Techpoint, Inc. - Quarter Report: 2020 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, 2020

☐	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 2, 2020, the registrant had 17,663,850 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 and Comprehensive Income (Loss)	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	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	29
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 5.	Other Information	31
Item 6.	Exhibits	32
	SIGNATURES	33

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,
	2020		2019
Assets
Current assets:
Cash and cash equivalents	$	4,926	$	11,391
Short-term investments		18,183		9,475
Accounts receivable		77		107
Inventory		7,718		6,048
Prepaid expenses and other current assets		671		875
Total current assets		31,575		27,896
Property and equipment - net		673		535
Deferred tax assets		553		677
Right-of-use assets		1,131		1,058
Other assets		4,944		8,380
Total assets	$	38,876	$	38,546
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	918	$	1,535
Accrued liabilities		1,562		2,012
Liability related to early exercised stock options		28		67
Customer deposits		940		1,371
Lease liabilities		704		549
Total current liabilities		4,152		5,534
Other liabilities		586		632
Total liabilities		4,738		6,166
Commitments and contingencies (Note 5)
Stockholders’ equity
Preferred stock, par value $0.0001 per share - 5,000,000 shares authorized as of September 30, 2020 and December 31, 2019; nil shares issued and outstanding as of September 30, 2020 and December 31, 2019		—		—
Common stock, par value $0.0001 per share - 75,000,000 shares authorized as of September 30, 2020 and December 31, 2019; 17,634,015 and 17,449,572 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively		2		2
Additional paid-in-capital		22,149		20,928
Accumulated other comprehensive income (loss)		66		(15	)
Retained earnings		11,921		11,465
Total stockholders’ equity		34,138		32,380
Total liabilities and stockholders’ equity	$	38,876	$	38,546

See accompanying notes to condensed consolidated financial statements.

Techpoint, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

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

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2020			2019		2020		2019
Revenue	$	6,214		$	9,613	$	20,823	$	21,809
Cost of revenue		2,983			4,874		9,567		10,862
Gross profit		3,231			4,739		11,256		10,947
Operating expenses
Research and development		1,578			1,686		5,499		4,762
Selling, general and administrative		1,695			1,442		5,327		4,939
Total operating expenses		3,273			3,128		10,826		9,701
Income (loss) from operations		(42	)		1,611		430		1,246
Other income - net		42			2		196		41
Income before income taxes		—			1,613		626		1,287
Income tax provision		26			156		170		113
Net income (loss)	$	(26	)	$	1,457	$	456	$	1,174
Net income (loss) per share:
Basic	$	(0.00	)	$	0.08	$	0.03	$	0.07
Diluted	$	(0.00	)	$	0.08	$	0.03	$	0.07
Weighted average shares outstanding in computing net income (loss) per share
Basic		17,619,958			17,316,172		17,559,438		17,239,544
Diluted		17,619,958			17,899,140		17,877,310		17,850,360
Comprehensive income (loss):
Net income (loss)	$	(26	)	$	1,457	$	456	$	1,174
Other comprehensive income, net of tax:
Unrealized gain (loss) on available-for-sale debt securities		(13	)		—		81		—
Comprehensive income (loss)	$	(39	)	$	1,457	$	537	$	1,174

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			Accumulated Other Comprehensive Income		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

Techpoint, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share amounts, unaudited)

	Common Stock
	Shares			Amount		Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Stockholders' Equity
Balances as of December 31, 2019		17,449,572		$	2	$	20,928		$	(15	)	$	11,465		$	32,380
Other comprehensive loss - unrealized loss on available-for-sale debt securities		—			—		—			(93	)		—			(93	)
Issuance of common stock upon exercise of stock options and vesting of early exercised options		58,310			—		103			—			—			103
Issuance of common stock upon vesting of RSUs		21,425			—		—			—			—			—
Shares repurchased for tax withholdings on vesting of RSUs		(4,264	)		—		(28	)		—			—			(28	)
Stock-based compensation		—			—		390			—			—			390
Net income		—			—		—			—			93			93
Balances as of March 31, 2020		17,525,043		$	2	$	21,393		$	(108	)	$	11,558		$	32,845
Other comprehensive income - unrealized gain on available-for-sale debt securities		—			—		—			187			—			187
Issuance of common stock upon exercise of stock options and vesting of early exercised options		18,996			—		36			—			—			36
Issuance of common stock upon vesting of RSUs		52,425			—		—			—			—			—
Shares repurchased for tax withholdings on vesting of RSUs		(5,081	)		—		(20	)		—			—			(20	)
Stock-based compensation		—			—		379			—			—			379
Net income		—			—		—			—			389			389
Balances as of June 30, 2020		17,591,383		$	2	$	21,788		$	79		$	11,947		$	33,816
Other comprehensive income - unrealized loss on available-for-sale debt securities		—			—		—			(13	)		—			(13	)
Issuance of common stock upon exercise of stock options and vesting of early exercised options		18,251			—		20			—			—			20
Issuance of common stock upon vesting of RSUs		30,075			—		—			—			—			—
Shares repurchased for tax withholdings on vesting of RSUs		(5,694	)		—		(26	)		—			—			(26	)
Stock-based compensation		—			—		367			—			—			367
Net loss		—			—		—			—			(26	)		(26	)
Balances as of September 30, 2020		17,634,015		$	2	$	22,149		$	66		$	11,921		$	34,138

See accompanying notes to condensed consolidated financial statements.

Techpoint, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands, unaudited)

	Nine Months Ended
	September 30,
	2020			2019
Cash Flows From Operating Activities
Net income	$	456		$	1,174
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		256			253
Stock-based compensation		1,136			1,021
Accretion of investment premium, net of amortization of discount		83			—
Inventory valuation adjustment		133			266
Deferred income taxes		106			(15	)
Noncash lease expense		512			475
Changes in operating assets and liabilities:
Accounts receivable		30			156
Inventory		(1,803	)		(4,910	)
Prepaid expenses and other current assets		267			52
Other assets		(6	)		2
Accounts payable		(615	)		590
Accrued expenses		(498	)		320
Customer deposits		(431	)		3,396
Lease liabilities		(117	)		(280	)
Other liabilities		(359	)		(240	)
Net cash provided by (used in) operating activities		(850	)		2,260
Cash Flows From Investing Activities
Purchase of property and equipment		(346	)		(267	)
Purchase of debt securities		(11,065	)		—
Proceeds from maturities of debt securities		5,750			—
Net cash used in investing activities		(5,661	)		(267	)
Cash Flows From Financing Activities
Net proceeds from exercise of stock options		120			128
Payment for shares withheld for tax withholdings on vesting of restricted stock units		(74	)		(57	)
Net cash provided by financing activities		46			71
Net increase (decrease) in cash and cash equivalents		(6,465	)		2,064
Cash and cash equivalents at beginning of period		11,391			25,941
Cash and cash equivalents at end of period	$	4,926		$	28,005

Supplemental Disclosure of Cash Flow Information
Cash paid for income taxes	$	66		$	35
Supplemental Disclosure of Noncash Investing and Financing Information
Property and equipment purchased but not yet paid	$	134		$	33
Vesting of early exercised options	$	36		$	51

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. (together with its wholly-owned subsidiaries, the “Company”, “we”, “us” and “our”) 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) 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, 2019 contained in our 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 (“ODMs”), contract manufacturers and design houses. The Company accounts for revenue under ASC Topic 606 (“ASC 606”), Revenue from Contracts with Customers. 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 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. 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.

COVID-19

In March 2020, the World Health Organization characterized a respiratory illness caused by a novel coronavirus disease, known as COVID-19, as a pandemic. The pandemic has resulted in government authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place or stay-at-home orders, and business shutdowns. For example, employees at our headquarters located in San Jose, California, are currently subject to a stay-at-home order from the state government. Our offices in Japan, China, South Korea and Taiwan have also been impacted by COVID-19 and have been subject to various measures implemented by local governments to reduce the spread of COVID-19. 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. For example, travel restrictions may prohibit our ability to conduct necessary face-to-face meetings with our customers. These measures by government authorities may remain in place 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.

Our security surveillance market has been affected by the weakness in our end markets in North and South Americas, the Middle East, and India due to the impact of the COVID-19 pandemic in those markets. In the third quarter of 2020, one of our largest customers significantly reduced orders to us in response to this market weakness. However, the impact to our security surveillance revenue was partially mitigated by revenue in the automotive market due to demand increase associated with the usual seasonal production cycle in the automotive industry in the second half of the year and multiple new design-wins going into production that we obtained from automotive manufacturers in prior quarters.

The extent to which the COVID-19 pandemic impacts our 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. Management is actively monitoring the impact of COVID-19 on the Company’s financial condition, liquidity, operations, customers, suppliers, industry, and workforce. 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.

Credit Risk and Concentration of Customer and Supplier

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 is as follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019
Customer
Customer A		34	%		66	%		42	%		61	%
Customer B		14	%	*				14	%	*
Customer C		14	%	*			*			*
Customer D		10	%	*				10	%	*
End-Customer
End-Customer A (1)	*				65	%		23	%		50	%
End-Customer B (1)	*			*			*				11	%

Less than 10%

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

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, the Company relies on Advanced Semiconductor Engineering, Inc. and Sigurd Microelectronics Corporation to assemble, package and test substantially all of its products.

Recently Adopted Accounting Pronouncements

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), which amends disclosure requirements for fair value measurements by requiring new disclosures, modifying existing requirements, and eliminating others. The amendments are the result of a broader disclosure project, which aims to improve the effectiveness of disclosures. ASU No. 2018-13 is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company has determined that the new standard had no material impact on its disclosures as of and for the nine months ended September 30, 2020.

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 after December 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 will have on the Company’s condensed consolidated financial statements.

In December 2019, the FASB issued Accounting Standard Update 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 is currently evaluating the impact this guidance will have on the Company’s condensed consolidated financial statements.

2. Balance Sheet Components

Inventory

Inventory consists of the following (in thousands):

	September 30,		December 31,
	2020		2019
Work in process	$	3,505	$	2,529
Finished goods		4,213		3,519
Total inventory	$	7,718	$	6,048

Property and Equipment - Net

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

	September 30,			December 31,
	2020			2019
Computer equipment and software	$	1,795		$	1,405
Leasehold improvements		89			89
Furniture		36			30
Total property and equipment		1,920			1,524
Less: accumulated depreciation		(1,247	)		(989	)
Total property and equipment - net	$	673		$	535

The Company recorded $0.1 million and $0.1 million of depreciation expense for the three months ended September 30, 2020 and 2019, respectively, and $0.3 million and $0.3 million for nine months ended September 30, 2020 and 2019, respectively.

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

	September 30,		December 31,
	2020		2019
Payroll-related expenses	$	591	$	780
Engineering services		506		637
Accrued inventory		301		283
Accrued warranty		58		194
Taxes payable		48		72
Professional fees		41		31
Other		17		15
Total accrued liabilities	$	1,562	$	2,012

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 $0.9 million, $0.3 million and $1.4 million as of September 30, 2020, June 30, 2020 and December 31, 2019, respectively. The Company generally expects to recognize revenue from customer deposits during the three month period immediately following the balance sheet date. During the three months ended September 30, 2020, the Company recognized $0.3 million of revenue from the June 30, 2020 customer deposit balance. During the nine months ended September 30, 2020, the Company recognized $1.4 million of revenue from the December 31, 2019 customer deposits balance.

3. Fair Value Measurements of Financial Instruments

Summary of Financial Instruments

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

	September 30,
	2020
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Estimated Fair Values
Available-for-sale securities:
Money market funds	$	2,544	$	—	$	—		$	2,544
Commercial paper		1,749		—		—			1,749
Corporate bonds		21,080		85		(1	)		21,164
Total available-for-sale securities	$	25,373	$	85	$	(1	)	$	25,457
Reported in:
Cash and cash equivalents								$	2,544
Short-term investments									18,183
Other assets									4,730
Total available-for-sale securities								$	25,457

	December 31,
	2019
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Estimated Fair Values
Available-for-sale securities:
Money market funds	$	2,027	$	—	$	—		$	2,027
Commercial paper		6,965		—		(3	)		6,962
Corporate bonds		12,943		1		(13	)		12,931
Total available-for-sale securities	$	21,935	$	1	$	(16	)	$	21,920
Reported in:
Cash and cash equivalents								$	4,275
Short-term investments									9,475
Other assets									8,170
Total available-for-sale securities								$	21,920

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

	September 30,
	2020
	Amortized Cost Basis		Estimated Fair Value
Due in one year or less	$	20,662	$	20,727
Due between one to two years		4,711		4,730
	$	25,373	$	25,457

The Company had 4 investments in unrealized loss positions as of September 30, 2020. The investments have been in unrealized loss positions for less than twelve months. The total fair value of such investments is $5.4 million with unrealized losses of $1,365 for the nine months ended September 30, 2020. 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 out of accumulated other comprehensive income for the nine months ended September 30, 2020.

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 not 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 September 30, 2020.

There were no sales of available-for-sale securities for the nine months ended September 30, 2020 and 2019.

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, 2020
Financial assets - available-for-sales securities
Money market funds	$	2,544	$	—	$	—	$	2,544
Commercial paper		—		1,749		—		1,749
Corporate bonds		—		21,164		—		21,164
Total financial assets - available-for-sales securities	$	2,544	$	22,913	$	—	$	25,457
As of December 31, 2019
Financial assets - available-for-sales securities
Money market funds	$	2,027	$	—	$	—	$	2,027
Commercial paper		—		6,962		—		6,962
Corporate bonds		—		12,931		—		12,931
Total financial assets - available-for-sales securities	$	2,027	$	19,893	$	—	$	21,920

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.

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,
	2020		2019		2020		2019
China	$	3,559	$	7,582	$	12,424	$	15,768
Taiwan		1,466		940		4,424		2,833
South Korea		952		894		3,260		2,445
Japan		147		170		458		673
Other		90		27		257		90
Total revenue	$	6,214	$	9,613	$	20,823	$	21,809

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Security surveillance	$	1,944	$	6,551	$	9,407	$	14,363
Automotive		4,270		3,062		11,416		7,446
Total revenue	$	6,214	$	9,613	$	20,823	$	21,809

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,
	2020		2019
Taiwan	$	593	$	409
United States		32		49
Japan		27		54
China		13		19
South Korea		8		4
Total property and equipment - net	$	673	$	535

5. Commitments and Contingencies

Operating leases

The Company determines if an arrangement contains a lease at inception. The Company leases facilities under non-cancellable lease agreements expiring through fiscal year 2022. 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 yet to be commenced.

As of September 30, 2020 and December 31, 2019, the right-of-use assets and lease liabilities related to operating leases were as follows (in thousands):

	September 30,		December 31,
	2020		2019
Right-of-use assets	$	1,131	$	1,058

Lease liabilities － Current	$	704	$	549
Lease liabilities － Non-Current		449		518
Total lease liabilities	$	1,153	$	1,067

Rent expense under operating leases was $0.2 million and $0.2 million for the three months ended September 30, 2020 and 2019, respectively. Rent expense under operating leases was $0.6 million and $0.5 million for nine months ended September 30, 2020 and 2019, respectively.

The rent expense recognized from short-term leases were $6,000 and $6,000 for the three months ended September 30, 2020 and 2019, respectively. The rent expense recognized from short-term leases were $18,000 and $18,000 for nine months ended September 30, 2020 and 2019, 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):

	Nine Months Ended			Nine Months Ended
	September 30, 2020			September 30, 2019
Operating lease cost (1)	$	549		$	501
Cash paid for operating leases (2)	$	542		$	508
Right-of-use assets obtained in exchange for operating lease liabilities (3)	$	585		$	839
Weighted average remaining term for operating leases	1.64 years			0.66 years
Weighted average discount rate for operating leases		6.0	%		6.0	%

(1)

Operating lease cost for the three months ended September 30, 2020 and 2019 were $0.2 million and $0.2 million, respectively.

(2)

Cash paid for operating leases for the three months ended September 30, 2020 and 2019 were $0.2 million and $0.2 million, respectively.

(3)

During the nine months ended September 30, 2020, the Company modified 4 existing operating leases. One of the lease modifications was treated as a separate contract as an additional right-of-use asset was granted. During the nine months ended September 30, 2019, there were no new leases that commenced. The balance represents the right-of-use assets recognized upon adoption of ASC 842.

As of September 30, 2020, the aggregate future minimum lease payments under operating leases consist of the following (in thousands):

Year Ending December 31,	Amount
2020 (remaining three months)	$	197
2021		740
2022		266
Total		1,203
Less effects of discounting		(50	)
Lease liabilities recognized	$	1,153

Purchase Commitments

As of September 30, 2020, 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, 2020, and $0.2 million and $49,000 for the year ending December 31, 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 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 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, 2020 and December 31, 2019. The shares of preferred stock issued and outstanding was nil as of September 30, 2020 and December 31, 2019.

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, 2020 and December 31, 2019. As of September 30, 2020, the shares of common stock issued and outstanding were 17,634,015 excluding 12,836 legally issued shares subject to repurchases related to the early exercise of options to purchase common stock. As of December 31, 2019, the shares of common stock issued and outstanding were 17,449,572 excluding 51,006 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,
	2020
Outstanding stock awards		1,190,084
Shares available for future issuance under the 2017 Stock Incentive Plan		5,527,607
Total common stock reserved for future issuances		6,717,691

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 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 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 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 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 2020 was 700,023 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:

	Awards Available for Grant
As of December 31, 2019		4,847,877
Authorized		700,023
Granted		(55,000	)
Canceled		34,707
As of September 30, 2020		5,527,607

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 nine months ended September 30, 2020 and 2019, the Company did not issue unvested shares of common stock upon early exercise. For the nine months ended September 30, 2020, the Company repurchased 3,334 shares of unvested common stock related to early exercised options at the original purchase price, and no shares were repurchased for the nine months ended September 30, 2019.

As of September 30, 2020 and December 31, 2019, 12,836 and 51,006 shares, respectively, held by employees were subject to repurchase at an aggregate price of $28,000 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, 2019		850,334		$	2.30	$	6.8	$	3,587
Granted		—			—
Exercised (1)		(95,557	)		1.66
Canceled		(6,668	)		1.95
As of September 30, 2020		748,109			2.38	$	6.1		1,463
Options vested and expected to vest as of September 30, 2020		748,109			2.38	$	6.1		1,463
Options vested and exercisable as of September 30, 2020		537,772			2.24	$	6.0		1,131

(1)

Includes vesting of early-exercised options.

The stock options outstanding and exercisable by exercise price at September 30, 2020 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		32,850		3.3	$	0.16		32,850	$	0.16
	0.37		53,251		4.7		0.37		52,917		0.37
	0.97		80,234		5.5		0.97		64,849		0.97
	2.51		117,902		5.9		2.51		82,234		2.51
	2.89		46,000		6.4		2.89		30,250		2.89
	2.93		311,672		6.6		2.93		210,807		2.93
	3.18		106,200		6.8		3.18		63,865		3.18
			748,109		6.1		2.38		537,772		2.24

The aggregate intrinsic value of options exercised for the nine months ended September 30, 2020 and 2019 was $0.2 million and $0.6 million, respectively. The Company has various vesting agreements with its employees. Options granted generally vest over a five-year period and generally are exercisable for 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, 2019		503,900		$	8.48
Granted		55,000			4.40
Released		(88,886	)		7.99
Canceled		(28,039	)		9.12
As of September 30, 2020		441,975			8.03

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,
	2020		2019		2020		2019
Cost of revenue	$	33	$	29	$	100	$	83
Research and development		133		124		401		370
Selling, general and administrative		201		184		635		568
Total	$	367	$	337	$	1,136	$	1,021

9. Net Income (Loss) 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,
	2020			2019		2020		2019
Numerator:
Basic:
Net income (loss)	$	(26	)	$	1,457	$	456	$	1,174
Diluted:
Net income (loss)	$	(26	)	$	1,457	$	456	$	1,174
Denominator:
Basic shares:
Weighted-average shares outstanding in computing basic net income (loss) per share		17,619,958			17,316,172		17,559,438		17,239,544
Diluted shares:
Effect of potentially dilutive securities:
Stock awards (1)		—			582,968		317,872		610,816
Weighted-average shares used in computing diluted net income (loss) per share		17,619,958			17,899,140		17,877,310		17,850,360
Net income (loss) per share:
Basic	$	(0.00	)	$	0.08	$	0.03	$	0.07
Diluted	$	(0.00	)	$	0.08	$	0.03	$	0.07

(1)

Includes early-exercised options.

For a net loss period, basic net loss per share and diluted net loss per share are the same as the effect of potential shares is antidilutive and therefore excluded. The potentially dilutive securities outstanding for the three months ended September 30, 2020 and 2019 and for the nine months ended September 30, 2020 and 2019 that were excluded from the computation of diluted net income (loss) per share for the period presented as the effect would have been antidilutive was 799,000, 325,000, 779,000 and 367,000 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,
	2020			2019		2020		2019
Domestic	$	(51	)	$	1,546	$	458	$	1,108
Foreign		51			67		168		179
Income before income taxes	$	—		$	1,613	$	626	$	1,287

The components of the income tax provision are as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
United States	$	15	$	145	$	139	$	86
Foreign		11		11		31		27
Income tax provision	$	26	$	156	$	170	$	113

As of September 30, 2020, 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, 2020, 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 benefit of $0.1 million against the Company’s effective tax rate.

The CARES Act did not have a material impact on our tax provision for the nine months ended September 30, 2020. We continue to examine the elements of the CARES Act and the impact that it may have on our future business.

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,” or the negative version of these words and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including the following:

•

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

•

our market opportunity and our ability to effectively manage or sustain our growth;

•

our ability to attract and retain end-customers in our current or future target markets;

•

our ability to continue to develop new technologies and obtain and maintain intellectual property rights protecting such technologies;

•

our ability to form and expand partnerships with technology partners and consulting partners;

•

our ability to maintain, protect and enhance our intellectual property;

•

our ability to successfully defend litigation brought against us;

•

new product releases and timing;

•

anticipated trends, key factors and challenges in our business and the competition that we face;

•

the effect of the COVID-19 pandemic on our business and the success of any measures we have taken or may take in the future in response thereto;

•

laws and regulations applicable to our business, including export restrictions and measures taken by government authorities in response to the COVID-19 pandemic;

•

our liquidity and working capital requirements; and

•

our expectations regarding future expenses and investments.

In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this 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 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, 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 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 162 million integrated circuits. Our revenue was $20.8 million and $21.8 million for the nine months ended September 30, 2020 and 2019, respectively. Historically, we have derived a significant majority of our revenue from the security surveillance market. However, recently the mix of our revenue has changed. The security surveillance market accounted for a 45% and 66% of our revenue in the nine months ended September 30, 2020 and fiscal year 2019, respectively. Meanwhile, the automotive market accounted for a 55% and 34% of our revenue in the nine months ended September 30, 2020 and fiscal year 2019, respectively. We recognized $9.4 million and $14.4 million of revenue on sales into the security surveillance market for the nine months ended September 30, 2020 and 2019, respectively. In addition, we recognized $11.4 million and $7.4 million of revenue on sales into the automotive market for the nine months ended September 30, 2020 and 2019, respectively. We recorded net income of $0.5 million and net income of $1.2 million for the nine months ended September 30, 2020 and 2019, 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, 2020 and 2019, 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 $1.6 million and $1.7 million for the three months ended September 30, 2020 and 2019, respectively, and $5.5 million and $4.8 million for the nine months ended September 30, 2020 and 2019, 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, 2020, we had 81 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.

Effective October 9, 2019, the U.S. Commerce Department’s Bureau of Industry and Security (“BIS”) added Hikvision, a customer that represented 6% and 65% of our revenue for the three months ended September 30, 2020 and 2019, respectively, and 23% and 50% of our revenue for the nine months ended September 30, 2020 and 2019, respectively, to the BIS Entity List with a

license requirement for all items subject to the Export Administration Regulations (“EAR”). The BIS Entity List is a published list of the names of certain foreign persons, including businesses, research institutions, government and private organizations and individuals, that are subject to specific governmental license requirements for the export, reexport and/or transfer of specified items. These license requirements could make it more difficult to ship, or in some cases, prevent the shipment of products to certain foreign persons named on the BIS Entity List.

We have taken action to confirm whether our products are subject to EAR. We have retained the continuous assistance of outside 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 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 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

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

COVID-19 Pandemic. In December 2019, a respiratory illness caused by a novel coronavirus disease (“COVID-19”) was reported in Wuhan, Hubei Province, China, and, in March 2020, the World Health Organization characterized COVID-19 as a pandemic. The full impact of the COVID-19 pandemic continues to evolve as of the date of this Quarterly Report on Form 10-Q. As such, it is uncertain as to the full magnitude that the pandemic will have on our financial condition, liquidity, and future results of operations. Management is actively monitoring the impact of COVID-19 on our financial condition, liquidity, operations, suppliers, industry, and workforce. This includes monitoring the results from new information that may emerge concerning COVID-19 and any actions taken to contain or treat COVID-19, as well as 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.

The COVID-19 pandemic has had an impact on our business and that of our customers and suppliers. The pandemic has resulted in government authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place or stay-at-home orders, and business shutdowns. For example, employees at our headquarters located in San Jose, California, have been subject to a stay-at-home order from the state government since March 2020. Our offices in Japan, China, South Korea and Taiwan have also been impacted by COVID-19 and have been subject to various measures implemented by local governments to reduce the spread of COVID-19. 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 remain in place 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 and fulfill our customers’ purchase orders during the nine months ended September 30, 2020.

Our security surveillance market has been and is expected to continue to be affected by the weakness in our end markets in North and South Americas, the Middle East, and India due to the impact of the COVID-19 pandemic in those markets. In the third quarter of 2020, one of our largest customers significantly reduced orders to us in response to this market weakness. However, the impact to our security surveillance revenue was partially mitigated by revenue in the automotive market due to demand increase associated with the usual seasonal production cycle in the automotive industry in the second half of the year and multiple new design-wins going into production that we obtained from automotive manufacturers in prior quarters.

We have taken several actions to address the potential COVID-19 disruption to our operations, which include the following priorities and actions:

Health and Safety

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The health and well-being of our employees, customers and supply partners is our top priority.

•

We have implemented strict measures to ensure and maintain safety, including working remotely where possible and social distancing.

•

We are closely monitoring rapidly evolving conditions and adhering to local, state and federal guidelines.

Business Continuity

•

We have implemented and continue to adjust comprehensive business continuity plans in response to COVID-19 to ensure that we are able to deliver for our customers and continue to work toward profitability.

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We are working closely with our supply partners globally to maintain adequate inventory levels, as our suppliers continue to support the health and safety of their employees.

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We are working to ensure demand continuity for our products among us, our supply partners, our manufacturers and our customers or their contract manufacturing partners around the world.

Financial Structure

•

We believe our balance sheet and liquidity position provide the flexibility needed to support our operations during this pandemic.

•

We have taken and will continue to take precautionary steps, as required, to maintain our financial position including, but not limited to, managing operating expenses prudently, deferring non-essential costs.

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, 2020 and 2019, Hikvision, the largest security surveillance manufacturer in China and one of our end-customers, accounted for 23% and 50% of our revenue, respectively. Although large customers can help us increase our revenue and improve our results of operations, reliance on large customers is a risk to our business. For example, Section 889 of the 2019 National Defense Authorization Act (“NDAA”) 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. 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. Revenue is recognized in accordance with ASC 606 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, foreign derived intangible income deduction, 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,
	2020			2019		2020		2019
Revenue	$	6,214		$	9,613	$	20,823	$	21,809
Cost of revenue (1)		2,983			4,874		9,567		10,862
Gross profit		3,231			4,739		11,256		10,947
Operating expenses: (1)
Research and development		1,578			1,686		5,499		4,762
Selling, general and administrative		1,695			1,442		5,327		4,939
Total operating expenses		3,273			3,128		10,826		9,701
Income (loss) from operations		(42	)		1,611		430		1,246
Other income (expense) - net		42			2		196		41
Income before income taxes		—			1,613		626		1,287
Income tax provision		26			156		170		113
Net income (loss)	$	(26	)	$	1,457	$	456	$	1,174

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Cost of revenue	$	33	$	29	$	100	$	83
Research and development		133		124		401		370
Selling, general and administrative		201		184		635		568
Total	$	367	$	337	$	1,136	$	1,021

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,
	2020			2019			2020			2019
Revenue		100	%		100	%		100	%		100	%
Cost of revenue		48			51			46			50
Gross profit		52			49			54			50
Operating expenses:
Research and development		25			18			26			22
Selling, general and administrative		28			14			26			22
Total operating expenses		53			32			52			44
Income (loss) from operations		(1	)		17			2			6
Other income (expense) - net		1			—			1			—
Income before income taxes		—			17			3			6
Income tax provision		—			2			1			1
Net income (loss)		0	%		15	%		2	%		5	%

Comparison of the Three and Nine Months Ended September 30, 2020 and September 30, 2019

Revenue

	Three Months Ended September 30,				Change						Nine Months Ended September 30,				Change
	2020		2019		Amount			%			2020		2019		Amount			%
	(dollars in thousands)
Revenue	$	6,214	$	9,613	$	(3,399	)		(35	)%	$	20,823	$	21,809	$	(986	)		(5	)%

Revenue decreased $3.4 million, or 35%, for the three months ended September 30, 2020 as compared to the three months ended September 30, 2019. This was mainly due to a $4.6 million decrease in security surveillance market revenue as a result of a 69% decrease in the volume of shipments. This decrease was partially offset by a $1.2 million increase in automotive market revenue due to a 75% increase in volume of shipments offset by a decrease in average selling price attributable to product mix.

Revenue decreased $1.0 million, or 5%, for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019. This was mainly due to a $5.0 million decrease in security surveillance market revenue due to a 36% decrease in the volume of shipments and a decrease in average selling price attributable to product mix. This decrease was partially offset by a $4.0 million increase in automotive market revenue driven by a 97% increase in volume of shipments.

Recently, our security surveillance market has been negatively affected by the weakness in our end markets in North and South Americas, the Middle East, and India due to the impact of COVID-19 in those markets.

We have determined that pricing of our products remains stable in our target markets. Fluctuation in our overall average selling price is 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 the major components of the change in revenue by geographic region for the three and nine months ended September 30, 2020 and September 30, 2019:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019
China		58	%		79	%		60	%		73	%
Taiwan		24			10			21			13
South Korea		15			9			16			11
Japan		2			2			2			3
Other		1			—			1			—
Total		100	%		100	%		100	%		100	%

Cost of revenue and gross margin

	Three Months Ended September 30,						Change						Nine Months Ended September 30,						Change
	2020			2019			Amount			%			2020			2019			Amount			%
	(dollars in thousands)
Cost of revenue	$	2,983		$	4,874		$	(1,891	)		(39	)%	$	9,567		$	10,862		$	(1,295	)		(12	)%
Gross margin		52	%		49	%								54	%		50	%

Cost of revenue decreased by $1.9 million, or 39%, and gross margin increased from 49% to 52% for the three months ended September 30, 2020 as compared to the three months ended September 30, 2019. Cost of revenue decreased due to a 29% decrease in volume of shipments, and a $0.1 million decrease in warranty expense. Gross margin was positively impacted by product mix.

Cost of revenue decreased by $1.3 million, or 12%, and gross margin increased from 50% to 54% for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019. Cost of revenue decreased mainly due to a $0.6 million decrease as a result of a decrease in inventory write-down, increased utilization of previously reserved inventory, decreased warranty expense, a reduction in warranty exposure, and product mix. Gross margin was positively impacted by these decreases.

We expect gross margins to fluctuate in future periods due to changes in product mix, average unit selling prices, manufacturing costs, adjustments to inventory valuation, if any, and end market product demand.

Research and development expense

	Three Months Ended September 30,				Change						Nine Months Ended September 30,				Change
	2020		2019		Amount			%			2020		2019		Amount		%
	(dollars in thousands)
Research and development	$	1,578	$	1,686	$	(108	)		(6	)%	$	5,499	$	4,762	$	737		15	%

Research and development expenses decreased $0.1 million, or 6%, for the three months ended September 30, 2020 as compared to the three months ended September 30, 2019 primarily due to a $0.2 million decrease in external design fees and software costs, partially offset by a $0.1 million increase in tape-out expenses associated with the development of new products.

Research and development expenses increased $0.7 million, or 15%, for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019 primarily due to a $0.9 million increase in tape-out expenses associated with the development of new products, offset by a $0.2 million decrease in external design fees and software costs.

Selling, general and administrative expense

	Three Months Ended September 30,				Change					Nine Months Ended September 30,				Change
	2020		2019		Amount		%			2020		2019		Amount		%
	(dollars in thousands)
Selling, general and administrative	$	1,695	$	1,442	$	253		18	%	$	5,327	$	4,939	$	388		8	%

Selling, general and administrative expenses increased $0.3 million, or 18%, for the three months ended September 30, 2020 as compared to the three months ended September 30, 2019 mainly due to a $0.1 million increase in personnel costs due to an increase in headcount as a result of expanding operations and a $0.1 million increase in professional service fees due to additional administrative efforts with operating as a U.S. company that is publicly traded in Japan.

Selling, general and administrative expenses increased $0.4 million or 8%, for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019 primarily due to a $0.3 million increase in personnel costs due to an increase in headcount as a result of expanding operations, a $0.1 million increase in professional service fees due to additional administrative efforts with operating as a U.S. company that is publicly traded in Japan, and a $0.1 million increase in stock-based compensation, partially offset by a $0.2 million decrease in marketing activities due to lower trade show costs and lower travel expenses.

Other income and expense

	Three Months Ended September 30,				Change					Nine Months Ended September 30,				Change
	2020		2019		Amount		%			2020		2019		Amount		%
	(dollars in thousands)
Other income (expense) - net	$	42	$	2	$	40		2000	%	$	196	$	41	$	155		378	%

Other income increased $40,000, or 2,000%, for the three months ended September 30, 2020 as compared to the three months ended September 30, 2019 primarily due to a $44,000 increase in other income due to the net interest income from investments, partially offset by the change from foreign currency exchange transactions and foreign currency fluctuations.

Other income increased $0.2 million, or 378%, for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019 primarily due to a $0.2 million increase in other income due to the net interest income from investments, partially offset by the change from foreign currency exchange transactions and foreign currency fluctuations.

Income tax provision

	Three Months Ended September 30,				Change						Nine Months Ended September 30,				Change
	2020		2019		Amount			%			2020		2019		Amount		%
	(dollars in thousands)
Income tax provision (benefits)	$	26	$	156	$	(130	)		(83	)%	$	170	$	113	$	57		50	%

The income tax provision decreased $0.1 million, or 83%, for the three months ended September 30, 2020 as compared to the three months ended September 30, 2019, primarily due to a decrease in income before tax.

The income tax provision increased $0.1 million, or 50%, for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019, primarily due to the increase in the effective tax rate due to fewer discrete tax benefits, partially offset by a decrease in income before tax.

Liquidity and Capital Resources

Our primary use of cash is to fund our operations as we continue to grow our business. Cash used to fund operating expenses is impacted by the timing of when we pay expenses, as reflected in the changes in our outstanding accounts payable and accrued expenses.

Our cash, cash equivalents, and short-term investments as of September 30, 2020 were $23.1 million. We believe our existing cash, cash equivalents, short-term investments, and cash we expect to generate from operations, will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of our spending to support research and development activities, the timing and cost of establishing additional sales and marketing capabilities, the introduction of new and enhanced products and our costs to implement new manufacturing technologies or potentially acquire and integrate other companies or assets. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. Any debt financing obtained by us in the future could also involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. Additionally, if we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. If we are unable to obtain adequate 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,
	2020			2019
Net cash provided by (used in) operating activities	$	(850	)	$	2,260
Net cash used in investing activities		(5,661	)		(267	)
Net cash provided by financing activities		46			71
Net increase (decrease) in cash and cash equivalents	$	(6,465	)	$	2,064

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, 2020, net cash used in operating activities was $0.9 million, primarily due to net income of $0.5 million and non-cash charges of $2.2 million primarily driven by stock-based compensation, noncash lease expense, depreciation and amortization, and inventory valuation adjustment, offset by net cash outflow used in operating assets and liabilities of $3.5 million. The net cash outflow used in operating assets and liabilities was primarily due to a $1.8 million cash outflow in inventory as units manufactured during the period and on hand were in excess of product sales during the period to support future

demand, a $0.6 million cash outflow in accounts payable due to timing of vendor payments, a $0.5 million cash outflow in accrued expenses due to timing of service performed, a $0.4 million cash outflow in customer deposit due to timing of customer pre-payments, and a $0.4 million cash outflow in other liabilities due to the renewals of operating leases, partially offset by a $0.3 million cash inflow in prepaid expenses and other current assets due to timing of payment for service to be performed.

During the nine months ended September 30, 2019, net cash provided by operating activities was $2.3 million, primarily due to $1.2 million of net income and non-cash charges of $2.0 million primarily driven by stock-based compensation, depreciation and amortization, inventory valuation adjustment and noncash lease expense, offset by net cash outflow used in the change in net operating assets and liabilities of $0.9 million. The net cash outflow used in the change in net 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.

Investing Activities

During the nine months ended September 30, 2020, cash used in investing activities was $5.7 million, primarily due to $11.1 million cash outflow used to purchase debt securities and a $0.3 million cash outflow due to purchases of property and equipment, partially offset by a $5.8 million cash inflow due to proceeds from maturities of debt securities.

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

Financing Activities

During the nine months ended September 30, 2020 and 2019, cash provided by financing activities was $46,000 and $0.1 million, respectively, primarily due to net proceeds from the exercise of stock options, partially offset by payments for shares withheld for tax withholdings on vesting of restricted stock units, respectively.

Contractual Obligations

Our outstanding contractual obligations as of September 30, 2020 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)

Purchase commitments

366

269

—

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 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, 2020 and 2019 and the nine months ended September 30, 2020 and 2019. 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, 2020 and 2019 and the nine months ended September 30, 2020 and 2019 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 net of other income (expense) on our Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).

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 risk by investing cash in excess of our operating needs in high-quality instruments issued by highly creditworthy financial institutions. We do not enter into 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.

With the amount of cash, cash equivalents and investments that we maintained at September 30, 2020, inconsequential changes in interest rates, would not have had a material effect on our cash and cash equivalents or the fair value of our investment portfolio.

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 September 30, 2020 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, 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.

We face risks related to health epidemics, including the COVID-19 pandemic, which could have a material adverse effect on our business, financial condition and results of operations.

We face various risks related to public health issues, including epidemics, pandemics, and other outbreaks, including the recent pandemic of respiratory illness caused by a novel coronavirus known as COVID-19, which the World Health Organization characterized as a pandemic in March 2020. The impact of COVID-19, including changes in consumer and business behavior, pandemic fears and market downturns, and restrictions on business and individual activities, has created significant volatility in the global economy and led to reduced economic activity.

The pandemic has resulted in government authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place or stay-at-home orders, and business shutdowns. For example, employees at our headquarters located in San Jose, California, have been subject to a stay-at-home order from the state government since March 2020. Our offices in Japan, China, South Korea and Taiwan have also been impacted by COVID-19 and have been subject to various measures implemented by local governments to reduce the spread of COVID-19. 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. For example, travel restrictions may prohibit our ability to conduct necessary face-to-face meetings with our customers. These measures by government authorities may remain in place for a significant period of time and they are likely to continue to adversely affect the progress of our research and development projects, our sales and marketing activities, product delivery schedule, and our business, financial condition and results of operations.

The spread of COVID-19 has caused us to modify our business practices (including restriction on employee travel, mandating that all non-essential personnel in our headquarters to work from home, temporary closures of our offices, and cancellation of physical participation in sales activities, meetings, events and conferences), and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, end-customers, distributors and suppliers. There is no certainty that such actions will be sufficient to mitigate the risks posed by the virus or otherwise be satisfactory to government authorities. If significant portions of our workforce are unable to work effectively, including due to illness, quarantines, social distancing, government actions or other restrictions in connection with the COVID-19 pandemic, our operations will be adversely impacted.

The extent to which the COVID-19 pandemic impacts our business, prospects and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, 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. The COVID-19 pandemic could cause fluctuations in foreign currency markets, impact the availability of future borrowings, increase the cost of borrowings, increase credit risks of our customers, disrupt supply and limit the ability of third-party suppliers’, manufactures’ and subcontractors’ ability to manufacture our products in time. We may also experience an increase in the cost of materials used to our products. Even after the COVID-19 pandemic has subsided, we may continue to experience an adverse impact to our business as a result of its global economic impact, including any recession that has occurred or may occur in the future.

Specifically, difficult macroeconomic conditions, such as decreases in per capita income and level of disposable income, increased and prolonged unemployment or a decline in consumer confidence as a result of the COVID-19 pandemic, as well as reduced spending by businesses and end-customers, could have a material adverse effect on the demand for our products. In addition, under difficult economic conditions, potential end-customers may seek to reduce discretionary spending by forgoing products that

incorporate our solutions, or our customers may seek to reduce spending by choosing alternative products. Because a significant portion of our revenue is concentrated in Asia, decreased demand for our products in Asia could have a disproportionately negative impact on our business and financial results. Currently, our customers in Asia are experiencing weakness in their markets in North and South Americas, the Middle East, and India due to the COVID-19 pandemic, which has negatively impacted our operating results for the nine and three months ended September 30, 2020.

There are no comparable recent events which may provide guidance as to the effect of the spread of COVID-19 and a pandemic, and, as a result, the ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. We do not yet know the full extent of COVID-19’s impact on our business, our operations, or the global economy as a whole. However, the effects could have a material impact on our results of operations, and we will continue to monitor the situation closely.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

On November 4, 2020, the Company’s board of directors appointed Maureen A. Monahan as our Chief Financial Officer and Vice President of Administrations, effective as of November 4, 2020. Ms. Monahan will serve as our principal financial officer.

Ms. Monahan, 57, has served as our Corporate Controller since September 2020. Prior to joining us, Ms. Monahan served as a consultant for Resources Connection, Inc. (“RGP”), a multinational professional services firm where she advised clients on finance, accounting and SEC reporting, from May 2016 to September 2020. Prior to her role at RGP, Ms. Monahan served as Vice President of Finance at Complete Genomics, Inc, a human genome DNA sequencing company, from 2008 to January 2016, and as Corporate Controller at Techwell, Inc., a semiconductor company, from 2005 to 2008. Ms. Monahan holds a Bachelor of Science degree in Commerce and an MBA from Santa Clara University, and is a Certified Public Accountant.

Ms. Monahan is expected to receive the following in connection with her appointment: (i) an annual base salary of $160,000 and (ii) restricted stock units with respect to 65,000 shares of common stock of the Company, subject to the terms and conditions of the Company’s 2017 Stock Incentive Plan (the “Plan”) and the award agreement issued under the Plan, of which 1/5th of the total number of shares vest after one year and the remaining shares vest at a rate of 1/20th quarterly thereafter, subject to continued employment.

Ms. Monahan will also be eligible for relocation services and expense reimbursement in accordance with the Company’s policies, as well as benefits generally available to employees and executives of the Company. Ms. Monahan is also expected to enter into the Company’s standard form of indemnification agreement.

There are no family relationships between Ms. Monahan and any of the Company’s directors or executive officers and there are no arrangements or understanding between Ms. Monahan and any other persons pursuant to which she was selected as an officer of the Company. There are no related party transactions between Ms. Monahan and the Company that are required to be disclosed pursuant to Item 404 (a) of Regulation S-K.

Item 6. Exhibits.

Exhibit Number		Description

31.1		Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a).
31.2		Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a).
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		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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 Quarterly Report on Form 10-Q and will not be deemed “filed” for purposes of Section 18 of 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 6, 2020	By:	/s/ Maureen Monahan
		Maureen Monahan
		Chief Financial Officer and Vice President of Administrations (Principal Financial and Accounting Officer)

Date: November 6, 2020	By:	/s/ Fumihiro Kozato
		Fumihiro Kozato
		President and Chief Executive Officer (Principal Executive Officer)