TECHPOINT, INC. Information Regarding Forward-Looking Statements
This Annual Report on Form10-K includes forward-looking statements. All statements other than statements of historical facts contained in this Annual Report on Form 10-K, including statements regarding our future results of operations and financial position, strategy and plans, and our expectations for future operations, are forward-looking statements. The words "anticipate", "believe," "continue," "could," "design," "estimate," "intend," "may," "plan," "project," "will," "expect," or the negative version of these words and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including the following:
• our future financial performance, including our revenue, cost of sales and
operating expenses;
• our market opportunity and our ability to effectively manage or sustain
our growth;
• our ability to attract and retain end-customers in our current or future
target markets;
• our ability to continue to develop new technologies and obtain and
maintain intellectual property rights protecting such technologies;
• our ability to form and expand partnerships with technology partners and
consulting partners;
• our ability to maintain, protect and enhance our intellectual property;
• our ability to successfully defend litigation brought against us; • new product releases and timing;
• anticipated trends, key factors and challenges in our business and the
competition that we face;
• the effect of the COVID-19 pandemic on our business and the success of any
measures we have taken or may take in the future in response thereto;
• laws and regulations applicable to our business, including the impact of
restrictions imposed by trade regulations;
• the impact of global shortages in manufacturing capacities;
• our liquidity and working capital requirements; and
• our expectations regarding future expenses and investments.
In light of these risks, uncertainties and assumptions, the forward-looking
events and circumstances discussed in this Annual Report on Form 10-K may not
occur, and actual results could differ materially and adversely from those
anticipated or implied in the forward-looking statements. Although we believe
that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, level of activity, performance
or achievements. Any forward-looking statement made by us in this Annual Report
on Form 10-K speaks only as of the date on which it is made. We do not intend to
update any of these forward-looking statements after the date of this Annual
Report on Form 10-K, except as required by law.
The following discussion and analysis should be read together with the
consolidated financial statements and related notes that appear in this Annual
Report on Form 10-K. This discussion contains forward-looking statements based
upon current expectations, assumptions, estimates and projections. These
forward-looking statements involve risks and uncertainties. Our actual results
may differ materially from those indicated in these forward-looking statements
as a result of certain factors, as more fully described in "Risk Factors"
included in Part I, Item 1A or in other parts of this Annual Report on Form
10-K. A discussion of changes in our results from the year ended December 31,
2021 has been omitted from this Annual Report on Form 10-K and may be found in
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" of our Annual Report on
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Form 10-K for the year ended
We have obtained or are in the process of obtaining registered trademarks for Techpoint and HD-TVI. This Annual Report on Form 10-K contains references to our trademarks and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to in this report, including logos, artwork and other visual displays, may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies' trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.
Overview
We are a fabless semiconductor company that designs, markets and sells
mixed-signal integrated circuits for multiple video applications in the security
surveillance and automotive markets. Our integrated circuits are enabling the
transition from standard definition ("SD") video to high-definition ("HD") video
in the security surveillance and automotive markets.
Our solutions take HD video signals from a camera and convert them into analog
signals for reliable long-distance transmission, then convert the HD analog
signal into the appropriate format for video processing and display. Our HD
analog technology operates at the same 1080p HD resolution as digital HD, but
processes video in an HD analog format and transmits the video in this same
analog format, thereby eliminating the need for any compression or
decompression. Our integrated circuits are based on our proprietary architecture
and mixed signal technologies that we believe provide high video quality, enable
high levels of integration and are cost effective. Our integrated circuits are
used by security surveillance manufacturers, such as Hikvision in China , IDIS in
South Korea and AVTech in Taiwan . These three manufacturers are each a leading
security surveillance manufacturer in their respective countries.
We derive our revenue from sales of our mixed-signal integrated circuits into
the security surveillance and automotive markets. We began shipping our products
in 2013 and to date, we have sold over 329 million integrated circuits. Our
revenue was $65.1 million and $64.7 million for the years ended December 31,
2022 and 2021, respectively. The automotive market accounted for 60% and 50% of
our revenue for the years ended December 31, 2022 and 2021, respectively.
Meanwhile, the security surveillance market accounted for 40% and 50% of our
revenue for the years ended December 31, 2022 and 2021, respectively. We
recognized $39.0 million and $32.1 million of revenue on sales into the
automotive market for the years ended December 31, 2022 and 2021, respectively.
In addition, we recognized $26.1 million and $32.6 million of revenue on sales
into the security surveillance market for the years ended December 31, 2022 and
2021, respectively. We recorded net income of $17.7 million and $17.3 million
for the years ended December 31, 2022 and 2021, respectively.
We sell our products to distributors that fulfill third-party orders for our
products. We also sell directly to Original Equipment Manufacturers ("OEM") and
original design manufacturers ("ODM"). For the years ended December 31, 2022 and
2021, we derived substantially all of our revenue from products sold to
distributors as compared to products sold to OEM/ODM directly.
We undertake significant product development efforts well in advance of a
product's release and in advance of receiving purchase orders. Our product
development efforts, which are focused on developing new designs with broad
demand and potential for future derivative products, typically take from six to
twenty-four months until production begins, depending on the product's
complexity. If we secure a design win, we believe the system designer is likely
to continue to use the same or enhanced versions of our product across a number
of their models, extending the life cycles of our products. Conversely, if a
competitor secures the design win, it may be difficult for us to sell into the
end-customer's application for an extended period. Our sales cycle typically
ranges from three to six months for the security surveillance market and one to
three years for the automotive market. Due to the length of our product
development and sales cycle, the majority of our revenue for any period is
likely to be weighted toward products introduced for sale in the prior one or
two years. As a result, our present revenue is not necessarily
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representative of future sales because our future sales are likely to be comprised of a different mix of products, some of which are now in the development stage.
We employ a fabless manufacturing strategy and use market-leading suppliers for all phases of the manufacturing process, including wafer fabrication, assembly, testing and packaging. This strategy significantly reduces the capital investment that would otherwise be required to operate manufacturing facilities of our own. We have made significant investments in research and development in order to develop our products to attract and retain end-customers. For the years endedDecember 31, 2022 and 2021, our research and development expense was$7.8 million and$6.4 million , respectively. Our research and development expenses can vary from period-to-period and can be significantly impacted by the number of tape-outs and new products that we initiate in any given period. As ofDecember 31, 2022 , we had 83 employees, 26 of whom are in research and development. Our headquarters are located inSan Jose, California , with additional operations inJapan ,Taiwan ,China andSouth Korea . EffectiveOctober 9, 2019 , theU.S. Commerce Department's Bureau of Industry and Security ("BIS") added Hikvision, a customer that represented 33% and 38% of our revenue for the years endedDecember 31, 2022 and 2021, respectively, to the BIS Entity List with a license requirement for all items subject to the Export Administration Regulations ("EAR"). The BIS Entity List is a published list of the names of certain foreign persons, including businesses, research institutions, government and private organizations and individuals, that are subject to specific governmental license requirements for the export, reexport and/or transfer of specified items. These license requirements could make it more difficult to ship, or in some cases, prevent the shipment of products to certain foreign persons named on the BIS Entity List. We have taken action to confirm whether our products are subject to EAR. We have retained the continuous assistance of outside advisors and, following Hikvision's designation on the BIS Entity List, performed a comprehensive review of our products and manufacturing operations. Based on that review, we have concluded that our products are not subject to EAR. Therefore, our products may continue to be shipped to Hikvision without aU.S. export license, even though Hikvision appears on the BIS Entity List. OnNovember 12, 2020 ,President Trump issued Executive Order 13959 on Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies which prohibits any transaction in publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities, of any identified Communist Chinese military company, which included Hikvision. OnJune 3, 2021 ,President Biden issued Executive Order 14032 amending the prior Executive Order. As amended, Executive Order 13959 continues to prohibit certain transactions involving the purchase or sale of publicly traded securities of designated companies. Restrictions are applicable to certain entities designated asChinese Military-Industrial Complex Companies who have been placed on the "CMIC List." Hikvision was listed in the Annex to Executive Order 14032 and is currently on the CMIC List. However, Hikvision is not on the Specially Designated Nationals (SDN) List and the restrictions imposed by these Executive Orders are not expected to directly impact our business. OnNovember 11, 2021 ,President Biden signed into law the Secure Equipment Act of 2021, which requires theU.S. Federal Communications Commission ("FCC") to adopt rules no later thanNovember 11, 2022 clarifying that it will no longer review or approve any application for equipment authorization for equipment that is on the list of covered communications equipment or services published by the FCC under section 2(a) of the Secure and Trusted Communications Networks Act of 2019. Items on theFCC's "covered list" include video surveillance and telecommunications equipment produced by Hikvision, to the extent it is used for the purpose of public safety, security of government facilities, physical security surveillance of critical infrastructure, and other national security purposes, including telecommunications or video surveillance services provided by such entity or using such equipment. The restrictions to be imposed by the FCC pursuant to the Secure Equipment Act of 2021 would impact imports of certain Hikvision equipment intothe United States by eliminating the ability of Hikvision to obtain FCC approval for its video surveillance and telecommunications equipment. The FCC is also considering the adoption of new rules to revoke past authorization issued for Hikvision equipment, but the FCC actions taken to date are currently not expected to directly impact our business. This may or may not directly impact our revenue in the future. In the event there is an impact on our revenue, we believe that it would be gradual and limited in scope both because Hikvision continues to sell its currently approved products in theU.S. and because other manufactures that 37 -------------------------------------------------------------------------------- incorporate our products could take market share from Hikvision in theU.S. We believe that our revenue would decrease only a few percentage points even if Hikvision's business is fully impacted by the restrictions to be imposed by the FCC that limit Hikvision's ability to import its future products into theU.S. Additionally, we plan to continue growing our revenue from new and existing customers, thus further limiting the impact of the restrictions to be imposed by the FCC that impact the importation of certain of Hikvision's future products into theU.S. The above conclusions are as of the date of filing of this Annual Report on Form 10-K. It is possible that changes inU.S. regulations or policies in the future may impose restrictions, including the imposition of license requirements or even a full or partial prohibition, on our sale of products to Hikvision.
Key Factors Affecting Our Results of Operations
Macroeconomic and Geopolitical Conditions. We have been impacted by adverse macroeconomic and geopolitical conditions. These conditions include but are not limited to inflation, foreign currency fluctuations, the COVID-19 pandemic and related supply chain challenges and disruptions caused by any of these events. Management continues to actively monitor the impact of these conditions on the Company's financial condition, liquidity, operations, end-customers (including its significant end-customers), distributors, suppliers, industry, and workforce. The extent to which such events impact the Company's business, prospects and results of operations will depend on future developments, which are highly uncertain. As our products are primarily sold inAsia , we are particularly impacted by shutdowns and government actions in the countries in that region. The COVID-19 pandemic continues to have an impact on our business and that of our customers and suppliers. This has resulted in government authorities implementing numerous measures to try to contain the pandemic, such as travel bans and restrictions, quarantines, shelter-in-place or stay-at-home orders, business shutdowns and vaccination efforts. All of our offices in theU.S. ,Japan ,China ,South Korea andTaiwan have been impacted by COVID-19 and have been subject to various measures implemented by local governments to reduce its spread. These measures may adversely impact our employees and operations and the operations of our end-customers (including our significant end-customers), distributors and suppliers, and may negatively impact our sales and marketing activities. Actions taken by government authorities to limit COVID-19 may be re-implemented for a significant period of time, which could adversely affect our sales and marketing activities, product delivery schedule, and our business, financial condition and results of operations. Despite these limitations, we have been able to secure products from our suppliers, fulfill our customers' purchase orders and increase revenues during the year endedDecember 31, 2022 as compared to the previous year. Ability to attract and retain customers that make large orders. While we expect the composition of our end-customers to change over time, our business and operating results depends on our ability to continually target new and retain existing end-customers that make large orders. For the years endedDecember 31, 2022 and 2021, Hikvision, the largest security surveillance manufacturer inChina and one of our end-customers, accounted for 33% and 38% of our revenue, respectively. Although large customers can help us increase our revenue and improve our results of operations, reliance on large customers is a risk to our business. For example, Section 889 of the 2019 National Defense Authorization Act could adversely impact our business with Hikvision. Section 889(a)(1)(A) went into effect onAugust 13, 2019 and prohibitsU.S. government agencies from procuring or obtaining equipment or services that use covered telecommunications equipment or services as a substantial or essential component or critical technology, including certain video surveillance products or telecommunications equipment and services produced or provided by Hikvision. OnJuly 14, 2020 , theU.S. government issued an interim final rule that implements Section 889(a)(1)(B) effective as ofAugust 13, 2020 . This rule prohibits theU.S. government from entering into contracts with persons who use covered telecommunications equipment or services as a substantial or essential component of any system, or as critical technology as part of any system, which again includes certain Hikvision video surveillance products. Although Section 889 does not prohibit commercial sales of video surveillance products by Hikvision in theU.S. , which we understand is the predominant business Hikvision does in theU.S. with video surveillance products that incorporate our products, the impact of these new regulations and the uncertainty ofU.S. andChina trade relations may adversely impact our business in the future with Hikvision and other significant customers. 38 -------------------------------------------------------------------------------- Design wins with new and existing customers. We believe our products provide high-quality HD video with an attractive combination of characteristics, at a lower overall cost than competing solutions. In order to get our solutions designed into our end-customer's products, we work with our end-customers and potential end-customers to understand their product roadmaps and strategies. We consider design wins to be critical to our future success. We define a design win as the successful completion of the evaluation stage, where an end-customer has tested our product, verified that our product meets its requirements and qualified our integrated circuits for their products. We have secured design wins with major automotive manufacturers to sell our solutions to them for automotive backup cameras. The revenue that we generate, if any, from each design win can vary significantly. Our long-term sales expectations are based on forecasts from end-customers, internal estimates of end-customer demand factoring in expected time to market for end-customer products incorporating our solutions and associated revenue potential and internal estimates of overall demand based on historical trends. Pricing, product cost and gross margins of our products. Our gross margin has been and will continue to be affected by a variety of factors, including the timing of changes in pricing, shipment volumes, new product introductions, changes in product mixes, changes in our purchase price of fabricated wafers and assembly and test service costs, manufacturing yields and inventory write downs, if any. In general, newly introduced products and products with higher performance and more features tend to be priced higher than older, more mature products. Average selling prices in the semiconductor industry typically decline as products mature. Consistent with this historical trend, we expect that the average selling prices of our products will decline as they mature. In the normal course of business, we will seek to offset the effect of declining average selling prices on existing products by reducing manufacturing costs and introducing new and higher value-added products. If we are unable to maintain overall average selling prices or offset any declines in average selling prices with realized savings on product costs, our gross margin will decline. Product adoption and safety regulations in the automotive market. We have secured design wins with major automotive equipment manufacturers to sell our solutions to them for automotive backup cameras. Certain jurisdictions have passed laws and regulations requiring that all new cars sold after a certain date must contain back-up cameras, including with respect to cars sold inthe United States afterMay 2018 . If these jurisdictions do not maintain and implement these rules, or if back-up cameras are not put into automobiles sold in other locations as well, or do so more slowly than we expect, our financial results could be adversely affected. Investment in growth. We have invested, and intend to continue to invest, in expanding our operations, increasing our headcount, developing our products and differentiated technologies to support our growth and expanding our infrastructure. We expect our total operating expenses to increase significantly in the foreseeable future to meet our growth objectives. We plan to continue to invest in our sales and support operations throughout the world, with a particular focus in the near term of adding additional sales and field applications personnel in theAsia-Pacific region to further broaden our support and coverage of our existing end-customer base, in addition to developing new end-customer relationships and generating design wins. We also intend to continue to invest additional resources in research and development to support the development of our products and differentiated technologies. Any investments we make in our sales and marketing organization, or research and development will occur in advance of experiencing any benefits from such investments, and the return on these investments may be lower than we expect. In addition, as we invest in expanding our operations into new areas internationally, our business and results will become further subject to the risks and challenges of operations in those locations, including potentially higher operating expenses and the impact of legal and regulatory costs.
Components of Consolidated Income Statements
Revenue
We derive substantially all of our revenue through the sale of our products to
distributors who, in turn, sell to our end-customers, which consists of OEM,
ODM, contract manufacturers and design houses. Revenue is recognized after we
(1) identify the contract with a customer; (2) identify the performance
obligations in the contract; (3) determine the transaction price; (4) allocate
the transaction price to the performance obligations in the contract; and (5)
satisfy the performance obligation when control is transferred to the customer.
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Cost of Revenue
Cost of revenue primarily consists of costs paid to our third-party manufacturers for wafer fabrication, assembly and testing of our products. To a lesser extent, cost of revenue also includes write-downs of inventory for excess and obsolete inventory, depreciation of test equipment, and expenses relating to manufacturing support activities, including personnel-related costs, logistics and quality assurance and shipping.
Research and Development Expenses
Research and development expenses consist primarily of compensation and associated costs of employees engaged in research and development, contractor costs, tape-out costs, development testing and evaluation costs, and depreciation expense. Before releasing new products, we incur charges for mask sets, prototype wafers and mask set revisions, which we refer to as tape-out costs. Tape-out costs may cause our research and development costs to increase in absolute dollars in the future as we increase our investment in new product development and headcount to support our development efforts.
Selling, General and Administrative Expenses
Selling expenses consist primarily of personnel-related costs for our sales, business development, marketing, and applications engineering activities, promotional and other marketing expenses, and travel expenses. We expect selling expenses to increase in absolute dollars for the foreseeable future as we continue to expand our sales teams and increase our marketing activities. General and administrative expenses consist primarily of personnel-related costs, consulting expenses, professional fees and facility costs. Professional fees principally consist of legal, audit, tax and accounting services. We expect general and administrative expenses to increase in absolute dollars for the foreseeable future as we hire additional personnel, make improvements to our infrastructure and incur significant additional costs for the compliance requirements of operating as aU.S. company that is publicly traded inJapan , including higher legal, insurance and accounting expenses. Personnel-related costs, including salaries, benefits, bonuses and stock-based compensation, are the most significant component of each of selling expenses and general and administrative expenses.
Provision for Income Taxes
The provision for income taxes consists of our estimated federal, state and
foreign income taxes based on our pre-tax income. Our provision differs from the
federal statutory rate primarily due to the research and development credit,
foreign derived intangible income (FDII) deduction, stock-based compensation and
change in valuation allowance.
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Results of Operations
The following table sets forth our consolidated results of operations for the periods shown (in thousands):
Year Ended
December 31,
2022 2021
Revenue $ 65,083 $ 64,707
Cost of revenue (1) 29,185 29,660
Gross profit 35,898 35,047
Operating expenses:
Research and development (1) 7,801 6,371
Selling, general and administrative (1) 8,749 8,791
Total operating expenses 16,550 15,162
Income from operations 19,348 19,885
Other income - net 246 29
Income before income taxes 19,594 19,914
Provision for income taxes 1,931 2,627
Net income $ 17,663 $ 17,287
(1) Includes stock-based compensation expense as follows (in thousands):
Year Ended
December 31,
2022 2021
Cost of revenue $ 147 $ 156
Research and development 581 580Selling, general and administrative 1,085 1,109 Total
$ 1,813 $ 1,845
The following table sets forth the consolidated income statements for each period presented as a percentage of revenue:
Year Ended
December 31,
2022 2021
Revenue 100 % 100 %
Cost of revenue 45 46
Gross profit 55 54
Operating expenses:
Research and development 12 10
Selling, general and administrative 13 13
Total operating expenses 25 23
Income from operations 30 31
Other income - net - -
Property and equipment, net 30 31
Provision for income taxes 3 4
Net income 27 % 27 %
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Revenue
Year Ended December 31, Change
2022 2021 Amount %
(dollars in thousands)
Automotive $ 38,985 $ 32,071 $ 6,914 22 %
Security surveillance 26,098 32,636 (6,538 ) (20 )%
Revenue $ 65,083 $ 64,707 $ 376 1 %
Revenue increased by $0.4 million , or 1%, for the year ended December 31, 2022
as compared to the year ended December 31, 2021 . This was attributable to a $6.9
million increase in automotive market revenue as a result of an increase in the
volume of shipments and an increase in average selling price attributable to
product mix, offset by a $6.5 million decrease in security surveillance revenue
due to a decrease in the volume of shipments offset by an increase in average
selling price attributable to product mix.
Revenue by
The table below sets forth revenue by geographic region as a percent of total revenue for the periods presented:
Year Ended
December 31,
2022 2021
China 69 % 69 %
Taiwan 15 16
South Korea 10 11
Japan 4 3
Other 2 1
Total revenue 100 % 100 %
Cost of Revenue and Gross Margin
Year Ended December 31, Change
2022 2021 Amount %
(dollars in thousands)
Cost of revenue $ 29,185 $ 29,660 $ (475 ) (2 )%
Gross margin 55 % 54 %
Cost of revenue decreased $0.5 million , or 2%, for the year ended December 31,
2022 as compared to the year ended December 31, 2021 . Gross margin increased to
55% for the year ended December 31, 2022 from 54% for the year ended December
31, 2021 , due to changes in product mix and market mix. We expect gross margins
to fluctuate in future periods due to changes in customer and product mix,
average unit selling prices, manufacturing costs, adjustments to inventory, if
any, and end market product demand.
Research and Development Expense
Year Ended December 31, Change
2022 2021 Amount %
(dollars in thousands)
Research and development $ 7,801 $ 6,371 $ 1,430 22 %
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Selling, General and Administrative Expense
Year Ended December 31, Change
2022 2021 Amount %
(dollars in thousands)
Selling, general and administrative
(42 ) (0 )%
The change in selling, general and administrative expenses was flat for the year
ended
Other income, net
Year Ended December 31, Change
2022 2021 Amount %
(dollars in thousands)
Other income - net $ 246 $ 29 $ 217 748 %
Other income, net for the year ended
Provision for Income Taxes
Year Ended December 31, Change
2022 2021 Amount %
(dollars in thousands)
Provision for income taxes $ 1,931 $ 2,627 $ (696 ) (26 )%
The provision for income taxes decreased by $0.7 million , or 26%, for the year
ended December 31, 2022 as compared to the year ended December 31, 2021 ,
primarily due to an increase in the foreign-derived intangible income deduction
for tax purposes.
Liquidity and Capital Resources
Our primary use of cash is to fund our operations as we continue to grow our business. Cash used to fund operating expenses is impacted by the timing of when we pay expenses, as reflected in the changes in our outstanding accounts payable and accrued expenses. Our cash, cash equivalents and short-term investments as ofDecember 31, 2022 were$44.7 million . We believe our existing cash, cash equivalents, short-term investments and cash we expect to generate from operations, will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of our spending to support research and development activities, the timing and cost of establishing additional sales and marketing capabilities, the introduction of new and enhanced products and our costs to implement new manufacturing technologies or potentially acquire and integrate other companies or assets. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. Any debt financing obtained by us in the future could also involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. Additionally, if we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. If we are unable to obtain adequate 43
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financing or financing on terms satisfactory to us when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited.
A summary of operating, investing and financing activities are shown in the following table (in thousands):
Year Ended
December 31,
2022 2021
Net cash provided by operating activities $ 19,621 $ 14,247
Net cash (used in) provided by investing activities (18,559 ) 1,183 Net cash (used in) financing activities
(9,049 )
(135 )
Net (decrease) increase in cash and cash equivalents
Operating Activities Our primary source of cash from operating activities has been from cash collections from our customers. We expect cash inflows from operating activities to be affected by fluctuations in sales. Our primary uses of cash from operating activities have been for personnel costs and investments in research and development and sales and marketing. During the year endedDecember 31, 2022 , net cash provided by operating activities was$19.6 million , due to net income of$17.7 million and non-cash charges of$2.3 million , and net cash outflows from changes in operating assets and liabilities of$0.3 million . Non-cash charges primarily consisted of stock-based compensation of$1.8 million , operating lease amortization right-of-use assets of$0.7 million , an increase in the inventory valuation allowance of$0.9 million and depreciation and amortization of$0.4 million , partially offset by an increase in deferred tax assets of$1.7 million . The net cash outflows from changes in operating assets and liabilities totaled$0.3 million , consisting of a$1.1 million increase in inventory, net of valuation adjustment, as units manufactured during the period and on hand were in excess of product sales, and a$0.8 million decrease in accrued expense, lease and other liabilities. Outflows were offset by inflows from a$0.2 million decrease in accounts receivable due to timing of receipts from customers versus shipment of units, a$0.4 million decrease in prepaid expenses due to timing of payments,$0.2 million increase in accounts payable and a$0.8 million increase in customer deposits. Investing Activities During the year endedDecember 31, 2022 , cash used in investing activities was$18.6 million , due to a$30.0 million cash outflow used to purchase debt securities, a$4.0 million cash outflow due to purchases of marketable security and a$0.5 million cash outflow used to purchase of property and equipment, partially offset by a$15.9 million cash inflow due to proceeds from maturities of debt securities. Financing Activities During the year endedDecember 31, 2022 , cash used in financing activities was$9.0 million , due to payment of dividends totaling$9.0 million in February andJuly 2022 , a$0.2 million in payments for shares withheld for tax withholdings on vesting of restricted stock units, partially offset by a$0.2 million in net proceeds from the exercise of stock options. 44
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Material Requirements from Contractual and Other Obligations
We are required to make future payments under certain operating leases. Our
outstanding contractual obligations as of
Payments Due by Period
Total Less than 1 year 1 to 3 years More than 3 years
Operating leases $ 1,035 $ 745 $ 290 $ -
Purchase commitments 854 429 425 -
Total $ 1,889 $ 1,174 $ 715 $ -
See Note 5 to the financial statements for a discussion of our commitments and
contingencies. We believe that the liquidity provided by operating, investing
and financing activities is adequate to meet our contractual obligations as
described above.
Off Balance Sheet Arrangements
During the periods presented, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Estimates
Our accounting policies and recent accounting pronouncements are more fully described in Note 1 of the consolidated financial statements.
Inventory Valuation Allowances
Inventory is valued net of allowances for unsalable or obsolete work in process and finished goods. The valuation allowance is adjusted for excess and obsolete inventory based on inventory age, shipment history and the forecast of demand over a specific future period. Actual future write-offs of inventory for salability and obsolescence reasons may differ from estimates and calculations used to determine valuation allowances due to changes in customer demand, customer negotiations, technology shifts and other factors.
Income Taxes
In determining net income for financial statement purposes, we must make certain estimates and judgments in the calculation of tax provisions and the resultant tax liabilities and in the recoverability of deferred tax assets that arise from temporary differences between the tax and financial statement recognition of revenue and expense. In the ordinary course of global business, there may be many transactions and calculations where the ultimate tax outcome is uncertain. The calculation of tax liabilities involves dealing with uncertainties in the interpretation and application of complex tax laws, and significant judgment is necessary to (i) determine whether, based on the technical merits, a tax position is more likely than not to be sustained and (ii) measure the amount of tax benefit that qualifies for recognition. We recognize potential liabilities for anticipated tax audit issues inthe United States and other tax jurisdictions based on an estimate of the ultimate resolution of whether, and the extent to which, additional taxes will be due. Although we believe the estimates are reasonable, no assurance can be given that the final outcome of these matters will not be different from what is reflected in the historical income tax provisions and accruals. As part of our financial process, we must assess the likelihood that our deferred tax assets can be recovered. If recovery is not likely, the provision for taxes must be increased by recording a reserve in the form of a valuation allowance for the deferred tax assets that are estimated not to be ultimately recoverable. Our judgment regarding future recoverability of our deferred tax assets may change due to various factors, including changes inU.S. or international tax laws and changes in market conditions and their impact on our assessment of taxable income in future periods. These changes, if any, may require adjustments to the valuation allowances and an accompanying reduction or increase in net income in the period when such determinations are made. 45
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