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 a number of risks, uncertainties, and assumptions that could cause our actual results to 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-chips, or SoCs, 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, manufacturing processes and conventional packaging technologies. 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, we believe our solutions have exceptional levels of functional integration and performance, low manufacturing cost, and reduced power consumption versus competition. These solutions also enable shorter design cycles, significant design flexibility and low system-level cost across a range of markets. Our customers primarily include electronics distributors, module makers, original equipment manufacturers, or OEMs and original design manufacturers, or ODMs, which incorporate our products in a wide range of electronic devices. Examples of such devices include radio transceivers and modems for 4G/5G base-station and backhaul infrastructure; optical transceivers targeting hyperscale data centers; Wi-Fi and wireline routers for home networking; broadband modems compliant with Data Over Cable Service Interface Specifications, or DOCSIS, passive optical fiber standards, or PON, and digital subscriber line, or DSL; as well as power management and interface products used in these and many other markets. In addition, we generate revenue from certain intellectual property sale agreements. In the nine months ended September 30, 2024, net revenue was $268.4 million, which was derived in part from sales of RF receivers and RF receiver SOC and connectivity solutions and intellectual property 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. We have experienced slower than expected recovery in sales and our ability to achieve revenue growth in the future will depend, among other factors, on our ability to improve revenue in key markets such as the broadband market which has experienced slower than expected recovery; our ability to further penetrate existing markets; our ability to expand our target addressable markets by developing new and innovative products such as researching, developing and designing capabilities for new solutions in advanced semiconductor process nodes such as 16nm and 5nm and beyond, and addressing challenges of capturing and processing high quality broadband communications and high-speed optical interconnect signals; changes in government trade policies; changes in export control regulations; our ability to carry on licensed activities with entities on the Entity List, which have been paused, delayed or halted by the U.S. Department of Commerce Bureau of Industry and Security, or BIS at certain times; and our ability to obtain design wins with device manufacturers, in particular manufacturers of 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 72% and 74% of net revenue during the nine months ended September 30, 2024 and 2023, respectively, including 37% from products shipped to Hong Kong during the nine months ended September 30, 2024 and 34% from products shipped to Hong Kong and 12% from products shipped to mainland China during nine months ended September 30, 2023. 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, 2024 and 2023 related principally to 42 Table of Contents 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 through sales of our products, as well as consideration under intellectual property sale agreements. Sales of products to customers comprise both direct sales to customers and indirect sales through distributors. In the three months ended September 30, 2024, one customer accounted for 25% of our net revenue, and our ten largest customers collectively accounted for 71% of our net revenue, of which distributor customers accounted for 8% of our net revenue. In the nine months ended September 30, 2024, one customer accounted for 13% of our net revenue, and our ten largest customers collectively accounted for 64% of our net revenue, of which distributor customers accounted for 15% of our net revenue. For certain customers, we sell multiple products into disparate end user applications such as PON outdoor units, or PON ODUs, Wi-Fi routers, broadband gateways, and cable modems. 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, however, 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 broadband data modem and gateway sectors, a design-in can have a product life cycle of 24 to 60 months. In the industrial and wired and wireless infrastructure markets, a design-in can have a product life cycle of 24 to 84 months and beyond. Impact of Global Economic Uncertainty and Inventory Build Inflation and uncertainty in customer demand and the worldwide economy has continued, and we could experience continued volatility in our sales and revenues. 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. However, the magnitude of such volatility on our business and its duration is uncertain and cannot be reasonably estimated at this time. As supplier lead times continue to stabilize, we have seen and expect to continue to see a more normalized demand-planning horizon. 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. 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 these grounds. 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. 43 Table of Contents 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, in August 2023, the Company was required to pay to Wells Fargo Bank a ticking fee of $18.3 million. Workforce Reductions We initiated a reduction in our workforce in July 2024, or the 2024 Workforce Reduction, following slower than expected recovery in our sales as a result of macroeconomic conditions and the demand environment. Previously, during the year ended December 31, 2023, we entered into two plans of restructuring to reduce our workforce, or the 2023 Workforce Reductions, which together with the 2024 Workforce Reduction, are referred to collectively as the Workforce Reductions. The Workforce Reductions are intended to align our operational needs with the changes in macroeconomic conditions and the demand environment while continuing to support the long-term business strategy by reducing our operating expenses. In the three months ended September 30, 2024, the Company incurred $26.8 million in restructuring costs pertaining to the 2024 Workforce Reduction, which included $17.0 million charges under contracts associated with cancelled projects and related impairment of assets, $9.1 million in severance costs and related expenses, and $0.7 million from exiting facilities. During the nine months ended September 30, 2024, we completed notification to the remaining affected employees of the 2023 Workforce Reductions, and incurred $23.5 million in restructuring costs, including $19.8 million in severance costs and related expenses, or a cumulative total of $43.3 million in restructuring costs under the 2023 Workforce Reductions. Substantially all of the severance and related costs incurred in the nine months ended September 30, 2024 that related to the 2023 Workforce Reductions pertained to statutory severance benefits in the jurisdictions in which the terminated employees were employed. We expect to incur additional restructuring costs associated with the 2023 Workforce Reductions and 2024 Workforce Reduction of approximately $3.0 million to $5.0 million, which is expected to pertain to severance due to statutory requirements in the jurisdictions in which the terminated employees were employed, as well as exiting facilities. We expect to complete notifications to employees regarding the 2024 Workforce Reduction and finalize our plans to exit facilities by the end of 2024. The estimate of costs that we expect to incur, and the timing thereof, are subject to a number of assumptions and actual results may differ. We may also incur other charges or cash expenditures not currently contemplated due to events that may occur as a result of, or associated with, the Workforce Reductions. Inducement Equity Incentive Plan for New Employees On May 22, 2024, the Board of Directors adopted the Inducement Plan pursuant to Rule 5635(c)(4) of the Nasdaq Listing Rules, and, subject to the adjustment provisions of the Inducement Plan, reserved 4,000,000 shares of the Company’s common stock for issuance under equity awards granted under the Inducement Plan. The Inducement Plan provides for the grant of equity-based awards, including non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance units and performance shares, and its terms are substantially similar to the 2010 Equity Incentive Plan, including with respect to treatment of equity awards in the event of a merger or “change in control” as defined under the Inducement Plan, but with such other terms and conditions intended to comply with the Nasdaq inducement award exception. Awards under the Inducement Plan may only be made to individuals not previously employees or non-employee directors of the Company as an inducement material to the individuals’ entry into employment with the Company. 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 44 Table of Contents 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, 2023, which we filed with the Securities and Exchange Commission, or SEC, on January 31, 2024, or our Annual Report. There have been no material changes to our critical accounting policies and estimates during the nine months ended September 30, 2024. 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. 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 and intellectual property 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 salaries, benefits, and stock-based compensation; equipment associated with manufacturing support, logistics and quality assurance; amortization of acquired developed technology and purchased licensed technology intangible assets; inventory fair value adjustments, if any; 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, or R&D, 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, partially offset by income from joint R&D projects and/or governmental R&D grants, if any. 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, if any, 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. 45 Table of Contents 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, net gains (losses) from sales or impairment of investments and/or income or losses from investments, if any, including unrealized holding gains (losses) from certain investments required to be marked to market value, if any, and a gain from partial curtailment of employee defined benefit obligations. 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. 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, 2024 2023 2024 2023 Net revenue 100 % 100 % 100 % 100 % Cost of net revenue 46 45 47 44 Gross profit 54 55 53 56 Operating expenses: Research and development 65 49 65 36 Selling, general and administrative 37 19 37 17 Impairment losses 2 — — — Restructuring charges 33 — 19 2 Total operating expenses 137 68 121 55 Income (loss) from operations (82) (13) (68) 1 Interest income 2 1 2 1 Interest expense (3) (2) (3) (1) Other income (expense), net (18) (17) (5) — Total other income (expense), net (19) (17) (6) (4) Loss before income taxes (102) (31) (74) (4) Income tax provision (benefit) (8) (1) (4) 2 Net loss (93) % (29) % (70) % (6) % Net Revenue Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 $ Change % Change 2024 2023 $ Change % Change (dollars in thousands) (dollars in thousands) Broadband $ 32,275 $ 34,416 $ (2,141) (6) % $ 87,157 $ 169,646 $ (82,489) (49) % % of net revenue 40 % 25 % 32 % 30 % Connectivity 12,726 15,025 (2,299) (15) % 35,700 119,232 (83,532) (70) % % of net revenue 16 % 11 % 13 % 21 % Infrastructure 23,046 49,985 (26,939) (54) % 87,436 145,549 (58,113) (40) % % of net revenue 28 % 37 % 33 % 26 % Industrial and multi-market 13,055 36,104 (23,049) (64) % 58,068 133,483 (75,415) (56) % % of net revenue 16 % 27 % 22 % 23 % Total net revenue $ 81,102 $ 135,530 $ (54,428) (40 %) $ 268,361 $ 567,910 $ (299,549) (53) % 46 Table of Contents Net revenue decreased $54.4 million to $81.1 million for the three months ended September 30, 2024, as compared to $135.5 million for the three months ended September 30, 2023, primarily as a result of macroeconomic conditions impacting customer demand, including excess inventory in the channel built up following the supply shortages in 2022. The decrease in broadband net revenue of $2.1 million was driven by decreases in the volume of broadband SOC, satellite ODU, and tuner shipments in this category, partially offset by increases from reversals of unclaimed rebates due to expiration of rebate pricing and improvements in shipments of cable data shipments. The decrease in connectivity net revenue of $2.3 million was driven by decreased volume of shipments of certain products associated with residential broadband market decline, while ethernet product shipments improved. The decrease in net infrastructure revenues of $26.9 million was driven by a decrease in the volume of wireless backhaul and high performance analog product shipments. The decrease in industrial and multi-market net revenue of $23.0 million was driven by decreased volume of shipments of component and high-performance analog products, while high speed interconnect product shipments improved. Price changes did not have a material impact to revenues period over period. Net revenue decreased $299.5 million to $268.4 million for the nine months ended September 30, 2024, as compared to $567.9 million for the nine months ended September 30, 2023, primarily as a result of macroeconomic conditions impacting customer demand, including excess inventory in the channel built up following the supply shortages in 2022. The decrease in broadband net revenue of $82.5 million was driven by decreases in the volume of broadband SOC shipments in this category, partially offset by revenue from certain intellectual property sale agreements and increases from reversals of unclaimed rebates due to expiration of rebate pricing. The decrease in connectivity net revenue of $83.5 million was driven by decreased volume of shipments of certain products associated with residential broadband market decline, partially offset by revenue from certain intellectual property sale agreements. The decrease in net infrastructure revenues of $58.1 million was driven by decreases in the volume of wireless backhaul products, and to a lesser extent, high performance analog shipments, partially offset by improvement in shipments of from high speed interconnect products, and revenues from certain intellectual property sale agreements. The decrease in industrial and multi-market net revenue of $75.4 million was driven by decreased volume of shipments of component and high-performance analog products. Price changes did not have a material impact to revenues period over period. We currently expect that revenue will fluctuate in the future, from period-to-period, consistent with the cyclical nature of our industry. Cost of Net Revenue and Gross Profit Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 $ Change % Change 2024 2023 $ Change % Change (dollars in thousands) (dollars in thousands) Cost of net revenue $ 37,022 $ 61,586 $ (24,564) (40) % $ 124,827 $ 250,786 $ (125,959) (50) % % of net revenue 46 % 45 % 47 % 44 % Gross profit 44,080 73,944 (29,864) (40) % 143,534 317,124 (173,590) (55) % % of net revenue 54 % 55 % 53 % 56 % Cost of net revenue decreased $24.6 million to $37.0 million for the three months ended September 30, 2024, as compared to $61.6 million for the three months ended September 30, 2023. The decrease was driven by a decreased volume of shipments as a result of macroeconomic conditions impacting customer demand for our products as described above under “Net Revenue.” Gross profit percentage declined for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, due to reduced absorption of intangible amortization and fixed costs. Cost of net revenue decreased $126.0 million to $124.8 million for the nine months ended September 30, 2024, as compared to $250.8 million for the nine months ended September 30, 2023. The decrease was driven by a decreased volume of shipments as a result of macroeconomic conditions impacting customer demand for our products as described above under “Net Revenue.” Gross profit percentage declined for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, due to reduced absorption of intangible amortization and fixed costs. 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. 47 Table of Contents Research and Development Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 $ Change % Change 2024 2023 $ Change % Change (dollars in thousands) (dollars in thousands) Research and development $ 52,604 $ 66,306 $ (13,702) (21) % $ 173,911 $ 204,254 $ (30,343) (15) % % of net revenue 65 % 49 % 65 % 36 % Research and development expense decreased $13.7 million to $52.6 million for the three months ended September 30, 2024, as compared to $66.3 million for the three months ended September 30, 2023. The decrease was driven by decreases in payroll and benefits expense of $5.6 million, bonuses of $3.1 million, stock based compensation of $2.0 million, CAD design tools expense of $1.7 million, consulting expense of $0.9 million and prototype expense of $0.7 million. These decreases were partially offset by the impact of a decrease to income from joint R&D projects and government grants of $0.7 million offset against R&D expense. The decrease in payroll and benefits, bonuses, and stock-based compensation are attributable to the 2023 Workforce Reductions. The decrease in CAD design tool, consulting and prototype expenses are due to timing of project completion. The decrease in research and development funded by others is due to timing of governmental R&D grants and termination of certain programs during the third quarter of 2024 as a result of the 2024 Workforce Reduction. The amount of income from research and development funded by others also varies from period to period depending on availability of such funding, including governmental grants. Research and development expense decreased $30.3 million to $173.9 million for the nine months ended September 30, 2024, as compared to $204.3 million for the nine months ended September 30, 2023. The decrease was driven by decreases in payroll and benefits expense of $15.8 million, CAD design tools expense of $5.9 million, stock based compensation of $5.2 million, bonuses of $3.3 million, consulting expense of $3.0 million, prototype expense of $2.3 million, depreciation expense of $1.7 million and occupancy expenses of $0.6 million. These decreases were partially offset by a decrease in income from joint R&D and governmental grants of $8.1 million offset against R&D expense. The decrease in payroll and benefits expense, stock-based compensation, and bonuses are attributable to the 2023 Workforce Reductions and cost reduction measures. The decrease in CAD design tool, consulting and prototype expenses are due to timing of project completion. The decrease in depreciation expense is from acquired assets becoming fully amortized as they reached the end of their useful lives. The decrease in income from joint R&D projects and governmental grants is due to timing of governmental R&D grants and termination of certain programs during the first and third quarters of 2024 as a result of the 2023 Workforce Reductions and 2024 Workforce Reduction. The amount of income from research and development funded by others also varies from period to period depending on availability of such funding, including governmental grants. We are reducing our research and development spending, including via our Workforce Reductions, to meet evolving demand; however, we expect our research and development expenses to increase in future years as we develop products to drive future growth. Selling, General and Administrative Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 $ Change % Change 2024 2023 $ Change % Change (dollars in thousands) (dollars in thousands) Selling, general and administrative $ 30,154 $ 25,402 $ 4,752 19 % $ 100,242 $ 97,772 $ 2,470 3 % % of net revenue 37 % 19 % 37 % 17 % Selling, general and administrative expense increased $4.8 million to $30.2 million for the three months ended September 30, 2024, as compared to $25.4 million for the three months ended September 30, 2023. The increase was a result of increase in stock based compensation of $9.8 million, partially offset by decreases in payroll and other benefits expense of $1.8 million, professional fees of $1.8 million, and bonuses of $1.4 million. The increase in stock-based compensation expense is a result of incremental grants made to executives for retention purposes in the first quarter of 2024. The decrease in professional fees is mainly due to a decrease in merger and acquisition related fees following the termination of our merger with Silicon Motion. The decreases in payroll and other benefits and bonuses are attributable to the 2023 Workforce Reductions and other cost reduction measures. 48 Table of Contents Selling, general and administrative expense increased $2.5 million to $100.2 million for the nine months ended September 30, 2024, as compared to $97.8 million for the nine months ended September 30, 2023. The increase was a result of increase in stock based compensation of $13.8 million, partially offset by decreases in professional fees of $4.1 million, payroll and other benefits expense of $3.9 million, bonuses of $1.6 million, commissions of $1.0 million, and depreciation and amortization of $1.0 million. The increase in stock-based compensation expense is a result of incremental grants made to executives for retention purposes in the first quarter of 2024. The decrease in professional fees is mainly due to a decrease in merger and acquisition related fees following the termination of our merger with Silicon Motion. The decreases in payroll and other benefits and bonuses are attributable to the 2023 Workforce Reductions and other cost reduction measures. The decrease in commissions expense is due to decreased revenues. The decrease in depreciation and amortization is from assets becoming fully amortized as they reached the end of their useful lives. We are reducing our selling, general and administrative expenses, including via our Workforce Reductions; 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, 2024 2023 $ Change % Change 2024 2023 $ Change % Change (dollars in thousands) (dollars in thousands) Impairment losses $ 1,237 $ — $ 1,237 N/A $ 1,237 $ 2,438 $ (1,201) (49) % % of net revenue 2 % — % — % — % Impairment losses in the three and nine months ended September 30, 2024 and 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, 2024 2023 $ Change % Change 2024 2023 $ Change % Change (dollars in thousands) (dollars in thousands) Restructuring charges $ 26,828 $ 54 $ 26,774 49,581 % $ 50,323 $ 9,138 $41,185 451 % % of net revenue 33 % — % 19 % 2 % Restructuring charges increased $26.8 million to $26.8 million for the three months ended September 30, 2024, compared to $0.1 million for the three months ended September 30, 2023. Restructuring charges for the three months ended September 30, 2024 included $17.0 million charges under contracts associated with cancelled projects and related impairment of assets, $9.1 million in severance and related charges related to the 2024 Workforce Reduction, and $0.7 million in charges related to the reduction of space leased for office facilities. A significant portion of the employee severance-related changes from the 2024 Workforce Reduction are estimated statutory severance benefits payable in the jurisdictions in which the terminated employees were employed. 49 Table of Contents Restructuring charges increased $41.2 million to $50.3 million for the nine months ended September 30, 2024, compared to $9.1 million for the nine months ended September 30, 2023. Restructuring charges for the nine months ended September 30, 2024 included $28.9 million in employee severance and related charges, $19.8 million of which related to the 2023 Workforce Reductions and $9.1 million which related to the 2024 Workforce Reduction, $17.8 million in charges under contracts associated with cancelled projects and related impairment of assets, and $3.6 million in charges related to reduction of space leased for office facilities. Substantially all of the employee severance-related charges from the 2023 Workforce Reductions and a significant portion of the employee severance-related charges from the 2024 Workforce Reduction are estimated statutory severance benefits payable in the jurisdictions in which the terminated employees were employed. Interest and Other Income (Expense) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 $ Change % Change 2024 2023 $ Change % Change (dollars in thousands) (dollars in thousands) Interest and other income (expense), net $ (15,755) $ (23,700) $ 7,945 (34) % $ (15,716) $ (24,701) $ 8,985 (36) % % of net revenue (19) % (17) % (6) % (4) % Interest and other income (expense), net changed by $7.9 million from expense of $23.7 million in the three months ended September 30, 2023 to expense of $15.8 million for the three months ended September 30, 2024. Interest and other income (expense), net for the three months ended September 30, 2023 included a loan ticking fee of approximately $18.3 million paid to lenders following the termination of the Silicon Motion merger and investment losses of $5.3 million, partially offset by a $1.0 million gain related to partial curtailment of defined benefit pension obligations which did not recur in the three months ended September 30, 2024. The positive impacts pertaining to these items were partially offset by negative impacts from the impairment of privately held investments and notes receivable of $12.3 million and currency exchange losses of $2.3 million. Interest and other income (expense), net changed by $9.0 million from expense of $24.7 million in the nine months ended September 30, 2023 to expense of $15.7 million for the nine months ended September 30, 2024. Interest and other income (expense), net for the three months ended September 30, 2023 included a loan ticking fee of approximately $18.3 million paid to lenders following the termination of the Silicon Motion merger and investment losses of $3.3 million, partially offset by $1.0 million gain related to partial curtailment of defined benefit pension obligations which did not recur in the three months ended September 30, 2024. Interest income increased by $1.1 million due to higher interest rates on interest-bearing cash equivalents. The positive impacts pertaining to these items were partially offset by negative impacts from the impairment of privately held investments and notes receivable of $12.3 million, and currency exchange losses of $0.8 million. Income Tax Provision (Benefit) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 $ Change % Change 2024 2023 $ Change % Change (dollars in thousands) (dollars in thousands) Income tax benefit $ (6,713) $ (1,689) $ (5,024) 297 % $ (10,535) $ 13,468 $ (24,003) (178) % The income tax benefit for the three months ended September 30, 2024 was $6.7 million compared to an income tax benefit of $1.7 million for the three months ended September 30, 2023. The income tax benefit for the nine months ended September 30, 2024 was $10.5 million compared to an income tax provision of $13.5 million for the nine months ended September 30, 2023. The difference between our effective tax rate and the 21.0% U.S. federal statutory rate for the nine months ended September 30, 2024 primarily related to the mix of pre-tax income among jurisdictions, permanent tax items, and stock based compensation. 50 Table of Contents 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, and release of certain reserves for uncertain tax positions under ASC 740-10. The permanent tax item related to global intangible low-taxed income also reflected the then recent legislative changes requiring the capitalization of research and experimentation costs, as well as limitations on the creditability of certain foreign income taxes. 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 income taxes in the nine months ended September 30, 2024 and 2023 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, 2024, we had cash and cash equivalents of $148.5 million, restricted cash of $1.0 million and net accounts receivable of $47.9 million. Additionally, as of September 30, 2024, our working capital, which we define as current assets less current liabilities, was $159.7 million. Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of cash and cash equivalents and accounts receivable. Collateral is generally not required for customer receivables. We limit our exposure to credit loss by placing our cash with high credit quality financial institutions. At times, such deposits may be in excess of insured limits. We have not experienced any losses on our deposits of cash and cash equivalents. 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. From time to time, we may also use cash to pay down outstanding debt and/or make investments. As of September 30, 2024, $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, subject to the terms and conditions of the agreement, a senior secured revolving credit facility, in an aggregate principal amount of up to $100.0 million which remained undrawn as of September 30, 2024. 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. 51 Table of Contents 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 high interest rates with large amounts of prepayments on our outstanding debt, if interest rates were to further increase substantially, it could have a material adverse effect on our operating results and could affect our ability to service the indebtedness. Please refer to the Risk Factor entitled “ As of September 30, 2024, 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 high 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, high 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. Our future capital requirements will depend on many factors, including changes in revenue, the expansion or contraction 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, but not limited to, amortization and depreciation of acquired intangible assets and leased right-of-use assets and property and equipment, stock-based compensation, impairment of assets, and gain on extinguishment of lease liabilities. 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 paid to satisfy minimum tax withholdings on behalf of employees for restricted stock units are included in financing activities in our consolidated statements of cash flows. As of September 30, 2024, 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 1-3 years 3-5 years More than 5 years (in thousands) Long-term debt obligations $ 125,000 $ — $ — $ 125,000 $ — Operating lease obligations 32,140 2,864 19,182 8,498 1,596 Purchase obligations 16,423 3,004 13,419 — — Other obligations 62,994 7,708 51,613 3,673 — Total $ 236,557 $ 13,576 $ 84,214 $ 137,171 $ 1,596 Our planned capital expenditures as of September 30, 2024 were not material. Our consolidated balance sheet at September 30, 2024 included $4.4 million in other long-term liabilities for uncertain tax positions, some of which may result in cash payment and $15.0 million received from other parties for jointly funded research and development projects which will be recognized into income when the contingencies associated with the repayment conditions have been resolved. 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. 52 Table of Contents Our primary sources of cash are cash receipts on accounts receivable from our shipment of products to distributors and direct customers, as well as proceeds that we receive under certain intellectual property sale agreements. 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. The following is a summary of our working capital, cash and cash equivalents, and restricted cash for the periods indicated: September 30, 2024 December 31, 2023 (in thousands) Working capital $ 159,663 $ 265,896 Cash and cash equivalents $ 148,476 $ 187,288 Short-term restricted cash 993 1,051 Long-term restricted cash 23 17 Total cash, cash equivalents, and restricted cash $ 149,492 $ 188,356 We believe that our $148.5 million of cash and cash equivalents at September 30, 2024 will be sufficient to fund our projected operating requirements for at least the next twelve months. As of September 30, 2024, 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, 2024. 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 SOFR 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 SOFR 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 SOFR 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 SOFR 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 was amended on June 29, 2023 to implement a benchmark replacement. 53 Table of Contents The 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, 2024 2023 (in thousands) Net cash provided by (used in) operating activities $ (17,457) $ 59,945 Net cash used in investing activities (20,448) (30,762) Net cash used in financing activities (135) (27,527) Effect of exchange rate changes on cash, cash equivalents and restricted cash (824) (1,861) Decrease in cash, cash equivalents and restricted cash $ (38,864) $ (205) Cash Flows from Operating Activities Net cash used in operating activities was $17.5 million for the nine months ended September 30, 2024, compared to net cash provided by operating activities of $59.9 million nine months ended September 30, 2023. The decline in operating cash flows was driven by a decline in revenue from decreased volume of shipments of our products as a result of macroeconomic conditions impacting customer demand for our products (as discussed under the heading, “Results of Operations,” above). Operating cash flows were also impacted by changes in our working capital, which increased $88.7 million, in particular, in the first nine months of 2024, we collected accounts receivable of $177.6 million, which was partially offset by payments against our price protection liability of $54.0 million and severance and other payments from the Workforce Reductions of $31.5 million. Cash Flows from Investing Activities Our use of cash in investing activities declined by $10.3 million driven by a reduction our acquisition investments, offset by increased capital purchases. In the nine months ended September 30, 2023, we used $12.4 million in acquiring a small business. We did not make any acquisition-related payments in the 2024 period. Our capital purchases of property and equipment and intangible assets increased $2.1 million for the nine months ended September 30, 2024 due to the timing of purchases of production masks and other property and equipment. Net cash used in investing activities was $20.4 million for the nine months ended September 30, 2024 and consisted of purchases of property and equipment of $15.5 million, and purchases of intangible assets of $5.0 million. 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. Cash Flows from Financing Activities Our use of cash in financing activities for the 2023 period included payment of debt commitment, or ticking fees, of $18.3 million in connection with the termination of the merger with Silicon Motion. Both the 2024 and 2023 periods included minimum tax withholding paid on behalf of employees for restricted stock, partially offset by net proceeds from issuance of common stock for stock-related awards to employee. The employee stock-related amounts declined due to a smaller amount of restricted stock units released for bonuses and a decline in value of other stock-related awards released during the periods. Warranties and Indemnifications In connection with the sale of products in the ordinary course of business, we often make representations affirming, among other things, that our products do not infringe on the intellectual property rights of others, and agree to indemnify customers against third-party claims for such infringement. Further, our certificate of incorporation and bylaws require us to indemnify our officers and directors against any action that may arise out of their services in that capacity, and we have also entered into indemnification agreements with respect to all of our directors and certain controlling persons.