Quarterly Report for Quarter Ending June 30, 2022 (Form 10-Q)

ck1556898-10q_20220630.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2022

OR

For the transition period from _______ to _______

Commission File Number: 000-55843

Techpoint, Inc.

(Exact Name of Registrant as Specified in its Charter)

2550 N. First Street, #550

San Jose, CAUSA 95131

(Address of principal executive offices) (Zip Code)

(408) 324-0588

(Registrant's telephone number,

including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No ☒

As of August 4, 2022, the registrant had 18,156,599 shares of common stock, $0.0001 par value per share, outstanding.

Table of Contents.

PART I-FINANCIAL INFORMATION

Item 1. Financial Statements.

Techpoint, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts, unaudited)

See accompanying notes to condensed consolidated financial statements.

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Techpoint, Inc.

Condensed Consolidated Statements of Income and Comprehensive Income

(in thousands, except share and per share amounts, unaudited)

See accompanying notes to condensed consolidated financial statements.

2

Techpoint, Inc.

Condensed Consolidated Statements of Stockholders' Equity

(in thousands, except share amounts, unaudited)

See accompanying notes to condensed consolidated financial statements.

3

Techpoint, Inc.

Condensed Consolidated Statements of Stockholders' Equity

(in thousands, except share amounts, unaudited)

See accompanying notes to condensed consolidated financial statements.

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Techpoint, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands, unaudited)

See accompanying notes to condensed consolidated financial statements.

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Techpoint, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Organization and Summary of Significant Accounting Policies

Organization

Techpoint, Inc. (together with its wholly-owned subsidiaries, the "Company") was originally incorporated in California in April 2012 and reincorporated in Delaware in July 2017. The Company is a fabless semiconductor company that designs, markets and sells mixed-signal integrated circuits for multiple video applications in the security surveillance and automotive markets. The Company is headquartered in San Jose, California.

Basis of Consolidation and Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and have been prepared in conformity with generally accepted accounting principles in the United States ("GAAP") and applicable rules and regulations of the Securities and Exchange Commission ("SEC"). All intercompany balances and transactions have been eliminated. The functional currency of each of the Company's subsidiaries is the U.S. dollar. Foreign currency gains or losses are recorded as other income (expense), net in the Condensed Consolidated Statements of Income and Comprehensive Income.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2021 contained in the Company's Annual Report on Form 10-K.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which only include normal recurring adjustments necessary to present fairly the Company's financial position, results of operations and cash flows for the interim periods and are not necessarily indicative of the results to be expected for the full fiscal year or for any other future annual or interim periods.

Revenue Recognition

The Company principally sells its products to distributors who, in turn, sell to original design manufacturers("ODM"), contract manufacturers and design houses. Product revenue consists of sales of mixed-signal integrated circuits into the security surveillance and automotive markets. The Company generally requires advance payments from customers and records these advance payments, or contract liabilities, as customer deposits on its condensed consolidated balance sheet. No stock rotation, price protection or return rights are offered. The Company provides product assurance warranty only and does not offer warranties to be purchased separately. Revenue is recognized when control of the product is transferred to the Company's customers, upon shipment, whereby legal title, risks and rewards of ownership, and physical possession are transferred to the customer.

Use of Management's Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Significant estimates included in the consolidated financial statements include inventory valuation and the valuation allowance for recorded deferred tax assets. These estimates are based upon information available as of the date of the consolidated financial statements. Actual results could differ materially from those estimates.

Certain Significant Risks and Uncertainties

The Company operates in a dynamic industry and can be affected by a variety of factors. For example, any of the following areas could have a negative effect on the Company in terms of its future financial position, results of operations or cash flows: the general state of the U.S., China and world economies; the highly cyclical nature of the industries the Company serves; successful and timely completion of product design efforts; trade restrictions by the United States against the Company's customers in China, or potential retaliatory trade actions taken by China; the loss of any of its larger customers; restrictions on the Company's ability to sell to foreign customers due to additional U.S. or new China trade laws, regulations and requirements; disruptions of the supply chain of components needed for its products; fundamental changes in the technology underlying the Company's products; the hiring, training and retention of key employees; and new product design introductions by competitors.

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The Company has 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.

Management continues to actively monitor the impact of COVID-19 on the Company's financial condition, liquidity, operations, end-customers (including its significant end-customers), distributors, suppliers, industry, and workforce. The extent to which the COVID-19 pandemic impacts the Company's business, prospects and results of operations will depend on future developments, which are highly uncertain, including, but not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating activities can resume. In particular, as economies reopen there have been increases in demand for the Company's products.The COVID-19 pandemic has resulted in a global shortage for semiconductor products due to limited manufacturing capacities as semiconductor suppliers have been unable to rapidly respond to increased demand. Although the Company continues to work with its suppliers as well as its manufacturing partners to secure additional capacity to meet the increased demand, there can be no assurances that such resources will be readily available when needed. The Company has made estimates of the impact of COVID-19 within its financial statements and there may be changes to those estimates in future periods.

Concentration of Customer and Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, investments, and trade receivables. Risks associated with cash and cash equivalents, and investments are mitigated by banking with, and investing in, creditworthy institutions. The Company generally requires advance payments from customers. The Company also performs credit evaluations of its customers and provides credit to certain customers in the normal course of business. The Company has not incurred bad debt write-offs during any of the periods presented.

For each significant customer, or distributor, and significant end-customer, revenue as a percentage of total revenue was as follows:

Concentration of Supplier Risk

The Company currently relies on Taiwan Semiconductor Manufacturing Company Limited and United Microelectronics Corporation (formerly Fujitsu Electronics America, Inc.) to produce substantially all of its semiconductors. Also, it relies on Advanced Semiconductor Engineering, Inc. and Sigurd Microelectronics Corporation to assemble, package and test substantially all of its semiconductors to satisfy substantially all of the Company's production requirements. The failure of any subcontractor to fulfill the production requirements of the Company on a timely basis would adversely impact future results. Although there are other subcontractors that are capable of providing similar services, an unexpected change in either subcontractor would cause delays in the Company's products and potentially result in a significant loss of revenue.

Recently Adopted Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2019-12, which simplifies the accounting for income taxes. The guidance in ASU No. 2019-12 is required for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2020, for public business entities, with early adoption permitted. The Company adopted this guidance on January 1, 2021. The adoption of this guidance did not have a material impact on the Company's condensed consolidated financial statements as of and for the six months ended June 30, 2022 or June 30, 2021.

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Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in more timely recognition of credit losses. The guidance is effective for fiscal years beginning afterDecember 15, 2022 for SEC filers that are eligible to be smaller reporting companies under the SEC's definition, and interim periods within those fiscal years. The Company is currently evaluating the impact this guidance may have on its condensed consolidated financial statements.

2. Balance SheetComponents

Inventory

Inventory consists of the following (in thousands):

Property and Equipment, Net

Property and equipment, net consists of the following (in thousands):

The Company recorded $0.1million of depreciation expense for each of the three months ended June 30, 2022 and 2021, respectively, and $0.2million for each of the six months ended June 30, 2022 and 2021, respectively.

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

Customer Deposits

Customer deposits represent payments received in advance of shipments and fluctuate depending on timing of customer pre-payments and product shipment. Customer deposits were $0.7 million and $0.8 millionas of June 30, 2022 and December 31, 2021,

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respectively. The Company generally expects to recognize revenue from customer deposits during the three month period immediately following the balance sheet date. The Company recognized $0.8 million of revenue from the March 31, 2022 customer deposit balance during the three months ended June 30, 2022, and $0.8million of revenue from the December 31, 2021 customer deposits balance during the three months ended March 31, 2022.

3. Fair Value Measurements of Financial Instruments

Summary of Financial Instruments

The following is a summary of financial instruments (in thousands):

The contractual maturities of available-for-sale securities are presented in the following table (in thousands):

The Company had 16 investments in unrealized loss positions as of June 30, 2022. The investments have been in unrealized loss positions for less than twelve months. The total fair value of such investments is $17.3 million with unrealized losses of approximately $0.1 million as of June 30, 2022. There were no material gross unrealized losses from available-for-sale securities and no material realized gains or losses from available-for-sale securities that were reclassified from accumulated other comprehensive income for the six months ended June 30, 2022.

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For investments in available-for-sale debt securities that have unrealized losses, the Company evaluates (i) whether it has the intention to sell any of these investments and (ii) whether it is more likely than not that it will be required to sell any of these investments before recovery of the entire amortized cost basis. Based on this evaluation, the Company determined that there were no other-than-temporary impairments associated with investments as of June 30, 2022.

There were no sales of available-for-sale securities for the six months ended June 30, 2022 and 2021.

Fair Value Measurements

Fair value is defined as the exchange price that would be received from selling an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company measures financial assets and liabilities at fair value at each reporting period using a fair value hierarchy which requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs. A financial instrument's classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:

Level 1. Quoted prices in active markets for identical assets or liabilities.

Level 2. Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3. Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

Financial assets measured at fair value on a recurring basis were as follows (in thousands):

The Company classifies money market funds in Level 1 since the financial assets consist of securities for which quoted prices are available in an active market.

In addition, the Company classifies corporate bonds and commercial paper in Level 2 since the financial assets use observable inputs including quoted prices in active markets for similar assets or liabilities. The Company uses a pricing service to assist in determining the fair values of all of its cash equivalents, short-term investments and long-term investments. The pricing service uses inputs from multiple industry standard data providers or other third party sources and applies various acceptable methodologies.

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4. Segment Information

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

The Company's chief operating decision maker, the chief executive officer, reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance on a regular basis. Accordingly, the Company considers itself to be one reportable segment, which is comprised of one operating segment - the designing, marketing and selling of mixed-signal integrated circuits for the security surveillance and automotive markets.

Product revenue from customers is designated based on the geographic region to which the product is delivered. Revenue by geographic region was as follows (in thousands):

Revenue by principal product lines was as follows (in thousands):

Long-lived assets by geographic region were as follows (in thousands):

5. Commitments and Contingencies

Operating leases

The Company determines if an arrangement contains a lease at inception. The Company leases facilities under non-cancelable lease agreements expiring through fiscal year 2024. The Company's agreements do not include variable lease payments or any restrictions or covenants imposed by the leases. As the rate implicit in each lease agreement is not readily determinable, the Company's incremental borrowing rate was used as the discount rate. The Company's right-of-use assets and lease liabilities have been adjusted for initial direct costs and prepaid rent but do not reflect any options to extend or terminate its lease agreements, any residual value guarantees, or any leases that have not yet commenced.

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The right-of-use assets and lease liabilities related to operating leases were as follows (in thousands):

Rent expense under operating leases was $0.2million for each of the three months ended June 30, 2022 and 2021, respectively. Rent expense under operating leases was $0.4million for each of the six months ended June 30, 2022 and 2021, respectively.

The rent expense recognized from short-term leases was $6,000for each of the three months ended June 30, 2022 and 2021, respectively. The rent expense recognized from short-term leases was $12,000 for each of the six months ended June 30, 2022 and 2021, respectively.

The following tables summarize the Company's lease costs and weighted-average assumptions used in determining its right-of-use assets and lease liabilities (in thousands):

During the six months ended June 30, 2021, the Company modified one existing operating lease. The lease modification was not treated as a separate contract as no additional right-of-use was granted and was accounted for as non-cash change in existing lease liabilities and the right-of-use assets.

As ofJune 30, 2022, the aggregate future minimum lease payments under non-cancelable operating leases consist of the following (in thousands):

Purchase Commitments

As of June 30, 2022, the Company had purchase commitments with its third-party suppliers through fiscal year 2025. Future minimum payments under purchase commitments total $3.5 million for the remaining six months ending December 31, 2022, $0.4 million for the year ending December 31, 2023, $0.4 million for the year ending December 31, 2024 and $0.1 million for the year ending December 31, 2025.

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Litigation

Although the Company is not currently a party to any legal proceedings and there is no litigation currently threatened, the Company may be subject to legal proceedings, claims and litigation, including intellectual property litigation, arising in the ordinary course of business. Such matters are subject to many uncertainties and outcomes and are not predictable with assurance. The Company accrues amounts that it believes are adequate to address any liabilities related to legal proceedings and other loss contingencies that the Company believes will result in a probable loss that is reasonably estimable.

Indemnification

During the normal course of business, the Company may make certain indemnities, commitments and guarantees which may include intellectual property indemnities to certain of its customers in connection with the sales of the Company's products and indemnities for liabilities associated with the infringement of other parties' technology based upon the Company's products. The Company's exposure under these indemnification provisions is generally limited to the total amount paid by a customer under the agreement. However, certain agreements include indemnification provisions that could potentially expose the Company to losses in excess of the amount received under the agreement. In addition, the Company indemnifies its officers, directors and certain key employees while they are serving in good faith in such capacities.

The Company has not recorded any liability for these indemnities, commitments and guarantees in the accompanying condensed consolidated balance sheets. Where necessary, the Company accrues for losses for any known contingent liabilities, including those that may arise from indemnification provisions, when future payment is probable.

6. Stockholders' Equity

Preferred Stock

The Company was authorized to issue 5,000,000 shares of preferred stock with a $0.0001 par value per share as of June 30, 2022 and December 31, 2021. There were no shares of preferred stock issued and outstanding as of June 30, 2022 and December 31, 2021.

Common Stock

The Company was authorized to issue 75,000,000 shares of common stock with $0.0001 par value per share as of June 30, 2022and December 31, 2021. As of June 30, 2022,the shares of common stock issued and outstanding totaled 18,108,593 and there were no shares subject to repurchases related to the early exercise of options to purchase common stock. As of December 31, 2021, the shares of common stock issued and outstanding were 17,928,748, excluding 334 legally issued shares subject to repurchase related to the early exercise of options to purchase common stock.

The Company has reserved the following number of shares of common stock for future issuances:

Dividend

On December 22, 2021, the Company announced a special cash dividend of an aggregate of $0.50 per share for fiscal 2022, payable in two equal installments of $0.25 per share. The first installment of the dividend was paid in February 2022 to stockholders of record on January 31, 2022. On June 2, 2022, the Company announced that the second installment payment of its cash dividend of an aggregate of $0.25 on shares of its common stock (including common stock underlying its Japanese Depositary Shares ("JDS")) was paid on July 18, 2022 to stockholders of record as of June 30, 2022.

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7. Stock Option Plan

Stock Incentive Plan

In April 2012, the Company adopted a 2012 Stock Option Plan ("2012 Plan"). The 2012 Plan provides for the granting of stock-based awards to employees, directors, and consultants under terms and provisions established by the Company's board of directors. Under the terms of the 2012 Plan, options may be granted at an exercise price not less than fair market value. For employees holding more than 10% of the voting rights of all classes of stock, the exercise prices for incentive and non-statutory stock options must be at least 110% of the fair market value of the common stock on the grant date, as determined by the Company's board of directors. The terms of options granted under the 2012 Plan may not exceed ten years.

The 2012 Plan was superseded by a 2017 Stock Option Plan ("2017 Plan"). Any outstanding awards under the 2012 Plan will continue to be governed by the terms of the 2012 Plan.

In August 2017, the Company adopted the 2017 Plan. The Company's stockholders approved the 2017 Plan in September 2017 and it became effective immediately prior to the closing of the Company's initial public offering. In connection with the adoption of the 2017 Plan, noadditional awards and no shares of common stock remain available for future issuance under the 2012 Plan and shares reserved but not issued under the 2012 Plan as of the effective date of the 2017 Plan were included in the number of shares reserved for issuance under the 2017 Plan. In addition, shares subject to awards under the 2012 Plan that are forfeited or terminated are added to the 2017 Plan. The number of shares available for issuance under the 2017 Plan is automatically increased on the first day of each fiscal year beginning on January 1, 2018 and ending on (and including) January 1, 2027, in an amount equal to the lesser of (1) 4% of the outstanding shares of the Company's common stock on the last day of the immediately preceding fiscal year, or (2) another amount determined by the Company's board of directors. The automatic increase in the number of shares available for issuance under the 2017 plan for the fiscal year 2022 was 717,163 shares. The 2017 Plan provides for the granting of incentive stock options within the meaning of Section 422 of the Internal Revenue Code to employees and the granting of non-statutory stock options to employees, non-employee directors, advisors and consultants. The 2017 Plan also provides for the grants of restricted stock, stock appreciation rights, stock unit and cash-based awards to employees, non-employee directors, advisors and consultants.

The Company's stock award activity under the stock incentive plan is summarized as follows:

Stock Options

The Company's stock option activity under the stock incentive plan is summarized as follows:

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The stock options outstanding and exercisable by exercise price at June 30, 2022 are as follows:

The aggregate intrinsic value of options exercised for the six months ended June 30, 2022 and 2021 was $1.1 million and $0.5 million, respectively. The Company has various vesting agreements with its employees. Options granted generally vest over a five-yearperiod and generally are exercisable for up to 10 years.

Restricted Stock Units

The Company's restricted stock units activity is summarized as follows:

Restricted stock units are converted into shares of the Company's common stock upon vesting on a one-for-one basis. Restricted stock unit awards generally vest over a five-yearperiod and are subject to the grantee's continued service with the Company.

8. Stock-Based Compensation

The following table summarizes the distribution of stock-based compensation expense (in thousands):

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9. Net Income Per Share

The following table presents the calculation of basic and diluted net income per share (amounts in thousands, except per share data):

The potentially dilutive shares of common stock outstanding for the three months ended June 30, 2022 and 2021 that were excluded from the computation of diluted net income per share as the effect would have been antidilutive, was approximately 61,000 and 9,000 shares, respectively. The potentially dilutive shares of common stock outstanding for the six months ended June 30, 2022 and 2021 that were excluded from the computation of diluted net income per share for the periods presented as the effect would have been antidilutive was 29,000 and 21,000 shares, respectively.

10. Provision for Income Taxes

The components of income before income taxes were as follows (in thousands):

The components of the provision for income taxes were as follows (in thousands):

As of June 30, 2022, there was no material increase in the liability for unrecognized tax benefits and no accrued interest or penalties related to uncertain tax positions.

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As ofJune 30, 2022, the Company had approximately $0.4 million of unrecognized tax benefits of which $0.3 million was netted against deferred tax assets with a full valuation allowance. If these amounts are recognized, there will be a tax benefit of $0.1 million against the Company's effective tax rate.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Information Regarding Forward-Looking Statements

This Quarterly Report on Form10-Q includes forward-looking statements. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, 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:

In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q is as of the date on which it is filed with the Securities and Exchange Commission ("SEC"). We do not intend to update any of these forward-looking statements after the date of this Quarterly Report on Form 10-Q, except as required by law.

General Background

The following discussion and analysis should be read together with our condensed consolidated financial statements and the notes to those statements that appear in this Quarterly Report on Form 10-Q and our consolidated financial statements and the notes to those statements that appear in our Annual Report on Form 10-K for the year ended December 31, 2021. This discussion contains forward-looking statements based on our current expectations, assumptions, estimates and projections. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those indicated in these forward-looking statements as a result of certain factors, as more fully described in "Risk Factors" in this Quarterly Report on Form 10-Q.

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In this Quarterly Report on Form 10-Q, unless otherwise specified or the context otherwise requires, "Techpoint," "we," "us," and "our" refer to Techpoint, Inc. and its consolidated subsidiaries.

We have obtained or are in the process of obtaining registered trademarks for Techpoint and HD-TVI. This Quarterly Report on Form 10-Q 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 216 million integrated circuits. Our revenue was $33.1 million and $30.2 million for the six months ended June 30, 2022 and 2021, respectively. The automotive market accounted for 58% and 48% of our revenue for the six months ended June 30, 2022 and 2021, respectively. The security surveillance market accounted for 42% and 52% of our revenue for the six months ended June 30, 2022 and 2021, respectively. We recognized $14.0 million and $15.7 million of revenue on sales into the security surveillance market for the six months ended June 30, 2022 and 2021, respectively. In addition, we recognized $19.1 million and $14.5 million of revenue on sales into the automotive market for the six months ended June 30, 2022 and 2021, respectively. We recorded net income of $8.5 million and $8.5 million for the six months ended June 30, 2022 and 2021, respectively.

We sell our products to distributors that fulfill third-party orders for our products. We also sell directly to original design manufacturers ("ODM"). For the six months ended June 30, 2022 and 2021, we derived substantially all of our revenue from products sold to distributors as compared to products sold to 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 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 three months ended June 30, 2022 and 2021, our research and development expense was $2.3 million and $1.4 million, respectively, and for the six months ended June 30, 2022 and 2021, our research and development expense was $4.2 and $2.7 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 of June 30, 2022, we had 81 employees, 27 of whom

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are in research and development. Our headquarters are located in San Jose, California, with additional operations in Japan, Taiwan, China and South Korea.

Effective October 9, 2019, the U.S. Commerce Department's Bureau of Industry and Security ("BIS") added Hikvision, a customer that represented 36% and 37% of our revenue for the six months ended June 30, 2022 and 2021, respectively, to the BIS Entity List with a license requirement for all items subject to the Export Administration Regulations ("EAR"). Hikvision represented 36% and 32% of our revenue for the three months ended June 30, 2022 and 2021, respectively. 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 experts 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 a U.S. export license, even though Hikvision appears on the BIS Entity List.

On November 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. On June 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 as Chinese 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.

On November 11, 2021, President Biden signed into law the Secure Equipment Act of 2021, which requires the U.S. Federal Communications Commission ("FCC") to adopt rules no later than November 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 the FCC'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 into the United States but are currently not expected to directly impact our business. This may or may not 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 because Hikvision continues to sell its currently approved products in the U.S. and because other manufacturers that incorporate our products could take market share from Hikvision in the U.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 enacted, which would limit Hikvision's ability to import its products into the U.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 when regulations are enacted and which may impact the importation of certain of Hikvision's future products into the U.S.

The above conclusions are as of the date of filing of this Quarterly Report on Form 10-Q. It is possible that changes in U.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.

As our products are primarily sold in Asia, we are particularly impacted by shutdowns and government actions in the countries impacted in that region. We continue to actively monitor the impact of COVID-19 on our financial condition, liquidity, operations, suppliers, industry, and workforce and accommodate and comply with regional restrictions as appropriate. These actions include monitoring the impact on our workforce and the economic impact on our customers and markets. We have made estimates of the impact of COVID-19 within our financial statements and there may be changes to those estimates in future periods.

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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 the U.S., Japan, China, South Korea and Taiwan 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. These measures by government authorities 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 six months ended June 30, 2022.

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. Hikvision, the largest security surveillance manufacturer in China, as previously noted, is one of our significant end-customers. 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 on August 13, 2019 and prohibits U.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. On July 14, 2020, the U.S. government issued an interim final rule that implements Section 889(a)(1)(B) effective as of August 13, 2020. This rule prohibits the U.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 the U.S., which we understand is the predominant business Hikvision does in the U.S. with video surveillance products that incorporate our products, the impact of these new regulations and the uncertainty of U.S. and China trade relations may adversely impact our business in the future with Hikvision and other significant customers.

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. However, due to the current global shortage of manufacturing capacity for semiconductors, manufacturing costs have been increasing. This has resulted in us increasing the prices we charge our customers. Nevertheless, consistent with the historical trend, we expect that the average selling prices of our products will, in the longer term, decline as our product lines 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 in the United States after May 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

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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 the Asia-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 developments.

Components of Condensed Consolidated Statements of Income

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 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.

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 a U.S. company that is publicly traded in Japan, 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 deduction and stock-based compensation deduction.

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Results of Operations

The following table sets forth our condensed consolidated results of operations for the periods shown (in thousands):

The following table sets forth the condensed consolidated statements of income for each of the periods as a percentage of revenue:

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Comparison of the Three and Six Months Ended June 30, 2022 and June 30, 2021

Revenue

The components of revenue are as follows (dollars in thousands):

Revenue increased $1.4 million, or 9%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. This was primarily attributable to a $1.4 million increase in automotive market revenue as a result of an increase in average selling prices attributable to product mix, offset by a decrease in volume of shipments. Security surveillance revenue increased $60,000 due to an increase in average selling prices attributable to product mix offset by a decrease in volume of shipments.

Revenue increased $2.9 million, or 10%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. This was primarily attributable to a $4.6 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 $1.7 million decrease in security surveillance revenue due to a decrease in the volume of shipments and decrease in average selling price attributable to product mix.

Our product pricing has increased in our target markets in response to our increased manufacturing costs. Additionally, fluctuations in our overall average selling price are directly attributable to changes in product mix given the natural pricing variation of the products in our portfolio. When the product mix shifts towards the higher priced products in our portfolio, the average selling price will be higher than when the product mix shifts towards the lower price point products.

Revenue by geographic region

The table below sets forth revenue by geographic region as a percent of total revenue for the periods presented:

Cost of revenue and gross margin (dollars in thousands)

Cost of revenue increased by $0.9 million, or 13%, and gross margin decreased to 55% from 57% for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 due toincreased production costs. Cost of revenue increased by $0.9 million, or 7%, and gross margin increased to 56% from 55% for the six months ended June 30, 2022 and 2021, respectively. Gross margin for the six months ended June 30, 2022 was positively impacted by increased average unit selling prices and changes in

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product 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 (dollars in thousands)

Research and development expenses increased $0.9 million, or 66%, for the three months ended June 30, 2022as compared to the three months ended June 30, 2021, primarily due to a $1.0 million increase in tape-out and design services, offset by a $0.1 million decrease in personnel-related and software expenses.

Research and development expenses increased $1.6 million, or 58%, for the six months ended June 30, 2022as compared to the six months ended June 30, 2021, primarily due to a $1.3 million increase in tape-out and design services, $0.1 million increase in personnel-related expense, $0.1 million increase in software expenses, and a $0.1 million increase in other miscellaneous expenses.

Selling, general and administrative expense (dollars in thousands)

Selling, general and administrative expenses increased $0.2 million, or 8%, for the three months ended June 30, 2022as compared to the three months ended June 30, 2021, primarily due to an increase in personnel-related expense.

Selling, general and administrative expenses increased $0.7 million, or 17%, for the six months ended June 30, 2022as compared to the six months ended June 30, 2021, primarily due to an increase in personnel-related expense.

Other income (expense), net (dollars in thousands)

Other income (expense), net decreased $63,000 for the three months ended June 30, 2022 as compared to thethree months ended June 30, 2021, primarily due to losses related to foreign currency exchange transactions and foreign currency fluctuations. Other income (expense), net decreased $0.1 million for the six months ended June 30, 2022 as compared to thesix months ended June 30, 2021, primarily due to losses related to foreign currency exchange transactions and foreign currency fluctuations.

Provision for income taxes (dollars in thousands)

The provision for income taxes decreased $0.1 million, or 16%, for the three months ended June 30, 2022as compared to the three months ended June 30, 2021, primarily due to an increase in the foreign-derived intangible income deduction and capitalization of research and development expenses for tax purposes.

The provision for income taxes decreased $0.4 million, or 27%, for the six months ended June 30, 2022as compared to the six months ended June 30, 2021, primarily due to an increase in the foreign-derived intangible income deduction and capitalization of research and development expenses for tax purposes.

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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. In the fourth quarter of 2021, our Board of Directors adopted a dividend policy to link dividend payments to business performance on an ongoing basis. During the six months ended June 30, 2022, cash used in financing activities consists primarily of $4.5 million in dividend payments to our common shareholders under this recently adopted dividend policy. On June 2, 2022, we announced the second installment payment of our cash dividend to stockholders of record as of June 30, 2022 whichwas paid on July 18, 2022.

Our cash, cash equivalents, and short-term investments as of June 30, 2022 were $49.1 million. We believe our existing cash, cash equivalents, short-term investments, and cash we expect to generate from operations in the future 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, or issue 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 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):

Operating Activities

Our primary source of cash from operating activities has been from cash collections from our customers. We expect cash flows 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 six months ended June 30, 2022, net cash provided by operating activities was $10.4 million, primarily due to net income of $8.5 million, non-cash charges of $1.2 million and net cash inflows from changes in operating assets and liabilities of $0.8 million.

Non-cash charges primarily consisted of stock-based compensation of $1.0 million, operating lease amortization of $0.4 million, an increase in the inventory valuation allowance of $0.4 million and depreciation and amortization of $0.2 million, partially offset by an increase in deferred tax assets of $0.8 million.

Net cash inflows from changes in operating assets and liabilities totaled $0.8 million, primarily consisting of a $1.2 million increase in accrued expenses due to timing of payments to vendors, a $0.3 million decrease in accounts receivable due to timing of receipts from customers versus shipment of units, and a $0.2 million decrease in prepaid expenses due to timing of payments, partially offset by a $0.6 million increase in inventory, as units manufactured during the period and on hand were in excess of product sales, and a $0.3 million decrease in lease and other liabilities.

During the six months ended June 30, 2021, net cash provided in operating activities was $9.3 million, primarily due to net income of $8.5 million, non-cash charges of $1.4 million and net cash outflows from changes in operating assets and liabilities of $0.6

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million. Non-cash charges primarily consisted of stock-based compensation of $0.8 million, depreciation and amortization of $0.2 million, and noncash lease expense of $0.4 million.

Net cash outflows from changes in operating assets and liabilities of $0.6 million, primarily consisting of a $3.2 million increase ininventory as units manufactured during the period and on hand were in excess of product sales, a $0.4 million decrease in accrued expenses due to the timing of payments to vendors and a $0.4 million cash outflow in lease and other liabilities, partially offset by a $2.5 million increase in customer deposits due to the timing of customer pre-payments, a $0.7 million increase in accounts payable due to the timing of vendor from payments, and a $0.2 million cash increase in prepaid expenses due to the timing of payments.

Investing Activities

During the six months ended June 30, 2022, cash used in investing activities was $0.6 million, primarily consisting of $6.5 million in investments in debt securities and $0.4 million in purchases of property and equipment, which is partially offset by $6.3 million in proceeds from maturities of debt securities.

During the six months ended June 30, 2021, cash provided by investing activities was $10.6 million, primarily consisting of $10.7 million in proceeds from maturities of debt securities partially offset by $0.1 million in purchases of property and equipment.

Financing Activities

During the six months ended June 30, 2022, cash used in financing activities was approximately $4.5 million, primarily due to the payment of $4.5 million in dividend payments. Other inflows consisted of proceeds from exercise of stock options, offset by payments for tax withholdings due to vesting of restricted stock units.

During the six months ended June 30, 2021, cash provided by financing activities was approximately $3,000, primarily due to $93,000 in net proceeds from the exercise of stock options, offset by $90,000 in payments for shares withheld for tax withholdings on vesting of restricted stock units.

Contractual Obligations

Our outstanding contractual obligations as of June 30, 2022 are summarized in the following table (in thousands):

Obligations under contracts that we can cancel without a significant penalty are not included in the table above. We believe our cash provided by operations is sufficient to satisfy our contractual obligations for all periods presented.

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 Policies, Significant Estimates and Judgments

Our financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We evaluate our estimates, assumptions, and judgments on an ongoing basis. Our estimates, assumptions and judgments are based on historical experience and various other factors that we believe to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our financial statements, which, in turn, could change the results from those reported. Please see Note 1 of Part I, Item 1 of this Quarterly Report on Form 10-Q for a summary of significant accounting policies and Item 7 "Critical Accounting Estimates" of our Annual Report on Form 10-K for a summary of our critical accounting estimates.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risk from fluctuations in foreign currency exchange rates and interest rates, which may adversely affect our results of operations and financial condition. We seek to minimize these risks through regular operating activities. We do not purchase, hold or sell derivative financial instruments for trading or speculative purposes.

Foreign exchange rates

We transact business globally and are subject to risks associated with fluctuating foreign exchange rates. Substantially all of our revenue was derived from sales outside of the U.S. in the three and six months ended June 30, 2022 and 2021. This revenue is generated in U.S. dollars with sales through distributors worldwide. Our operating expenses are denominated in the currencies of the countries in which our subsidiaries are located and may be subject to fluctuations due to changes in foreign currency exchange rates. To date, we have not entered into any hedging contracts, but may elect to do so in the future. A hypothetical increase or decrease of 10% in foreign exchange rates for the three and six months ended June 30, 2022 and 2021 would not have resulted in a significant increase or decrease in revenue or net income during that period.

The U.S. dollar is the functional currency for all of our foreign operations. Monetary assets and liabilities denominated in foreign currencies are remeasured into the functional currency of the subsidiary at the balance sheet date. The gains and losses from remeasurement of foreign currency denominated balances into the functional currency of the subsidiary are included in other income (expense), net on our Condensed Consolidated Statements of Income and Comprehensive Income.

Interest rates

Our exposure to market risk for changes in interest rates relates primarily to our cash, cash equivalents and investments. Our cash, cash equivalents and investments consist primarily of cash, money market funds, corporate notes and bonds, and commercial paper. The primary objectives of our investment activities are the preservation of capital, the maintenance of liquidity, and capturing a market rate of return. We seek to minimize riskby investing cash in excess of our operating needs in high-quality instruments issued by highly creditworthy financial institutions. We do not purchase investments for trading or speculative purposes. Due to the nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Decreases in interest rates, however, would reduce future interest income.

A hypothetical increase or decrease of 10% in interest rates in the three and six months ended June 30, 2022 and 2021 would not have resulted in a significant increase or decrease in cash, cash equivalents or the fair value of our investment during those periods.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on management's evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective at a reasonable assurance level.

In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three months ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management continues to monitor the impact of the COVID-19 pandemic on our financial condition, liquidity, operations, suppliers, industry, and workforce. Additionally, we have undertaken measures to protect our employees, suppliers, and customers, including encouraging, and in many cases requiring employees to work remotely as appropriate. We have also modified some of our internal control procedures, but those changes have not been significant and have not materially affected and are not reasonably likely to materially affect our internal control over financial reporting.

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PART II-OTHER INFORMATION

Item 1. Legal Proceedings.

Although we are not currently a party to any legal proceedings, and no legal proceeding is currently threatened against us,we may be subject tolegal proceedings,claims and litigation, including intellectual property litigation, arising in the ordinary course of business. Such matters are subject to many uncertainties and outcomes and are not predictable with assurance. We accrue amounts that we believe are adequate to address any liabilities related to legal proceedings and other loss contingencies that we believe may result in a probable loss that is reasonably estimable.

Item 1A. Risk Factors.

There have been no material changes to the previously disclosed risk factors discussed in "Part I, Item 1A, Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2021. You should consider carefully these factors, together with all of the other information in this Quarterly Report on Form 10-Q, including our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, before making an investment decision.

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Item 6. Exhibits.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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