What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-12 compared with 2020-05-08 · 53 added, 34 removed, 107 unchanged (45% of the section changed)

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This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying condensed consolidated financial statements and notes included in this report.

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which include, without limitation, statements about the market for our technology, our strategy, competition, expected financial performance and capital raising efforts, all information disclosed under Item 3 of this Part I, and other aspects of our business identified in our most recent annual report on Form 10-K filed with the Securities and Exchange Commission on March 17, 2020 and in other reports that we file from time to time with the Securities and Exchange Commission.

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which include, without limitation, statements about the market for our technology, our strategy, competition, expected financial performance and capital raising efforts, the impacts of COVID-19 on our business, all information disclosed under Item 3 of this Part I, and other aspects of our business identified in our most recent annual report on Form 10-K filed with the Securities and Exchange Commission on March 17, 2020 and in other reports that we file from time to time with the Securities and Exchange Commission.

Any statements about our business, financial results, financial condition and operations contained in this Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements.

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Company Overview

Our strategy and primary business objective is to be a profitable IP-rich fabless semiconductor company offering ICs and related software and IP that deliver unparalleled memory bandwidth and access rate performance for high-performance data processing in cloud networking, communications, security appliances, video, test and monitoring, and data center systems.

Our strategy and primary business objective is to be a profitable IP-rich fabless semiconductor company offering ICs and related software, firmware and IP that deliver unparalleled memory bandwidth and access rate performance for high-performance data processing in cloud networking, communications, security appliances, video, test and monitoring, and data center systems.

Our solutions deliver time-to-market, performance, power, area and economic benefits for system original equipment manufacturers, or OEMs.

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As we are not developing new IC products, from a product development perspective, we continue to leverage our current technologies and core competencies to expand our product offerings without incurring significant additional R&D expenses.

Recently, we announced our new Software Accelerator product line consisting of software and IP available for license.

Recently, we announced our new Virtual Accelerator Engine product line consisting of software, firmware and IP available for license.

This new product line will include multiple function accelerator platform products, which target specific application functions and will use a common software interface to allow performance scalability over multiple hardware environments.

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We believe the technology will generate new opportunities that require less up-front architectural changes by system designers and provide a scalable performance roadmap of options using our Accelerator Engine ICs.

We expect our initial software accelerator products to be available for license in the first half of 2020.

Despite our limited new IC product development efforts, we believe our current hardware and software/firmware product portfolio positions us for future growth and profitability.

We incurred net losses of approximately $2.6 million and $11.4 million for the years ended December 31, 2019 and 2018, respectively, and had an accumulated deficit of approximately $239.9 million as of March 31, 2020.

We incurred net losses of approximately $0.6 million for the six months ended June 30, 2020 and $2.6 million and $11.4 million for the years ended December 31, 2019 and 2018, respectively, and had an accumulated deficit of approximately $240.9 million as of June 30, 2020.

These and prior year losses have resulted in significant negative cash flows for almost a decade and have necessitated that we raise substantial amounts of additional capital during this period.

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and foreign government agencies to prevent disease spread, all of which are uncertain, out of our control, and cannot be predicted.

On March 16, 2020, Santa Clara County in California, where we are based, issued a "shelter-in-place" order (the Order) that was initially effective through April 7, 2020 and has now been extended through May 31, 2020.

We have been complying with the Order and have minimized business activities at our San Jose headquarters facility (our only facility) effective March 17, 2020.

In March 2020, Santa Clara County in California, where we are based, issued a "shelter-in-place" order (the Order) that was initially effective through April 7, 2020 and has now been extended.

We have been complying with the Order and have minimized business activities at our San Jose headquarters facility (our only facility) since March 2020.

We have implemented a teleworking policy for our employees and contractors to reduce on-site activity at our facility.

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In April, we resumed shipments of our IC products, as we and our vendors are supporting shipment of components for critical infrastructure, as defined by the federal government;

however, our employees are restricted from visiting our vendor sites in compliance with the Order, and we are unable to conduct certain product testing and development activities.

We expect that the impacts of the COVID-19 pandemic will have a negative impact on our revenues for the remainder of 2020, although we are not in a position to quantify such impacts.

however, our employees are restricted from visiting our customer and vendor sites in compliance with the Order, and we are unable to conduct certain product testing and development activities.

We remain diligent in continuing to identify and manage risks to our business given the changing uncertainties related to COVID-19.

The ultimate impact of the Covid-19 pandemic on our business and results of operations is uncertain and difficult to predict, and we are closely monitoring impacts, especially to customer programs and our supply chain.

We expect that the impacts of the COVID-19 pandemic will have a negative impact on our revenues for the remainder of 2020, although we are not in a position to quantify such impacts.

In addition, we have already experienced longer lead times for certain components used to manufacture our IC products.

While we believe that our operations personnel are currently in a position to meet expected customer demand levels in the coming quarters, we recognize that unpredictable events could create difficulties in the months ahead.

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The continued spread of COVID-19 has also led to disruption and volatility in the global capital markets.

We were recently able to raise additional capital (see discussion below under Liquidity), however, if we need to raise additional capital to support operations in the future, we may be unable to access the capital markets and additional capital may only be available to us on terms that could be significantly detrimental to our existing stockholders and to our business.

We were recently able to raise additional capital and received a loan under the Paycheck Protection Program (see discussion below under Liquidity and in Note 9 to the condensed consolidated financial statements included in Part I, Item I of this Report), however, if we need to raise additional capital to support operations in the future, we may be unable to access the capital markets and additional capital may only be available to us on terms that could be significantly detrimental to our existing stockholders and to our business.

For additional information on risks that could impact our future results, please refer to "Risk Factors" in Part II, Item 1A.

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

Our significant accounting policies and estimates are disclosed in Note 1 of the “Notes to Consolidated Financial Statements” in our

Annual Report on Form 10-K for the year ended December 31, 201 9 .

As of March 3 1 , 20 20 , there have been no material changes to our sig nificant accounting policies and estimates .

Our significant accounting policies and estimates are disclosed in Note 1 of the “Notes to Consolidated Financial Statements” in our Annual Report on Form 10-K for the year ended December 31, 2019.

As of June 30, 2020, there have been no material changes to our significant accounting policies and estimates.

Results of Operations

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Percentage of total net revenue

Product revenue decreased for the three months ended March 31, 2020 compared with the same periods of 2019 primarily due to lower sales of our Bandwidth Engine products.

Product -six months ended

Percentage of total net revenue

Product revenue decreased for the three and six months ended June 30, 2020 compared with the same periods of 2019 primarily due to lower sales of our Bandwidth Engine products.

Approximately $0.7 million of Bandwidth Engine product shipments were pushed out from the first quarter of 2020 to the second quarter due to COVID-19 shelter-in-place orders.

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Percentage of total net revenue

Royalty and other -six months ended

Percentage of total net revenue

Royalty and other includes license, royalty and related revenues generated from licensing agreements.

The increase in royalty and other revenue for 2020 was primarily due to higher royalty revenues in 2020 resulting from higher shipment volumes by licensees whose products incorporate our licensed IP.

The increase in royalty and other revenue for 2020 was due to higher royalty revenues in 2020 resulting from higher shipment volumes by licensees whose products incorporate our licensed IP and higher licensing revenue.

Cost of Net Revenue and Gross Profit.

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Percentage of total net revenue

Cost of net revenue -six months ended

Percentage of total net revenue

(dollar amounts in thousands)

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Percentage of total net revenue

Gross profit -six months ended

Percentage of total net revenue

Cost of net revenue is primarily comprised of direct and indirect costs related to the sale of IC products.

Cost of net revenue decreased for the three months ended March 31, 2020 compared with the same period of 2019 primarily due to decreased shipment volumes of our Bandwidth Engine products.

Gross profit decreased for the three months ended March 31, 2020, compared with the same period of 2019 due to the decrease in gross profit attributable to the reductions in product revenues.

As a percentage of net revenue, gross profit decreased due to lower gross margins on our product sales, which was partially offset by higher royalty and other revenue, which generally has no associated cost.

Cost of net revenue decreased for the three and six months ended June 30, 2020 compared with the same period of 2019 primarily due to decreased shipment volumes of our Bandwidth Engine products, which was partially offset by a $0.1 million write-down of inventory in the second quarter for lead-based Bandwidth Engine 2 products due to the timing of customer transitions to lead-free products.

Gross profit decreased for the three and six months ended June 30, 2020, compared with the same period of 2019 due to the decrease in gross profit attributable to the reductions in product revenues.

As a percentage of net revenue, gross profit increased due to higher gross margins on our product sales and higher royalty and other revenue, which generally has no associated cost.

Research and Development

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Percentage of total net revenue

Research and development -six months ended

Percentage of total net revenue

Our research and development expenses include costs related to the development of our IC products and amortization of intangible assets.

We expense research and development costs as they are incurred.

The decrease for the three months ended March 31, 2020 was primarily due to decreased material costs partially offset by increased personnel and consulting costs.

The slight increase for the three months ended June 30, 2020 was primarily due to increases in expenses for consulting for software development.

The decrease for the six months ended June 30, 2020 was primarily due to decreased prototyping, testing and related material costs, which was partially offset by increased personnel and consulting costs.

We expect that total research and development expenses will remain relatively consistent for the remainder of 2020.

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Percentage of total net revenue

SG&A -six months ended

Percentage of total net revenue

Selling, general and administrative, or SG&A, expenses consist primarily of personnel and related overhead costs for sales, marketing, finance, human resources and general management.

The increase for the three months ended March 31, 2020 was primarily due to increased personnel costs and higher stock-based compensation expense.

The increase for the three and six months ended June 30, 2020 was primarily due to increased personnel costs and consulting expenses.

We expect total SG&A expenses to remain relatively consistent for the remainder of 2020.

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Percentage of total net revenue

Interest expense - six months ended

Percentage of total net revenue

Interest expense consisted of interest expense on our senior secured convertible notes (the Notes).

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Changes in Financial Condition

As of March 31, 2020, we had cash, cash equivalents and short-term investments of $5.6 million and working capital of $6.2 million.

Net cash used in operating activities was $0.7 million for the first three months of 2020, which primarily resulted from our net loss of $1.4 million which was partially offset by $0.5 in net changes in assets and liabilities and non-cash charges of $0.1 million of stock-based compensation, depreciation and amortization expenses and $0.1 million of accrued interest.

The changes in assets and liabilities primarily related to the timing of customer collections and inventory and other vendor payables and prepayments.

Net cash used in operating activities was $0.

7 million for the first three months of 201 9 , which primarily resulted from $0.9 in net changes in assets and liabilities, partially o ffset by the effects of depreciation and amortization expenses of $0.

1 million and accrued interest of $0.

The changes in assets and liabilities primarily related to the timing of customer collections and inventory and other vendor payables and prepayments.

Net cash provided by investing activities of $0.3 million for the three months ended March 31, 2020 was mainly due to proceeds from the maturities of short-term investments of $0.3 million.

Net cash used in investing activities of $1.6 million during the three months ended March 31, 2019 was mainly due to the purchase of marketable securities, which did not affect our liquidity.

There were minimal cash flows provided by (used in) financing activities during the three months ended March 31, 2020 and 2019.

As of June 30, 2020, we had cash, cash equivalents and short-term investments of $7.4 million and working capital of $7.7 million.

Net cash used in operating activities was $1.2 million for the first six months of 2020, which primarily resulted from our net loss of $2.0 million which was partially offset by $0.5 million in net changes in assets and liabilities and non-cash charges of $0.2 million of stock-based compensation and depreciation and amortization expenses and $0.1 million of accrued interest.

The changes in assets and liabilities primarily related to the timing of accounts receivable collections and inventory and other vendor payables and prepayments.

Net cash provided by operating activities was $0.4 million for the first six months of 2019, which primarily resulted from $0.2 in net changes in assets and liabilities and non-cash charges, stock-based compensation of $0.1 million, depreciation and amortization expenses of $0.1 million and accrued interest of $0.1 million, partially offset by net loss of $0.1 million.

The changes in assets and liabilities primarily related to the timing of accounts receivable collections and inventory and other vendor payables and prepayments.

Net cash provided by investing activities of $0.3 million for the six months ended June 30, 2020 was mainly due to proceeds from the maturities of short-term investments of $0.3 million.

Net cash used in investing activities of $1.1 million for the six months ended June 30, 2019 was mainly due to the purchase of short-term investments of $1.6 million, which did not affect our liquidity, partially offset by proceeds from the maturities of short-term investments of $0.5 million.

Net cash provided by financing activities of $2.2 million for the six months ended June 30, 2020 primarily consisted of $1.6 million in net proceeds received from the sale of common stock in a registered direct offering of securities completed in April 2020 and $0.6 million of proceeds from an unsecured loan under the Paycheck Protection Program.

There were minimal cash flows used in financing activities during the six months ended June 30, 2019.

Our future liquidity and capital requirements are expected to vary from quarter-to-quarter, depending on numerous factors, including:

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whether interest payments on the Notes are paid in cash or, at our election, in-kind through the issuance of new Notes with identical terms for the accrued interest;

whether the PPP Note is substantially forgiven.

Working Capital

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We expect our cash expenditures to exceed receipts in 2020, as our revenues will not be sufficient to offset our working capital requirements.

On April 21, 2020, we completed a registered direct offering of securities for net proceeds of approximately $1.6 million.

If we were to raise additional capital through sales of our equity securities, our stockholders would suffer dilution of their equity ownership.

If we engage in debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness, prohibit us from paying dividends, repurchasing our stock or making investments, and force us to maintain specified liquidity or other ratios, any of which could harm our business, operating results and financial condition.

In April 2020, we completed a registered direct offering of securities that generated net proceeds of approximately $1.6 million.

In May 2020, we entered into a Promissory Note with Wells Fargo Bank, N.A.

in an aggregate principal amount of approximately $0.6 million (the PPP Note), pursuant to the Paycheck Protection Program (the PPP) under the CARES Act.

We intend to apply for forgiveness of the PPP Note under the terms of the PPP.

No assurance is provided that we will obtain forgiveness of the PPP Note in whole or in part, but we intend to use the proceeds in accordance with the PPP.

If we were to raise additional capital through sales of our equity securities, our stockholders would suffer dilution of their equity ownership, and we may be required to accept other terms that could be significantly detrimental to our existing stockholders and to our business.

If we engage in debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness, prohibit us from paying dividends, repurchasing our stock or making investments, and force us to maintain specified liquidity or other ratios, any of which could be significantly detrimental to our business, operating results and financial condition.

If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:

repay the Notes when they are due;

repay the Notes and the PPP Note when they are due;

develop or enhance our products;

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis