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Item 7. Management’s Discussion and Analysis

2021-03-05 compared with 2020-03-16 · 116 added, 162 removed, 143 unchanged (66% of the section changed)

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The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes that appear elsewhere in this document.

We design, develop, manufacture and ship control and sensor technology solutions and a broad line of pre-programmed and universal control products, audio-video ("AV") accessories, and intelligent wireless security and smart home products that are used by the world's leading brands in the consumer electronics, subscription broadcasting, home entertainment, automation, security, hospitality and climate control markets.

Our offerings include:

easy-to-use, pre-programmed universal infrared ("IR") and radio frequency ("RF") remote controls that are sold primarily to subscription broadcasting providers (cable, satellite and Internet Protocol television ("IPTV") and Over the Top services), original equipment manufacturers ("OEMs"), retailers, and private label customers;

integrated circuits, on which our software and universal device control database is embedded, sold primarily to OEMs, subscription broadcasting providers, and private label customers;

software, firmware and technology solutions that can enable devices such as TVs, set-top boxes, audio systems, smartphones, tablets, game controllers and other consumer electronic devices to wirelessly connect and interact with home networks and interactive services to control and deliver digital entertainment and information;

intellectual property which we license primarily to OEMs, software development companies, private label customers, and subscription broadcasting providers;

proprietary and standards-based RF sensors designed for residential security, safety and automation applications;

wall-mount and handheld thermostat controllers and connected accessories for intelligent energy management systems, primarily to OEM customers as well as hospitality system integrators;

AV accessories sold, directly and indirectly, to consumers.

Since our beginning in 1986, we have compiled an extensive device control knowledge library that includes nearly 9,000 brands comprising over 800,000 device models across AV and smart home platforms, supported by many common smart home protocols, including IR, HDMI-CEC, Zigbee, and Home Network or Cloud Control.

This device knowledge graph is backed by our unique device fingerprinting technology which includes over 700,000 unique device fingerprints across both AV and smart home devices.

Our technology also includes other remote controlled home entertainment devices and home automation control modules, as well as wired Consumer Electronics Control ("CEC") and wireless Internet Protocol ("IP") control protocols commonly found on many of the latest HDMI and internet connected devices.

Our proprietary software automatically detects, identifies and enables the appropriate control commands for any given home entertainment, automation and air conditioning device in the home.

Our libraries are continuously updated with device control codes used in newly introduced AV and Internet of Things ("IOT") devices.

These control codes are captured directly from original remote control devices or from the manufacturer's written specifications to ensure the accuracy and integrity of the library.

We design, develop, manufacture, ship and support control and sensor technology solutions and a broad line of universal control systems, audio-video ("AV") accessories, and intelligent wireless security and smart home products that are used by the world's leading brands in the video services, consumer electronics, security, home automation, climate control, and home appliance markets.

Our product and technology offerings include:

• easy-to-use, voice-enabled, automatically-programmed universal remote controls with two-way radio frequency ("RF") as well as infrared ("IR") remote controls, that are sold primarily to video service providers (cable, satellite, Internet Protocol television ("IPTV") and Over the Top ("OTT") services), original equipment manufacturers ("OEMs"), retailers, and private label customers;

• integrated circuits ("ICs"), on which our software and universal device control database is embedded, sold primarily to OEMs, video service providers, and private label customers;

• software, firmware and technology solutions that can enable devices such as TVs, set-top boxes, audio systems, smart speakers, game controllers and other consumer electronic and smart home devices to wirelessly connect and interact with home networks and interactive services to control and deliver home entertainment, smart home services and device or system information;

• cloud-services that support our embedded software and hardware solutions (directly or indirectly) enabling real-time device identification and system control with billions of transactions per year in device and data management;

• intellectual property that we license primarily to OEMs, software development companies, private label customers, and video service providers;

• proprietary and standards-based RF sensors designed for residential security, safety and home automation applications;

• wall-mount and handheld thermostat controllers and connected accessories for intelligent energy management systems, primarily to OEM customers, as well as hotels and hospitality system integrators;

• AV accessories sold, directly and indirectly, to consumers including universal remote controls, television wall mounts and stands and digital television antennas.

A key factor in creating products and software for control of entertainment devices is our proprietary device knowledge graph.

Since our beginning in 1986, we have compiled an extensive device control knowledge library that includes nearly 13,000 brands comprising over 930,000 device models across AV and smart home platforms, supported by many common smart home protocols, including IR, HDMI-CEC, Zigbee (Rf4CE), Z-Wave, IP, as well as Home Network and Cloud Control.

This device knowledge graph is backed by our unique device fingerprinting technology which includes over 8.3 million unique device fingerprints across both AV and Smart Home devices.

Our technology also includes other remote controlled home entertainment devices and home automation control modules, as well as wired Consumer Electronics Control ("CEC") and wireless IP control protocols commonly found on many of the latest HDMI and internet connected devices.

Our proprietary software automatically detects, identifies and enables the appropriate control commands for many home entertainment and automation devices in the home.

Our libraries are continuously updated with device control codes used in newly introduced AV and IoT devices.

These control codes are captured directly from original control devices or from the manufacturer's written specifications to ensure the accuracy and integrity of the library.

Our proprietary software and know-how permit us to offer a device control code database that is more robust and efficient than similarly priced products of our competitors.

We operate as one business segment.

We have 2 domestic subsidiaries and 24 international subsidiaries located in Argentina, Brazil, British Virgin Islands, Cayman Islands, France, Germany, Hong Kong (3), India, Italy, Japan, Korea, Mexico, the Netherlands, People's Republic of China (the "PRC") (6), Singapore, Spain and the United Kingdom.

We have two domestic subsidiaries and 26 international subsidiaries located in Argentina, Brazil, British Virgin Islands, Cayman Islands, France, Germany, Hong Kong (3), India, Italy, Japan, Korea, Mexico (2), the Netherlands, the People's Republic of China (7), Singapore, Spain and the United Kingdom.

To recap our results for 2020:

Net sales increased 10.8% to $753.5 million in 2019 from $680.2 million in 2018 .

• Net sales decreased 18.4% to $614.7 million in 2020 from $753.5 million in 2019.

• Our gross profit percentage increased to 28.7% in 2020 from 22.6% in 2019.

Operating expenses, as a percent of sales, decreased to 20.6% in 2019 from 21.1% in 2018 .

Operating income increased to $15.3 million in 2019 from an operating loss of $1.7 million in 2018 , and our operating margin percentage increased to 2.0% in 2019 , compared to an operating deficit of 0.2% in 2018 .

Our effective tax rate increased to 65.1% in 2019 from 54.4% in 2018 .

• Operating expenses, as a percent of sales, increased to 22.6% in 2020 from 20.6% in 2019.

• Operating income increased to $37.3 million in 2020 from $15.3 million in 2019, and our operating margin percentage increased to 6.1% in 2020, compared to 2.0% in 2019.

• Our effective tax rate decreased to 12.1% in 2020 from 65.1% in 2019.

Our strategic business objectives for 2021 include the following:

continue to develop and market the advanced remote control products and technologies our customer base is adopting;

• continue to develop and market advanced remote control products and technologies our customer base is adopting;

• continue to broaden our home control and home automation product offerings;

further penetrate international subscription broadcasting markets;

• continue to expand our software and service offerings to deliver a complete managed service platform;

• further penetration of international subscription broadcasting markets;

• acquire new customers in historically strong regions;

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We intend for the following discussion of our financial condition and results of operations to provide information that will assist in understanding our consolidated financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our consolidated financial statements.

Critical Accounting Policies and Estimates

COVID-19 Pandemic Impact

The global spread of COVID-19 has been and continues to be a complex and rapidly-evolving situation, with governments, public institutions and other organizations imposing or recommending, and businesses and individuals implementing, at various times and to varying degrees, restrictions on various activities or other actions to combat its spread, such as restrictions and bans on travel or transportation, limitations on the size of gatherings, closures of or occupancy or other operating limitations on work facilities, schools, public buildings and businesses, cancellation of events, including sporting events, conferences and meetings, and quarantines and lock-downs.

The COVID-19 pandemic and its consequences have and will continue to impact our business, operations, and financial results.

The extent to which the COVID-19 pandemic impacts our business, operations, and financial results, including the duration and magnitude of such effects, will depend on numerous evolving factors that we may not be able to accurately predict or assess, including the duration and scope of the COVID-19 pandemic (including the location and extent of resurgences of the virus and the availability of effective treatments or vaccines);

the negative impact the COVID-19 pandemic has on global and regional economies and economic activity, including the duration and magnitude of its impact on unemployment rates and consumer discretionary spending.

Because the severity, magnitude and duration of the COVID-19 pandemic are uncertain, rapidly changing, and difficult to predict, the pandemic's impact on our operations and financial performance, as well as its impact on our ability to successfully execute our business strategy and initiatives, remains uncertain.

As the COVID-19 pandemic has spread to other jurisdictions and has been declared a global pandemic, the full extent of this outbreak and the related governmental, business and travel restrictions in order to contain the COVID-19 pandemic are continuing to evolve globally.

In response, we have created a COVID-19 task force, which includes a cross-functional group of senior-level executives, to manage and respond to the ever changing health and safety requirements across the globe and communicate our response to the pandemic to our global factory and office leaders.

Local government mandates required us, in the first quarter of 2020, to keep our China factories closed for a period of approximately two weeks beyond the end of the Chinese Lunar New Year.

Our Mexico factory was closed for more than one week due to local health ordinance requirements during the second quarter of 2020.

As a part of our response to this pandemic, our COVID-19 task force has developed and we have implemented additional safety measures for all factory employees across the globe, including temperature scans upon entry, hand sanitizer stations located throughout the facilities, mandatory mask wearing, social distancing measures in gathering places and restricting all visitor access.

All factories are up to or near labor capacity as of the issuance of this report.

We have also taken measures to safeguard the health and well-being of our employees in our office locations throughout the world, including implementing work from home arrangements and a moratorium on all travel, except where essential and approved in advance.

We have implemented enhanced safety measures upon the reopening of our office locations, including more frequent office sanitation, temperature scans upon arrival, mandatory mask wearing, additional hand sanitizer locations, social distancing measures throughout locations and restricted visitor access.

The reopening of our offices continues to follow suggested guidelines by the Centers for Disease Control and Prevention, the World Health Organization, and local governmental orders and recommendations.

The continued safety and welfare of our employees will remain at the forefront of all decision-making.

We anticipate that these actions and the global health crisis caused by the COVID-19 pandemic will continue to negatively impact business activity across the globe, including our business.

We expect our sales demand to be negatively impacted into, at least, the first half of 2021 given the global reach and economic impact of the COVID-19 pandemic and the various quarantine and social distancing measures put in place to contain the spread of the COVID-19 pandemic.

We have also seen some disruptions in our supply chain that, if continued, may cause us difficulty in fulfilling customer orders.

A closure of one of our factories for a sustained period of time would, in the short run, impact our ability to meet customer demand and would negatively impact our results.

We will continue to actively monitor the situation and may take further actions altering our business operations as necessary or as required by federal, state, or local authorities.

The potential effects of any such alterations or modifications may have a material adverse impact on our business during 2021.

Even after the COVID-19 pandemic subsides or effective treatments or vaccines become available, our business, markets, growth prospects and business model could be materially impacted or altered.

Critical Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("U.S.

GAAP") requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, allowances for doubtful accounts, inventory valuation, impairment of long-lived assets, intangible assets and goodwill, business combinations, income taxes, stock-based compensation expense and performance-based common stock warrants.

On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, inventory valuation, impairment of long-lived assets, intangible assets and goodwill and income taxes.

Actual results may differ from these judgments and estimates, and they may be adjusted as more information becomes available.

Any adjustment may be significant and may have a material impact on our consolidated financial position or results of operations.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably may have been used, or if changes in the estimate that are reasonably likely to occur may materially impact the financial statements.

Management believes the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Any adjustment may be significant and may have a material impact on our consolidated financial statements.

An accounting estimate is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably may have been used, or if changes in the estimate that are reasonably likely to occur may materially impact the financial statements.

Management believes the following critical accounting estimates affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

In addition to the accounting policies mentioned below, see "ITEM 8.

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Revenues are generated from manufacturing and delivering universal control, sensing and automation products and AV accessories, which are sold through multiple channels, and licensing intellectual property that is embedded in these products or licensed to others for use in their products.

Revenue - Product revenue is generated through manufacturing and delivering universal control, sensing and automation products and AV accessories, which are sold through multiple channels.

Our performance obligations are satisfied over time or at a point in time, depending on the nature of the product.

Our contracts have an anticipated duration of less than a year and consideration may be variable based on indeterminate volumes.

Revenue is recognized over time when our performance creates an asset with no alternative use to us (custom products) and we have an enforceable right to payment for performance completed to date, including a reasonable margin, through a contractual commitment from the customer.

Custom products are those products for which we are unable to redirect the asset to another customer in the foreseeable future without significant rework.

The method for measuring progress towards satisfying a performance obligation for a custom product is based on the costs incurred to date (cost-to-cost method).

We believe that the costs associated with production are most closely aligned with the revenue associated with those products.

We recognize revenue at a point in time if the criteria for recognizing revenue over time are not met, the title of the goods has transferred and we have a present right to payment.

A provision is recorded for estimated sales returns and allowances and is deducted from gross sales to arrive at net sales in the period the related revenue is recorded.

Timing of Revenue Recognition – When determining the classification of over time verses point in time revenue recognition, there is significant judgment exercised by management in identifying and evaluating whether new contracts and/or products meet the criteria for over time or point in time revenue recognition.

Significant judgments include the evaluation of legal terms and rights within each jurisdiction that we operate, specifically as it relates to our entitlement to gross margin at termination, and the evaluation of whether it is possible, contractually or economically, to repurpose or redirect products.

Royalty Revenue - We license our intellectual property including our patented technologies and database of control codes.

We record license revenue for per-unit based licenses when our customers manufacture or ship a product incorporating our intellectual property and we have a present right to payment.

The number of shipped units is estimated based on historical revenue royalty and other known factors.

If actual shipped units differs from our estimates we will record a reduction or increase to net sales in the period the actuals are reported by the licensee, typically in the following quarter.

Sales Returns and Allowances - A provision is recorded for estimated sales returns and allowances and is deducted from gross sales to arrive at net sales in the period the related revenue is recorded.

These estimates are based on historical sales returns and allowances, analysis of credit memo data and other known factors.

Actual returns and claims in any future period are inherently uncertain and thus may differ from our estimates.

If actual or expected future returns and claims are significantly greater or lower than the reserves that we have established, we will record a reduction or increase to net revenue in the period in which we make such a determination.

We license our intellectual property including our patented technologies and database of control codes.

We record license revenue for per-unit based licenses when our customers manufacture or ship a product incorporating our intellectual property and we have a present right to payment.

We record revenue upon delivery of intellectual property for fixed up-front fee licenses or if the contract contains a minimum guarantee.

Tiered royalties are recorded on a straight-line basis according to the forecasted per-unit fees taking into account the pricing tiers.

Contract assets - Contract assets represent the value of revenue recognized over time for which we have not yet invoiced the customer.

Generally, we invoice the customer within 90 days of revenue recognition.

Contract liabilities - A contract liability is recorded when consideration is received from a customer prior to fully satisfying a performance obligation in a contract.

Our contract liabilities primarily consist of cash received in advance for non-recurring engineering and tooling services.

These contract liabilities will be recognized as revenues when control of the related product or service is transferred to the customer.

Other performance obligations - Payment terms are typically on open credit terms consistent with industry practice and do not have significant financing components.

If actual or expected future returns and claims are significantly greater or lower than the reserves that we have established, we will record a reduction or increase to net sales in the period in which we make such a determination.

Sales Discounts and Rebates - A provision is recorded for estimated sales discounts and rebates and is deducted from gross sales to arrive at net sales in the period the related revenue is recorded.

We accrue for discounts and rebates based on historical experience and our expectations regarding future sales to our customers.

Accruals for discounts and rebates are recorded as a reduction to sales in the same period as the related revenue.

Changes in such accruals may be required if future rebates and incentives differ from our estimates.

Trade accounts receivable are recorded at the invoiced amount and do not bear interest.

Sales allowances are recognized as reductions of gross accounts receivable to arrive at accounts receivable, net if the sales allowances are distributed in customer account credits.

We present all non-income government-assessed taxes (sales, use and value added taxes) collected from our customers and remitted to governmental agencies on a net basis (excluded from revenue) in our financial statements.

The government-assessed taxes are recorded in our consolidated balance sheets until they are remitted to the government agency.

Adoption of revenue recognition standard - On January 1, 2018, we adopted Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers," and all related amendments.

The guidance provides a single, comprehensive revenue recognition model for all contracts with customers and supersedes most existing revenue recognition guidance.

The primary impact to our revenue recognition policies resulting from this standard relates to the timing of revenue recognition for products which are customized for a specific customer.

Results for reporting periods beginning after January 1, 2018 are presented under the new standard while prior periods have not been adjusted.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make payments for products sold or services rendered.

The allowance for doubtful accounts is estimated based on a variety of factors, including credit reviews, historical experience, length of time receivables are past due, current economic trends and changes in customer payment behavior.

We also record specific provisions for individual accounts when we become aware of a customer's inability to meet its financial obligations to us, such as in the case of bankruptcy filings or deterioration in the customer's operating results or financial position.

Our historical reserves have been sufficient to cover losses from uncollectible accounts.

However, because we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates and may have a material effect on our consolidated financial position, results of operations and cash flows.

Changes in such accruals may be required if actual discounts and rebates differ from our estimates.

Our finished good, component part, and raw material inventories are valued at the lower of cost or net realizable value.

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In assessing fair value, we must make assumptions regarding estimated future cash flows, the discount rate and other factors.

If the actual performance of the assets becomes less favorable than those projected by management, adjustments to the carrying values of the these assets may have a material effect on the consolidated financial statements.

We evaluate the carrying value of goodwill on December 31 of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount.

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A downward revision of these assumptions could cause the fair value of the reporting unit to fall below its respective carrying values and a noncash impairment charge would be required.

Such a charge may have a material effect on the Consolidated Statements of Operations and Consolidated Balance Sheet.

Business Combinations

We allocate the purchase price of acquired businesses to the tangible and intangible assets and the liabilities assumed based on their estimated fair values on the acquisition date.

The excess of the purchase price over the fair value of net assets acquired is recorded as goodwill.

We engage independent third-party appraisal firms to assist us in determining the fair values of assets acquired and liabilities assumed.

Such valuations require management to make significant fair value estimates and assumptions, especially with respect to intangible assets and contingent consideration.

Management estimates the fair value of certain intangible assets and contingent consideration by utilizing the following (but not limited to):

future cash flow from customer contracts, customer lists, distribution agreements, acquired developed technologies, trademarks, trade names and patents;

expected costs to complete development of in-process technology into commercially viable products and cash flows from the products once they are completed;

brand awareness and market position as well as assumptions regarding the period of time the brand will continue to be used in our product portfolio;

discount rates utilized in discounted cash flow models.

In those circumstances where an acquisition involves a contingent consideration arrangement, we recognize a liability equal to the fair value of the contingent payments we expect to make as of the acquisition date.

We re-measure this liability at each reporting period and record changes in the fair value within operating expenses.

Increases or decreases in the fair value of the contingent consideration liability can result from changes in discount periods and rates, as well as changes in the timing and amount of earnings estimates or in the timing or likelihood of achieving earnings-based milestones.

Our estimates are based upon assumptions believed to be reasonable;

however, unanticipated events or circumstances may occur which may affect the accuracy of our fair value estimates, including assumptions regarding industry economic factors and business strategies.

Results of operations and cash flows of acquired businesses are included in our operating results from the date of acquisition.

Such a charge may have a material effect on the consolidated financial statements.

We calculate our current and deferred tax provisions based on estimates and assumptions that may differ from the actual results reflected in our income tax returns filed during the subsequent year.

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In order for us to realize our deferred tax assets we must be able to generate sufficient taxable income in the tax jurisdictions in which the deferred tax assets are located.

Our cash balances are held in numerous locations throughout the world.

The majority of our cash is held outside of the United States and may be repatriated to the United States but, under current law, may be subject to state income taxes and foreign withholding taxes.

Additionally, repatriation of some foreign balances is restricted by local laws.

We have provided for the state income tax and foreign withholding tax liabilities on these amounts for financial statement purposes.

Any changes to the realizability of our deferred tax assets or liabilities may have a material impact on our financial statements.

We are subject to income taxes in the United States and foreign countries, and we are subject to routine corporate income tax audits in many of these jurisdictions.

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We review our reserves quarterly, and we may adjust such reserves due to proposed assessments by tax authorities, changes in facts and circumstances, issuance of new regulations or new case law, previously unavailable information obtained during the course of an examination, negotiations between tax authorities of different countries concerning our transfer prices, execution of advanced pricing agreements, resolution with respect to individual audit issues, the resolution of entire audits, or the expiration of statutes of limitations.

The amounts ultimately paid upon resolution of audits may be materially different from the amounts previously included in our income tax expense and, therefore, may have a material impact on our operating results, financial position and cash flows.

Stock-Based Compensation

We recognize the grant date fair value of stock-based compensation awards as expense in proportion to vesting during the requisite service period, which ranges from one to four years.

Forfeitures of stock-based awards are accounted for as they occur.

We determine the fair value of restricted stock awards utilizing the average of the high and low trading prices of our common shares on the date they were granted.

The fair value of stock options granted to employees and directors is determined utilizing the Black-Scholes option pricing model.

The assumptions utilized in the Black-Scholes model include the risk-free interest rate, expected volatility, expected life in years and dividend yield.

The risk-free interest rate over the expected term is equal to the prevailing U.S.

Treasury note rate over the same period.

Expected volatility is determined utilizing historical volatility over a period of time equal to the expected life of the stock option.

Expected life is computed utilizing historical exercise patterns and post-vesting behavior.

The dividend yield is assumed to be zero since we have not historically declared dividends and do not have any plans to declare dividends in the future.

Performance-Based Common Stock Warrants

The measurement date for performance-based common stock warrants is the date on which the warrants vest.

We recognize the fair value of performance-based common stock warrants as a reduction to net sales ratably as the warrants vest based on the projected number of warrants that will vest, the proportion of the performance criteria achieved by the customer within the period relative to the total performance required (aggregate purchase levels) for the warrants to vest and the then-current fair value of the related unvested warrants.

If we do not have a reliable forecast of future purchases to be made by the customer by which to estimate the number of warrants that will vest, then the maximum number of potential warrants is assumed until such time that a reliable forecast of future purchases is available.

To the extent that our projections change in the future as to the number of warrants that will vest, a cumulative catch-up adjustment will be recorded in the period in which our estimates change.

The fair value of performance-based common stock warrants is determined utilizing the Black-Scholes option pricing model.

The assumptions utilized in the Black-Scholes model include the price of our common stock, the risk-free interest rate, expected volatility, expected life in years and dividend yield.

The price of our common stock is equal to the average of the high and low trade prices of our common stock on the measurement date.

The risk-free interest rate over the expected life is equal to the prevailing U.S.

Treasury note rate over the same period.

Expected volatility is determined utilizing historical volatility over a period of time equal to the expected life of the warrant.

Expected life is equal to the remaining contractual term of the warrant.

The dividend yield is assumed to be zero since we have not historically declared dividends and do not have any plans to declare dividends in the future.

Results of Operations

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Year Ended December 31,

Net sales 100.0 % 100.0 %

Cost of sales 71.3 77.4

Gross profit 28.7 22.6

Research and development expenses 5.1 3.9

Selling, general and administrative expenses 17.5 16.7

Operating income (loss)

Operating income 6.1 2.0

Interest income (expense), net (0.2) (0.5)

Gain on sale of Guangzhou factory

Accrued social insurance adjustment 1.5 —

Other income (expense), net (0.2) (0.1)

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Provision for income taxes 0.9 0.9

Net income (loss)

Net income 6.3 % 0.5 %

Year Ended December 31, 2020 ("2020") Compared to Year Ended December 31, 2019 ("2019")

Net sales for 2019 were $753.5 million , an increase of 10.8% compared to $680.2 million in 2018 .

The increase in net sales was primarily due to the recent launches of higher end platforms by existing customers in the subscription broadcasting channel, a newly acquired customer and continued strength in home automation.

Net sales for 2020 were $614.7 million, a decrease of 18.4% compared to $753.5 million in 2019.

The decrease in net sales occurred primarily with our traditional home entertainment and security customers as we experienced demand, production and supply disruptions caused by the COVID-19 pandemic.

Certain customers reduced order quantities, our China-based manufacturing facilities were delayed in re-opening after the Lunar New Year holiday and certain key suppliers were ordered to close by local authorities.

Gross profit.

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Gross profit as a percent of sales increased to 28.7% in 2020 from 22.6% in 2019.

The gross profit percentage was favorably impacted by product mix as small- to medium-sized subscription broadcasters launched advanced platforms;

an increase in royalty revenue as certain consumer electronic companies are embedding our technology in their devices;

lower raw material costs during 2019;

and foreign currency as the U.S.

Dollar strengthened by approximately 400 basis points versus the Chinese Yuan Renminbi.

The gross profit percentage was unfavorably impacted by higher U.S.

tariffs on many of our products that are manufactured in the PRC and imported into the U.S.

In an effort to mitigate the effect of the increased tariffs, we transitioned the production of many of our goods destined for the U.S.

market from our PRC factories to our factory in Mexico.

In connection with this transition, which began in the fourth quarter of 2018, we incurred costs related to the movement of materials, duplicative labor efforts and indirect costs including unabsorbed duplicative overhead.

Gross profit as a percent of sales was favorably impacted by a reduction in U.S.

tariff expense, improved operational efficiencies in our Mexico-based manufacturing facility as it emerged from a start-up phase, an increase in royalty revenue as certain consumer electronics companies embed our technology in their devices, and the strengthening of the U.S.

Dollar versus the Mexican Peso.

Our manufacturing costs were negatively impacted by the COVID-19 pandemic as our China-based manufacturing facilities were delayed in re-opening after the Lunar New Year holiday and our Mexico-based manufacturing facility was closed for approximately 10 days.

Research and development ("R&D") expenses.

R&D expenses increased 23.5% to $29.4 million in 2019 from $23.8 million in 2018 primarily due to our continued investment in the development of new products that enhance the user experience in home entertainment and home automation.

R&D expenses increased 6.9% to $31.5 million in 2020 from $29.4 million in 2019 primarily due to our continued investment in the development of products that enhance the user experience in home entertainment and home automation.

Selling, general and administrative ("SG&A") expenses.

SG&A expenses increased 4.9% to $125.5 million in 2019 from $119.7 million in 2018 , primarily due to increases in incentive compensation expense and an increase in contingent consideration recorded in connection with our acquisition of the net assets of Ecolink Intelligent Technology, Inc.

Partially offsetting these increases was payroll expense, which decreased as a result of our ongoing corporate restructuring initiatives.

SG&A expenses decreased 14.3% to $107.5 million in 2020 from $125.5 million in 2019, primarily due to a reduction in incentive compensation expense, a decrease in contingent consideration recorded in connection with our acquisition of the net assets of Ecolink Intelligent Technology, Inc.

("Ecolink"), a decrease in freight costs and a reduction in travel expenditures.

We also reduced certain discretionary expenses as a result of the COVID-19 pandemic.

Interest income (expense), net.

Net interest expense was $3.9 million in 2019 compared to $4.7 million in 2018 .

This decrease was a result of a lower average quarterly loan balance.

Gain on sale of Guangzhou factory.

In June 2018, we completed the sale of our Guangzhou manufacturing facility in exchange for cash proceeds of $51.3 million, resulting in a pre-tax gain of $37.0 million.

Net interest expense was $1.4 million in 2020 compared to $3.9 million in 2019 as a result of a lower average loan balance and a lower interest rate.

Accrued social insurance adjustment.

In 2020, we reversed approximately $9.5 million of accrued social insurance.

In June 2018, we sold our Guangzhou entity via a stock deal and the terms of the agreement included a two-year indemnification period.

In June 2020, the indemnification period expired and we determined we were no longer legally liable for any liabilities associated with our Guangzhou entity.

Accordingly, we reversed the accrued social insurance amount associated with the Guangzhou entity which was approximately $9.5 million

Other income (expense), net.

Net other expense was $1.0 million in 2019 compared to $4.5 million in 2018 .

This change was driven primarily by both a decline in foreign currency losses associated with fluctuations in the Chinese Yuan Renminbi versus the U.S.

Dollar and foreign currency gains associated with fluctuations in the Brazilian Real versus the U.S.

Dollar in 2019.

Net other expense was $1.4 million in 2020 compared to $1.0 million in 2019, as a result of net foreign currency losses.

Income tax expense.

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Our effective tax rate was 12.1% in 2020 compared to 65.1% in 2019.

Our effective tax rate was higher than normal in 2018 as a result of the recording of an $8.1 million valuation allowance against U.S.

federal and state deferred tax assets.

In 2019, the U.S.

incurred a loss and, because of the valuation allowance, was not able to benefit the loss resulting in an elevated tax rate.

Our effective tax rate was lower than normal in 2020 as a result of the application of preferential foreign tax rates as well as foreign income not subject to tax in its respective local jurisdictions, partially offset by the U.S.

tax loss not being benefited due to the valuation allowance.

Liquidity and Capital Resources

Sources and Uses of Cash

(In thousands)

Year Ended December 31, 2019

Year Ended December 31, 2018

(In thousands) Year Ended December 31, 2020 Increase

(Decrease) Year Ended December 31, 2019

Cash provided by operating activities $ 73,392 $ (11,865) $ 85,257

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Cash provided by (used for) financing activities (65,964) (26,733) (39,231)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

Net increase (decrease) in cash, cash equivalents and restricted cash

December 31, 2019

December 31, 2018

Effect of exchange rate changes on cash and cash equivalents (843) 120 (963)

Net increase (decrease) in cash and cash equivalents $ (17,149) $ (38,244) $ 21,095

December 31, 2020 Increase

(Decrease) December 31, 2019

Cash and cash equivalents $ 57,153 $ (17,149) $ 74,302

Working capital 147,333 35,037 112,296

Net cash provided by operating activities increased $72.4 million in 2019 compared to 2018 , primarily due to the net impact of the gain on sale of the Guangzhou factory and changes in working capital associated with accounts receivable and accounts payable.

Accounts receivable and contract assets produced cash inflows of $17.2 million in 2019 compared to $5.5 million in 2018 largely due to a decrease in days sales outstanding from 71 days at December 31, 2018 to 64 days at December 31, 2019.

Accounts payable and accrued liabilities produced net cash inflows of $14.2 million during 2019 compared to cash outflows of $7.4 million in 2018, largely as a result of timing of payments.

Net cash provided by operating activities was $73.4 million during 2020 compared to $85.3 million during 2019.

Net income was $38.6 million in 2020 compared to $3.6 million in 2019.

Accounts payable and accrued liabilities resulted in net cash outflows of $43.0 million in 2020 compared to net cash inflows of $14.2 million in 2019, largely as a result of a significant decrease in inventories as well as payments related to accrued compensation and contingent consideration.

Inventories decreased by $28.3 million during the year ended December 31, 2020 compared to an increase of $1.9 million during the year ended December 31, 2019 as a result of lower sales volume in 2020.

Our inventory turns remained relatively consistent with 3.4 turns at December 31, 2020 compared to 3.2 turns at December 31, 2019.

Net cash used for investing activities during 2019 was $24.0 million compared to net cash provided by investing activities of $23.6 million during 2018 .

In 2019, acquisitions of property, plant and equipment were $21.3 million which reflects a normalized level of spending.

In 2018, we received net cash proceeds of $46.2 million for the sale of our Guangzhou factory, which was completed in June 2018, which was partially offset by acquisitions of property, plant and equipment of $20.1 million.

Net cash used for financing activities was $39.2 million during 2019 compared to net cash used for financing activities of $53.3 million during 2018 .

The primary drivers of our cash flows from financing activities in 2019 and 2018 were borrowings and

repayments on our line of credit and repurchases of shares of our common stock on the open market.

Net payments on our line of credit were $33.5 million and $36.5 million in 2019 and 2018, respectively.

Accrued income taxes decreased by $6.5 million during the year ended December 31, 2020 compared to an increase of $3.6 million during the year ended December 31, 2019, largely as a result of increased tax payments during 2020.

Net cash used for investing activities during 2020 was $23.7 million, of which $16.9 million and $6.4 million was used for capital expenditures and development of patents, respectively.

Net cash used for investing activities during 2019 was $24.0 million, of which $21.3 million and $2.7 million was used for capital expenditures and development of patents, respectively.

Net cash used for financing activities was $66.0 million during 2020 compared to $39.2 million during 2019.

The primary financing activities in 2020 and 2019 were borrowings and repayments on our line of credit and repurchases of shares of our common stock.

Net repayments on our line of credit were $48.0 million and $33.5 million in 2020 and 2019, respectively.

During 2020, we purchased 443,803 shares of our common stock at a cost of $17.7 million compared to 57,740 shares at a cost of $1.9 million during 2019.

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Payments Due by Period

(In thousands)

(In thousands) Total Less than

Operating lease obligations $ 22,282 $ 7,381 $ 10,072 $ 3,865 $ 964

Purchase obligations (1)

2,784 2,784 — — —

Contingent consideration (2)

2,050 1,758 292 — —

Total contractual obligations $ 27,116 $ 11,923 $ 10,364 $ 3,865 $ 964

(1) Purchase obligations primarily consist of contractual payments to purchase property, plant and equipment.

Contingent consideration consists of contingent payments related to our purchases of the net assets of Ecolink and Residential Control Systems, Inc.

(2) Contingent consideration consists of contingent payments relate to our purchases of the net assets of Ecolink and Residential Control Systems, Inc.

Historically, we have utilized cash provided from operations as our primary source of liquidity, as internally generated cash flows have been sufficient to support our business operations, capital expenditures and discretionary share repurchases.

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We attempt to mitigate our exposure to liquidity, credit and other relevant risks by placing our cash and cash equivalents with financial institutions we believe are high quality.

On November 1, 2019, we extended the term of our Second Amended and Restated Credit Agreement ("Second Amended Credit Agreement") with U.S.

Bank National Association ("U.S.

On November 1, 2019, we extended the term of our Second Amended Credit Agreement with U.S.

Bank to November 1, 2021.

The Second Amended Credit Agreement

provided for a $130.0 million Credit Line through June 30, 2019 and a $125.0 million Credit Line thereafter and through its expiration date.

The Second Amended Credit Agreement provided for a $130.0 million Credit Line through June 30, 2019 and a $125.0 million Credit Line thereafter and through its expiration date.

The Credit Line may be used for working capital and other general corporate purposes including acquisitions, share repurchases and capital expenditures.

Amounts available for borrowing under the Credit Line are reduced by the balance of any outstanding letters of credit, of which there were $2.7 million at December 31, 2020.

On January 7, 2021, we executed an amendment to extend the term of our Second Amended Credit Agreement to November 1, 2022.

All obligations under the Credit Line are secured by substantially all of our U.S.

5 unchanged sentences

There are no commitment fees or unused line fees under the Second Amended Credit Agreement.

The amendment executed on January 7, 2021 defines the Secured Overnight Financing Rate ("SOFR") as a replacement benchmark for LIBOR upon its phase out.

The Second Amended Credit Agreement includes financial covenants requiring a minimum fixed charge coverage ratio and a maximum cash flow leverage ratio.

7 unchanged sentences

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-K

Item 7. Management’s Discussion and Analysis