MAXLINEAR, INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in Part II, Item 1A in this report. Overview We are a provider of communications systems-on-chip solutions used in broadband, mobile and wireline infrastructure, data center, and industrial and multi-market applications. We are a fabless integrated circuit design company whose products integrate all or substantial portions of a high-speed communication system, including radio frequency, or RF, high-performance analog, mixed-signal, digital signal processing, security engines, data compression and networking layers, and power management. In most cases, these products are designed on a single silicon-die, using standard digital complementary metal oxide semiconductor, or CMOS, processes and conventional packaging technologies. We believe this approach enables our solutions to achieve superior power, performance, and cost relative to our industry competition. Our customers include electronics distributors, module makers, original equipment manufacturers, or OEMs, and original design manufacturers, or ODMs, who incorporate our products in a wide range of electronic devices. Examples of such devices include cable Data Over Cable Service Interface Specifications, or DOCSIS, fiber and DSL broadband modems and gateways; Wi-Fi and wireline routers for home networking; radio transceivers and modems for 4G/5G base-station and backhaul infrastructure; fiber-optic modules for data center, metro, and long-haul transport networks; as well as power management and interface products used in these and many other markets. Our highly integrated semiconductor devices and platform-level solutions are primarily manufactured using low-cost CMOS process technology. CMOS processes are ideally suited for large digital logic implementations targeting high-volume and low-cost consumer applications. Importantly, our ability to design analog and mixed-signal circuits in CMOS allows us to efficiently combine analog functionality and complex digital signal processing logic in the same integrated circuit. As a result, our solutions have exceptional levels of functional integration and performance, low manufacturing cost, and reduced power consumption. In addition, our proprietary CMOS-based radio and digital system architectures also enable shorter design cycles, significant design flexibility and low system-level cost across a wide range of broadband communications, wired and wireless infrastructure, and industrial and multi-market customer applications. In the nine months ended September 30, 2023, revenues of $567.9 million were derived in part from sales of RF receivers and RF receiver systems-on-chip and connectivity solutions into broadband operator voice and data modems and gateways and connectivity adapters, global analog and digital RF receiver products, radio and modem solutions into wireless carrier access and backhaul infrastructure platforms, high-speed optical interconnect solutions sold into optical modules for data-center, metro and long-haul networks, and high-performance interface and power management solutions into a broad range of communications, industrial, automotive and multi-market applications. Our ability to achieve revenue growth in the future will depend, among other factors, on our ability to further penetrate existing markets; our ability to expand our target addressable markets by developing new and innovative products; changes in government trade policies; changes in export control regulations; and our ability to obtain design wins with device manufacturers, in particular manufacturers of set-top boxes, data modems, and gateways for the broadband service provider, storage networking market, cable infrastructure market, industrial and automotive markets, and optical module and telecommunications infrastructure markets. Products shipped to Asia accounted for 73% and 82% of net revenue during the three months ended September 30, 2023 and 2022, respectively, including 41% from products shipped to Hong Kong and 10% from products shipped to Taiwan, ROC during the three months ended September 30, 2023 and 51% from products shipped to Hong Kong and 14% from products shipped to mainland China during three months ended September 30, 2022. 33 Table of Contents Products shipped to Asia accounted for 74% and 81% of net revenue during the nine months ended September 30, 2023 and 2022, respectively, including 34% from products shipped to Hong Kong and 12% from products shipped to mainland China during the nine months ended September 30, 2023 and 43% from products shipped to Hong Kong and 16% from products shipped to mainland China during the nine months ended September 30, 2022. Although a large percentage of our products is shipped to Asia, we believe that a significant number of the systems designed by these customers and incorporating our semiconductor products are then sold outside Asia. For example, revenue generated from sales of our products during the nine months ended September 30, 2023 and 2022 related principally to sales to Asian ODMs and contract manufacturers delivering products into European and North American markets. To date, all of our sales have been denominated in United States dollars. A significant portion of our net revenue has historically been generated by a limited number of customers. Sales to customers is comprised of both direct sales to customers and indirect sales through distributors. In the three months ended September 30, 2023, one single customer accounted for 10% or more of our net revenue, and our ten largest customers collectively accounted for 60% of our net revenue, of which distributor customers accounted for 11% of our net revenue. In the nine months ended September 30, 2023, one single customer accounted for 11% of our net revenue, and our ten largest customers collectively accounted for 55% of our net revenue, of which distributor customers accounted for 11% of our net revenue. For certain customers, we sell multiple products into disparate end user applications such as cable modems, PON ODUs, Wi-Fi routers, and broadband gateways. Our business depends on winning competitive bid selection processes, known as design wins, to develop integrated circuits for use in our customers’ products. These selection processes are typically lengthy, and as a result, our sales cycles will vary based on the specific market served, whether the design win is with an existing or a new customer and whether our product being designed in our customer’s device is a first generation or subsequent generation product. Our customers’ products can be complex and, if our engagement results in a design win, can require significant time to define, design and result in volume production. Because the sales cycle for our products is long, we can incur significant design and development expenditures in circumstances where we do not ultimately recognize any revenue. We do not have any long-term purchase commitments with any of our customers, all of whom purchase our products on a purchase order basis. Once one of our products is incorporated into a customer’s design, we believe that our product is likely to remain a component of the customer’s product for its life cycle because of the time and expense associated with redesigning the product or substituting an alternative chip. Product life cycles in our target markets will vary by application. For example, in the cable operator modem and gateway sectors, a design-in can have a product life cycle of 24 to 48 months. In the industrial and wired and wireless infrastructure markets, a design-in can have a product life cycle of 24 to 60 months and beyond. Impact of the Global Economic Uncertainty and Inventory Build Inflation, and uncertainty in customer demand and the worldwide economy has continued, and we expect to experience continued volatility in our sales and revenues. In particular, we believe an economic slowdown and inventory oversupply will continue to add to volatility in managing the business. In addition, inventory oversupply could potentially lead to more inventory write-downs, including charges for any excess or obsolete inventory which could negatively impact our gross margins. As customer lead times continue to improve, we have seen and expect to continue to see a more normalized demand-planning horizon. While we expect inventory to remain elevated in the near term, we expect channel inventory will continue to decline over the coming quarters. Terminated Silicon Motion Merger On May 5, 2022, we entered into an agreement and plan of merger, or the Merger Agreement, with Silicon Motion Technology Corporation, or Silicon Motion, an exempted company with limited liability incorporated under the Law of the Cayman Islands, pursuant to which, subject to the terms and conditions thereof, we agreed to acquire Silicon Motion pursuant to a statutory merger of Shark Merger Sub, a wholly-owned subsidiary of MaxLinear, with and into Silicon Motion, with Silicon Motion surviving the merger as a wholly-owned subsidiary of MaxLinear. Silicon Motion is a provider of NAND flash controllers for solid state drives and other solid state storage devices. 34 Table of Contents On July 26, 2023, we terminated the Merger Agreement and notified Silicon Motion that we were relieved of our obligations to close because, among other reasons, (i) certain conditions to closing set forth in the Merger Agreement were not satisfied and were incapable of being satisfied, (ii) Silicon Motion had suffered a Material Adverse Effect that was continuing, (iii) Silicon Motion was in material breach of representations, warranties, covenants, and agreements in the Merger Agreement that gave rise to the right of the Company to terminate, and (iv) in any event, the First Extended Outside Date had passed and was not automatically extended because certain conditions in Article 6 of the Merger Agreement were not satisfied or waived as of May 5, 2023. Under the terms of the Merger Agreement, MaxLinear was not required to pay a break-up fee or other fee as a result of the termination of the Merger Agreement. On August 16, 2023, Silicon Motion delivered a notice to us, which Silicon Motion publicly disclosed, that it was purporting to terminate the Merger Agreement and that Silicon Motion would be commencing an arbitration to seek damages from us arising from our alleged breaches of the Merger Agreement. Undefined capitalized terms in this paragraph have the same meaning as in the Merger Agreement. On October 5, 2023, Silicon Motion filed a Notice of Arbitration with the Singapore International Arbitration Centre alleging that we breached the Merger Agreement. See Part II, Item 1 (Legal Proceedings) of this report for more information on legal proceedings related to the termination of the Merger Agreement. The second amended and restated commitment letter dated October 24, 2022 with Wells Fargo Bank, N.A., or Wells Fargo Bank, and other lenders, and related financing commitments for the previously pending (now terminated) merger were also terminated upon termination of the Merger Agreement. As a result of the termination of the financing, the Company was required to pay to Wells Fargo Bank a ticking fee of $18.3 million, which is included in other income (expense), net in the three months ended September 30, 2023. Acquisition of Company Y On January 17, 2023, the Company completed its acquisition of a business, or Company Y, pursuant to a Purchase and Sale Agreement, or the Purchase Agreement. The transaction consideration included $9.7 million in cash. In addition, Company Y stockholders may receive up to an additional $2.6 million in potential contingent consideration, subject to the acquired business satisfying certain personnel objectives by June 17, 2024. Company Y is headquartered in Bangalore, India and operates as a provider of engineering design services. Critical Accounting Policies and Estimates Management’s discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements which are prepared in accordance with accounting principles that are generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, related disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to business combinations, revenue recognition, inventory valuation, production masks, goodwill and other intangible assets valuation, and income taxes. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known. We believe that accounting policies we have identified as critical involve a greater degree of judgment and complexity than our other accounting policies. Accordingly, those are the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations. For a summary of our critical accounting policies and estimates, refer to Management’s Discussion and Analysis section of our Annual Report on Form 10-K for the year ended December 31, 2022, which we filed with the Securities and Exchange Commission, or SEC, on February 1, 2023, or our Annual Report. There have been no material changes to our critical accounting policies and estimates during the nine months ended September 30, 2023. Recently Issued Accounting Pronouncements See Note 1 to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for recently issued accounting pronouncements not yet adopted as of the date of this report. 35 Table of Contents Results of Operations The following describes the line items set forth in our unaudited consolidated statements of operations. Net Revenue. Net revenue is generated from sales of radio-frequency, analog, digital, and mixed-signal integrated circuits for access and connectivity, wired and wireless infrastructure, and industrial and multi-market applications. A significant portion of our sales are to distributors, who then resell our products. Cost of Net Revenue. Cost of net revenue includes the cost of finished silicon wafers processed by third-party foundries; costs associated with our outsourced packaging and assembly, test and shipping; costs of personnel, including stock-based compensation, and equipment associated with manufacturing support, logistics and quality assurance; amortization of acquired developed technology intangible assets and certain purchased licensed technology intangible assets; amortization of certain production mask costs and computer-aided design software license costs; cost of production load boards and sockets; and an allocated portion of our occupancy costs. Research and Development. Research and development expense includes personnel-related expenses, including salaries and benefits and stock-based compensation, new product engineering mask costs, prototype integrated circuit packaging and test costs, computer-aided design software license costs, intellectual property license costs, reference design development costs, development testing and evaluation costs, depreciation expense and allocated occupancy costs. Research and development activities include the design of new products, refinement of existing products and design of test methodologies to ensure compliance with required specifications. All research and development costs are expensed as incurred. Selling, General and Administrative. Selling, general and administrative expense includes personnel-related expenses, including salaries and benefits and stock-based compensation, amortization of certain acquired intangible assets, merger, acquisition and integration costs, third-party sales commissions, field application engineering support, travel costs, professional and consulting fees, legal fees, depreciation expense and allocated occupancy costs. Impairment Losses. Impairment losses consist of charges resulting from the impairment of intangible assets. Restructuring Charges . Restructuring charges consist of severance, lease and leasehold impairment charges, and other charges related to restructuring plans. Interest and Other Income (Expense), Net. Interest and other income (expense), net includes interest income, interest expense and other income (expense). Interest income consists of interest earned on our cash, cash equivalents and restricted cash balances. Interest expense consists of interest accrued on debt and amortization of discounts on debt and other liabilities. Other income (expense) consists of income (expense) generated from non-operating transactions, including a ticking fee paid to lenders following the termination of the Silicon Motion merger and unrealized holding gains (losses) from certain investments required to be marked to market value. Income Tax Provision (Benefit). We make certain estimates and judgments in determining income taxes for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expenses for tax and financial statement purposes and the realizability of assets in future years. 36 Table of Contents The following table sets forth our consolidated statement of operations data as a percentage of net revenue for the periods indicated: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net revenue 100 % 100 % 100 % 100 % Cost of net revenue 45 41 44 41 Gross profit 55 59 56 59 Operating expenses: Research and development 49 27 36 27 Selling, general and administrative 19 13 17 15 Impairment losses — — — — Restructuring charges — — 2 — Total operating expenses 68 40 55 42 Income (loss) from operations (13) 18 1 17 Interest income 1 — 1 — Interest expense (2) (1) (1) (1) Other income (expense), net (17) (2) — — Total other income (expense), net (17) (3) (4) (1) Income (loss) before income taxes (31) 16 (4) 16 Income tax provision (benefit) (1) 6 2 5 Net income (loss) (29) % 10 % (6) % 11 % Net Revenue Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 $ Change % Change 2023 2022 $ Change % Change (dollars in thousands) (dollars in thousands) Broadband $ 34,416 $ 120,165 $ (85,749) (71) % $ 169,646 $ 393,819 $ (224,173) (57) % % of net revenue 25 % 42 % 30 % 47 % Connectivity 15,025 82,603 (67,578) (82) % 119,232 199,182 (79,950) (40) % % of net revenue 11 % 29 % 21 % 24 % Infrastructure 49,985 35,580 14,405 40 % 145,549 104,650 40,899 39 % % of net revenue 37 % 12 % 26 % 13 % Industrial and multi-market 36,104 47,382 (11,278) (24) % 133,483 132,015 1,468 1 % % of net revenue 27 % 17 % 23 % 16 % Total net revenue $ 135,530 $ 285,730 $ (150,200) (53 %) $ 567,910 $ 829,666 $ (261,756) (32) % Net revenue decreased $150.2 million to $135.5 million for the three months ended September 30, 2023, as compared to $285.7 million for the three months ended September 30, 2022, primarily as a result of macroeconomic conditions impacting customer demand, including excess inventory in the channel built up following the supply shortages in the prior year. The decrease in broadband net revenue of $85.7 million was primarily from gateway revenues, and to a lesser extent, cable. The decrease in connectivity revenue of $67.6 million was driven by declines in Wi-Fi, ethernet and MoCA revenues. The increase in infrastructure revenues of $14.4 million was primarily driven by an increase in wireless backhaul product shipments. The decrease in industrial and multi-market revenue of $11.3 million was related to decreased shipments of high-performance analog and component products. 37 Table of Contents Net revenue decreased $261.8 million to $567.9 million for the nine months ended September 30, 2023, as compared to $829.7 million for the nine months ended September 30, 2022, primarily as a result of macroeconomic conditions impacting customer demand, including excess inventory in the channel built up following the supply shortages in the prior year. The decrease in broadband net revenue of $224.2 million was primarily from gateway revenues, and to a lesser extent, cable, tuners and satellite. The decrease in connectivity revenue of $80.0 million was primarily driven by declines in Wi-Fi, MoCA and ethernet revenues. The increase in infrastructure revenues of $40.9 million was primarily driven by an increase in wireless backhaul product shipments. The increase in industrial and multi-market revenue of $1.5 million was related to increased shipments of component products, partially offset by decreased shipments of high-performance analog products. We currently expect that revenue will fluctuate in the future, from period-to-period, consistent with the cyclical nature of our industry, and we may experience further decline in revenue due to current macroeconomic conditions impacting customer demand for various products. Cost of Net Revenue and Gross Profit Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 $ Change % Change 2023 2022 $ Change % Change (dollars in thousands) (dollars in thousands) Cost of net revenue $ 61,586 $ 118,242 $ (56,656) (48) % $ 250,786 $ 343,237 $ (92,451) (27) % % of net revenue 45 % 41 % 44 % 41 % Gross profit 73,944 167,488 (93,544) (56) % 317,124 486,429 (169,305) (35) % % of net revenue 55 % 59 % 56 % 59 % Cost of net revenue decreased $56.7 million to $61.6 million for the three months ended September 30, 2023, as compared to $118.2 million for the three months ended September 30, 2022. The decrease was primarily driven by lower sales and expenses. Gross profit percentage declined for the three months ended September 30, 2023, as compared to the three months ended September 30, 2022, due primarily to revenue mix and decreased absorption of amortization of intangible assets. Cost of net revenue decreased $92.5 million to $250.8 million for the nine months ended September 30, 2023, as compared to $343.2 million for the nine months ended September 30, 2022. The decrease was primarily driven by lower sales and expenses. Gross profit percentage declined for the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022, due primarily to revenue mix and decreased absorption of amortization of intangible assets. We currently expect that gross profit percentage will fluctuate in the future, from period-to-period, based on changes in product mix, average selling prices, and average manufacturing costs. Research and Development Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 $ Change % Change 2023 2022 $ Change % Change (dollars in thousands) (dollars in thousands) Research and development $ 66,306 $ 76,437 $ (10,131) (13) % $ 204,254 $ 222,718 $ (18,464) (8) % % of net revenue 49 % 27 % 36 % 27 % Research and development expense decreased $10.1 million to $66.3 million for the three months ended September 30, 2023, as compared to $76.4 million for the three months ended September 30, 2022. The decrease was primarily driven by the impact from the decrease in headcount from a reduction in force. Research and development expense decreased $18.5 million to $204.3 million for the nine months ended September 30, 2023, as compared to $222.7 million for the nine months ended September 30, 2022. The decrease was primarily driven by the impact from the decrease in headcount from a reduction in force. We are closely managing our research and development expenses to meet evolving demand; however, we expect our research and development expenses to increase in future years when we return to expanding our product portfolio and enhancing existing products. 38 Table of Contents Selling, General and Administrative Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 $ Change % Change 2023 2022 $ Change % Change (dollars in thousands) (dollars in thousands) Selling, general and administrative $ 25,402 $ 38,472 $ (13,070) (34) % $ 97,772 $ 123,536 $ (25,764) (21) % % of net revenue 19 % 13 % 17 % 15 % Selling, general and administrative expense decreased $13.1 million to $25.4 million for the three months ended September 30, 2023, as compared to $38.5 million for the three months ended September 30, 2022. The decrease was primarily due to decreased amortization of intangibles and stock based-compensation expenses. Selling, general and administrative expense decreased $25.8 million to $97.8 million for the nine months ended September 30, 2023, as compared to $123.5 million for the nine months ended September 30, 2022. The decrease was primarily due to decreased amortization of intangibles and stock based-compensation expenses. We are closely managing our selling, general and administrative expenses; however, we expect selling, general and administrative expenses to increase in future years when we return to growing our sales and marketing organization to expand into existing and new markets. Impairment losses Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 $ Change % Change 2023 2022 $ Change % Change (dollars in thousands) (dollars in thousands) Impairment losses $ — $ — $ — N/A $ 2,438 $ — $ 2,438 N/A % of net revenue — % — % — % — % Impairment losses in the nine months ended September 30, 2023 related to abandonment of certain intellectual property licenses. Restructuring Charges Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 $ Change % Change 2023 2022 $ Change % Change (dollars in thousands) (dollars in thousands) Restructuring charges $ 54 $ 631 $ (577) (91) % $ 9,138 $ 1,093 $8,045 736 % % of net revenue — % — % 2 % — % Restructuring charges decreased $0.6 million to $0.1 million for the three months ended September 30, 2023, compared to $0.6 million for the three months ended September 30, 2022. Restructuring charges increased $8.0 million to $9.1 million for the nine months ended September 30, 2023, compared to $1.1 million for the nine months ended September 30, 2022. Restructuring charges in the nine months ended September 30, 2023 consisted primarily of $8.9 million of employee severance-related charges from a reduction in force. 39 Table of Contents Interest and Other Income (Expense) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 $ Change % Change 2023 2022 $ Change % Change (dollars in thousands) (dollars in thousands) Interest and other income (expense), net $ (23,700) $ (7,354) $ (16,346) 222 % $ (24,701) $ (5,597) $ (19,104) 341 % % of net revenue (17) % (3) % (4) % (1) % Interest and other income (expense), net changed by $16.3 million from expense of $7.4 million in the three months ended September 30, 2022 to expense of $23.7 million for the three months ended September 30, 2023. The change in interest and other income (expense), net was primarily due to a loan ticking fee of approximately $18.3 million paid to lenders following the termination of the Silicon Motion merger, partially offset by an increase in interest income of $1.7 million on interest-bearing cash equivalents. Interest and other income (expense), net changed by $19.1 million from expense of $5.6 million in the nine months ended September 30, 2022 to expense of $24.7 million for the nine months ended September 30, 2023. The change in interest and other income (expense), net was primarily due to a $22.9 million change in other income (expense), net, from income of $1.7 million in the 2022 period to expense of $21.2 million in the 2023 period, partially offset by the impact of a $4.1 million increase in interest income. The $22.9 million change in other income (expense), net primarily related to a loan ticking fee of approximately $18.3 million paid to lenders following the termination of the Silicon Motion merger, $2.5 million impact of change from $1.4 million in net unrealized holding loss in the 2022 period to net unrealized holding loss of $3.9 million recognized on equity securities that are marked to market value in other income (expense), net, and $3.4 million impact from foreign currency fluctuations, partially offset by a gain of $1.0 million related to partial curtailment of defined benefit pension obligations. The $4.1 million increase in interest income is from interest-bearing cash equivalents. Income Tax Provision (Benefit) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 $ Change % Change 2023 2022 $ Change % Change (dollars in thousands) (dollars in thousands) Income tax provision (benefit) $ (1,689) $ 16,186 $ (17,875) (110) % $ 13,468 $ 39,525 $ (26,057) (66) % The income tax benefit for the three months ended September 30, 2023 was $1.7 million compared to an income tax provision of $16.2 million for the three months ended September 30, 2022. The income tax provision for the nine months ended September 30, 2023 was $13.5 million compared to an income tax provision of $39.5 million for the nine months ended September 30, 2022. The difference between our effective tax rate and the 21.0% U.S. federal statutory rate for the nine months ended September 30, 2023 primarily related to the mix of pre-tax income among jurisdictions, permanent tax items including a tax on global intangible low-taxed income, stock based compensation, excess tax benefits related to stock-based compensation, release of uncertain tax positions under ASC 740-10, and release of the valuation allowance on certain federal R&D credits. The permanent tax item related to global intangible low-taxed income also reflects legislative changes requiring the capitalization of research and experimentation costs, as well as limitations on the creditability of certain foreign income taxes. The difference between our effective tax rate and the 21.0% U.S. federal statutory rate for the nine months ended September 30, 2022 primarily related to the mix of pre-tax income among jurisdictions, permanent tax items including the tax on global intangible low-taxed income, stock based compensation, excess tax benefits related to stock-based compensation, release of certain reserves for uncertain tax positions under ASC 740-10, and release of the valuation allowance on certain federal R&D credits. The permanent tax item related to global intangible low-taxed income also reflects legislative changes requiring the capitalization of research and experimentation costs, as well as limitations on the creditability of certain foreign income taxes. 40 Table of Contents We continue to maintain a valuation allowance to offset state and certain federal and foreign deferred tax assets, as realization of such assets does not meet the more-likely-than-not threshold required under accounting guidelines. In making such determination, we consider all available positive and negative evidence quarterly, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Based upon our review of all positive and negative evidence, we continue to have a valuation allowance on state deferred tax assets, certain federal deferred tax assets, and certain foreign deferred tax assets in jurisdictions where we have cumulative losses or otherwise are not expected to utilize certain tax attributes. We do not incur income tax expense or benefit in certain tax-free jurisdictions in which we operate. Our subsidiary in Singapore operates under certain tax incentives in Singapore, which are effective through March 2027. Under these incentives, qualifying income derived from certain sales of our integrated circuits is taxed at a concessionary rate over the incentive period. We also receive a reduced withholding tax rate on certain intercompany royalty payments made by our Singapore subsidiary during the incentive period. We recorded a tax provision in the nine months ended September 30, 2023 and 2022 at the incentive rate. The incentives are conditional upon our meeting certain minimum employment and investment thresholds within Singapore over time, and we may be required to return certain tax benefits in the event we do not achieve compliance related to that incentive period. We currently believe that we will be able to satisfy these conditions without material risk. Liquidity and Capital Resources As of September 30, 2023, we had cash and cash equivalents of $187.0 million, restricted cash of $1.1 million and net accounts receivable of $158.2 million. Additionally, as of September 30, 2023, our working capital was $275.7 million. Our primary uses of cash are to fund operating expenses and purchases of inventory, property and equipment, and from time to time, the acquisition of businesses. In May 2022, we entered into the Merger Agreement to acquire Silicon Motion. However, on July 26, 2023, we terminated the Merger Agreement and were relieved of our obligations to close. We also use cash to pay down outstanding debt, and from time to time, make investments. As of September 30, 2023, $125.0 million of principal was outstanding under a senior secured term B loan facility or the “Initial Term Loan under the June 23, 2021 Credit Agreement.” The Company also has available a senior secured revolving credit facility, in an aggregate principal amount of up to $100.0 million which remained undrawn as of September 30, 2023. The proceeds of the revolving facility may be used to finance the working capital needs and other general corporate purposes of the Company and its subsidiaries. Commencing on September 30, 2021, the Initial Term Loan under the June 23, 2021 Credit Agreement has amortized in equal quarterly installments equal to 0.25% of the original principal amount of the Initial Term Loan under the June 23, 2021 Credit Agreement, with the balance payable on June 23, 2028. We could be subject to substantial variable interest rate risk because our interest rate under term loans typically vary based on a fixed margin over an indexed rate or an adjusted base rate. While we had been mitigating the impact of rising interest rates with large amounts of prepayments on our outstanding debt, if interest rates were to further increase substantially, it would have a material adverse effect our operating results and could affect our ability to service the indebtedness. Please refer to the Risk Factor entitled “ As of September 30, 2023, our aggregate indebtedness was $125.0 million, and we are subject to a variable amount of interest on the principal balance of our credit agreements and could continue to be adversely impacted by rising interest rates in the future. Such indebtedness adversely affects our operating results and cash-flows as we satisfy our underlying interest and principal payment obligations and contains financial and operational covenants that could adversely affect our operational freedom or ability to pursue strategic transactions that we would otherwise consider to be in the best interest of stockholders, including obtaining additional indebtedness to finance such transactions. In addition, rising interest rates may make it more difficult for us, our customers, and our distributors to obtain financing and service their interest and debt obligations, which in turn has an impact on customer demand for our products and our distributors' business ” for a discussion of how our indebtedness could have a material adverse effect on our liquidity and capital resources. 41 Table of Contents Our future capital requirements will depend on many factors, including changes in revenue, the expansion of our engineering, sales and marketing activities, the timing and extent of our expansion into new territories, the timing of introductions of new products and enhancements to existing products, the continuing market acceptance of our products, any damages from legal proceedings related to the termination of the Merger Agreement with Silicon Motion or any alleged breaches of the Merger Agreement that we are required to pay, or any amounts we agree to pay in any settlement and any other potential material investments in, or acquisitions of, complementary businesses, services or technologies. Additional funds may not be available on terms favorable to us or at all. If we are unable to raise additional funds when needed, we may not be able to sustain our operations or execute our strategic plans. Our cash and cash equivalents are impacted by the timing of when we pay expenses as reflected in the change in our outstanding accounts payable and accrued expenses. Cash used to fund operating expenses in our consolidated statements of cash flows excludes the impact of non-cash items such as amortization and depreciation of acquired intangible assets and leased right-of-use assets and property and equipment, stock-based compensation, impairment of intangible assets and unrealized holding gains or losses on marketable equity securities. Cash used to fund capital purchases and acquisitions of businesses and investments are included in investing activities in our consolidated statements of cash flows. Cash proceeds from issuance of common stock and debt and cash used to pay down outstanding debt are included in financing activities in our consolidated statements of cash flows. As of September 30, 2023, our material cash requirements include long-term debt, non-cancelable operating leases, inventory purchase obligations and other obligations, which primarily consist of contractual payments due for computer-aided design software, as follows: Payments due Total Less than 1 year 2-3 years 4-5 years More than 5 years (in thousands) Long-term debt obligations $ 125,000 $ — $ — $ 125,000 $ — Operating lease obligations 41,218 2,791 20,882 13,499 4,046 Inventory purchase obligations 41,164 23,603 17,561 — — Other obligations 87,846 6,051 59,555 22,240 — Total $ 295,228 $ 32,445 $ 97,998 $ 160,739 $ 4,046 Our planned capital expenditures as of September 30, 2023 were not material. Our consolidated balance sheet at September 30, 2023 included $5.2 million in other long-term liabilities for uncertain tax positions, some of which may result in cash payment. The future payments related to uncertain tax positions recorded as other long-term liabilities have not been presented in the table above due to the uncertainty of the amounts and timing of cash settlement with the taxing authorities. Our primary sources of cash are cash receipts on accounts receivable from our shipment of products to distributors and direct customers. Aside from the amounts billed to our customers, net cash collections of accounts receivable are impacted by the efficiency of our cash collections process, which can vary from period to period depending on the payment cycles of our major distributor customers, and relative linearity of shipments period-to-period. The June 23, 2021 Credit Agreement, under which we entered into a senior secured term B loan facility and a revolving credit facility, permits us to request incremental loans in an aggregate principal amount not to exceed the sum of an amount equal to the greater of (x) $175.0 million and (y) 100% of “Consolidated EBITDA” (as defined in such agreement), plus the amount of certain voluntary prepayments, plus an unlimited amount that is subject to pro forma compliance with certain first lien net leverage ratio, secured net leverage ratio and total net leverage ratio tests. 42 Table of Contents Following is a summary of our working capital, cash and cash equivalents, and restricted cash for the periods indicated: September 30, 2023 December 31, 2022 (in thousands) Working capital $ 275,697 $ 222,038 Cash and cash equivalents $ 187,028 $ 187,353 Short-term restricted cash 1,105 982 Long-term restricted cash 19 22 Total cash, cash equivalents, and restricted cash $ 188,152 $ 188,357 Following is a summary of our cash flows provided by (used in) operating activities, investing activities and financing activities for the periods indicated: Nine Months Ended September 30, 2023 2022 (in thousands) Net cash provided by operating activities $ 59,945 $ 319,369 Net cash used in investing activities (30,762) (74,390) Net cash used in financing activities (27,527) (191,824) Effect of exchange rate changes on cash, cash equivalents and restricted cash (1,861) (2,400) Increase (decrease) in cash, cash equivalents and restricted cash $ (205) $ 50,755 Cash Flows from Operating Activities Net cash provided by operating activities was $59.9 million for the nine months ended September 30, 2023. Net cash provided by operating activities consisted of non-cash items of $103.1 million, and excess tax benefits and deferred income taxes totaling $6.0 million, partially offset by net loss of $34.6 million and changes in operating assets and liabilities of $14.5 million. Non-cash items included in net loss for the nine months ended September 30, 2023 primarily consisted of depreciation and amortization of property, equipment, acquired intangible assets and leased right-of-use assets of $54.9 million, stock-based compensation of $38.8 million, unrealized holding loss on investments of $3.9 million, impairment losses of $2.4 million, and loss on disposal of property and equipment of $2.1 million. Net cash provided by operating activities was $319.4 million for the nine months ended September 30, 2022. Net cash provided by operating activities consisted of positive impact of net income of $94.0 million, non-cash items of $120.3 million, and changes in operating assets and liabilities of $91.5 million, partially offset by excess tax benefits and deferred income taxes totaling $13.6 million. Non-cash items included in net income for the nine months ended September 30, 2022 primarily consisted of depreciation and amortization of property, equipment, acquired intangible assets and leased right-of-use assets of $61.9 million and stock-based compensation of $58.2 million. Cash Flows from Investing Activities Net cash used in investing activities was $30.8 million for the nine months ended September 30, 2023 and consisted of cash used in acquisitions of Company X and Y of $12.4 million (including $2.7 million contingent consideration paid to shareholders of Company X), purchases of property and equipment of $12.2 million, and purchases of intangible assets of $6.2 million. Net cash used in investing activities was $74.4 million for the nine months ended September 30, 2022 and consisted of purchases of long-term investments of $29.3 million, purchases of property and equipment of $24.6 million, purchases of intangible assets of $10.4 million, and proceeds loaned under notes receivable of $10.0 million. 43 Table of Contents Cash Flows from Financing Activities Net cash used in financing activities was $27.5 million for the nine months ended September 30, 2023. Net cash used in financing activities consisted primarily of payment of debt commitment, or ticking fees, of $18.3 million in connection with the termination of the merger with Silicon Motion and minimum tax withholding paid on behalf of employees for restricted stock units of $12.4 million, partially offset by net proceeds from issuance of our common stock upon exercise of stock options and purchases made under our ESPP of $3.2 million. Net cash used in financing activities was $191.8 million for the nine months ended September 30, 2022. Net cash used in financing activities consisted primarily of repayments of debt of $135.0 million, common stock repurchases of $31.5 million, and minimum tax withholding paid on behalf of employees for restricted stock units of $28.5 million, partially offset by $3.2 million in net proceeds from issuance of our common stock upon exercise of stock options and purchases made under our ESPP. We believe that our $187.0 million of cash and cash equivalents at September 30, 2023 will be sufficient to fund our projected operating requirements for at least the next twelve months. As of September 30, 2023, our indebtedness totaled $125.0 million, which consists of outstanding principal under the Initial Term Loan under the June 23, 2021 Credit Agreement. The June 23, 2021 Credit Agreement also provides the Company with the Revolving Facility in an aggregate principal amount of up to $100.0 million, which remained undrawn as of September 30, 2023. The Initial Term Loan under the June 23, 2021 Credit Agreement has a seven-year term expiring in June 2028 and bears interest, at the Company’s option, at a per annum rate equal to either (i) a base rate equal to the highest of (x) the federal funds rate, plus 0.50%, (y) the prime rate then in effect and (z) an adjusted LIBOR rate determined on the basis of a one-month interest period plus 1.00%, in each case, plus an applicable margin of 1.25% or (ii) an adjusted LIBOR rate, subject to a floor of 0.50%, plus an applicable margin of 2.25%. Loans under the Revolving Facility initially bear interest, at a per annum rate equal to either (i) a base rate (as calculated above) plus an applicable margin of 0.00%, or (ii) an adjusted LIBOR rate (as calculated above) plus an applicable margin of 1.00%. Following delivery of financial statements for the Company’s fiscal quarter ending June 30, 2021, the applicable margin for loans under the Revolving Facility will range from 0.00% to 0.75% in the case of base rate loans and 1.00% to 1.75% in the case of LIBOR rate loans, in each case, depending on the Company’s secured net leverage ratio as of the most recently ended fiscal quarter. The Company is required to pay commitment fees ranging from 0.175% to 0.25% per annum on the daily undrawn commitments under the Revolving Facility, depending on the Company’s secured net leverage ratio as of the most recently ended fiscal quarter. Commencing on September 30, 2021, the Initial Term Loan under the June 23, 2021 Credit Agreement amortizes in equal quarterly installments equal to 0.25% of the original principal amount, with the balance payable at maturity on June 23, 2028. The June 23, 2021 Credit Agreement contains customary provisions specifying alternative interest rate calculations to be employed at such time as LIBOR ceases to be available as a benchmark for establishing the interest rate on floating interest rate borrowings. Our cash and cash equivalents in recent years have been favorably affected by our implementation of an equity-based bonus program for our employees, including executives. In connection with that bonus program, in February 2023, we issued 0.9 million freely-tradable (subject to restrictions for affiliates) shares of our common stock in settlement of bonus awards for the 2022 performance period. We expect to implement a similar equity-based plan for fiscal 2023, but our compensation committee retains discretion to effect payment in cash, stock, or a combination of cash and stock.