What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-14 compared with 2023-03-08 · 114 added, 107 removed, 160 unchanged (58% of the section changed)

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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, 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;

• easy-to-use, voice-enabled, automatically-programmed universal, two-way radio frequency ("RF") as well as infrared ("IR") remote controls, 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;

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

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

• 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 consoles 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;

• software, firmware and technology solutions that can enable devices such as Smart TVs, hybrid set-top boxes, audio systems, smart speakers, game consoles and other consumer electronic and smart home devices to wirelessly connect and interoperate within home networks to enable control and delivery of 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;

• intellectual property that we license primarily to OEMs and video service providers;

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

• embedded and cloud-enabled software for reliable firmware update and digital rights management validation services to major consumer electronics brands;

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

• embedded and cloud-enabled software for reliable firmware update provisioning and digital rights management validation services to major consumer electronics brands;

• 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.

Each year our device control library continues to grow across AV and smart home platforms, supporting many common smart home protocols, including IR, HDMI-CEC, Zigbee (Rf4CE), Z-Wave, IP, as well as Home Network and Cloud Control.

Each year our device discovery and control libraries continue to grow across AV and smart home platforms, supporting many common smart home protocols, including IR, HDMI-CEC, Zigbee (Rf4CE), Z-Wave, IP, as well as Home Network and Cloud Control.

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.

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• Operating expenses, as a percent of sales, increased to 43.5% in 2023 from 25.4% in 2022.

• Operating income decreased to $14.5 million in 2022 from $23.3 million in 2021, and our operating margin percentage decreased to 2.7% in 2022, compared to 3.9% in 2021.

• Our effective tax rate increased to 96.4% in 2022 from 67.0% in 2021.

• Operating loss was $85.3 million in 2023 compared to operating income of $14.5 million in 2022, and our operating loss percentage was 20.3% in 2023, compared to an operating income percentage of 2.7% in 2022.

• Income tax expense was $6.0 million in 2023 compared to $11.0 million in 2022.

Our strategic business objectives for 2024 include the following:

• increase new product development efforts in high-growth HVAC OEM channel to grow our market penetration with existing customers and acquire new customers with the goal of achieving market share leadership in climate control channel within 2 years;

• broaden our home control and home automation product solutions with the aim of acquiring new customers that represent market share leaders in their respective channels and regions;

• expand our software and service platform, QuickSet, to deliver a complete smart entertainment and smart home managed service platform;

• invest in creating sustainable technology solutions that offer product differentiation across our global product portfolio;

• explore and expand product offerings in our core subscription broadcasting channel beyond traditional entertainment remote controls;

• deliver new standard products, as well as custom variants, currently on our project development backlog, specifically in the climate control channel;

• broaden our home control and home automation product offerings with the aim of acquiring new customers that represent market share leaders in their respective channels and regions;

• expand our software and service platform, QuickSet, to deliver new features that enhance the personalization and engagement of users on smart entertainment and smart home platforms;

• execute go-to-market strategies that help position our sustainable technology in our major verticals;

• seek acquisitions or strategic partners that complement and strengthen our existing business;

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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.

COVID-19 Pandemic and Supply Chain Impact

The COVID-19 pandemic, including related measures to curtail its spread, continues to be a complex and evolving situation and has and will continue to impact our business, operations, and financial results.

We anticipate that 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 2023 given the global reach and economic impact of the COVID-19 pandemic and the various governmentally imposed lockdowns, quarantine and social distancing measures put in place to contain the spread of the COVID-19 pandemic.

A future suspension of our manufacturing operations would impact our ability to meet customer demand and could have a significant adverse effect on our financial conditions and results of operations.

COVID-19 also continues to impact the global supply chain causing disruptions to service providers, logistics and the flow and availability of supplies and products.

Our manufacturing sites, as well as our suppliers and outsourcing partners, and our supply chain have been adversely and may continue to be adversely impacted as a result of restrictions and logistics and operational challenges related to COVID-19.

These disruptions have resulted and may continue to result in supply shortages and delays impacting sales worldwide.

We may experience further disruptions to our manufacturing operations, supply chain and/or distribution channels in the future, and these disruptions may be prolonged.

We have also been negatively impacted by supply chain difficulties including obtaining ICs and other long-lead time components and we expect this to continue into 2023.

While we are taking production and inventory control steps to mitigate the effects caused by these shortages including advanced purchasing of long-lead time components, we cannot guarantee that these steps will allow us to meet our short-term IC and other component parts needs.

As such, these supply constraints continue to cause difficulty and delays in our ability to fulfill customer orders and have at times resulted in increased logistics costs.

In addition, many of our products are paired with certain of our customers' products, like set-top boxes or televisions.

If those customers are not able to obtain sufficient quantities of ICs for their products, their demand for our products may decrease.

Macroeconomic Conditions

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While we have been able to increase sales prices on certain products, there may be a delay in our ability to increase prices and we may not be able to fully offset the impact of increased material costs which would negatively impact our gross profit.

Our cost of labor, materials and borrowing may continue to increase which would negatively impact our business and financial results.

In addition, we expect recessionary fears in the global economy will ultimately negatively impact our sales demand.

Qinzhou, China Facility

In October 2021, Reuters published an article indicating that individuals from China's Uyghur minority, originally resident in the PRC region of Xinjiang, were working in a facility in Qinzhou, Guangxi operated by our Chinese subsidiary, Gemstar Technology (Qinzhou) Co.

The article alleged that the presence of these workers in Guangxi was indicative of "a transfer program described by some rights groups as forced labor."

We have reviewed and confirmed that Gemstar compensated these individuals for their work at the same rates as workers of other ethnicities who had comparable skills and roles, and at a level that was above the local minimum wage.

Although our review did not identify any instances in which individuals were obliged or in any other way forced to work at the Qinzhou facility or were paid less than their promised wage, Gemstar, which engaged these workers through a third-party labor agency, terminated its relationship with that agency, ended its arrangement with these workers, and paid all outstanding wages and severance directly and individually to each of the workers in question.

Nonetheless, the perception that we or an entity affiliated with us might have had associations with a program described by some as involving forced labor could result in reputational damage as well as lost revenue.

To date, as a result of this perception, one customer has put further business with us on hold.

Should additional customers cease doing business with us, the loss of revenue could become material, which would have an adverse effect on our business, results of operations and financial condition.

We take all allegations regarding working conditions seriously, and took a cooperative approach to responding to the Committee's letter, cooperated fully with the Committee's inquiry and provided the Committee with timely and complete responses to all of its questions.

Our cost of labor, materials and borrowing may continue to increase, which would negatively impact our financial results.

In addition, we expect recessionary pressures in the global economy will ultimately negatively impact our sales demand.

We continued to see supply chain improvements across most long-lead time components, including ICs, during 2023.

While we expect this to continue, demand fluctuations and output may affect us in the future based on feedback from our supplier base.

We continue to take production and inventory control steps as required to mitigate the effects caused by any shortages including advanced purchasing of long-lead time components, as necessary;

however, we cannot guarantee that these steps will allow us to meet some customer short-term requirements.

As such, these supply constraints may continue to cause difficulty and delays in our ability to fulfill customer orders and may at times result in increased logistics costs.

Goodwill and Long-Lived Assets Impairment Trigger

During the three months ended March 31, 2023, a decline in our financial performance, the overall negative trend in the video service provider channel and an uncertain economic environment contributed to a significant decline in our market capitalization.

We considered this to be an impairment trigger.

We, therefore, performed a quantitative valuation analysis indicating a significant implied control premium over our market capitalization.

As a result of the substantial implied control premium, we recorded an impairment charge of $49.1 million during the three months ended March 31, 2023.

Long-Lived Assets

During the three months ended March 31, 2023, market conditions deteriorated and our stock price declined significantly, which we considered to be a trigger of potential impairment for our long-lived asset group.

As such, we performed a recoverability test using non-discounted forecasted cash flows, which resulted in total cash flows in excess of the carrying value of the asset group by approximately 11% to 57%.

This test indicated no recoverability issues.

During the three months ended September 30, 2023, as part of our manufacturing footprint optimization efforts, we identified certain long-lived assets that were unused due to the closure of our southwestern China factory and unused at our Mexico factory, due to decreased demand in our U.S.

As a result, we recorded impairment charges of $7.7 million during the three months ended September 30, 2023.

In addition, certain future events and circumstances, including adverse changes in general business and economic conditions in the United States and worldwide and changes in consumer behavior could result in changes to our assumptions and judgments used in the impairment tests.

A downward revision of these assumptions could cause the total undiscounted cash flows of the long-lived asset group to fall below its respective carrying values and a non-cash impairment charge would be required.

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

Manufacturing Footprint

We expect to commence manufacturing operations in a new factory in Vietnam in the first half of 2023, which may result in manufacturing inefficiencies.

We are currently evaluating our manufacturing footprint with the expectation that once the Vietnam factory is operating efficiently, we will reduce our manufacturing capacity, most likely, by shutting down an existing facility.

If this were to occur, we would record an impairment charge and severance expense in amounts that are not presently calculable, however could be material.

We are analyzing various scenarios, each contingent on the success of the new Vietnam factory, and have yet to conclude on a specific plan.

We have been evaluating our global manufacturing footprint based upon our long-term factory planning strategy to (1) de-risk our reliance on a PRC-based supply chain and (2) reduce our manufacturing capacity due to decreased demand and a change in mix of our products.

As part of this evaluation, we opened a new factory in Vietnam, which commenced manufacturing operations in June 2023 after incurring startup costs in the first half of 2023.

With our Vietnam factory now open and meeting short-term operational targets, with the expectation of continued improvement, we stopped manufacturing activities in our southwestern China factory in September 2023 and have substantially completed its shutdown.

We are also working to downsize our factory in Mexico due to decreased demand in our U.S.

market and our Vietnam facility's ability to supply our North American customers.

As a result of these decisions, we have recorded impairment charges of $7.7 million and severance and other restructuring expenses of $4.0 million during the year ended December 31, 2023.

We continue to evaluate our Mexico facility as part of our long-term factory planning strategy.

We are currently planning to downsize and streamline the Mexico operations by moving to a smaller, more efficient facility.

We expect to commence operations in this downsized facility in the second quarter of 2024, which may result in a material amount of severance and moving costs.

We will continue to evaluate our global factory footprint to identify ways to operate more efficiently and decisions may result in charges that could have a material effect on the consolidated the financial statements.

Critical Accounting Estimates

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We also generate revenues from a cloud-based software solution enabling software updates, digital rights management provisioning and remote technical support to consumer electronics customers.

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.

Timing of Revenue Recognition – When determining the classification of over time versus 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 symbolic intellectual property which includes our patented technologies and database of control codes.

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Each percentage point change in the ratio of excess and obsolete inventory reserve to inventory would impact cost of sales by approximately $1.0 million.

Valuation of Long-Lived Assets and Intangible Assets

We assess long-lived and intangible assets for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable.

Factors considered important which may trigger an impairment review, if significant, include the following:

• underperformance relative to historical or projected future operating results;

• changes in the manner of use of the assets;

• changes in the strategy of our overall business;

• negative industry or economic trends;

• a decline in our stock price for a sustained period;

• a variance between our market capitalization relative to net book value.

If the carrying value of the asset is larger than its projected undiscounted future cash flows, the asset is impaired.

The impairment is measured as the difference between the net book value of the asset and the asset's estimated fair value.

Fair value is estimated utilizing the asset's projected discounted future cash flows.

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 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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(1) a significant adverse change in legal factors or in business climate, (2) a decline in macroeconomic conditions, (3) a significant decline in our financial performance or (4) a significant decline in the price of our common stock for a sustained period of time.

We perform our annual impairment test using a qualitative assessment weighing the relative impact of factors that are specific to our single reporting unit as well as industry and macroeconomic factors.

Based on the qualitative assessment performed, considering the aggregation of the relevant factors, we concluded that it is not more likely than not that the fair value of our single reporting unit is less than the carrying value.

Therefore, performing a quantitative impairment test was unnecessary.

Certain future events and circumstances, including adverse changes in general business and economic conditions in the United States and worldwide and changes in consumer behavior could result in changes to our assumptions and judgments used in the goodwill impairment tests.

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 financial statements.

We perform our annual impairment test, and any required interim tests, using the optional qualitative assessment, weighing the relative impact of factors that are specific to our single reporting unit including our market capitalization compared to the carrying value of our stockholders' equity, as well as industry and macroeconomic factors.

Based on the qualitative assessment performed, we consider the aggregation of the relevant factors, and conclude whether it is more likely than not that the fair value of our single reporting unit is less than the carrying value.

If we conclude that it is more likely than not that the fair value of our single reporting unit is less than the carrying value, or if we decide not to elect the optional qualitative assessment, we perform a quantitative impairment test, using cash flow projections, discounted by our weighted-average cost of capital.

In addition to any quantitative impairment analysis, we also consider the implied control premium compared to our market capitalization.

Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions.

These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows and risk-adjusted discount rates.

In addition, we make certain judgments and assumptions in determining our reporting unit.

We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain.

Actual future results may differ from those estimates.

Long-Lived and Intangible Assets Impairment

We assess the impairment of long-lived and intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

Factors considered important which may trigger an impairment review may include the following, but are not limited to:

(1) significant underperformance relative to historical or projected future operating results;

(2) significant changes in the manner or use of the assets, their physical condition or strategy for the overall business;

(3) significant negative industry or economic trends;

(4) a current expectation that a long-lived asset will be sold or otherwise disposed of significantly before the end of it previously estimated useful life;

or (5) a significant decline in our stock price for a sustained period.

We conduct an impairment review when we determine that the carrying value of a long-lived or intangible asset may not be recoverable based upon the existence of one or more of the above indicators of impairment.

The asset is impaired if its carrying value exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.

In assessing recoverability, we make assumptions regarding estimated future cash flows and other factors.

Determining the recoverability of long-lived or intangible assets is judgmental in nature and involves the use of significant estimates and assumptions.

These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows and the future market value of our asset group.

In addition, we make certain judgments and assumptions in determining our asset group.

We base our recoverability estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain.

Actual future results may differ from those estimates.

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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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.

We believe that our tax return positions are fully supported, but tax authorities are likely

to challenge certain positions, which may not be fully sustained.

We believe that our tax return positions are fully supported, but tax authorities could challenge certain positions which may not be fully sustained.

Our income tax expense includes amounts intended to satisfy income tax assessments that result from these challenges in accordance with the accounting for uncertainty in income taxes prescribed by U.S.

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Research and development expenses 7.4 6.0

Factory restructuring charges 1.0 —

Selling, general and administrative expenses 23.4 19.4

Operating income 2.7 3.9

Goodwill impairment 11.7 —

Operating income (loss) (20.3) 2.7

Interest income (expense), net (1.0) (0.4)

Loss on sale of Argentina subsidiary 0.0 (1.0)

Other income (expense), net (0.6) (0.2)

Income before provision for income taxes 2.1 2.7

Income (loss) before provision for income taxes (21.9) 2.1

Provision for income taxes 1.4 2.0

Net income 0.1 % 0.9 %

Net income (loss) (23.3) % 0.1 %

Year Ended December 31, 2023 ("2023") Compared to Year Ended December 31, 2022 ("2022")

Net sales for 2023 were $420.5 million, a decrease of 22.5% compared to $542.8 million in 2022.

Sales in our subscription broadcast channel were lower than in the prior year due primarily to lower customer demand and component shortages.

Sales in our retail channel were also lower than the prior year due to macroeconomic headwinds and the loss of a customer in North America.

Lower customer demand in our home entertainment channel, consisting of video service providers and consumer electronics companies, was the primary reason for the decline in sales.

Gross profit.

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Gross profit as a percent of sales decreased to 23.2% in 2023 compared to 28.1% in 2022.

Gross profit as a percent of sales was unfavorably impacted by inflationary pressures associated with raw materials and components, freight costs and wages.

Partially offsetting these unfavorable impacts were sales price increases on certain products, which were implemented throughout the first two quarters of 2022.

Gross profit as a percentage of sales was adversely impacted by excess capacity which resulted in manufacturing inefficiencies.

In an effort to optimize our factory footprint and reduce capacity to be commensurate with current demand, we impaired machinery and equipment and leasehold improvements associated with the closure of our southwestern China factory, which ceased manufacturing operations in September 2023.

We also incurred impairment charges relating to machinery and equipment at our Mexico factory.

In addition, we incurred start-up costs in the first half of 2023 associated with our Vietnam facility.

Overall, operations in our new Vietnam factory have exceeded our expectations and we expect continued improvement in production efficiencies as it scales.

Partially offsetting these items was a stronger U.S.

dollar versus the Chinese Yuan Renminbi.

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

R&D expenses increased 5.0% to $32.5 million in 2022 from $30.9 million in 2021.

The increase in R&D expenses is due to an increase in product development activities as we continue to expand our portfolio of products and focus on growth channels including HVAC, home security and home automation.

R&D expenses decreased 3.6% to $31.3 million in 2023 from $32.5 million in 2022.

The decrease in R&D expenses is primarily due to reduced external product development expenses.

Factory restructuring charges.

During the year ended December 31, 2023, we recorded $4.0 million in expense, which included severance and other expenses related to the closure of our southern China factory.

In addition, we incurred expenses to move equipment from our Mexico factory to our Vietnam factory.

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

SG&A expenses decreased 11.4% to $105.3 million in 2022 from $118.8 million in 2021, primarily due to a decrease in outside legal expenses related to a specific legal matter.

SG&A expenses decreased 6.5% to $98.5 million in 2023 from $105.3 million in 2022, due to a decrease in outside legal expenses related to a specific legal matter, as well as cost savings initiatives executed in 2023.

Goodwill impairment.

During the year ended December 31, 2023, we recorded a non-cash goodwill impairment charge of $49.1 million due to our market capitalization being significantly less than the carrying value of our equity.

Interest income (expense), net.

Net interest expense increased to $2.2 million in 2022 from $0.6 million in 2021 as a result of a higher average loan balance and a higher average interest rate.

Loss on sale of Argentina subsidiary.

During 2021, we completed the sale of our subsidiary, One For All Argentina S.R.L, recording a loss on sale of $6.1 million.

The loss was primarily attributable to the weakening of the Argentinian Peso versus the U.S.

Dollar resulting in a loss in equity value in our Argentina subsidiary and ultimately sales proceeds that were significantly less than the invested capital.

Net interest expense increased to $4.3 million in 2023 from $2.2 million in 2022 as a result of a higher interest rate, partially offset by a lower average loan balance and increased interest income.

Other income (expense), net.

Other expense, net was $1.0 million in 2022, compared to other expense, net of $0.6 million in 2021, both as a result of net foreign currency losses offset partially by miscellaneous non-operating gains.

Other expense, net was $2.6 million in 2023, compared to other expense, net of $1.0 million in 2022, both as a result of additional net foreign currency losses offset partially by fixed asset sales.

Income tax expense.

Income tax expense was $6.0 million in 2023 compared to $11.0 million in 2022.

Our effective tax rate was elevated in both 2022 and 2021 at 96.4% and 67.0%, respectively, as a result of our mix of pre-tax income/loss by jurisdiction, as well as losses incurred in the U.S.

Our effective tax rate in 2023 and 2022, (6.5)% and 96.4%, respectively, differs from the U.S.

statutory rate of 21% primarily as a result of our jurisdictional mix of pre-tax income/loss, as well as losses incurred in the U.S.

which are not benefited due to a valuation allowance.

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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.

In addition, we have utilized our revolving line of credit to fund an increased level of share repurchases and past acquisitions.

In addition, we have utilized our revolving line of credit to fund share repurchases and past acquisitions.

We anticipate that we will continue to utilize both cash flows from operations and our revolving line of credit to support ongoing business operations, capital expenditures, expenses associated with our long-term factory planning strategy, future discretionary share repurchases and potential future acquisitions.

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Bank National Association ("U.S.

Bank") provides for a $125.0 million revolving line of credit ("Credit Line") that expires on November 1, 2023.

We expect to renew our credit agreement with U.S.

Bank, for an additional two years, prior to its expiration.

Bank") provides for a $125.0 million revolving line of credit ("Credit Line") that expires on April 30, 2024.

On March 13, 2024, we executed an amendment to our Second Amended Credit Agreement, which adjusts the Credit Line to a two-tiered limit of $85.0 million up to $100.0 million (subject to meeting certain financial conditions) and extends the term to April 30, 2025.

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

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Net cash provided by operating activities was $25.2 million during 2023 compared to $10.9 million during 2022.

Net income was $0.4 million in 2022 compared to $5.3 million in 2021.

Accounts receivables decreased by $12.8 million during the year ended December 31, 2022 compared to a decrease of $2.0 million during the year ended December 31, 2021 largely due to a reduction in sales during 2022.

Inventories increased by $9.9 million during the year ended December 31, 2022 compared to an increase of $15.0 million during the year ended December 31, 2021.

We still remain in a unique environment where certain components, prominently ICs, are in short supply.

Although this issue is abating, the lead times associated with certain component vendors remain elevated;

consequently, when an opportunity arises to procure more than what is needed at a given period of time, we are proceeding with the purchase.

Furthermore, certain customers ordered fewer units than originally forecasted, causing our finished goods inventory to be temporarily elevated.

Our inventory turns decreased to 2.2 turns at December 31, 2022 compared to 2.9 turns at December 31, 2021.

Changes in accounts payable and accrued liabilities resulted in cash outflows of $28.7 million during the year ended December 31, 2022 compared to cash inflows of $0.9 million during the year ended December 31, 2021, largely as a result of lower sales volume resulting in fewer purchases of raw materials and components, excluding, in certain situations, components in short supply.

Changes in accrued income taxes resulted in cash outflows of $2.1 million during the year ended December 31, 2022 compared to cash inflows of $2.9 million during the year ended December 31, 2021.

Net loss was $98.2 million for the year ended December 31, 2023, which includes the impairment of goodwill of $49.1 million and long-lived assets of $8.0 million, compared to net income of $0.4 million for the year ended December 31, 2022.

Inventories decreased by $51.5 million during the year ended December 31, 2023 compared to an increase of $9.9 million during the year ended December 31, 2022.

This significant decrease in inventories is primarily the result of less demand for our video service products.

In addition, lead times for components and raw materials have normalized, enabling more efficient production planning.

Our inventory turns increased to 2.8 turns at December 31, 2023 compared to 2.2 turns at December 31, 2022.

Changes in accounts receivables and contract assets resulted in cash inflows of $5.0 million during the year ended December 31, 2023 compared to $12.8 million during the year ended December 31, 2022, largely as a result of a reduction in sales during 2023 offset by an increase in days sales outstanding.

Days sales outstanding were 94 days at December 31, 2023 compared to 80 days at December 31, 2022.

Changes in accounts payable and accrued liabilities resulted in cash outflows of $21.4 million and $28.7 million during the years ended December 31, 2023 and December 31, 2022, respectively, due primarily to a decrease in inventory purchases as a result of lower demand.

Changes in accrued income taxes resulted in cash outflows of $3.5 million during the year ended December 31, 2023 compared to $2.1 million during the year ended December 31, 2022.

Net cash used for investing activities during 2023 was $13.9 million, of which $8.1 million and $5.8 million was used for capital expenditures and the development of patents, respectively.

Net cash used for investing activities during 2022 was $21.2 million, of which $7.5 million, $0.9 million, $14.0 million and $6.6 million was used for the purchase of our term deposit investment, acquisition of Qterics Inc., capital expenditures, and the development of patents, respectively.

Offsetting these amounts was $7.8 million received upon the redemption of our term deposit investment.

Net cash used for investing activities during 2021 was $17.0 million, of which $12.6 million and $4.4 million was used for capital expenditures and development of patents, respectively.

Future cash flows used for investing activities are largely dependent on the timing and amount of capital expenditures.

We estimate that we will incur between $12.0 million and $15.0 million in 2023 which includes amounts associated with our factory in Vietnam which we anticipate commencing operations in the first half of 2023.

Net cash provided by financing activities was $20.5 million during 2022 compared to net cash used for financing activities of $22.0 million during 2021.

We estimate that we will incur between $9.0 million and $11.0 million in 2024, which includes amounts associated with our factory in Vietnam, which commenced operations during the second quarter of 2023.

Net cash used for financing activities was $34.8 million during 2023 compared to net cash provided by financing activities of $20.5 million during 2022.

The primary financing activities in 2023 and 2022 were borrowings and repayments on our line of credit and repurchases of shares of our common stock.

Net borrowings on our line of credit were $32.0 million in 2022 and $36.0 million in 2021.

Net repayments on our line of credit were $33.0 million in 2023 and net borrowings were $32.0 million in 2022.

During 2023, we purchased 164,540 shares of our common stock at a cost of $1.8 million compared to 434,107 shares at a cost of $13.0 million during 2022.

1 unchanged sentence

Additionally, potential future repurchases of shares of our common stock will impact our cash flows used for financing activities.

Given the recent decrease in the price of our common stock, we may opportunistically purchase shares of our common stock.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - Notes to Consolidated Financial Statements - Note 14" for further information regarding our share repurchase programs.

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Credit Line $ 55,000 $ 55,000 $ — $ — $ —

$ 88,000 $ 88,000 $ — $ — $ —

Inventory purchases 7,498 7,498 — — —

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Total material cash commitments $ 90,229 $ 70,816 $ 9,337 $ 5,698 $ 4,378

(1) We expect to renew our credit agreement with U.S.

Bank, for an additional two years, prior to its expiration.

We anticipate meeting our material cash commitments with our cash generated from operations and available borrowing resources, including our Credit Line.

We anticipate meeting our material cash commitments with our cash generated from operations and available borrowing on our Credit Line.

Recent Accounting Pronouncements

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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-K

Item 7. Management’s Discussion and Analysis