Techpoint, Inc. - Quarter Report: 2022 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, 2022

☐	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

(Address of principal executive offices) (Zip Code)

(408) 324-0588

(Registrant’s telephone number,

including area code)

N/A

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

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

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 (Growth Market)

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

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 7, 2022, the registrant had 18,194,152 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 Income Statements and Comprehensive Income (Loss)	2
	Condensed Consolidated Statements of Stockholders’ Equity	3
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	28
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	29

Item 6.	Exhibits	30
	Signatures	31

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,
	2022			2021
Assets
Current assets:
Cash and cash equivalents	$	32,674		$	27,379
Short-term investments		11,912			14,942
Accounts receivable		95			336
Inventory		14,487			13,522
Prepaid expenses and other current assets		558			895
Total current assets		59,726			57,074
Property and equipment, net		576			713
Deferred tax assets		1,855			584
Right-of-use assets		1,158			1,009
Other assets		4,538			2,558
Total assets	$	67,853		$	61,938
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,705		$	1,838
Accrued liabilities		2,630			1,896
Customer deposits		1,056			775
Lease liabilities		681			525
Dividends payable		—			4,504
Total current liabilities		6,072			9,538
Other liabilities		582			583
Total liabilities		6,654			10,121
Commitments and contingencies (Note 5)
Stockholders’ equity
Preferred stock, par value $0.0001 per share - 5,000,000 shares authorized as of September 30, 2022 and December 31, 2021; nil shares issued and outstanding as of September 30, 2022 and December 31, 2021		—			—
Common stock, par value $0.0001 per share - 75,000,000 shares authorized as of September 30, 2022 and December 31, 2021; 18,161,529 and 17,928,748 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively		2			2
Additional paid-in capital		25,666			24,251
Accumulated other comprehensive loss		(166	)		(26	)
Retained earnings		35,697			27,590
Total stockholders’ equity		61,199			51,817
Total liabilities and stockholders’ equity	$	67,853		$	61,938

See accompanying notes to condensed consolidated financial statements.

Techpoint, Inc.

Condensed Consolidated Income Statements and Comprehensive Income (Loss)

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
Revenue	$	15,505		$	17,060		$	48,585		$	47,233
Cost of revenue		6,904			7,919			21,414			21,524
Gross profit		8,601			9,141			27,171			25,709
Operating expenses
Research and development		2,012			2,037			6,230			4,700
Selling, general and administrative		2,018			2,278			6,843			6,402
Total operating expenses		4,030			4,315			13,073			11,102
Income from operations		4,571			4,826			14,098			14,607
Other income (expense), net		53			3			(29	)		33
Income before income taxes		4,624			4,829			14,069			14,640
Provision for income taxes		469			573			1,435			1,905
Net income	$	4,155		$	4,256		$	12,634		$	12,735
Net income per share:
Basic	$	0.23		$	0.24		$	0.70		$	0.72
Diluted	$	0.22		$	0.23		$	0.68		$	0.69
Weighted average shares outstanding in computing net income per share
Basic		18,152,849			17,873,516			18,081,235			17,800,721
Diluted		18,598,601			18,628,974			18,555,119			18,574,702
Comprehensive income:
Net income	$	4,155		$	4,256		$	12,634		$	12,735
Other comprehensive income (loss), net of tax:
Unrealized loss on available-for-sale debt securities, net of tax benefit of $16, $3, $37 and $12 for the three and nine months ended September 30, 2022 and 2021, respectively		(62	)		(12	)		(140	)		(45	)
Comprehensive income	$	4,093		$	4,244		$	12,494		$	12,690

See accompanying notes to condensed consolidated financial statements.

Techpoint, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share amounts, unaudited)

	Shares			Amount		Additional Paid-In Capital			Comprehensive Income (Loss)			Retained Earnings		Total Stockholders' Equity
Balances as of December 31, 2020		17,690,062		$	2	$	22,523		$	41		$	14,807	$	37,373
Other comprehensive loss - unrealized loss on available-for-sale debt securities		—			—		—			(20	)		—		(20	)
Issuance of common stock upon exercise of stock options and vesting of early exercised options		47,766			—		77			—			—		77
Issuance of common stock upon vesting of restricted stock units		24,125			—		—			—			—		—
Shares repurchased for tax withholdings on vesting of restricted stock units		(3,920	)		—		(29	)		—			—		(29	)
Stock-based compensation		—			—		371			—			—		371
Net income		—			—		—			—			3,853		3,853
Balances as of March 31, 2021		17,758,033		$	2	$	22,942		$	21		$	18,660	$	41,625
Other comprehensive loss - 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		15,583			—		29			—			—		29
Issuance of common stock upon vesting of restricted stock units		51,608			—		—			—			—		—
Shares repurchased for tax withholdings on vesting of restricted stock units		(4,739	)		—		(61	)		—			—		(61	)
Stock-based compensation		—			—		431			—			—		431
Net income		—			—		—			—			4,626		4,626
Balances as of June 30, 2021		17,820,485		$	2	$	23,341		$	8		$	23,286	$	46,637
Other comprehensive loss - unrealized loss on available-for-sale debt securities		—			—		—			(12	)		—		(12	)
Issuance of common stock upon exercise of stock options and vesting of early exercised options		45,568			—		72			—			—		72
Issuance of common stock upon vesting of restricted stock units		29,900			—		—			—			—		—
Shares repurchased for tax withholdings on vesting of restricted stock units		(4,737	)		—		(86	)		—			—		(86	)
Stock-based compensation		—			—		515			—			—		515
Net income		—			—		—			—			4,256		4,256
Balances as of September 30, 2021		17,891,216		$	2	$	23,842		$	(4	)	$	27,542	$	51,382

See accompanying notes to condensed consolidated financial statements.

Techpoint, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share amounts, unaudited)


	Common Stock					Additional			Accumulated Other						Total
	Shares			Amount		Paid-In Capital			Comprehensive Income (Loss)			Retained Earnings			Stockholders' Equity
Balances as of December 31, 2021		17,928,748		$	2	$	24,251		$	(26	)	$	27,590		$	51,817
Other comprehensive loss – unrealized loss on available-for-sale debt securities		—			—		—			(50	)		—			(50	)
Issuance of common stock upon exercise of stock options and vesting of early exercised options		79,517			—		142			—			—			142
Issuance of common stock upon vesting of restricted stock units		32,225			—		—			—			—			—
Shares repurchased for tax withholdings on vesting of restricted stock units		(5,906	)		—		(82	)		—			—			(82	)
Stock-based compensation		—			—		515			—			—			515
Net income		—			—		—			—			4,377			4,377
Balances as of March 31, 2022		18,034,584		$	2	$	24,826		$	(76	)	$	31,967		$	56,719
Other comprehensive loss – unrealized loss on available-for-sale debt securities		—			—		—			(28	)		—			(28	)
Issuance of common stock upon exercise of stock options and vesting of early exercised options		8,838			—		24			—			—			24
Issuance of common stock upon vesting of restricted stock units		70,975			—		—			—			—			—
Shares repurchased for tax withholdings on vesting of restricted stock units		(5,804	)		—		(51	)		—			—			(51	)
Stock-based compensation		—			—		475			—			—			475
Cash dividends declared ($0.25 per share)		—			—		—			—			(4,527	)		(4,527	)
Net income		—			—		—			—			4,102			4,102
Balances as of June 30, 2022		18,108,593		$	2	$	25,274		$	(104	)	$	31,542		$	56,714
Other comprehensive loss - unrealized loss on available-for-sale debt securities		—			—		—			(62	)		—			(62	)
Issuance of common stock upon exercise of stock options and vesting of early exercised options		24,600			—		30			—			—			30
Issuance of common stock upon vesting of restricted stock units		34,250			—		—			—			—			—
Shares repurchased for tax withholdings on vesting of restricted stock units		(5,914	)		—		(58	)		—			—			(58	)
Stock-based compensation		—			—		420			—			—			420
Net income		—			—		—			—			4,155			4,155
Balances as of September 30, 2022		18,161,529		$	2	$	25,666		$	(166	)	$	35,697		$	61,199

See accompanying notes to condensed consolidated financial statements.

Techpoint, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands, unaudited)

	Nine Months Ended
	September 30,
	2022			2021
Cash Flows From Operating Activities
Net income	$	12,634		$	12,735
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		313			307
Stock-based compensation		1,410			1,317
Amortization of premium on available-for-sale investments		105			121
Inventory valuation adjustment		413			209
Deferred income taxes		(1,248	)		(230	)
Noncash lease expense		566			562
Changes in operating assets and liabilities:
Accounts receivable		241			(127	)
Inventory		(1,378	)		(3,534	)
Prepaid expenses and other current assets		371			169
Other assets		26			10
Accounts payable		(139	)		541
Accrued liabilities		965			485
Customer deposits		281			378
Lease liabilities		(194	)		(262	)
Other liabilities		(353	)		(324	)
Net cash provided by operating activities		14,013			12,357
Cash Flows From Investing Activities
Purchases of property and equipment		(400	)		(274	)
Purchases of debt securities		(12,166	)		(12,916	)
Proceeds from maturities of debt securities		12,875			14,020
Net cash provided by investing activities		309			830
Cash Flows From Financing Activities
Payment of dividends		(9,031	)		—
Net proceeds from exercise of stock options		195			161
Payment for shares withheld for tax withholdings on vesting of restricted stock units		(191	)		(176	)
Net cash used in financing activities		(9,027	)		(15	)
Net increase in cash and cash equivalents		5,295			13,172
Cash and cash equivalents at beginning of period		27,379			12,084
Cash and cash equivalents at end of period	$	32,674		$	25,256

Supplemental Disclosure of Cash Flow Information
Cash paid for income taxes	$	2,614		$	2,347
Supplemental Disclosure of Noncash Investing and Financing Information
Property and equipment purchased but not yet paid	$	6		$	9
Vesting of early exercised options	$	1		$	17

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”) was originally incorporated in California in April 2012 and reincorporated in Delaware in July 2017. The Company is a fabless semiconductor company that designs, markets and sells mixed-signal integrated circuits for multiple video applications in the security surveillance and automotive markets. The Company is headquartered in San Jose, California.

Basis of Consolidation and Significant Accounting Policies

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

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

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

Revenue Recognition

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

Use of Management’s Estimates

The preparation of 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 and valuation allowance for recorded deferred tax assets. 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.

Certain Significant Risks and Uncertainties

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

The Company has been impacted by adverse macroeconomic and geopolitical conditions. These conditions include but are not limited to inflation, foreign currency fluctuations, the COVID-19 pandemic, and the supply chain challenges and disruptions caused by any of these events. Management continues to actively monitor the impact of these conditions on the Company’s financial condition, liquidity, operations, end-customers (including its significant end-customers), distributors, suppliers, industry, and workforce. The extent to which such events impact the Company’s business, prospects and results of operations will depend on future developments, which are highly uncertain. The Company has made estimates of the impact of these events within its financial statements and there may be changes to those estimates in future periods.

Credit and Concentration of Customer Risk

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

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
Customer
Customer A		47	%		53	%		49	%		54	%
Customer B		10	%	*			*			*
End-Customer
End-Customer A (1)		37	%		40	%		36	%		38	%

Less than 10%

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

Concentration of Supplier Risk

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

Recently 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 may have on its condensed consolidated financial statements.

In September 2022, the FASB issued ASU No. 2022-4, Liabilities-Supplier Finance Programs (Subtopic 405-50), which requires that a buyer in a supplier finance program disclose sufficient information about the program to allow a user of financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude. Supplier finance programs, which also may be referred to as reverse factoring, payables finance, or structured payables arrangements, allow a buyer to offer its suppliers the option for access to payment in advance of an invoice due date, which is paid by a third-party

finance provider or intermediary on the basis of invoices that the buyer has confirmed as valid. Under such programs, suppliers can request early payment from the finance provider or intermediary for those confirmed invoices. The guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. As the Company does not have any supplier finance program obligations, the guidance is not expected to have any impact on its condensed consolidated financial statements.

2. Balance Sheet Components

Inventory

Inventory consists of the following (in thousands):

	September 30,		December 31,
	2022		2021
Work in process	$	8,487	$	6,038
Finished goods		6,000		7,484
Total inventory	$	14,487	$	13,522

Property and Equipment - Net

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

	September 30,			December 31,
	2022			2021
Computer equipment and software	$	2,389		$	2,224
Leasehold improvements		94			84
Furniture		36			36
Total property and equipment		2,519			2,344
Less: accumulated depreciation		(1,943	)		(1,631	)
Total property and equipment, net	$	576		$	713

The Company recorded $0.1 million of depreciation expense for each of the three months ended September 30, 2022 and 2021, respectively, and $0.3 million for each of the nine months ended September 30, 2022 and 2021, respectively.

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

	September 30,		December 31,
	2022		2021
Payroll-related expenses	$	2,087	$	803
Engineering services		234		681
Accrued warranty		174		145
Taxes payable		69		117
Professional fees		60		62
Other		6		18
Accrued inventory		—		70
Total accrued liabilities	$	2,630	$	1,896

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 $1.1 million and $0.8 million as of September 30, 2022 and December 31, 2021, respectively. The Company recognized $0.7 million of revenue from the June 30, 2022 customer deposit balance during the three months ended September 30, 2022 and $0.8 million of revenue from the December 31, 2021 customer deposits balance during the nine months ended September 30, 2022.

3. Fair Value Measurements of Financial Instruments

Summary of Financial Instruments

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


	September 30, 2022
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Estimated Fair Values
Available-for-sale securities:
Money market funds	$	4,888	$	—	$	—		$	4,888
Commercial paper		8,257		—		(27	)		8,230
Government agency bonds		1,000		—		(17	)		983
Corporate bonds		11,518		—		(166	)		11,352
Total available-for-sale securities	$	25,663	$	—	$	(210	)	$	25,453
Reported in:
Cash and cash equivalents								$	9,183
Short-term investments									11,912
Other assets									4,358
Total available-for-sale securities								$	25,453


	December 31, 2021
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Estimated Fair Values
Available-for-sale securities:
Money market funds	$	8,222	$	—	$	—		$	8,222
Commercial paper		3,993		—		(6	)		3,987
Corporate bonds		13,333		—		(27	)		13,306
Total available-for-sale securities	$	25,548	$	—	$	(33	)	$	25,515
Reported in:
Cash and cash equivalents								$	8,222
Short-term investments									14,942
Other assets									2,351
Total available-for-sale securities								$	25,515

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


	September 30, 2022
	Amortized Cost Basis		Estimated Fair Value
Due in one year or less	$	21,204	$	21,095
Due between one to two years	$	4,459	$	4,358
	$	25,663	$	25,453

The Company had 24 investments in unrealized loss positions as of September 30, 2022. The investments have been in unrealized loss positions for less than twelve months. The total fair value of such investments is $25.5 million with unrealized losses of approximately $0.2 million as of September 30, 2022. There were no material gross unrealized losses from available-for-sale securities and no material realized gains or losses from available-for-sale securities that were reclassified out of accumulated other comprehensive income for the nine months ended September 30, 2022.

For investments in available-for-sale debt securities that have unrealized losses, the Company evaluates (i) whether it has the intention to sell any of these investments and (ii) whether it is more likely than not that it will be required to sell any of these investments before recovery of the entire amortized cost basis. Based on this evaluation, the Company determined that there were no other-than-temporary impairments associated with investments as of September 30, 2022. There were no sales of available-for-sale securities for the nine months ended September 30, 2022 and 2021.

Fair Value Measurements

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

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

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

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

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

	Fair Value Measurement at Reporting Date Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Total
As of September 30, 2022
Financial assets - available-for-sale securities
Money market funds	$	4,888	$	—	$	4,888
Commercial paper		—		8,230		8,230
Government agency bonds		—		983		983
Corporate bonds		—		11,352		11,352
Total financial assets - available-for-sale securities	$	4,888	$	20,565	$	25,453
As of December 31, 2021
Financial assets - available-for-sale securities
Money market funds	$	8,222	$	—	$	8,222
Commercial paper		—		3,987		3,987
Corporate bonds		—		13,306		13,306
Total financial assets - available-for-sale securities	$	8,222	$	17,293	$	25,515

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,
	2022		2021		2022		2021
China	$	10,734	$	11,748	$	34,045	$	32,575
Taiwan		1,982		2,756		6,374		8,006
South Korea		1,854		1,845		4,849		5,287
Japan		907		564		2,821		968
Other		28		147		496		397
Total revenue	$	15,505	$	17,060	$	48,585	$	47,233

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Automotive	$	8,742	$	8,315	$	27,807	$	22,773
Security surveillance		6,763		8,745		20,778		24,460
Total revenue	$	15,505	$	17,060	$	48,585	$	47,233

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,
	2022		2021
Taiwan	$	354	$	415
China		153		207
United States		61		79
Japan		5		5
South Korea		3		7
Total property and equipment, net	$	576	$	713

5. Commitments and Contingencies

Operating leases

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

As of September 30, 2022 and December 31, 2021, the right-of-use assets and lease liabilities related to operating leases were as follows (in thousands):

	September 30,		December 31,
	2022		2021
Right-of-use assets	$	1,158	$	1,009

Lease liabilities － Current	$	681	$	525
Lease liabilities － Non-Current		445		468
Total lease liabilities	$	1,126	$	993

Rent expense under operating leases was $0.2 million for each of the three months ended September 30, 2022 and 2021, respectively. Rent expense under operating leases was $0.6 million for each of the nine months ended September 30, 2022 and 2021, respectively.

The rent expense recognized from short-term leases was $6,000 for each of the three months ended September 30, 2022 and 2021, respectively. The rent expense recognized from short-term leases was $18,000 for each of the nine months ended September 30, 2022 and 2021, respectively.

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

	Nine Months Ended			Nine Months Ended
	September 30, 2022			September 30, 2021
Operating lease cost	$	603		$	630
Cash paid for operating leases	$	589		$	571
Right-of-use assets obtained in exchange for operating lease liabilities (1)	$	715		$	789
Weighted average remaining term for operating leases	1.67 years			2.07 years
Weighted average discount rate for operating leases		4.9	%		4.0	%

(1)

During the nine months ended September 30, 2022, the Company entered into a new lease in Taiwan when its existing facility lease terminated, and extended the term of its leases in China, Japan and South Korea. The lease extensions were treated as modifications but not as separate contracts, as no additional right-of-use was granted. The China, Japan and South Korea lease modifications were accounted for as non-cash changes in existing lease liabilities and right-of-use assets.

During the nine months ended September 30, 2021, the Company modified two existing operating leases. The lease modifications were not treated as separate contracts as no additional right-of-use was granted and were accounted for as non-cash changes in existing lease liabilities and right-of-use assets.

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

Year Ending December 31,	Amount
2022 (remaining three months)	$	198
2023		745
2024		289
Total		1,232
Less effects of discounting		(106	)
Lease liabilities recognized	$	1,126

Purchase Commitments

As of September 30, 2022, the Company had purchase commitments with its third-party suppliers through fiscal year 2025. Future minimum payments under purchase commitments are $1.8 million for the remaining three months ending December 31, 2022, $0.4 million for the year ending December 31, 2023, $0.4 million for the year ending December 31, 2024, and $0.1 million for the year ending December 31, 2025.

Litigation

Although the Company is not currently a party to any legal proceedings, 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 the Company to losses in excess of the amount received under the agreement. In addition, the Company indemnifies its officers, directors and certain key employees while they are serving in good faith in such capacities.

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

6. Stockholders’ Equity

Preferred Stock

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

Common Stock

The Company was authorized to issue 75,000,000 shares of common stock with $0.0001 par value per share as of September 30, 2022 and December 31, 2021. As of September 30, 2022, the shares of common stock issued and outstanding were 18,161,529. As of December 31, 2021, the shares of common stock issued and outstanding were 17,928,748, excluding 334 legally issued shares subject to repurchase related to the early exercise of options to purchase common stock.

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

	September 30,
	2022
Outstanding stock awards		923,721
Shares available for future issuance under the 2017 Stock Incentive Plan		6,691,535
Total common stock reserved for future issuances		7,615,256

Dividends

On December 22, 2021, the Company announced a special cash dividend of an aggregate of $0.50 per share for fiscal 2022, payable in two equal installments of $0.25 per share. The first installment of the dividend was paid in February 2022 to stockholders of record as of January 31, 2022. The second installment of the dividend was paid in July 2022 to stockholders of record as of June 30, 2022.

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 value of the common stock on the grant date, as determined by the Company’s board of directors. The terms of options granted under the 2012 Plan may not exceed ten years. The 2012 Plan was superseded by a 2017 Stock Option Plan (“2017 Plan”). Any outstanding awards under the 2012 Plan will continue to be governed by the terms of the 2012 Plan.

In August 2017, the Company adopted the 2017 Plan. The Company’s stockholders approved the 2017 Plan in September 2017 and it became effective immediately prior to the closing of the Company’s initial public offering. In connection with the adoption of the 2017 Plan, 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 2022 was 717,163 shares. The 2017 Plan provides for the granting of incentive stock options within the meaning of Section 422 of the Internal Revenue Code to employees and the granting of non-statutory stock options to employees, non-employee directors, advisors and consultants. The 2017 Plan also provides for the grants of restricted stock, stock appreciation rights, stock unit and cash-based awards to employees, non-employee directors, advisors and consultants.

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

	Awards Available for Grant
As of December 31, 2021		6,072,181
Increase in authorized		717,163
Granted		(187,500	)
Canceled		89,691
As of September 30, 2022		6,691,535

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, 2021		584,243		$	2.51		5.0	$	7,438
Granted		—
Exercised (1)		(112,955	)		1.74
Canceled		(167	)		2.93
As of September 30, 2022		471,121			2.69		4.4		2,089
Options vested, expected to vest and exercisable as of September 30, 2022		471,121			2.69		4.4		2,089

(1)

Includes vesting of early-exercised options.

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

		Options Outstanding, Vested and Exercisable
Exercise Price		Number		Weighted- Average Remaining Contractual Life (Years)		Weighted- Average Exercise Price
$	0.16		7,250		1.3	$	0.16
	0.37		16,750		2.6		0.37
	0.97		21,500		3.4		0.97
	2.51		58,780		3.9		2.51
	2.89		40,000		4.4		2.89
	2.93		246,584		4.7		2.93
	3.18		80,257		4.8		3.18
			471,121		4.4		2.69

The aggregate intrinsic value of options exercised for the nine months ended September 30, 2022 and 2021 was $1.2 million and $1.2 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, 2021		474,450		$	9.28
Granted		187,500			8.38
Released, net		(119,826	)		11.64
Canceled		(89,524	)		7.21
As of September 30, 2022		452,600			8.69

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,
	2022		2021		2022		2021
Cost of revenue	$	36	$	39	$	111	$	117
Research and development		153		143		437		440
Selling, general and administrative		231		333		862		760
Total	$	420	$	515	$	1,410	$	1,317

9. Net Income Per Share

The following 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,
	2022		2021		2022		2021
Numerator:
Basic and diluted:
Net income	$	4,155	$	4,256	$	12,634	$	12,735
Denominator:
Basic shares:
Weighted-average shares outstanding in computing basic net income per share		18,152,849		17,873,516		18,081,235		17,800,721
Diluted shares:
Effect of potentially dilutive securities:
Stock awards (1)		445,752		755,458		473,884		773,981
Weighted-average shares used in computing diluted net income per share		18,598,601		18,628,974		18,555,119		18,574,702
Net income per share:
Basic	$	0.23	$	0.24	$	0.70	$	0.72
Diluted	$	0.22	$	0.23	$	0.68	$	0.69

(1)

Includes early-exercised options.

The potentially dilutive securities outstanding for the three months ended September 30, 2022 and 2021 that were excluded from the computation of diluted net income per share for the period presented, as the effect would have been antidilutive, was 33,000 and 19,000 shares, respectively. The potentially dilutive securities for the nine months ended September 30, 2022 and 2021 that were excluded from the computation of diluted net income per share for the period presented, as the effect would have been antidilutive, was 31,000 and 23,000 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,
	2022		2021		2022		2021
Domestic	$	4,578	$	4,767	$	14,023	$	14,465
Foreign		46		62		46		175
Income before income taxes	$	4,624	$	4,829	$	14,069	$	14,640

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
United States	$	469	$	563	$	1,430	$	1,875
Foreign		—		10		5		30
Income tax provision	$	469	$	573	$	1,435	$	1,905

As of September 30, 2022, there was no material increase in the liability for unrecognized tax benefits nor any accrued interest and penalties related to uncertain tax positions.

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

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

Information Regarding Forward-Looking Statements

This Quarterly Report on Form10-Q includes forward-looking statements. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, strategy and plans, and our expectations for future operations, are forward-looking statements. The words “anticipate”, “believe,” “continue,” “could,” “design,” “estimate,” “intend,” “may,” “plan,” “project,” “will,” “expect,” or the negative version of these words and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including the following:

•

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

•

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

•

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

•

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

•

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

•

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

•

our ability to successfully defend litigation brought against us;

•

new product releases and timing;

•

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

•

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

•

laws and regulations applicable to our business, including the expected impact of restrictions to be imposed by the FCC pursuant to the Secure Equipment Act of 2021;

•

the impact of global shortages in manufacturing capacities;

•

our liquidity and working capital requirements; and

•

our expectations regarding future expenses and investments.

In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance, or achievements. Any forward-looking statement made by us in this Quarterly Report on Form 10-Q is as of the date on which it is filed with the Securities and Exchange Commission ("SEC"). We do not intend to update any of these forward-looking statements after the date of this Quarterly Report on Form 10-Q, except as required by law.

General Background

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

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.

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 215 million integrated circuits. Our revenue was $48.6 million and $47.2 million for the nine months ended September 30, 2022 and 2021, respectively. The security surveillance market accounted for 43% and 52% of our revenue in the nine months ended September 30, 2022 and 2021, respectively. The automotive market accounted for a 57% and 48% of our revenue in the nine months ended September 30, 2022 and 2021, respectively. We recognized $20.8 million and $24.4 million of revenue on sales into the security surveillance market for the nine months ended September 30, 2022 and 2021, respectively. In addition, we recognized $27.8 million and $22.8 million of revenue on sales into the automotive market for the nine months ended September 30, 2022 and 2021, respectively. We recorded net income of $12.6 million and $12.7 million for the nine months ended September 30, 2022 and 2021, respectively.

We sell our products to distributors that fulfill third-party orders for our products. We also sell directly to original design manufacturers (“ODM”). For the nine months ended September 30, 2022 and 2021, we derived substantially all of our revenue from products sold to distributors as compared to products sold to ODM directly.

We undertake significant product development efforts well in advance of a product’s release and in advance of receiving purchase orders. Our product development efforts, which are focused on developing new designs with broad demand and potential for future derivative products, typically take from six to twenty-four months until production begins, depending on the product’s complexity. If we secure a design win, we believe the system designer is likely to continue to use the same or enhanced versions of our product across a number of their models, 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 one to three years for the automotive market and three to six months for the security surveillance 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 $2.0 million and $2.0 million for the three months ended September 30, 2022 and 2021, respectively, and $6.2 million and $4.7 million for the nine months ended September 30, 2022 and 2021, 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, 2022, we had 80 employees, 27 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 37% and 40% of our revenue for the three months ended September 30, 2022 and 2021, respectively, and 36% and 38% of our revenue for the nine months ended September 30, 2022 and 2021, respectively, to the BIS Entity List with a license requirement for all items subject to the Export Administration Regulations (“EAR”). The BIS Entity List is a published list of the names of certain foreign persons, including businesses, research institutions, government and private organizations and individuals, that are subject to specific governmental license requirements for the export, reexport and/or transfer of specified items. These license requirements could make it more difficult to ship, or in some cases, prevent the shipment of products to certain foreign persons named on the BIS Entity List.

We have taken action to confirm whether our products are subject to EAR. We have retained the continuous assistance of outside experts and, following Hikvision’s designation on the BIS Entity List, performed a comprehensive review of our products and manufacturing operations. Based on that review, we have concluded that our products are not subject to EAR. Therefore, our products may continue to be shipped to Hikvision without a U.S. export license, even though Hikvision appears on the BIS Entity List.

On November 12, 2020, President Trump issued Executive Order 13959 on Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies which prohibits any transaction in publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities, of any identified Communist Chinese military company, which included Hikvision. On June 3, 2021, President Biden issued Executive Order 14032 amending the prior Executive Order. As amended, Executive Order 13959 continues to prohibit certain transactions involving the purchase or sale of publicly traded securities of designated companies. Restrictions are applicable to certain entities designated as Chinese Military-Industrial Complex Companies who have been placed on the “CMIC List.” Hikvision was listed in the Annex to Executive Order 14032 and is currently on the CMIC List. However, Hikvision is not on the Specially Designated Nationals (SDN) List and the restrictions imposed by these Executive Orders are not expected to directly impact our business.

On November 11, 2021, President Biden signed into law the Secure Equipment Act of 2021, which requires the U.S. Federal Communications Commission (“FCC”) to adopt rules no later than November 11, 2022 clarifying that it will no longer review or approve any application for equipment authorization for equipment that is on the list of covered communications equipment or services published by the FCC under section 2(a) of the Secure and Trusted Communications Networks Act of 2019. Items on the FCC’s “covered list” include video surveillance and telecommunications equipment produced by Hikvision, to the extent it is used for the purpose of public safety, security of government facilities, physical security surveillance of critical infrastructure, and other national security purposes, including telecommunications or video surveillance services provided by such entity or using such equipment. The restrictions to be imposed by the FCC pursuant to the Secure Equipment Act of 2021 would impact imports of certain Hikvision equipment into the United States but are currently not expected to directly impact our business. This may or may not impact our revenue in the future. In the event there is an impact on our revenue, we believe that it would be gradual and limited in scope because Hikvision continues to sell its currently approved products in the U.S. and because other manufacturers that incorporate our products could take market share from Hikvision in the U.S. We believe that our revenue would decrease only a few percentage points even if Hikvision’s business is fully impacted by the restrictions to be enacted, which would limit Hikvision’s ability to import its products into the U.S. Additionally, we plan to continue growing our revenue from new and existing customers, thus further limiting the impact of the restrictions to be imposed by the FCC when regulations are enacted and which may impact the importation of certain of Hikvision’s future products into the U.S.

On October 7, 2022, BIS placed on public display an interim final rule amending the EAR to, among other things, implement controls on advanced computing integrated circuits, computer commodities that contain such circuits, and certain semiconductor manufacturing items. We have reviewed this rule and do not expect it to directly impact our business.

The above conclusions are as of the date of filing of this Quarterly Report on Form 10-Q. It is possible that changes in U.S. regulations or policies in the future may impose restrictions, including the imposition of license requirements or even a full or partial prohibition, on our sale of products to Hikvision.

Key Factors Affecting Our Results of Operations

Macroeconomic and Geopolitical Conditions. We have been impacted by adverse macroeconomic and geopolitical conditions. These conditions include but are not limited to inflation, foreign currency fluctuations, the COVID-19 pandemic and related supply chain challenges and disruptions caused by any of these events. Management continues to actively monitor the impact of these conditions on the Company’s financial condition, liquidity, operations, end-customers (including its significant end-customers), distributors, suppliers, industry, and workforce. The extent to which such events impact the Company’s business, prospects and results of operations will depend on future developments, which are highly uncertain.

As our products are primarily sold in Asia, we are particularly impacted by shutdowns and government actions in the countries in that region. The COVID-19 pandemic continues to have an impact on our business and that of our customers and suppliers. This has resulted in government authorities implementing numerous measures to try to contain the pandemic, such as travel bans and

restrictions, quarantines, shelter-in-place or stay-at-home orders, business shutdowns and vaccination efforts. All of our offices in the U.S., Japan, China, South Korea and Taiwan have been impacted by COVID-19 and have been subject to various measures implemented by local governments to reduce its spread. These measures may adversely impact our employees and operations and the operations of our end-customers (including our significant end-customers), distributors and suppliers, and may negatively impact our sales and marketing activities. Actions taken by government authorities to limit COVID-19 may be re-implemented for a significant period of time, which could adversely affect our sales and marketing activities, product delivery schedule, and our business, financial condition and results of operations. Despite these limitations, we have been able to secure products from our suppliers, fulfill our customers’ purchase orders and increase revenues during the nine months ended September 30, 2022 as compared to the same period in the previous year.

Ability to attract and retain customers that make large orders. While we expect the composition of our end-customers to change over time, our business and operating results depend on our ability to continually target new and retain existing end-customers that make large orders. As previously noted, Hikvision, the largest security surveillance manufacturer in China, is one of our end-customers. Although large customers can help us increase our revenue and improve our results of operations, reliance on large customers is a risk to our business. For example, Section 889 of the 2019 National Defense Authorization Act (“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 Income Statements

Revenue

We derive substantially all of our revenue through the sale of our products to distributors who, in turn, sell to our end-customers, which consists of ODM, 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 development and headcount to support our development efforts.

Selling, General and Administrative Expenses

Selling expenses consist primarily of personnel-related costs for our sales, business development, marketing, and applications engineering activities, promotional and other marketing expenses, and travel expenses. We expect selling expenses to increase in absolute dollars for the foreseeable future as we continue to expand our sales teams and increase our marketing activities.

General and administrative expenses consist primarily of personnel-related costs, consulting expenses, professional fees and facility costs. Professional fees principally consist of legal, audit, tax and accounting services. We expect general and administrative expenses to increase in absolute dollars for the foreseeable future as we hire additional personnel, make improvements to our infrastructure and incur significant additional costs for the compliance requirements of operating as a U.S. company that is publicly traded in Japan, including higher legal, insurance and accounting expenses. Personnel-related costs, including salaries, benefits, bonuses and stock-based compensation, are the most significant component of each of selling expenses and general and administrative expenses.

Provision for Income Taxes

The provision for income taxes consists of our estimated federal, state and foreign income taxes based on our pre-tax income. Our provision differs from the federal statutory rate primarily due to the research and development credit, foreign derived intangible income deduction and stock-based compensation deduction.

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,
	2022		2021		2022			2021
Revenue	$	15,505	$	17,060	$	48,585		$	47,233
Cost of revenue (1)		6,904		7,919		21,414			21,524
Gross profit		8,601		9,141		27,171			25,709
Operating expenses: (1)
Research and development		2,012		2,037		6,230			4,700
Selling, general and administrative		2,018		2,278		6,843			6,402
Total operating expenses		4,030		4,315		13,073			11,102
Income from operations		4,571		4,826		14,098			14,607
Other income (expense) - net		53		3		(29	)		33
Income before income taxes		4,624		4,829		14,069			14,640
Income tax provision		469		573		1,435			1,905
Net income	$	4,155	$	4,256	$	12,634		$	12,735

___________________

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Cost of revenue	$	36	$	39	$	111	$	117
Research and development		153		143		437		440
Selling, general and administrative		231		333		862		760
Total	$	420	$	515	$	1,410	$	1,317

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,
	2022			2021			2022			2021
Revenue		100	%		100	%		100	%		100	%
Cost of revenue		45			46			44			46
Gross profit		55			54			56			54
Operating expenses:
Research and development		13			12			13			10
Selling, general and administrative		13			13			14			14
Total operating expenses		26			25			27			24
Income from operations		29			29			29			30
Other income (expense) - net		1			(1	)		—			1
Income before income taxes		30			28			29			31
Income tax provision		3			3			3			4
Net income		27	%		25	%		26	%		27	%

Comparison of the Three and Nine Months Ended September 30, 2022 and 2021

Revenue (dollars in thousands)

	Three Months Ended September 30,				Change						Nine Months Ended September 30,				Change
	2022		2021		Amount			%			2022		2021		Amount			%
Automotive	$	8,742	$	8,315	$	427			5	%	$	27,807	$	22,773	$	5,034			22	%
Security surveillance		6,763		8,745		(1,982	)		(23	)%		20,778		24,460		(3,682	)		(15	)%
Revenue	$	15,505	$	17,060	$	(1,555	)		(9	)%	$	48,585	$	47,233	$	1,352			3	%

Revenue decreased $1.6 million, or 9%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. This was primarily attributable a security surveillance revenue decrease of $2.0 million due to a decrease in volume of shipments, slightly offset by an increase in average selling price attributable to product mix, and a $0.4 million increase in automotive market revenue due to an increase in average selling prices attributable to product mix, offset by a decrease in volume of shipments.

Revenue increased $1.4 million, or 3%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. This was primarily attributable to a $5.0 million increase in automotive market revenue as a result of an increase in the volume of shipments and an increase in average selling price attributable to product mix, offset by a $3.7 million decrease in security surveillance revenue due to a decrease in the volume of shipments offset by an increase in average selling price attributable to product mix.

Our product pricing has increased in our target markets in response to our increased manufacturing costs. Additionally, fluctuations in our overall average selling price are directly attributable to changes in product mix given the natural pricing variation of the products in our portfolio and customer base. 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. Decreases in the volume of shipments is primarily reflective of customer buildup of product in the second quarter of 2022.

Revenue by geographic region

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
China		69	%		69	%		70	%		69	%
Taiwan		13			16			13			17
South Korea		12			11			10			11
Japan		6			3			6			2
Other		—			1			1			1
Total		100	%		100	%		100	%		100	%

Cost of revenue and gross margin (dollars in thousands)

	Three Months Ended September 30,						Change						Nine Months Ended September 30,						Change
	2022			2021			Amount			%			2022			2021			Amount			%
Cost of revenue	$	6,904		$	7,919		$	(1,015	)		(13	)%	$	21,414		$	21,524		$	(110	)		(1	)%
Gross margin		55	%		54	%								56	%		54	%

Cost of revenue decreased by $1.0 million and $0.1 million in the three and nine months ended September 30, 2022, respectively, compared to the comparable periods ended September 30, 2021. Gross margins for the three and nine months ended September 30, 2022, increased to 55% to 56%, respectively, compared to the comparable periods ended September 30, 2021, due to changes in product mix and market mix. We expect gross margins to fluctuate in future periods due to changes in customer and product mix, market mix, average unit selling prices, manufacturing costs, adjustments to inventory, if any, and end user product demand.

Research and development expense (dollars in thousands)

	Three Months Ended September 30,				Change						Nine Months Ended September 30,				Change
	2022		2021		Amount			%			2022		2021		Amount		%
Research and development	$	2,012	$	2,037	$	(25	)		(1	)%	$	6,230	$	4,700	$	1,530		33	%

Research and development expenses decreased by $25,000, or 1%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, primarily due to a $0.3 million decrease in personnel-related expenses and $0.1 million decrease in software expenses, offset by a $0.3 million increase in tape-out and design services.

Research and development expenses increased $1.5 million, or 33%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, primarily due to a $1.6 million increase in tape-out and design services that occurred during the six months ended June 30, 2022.

Selling, general and administrative expense (dollars in thousands)

	Three Months Ended September 30,				Change						Nine Months Ended September 30,				Change
	2022		2021		Amount			%			2022		2021		Amount		%
Selling, general and administrative	$	2,018	$	2,278	$	(260	)		(11	)%	$	6,843	$	6,402	$	441		7	%

Selling, general and administrative expenses decreased $0.3 million, or 11%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, primarily due to a $0.3 million decrease in personnel-related expense.

Selling, general and administrative expenses increased $0.4 million, or 7%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, primarily due to a $0.5 million increase in personnel-related expense, offset by a $0.2 million decrease in professional services.

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

	Three Months Ended September 30,				Change					Nine Months Ended September 30,					Change
	2022		2021		Amount		%			2022			2021		Amount			%
Other income (expense), net	$	53	$	3	$	50		1667	%	$	(29	)	$	33	$	(62	)		(188	)%

Other income (expense), net increased $50,000 for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, primarily due to an increase in interest income, offset by losses related to foreign currency exchange transactions and fluctuations. Other income (expense), net decreased $62,000 for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, primarily due to losses related to foreign currency exchange transactions and fluctuations offset by an increase in interest income.

Provision for income taxes (dollars in thousands)

	Three Months Ended September 30,				Change						Nine Months Ended September 30,				Change
	2022		2021		Amount			%			2022		2021		Amount			%
Provision for income taxes	$	469	$	573	$	(104	)		(18	)%	$	1,435	$	1,905	$	(470	)		(25	)%

The provision for income taxes decreased $0.1 million, or 18%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, primarily due to a decrease in pre-tax income, an increase in the foreign-derived intangible income deduction and the capitalization of research and development expenses for tax purposes.

The provision for income taxes decreased $0.5 million, or 25%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, primarily due to an increase in the foreign-derived intangible income deduction and capitalization of research and development expenses for tax purposes.

Liquidity and Capital Resources

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

Our cash, cash equivalents, and short-term investments as of September 30, 2022 were $44.6 million. We believe our existing cash, cash equivalents, short-term investments, and cash we expect to generate from operations in the future will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements depend on many factors, including our growth rate, the timing and extent of our spending to support research and development activities, the timing and cost of establishing additional sales and marketing capabilities, the introduction of new and enhanced products and our costs to implement new manufacturing technologies or potentially acquire and integrate other companies or assets. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. Any debt financing obtained by us in the future could also involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. Additionally, if we raise additional funds through further issuances of equity, or issue convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited.

A summary of operating, investing and financing activities are shown in the following table (in thousands):

	Nine Months Ended
	September 30,
	2022			2021
Net cash provided by operating activities	$	14,013		$	12,357
Net cash provided by investing activities		309			830
Net cash used in financing activities		(9,027	)		(15	)
Net increase in cash and cash equivalents	$	5,295		$	13,172

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, 2022, net cash provided by operating activities was $14.0 million, primarily due to net income of $12.6 million, non-cash charges of $1.6 million, net and net cash outflows from changes in operating assets and liabilities of $0.2 million.

Non-cash charges primarily consisted of stock-based compensation of $1.4 million, operating lease amortization of $0.6 million, an increase in the inventory valuation allowance of $0.4 million and depreciation and amortization of $0.3 million, partially offset by an increase in deferred tax assets of $1.2 million.

Net cash outflows from changes in operating assets and liabilities totaled $0.2 million, primarily consisting of a $1.4 million increase in inventory, net of valuation allowance, as units manufactured during the period and on hand were in excess of product sales, and a $0.7 million decrease in accounts payable, lease and other liabilities. Outflows were offset by inflows from a $1.0 million increase in accrued liabilities, a $0.2 million decrease in accounts receivable due to timing of receipts from customers versus shipment of units, a $0.4 million decrease in prepaid expenses due to timing of payments, and a $0.3 million increase in customer deposits.

During the nine months ended September 30, 2021, net cash used in operating activities was $12.4 million, primarily due to net income of $12.7 million, non-cash charges of $2.3 million and net cash outflows from changes in operating assets and liabilities of $2.7 million. Non-cash charges primarily consisted of stock-based compensation of $1.3 million, depreciation and amortization of $0.3 million and operating lease amortization of $0.6 million.

Net cash outflows from changes in operating assets and liabilities totaled $2.7 million, primarily attributable to a $3.5 million cash outflow for inventory as units manufactured during the period and on hand were in excess of product sales during the period to support future demand and a $0.6 million cash outflow in lease liabilities and other liabilities due to the renewal of an operating lease,

partially offset by a $0.5 million cash inflow in accrued liabilities due to the timing of services performed, a $ 0.5 million cash inflow due to an increase in accounts payable due to the timing of payments to vendors, and a $0.4 million cash decrease in customer deposits due to the timing of customer pre-payments.

Investing Activities

During the nine months ended September 30, 2022, cash provided in investing activities was $0.3 million, primarily due to a $12.9 million cash inflow due to proceeds from maturities of debt securities, partially offset by a $12.2 million cash outflow used to purchase debt securities and a $0.4 million cash outflow due to purchases of property and equipment.

During the nine months ended September 30, 2021, cash provided in investing activities was $0.8 million, primarily due to $14.0 million cash inflow due to proceeds from maturities of debt securities, partially offset by a $12.9 million cash outflow used to purchase debt securities and a $0.3 million cash outflow due to purchases of property and equipment.

Financing Activities

During the nine months ended September 30, 2022, cash used in financing activities was $9.0 million, primarily due to payment of dividends totaling $9.0 million in February and July, 2022, as discussed in “Dividends” in Note 6 of Part I, Item 1 of this Quarterly Report on Form 10-Q, and $0.2 million in net proceeds from the exercise of stock options, offset by $0.2 million in payments for shares withheld for tax withholdings on vesting of restricted stock units.

During the nine months ended September 30, 2021, cash used in financing activities was $15,000 due to net proceeds from the exercise of stock options of $0.2 million, offset by $0.2 million in payments for shares withheld for tax withholdings on vesting of restricted stock units.

Off-Balance Sheet Arrangements

During the periods presented, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies, Significant Estimates and Judgments

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

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

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

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

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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

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

Changes in Internal Control over Financial Reporting

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

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

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

Although we are not currently a party to any legal proceedings, and no legal proceeding is currently threatened against us, we may be subject 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. We accrue amounts that we believe are adequate to address any liabilities related to legal proceedings and other loss contingencies that we believe may result in a probable loss that is reasonably estimable.

Item 1A. Risk Factors.

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

Item 6. Exhibits.

Exhibit Number		Description
10.1#	Offer Letter between Techpoint, Inc. and Arthur Nguyen (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed August 30, 2022).
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 (embedded within the Inline XBRL document)

#	Indicates management contract or compensatory plan or arrangement.

In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this 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 10, 2022	By:	/s/ Arthur Nguyen
		Arthur Nguyen
		Chief Financial Officer and Vice President of Administrations (Principal Financial and Accounting Officer)

Date: November 10, 2022	By:	/s/ Fumihiro Kozato
		Fumihiro Kozato
		President and Chief Executive Officer (Principal Executive Officer)