What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-13 compared with 2020-11-10 · 43 added, 61 removed, 106 unchanged (50% 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, 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, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, 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 18, 2021 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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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.

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

We are developing our Virtual Accelerator Engine, or VAE, 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.

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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 $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.

We incurred net losses of approximately $1.4 million for the three months ended March 31, 2021 and $3.8 million and $2.6 million for the years ended December 31, 2020 and 2019, respectively, and had an accumulated deficit of approximately $244.0 million as of March 31, 2021.

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.

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.

In March 2020, Santa Clara County in California, where we are based, issued a ”shelter-in-place” order (the Order) that was effective through the first quarter of 2021.

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

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In April 2020, 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 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.

however, our employees are still generally restricted from visiting our customer and vendor sites, 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 and continue experience longer lead times for certain components used to manufacture our IC products.

We expect that the impacts of the COVID-19 pandemic will continue to have a negative impact on our revenues for the remainder of 2021, although we are not in a position to quantify such impacts.

In addition, we have and continue to 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.

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.

During the quarter ended March 31, 2021, we were able to raise additional capital and make full repayment of our convertible notes payable (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, 2020.

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

As of March 31, 2021, 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 -nine months ended

Percentage of total net revenue

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,

Product revenue increased for the three months ended March 31, 2021 compared with the same period of 2020 primarily due to higher sales of our Bandwidth Engine 2 products, partially offset by decreases in our LineSpeed product sales.

(dollar amounts in thousands)

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Percentage of total net revenue

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 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.

The decrease in royalty and other revenue for the three months ended March 31, 2021 compared with the same period of 2020 was primarily due to a decrease in royalty revenue for one licensee.

Cost of Net Revenue and Gross Profit

September 30,

(dollar amounts in thousands)

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Percentage of total net revenue

Cost of net revenue -nine months ended

Percentage of total net revenue

September 30,

(dollar amounts in thousands)

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Percentage of total net revenue

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 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.

Cost of net revenue decreased for the three months ended March 31, 2021 when compared with the same period in 2020, primarily due to decreased shipment volumes of our LineSpeed product which was only partially offset by the increase of our Bandwidth Engine products that have lower production costs.

Gross profit increased for the three months ended March 31, 2021 compared with the same period of 2020 due to the increase in gross profit attributable to the increases in product revenues.

As a percentage of net revenue, gross profit

in creased 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,

(dollar amounts in thousands)

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Percentage of total net revenue

Research and development -nine 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.

Our research and development expenses include costs related to the development of our IC and VAE IP products.

We expense research and development costs as they are incurred.

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.

The increase for the three months ended March 31, 2021 compared with the same period of 2020 was primarily due to increases in personnel costs due to new hires and increases in consulting costs for development of our VAE products.

We expect that total research and development expenses will increase in 2021 compared with 2020 as we incur increased development costs for our VAE products.

Selling, General and Administrative

September 30,

(dollar amounts in thousands)

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Percentage of total net revenue

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 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 .

The decrease for the three months ended March 31, 2021 compared with the same period of 2020 was primarily due to decreases in professional services and facilities and travel costs, partially offset by increased legal and personnel costs.

We expect total SG&A expenses to remain relatively consistent for the remainder of 2021.

Interest expense

September 30,

(dollar amounts in thousands)

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Percentage of total net revenue

Interest expense - nine months ended

Percentage of total net revenue

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

As of March 31, 2021, we had repaid the full remaining principal amount of the Notes and accrued interest.

We do not expect to incur interest expense during the remainder of 2021.

See Note 9 to the condensed consolidated financial statements for additional disclosure.

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Changes in Financial Condition

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.

As of March 31, 2021, we had cash, cash equivalents and short-term investments of $11.1 million and working capital of $10.9 million.

We believe that cash generated from our liquidity sources will be sufficient to meet both our short-term and long-term working capital and capital expenditure needs for the foreseeable future.

Net cash used in operating activities was $ 1.

0 million for the first three months of 20 2 1 , which primarily resulted from our net loss of $ 1.4 million , which was partially offset by $0.

3 million i n net changes in assets and liabilities and non-cash charges of $0.

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.

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 million 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 investing activities of $1.6 million for the three months ended March 31, 2021 represented purchases of short-term investments.

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

Net cash provided by financing activities of $6.3 million for the three months ended March 31, 2021 primarily consisted of $6.8 million in net proceeds received from the registered direct offering of our common stock completed in February 2021 and $2.5 million of proceeds from the exercise of warrants to purchase shares of common stock at a price of $2.40 per share.

We used approximately $3 million of these proceeds to repay in full the outstanding balance of our senior secured convertible notes.

There were minimal cash flows used in financing activities during the three months ended March 31, 2020.

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

level of revenue;

cost, timing and success of technology development efforts;

cost, timing and success of technology development efforts, especially for our VAE products;

inventory levels, timing of product shipments and length of billing and collection cycles;

fabrication costs, including mask costs, of our ICs, currently under development;

variations in manufacturing yields, materials costs and other manufacturing risks;

variations in manufacturing yields, material lead time and costs and other manufacturing risks;

profitability of our business;

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;

costs of acquiring other businesses and integrating the acquired operations;

whether the PPP Note is substantially forgiven.

Working Capital

Our primary need for liquidity is to fund working capital requirements of our business, capital expenditures and general corporate purposes.

Our primary need for liquidity is to fund working capital requirements of our businesses, capital expenditures and for general corporate purposes.

We expect our cash expenditures to exceed receipts in 2021, as our revenues will not be sufficient to offset our working capital requirements.

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

During the three months ended March 31, 2021, we received proceeds of $2.5 million from the exercise of common stock warrants, and we used $1.5 million of these proceeds to repay a portion of the principal balance of our senior secured convertible notes.

In February 2021, we completed a registered direct offering of securities that generated net proceeds of approximately $6.8 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.

In March 2021 we applied 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 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.

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.

In the event that additional financing is required 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.

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 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