What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-10 compared with 2020-08-12 · 46 added, 39 removed, 121 unchanged (41% 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, 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.

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, 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.

Without limiting the foregoing, the words “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects” or similar expressions are intended to identify forward-looking statements.

Our actual results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors, including the risk factors described under Item 1A of our annual report on Form 10-K for the year ended December 31, 2019 and the risk factors described below under Item 1A of this Form 10.

We undertake no obligation to update publicly any forward-looking statements for any reason, except as required by law, even as new information becomes available or events occur in the future.

Company Overview

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 strategy and primary business objective is to be a profitable intellectual property-rich fabless semiconductor company offering integrated circuits, or ICs, and related software, firmware and intellectual property, or 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 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.

We are developing our Virtual Accelerator Engine product line consisting of software, firmware and IP available for license.

This 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.

These function accelerator platform products are hardware agnostic and operate with or without one of our Accelerator Engine ICs.

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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 $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.

We incurred net losses of approximately $2.8 million for the nine months ended September 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 $241.6 million as of September 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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We have implemented a teleworking policy for our employees and contractors to reduce on-site activity at our facility.

The Order impacted our ability to produce and ship our IC products in the second half of March, as certain of our vendors in the San Francisco Bay Area closed in accordance with the Order (see discussion below, under Results of Operations).

The Order impacted our ability to produce and ship our IC products in the second half of March, as certain of our vendors in the San Francisco Bay Area closed in accordance with the Order.

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 customer and vendor sites in compliance with the Order, and we are unable to conduct certain product testing and development activities.

however, our employees are generally 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.

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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.

In addition, we have and continue experience 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 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.

During the nine months ended September 30, 2020, we were able to raise additional capital and received a loan under the Paycheck Protection Program (see discussion below under Liquidity and in Notes 8 and 9 to the condensed consolidated financial statements included in Part I, Item I of this Form 10-Q), 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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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.

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

Results of Operations

September 30,

(dollar amounts in thousands)

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Percentage of total net revenue

Product -six months ended

Product -nine 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.

Product revenue increased for the three months ended September 30, 2020 compared with the same period of 2019 primarily due to higher sales of our Bandwidth Engine 2 products, partially offset by decreases in our LineSpeed product sales.

Product revenue decreased for the nine months ended September 30, 2020 compared with the same period of 2019 primarily due to lower sales of our Bandwidth Engine and LineSpeed products.

September 30,

(dollar amounts in thousands)

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Percentage of total net revenue

Royalty and other -six months ended

Royalty and other -nine 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 due to higher royalty revenues in 2020 resulting from higher shipment volumes by licensees whose products incorporate our licensed IP and higher licensing revenue.

The increase in royalty and other revenue for the nine months ended September 30, 2020 compared with the same period of 2019 was primarily due to new customer licensing revenue recognized in the quarter ended June 30, 2020, partially offset by a small decrease in royalty revenue.

Cost of Net Revenue and Gross Profit

September 30,

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Percentage of total net revenue

Cost of net revenue -six months ended

Cost of net revenue -nine months ended

Percentage of total net revenue

September 30,

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Percentage of total net revenue

Gross profit -six months ended

Gross profit -nine 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 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.

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

Cost of net revenue increased for the three months ended September 30, 2020 compared with the same period of 2019 primarily due to increased shipment volumes of our Bandwidth Engine 2 products.

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

Gross profit decreased for the nine months ended September 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

September 30,

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Percentage of total net revenue

Research and development -six months ended

Research and development -nine months ended

Percentage of total net revenue

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We expense research and development costs as they are incurred.

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.

The decrease for the three and nine months ended September 30, 2020 compared with the same period of 2019 was primarily due to decreases in personnel costs and decreased prototyping, testing and related material costs, partially offset by increases in consulting costs for development of our new Virtual Accelerator Engine products.

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

Selling, General and Administrative

September 30,

(dollar amounts in thousands)

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Percentage of total net revenue

SG&A -six months ended

SG&A -nine 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 and six months ended June 30, 2020 was primarily due to increased personnel costs and consulting expenses.

The decrease for the three months ended September 30, 2020 compared with the same period of 2019 was primarily due to decrease s in professional services fees as we held our 2019 annual meeting and effected a reverse stock split in the quarter ended Septemb er 30, 2019 .

The increase for the nine months ended September 30 , 20 20 compared with the same period of 2019 was primarily due to increased personnel costs and facilities costs partially offset by decreases in professional service fees and trade show cos ts .

We expect total SG&A expenses to remain relatively consistent for the remainder of 20 20 .

Interest expense

September 30,

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Percentage of total net revenue

Interest expense - six months ended

Interest expense - nine months ended

Percentage of total net revenue

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

To date, we have paid all accumulated interest for the Notes in-kind through the issuance of identical new senior secured convertible notes.

As of September 30,2020, we have paid all accumulated interest for the Notes in-kind through the issuance of identical new senior secured convertible notes.

See Note 8 to the condensed consolidated financial statements for additional disclosure.

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Changes in Financial Condition

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.

As of September 30, 2020, we had cash, cash equivalents and short-term investments of $6.9 million and working capital of $7.1 million.

Net cash used in operating activities was $1.6 million for the first nine months of 2020, which primarily resulted from our net loss of $2.8 million that was partially offset by $0.7 million in net changes in assets and liabilities and non-cash charges of $0.3 million for stock-based compensation and depreciation and amortization expenses and $0.2 million of accrued interest.

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

Net cash used in operating activities was $0.2 million for the first nine months of 2019, which primarily resulted from our net loss of $1.9 million, which was offset by $0.7 million in net changes in assets and liabilities and non-cash charges, stock-based compensation of $0.2 million, depreciation and amortization expenses of $0.2 million, accrued interest of $0.2 million and a goodwill impairment charge of $0.4 million.

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

Net cash provided by investing activities of $0.3 million for the nine months ended September 30, 2020 represented proceeds from the maturities of short-term investments.

Net cash used in investing activities of $0.7 million for the nine months ended September 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 $0.9 million.

Net cash provided by financing activities of $2.2 million for the nine months ended September 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 received in May 2020 from an unsecured loan under the Paycheck Protection Program.

There were minimal cash flows used in financing activities during the nine months ended September 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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variations in manufacturing yields, materials costs and other manufacturing risks;

costs of acquiring other businesses and integrating the acquired operations;

profitability of our business;

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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.

No assurance is provided that we will obtain forgiveness of the PPP Note in whole or in part, but we believe we have used 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.

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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