Techpoint, Inc. - Quarter Report: 2019 September (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission File Number: 000-55843

Techpoint, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware

80-0806545

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

2550 N. First Street, #550

San Jose, CA 95131 USA

(408) 324-0588

(Address, including zip code, and telephone number,

including area code, of registrant’s principal executive offices)

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Japanese Depositary Shares, each representing one

Common Stock Share, Par Value $0.0001 Per Share

M-6697

Tokyo Stock Exchange (Mothers Market)

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 November 7, 2019, the registrant had 17,474,907 shares of common stock, $0.0001 par value per share, outstanding.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Stockholders’ Equity	3
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	26
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 6.	Exhibits	28
	Signatures	29

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Techpoint, Inc.

Condensed Consolidated Balance Sheets

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

	September 30,		December 31,
	2019		2018
Assets
Current assets:
Cash and cash equivalents	$	28,005	$	25,941
Accounts receivable		80		236
Inventory		6,851		2,207
Prepaid expenses and other current assets		874		936
Total current assets		35,810		29,320
Property and equipment - net		506		611
Deferred tax assets		575		560
Lease assets		365		—
Other assets		204		215
Total assets	$	37,460	$	30,706
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,500	$	1,063
Accrued liabilities		1,048		718
Liability related to early exercised stock options		85		136
Customer deposits		3,398		2
Lease liabilities		374		—
Total current liabilities		6,405		1,919
Other liabilities		106		156
Total liabilities		6,511		2,075
Commitments and contingencies (Note 5)
Stockholders’ equity
Preferred stock, par value $0.0001 per share - 5,000,000 shares authorized as of September 30, 2019 and December 31, 2018; nil shares issued and outstanding as of September 30, 2019 and December 31, 2018		—		—
Common stock, par value $0.0001 per share - 75,000,000 shares authorized as of September 30, 2019 and December 31, 2018; 17,369,590 and 17,130,507 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively		2		2
Additional paid-in-capital		20,502		19,358
Retained earnings		10,445		9,271
Total stockholders’ equity		30,949		28,631
Total liabilities and stockholders’ equity	$	37,460	$	30,706

See accompanying notes to condensed consolidated financial statements.

Techpoint, Inc.

Condensed Consolidated Statements of Operations

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

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2019		2018			2019		2018
Revenue	$	9,613	$	8,667		$	21,809	$	22,190
Cost of revenue		4,874		4,220			10,862		10,513
Gross profit		4,739		4,447			10,947		11,677
Operating expenses
Research and development		1,686		1,704			4,762		5,493
Selling, general and administrative		1,442		1,899			4,939		5,092
Total operating expenses		3,128		3,603			9,701		10,585
Income from operations		1,611		844			1,246		1,092
Other income (expense)		2		(94	)		41		130
Income before income taxes		1,613		750			1,287		1,222
Income tax provision (benefits)		156		186			113		(16	)
Net income	$	1,457	$	564		$	1,174	$	1,238
Net income per share:
Basic	$	0.08	$	0.03		$	0.07	$	0.07
Diluted	$	0.08	$	0.03		$	0.07	$	0.07
Weighted average shares outstanding in computing net income per share
Basic		17,316,172		17,045,689			17,239,544		16,936,898
Diluted		17,899,140		17,922,635			17,850,360		18,039,404

See accompanying notes to condensed consolidated financial statements.

Techpoint, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share amounts, unaudited)

	Common Stock
	Shares		Amount		Additional Paid-In Capital		Retained Earnings		Total Stockholders' Equity
Balances as of December 31, 2017		16,752,171	$	2	$	17,580	$	7,386	$	24,968
Issuance of common stock upon exercise of stock options and vesting of early exercised options		132,348		—		138		—		138
Stock-based compensation		—		—		270		—		270
Net Income		—		—		—		473		473
Balances as of March 31, 2018		16,884,519	$	2	$	17,988	$	7,859	$	25,849
Issuance of common stock upon exercise of stock options and vesting of early exercised options		114,658		—		122		—		122
Stock-based compensation		—		—		193		—		193
Net Income		—		—		—		201		201
Balances as of June 30, 2018		16,999,177	$	2	$	18,303	$	8,060	$	26,365
Issuance of common stock upon exercise of stock options and vesting of early exercised options		75,459		—		105		—		105
Stock-based compensation		—		—		551		—		551
Net Income		—		—		—		564		564
Balances as of September 30, 2018		17,074,636	$	2	$	18,959	$	8,624	$	27,585

Techpoint, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share amounts, unaudited)

	Common Stock
	Shares			Amount		Additional Paid-In Capital			Retained Earnings			Total Stockholders' Equity
Balances as of December 31, 2018		17,130,507		$	2	$	19,358		$	9,271		$	28,631
Issuance of common stock upon exercise of stock options and vesting of early exercised options		46,666			—		64			—			64
Issuance of common stock upon vesting of RSUs		14,200			—		—			—			—
Shares repurchased for tax withholdings on vesting of RSUs		(1,510	)		—		(7	)		—			(7	)
Stock-based compensation		—			—		336			—			336
Net loss		—			—		—			(618	)		(618	)
Balances as of March 31, 2019		17,189,863		$	2	$	19,751		$	8,653		$	28,406
Issuance of common stock upon exercise of stock options and vesting of early exercised options		38,000			—		36			—			36
Issuance of common stock upon vesting of RSUs		31,300			—		—			—			—
Shares repurchased for tax withholdings on vesting of RSUs		(3,553	)		—		(24	)		—			(24	)
Stock-based compensation		—			—		348			—			348
Net Income		—			—		—			335			335
Balances as of June 30, 2019		17,255,610		$	2	$	20,111		$	8,988		$	29,101
Issuance of common stock upon exercise of stock options and vesting of early exercised options		100,015			—		80			—			80
Issuance of common stock upon vesting of RSUs		17,925			—		—			—			—
Shares repurchased for tax withholdings on vesting of RSUs		(3,960	)		—		(26	)		—			(26	)
Stock-based compensation		—			—		337			—			337
Net Income		—			—		—			1,457			1,457
Balances as of September 30, 2019		17,369,590		$	2	$	20,502		$	10,445		$	30,949

See accompanying notes to condensed consolidated financial statements.

Techpoint, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands, unaudited)

	Nine Months Ended
	September 30,
	2019			2018
Cash Flows From Operating Activities
Net income	$	1,174		$	1,238
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		728			170
Stock-based compensation		1,021			1,014
Write off of deferred costs		—			57
Provision for excess inventories		266			93
Deferred income taxes		(15	)		(69	)
Changes in operating assets and liabilities:
Accounts receivable		156			(255	)
Inventory		(4,910	)		245
Prepaid expenses and other current assets		52			(31	)
Other assets		2			(54	)
Accounts payable		590			259
Accrued expenses		320			401
Customer deposits		3,396			191
Lease liabilities		(280	)		—
Other liabilities		(240	)		17
Net cash provided by operating activities		2,260			3,276
Cash Flows From Investing Activities
Purchase of property and equipment		(267	)		(276	)
Net cash used in investing activities		(267	)		(276	)
Cash Flows From Financing Activities
Net proceeds from exercise of stock options		128			367
Payment for shares withheld for tax withholdings on vesting of restricted stock units		(57	)		—
Payment of deferred costs		—			(57	)
Net cash provided by financing activities		71			310
Net increase in cash and cash equivalents		2,064			3,310
Cash and cash equivalents at beginning of period		25,941			21,536
Cash and cash equivalents at end of period	$	28,005		$	24,846

Supplemental Disclosure of Cash Flow Information
Cash paid for income taxes	$	35		$	43
Supplemental Disclosure of Noncash Investing and Financing Information
Property and equipment purchased but not yet paid	$	33		$	40
Vesting of early exercised options	$	51		$	56

See accompanying notes to condensed consolidated financial statements.

Techpoint, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Organization and Summary of Significant Accounting Policies

Organization

Techpoint, Inc. and its wholly-owned subsidiaries (the “Company”) was originally incorporated in California in April 2012 and reincorporated into 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 its wholly-owned subsidiaries, 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) in the Condensed Consolidated Statements of Operations.

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, 2018 contained in our Annual Report on Form 10-K filed with the SEC on March 15, 2019.

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, or ODMs, contract manufacturers and design houses. The Company adopted ASC Topic 606, or ASC 606, Revenue from Contracts with Customers on January 1, 2018. Under ASC 606, the Company satisfies its performance obligations and primarily recognizes revenue upon shipment, at which time control of its products is transferred to its customers. The Company applies the following five-step model for recognizing revenue from contracts with customers: (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) recognize revenue when the performance obligation is satisfied.

Product revenues consist 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. Since the Company’s performance obligations relate to contracts with a duration of less than one year, the Company has elected to apply the optional exemption practical expedient provided in ASC 606 and is therefore not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. The Company provides product assurance warranty only and does not offer warranties to be purchased separately. The Company does not offer variable consideration or other significant payment terms and allocates the transaction price to each distinct product based on a relative standalone selling price. Revenue is recognized when control of the product is transferred to our customers, upon shipment, at which time the performance obligation is satisfied. The Company’s shipping terms are primarily FOB (free on board) shipping point, whereby legal title, risks and rewards of ownership, and physical possession are transferred to the customer upon shipment. Substantially all of the Company’s customers pay in advance of shipment, and no stock rotation, price protection or return rights are offered.

Use of Management’s Estimates

The preparation of condensed 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 condensed consolidated financial statements include inventory valuation, valuation allowance for recorded deferred tax assets, and stock-based compensation. These estimates are based upon information available as of the date of the condensed consolidated financial statements. Actual results could differ materially from those estimates.

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 and trade receivables. Risks associated with cash and cash equivalents are mitigated by banking with 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 is as follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Customer
Customer A		66	%		70	%		61	%		76	%
End-Customer
End-Customer A (1)		65	%		59	%		50	%		62	%
End-Customer B (1)	*			*				11	%	*

Less than 10%

(1)	Sales to End-Customer A and End-Customer B primarily occurred through Customer A

Recently Adopted Accounting Pronouncements

Stock Compensation Guidance. In June 2018, the FASB issued ASU No 2018-07, Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting, which amends ASC 718 to include share-based payments issued to nonemployees for goods or services. The amendments in this update are effective for annual periods beginning after December 15, 2018, and interim periods therein. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. The Company early adopted this guidance on July 1, 2018 during the third quarter of fiscal 2018, which resulted in no impact on its condensed consolidated financial statements.

Lease Guidance. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to recognize all leases with terms in excess of one year on their balance sheet as a right of use asset and a lease liability at the commencement date. The new standard also simplifies the accounting for sale and leaseback transactions. The amendments in this update are effective for annual periods beginning after December 15, 2018, and interim periods therein and must be adopted using a modified retrospective method for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The new standard also requires lessees and lessors to disclose qualitative and quantitative information about their leases and significant judgements made in applying the standard. The Company adopted this guidance on January 1, 2019 in the first quarter of fiscal 2019 under the modified retrospective transition method approach. The Company elected to use the package of practical expedients and did not reassess whether any expired or existing contracts are or contain leases, the lease classification for any expired or existing leases, or initial direct costs for any existing leases, and the practical expedient to not separate lease and non-lease components. Additionally, the Company elected the short-term lease exception and excluded all leases that are twelve or less months in duration. As a result, financial information for reporting periods beginning after January 1, 2019 are reported under the new standard, while comparative financial information has not been adjusted and continues to be reported in accordance with the previous standard. As a result, the Company recognized $0.8 million of lease assets and $0.9 million of lease liabilities, of which $0.2 million is recorded as non-current lease liabilities on the Company’s Condensed Consolidated Balance Sheet as of January 1, 2019. Additionally upon adoption, there was no impact on the Condensed Consolidated Statement of Operations and no cumulative effect adjustment to retained earnings as of January 1, 2019.

Revenue Recognition Guidance. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, creating ASC 606. Upon adoption, revenue is recognized under a five-step process: 1. Identify the contract(s) with a customer. 2. Identify the performance obligations in the contract. 3. Determine the transaction price. 4. Allocate the transaction price to performance obligations in the contract. 5. Recognize revenue when (or as) the entity satisfies a performance obligation. Additional considerations under this update include accounting for costs to obtain or fulfill a contract with a customer and additional quantitative and qualitative disclosures. ASU 2014-09 became effective for periods beginning after December 15, 2017 (including interim reporting periods within those periods), or the first quarter 2018, and allows for retrospective or modified retrospective application. The Company adopted this guidance in the first quarter of fiscal 2018 under the modified retrospective approach as applied to customer contracts that were not completed as of January 1, 2018. As a result, financial information for reporting periods beginning after January 1, 2018 are reported under the new standard. There was no cumulative impact to adopting the new standard on the Company’s condensed consolidated financial statements.

2. Balance Sheet Components

Inventory

Inventory consists of the following (in thousands):

	September 30,		December 31,
	2019		2018
Work in process	$	2,897	$	961
Finished goods		3,954		1,246
Total inventory	$	6,851	$	2,207

Property and Equipment - Net

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

	September 30,			December 31,
	2019			2018
Computer equipment and software	$	1,321		$	1,173
Leasehold improvements		84			84
Furniture		30			30
Total property and equipment		1,435			1,287
Less: accumulated depreciation		(929	)		(676	)
Total property and equipment - net	$	506		$	611

The Company recorded $0.1 million and $0.1 million of depreciation expense for the three months ended September 30, 2019 and 2018, respectively, and $0.3 million and $0.2 million for the nine months ended September 30, 2019 and 2018, respectively.

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

	September 30,		December 31,
	2019		2018
Payroll-related expenses	$	485	$	398
Accrued warranty		206		73
Engineering services		197		134
Taxes payable		56		28
Professional fees		51		48
Other		53		37
Total accrued liabilities	$	1,048	$	718

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 $3.4 million, $1.1 million and $2,000 as of September 30, 2019, June 30, 2019 and December 31, 2018, respectively. The Company generally expects to recognize revenue from customer deposits during the three month interim period immediately following the balance sheet date. During the three months ended September 30, 2019, the Company recognized $1.0 million of revenue from the June 30, 2019 customer deposits balance. During the nine months ended September 30, 2019, the Company recognized $2,000 of revenue from the December 31, 2018 customer deposits balance.

3. 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 us 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):

	Fair Value Measurement at Reporting Date Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
As of September 30, 2019
Assets:
Money market funds	$	6,992	$	—	$	—	$	6,992
As of December 31, 2018
Assets:
Money market funds	$	6,974	$	—	$	—	$	6,974

As of September 30, 2019 and December 31, 2018, money market funds are classified as Level 1 because they are valued using quoted market prices and are included in cash and cash equivalents.

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):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
China	$	7,582	$	6,992	$	15,768	$	18,175
Taiwan		940		589		2,833		933
South Korea		894		705		2,445		2,018
Japan		170		370		673		1,047
Other		27		11		90		17
Total revenue	$	9,613	$	8,667	$	21,809	$	22,190

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Security surveillance	$	6,551	$	7,083	$	14,363	$	18,622
Automotive		3,062		1,584		7,446		3,568
Total revenue	$	9,613	$	8,667	$	21,809	$	22,190

Long-lived assets are attributed to the geographic region where they are located. Net long-lived assets by geographic region were as follows (in thousands):

	September 30,		December 31,
	2019		2018
Taiwan	$	356	$	399
Japan		66		104
United States		61		102
China		18		2
South Korea		5		4
Total property and equipment - net	$	506	$	611

5. Commitments and Contingencies

Operating leases

The Company leases facilities under non-cancellable lease agreements expiring through fiscal year 2020. 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 lease 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 yet to be commenced.

As of September 30, 2019, the right of use asset and lease liabilities related to operating leases were as follows (in thousands):

	September 30,
	2019
Lease assets	$	365

Lease liabilities － Current	$	374
Lease liabilities － Non-Current		—
Total lease liabilities	$	374

Rent expense under operating leases was $0.2 million and $0.2 million for the three months ended September 30, 2019 and 2018, respectively, and $0.5 million and $0.5 million for the nine months ended September 30, 2019 and 2018, respectively.

The following table summarizes the Company’s lease costs and weighted-average assumptions used in determining its lease assets and lease liabilities (in thousands):

	Nine Months Ended
	September 30, 2019
Operating lease cost (1)	$	501
Cash paid for operating leases (1)	$	508
Lease assets obtained in exchange for operating lease liabilities (2)	$	839
Weighted average remaining term for operating leases	0.66 years
Weighted average discount rate for operating leases		6.0	%

(1)	Operating lease cost and cash paid for operating leases for the three months ended September 30, 2019 were $0.2 million and $0.2 million, respectively.

(2)	Represents the amount for operating leases existing on January 1, 2019. There were no new leases that commenced during the nine months ended September 30, 2019.

As of December 31, 2018, the aggregate future minimum lease payments under operating leases consist of the following (in thousands):

Year Ending December 31,	Amount
2019	$	645
2020		201
Total	$	846

As of September 30, 2019, the aggregate future minimum lease payments under operating leases consist of the following (in thousands):

Year Ending December 31,	Amount
2019 (remaining three months)	$	181
2020		201
Total		382
Less effects of discounting		(8	)
Lease liabilities recognized	$	374

Purchase Commitments

As of September 30, 2019, the Company had purchase commitments with its third-party suppliers through fiscal year 2022. Future minimum payments under purchase commitments are $0.1 million for the remaining three months ending December 31, 2019 and $0.3 million, $0.2 million and $49,000 for the year ending December 31, 2020, 2021 and 2022, respectively.

Litigation

Although the Company is not currently subject to any litigation, and no litigation is currently threatened against it, 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 the Company’s 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 us 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 September 30, 2019 and December 31, 2018. The shares of preferred stock issued and outstanding was nil as of September 30, 2019 and December 31, 2018.

Common Stock

The Company was authorized to issue 75,000,000 shares of common stock with $0.0001 par value per share as of September 30, 2019 and December 31, 2018. As of September 30, 2019, the shares of common stock issued and outstanding were 17,369,590 excluding 78,757 legally issued shares subject to repurchase related to the early exercise of options to purchase common stock. As of December 31, 2018, the shares of common stock issued and outstanding were 17,130,507 excluding 155,257 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:

	September 30,
	2019
Outstanding stock awards		1,229,160
Shares available for future issuance under the 2017 Stock Incentive Plan		5,052,933
Total common stock reserved for future issuances		6,282,093

7. Stock Option Plan

Stock Incentive Plan

In April 2012, the Company adopted the 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 nonstatutory stock options must be at least 110% of fair market 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 the 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 IPO. In connection with the adoption of the 2017 Plan, no additional 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 will be added to the 2017 Plan. The number of shares available for issuance under the 2017 Plan will be 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 our 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 2019 was 691,431 shares. The 2017 Plan provides for the granting of incentive stock options, or ISOs, within the meaning of Section 422 of the Internal Revenue Code to employees and the granting of nonstatutory stock options, or NSOs, to employees, non-employee directors, advisors and consultants. The 2017 Plan also provides for the grants of restricted stock, stock appreciation rights, or SARs, 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:

	Awards Available for Grant
As of December 31, 2018		4,434,310
Authorized		691,431
Granted		(143,750	)
Canceled		70,942
As of September 30, 2019		5,052,933

Early Exercise of Stock Options

Certain employees and directors have exercised option grants prior to vesting. The unvested shares are subject to a repurchase right held by the Company at the original purchase price. The proceeds initially are recorded as a liability related to early exercised stock options and reclassified to common stock and additional paid in capital as the repurchase right lapses.

For the three and nine months ended September 30, 2019, there were no options early exercised. In addition, the Company did not repurchase any shares of unvested common stock related to early exercised stock options during the period.

For the three and nine months ended September 30, 2018, the Company issued 3,167 shares and 27,333 shares of unvested shares of common stock upon early exercise, respectively, for total exercise proceeds of $1,000 and $0.1 million, respectively. For the nine months ended September 30, 2018, the Company repurchased 6,834 shares of unvested common stock related to early exercised options at the original purchase price.

As of September 30, 2019 and December 31, 2018, 78,757 and 155,257 shares, respectively, held by employees and nonemployees were subject to repurchase at an aggregate price of $0.1 million and $0.1 million, respectively.

Stock Options

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

	Options Issued and Outstanding			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (in thousands)
As of December 31, 2018		1,139,935		$	2.01		7.6	$	3,428
Granted		—		$	—
Exercised (1)		(184,681	)	$	0.97
Canceled		(34,169	)	$	2.61
As of September 30, 2019		921,085		$	2.19		7.0	$	4,539
Options vested and expected to vest as of September 30, 2019		921,085		$	2.19		7.0	$	4,539
Options vested and exercisable as of September 30, 2019		471,375		$	2.05		6.8	$	2,390

(1)

Includes vesting of early-exercised options.

The stock options outstanding and exercisable by exercise price at September 30, 2019 are as follows:

		Options Outstanding						Options Vested and Exercisable
Exercise Price		Number Outstanding		Weighted- Average Remaining Contractual Life (Years)		Weighted- Average Exercise Price		Number Exercisable		Weighted- Average Exercise Price
$	0.16		54,350		4.3	$	0.16		54,350	$	0.16
$	0.37		98,755		5.7	$	0.37		44,414	$	0.37
$	0.97		119,251		6.5	$	0.97		63,549	$	0.97
$	2.51		160,861		6.9	$	2.51		85,593	$	2.51
$	2.89		49,000		7.4	$	2.89		22,250	$	2.89
$	2.93		328,168		7.6	$	2.93		155,854	$	2.93
$	3.18		110,700		7.8	$	3.18		45,365	$	3.18
			921,085		7.0	$	2.19		471,375	$	2.05

The aggregate intrinsic value of options exercised for the nine months ended September 30, 2019 and 2018 was $0.6 million and $2.8 million, respectively. The Company has various vesting agreements with employees. Options granted generally vest over a five-year period and generally are exercisable up to 10 years.

Restricted Stock Units

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

	Units Issued and Outstanding			Weighted-Average Grant Date Fair Value
As of December 31, 2018		255,500		$	11.53
Granted		143,750		$	6.34
Released		(54,402	)	$	13.16
Canceled		(36,773	)	$	9.86
As of September 30, 2019		308,075		$	9.02

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-year period 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):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Cost of revenue	$	29	$	28	$	83	$	46
Research and development		124		111		370		231
Selling, general and administrative		184		412		568		737
Total	$	337	$	551	$	1,021	$	1,014

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):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Numerator:
Basic:
Net income	$	1,457	$	564	$	1,174	$	1,238
Diluted:
Net income	$	1,457	$	564	$	1,174	$	1,238
Denominator:
Basic shares:
Weighted-average shares outstanding in computing basic net income per share		17,316,172		17,045,689		17,239,544		16,936,898
Diluted shares:
Effect of potentially dilutive securities:
Stock awards (1)		582,968		876,946		610,816		1,102,506
Weighted-average shares used in computing diluted net income per share		17,899,140		17,922,635		17,850,360		18,039,404
Net income per common share:
Basic	$	0.08	$	0.03	$	0.07	$	0.07
Diluted	$	0.08	$	0.03	$	0.07	$	0.07

(1)	Including early-exercised options.

The potentially dilutive securities outstanding for the three months ended September 30, 2019 and 2018 and for the nine months ended September 30, 2019 and 2018 that were excluded from the computation of diluted net income per common share for the period presented as the effect would have been antidilutive was 325,000; 50,000; 367,000; and 91,000 shares, respectively.

10. Income Taxes

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Domestic	$	1,546	$	708	$	1,108	$	1,089
Foreign		67		42		179		133
Income before income taxes	$	1,613	$	750	$	1,287	$	1,222

The components of the provision for (benefit from) income taxes are as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
United States	$	145	$	171	$	86	$	(44	)
Foreign		11		15		27		28
Income tax provision (benefits)	$	156	$	186	$	113	$	(16	)

As of September 30, 2019, there was no material increase in the liability for unrecognized tax benefits nor any accrued interest and penalties related to uncertain tax positions.

Additionally, as of September 30, 2019, the Company had approximately $0.3 million of unrecognized tax benefits of which $0.2 million was netted against deferred tax assets with a full valuation allowance. If these amounts are recognized, there will be a tax benefits of $0.1 million against the Company's effective tax rate.

The Company’s federal, state, and foreign tax returns may be subject to examination by the tax authorities for fiscal years ended from 2014 to 2018.

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 “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “design,” “plan,” “project,” “intend,” “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:

•

fluctuations in our future financial performance, including our revenue, cost of sales and operating expenses;

•

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;

•

our liquidity and working capital requirements;

•

our expectations regarding future expenses and investments; and

•

those other risks set forth in this Quarterly Report on Form 10-Q under Part II – Other Information, Item 1A. Risk Factors.

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 speaks only as of the date on which it is made. We disclaim any duty 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, 2018 filed with the SEC on March 15, 2019. 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.

In this Quarterly Report, unless otherwise specified or the context otherwise requires, “Techpoint,” “we,” “us,” and “our” refer to Techpoint, Inc. and its consolidated subsidiaries.

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, or SD, video to high definition, or 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. The security surveillance market accounted for a majority of our revenue in the nine months ended September 30, 2019 and fiscal year 2018. We have secured design wins with major automotive equipment manufacturers to sell our solutions to them for automotive backup cameras. We began shipping our products in 2013 and to date, we have sold over 122 million integrated circuits. Our revenue was $21.8 million and $22.2 million for the nine months ended September 30, 2019 and 2018, respectively. We recognized $7.4 million and $3.6 million of revenue on sales into the automotive market for the nine months ended September 30, 2019 and 2018, respectively. We recorded net income of $1.2 million and net income of $1.2 million for the nine months ended September 30, 2019 and 2018, respectively.

We sell our products to distributors that fulfill third-party orders for our products. We also sell directly to ODMs. For the nine months ended September 30, 2019 and 2018, we derived substantially all of our revenue from products sold to distributors as compared to products sold to ODMs 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, tending to extend 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. Our research and development expense was $1.7 million and $1.7 million for three months ended September 30, 2019 and 2018, respectively, and $4.8 million and $5.5 million for the nine months ended September 30, 2019 and 2018, 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 September 30, 2019, we had 75 employees, 25 of whom are in research and development. Our headquarters are located in San Jose, California, with additional operations in Japan, Taiwan, China and South Korea.

On October 7, 2019, the U.S. Commerce Department’s Bureau of Industry and Security (BIS) announced that effective October 9, 2019, Hikvision, a customer that represented 50% and 62% of our revenue for the nine months ended September 30, 2019 and 2018, respectively, will be added 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 the EAR. We have retained the continuous assistance of outside experts and, following the above announcement by BIS, performed a comprehensive review of our products and manufacturing operations. Based on that review, we have concluded that our products are not subject to the 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.

The above conclusions are as of the date of filing of this 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

The following are key factors that impact our results of operations:

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 depend on our ability to continually target new and retain existing end-customers that make large orders. For the nine months ended September 30, 2019 and 2018, Hikvision, the largest security surveillance manufacturer in China and one of our end-customers, accounted for 50% and 62% 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, the U.S. Senate’s recent passage of the 2019 National Defense Authorization Act (“NDAA”) could adversely impact our business with Hikvision because the NDAA includes a provision barring U.S. government agencies from purchasing video surveillance products from certain Chinese manufacturers, including Hikvision. Although this 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. 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, including the United States, 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 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 Operations

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 ODMs, contract manufacturers and design houses. Upon adoption of ASC 606, 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 cause our research and development expenses to fluctuate because they are not incurred uniformly every quarter. We expect our research and development costs to increase in absolute dollars in the future as we increase our investment in new product developments 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 public company, including higher legal, insurance and accounting expenses, particularly with respect to operating as a U.S. company that is publicly traded in Japan. 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.

Income Tax Provision

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 tax credits, non-deductible stock-based compensation, international tax reform provisions, and tax benefits from stock-option exercises and dispositions.

Results of Operations

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

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2019		2018			2019		2018
Revenue	$	9,613	$	8,667		$	21,809	$	22,190
Cost of revenue (1)		4,874		4,220			10,862		10,513
Gross profit		4,739		4,447			10,947		11,677
Operating expenses: (1)
Research and development		1,686		1,704			4,762		5,493
Selling, general and administrative		1,442		1,899			4,939		5,092
Total operating expenses		3,128		3,603			9,701		10,585
Income from operations		1,611		844			1,246		1,092
Other income (expense)		2		(94	)		41		130
Income before income taxes		1,613		750			1,287		1,222
Income tax provision (benefits)		156		186			113		(16	)
Net income	$	1,457	$	564		$	1,174	$	1,238

(1)	Includes stock-based compensation expense as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Cost of revenue	$	29	$	28	$	83	$	46
Research and development		124		111		370		231
Selling, general and administrative		184		412		568		737
Total	$	337	$	551	$	1,021	$	1,014

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Revenue		100	%		100	%		100	%		100	%
Cost of revenue		51			49			50			47
Gross profit		49			51			50			53
Operating expenses:
Research and development		18			19			22			25
Selling, general and administrative		14			22			22			23
Total operating expenses		32			41			44			48
Income from operations		17			10			6			5
Other income (expense)		—			(1	)		—			1
Income before income taxes		17			9			6			6
Income tax provision (benefits)		2			2			1			—
Net income		15	%		7	%		5	%		6	%

Comparison of the Three and Nine Months Ended September 30, 2019 and September 30, 2018

Revenue

	Three Months Ended September 30,				Change					Nine Months Ended September 30,				Change
	2019		2018		Amount		%			2019		2018		Amount			%
	(dollars in thousands)
Revenue	$	9,613	$	8,667	$	946		11	%	$	21,809	$	22,190	$	(381	)		(2	)%

Revenue increased $0.9 million, or 11%, for the three months ended September 30, 2019 as compared to the three months ended September 30, 2018. This was mainly due to a $1.5 million increase in automotive market revenue resulting from a 129% increase in volume of shipments offset by a 16% decrease in average selling price attributable to customer and product mix. This increase in automotive market revenue was partially offset by a $0.5 million decrease in security surveillance market revenue due to a 24% decrease in average selling price from customer and product mix.

Revenue decreased $0.4 million, or 2%, for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. This was mainly due to a $4.3 million decrease in security surveillance market revenue due to a 23% average selling price decrease attributable to customer and product mix. This decrease in security surveillance market revenue was partially offset by a $3.9 million increase in automotive market revenue driven by a 120% increase in volume of shipments.

Revenue by geographic region

The table below sets forth the major components of the change in revenue by geographic region for the three and nine months ended September 30, 2019 and September 30, 2018:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
China		79	%		81	%		73	%		82	%
Taiwan		10			7			13			4
South Korea		9			8			11			9
Japan		2			4			3			5
Other		-			-			-			-
Total		100	%		100	%		100	%		100	%

Cost of revenue and gross margin

	Three Months Ended September 30,						Change					Nine Months Ended September 30,						Change
	2019			2018			Amount		%			2019			2018			Amount		%
	(dollars in thousands)
Cost of revenue	$	4,874		$	4,220		$	654		15	%	$	10,862		$	10,513		$	349		3	%
Gross margin		49	%		51	%							50	%		53	%

Cost of revenue increased by $0.7 million, or 15%, while gross margin decreased to 49% from 51% for the three months ended September 30, 2019 as compared to the three months ended September 30, 2018. Cost of revenue increased due to a 40% increase in volume of shipments. Gross margins were negatively impacted by customer and product mix.

Cost of revenue increased by $0.3 million, or 3%, while gross margin decreased to 50% from 53% for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. Cost of revenue increased due to a 19% increase in volume of shipments and $0.2 million increase in inventory write downs. This increase was partially offset by a decrease in product costs mainly due to the changes in product mix. Gross margins were negatively impacted by customer mix and by the increase in inventory write downs.

We expect gross margins to fluctuate in future periods due to changes in customer and product mix, average unit selling prices, manufacturing costs, manufacturing yields, levels of inventory valuation, if any, and levels of product demand.

Research and development expense

	Three Months Ended September 30,				Change						Nine Months Ended September 30,				Change
	2019		2018		Amount			%			2019		2018		Amount			%
	(dollars in thousands)
Research and development	$	1,686	$	1,704	$	(18	)		(1	)%	$	4,762	$	5,493	$	(731	)		(13	)%

Research and development expenses decreased $18,000, or 1%, for the three months ended September 30, 2019 as compared to the three months ended September 30, 2018 primarily due to a $0.2 million decrease in tape-out expenses partially offset by a $0.1 million increase in product development expense and a $0.1 million increase in personnel costs due to a 4% increase in headcount as a result of expanding operations.

Research and development expenses decreased $0.7 million, or 13% for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018 primarily due to a $1.2 million decrease in tape-out expenses partially offset by a $0.2 million increase in personnel costs due to a 5% increase in headcount as a result of expanding operations, a $0.1 million increase in design software expense, and a $0.1 million increase in stock-based compensation expense.

Selling, general and administrative expense

	Three Months Ended September 30,				Change						Nine Months Ended September 30,				Change
	2019		2018		Amount			%			2019		2018		Amount			%
	(dollars in thousands)
Selling, general and administrative	$	1,442	$	1,899	$	(457	)		(24	)%	$	4,939	$	5,092	$	(153	)		(3	)%

Selling, general and administrative expenses decreased $0.5 million, or 24%, for the three months ended September 30, 2019 as compared to the three months ended September 30, 2018 mainly due to a $0.3 million decrease in professional service fees and a $0.2 million decrease in stock-based compensation expense.

Selling, general and administrative expenses decreased, $0.2 million or, 3% for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018 primarily due to a $0.2 million decrease in stock-based compensation expense.

Other income and expense

	Three Months Ended September 30,					Change					Nine Months Ended September 30,				Change
	2019		2018			Amount		%			2019		2018		Amount			%
	(dollars in thousands)
Other income (expense)	$	2	$	(94	)	$	96		(102	)%	$	41	$	130	$	(89	)		(68	)%

Other income for the three months ended September 30, 2019 was $2,000 and other expense for the three months ended September 30, 2018 was $0.1 million. This change was mainly driven by foreign currency exchange transactions and foreign currency fluctuations.

Other income for the nine months ended September 30, 2019 and 2018 was $41,000 and $0.1 million, respectively. This change was driven by foreign currency exchange transactions and foreign currency fluctuations.

Provision for (benefits from) income taxes

	Three Months Ended September 30,				Change						Nine Months Ended September 30,					Change
	2019		2018		Amount			%			2019		2018			Amount		%
	(dollars in thousands)
Income tax provision (benefits)	$	156	$	186	$	(30	)		(16	)%	$	113	$	(16	)	$	129		(806	)%

The income tax provision for the three months ended September 30, 2019 decreased $30,000, or 16%, as compared to the three months ended September 30, 2018, primarily due to a release of tax reserves, partially offset by an increase in taxable income.

The income tax provision for the nine months ended September 30, 2019 was $0.1 million and the income tax benefits for the nine months ended September 30, 2018 was $16,000. The change is primarily due to a decrease in tax benefits from stock-option exercises and dispositions and an increase in taxable income.

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 and cash equivalents as of September 30, 2019 were $28.0 million. We believe our existing cash and cash equivalents, 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 of our company, 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):

	Nine Months Ended
	September 30,
	2019			2018
Net cash provided by operating activities	$	2,260		$	3,276
Net cash used in investing activities		(267	)		(276	)
Net cash provided by financing activities		71			310
Net increase in cash and cash equivalents	$	2,064		$	3,310

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 nine months ended September 30, 2019, net cash provided by operating activities was $2.3 million, primarily due to net income of $1.2 million and non-cash charges of $2.0 million primarily driven by stock-based compensation, depreciation and amortization, and provision for excess inventories, partially offset by net cash outflow used in operating assets and liabilities of $0.9 million. The net cash outflow used in operating assets and liabilities was primarily due to a $4.9 million cash outflow in inventory as units manufactured during the period and on hand were in excess of product sales to support future demand, partially offset by a $3.4 million cash inflow in customer deposits due to timing of customer pre-payments and a $0.6 million cash inflow in accounts payable due to timing of vendor payments.

During the nine months ended September 30, 2018, net cash provided by operating activities was $3.3 million, primarily due to net income of $1.2 million and non-cash charges of $1.3 million primarily driven by stock-based compensation, depreciation and amortization, and provision for excess inventories, partially offset by deferred income taxes, and cash inflow provided by the change in net operating assets and liabilities of $0.8 million. The cash inflow provided by the change in net operating assets and liabilities was primarily due to a $0.4 million cash inflow in accrued expenses due to timing of services performed, a $0.3 million cash inflow in accounts payable due to timing of vendor payments, a $0.3 million cash inflow in inventory due to product sales in excess of units on hand and manufactured during the period, a $0.2 million cash inflow in customer deposits due to timing of customer pre-payments, offset by $0.3 million cash outflow in accounts receivable due to timing of customer collections.

Investing Activities

During the nine months ended September 30, 2019 and 2018, cash used in investing activities was $0.3 million and $0.3 million, respectively, due to purchases of property and equipment.

Financing Activities

During the nine months ended September 30, 2019 and 2018, cash provided by financing activities was $0.1 million and $0.3 million, respectively, primarily due to net proceeds from the exercise of stock options.

Contractual Obligations

We are required to make future payments under certain operating leases. Our outstanding contractual obligations as of September 30, 2019 are summarized in the following table:

			Payments Due by Period
	Total		Less than 1 year		1 to 3 years		More than 3 years
			(in thousands)
Operating leases	$	382	$	382	$	—	$	—
Purchase commitments	$	660		294		366		—
Total	$	1,042	$	676	$	366	$	—

Obligations under contracts that we can cancel without a significant penalty are not included in the table 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 Policies, Significant Estimates and Judgments

Our financial statements are prepared in accordance with U.S. generally accepted accounting principles, or 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.

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 months ended September 30, 2019 and 2018 and the nine months ended September 30, 2019 and 2018. 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 months ended September 30, 2019 and 2018 and nine months ended September 30, 2019 and 2018 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) on our Condensed Consolidated Statement of Operations.

Interest rates

Our exposure to market risk for changes in interest rates relates primarily to our cash and cash equivalents. We seek to minimize the risk to our cash and cash equivalents by investing cash in excess of our operating needs in short-term, high-quality instruments issued by highly creditworthy financial institutions. With the amount of cash and cash equivalents that we maintained at September 30, 2019, a hypothetical increase or decrease of one percentage point, or 100 basis points, in interest rates, would not have had a material effect on our financial statements.

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 Exchange Act, as of the end of the period covered by this report. 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 September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We are not currently a party to any material legal proceedings that we believe to be material to our business or financial condition. From time to time we may become party to various litigation matters and subject to claims that arise in the ordinary course of business.

Item 1A. Risk Factors.

Except for the risk factor set forth below, there have been no material changes to the previously disclosed risk factors discussed in Part 1 “Part I, Item 1A, Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on March 15, 2019. 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.

Changes in the U.S. trade environment, including potential changes in international trade relations between China and the United States, could adversely affect the amount or timing of our revenues, results of operations or cash flows.

The current U.S. presidential administration has called for substantial changes to U.S. foreign trade policy, and in particular with respect to China, including the possibility of imposing greater restrictions on international trade and significant increases in tariffs on goods imported into the United States. A significant percentage of our sales are made to customers located in Asia, and in particular China. The percentage of our revenue attributable to sales to customers in Asia and in China was approximately 100% and 73% of our revenue for the nine months ended September 30, 2019, respectively. In addition, our largest end customer, Hikvision, who accounted for 50% of our revenue for the nine months ended September 30, 2019, is located in China and is currently included in recent trade legislation described below.

There is significant uncertainty about the future relationship between the United States and China, including with respect to trade policies, treaties, government regulations and tariffs. Recently, the United States Congress passed the John S. McCain National Defense Authorization Act for Fiscal Year 2019 (“NDAA”), which includes a prohibition on U.S. government agencies from procuring specified telecommunications equipment or entering into a contract with any entity that uses any equipment, system or service that uses this specified telecommunications equipment. Video surveillance equipment produced by Hikvision is included in the specified telecommunications equipment under the NDAA. The products that we sell Hikvision are used in its video surveillance equipment. Although the NDAA does not prohibit commercial sales into the United States by Hikvision, these new restrictions placed on United States government procurement could negatively impact our business. In addition, on October 7, 2019, the U.S. Commerce Department’s Bureau of Industry and Security (BIS) announced that effective October 9, 2019, Hikvision was added to the BIS Entity List, which imposes a requirement to obtain an export license for all items subject to the Export Administration Regulations (EAR) in order to be shipped to Hikvision. Although our products are not currently subject to the EAR; and thus, not impacted by Hikvision’s designation on the BIS Entity List, we may face additional requirements in the future now that Hikvision has been placed on the BIS Entity List. These new regulations also illustrate the uncertain regulatory environment our business faces by doing a significant portion of our business in China and with Hikvision.

In addition, the U.S. government recently proposed new or higher tariffs on specified imported products originating from China in response to what it characterizes as unfair trade practices, and China has responded by proposing new or higher tariffs on specified products imported from the United States. There is a risk of further escalation and retaliatory actions between the two countries. If significant tariffs or other restrictions are placed on goods imported into the United States from China or any related counter-measures are taken by China, our revenue and results of operations may be materially harmed. These tariffs may also make our products more expensive for consumers, which may reduce consumer demand. We may need to offset the financial impact by, among other things, modifying other business practices or raising prices. If we are not successful in offsetting the impact of any such tariffs, our business and financial results may be adversely affected.

The current U.S. presidential administration, certain members of Congress and federal officials have stated that the United States may seek to implement more protective trade measures, not just with respect to China but with respect to other countries in the Asia Pacific region as well. This could include new or higher tariffs and even more restrictive trade barriers, such as prohibiting certain types of, or all sales of certain products or products sold by certain parties into the United States. Any increased trade barriers or restrictions on global trade, especially trade with China, could have a materially adverse impact on our business and financial results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Recent Sale of Unregistered Securities

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit Number		Description

10.1#		Offer Letter dated September 30, 2019, between the Company and Mark Voll
31.1		Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

# Management contract or compensatory plan, contact or arrangement.

In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or deemed to be incorporated by reference into any filing under the Exchange Act or the Securities Act of 1933 except to the extent that the registrant specifically incorporates it by reference.

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.

	Techpoint, Inc.

Date: November 12, 2019	By:	/s/ Mark Voll
		Mark Voll
		Chief Financial Officer and Vice President of Administrations (Principal Financial and Accounting Officer)

Date: November 12, 2019	By:	/s/ Fumihiro Kozato
		Fumihiro Kozato
		President and Chief Executive Officer (Principal Executive Officer)