of COVID-19, such as travel bans and restrictions, quarantines, “shelter-in-place,” “stay-at-home,” total lock-down orders, business limitations or shutdowns and similar orders.

The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and workforce participation, and initially created significant volatility and disruption of financial markets.

Overall, our business remains operational in the midst of the pandemic.

We continue to work closely with our manufacturing partners and suppliers to support demand for our products.

In an effort to protect the health and safety of our employees, we:

transitioned most of our office and support employees and contractors to working from home;

suspended all business travel;

and implemented social distancing guidelines for our employees and contractors who must work in our manufacturing and laboratory locations.

The remote working environment has had some impact on cost reduction projects given delays in data gathering and analysis, as well as inefficiencies of teams solving technical problems by remote-only means, which has negatively impacted our cost of sales.

The full impact on our demand from customers remains unknown.

We do not have clear visibility into the demand trends, both near-term and long-term.

However, as a result of the COVID-19 outbreak and the related responses from government authorities, our business, results of operations and financial condition have been, and continue to be, adversely impacted.

For example, we have experienced electronics supply chain and demand disruptions from extended factory shutdowns, particularly in some Asian countries, which created unusual order patterns, and subsequently slowed Toggle demand, particularly from our industrial customers.

We continue to see an impact as reflected in reduced demand from some customers and distributors.

While we are working closely with our manufacturing partners and suppliers to support demand for our products, the full impact on our demand from customers remains unknown.

Management is thus planning for a broad range of possible demand outcomes in an effort to ensure the success of our business under a variety of end market conditions.

Further, in an effort to protect the health and safety of our employees, we transitioned most of our office and support employees and contractors to working from home;

suspended all non-essential business travel;

and implemented social distancing guidelines for our employees and contractors who must work in our manufacturing and laboratory locations.

Consequently, the remote working environment we have implemented for our employees has adversely impacted manufacturing yield improvement projects given delays in data gathering, analysis and inefficiencies of teams solving technical problems via remote-only means, which impacts our cost of sales.

We will continue to monitor the situation and take additional actions as warranted.

These actions may include further altering our operations in order to protect the best interests of our employees, customers and suppliers, and to comply with government requirements, while also planning and executing our business to best support our customers, suppliers, and partners.

The ultimate extent of the impact of the COVID-19 pandemic on our business, results of operations and financial condition will depend on future developments, which are highly uncertain, continuously evolving and cannot be predicted, including, but not limited to, the duration and spread of the COVID-19 outbreak, its severity, the actions to contain the virus or treat its impact and how quickly and to what extent normal economic and operating conditions can resume.

Accordingly, our current results and financial condition discussed herein may not be indicative of future operating results and trends.

See “Risk Factors” in Part II, Item 1A of this report for additional risks we face due to the COVID-19 pandemic.

Results of Operations

The following table sets forth our results of operations for the periods indicated:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

September 30,

(In thousands)

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Other (expense) income, net

Comparison of the three months ended June 30, 2020 and 2019

We generated 52.7% and 64.3% of our revenue from products sold through distributors for the three months ended June 30, 2020 and 2019, respectively.

We maintain a direct selling relationship, for strategic purposes, with several key customer accounts.

Comparison of the three months ended September 30, 2020 and 2019

We generated 53% and 62% of our revenue from products sold through distributors for the three months ended September 30, 2020 and 2019, respectively.

In addition to selling our products to our distributors, we maintain a direct selling relationship, for strategic purposes, with several key customer accounts.

We have organized our sales team and representatives into three primary regions:

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and Asia-Pacific and Japan (APJ).

We recognize revenue by geography based on the region in which our products are sold, and not to where the end products in which they are assembled are shipped.

revenue by geography based on the region in which our products are sold, and not to where the end products in which they are assembled are shipped.

Our revenue by region for the periods indicated was as follows (in thousands):

Three Months Ended June 30,

Three Months Ended September 30,

North America

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Three Months Ended

September 30,

(Dollars in thousands)

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Total revenue

Total revenue increased by $3.2 million, or 36.8%, from $8.6 million during the three months ended June 30, 2019, to $11.8 million during the three months ended June 30, 2020.

Total revenue increased by $0.9 million, or 10.3%, from $9.2 million during the three months ended September 30, 2019, to $10.1 million during the three months ended September 30, 2020.

Product sales increased by $1.2 million, or 14.4%, from $8.4 million to $9.6 million.

The increase was driven by new product sales.

The increase was driven by sales of STT MRAM.

Licensing, royalty, and other revenue is a highly variable revenue item characterized by a small number of transactions annually with revenue based on size and terms of each transaction.

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Three Months Ended

September 30,

(Dollars in thousands)

Cost of sales

Cost of sales increased by $2.0 million or 43.4%, from $4.6 million during the three months ended June 30, 2019, to $6.6 million during the three months ended June 30, 2020.

The increase was due to higher volume of units produced and sold.

Gross margin decreased from 46.5% during the three months ended June 30, 2019, to 43.9% during the three months ended June 30, 2020.

The decrease in gross margin was due primarily to delays in cost reduction projects for our 1GB STT-MRAM product.

Cost of sales increased by $3.0 million, or 61.5%, from $4.8 million during the three months ended September 30, 2019 to $7.8 million during the three months ended September 30, 2020.

The increase was due to a higher volume of units produced and sold, as well as a $1.7 million reserve charge for excess and obsolete inventory.

Management performs a quarterly assessment of inventory on hand and expected future demand.

As part of our third quarter 2020 evaluation, we identified increasing economic uncertainty and declining forecasted demand for certain products, as well as the loss of certain customer designs during the period.

Gross margin decreased from 47.4% during the three months ended September 30, 2019 to 23.0% during the three months ended September 30, 2020.

The decrease in gross margin was due primarily to a reserve charge for excess and obsolete inventory.

Operating Expenses

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Our research and development expenses consist primarily of personnel-related expenses for the design and development of our products and technologies, development wafers required to validate and characterize our technology, and expenses associated with our joint development activities.

Research and development expenses also include consulting services, circuit design costs, materials and laboratory supplies, fabrication and new packaging technology, and an allocation of related facilities and equipment costs.

Research and development expenses also include consulting services, circuit design costs, materials and laboratory supplies,

fabrication and new packaging technology, and an allocation of related facilities and equipment costs.

We recognize research and development expenses as they are incurred.

Three Months Ended

September 30,

(Dollars in thousands)

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Research and development as a % of revenue

Research and development expenses decreased by $0.7 million or 21.2%, from $3.5 million during the three months ended June 30, 2019, to $2.8 million during the three months ended June 30, 2020.

The decrease was due to a $0.4 million decrease in expenses incurred in connection with our joint development agreement with GLOBALFOUNDRIES due to less spending on STT-MRAM process and product development and a $0.4 million decrease in employee and

contract labor related costs due to a decrease in headcount as a result of our corporate restructuring plan approved in December 2019.

Research and development expenses decreased by $0.8 million, or 24%, from $3.4 million during the three months ended September 30, 2019 to $2.6 million during the three months ended September 30, 2020.

The decrease was due to a $0.4 million decrease in expenses incurred in connection with our joint development agreement with GLOBALFOUNDRIES and a $0.3 million decrease in employee and contract labor related costs due to a decrease in headcount as a result of our corporate restructuring plan completed in January 2020.

Three Months Ended

September 30,

(Dollars in thousands)

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General and Administrative Expenses.

General and administrative expenses decreased by $0.4 million or 14.3%, from $2.9 million during the three months ended June 30, 2019, to $2.5 million during the three months ended June 30, 2020.

The decrease was primarily due to a $0.3 million decrease in employee and contract labor related costs due to a decrease in headcount as a result of our corporate restructuring plan approved in December 2019 and a $0.2 million decrease in professional service related costs.

General and administrative expenses decreased by $0.5 million or 16.4%, from $3.0 million during the three months ended September 30, 2019, to $2.5 million during the three months ended September 30, 2020.

The decrease was primarily due to a $0.4 million decrease in employee and contract labor related costs due to a decrease in headcount as a result of our corporate restructuring plan completed in January 2020.

Three Months Ended

September 30,

(Dollars in thousands)

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Sales and Marketing Expenses.

Sales and marketing expenses decreased by $0.2 million or 14.8%, from $1.2 million during the three months ended June 30, 2019, to $1.0 million during the three months ended June 30, 2020.

The decrease was primarily due to a decrease in employee and contract labor related costs due to a decrease in headcount as a result of our corporate restructuring plan approved in December 2019.

Sales and marketing expenses decreased by $0.6 million or 38.8%, from $1.5 million during the three months ended September 30, 2019, to $0.9 million during the three months ended September 30, 2020.

The decrease was primarily due to a decrease in employee and contract labor related costs due to a decrease in headcount as a result of our corporate restructuring plan completed in January 2020.

Interest Expense

Three Months Ended

September 30,

(Dollars in thousands)

Interest expense

Interest expense remained relatively flat at $0.2 million during the three months ended June 30, 2020, compared to the three months ended June 30, 2019.

The slight decrease was partially due to a decrease in non-cash interest related to the amortization of debt discounts derived from the issuance of a warrant, the end of term fee and debt issuance costs and a decrease in interest paid on our credit facilities as a result of a lower outstanding principal balance under our 2019 credit facilities.

Interest expense remained relatively flat during the three months ended September 30, 2020, compared to the three months ended September 30, 2019.

Other (Expense) Income, Net

Three Months Ended

September 30,

(Dollars in thousands)

Other (expense) income, net

Other (expense) income, net changed by $0.1 million from income of $0.1 million during the three months ended June 30, 2019, to expense of $35,000 during the three months ended June 30, 2020.

Other (expense) income, net decreased by $0.1 million during the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

The change was primarily due to a decrease in interest income earned on our cash balances during the quarter from the lower interest rate environment.

Comparison of the six months ended June 30, 2020 and 2019

We generated 60% and 68% of our revenue from products sold through distributors for the six months ended June 30, 2020 and 2019, respectively.

Comparison of the nine months ended September 30, 2020 and 2019

We generated 59% and 66% of our revenue from products sold through distributors for the nine months ended September 30, 2020 and 2019, respectively.

Our revenue by region for the periods indicated was as follows (in thousands):

Six Months Ended June 30,

Nine Months Ended September 30,

North America

Total revenue

Six Months Ended

Nine Months Ended

September 30,

(Dollars in thousands)

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Total revenue

Total revenue increased by $3.2 million, or 17.5%, from $18.7 million during the six months ended June 30, 2019, to $21.9 million during the three months ended June 30, 2020.

Total revenue increased by $4.2 million, or 15.1%, from $27.9 million during the nine months ended September 30, 2019 to $32.1 million during the nine months ended September 30, 2020.

Product sales increased by $4.7 million, or 18.7%, from $25.4 million to $30.1 million.

The increase was driven by new product sales.

The increase was driven by sales of STT MRAM.

Licensing, royalty, and other revenue is a highly variable revenue item characterized by a small number of transactions annually with revenue based on size and terms of each transaction.

Cost of Sales and Gross Margin

Six Months Ended

Nine Months Ended

September 30,

(Dollars in thousands)

Cost of sales

Cost of sales increased by $1.5 million or 15.4%, from $9.9 million during the six months ended June 30, 2019, to $11.4 million during the six months ended June 30, 2020.

The increase was due to higher volume of units produced and sold.

Gross margin increased from 47.2% during the six months ended June 30, 2019, to 48.1% during the six months ended June 30, 2020.

The increase in gross margin was due to improvements in manufacturing yields of our mature products.

Cost of sales increased by $4.5 million, or 30.6%, from $14.7 million during the nine months ended September 30, 2019 to $19.2 million during the nine months ended September 30, 2020.

The increase was due to a higher volume of units produced and sold, as well as a $1.7 million reserve charge for excess and obsolete inventory.

Management performs a quarterly assessment of inventory on hand and expected future demand.

Gross margin decreased from 47.2% during the nine months ended September 30, 2019, to 40.2% during the nine months ended September 30, 2020.

The decrease in gross margin was due primarily to a reserve charge for excess and obsolete inventory.

Operating Expenses

Research and Development Expenses

Six Months Ended June 30,

Nine Months Ended September 30,

(Dollars in thousands)

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Research and development as a % of revenue

Research and development expenses decreased by $1.7 million or 22.8%, from $7.5 million during the six months ended June 30, 2019, to $5.8 million during the six months ended June 30, 2020.

The decrease was due to a $1.2 million decrease in expenses incurred in connection with our joint development agreement with GLOBALFOUNDRIES due to less spending on STT-MRAM process and product development, and a $0.4 million decrease in employee and contract labor related costs due to a decrease in headcount as a result of our corporate restructuring plan approved in December 2019.

Six Months Ended June 30,

Research and development expenses decreased by $2.5 million or 23.2%, from $10.9 million during the nine months ended September 30, 2019, to $8.4 million during the nine months ended September 30, 2020.

The decrease was due to a $1.6 million decrease in expenses incurred in connection with our joint development agreement with GLOBALFOUNDRIES due to less spending on STT-MRAM process and product development, and a $0.9 million decrease in employee and contract labor related costs due to a decrease in headcount as a result of our corporate restructuring plan completed in January 2020.

Nine Months Ended September 30,

(Dollars in thousands)

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General and Administrative Expenses.

General and administrative expenses decreased by $1.2 million or 18.6%, from $6.5 million during the six months ended June 30, 2019, to $5.3 million during the six months ended June 30, 2020.

The decrease was primarily due to a $0.8 million decrease in employee and contract labor related costs due to a decrease in headcount as a result of our corporate restructuring plan approved in December 2019 and a $0.4 million decrease in professional service related costs.

Six Months Ended June 30,

General and administrative expenses decreased by $1.7 million, or 17.9%, from $9.5 million during the nine months ended September 30, 2019 to $7.8 million during the nine months ended September 30, 2020.

The decrease was primarily due to a $1.1 million decrease in employee and contract labor related costs due to a decrease in headcount as a result of our corporate restructuring plan completed in January 2020 and a $0.4 million decrease in professional service related costs .

Nine Months Ended September 30,

(Dollars in thousands)

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Sales and Marketing Expenses.

Sales and marketing expenses decreased by $0.4 million or 17.1%, from $2.6 million during the six months ended June 30, 2019, to $2.2 million during the six months ended June 30, 2020.

The decrease was primarily due to a decrease in employee and contract labor related costs due to a decrease in headcount as a result of our corporate restructuring plan approved in December 2019.

Sales and marketing expenses decreased by $1.0 million or 25.0%, from $4.1 million during the nine months ended September 30, 2019, to $3.1 million during the nine months ended September 30, 2020.

The decrease was primarily due to a decrease in employee and contract labor related costs due to a decrease in headcount as a result of our corporate restructuring plan completed in January 2020.

Interest Expense

Six Months Ended

Nine Months Ended

September 30,

(Dollars in thousands)

Interest expense

Interest expense remained relatively flat during the six months ended June 30, 2019 compared to the six months ended June 30, 2020.

Interest expense remained relatively flat during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2020.

Other (Expense) Income, Net

Six Months Ended

Nine Months Ended

September 30,

(Dollars in thousands)

Other (expense) income, net

Other (expense) income, net changed by $0.2 million from income of $0.2 million during the six months ended June 30, 2019, to an expense of $12,000 during the six months ended June 30, 2020.

The change was primarily due to a decrease in interest income earned on our cash balances during the quarter.

Other (expense) income, net decreased by $0.4 million during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

The change was primarily due to a decrease in interest income earned on our cash balances during the period.

Liquidity and Capital Resources

We have generated significant losses since our inception and had an accumulated deficit of $151.7 million as of June 30, 2020, compared to $148.7 million as of December 31, 2019.

We have financed our operations primarily through the sale of our common stock in our initial public offering (IPO) and follow-on public offering, sales of our common stock under our at-the-market sales agreement, sales of our redeemable convertible preferred stock, debt financing and the sale of our products.

As of June 30, 2020, we had $12.9 million of cash and cash equivalents, compared to $14.5 million as of December 31, 2019.

In May 2017, we executed a Loan and Security Agreement (2017 Credit Facility) with Silicon Valley Bank for a $12.0 million term loan, which we subsequently amended in January 2019 and June 2019.

In August 2019, we executed an Amended and Restated Loan and Security Agreement (the 2019 Credit Facility) providing for a formula revolving line of credit (Line of Credit) and a term loan (2019 Term Loan) with Silicon Valley Bank to refinance in full the outstanding principal balance under the 2017 Credit Facility.

The 2019 Credit Facility amended and restated the 2017 Credit Facility.

In July 2020, we executed an amendment to the 2019 Credit Facility with Silicon Valley Bank.

The amendment extended the initial 12 months interest-only period for the term loan to a 16 months interest only period.

The floor interest rate has been lowered by 100 basis points.

The 2019 Term Loan bears interest at a floating rate equal to the WSJ prime rate minus 0.75%, subject to a floor of 3.75% p.a.

The floor interest rate for the Line of Credit Facility has been lowered by 200 basis points.

The Line of Credit now bears interest at a floating rate equal to the Wall Street Journal (WSJ) prime rate plus 1.5%, per annum, subject to a floor of 4.75% p.a.

In conjunction with entering into the First Amendment to the 2019 Credit Facility, on July 15, 2020, we issued a warrant to Silicon Valley Bank to purchase 21,500 shares of our common stock at $0.01 per share.

We have generated significant losses since our inception and had an accumulated deficit of $155.6 million as of September 30, 2020, compared to $148.7 million as of December 31, 2019.

We have historically financed our operations primarily through the sale of our common stock in our initial public offering (IPO) and follow-on public offering, sales of our common stock under our at-the-market (ATM) sales agreement, sales of our redeemable convertible preferred stock, debt financing and the sale of our products.

As of September 30, 2020, we had $13.9 million of cash and cash equivalents, compared to $14.5 million as of December 31, 2019.

We believe that our existing cash and cash equivalents as of September 30, 2020, coupled with the amount available under our line of credit entered into in August 2019, our anticipated growth and sales levels will be sufficient to meet our anticipated cash requirements for at least the next twelve months.

Our future capital requirements will depend on many factors, including our revenue growth rate, our ability to control operating expenses and achieve our cost reduction targets.

2019 Credit Facility

In May 2017, we executed a Loan and Security Agreement (2017 Credit Facility) with Silicon Valley Bank (SVB) for a $12.0 million term loan, which we subsequently amended in January 2019 and June 2019.

In August 2019, we executed an Amended and Restated Loan and Security Agreement (2019 Credit Facility), which amended and restated the 2017 Credit Facility, providing for a formula revolving line of credit (Line of Credit) and a term loan (2019 Term Loan) with SVB to refinance in full the outstanding principal balance of $8.0 million under the 2017 Credit Facility.

In July 2020, we executed the first amendment to the 2019 Credit Facility with SVB.

The amendment, among other things, extended the initial 12 months interest-only period for the term loan to a 16 months interest-only period and lowered the floor interest rate.

The floor interest rates for 2019 Term Loan and the Line of Credit Facility were reduced from 4.75% and 6.75% to 3.75 and 4.75%, respectively.

The amended Line of Credit allows for a maximum draw of $5.0 million, subject to a formula borrowing base, has a two-year term and bears interest at a floating rate equal to the Wall Street Journal (WSJ) prime rate plus 1.5%, per annum, subject to a floor of 4.75%.

At execution, $2.0 million from the Line of Credit was used to refinance a portion of the outstanding balance of the 2017 Credit Facility, and $3.0 million remains available under the Line of Credit, subject to borrowing base availability.

As of September 30, 2020, the effective interest rate under the Line of Credit was 10.18% and the outstanding balance was $2.0 million.

The Line of Credit matures on August 5, 2021.

The amended 2019 Term Loan provides for a $6.0 million term loan, which was used to refinance the remaining balance of the 2017 Credit Facility.

The amended 2019 Term Loan has a term of 46 months, and a 16-month interest only period followed by 30 months of equal principal payments, plus accrued interest.

The 2019 Term Loan bears interest at a floating rate equal to the WSJ prime rate minus 0.75%, subject to a floor of 3.75%.

As of September 30, 2020, the effective interest rate under the 2019 Term Loan was 7.61% and the outstanding balance was $6.0 million.

The 2019 Term Loan matures on June 1, 2023.

Collateral for the 2019 Credit Facility includes all of our assets except for intellectual property.

We are required to comply with certain covenants under the 2019 Credit Facility, including requirements to maintain a minimum cash balance and availability under the Line of Credit, and restrictions on certain actions without the consent of the lender, such as limitations on its ability to engage in mergers or acquisitions, sell assets, incur indebtedness or grant liens or negative pledges on its assets, make loans or make other investments.

Under these covenants, the Company is prohibited from paying cash dividends with respect to its capital stock.

We were in compliance with all covenants at September 30, 2020.

In conjunction with entering into the 2019 Credit Facility, on August 5, 2019, we and SVB amended and restated the warrant issued to SVB in connection with the first amendment to the 2017 Credit Facility, which was a warrant to purchase 9,375 shares of our common stock at an exercise price of $8.91 per share, to add an option by SVB to put the warrant back to us for $50,000 upon expiration or a liquidity event, to be prorated if SVB exercises a portion of the warrant.

The warrant expires on July 6, 2023.

Additionally, in conjunction with entering into the first amendment to the 2019 Credit Facility, on July 15, 2020, we issued a warrant to SVB to purchase 21,500 shares of our common stock at an exercise price of $0.01 per share.

The warrant expires on July 15, 2025.

For additional information about the 2019 Credit Facility, see Note 6 to our consolidated financial statements in Part I, Item 1 of this report.

At-the-Market Sales Agreement

In August 2019, we entered into an open market sale agreement (2019 Sales Agreement) with Jefferies, LLC (Jefferies), for the offer and sale of shares of our common stock having an aggregate offering of up to $25.0 million from time to time through Jefferies, acting as sales agent.

The issuance and sale of these shares by us pursuant to the 2019 Sales Agreement were deemed an “at-the-market” offering under the Securities Act of 1933, as amended.

The issuance and sale of these shares by us pursuant to the 2019 Sales Agreement were deemed an “at-the-market” offering under the Securities Act.

Under the 2019 Sales Agreement, we agreed to pay Jefferies a commission of up to 3% of the gross proceeds of any sales made pursuant to the 2019 Sales Agreement.

During the six months ended June 30, 2020, we received net proceeds of $2.1 million after deducting commissions and expenses payable by us, from the sale of 468,427 shares of common stock pursuant to the 2019 Sales Agreement.

The ATM sales were suspended in March 2020.

As of June 30, 2020, we had an aggregate of $17.7 million available for future sales under the 2019 Sales Agreement.

The Company has currently suspended sales under the 2019 Sales Agreement.

We believe that our existing cash and cash equivalents as of June 30, 2020, coupled with the amount available under our Line of Credit entered into in August 2019, our anticipated growth and sales levels will be sufficient to meet our anticipated cash requirements for at least the next twelve months.

Our future capital requirements will depend on many factors, including our revenue growth rate, our ability to control operating expenses and achieve our cost reduction targets.

During the nine months ended September 30, 2020, we received net proceeds of $2.1 million after deducting commissions and expenses payable by us, from the sale of 468,427 shares of common stock pursuant to the 2019 Sales Agreement.

As of September 30, 2020, we had an aggregate of $17.7 million available for future sales under the 2019 Sales Agreement.

We have currently suspended sales under the 2019 Sales Agreement since March 2020.

The following table summarizes our cash flows for the periods indicated (in thousands):

Six Months Ended

Nine Months Ended

September 30,

(In thousands)

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Cash Flows From Operating Activities

During the six months ended June 30, 2020, cash used in operating activities was $4.2 million, which consisted of a net loss of $3.0 million, adjusted by non-cash charges of $2.7 million and a change of $3.9 million in our net operating

assets and liabilities.

The non-cash charges primarily consisted of stock-based compensation of $1.7 million, depreciation and amortization of $0.8 million, and interest expense related to the amortization of debt issuance costs of $0.1 million.

The use of cash due to the change in our net operating assets and liabilities was primarily due to a decrease of $1.8 million in accounts payable and accrued liabilities due to the timing of payments, an increase in accounts receivable of $1.5 million due to timing of cash receipts for outstanding balances, and an increase of $0.5 million in inventory due to adjusting purchasing practices to meet expected sales volumes.

During the six months ended June 30, 2019, cash used in operating activities was $4.8 million, which consisted of a net loss of $7.9 million, adjusted by non-cash charges of $2.6 million and a change of $0.6 million in our net operating assets and liabilities.

During the nine months ended September 30, 2020, cash used in operating activities was $3.5 million, which consisted of a net loss of $6.9 million, adjusted by non-cash charges of $6.2 million and a change of $2.8 million in our net operating assets and liabilities.

The non-cash charges primarily consisted of stock-based compensation of $2.6 million, depreciation and amortization of $1.6 million, write down of obsolete inventory of $1.7 million, and interest expense related to the amortization of debt issuance costs of $0.2 million.

The use of cash due to the change in our net operating assets and liabilities was primarily due to an increase of $2.4 million in accounts receivable due to timing of cash receipts for outstanding balances and a decrease of $0.7 million in accounts payable and accrued liabilities due to the timing of payments.

These changes were partially offset by a $0.4 million decrease in prepaid expenses and other current assets.

During the nine months ended September 30, 2019, cash used in operating activities was $5.5 million, which consisted of a net loss of $11.6 million, adjusted by non-cash charges of $3.9 million and a change of $2.2 million in our

net operating assets and liabilities.

The non-cash charges primarily consisted of stock-based compensation of $2.4 million, depreciation and amortization of $1.3 million, and interest expense related to the amortization of debt issuance costs of $0.2 million.

The cash provided by the change in our net operating assets and liabilities was primarily due to a decrease in accounts receivable of $1.7 million due to timing of cash receipts for outstanding balances, a decrease of $0.1 million in inventory, and a decrease of $0.2 million in prepaid expenses and other current assets due to the timing of payments.

These effects were partially offset by a decrease of $1.4 million in accrued liabilities and accounts payable due to a decrease in accrued payroll costs, accrued manufacturing costs, and the timing of payments.

The change in our net operating assets and liabilities was primarily due to a decrease in accounts receivable of $2.0 million due to a lower sales volume and timing of cash receipts for outstanding balances, a decrease of $0.8 million in inventory due to adjusting purchasing practices to meet expected sales volumes, a decrease of $0.5 million in prepaid expenses due to the timing of payments, and an increase of $0.5 million in accounts payable due to the timing of payments.

These changes were partially offset by a decrease of $1.4 million in accrued liabilities due to a decrease in accrued manufacturing costs and the timing of payments.

Cash Flows From Investing Activities

Cash used in investing activities during the six months ended June 30, 2020 and 2019, was $0.3 million and $0.5 million, respectively, for the purchase of manufacturing and computer equipment.

Cash used in investing activities during the nine months ended September 30, 2020 and 2019, was $0.3 million and $0.6 million, respectively, for the purchase of manufacturing and computer equipment.

Cash Flows From Financing Activities

Cash provided by financing activities during the six months ended June 30, 2020 was $2.9 million, consisting of $2.1 million net proceeds from the sale of our common stock in our at-the-market offering under our 2019 Sales Agreement with Jefferies and $0.8 million in proceeds from stock options exercises and purchase of shares in our employee stock purchase plan.

Cash used in financing activities during the six months ended June 30, 2019, was $2.9 million primarily consisting of $3.0 million in payments of long-term debt offset in part by $0.2 million in proceeds from stock options exercises and purchase of shares in our employee stock purchase plan

Cash provided by financing activities during the nine months ended September 30, 2020 was $3.3 million, consisting of $2.1 million net proceeds from the sale of our common stock in our ATM offering under our 2019 Sales Agreement with Jefferies and $1.2 million in proceeds from stock option exercises and purchase of shares in our employee stock purchase plan.

Cash used in financing activities during the nine months ended September 30, 2019 was $2.6 million primarily consisting of $4.8 million in payments of long-term debt and a $0.1 million payment of debt issuance costs, offset in part by $2.2 million in net proceeds from the sale of our common stock in our ATM offering under our 2019 Sales Agreement with Jefferies, and $0.2 million in proceeds from stock option exercises and purchases of shares in our employee stock purchase plan.

Off-Balance Sheet Arrangements

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Actual results may differ from these estimates under different assumptions or conditions.

There have been no changes to our critical accounting policies and estimates described in the Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission (SEC) on March 12, 2020, that have had a material impact on our condensed financial statements and related notes.

There have been no changes to our critical accounting policies and estimates described in the Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 13, 2020, that have had a material impact on our condensed financial statements and related notes.

Quantitative and Qualitativ e Disclosures about Market Risk

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Evaluation of disclosure controls and procedures.

Our management, with the participation of our management team, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended), as of June 30, 2020, the end of the period covered by this quarterly report on Form 10-Q.

Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2020.

Our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and

15d-15(e) under the Exchange Act), as of September 30, 2020, the end of the period covered by this quarterly report on Form 10-Q.

Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2020.

Material weakness in internal control over financial reporting.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

In connection with the preparation of our unaudited condensed financial statements for the quarter ended September 30, 2018, we identified an error in the previously filed financial statements that has caused us to restate and amend the our previously issued condensed financial statements and related financial information as of and for the three and six months ended June 30, 2018.

This error was the result of a material weakness in our internal control over financial reporting, which we are remediating as of June 30, 2020 through the plan outlined below.

This error was the result of a material weakness in our internal control over financial reporting, which we are remediating as of September 30, 2020 through the plan outlined below.

Management’s plan to remediate the material weakness.

To remediate this material weakness, we took the following actions:

● We updated our information technology tools, including our ERP system, to enhance our ability to monitor inventory and its movement through our manufacturing process and to provide checks and balances to third-party reports.

● We updated our information technology tools, including implementing a new ERP system as of January 1, 2020, to enhance our ability to monitor inventory and its movement through our manufacturing process and to provide checks and balances to third-party reports.

● We put in place management dashboard tools to alert all involved as to the performance of inventory against our business goals.

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● We hired additional qualified personnel to assist management with its financial statement close process and provide oversight of our financial reporting.

As of January 1, 2020, we implemented the new ERP system.

We will continue to monitor stability of the platform and further enhance the business controls around inventory management.

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Changes in internal control over financial reporting.

Except with respect to the remediation described above, there have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) that occurred during the three months ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Except with respect to the remediation described above, there have been no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent limitation on the effectiveness of internal control.

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Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurances.

In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

procedures may deteriorate.

We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.

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We may need additional funding and may be unable to raise capital when needed, which could force us to delay, reduce, or eliminate planned activities.

Our total revenue was approximately $21.9 million for the six months ended June 30, 2020, and $37.5 million for the year ended December 31, 2019, and, as of June 30, 2020, we had cash and cash equivalents of approximately $12.9 million.

Our existing capital may be insufficient to meet our long-term requirements.

Based on our current operating plan including the execution of our reorganization plan announced in January 2020, we believe our cash and cash equivalents and availability under our revolving line of credit facility will be sufficient to fund our operating requirements for at least 12 months.

Our reorganization plan completed in January 2020, which included a reduction in headcount of approximately 15%, was done to reduce operating expenses, increase operating efficiency and enhance our ability to become profitable.

Our total revenue was approximately $32.1 million for the nine months ended September 30, 2020, and $37.5 million for the year ended December 31, 2019, and, as of September 30, 2020, we had cash and cash equivalents of approximately $13.9 million.

Based on our current operating plan, we believe our cash and cash equivalents and availability under our revolving line of credit facility will be sufficient to fund our operating requirements for at least the next 12 months.

However, our existing capital may be insufficient to meet our long-term requirements.

We have no committed sources of funding other than our revolving line of credit facility and there is no assurance that additional funding will be available to us in the future or be secured on acceptable terms.

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In such event, our stockholders may lose their entire investment in our company.

We may need to raise additional funds through financings or borrowings in order to accomplish our long-term planned objectives If we raise additional funds through issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock.

Further, we may need to raise additional funds through financings or borrowings in order to accomplish our long-term planned objectives If we raise additional funds through issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock.

In addition, if we do not meet our payment obligations to third parties as they become due, we may be subject to litigation claims and our creditworthiness would be adversely affected.

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Stockholders should not rely on our balance sheet as an indication of the amount of proceeds that would be available to satisfy claims of creditors, and potentially be available for distribution to stockholders, in the event of liquidation.

The COVID-19 Pandemic is having and may continue to have an adverse impact on our business.

The full long-term impact of the coronavirus 2019 (COVID-19) on our business is uncertain and we are unable to predict the impacts it will have going forward.

Recent impacts included the extended China factory shutdowns that resulted from the COVID-19 outbreak, which created a longer than usual pause in new orders and we believe also slowed Toggle demand growth in the weeks since then.

The recent novel coronavirus (COVID-19) global pandemic has adversely affected, and is expected to continue to adversely affect, our business, results of operations and financial condition.

The widespread outbreak of any other illnesses or communicable diseases could also adversely affect our business, results of operations and financial condition.

We could be negatively impacted by the widespread outbreak of an illness, any other communicable disease or any other public health crisis that results in economic and trade disruptions, including the disruption of global supply chains.

In late 2019, there was an outbreak of a new strain of coronavirus, COVID-19, which has since spread globally.

On March 11, 2020, the World Health Organization declared COVID-19 a pandemic.

Further, the COVID-19 outbreak has resulted in government authorities around the world implementing numerous measures to try to reduce the spread of COVID-19, such as travel bans and restrictions, quarantines, “shelter-in-place,” “stay-at-home,” total lock-down orders, business limitations or shutdowns and similar orders.

As a result of the COVID-19 pandemic and the related responses from government authorities, our business, results of operations and financial condition have been, and continue to be, adversely impacted.

We continue to see an impact as reflected in reduced demand from some customers and distributors.

Further, the remote working environment we have implemented for our employees has had some impact on manufacturing yield improvement projects given delays in data gathering, analysis and inefficiencies of teams solving technical problems via remote-only means, which impacts our cost of sales.

Although we will continue to monitor the situation and take further actions, which may include further altering our operations, in order to protect the best interests of our employees, customers and suppliers and comply with government requirements, the ultimate duration or severity of the COVID-19 pandemic is unknown, and we cannot predict how much, or for how long, we will be impacted by this pandemic.

In addition, the effects of the COVID-19 pandemic may exacerbate some or many of the risks discussed in this “Risk Factors” section.

Further, in an effort to protect the health and safety of our employees, we:

transitioned most of our office and support employees and contractors to working from home;

suspended all non-essential business travel;

and implemented social distancing guidelines for our employees and contractors who must work in our manufacturing and laboratory locations.

Additionally, our business, results of operations and financial condition have been and may be further impacted in several ways, including, but not limited to, the following:

● further disruptions to our operations, including due to additional facility closures, restrictions on our operations and sales, marketing and distribution efforts and/or interruptions to our research and development activities, product development and other important business activities;

● further reduced demand for our products, particularly due to disruptions to the businesses and operations of our customers;

● interruptions, availability or delays in global shipping to transport our products;

● further slowdowns or stoppages in the supply chain for our products, in addition to higher costs;

● limitations on employee resources and availability, including due to sickness, government restrictions, the desire of employees to avoid contact with large groups of people or mass transit disruptions;

● greater difficulty in collecting customer receivables;

● a fluctuation in foreign currency exchange rates or interest rates could result from market uncertainties;

● an increase in the cost or the difficulty to obtain debt or equity financing could affect our financial condition or our ability to fund operations or future investment opportunities.

Additionally, COVID-19 could impact our internal controls over financial reporting as a portion of our workforce is required to work from home and therefore new processes, procedures, and controls could be required to respond to changes in our business environment.

Further, should any key employees become ill from COVID-19 and unable to work, the attention of the management team could be diverted.

Although we will continue to monitor the situation and take further actions, which may include further altering our operations, in order to protect the best interests of our employees, customers and suppliers and comply with government requirements, there is no certainty that such measures will be enough to mitigate the risks posed by the virus, and our ability to perform critical functions could be harmed.

Any of the foregoing could adversely affect our business, results of operations and financial condition.

The potential effects of COVID-19 may also impact many of our other risk factors discussed in this “Risk Factors” section.

We have a history of losses which may continue in the future, and we cannot be certain that we will achieve or sustain profitability.

We have incurred net losses since our inception.

We incurred net losses of $14.7 million and $3.0 million for the year ended December 31, 2019 and the six months ended June 30, 2020, respectively.

As of June 30, 2020, we had an accumulated deficit of $151.7 million.

Our restructuring plan completed in January 2020, which targets achieving cash-flow break even on a quarterly basis by the end of 2020, is dependent on controlling expenses, growing revenue, and

achieving specific product cost objectives.

One or more of these financial metrics may not be achieved and pose a significant risk to our ability to achieve our cash-flow objective.

We incurred net losses of $14.7 million and $6.9 million for the year ended December 31, 2019 and the nine months ended September 30, 2020, respectively.

As of September 30, 2020, we had an accumulated deficit of $155.6 million.

While our products offer unique benefits over other industry memory technologies, the rate of adoption of our products and our ability to capture market share from legacy technologies is uncertain.

Our revenue may also be adversely impacted by a number of other possible reasons, many of which are outside our control, including business conditions that adversely affect the semiconductor memory industry resulting in a decline in end market demand for our products, the projected recession resulting from the COVID-19 pandemic, increased competition, or our failure to capitalize on growth opportunities.

Our revenue may also be adversely impacted by a number of other possible reasons, many of which are outside our control, including business conditions that adversely affect the semiconductor memory industry resulting in a decline in end market demand for our products, adverse impacts resulting from the COVID-19 pandemic, increased competition, or our failure to capitalize on growth opportunities.

We also rely on achieving specific cost reduction targets that have uncertainty in their timing and magnitude.

We may also incur unforeseen expenses in the ongoing operation of our business that cause us to exceed our operational spending plan.

As a result, our ability to generate sufficient revenue growth to transition to profitability and generate consistent positive cash flows is uncertain.

If we fail to generate sufficient revenue to support our operations, we may not be able to achieve or sustain profitability.

If revenue does not grow sufficiently, we may not be able to meet our debt covenants, including the liquidity ratio and sales targets.

As a result, our ability to generate sufficient revenue growth and/or controlling expenses to transition to profitability and generate consistent positive cash flows is uncertain.

The limited history of STT-MRAM adoption makes it difficult to evaluate our current business and future prospects.

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We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly changing industries, including unpredictable and volatile revenue and increased expenses as we continue to grow our business.

The viability and demand for our products may be affected by many factors outside of our control, such as the factors affecting the growth of the industrial, automotive, transportation, and enterprise storage industries and changes in macroeconomic conditions.

The viability and demand for our products may be affected by many factors outside of our control, such as the factors affecting the growth of the industrial, automotive, transportation, and data center market segments and changes in macroeconomic conditions.

If we do not manage these risks and overcome these difficulties successfully, our business will suffer.

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However, our manufacturing arrangement is also subject to both a minimum and maximum order quantity that while we believe currently addresses our projected foundry capacity needs, may not address our maximum foundry capacity requirements in the future.

We may also be

obligated to pay for unused capacity if our demand decreases in the future, or if our estimates prove inaccurate.

We may also be obligated to pay for unused capacity if our demand decreases in the future, or if our estimates prove inaccurate.

GLOBALFOUNDRIES also has the ability to discontinue its manufacture of any of our wafers upon due notice and completion of the notice period.

This could cause us to have to find another foundry to manufacture those wafers or redesign our core technology and would mean that we may not have products to sell until such time.

Any time spent engaging a new manufacturer or redesigning our core technology could be costly and time consuming and may allow potential competitors to take opportunities in the market place.

Any time spent engaging a new manufacturer or redesigning our core technology could be costly and time consuming and may allow potential competitors to take opportunities in the marketplace.

Moreover, if we are unable to find another foundry to manufacture our products or if we have to redesign our core technology, this could cause material harm to our business and operating results.

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In addition, the time and expense to qualify a new foundry could result in additional expense, diversion of resources or lost sales, any of which would negatively impact our financial results.

If any of our current or future foundries or packaging, assembly and testing subcontractors significantly increases the costs of wafers or other materials or services, interrupts or reduces our supply, including for reasons outside of their control, or if any of our relationships with our suppliers is terminated, our operating results could be adversely affected.

If any of our current or future foundries or packaging, assembly and testing subcontractors significantly increases the costs of wafers or other materials or services, interrupts or reduces our supply, including for reasons outside of their control, such as due to the COVID-19 pandemic, or if any of our relationships with our suppliers is terminated, our operating results could be adversely affected.

Such occurrences could also damage our customer relationships, result in lost revenue, cause a loss in market share or damage our reputation.

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The rate of decline may be affected by a number of factors, including relative supply and demand, the level of competition, production costs and technological changes.

As a result of the decreasing average selling prices of our products following their launch, our ability to increase or maintain our margins depends on our ability to introduce new or enhanced products with higher average selling prices and to reduce our per-unit cost of sales and our operating costs.

reduce our per-unit cost of sales and our operating costs.

We may not be able to reduce our costs as rapidly as companies that operate their own manufacturing, assembly and testing facilities, and our costs may even increase because we rely in part on third parties to manufacture, assemble and test our products, which could also reduce our gross margins.

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Unfavorable economic and market conditions, domestically and internationally, may adversely affect our business, financial condition, results of operations and cash flows.

We have significant customer sales both in the U.S.

and internationally.

We have significant customer sales both in the United States and internationally.

We also rely on domestic and international suppliers, manufacturing partners and distributors.

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and international economic and market conditions.

If any of our manufacturing partners, customers, distributors or suppliers experience slowdowns in their business, serious financial difficulties or cease operations, our business will be adversely affected.

If any of our manufacturing partners, customers, distributors or suppliers experience slowdowns in their business, serious financial difficulties or cease operations, including as a result of the COVID-19 pandemic, our business will be adversely affected.

In addition, the adverse impact of an unfavorable economy may adversely impact consumer spending, which may adversely impact our customers’ spending and demand for our products.

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Because of the extensive time and resources that we invest in developing new and enhanced products, if we are unable to sell customers our new products, our revenue could decline and our business, financial condition, results of operations and cash flows would be negatively affected.

While we expect revenue from our STT-MRAM products to increase, if we are unable to generate more customer adoption of our 1Gb product and address new growth opportunities with subsequent STT-MRAM products, we may not be able to materially increase our revenue.

If we are unable to

successfully develop and market our new and enhanced products that we have incurred significant expenses developing, our results of operations and financial condition will be materially and adversely affected.

For example, if we are unable to generate more customer adoption of our 1Gb product and address new growth opportunities with subsequent STT-MRAM products, we may not be able to materially increase our revenue.

If we are unable to successfully develop and market our new and enhanced products that we have incurred significant expenses developing, our results of operations and financial condition will be materially and adversely affected.

Our success and future revenue depend on our ability to secure design wins and on our customers’ ability to successfully sell the products that incorporate our solutions.

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A design win occurs after a customer has tested our product, verified that it meets the customer’s requirements and qualified our solutions for their products.

We believe we are dependent on the adoption of our 256Mb and 1Gb MRAM products by our customers to secure design wins.

We believe we are dependent, among other things, on the adoption of our 256Mb and 1Gb MRAM products by our customers to secure design wins.

Our customers may need several months to years to test, evaluate and adopt our product and additional time to begin volume production of the product that incorporates our solution.

Due to this generally lengthy design cycle, we may experience significant delays from the time we increase our operating expenses and make investments in our products to the time that we generate revenue from sales of these products.

Moreover, even if a customer selects our solution, we cannot guarantee that this will result in any sales of our products, as the customer may ultimately change or cancel its product plans, or efforts by our customer to market and sell its product may not be successful.

Moreover, even if a customer selects our

solution, we cannot guarantee that this will result in any sales of our products, as the customer may ultimately change or cancel its product plans, or efforts by our customer to market and sell its product may not be successful.

We may not generate any revenue from design wins after incurring the associated costs, which would cause our business and operating results to suffer.

If a current or prospective customer designs a competitor’s solution into its product, it becomes significantly more difficult for us to sell our solutions to that customer because changing suppliers involves significant time, cost, effort and risk for the customer even if our solutions are superior to other solutions and remain compatible with their product design.

If a current or prospective customer incorporates a competitor’s solution into its product, it becomes significantly more difficult for us to sell our solutions to that customer because changing suppliers involves significant time, cost, effort and risk for the customer even if our solutions are superior to other solutions and remain compatible with their product design.

Our ability to compete successfully depends on customers viewing us as a stable and reliable supplier to mission critical customer applications when we have less production capacity and less financial resources compared to most of our larger competitors.

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We have derived and expect to continue to derive a significant portion of our revenues from a small group of customers during any particular period due in part to the concentration of market share in the semiconductor industry.

Our four largest end customers together accounted for 56.4% of our total revenue for the six months ended June 30, 2020, and none of these customers accounted for more than 10% of our revenue during that period.

Our four largest end customers together accounted for 22% of our total revenue for the year ended December 31, 2019, and two of these customers individually accounted for more than 10% of our total revenue during the period.

Our four largest end customers together accounted for 57.7% of our total revenue for the nine months ended September 30, 2020, and one of these customers accounted for more than 10% of our revenue during that period.

Our four largest end customers together accounted for 22% of our total revenue for the year ended December 31, 2019, and one of these customers individually accounted for more than 10% of our total revenue during the period.

The loss of a significant customer, a business combination among our customers, a reduction in orders or decrease in price from a significant customer or disruption in any of our commercial or distributor arrangements may result in a significant decline in our revenues and could have a material adverse effect on our business, liquidity, results of operations, financial condition and cash flows.

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Unacceptably low product yields or other product manufacturing problems could substantially increase overall production time and costs and adversely impact our operating results.

Product yield losses will increase our costs and reduce our gross margin.

Product yield losses may also increase our costs and reduce our gross margin.

In addition to significantly harming our results of operations and cash flow, poor yields may delay shipment of our products and harm our relationships with existing and potential customers.

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Defects could cause problems with the functionality of our products, resulting in interruptions, delays or cessation of sales of these products to our customers.

We may also be

required to make significant expenditures of capital and resources to resolve such problems.

We may also be required to make significant expenditures of capital and resources to resolve such problems.

We cannot assure our stockholders that problems will not be found in new products, both before and after commencement of commercial production, despite testing by us, our suppliers or our customers.

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These ongoing efforts require us from time to time to modify the manufacturing processes for our products and to redesign some products, which in turn may result in delays in product deliveries.

For example, as smaller line width geometry manufacturing processes become more prevalent, we intend to move our future products to increasingly smaller geometries to integrate greater levels of memory capacity and/or functionality into our products.

This transition will require us and our third-party foundries to migrate to new designs and manufacturing processes for smaller geometry products.

We may face difficulties, delays and increased expense as we transition our products to new processes, and potentially to new foundries.

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If we or any of our third-party foundries experience significant delays in transitioning to new processes or fail to efficiently implement transitions, we could experience reduced manufacturing yields, delays in product deliveries and increased expenses, any of which could harm our relationships with our customers and our operating results.

As smaller line width geometry manufacturing processes become more prevalent, we intend to move our future products to increasingly smaller geometries to integrate greater levels of memory capacity and/or functionality into our products.

This transition will require us and our third-party foundries to migrate to new designs and manufacturing processes for smaller geometry products.

We may not be able to achieve smaller geometries with higher levels of design integration or to deliver new integrated products on a timely basis.

We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies to increase product value.

We are dependent on our relationships with our third-party foundries to transition to smaller geometry processes successfully.

We cannot assure our stockholders that our third-party foundries will be able to effectively manage any such transition.

If we or our third-party foundries experience significant delays in any such transition or fail to implement a transition, our business, financial condition and results of operations could be materially harmed.

Changes to industry standards and technical requirements relevant to our products and markets could adversely affect our business, results of operations and prospects.

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The steps we take to protect our intellectual property rights may not be adequate, particularly in foreign jurisdictions such as China.

Any patents we hold may not adequately protect our intellectual property rights or our products against competitors, and third parties may challenge the scope, validity or enforceability of our issued patents, which third parties may have significantly more financial resources with which to litigate their claims than we have to defend against them.

Any patents we hold may not adequately protect our intellectual property rights or our products against competitors, and third parties may challenge the scope,

validity or enforceability of our issued patents, which third parties may have significantly more financial resources with which to litigate their claims than we have to defend against them.

In addition, other parties may independently develop similar or competing technologies designed around any patents or patent applications that we hold.

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If we lose the services of any key senior management member or employee, we may not be able to locate suitable or qualified replacements, and may incur additional expenses to recruit and train new personnel, which could severely impact our business and prospects.

The loss of the services of one or more of our key employees,

especially our key engineers, or our inability to attract and retain qualified engineers, could harm our business, financial condition and results of operations.

We are seeking to expand our operations outside of the United States which exposes us to significant risks.

The loss of the services of one or more of our key employees, especially our key engineers, or our inability to attract and retain qualified engineers, could harm our business, financial condition and results of operations.

We currently maintain, and are seeking to expand operations outside of the United States which exposes us to significant risks.

The success of our business depends, in large part, on our ability to operate successfully from geographically disparate locations and to further expand our international operations and sales.

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Failure to comply with environmental regulations could subject us to civil or criminal sanctions and property damage or personal injury claims.

Compliance with current or future environmental laws and regulations could restrict our ability to expand our business or require us

to modify processes or incur other substantial expenses which could harm our business.

Compliance with current or future environmental laws and regulations could restrict our ability to expand our business or require us to modify processes or incur other substantial expenses which could harm our business.

In response to environmental concerns, some customers and government agencies impose requirements for the elimination of hazardous substances, such as lead (which is widely used in soldering connections in the process of semiconductor packaging and assembly), from electronic equipment.

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While we have not experienced any materially adverse effects on our operations from recently adopted environmental regulations, our business and results of operations could suffer if for any reason we fail to control the storage or use of, or to adequately restrict the discharge or disposal of, hazardous substances under present or future environmental regulations.

Some of the facilities of our suppliers are located near known earthquake fault zones, and the occurrence of an earthquake or other catastrophic disaster could damage our facilities, which could cause us to curtail our operations.

Some of our foundries and suppliers’ facilities in Asia are located near known earthquake fault zones and, therefore, are vulnerable to damage from earthquakes.

Our business may be adversely impacted by natural disasters and other catastrophic events.

Our operations and business, and those of our manufacturing partners, customers, distributors or suppliers, can be disrupted by natural disasters;

industrial accidents;

public health issues, such as the COVID-19 pandemic;

cybersecurity incidents;

interruptions of service from utilities, transportation, telecommunications, or IT systems providers;

manufacturing equipment failures;

or other catastrophic events.

For example, some of our foundries and suppliers’

facilities in Asia are located near known earthquake fault zones and, therefore, are vulnerable to damage from earthquakes.

We are also vulnerable to damage from other types of disasters, such as power loss, fire, floods and similar events.

If any such disaster were to occur, our ability to operate our business could be seriously impaired.

If any such natural disasters or other catastrophic events were to occur, our ability to operate our business could be seriously impaired.

In addition, we may not have adequate insurance to cover our losses resulting from disasters or other similar significant business interruptions.

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Borrowings under our existing credit facility are secured by substantially all of our assets, except for intellectual property.

Our term loan facility prohibits our ability to, among other things:

Additionally, the operating restrictions and covenants relating to our existing credit facility restrict, and any future financing agreements that we may enter into may further restrict, our ability to finance our operations, engage in business activities or expand or fully pursue our business strategies.

For example, our existing credit facility prohibits our ability to, among other things:

● dispose of or sell assets;

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These restrictions are subject to certain exceptions.

In addition, our existing credit facility requires that we meet certain operating covenants, such as maintaining insurance on the collateral and meeting certain financial covenants, such as a minimum liquidity ratio.

The operating restrictions and covenants in the term loan facility, as well as any future financing agreements that we may enter into, may restrict our ability to finance our operations, engage in business activities or expand or fully pursue our business strategies.

Our ability to comply with these covenants may be affected by events beyond our control, and we may not be able to meet those covenants.

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The federal NOLs generated in taxable years beginning prior to 2018 will continue to be governed by the NOL tax rules as they existed prior to the adoption of the changes in the tax laws that occurred in 2017, as amended by federal tax legislation enacted in March 2020, which means that generally they will expire 20 years after they were generated if not used prior thereto.

The changes in the federal tax law that occurred in 2017, as amended by federal tax legislation enacted in March 2020, repealed the 20-year carryforward and two-year carryback of NOLs originating after December 31, 2017 (but for tax years beginning in 2018 through 2020 permits a five-year carryback of NOLs) and also limits the NOL deduction to 80% of taxable income for tax years beginning after December 31, 2020.

five-year carryback of NOLs) and also limits the NOL deduction to 80% of taxable income for tax years beginning after December 31, 2020.

Any NOLs generated in taxable years beginning in 2018 and thereafter will be carried forward and will not expire.

There is no current impact to us from the 2017 and 2020 federal tax law changes as we continue to be in a tax loss position for US tax purposes.

There is no current impact to us from the 2017 and 2020 federal tax law changes as we continue to be in a tax loss position for U.S.

tax purposes.

We may experience an ownership change in the future, and our ability to utilize our NOLs and tax credits could be further limited by Section 382 of the Code.

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These requirements require companies to perform diligence and disclose and report whether or not such minerals originate from the Democratic Republic of Congo and adjoining countries.

These requirements could adversely affect the sourcing, availability and pricing of minerals used in the manufacture of our products, and affect our costs and relationships with customers, distributors and suppliers as we must obtain additional information from them to ensure our compliance with the disclosure requirement.

These requirements could adversely affect the sourcing, availability and pricing of minerals used in the manufacture of our products, and affect our costs and

relationships with customers, distributors and suppliers as we must obtain additional information from them to ensure our compliance with the disclosure requirement.

In addition, we incur additional costs in complying with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products.

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Risks Related to Our Common Stock

Our results of operations can fluctuate from period to period, which could cause our share price to fluctuate.

Our results of operations have fluctuated in the past and may fluctuate from period to period in the future due to a variety of factors, many of which are beyond our control.

Factors relating to our business that may contribute to these fluctuations include the following factors, as well as other factors described elsewhere in this report:

● the receipt, reduction, delay or cancellation of orders by large customers;

● the gain or loss of significant customers or distributors;

● the timing and success of our launch of new or enhanced products and those of our competitors;

● market acceptance of our products and our customers’ products;

● the level of growth or decline in the industrial, automotive, transportation, enterprise storage and other markets;

● the timing and extent of research and development and sales and marketing expenditures;

● the amount and timing of operating expenses related to the maintenance and expansion of our business, operations and infrastructure;

● changes in our product mix;

● our ability to reduce the manufacturing costs of our products;

● competitive pressures resulting in lower than expected average selling prices;

● fluctuations in sales by and inventory levels of OEMs and ODMs that incorporate our memory products in their products;

● cyclical and seasonal fluctuations in our markets;

● fluctuations in the manufacturing yields of our third-party manufacturers;

● quality issues that arise from manufacturing issues at our third-party manufacturers;

● events that impact the availability of production capacity at our third-party subcontractors and other interruptions in the supply chain including due to geopolitical events, natural disasters, materials shortages, bankruptcy or other causes;

● supply constraints for and changes in the cost of the other components incorporated into our customers’ products;

● the timing of expenses related to the acquisition of technologies or businesses;

● product rates of return or price concessions in excess of those expected or forecasted;

● costs associated with the repair and replacement of defective products;

● unexpected inventory write-downs or write-offs;

● costs associated with litigation over intellectual property rights and other litigation;

● changes in accounting standards, such as revenue recognition, which we were required to adopt beginning in 2018;

● changes in tax laws, such as the Tax Cuts and Jobs Act of 2017 recently enacted;

● the length and unpredictability of the purchasing and budgeting cycles of our customers;

● loss of key personnel or the inability to attract qualified engineers;

● geopolitical events, such as war, threat of war or terrorist actions, or the occurrence of natural disasters.

The semiconductor memory industry is highly cyclical and our markets may experience significant cyclical fluctuations in demand as a result of changing economic conditions, budgeting and buying patterns of customers and other factors.

As a result of these and other factors affecting demand for our products and our results of operations in any given period, the results of any prior quarterly or annual periods should not be relied upon as indicative of our future revenue or operating performance.

Fluctuations in our revenue and operating results could also cause our stock price to decline.

We expect that the price of our common stock will fluctuate substantially.

The market price of our common stock is likely to be highly volatile and may fluctuate substantially due to many factors, including:

● the duration and severity of the COVID-19 pandemic and its effects on our business, financial condition, results of operations and cash flows;

● the introduction of new products or product enhancements by us or others in our industry;

● announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, capital commitments or restructurings;

● disputes or other developments with respect to our or others’ intellectual property rights;

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● sales of large blocks of our common stock, including sales by our executive officers and directors;

● changes in senior management or key personnel;

● changes in earnings estimates or recommendations by securities analysts;

● general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors.

● general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors, including those due to the duration and severity of the COVID-19 pandemic.

Stock markets generally have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies.

Broad market and industry factors may significantly affect the market price of our common stock, regardless of our actual operating performance.

These fluctuations may be even more pronounced in the trading market for our common stock.

Further, the semiconductor memory industry is highly cyclical and our markets may experience significant cyclical fluctuations in demand as a result of changing economic conditions, budgeting and buying patterns of customers and other factors.

Fluctuations in our revenue and operating results could also cause our stock price to decline.

In addition, in the past, class action litigation has often been instituted against companies whose securities have experienced periods of volatility in market price, or for other reasons.

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● our stockholders may not act by written consent or call special stockholders’ meetings;

as a result, a holder, or holders, controlling a majority of our capital stock would not be able to take certain actions other than at annual stockholders’ meetings or special stockholders’ meetings called by the board of directors, the chairman of the board, the chief executive officer or the president;

● our certificate of incorporation prohibits cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;

● the affirmative vote of holders of at least 66-2/3% of the voting power of all of the then outstanding shares of voting stock, voting as a single class, will be required (a) to amend certain provisions of our certificate of incorporation, including provisions relating to the size of the board, special meetings, actions by written consent and cumulative voting and (b) to amend or repeal our bylaws, although our bylaws may be amended by a simple majority vote of our board of directors;

as a result, a holder, or holders, controlling a majority of our capital stock would not be able to take certain actions other than at annual stockholders’ meetings or special stockholders’ meetings called by the board of directors pursuant to a resolution adopted by a majority of the total number of authorized directors, the chairman of the board or the chief executive officer;

● our amended and restated certificate of incorporation prohibits cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;

● the affirmative vote of holders of at least 66-2/3% of the voting power of all of the then outstanding shares of voting stock, voting as a single class, will be required (a) to amend certain provisions of our certificate of incorporation, including provisions relating to the size of the board, special meetings, actions by written consent and cumulative voting and (b) to amend or repeal our amended and restated bylaws, although such bylaws may be amended by a simple majority vote of our board of directors;

● stockholders must provide advance notice and additional disclosures to nominate individuals for election to the board of directors or to propose matters that can be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of our company;

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Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.

Our certificate of incorporation provides that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.

Our certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common law:

Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.

Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common law:

• any derivative action or proceeding brought on our behalf;

• any action asserting a breach of fiduciary duty;

• any action asserting a claim against us arising under the Delaware General Corporation Law;

• any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee to us or our stockholders;

• any action asserting a claim against us arising under the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws;

• any action asserting a claim against us that is governed by the internal-affairs doctrine.

This provision would not apply to suits brought to enforce a duty or liability created by the Securities Exchange Act of 1934, as amended.

This provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act.

Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions.

Accordingly, both state and federal courts have jurisdiction to entertain such claims.

To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our certificate of incorporation provides that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act of 1933, as amended.

To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act.

While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions.

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These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers and other employees.

If a court were to find either exclusive-forum provision in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with resolving the dispute in other jurisdictions, all of which could seriously harm our business.

If a court were to find either exclusive-forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with resolving the dispute in other jurisdictions, all of which could seriously harm our business.

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