VICOR CORP - Quarter Report: 2020 March (Form 10-Q)

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 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 (§232.405 of this chapter) during the preceding 12 Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a filer, a 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 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.  

The number of shares outstanding of each of the issuer’s classes of Common Stock as of was:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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3120203120203120193120192820202019

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As of March 31, 2020, there was insufficient observable auction rate security market information available to determine the fair value of the Failed Auction Security using Level 1 or Level 2 inputs. As such, the Company’s investment in the Failed Auction Security was deemed to require valuation using Level 3 inputs. Management, after consulting with advisors, valued the Failed Auction Security using analyses and pricing models similar to those used by market participants (i.e., buyers, sellers, and the broker-dealers responsible for execution of the Dutch auction pricing mechanism by which each issue’s interest rate was set). Management utilized a probability weighted discounted cash flow (“DCF”) model to determine the estimated fair value of this security as of March 31, 2020. The major assumptions used in preparing the DCF model were similar to those described in Note 5Fair Value Measurements in the Notes to the Consolidated Financial Statements contained in the Company’s 2019 Form

 

 

 

 

 

 

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The tax (benefit) provision is based on the estimated annual effective tax rate for the year, which includes estimated federal, state and foreign income taxes on the Company’s projected income.

As of March 31, 2020, the Company has a valuation allowance of approximately $30,363,000

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The following table sets forth the computation of basic and diluted net (loss) income per share (in thousands, except per share amounts):

1.

In 2011, in response to the filing of the Texas Action, the Company’s IPRx proceedings at the USPTO challenged the validity of all claims that were asserted against the Company by SynQor. The current status of these proceedings is as follows. Regarding the ‘190 patent IPRx, the United States Court of Appeals for the Federal Circuit (the “Federal Circuit”) issued a decision on March 13, 2015, determining that certain claims were invalid and remanding the matter to the Patent Trial and Appeal Board (“PTAB”) of the USPTO for further proceedings. On February 20, 2019, the PTAB issued a decision finding that all of the remaining challenged claims were unpatentable. SynQor has appealed that decision to the Federal Circuit, and the appeal remains pending. On August 30, 2017, the Federal Circuit issued rulings with regard to the IPRx proceedings for the ’021, ‘702 and ‘290 patents. With respect to the ‘021 patent, the Federal Circuit affirmed the PTAB’s determination that all of the challenged claims of the ‘021 patent were invalid. The Federal Circuit remanded the case to the PTAB for further consideration of the patentability of certain claims that had been added by amendment during the reexamination. On February 20, 2019, the PTAB issued a decision affirming the examiner’s rejections of all challenged claims. SynQor has filed an appeal of that decision in the Federal Circuit, and that appeal remains pending. With respect to the ‘702 patent, the Federal Circuit affirmed the PTAB’s determination that all of the challenged claims of the ‘702 patent were patentable. With respect to the ‘290 patent, the Federal Circuit vacated the PTAB’s decision upholding the patentability of the ‘290 patent claims, and remanded the case to the PTAB for further consideration. On February 20, 2019, the PTAB issued a decision reversing its prior affirmance of the examiner’s of rejections with respect to the ‘290 patent, and entering rejections of all of the claims of the ‘290 patent. On May 20, 2019, as permitted by USPTO rules, SynQor requested the USPTO to reopen prosecution of this proceeding to address the new rejections made by the PTAB. While prosecution was reopened, the examiner has yet to issue a further substantive ruling.

On January 23, 2018, the terms of the ‘190 patent, the ‘021 patent, the ‘702 patent and the ‘290 patent expired. As a consequence of these expirations, the Company cannot be liable under any of the SynQor patents for allegedly infringing activities occurring after the patents’ respective expiration dates. In addition, any amended claims that may issue as a result of any of the still-pending reexamination proceedings will have no effective term and cannot be the basis for any liability by the Company.

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In June 2016, the FASB issued new guidance which will require measurement and recognition of expected credit losses on certain types of financial instruments. It also modifies the impairment model for debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. It is required to be applied on a modified-retrospective approach with certain elements being adopted prospectively. The Company adopted the new guidance as of January 1, 2020. The adoption did not have a material impact on the Company’s consolidated financial statements and disclosures.

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

The Company’s consolidated operating results are affected by a wide variety of factors that could materially and adversely affect revenues and profitability, including the risk factors described in the Company’s Annual Report on Form for the year ended December 31, 2019 and the risk factor described in this Quarterly Report on Form As a result of these and other factors, the Company may experience material fluctuations in future operating results on a quarterly or annual basis, which could materially and adversely affect its business, consolidated financial condition, and operating results, and the share price of its listed common stock. This document and other documents filed by the Company with the Securities and Exchange Commission (“SEC”) include forward-looking statements regarding future events and the Company’s future results that are subject to the safe harbor afforded under the Private Securities Litigation Reform Act of 1995 and other safe harbors afforded under the Securities Act of 1933 and the Securities Exchange Act of 1934. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. Forward-looking statements are based on our current beliefs, expectations, estimates, forecasts, and projections for the future performance of the Company. Forward-looking statements are identified by the use of the words denoting uncertain, future events, such as “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “future,” “if,” “intend,” “may,” “plan,” “potential,” “project,” “prospective,” “seek,” “should,” “target,” “will,” or “would,” as well as similar words and phrases, including the negatives of these terms, or other variations thereof. Forward-looking statements also include statements regarding: our expectations that the Company has adequate resources to respond to financial and operational risks associated with the novel coronavirus “COVID-19,” and our ability to effectively conduct business during the pandemic; ongoing development of power conversion architectures, switching topologies, materials, packaging, and products; the ongoing transition of our business strategically, organizationally, and operationally from serving a large number of relatively low volume customers across diversified markets and geographies to serving a small number of relatively large volume customers; our intent to enter new market segments; the levels of customer orders overall and, in particular, from large customers and the delivery lead times associated therewith; the financial and operational impact of customer changes to shipping schedules; the derivation of a portion of our sales in each quarter from orders booked in the same quarter; our intent to expand the percentage of revenue associated with licensing our intellectual property to third parties; our plans to invest in expanded manufacturing capacity and the timing, location, and funding thereof; our belief cash generated from operations and the total of our cash and cash equivalents will be sufficient to fund operations and capital investments for the foreseeable future; our outlook regarding tariffs and the impact thereof on our business; our belief that we have limited exposure to currency risks; our intentions regarding the declaration and payment of cash dividends; our intentions regarding protecting our rights under our patents; and our expectation that no current litigation or claims will have a material adverse impact on our financial position or results of operations. These forward-looking statements are based upon our current expectations and estimates associated with prospective events and circumstances that may or may not be within our control and as to which there can be no assurance. Actual results could differ materially from those implied by forward-looking statements as a result of various factors, including but not limited to those described in the Company’s Annual Report on Form for the year ended December 31, 2019 under Part I, Item 1 — “Business,” under Part I, Item 1A — “Risk Factors,” under Part I, Item 3 — “Legal Proceedings,” and under Part II, Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” and those described in this Quarterly Report on Form particularly under Part I, Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A – “Risk Factors.” The discussion of our business contained herein, including the identification and assessment of factors that may influence actual results, may not be exhaustive. Therefore, the information presented should be read together with other documents we file with the SEC from time to time, including our Annual Reports on Form our Quarterly Reports on Form and our Current Reports on Form which may supplement, modify, supersede, or update the factors discussed in this Quarterly Report on Form We do not undertake any obligation to update any forward-looking statements as a result of future events or developments, except as required by law.

Given the growth profiles of the markets we serve with our Advanced Products line and our Brick Products line, our strategy involves a transition in organizational focus, emphasizing investment in our Advanced Products line and targeting high growth market segments with a high-volume operational model, while maintaining a profitable business in the mature market segments we serve with our Brick Products line with a operational model.

Total revenue for the first quarter of 2020 sequentially increased 0.4%, compared to total revenue for the fourth quarter of 2019, as shipments of Advanced Products sequentially increased 9.8%, while shipments of Brick Products sequentially declined 2.8%. An increase in domestic shipments of both Advanced Products and Brick Products was offset by a decline in shipments to China and Hong Kong, resulting from the influence of tariffs and other trade-related matters on prior period bookings. Shipments to other Asian countries also declined, largely due to gaps in scheduling for certain Advanced Product backlog delivery schedules. European shipments for the first quarter of 2020 also declined, as compared to shipments during the fourth quarter of 2019, reflecting prior period bookings patterns and the ongoing weakness of regional business conditions. Revenue fell short of forecast, as certain supply chain constraints caused manufacturing delays, which, in turn, caused a reduction in shipments, and production inefficiencies, which, in turn, caused an increase in costs. We experienced a small number of customer requests to postpone shipments due to the pandemic, but the impact of such postponed shipments on revenue for the first quarter of 2020 was immaterial.

Bookings for the first quarter of 2020 decreased 8.8%, compared to the fourth quarter of 2019, as orders for Brick Products declined 3.1% sequentially, primarily as a result of the impact of the pandemic on business activity across Asia, while orders for Advanced Products decreased 16.1% sequentially. Advanced Products order volume for the first quarter of 2020 met expectations. The sequential 8.8% decline reflects the composition of the prior quarter’s bookings, which included a large, year-long program for commercial lighting. Absent that single large order, Advanced Product bookings rose 23.2% sequentially and were almost entirely associated with customers in Artificial Intelligence applications.

Our quarterly consolidated operating results can be difficult to forecast and have been subject to significant fluctuations. We plan our production and inventory levels based on management’s estimates of customer demand, based on customer forecasts and based on other information sources. Customer forecasts, particularly those of OEM, ODM, and contract manufacturing customers to which we supply Advanced Products in high volumes, are subject to scheduling changes on short notice, contributing to operating inefficiencies and excess costs. In addition, external factors such as supply chain uncertainties, often associated with cyclicality of the electronics industry, regional macroeconomic and trade-related circumstances, and , most recently evidenced by the pandemic, have caused our operating results to vary meaningfully. Our quarterly gross margin as a percentage of revenue may vary, depending on production volumes, average selling prices, average unit costs, the mix of products sold that quarter, and the level of importation of raw materials. Our quarterly operating margin as a percentage of revenue also may vary with changes in revenue and product level profitability, but our operating costs are largely associated with compensation and related employee costs, which are not subject to sudden or significant changes.

On January 30, 2020, the World Health Organization designated the outbreak a “Public Health Emergency of International Concern” (i.e., a health emergency requiring coordinated action by the governments of effected countries). On January 31, 2020, the U.S. Department of Health and Human Services declared a public health emergency for the entire United States, thereby facilitating nationwide public health response. On March 11, 2020, was declared a pandemic by the World Health Organization, an indication of its global severity. Governments worldwide have responded with measures intended to contain the further spread of including mandatory closures of businesses, schools, and organizations.

On March 23, 2020, the Commonwealth of Massachusetts ordered businesses closed and prohibited gatherings of more than 10 people, extending the emergency declaration of March 10, 2020. Our headquarters offices and primary manufacturing facility are located in Massachusetts. However, the Company is designated as essential by the U.S. Department of Homeland Security, given our role in supporting industrial sectors considered “critical infrastructure.” As such, we have continued to operate at, or close to, full manufacturing capacity, although there can be no assurance we will be able to continue to operate at such levels of manufacturing capacity.

Widespread uncertainty associated with the pandemic has contributed to reduced business activity worldwide. As described above, our financial performance for the first quarter of 2020 was not materially influenced by the pandemic, although there can be no assurance our financial performance will not be materially negatively influenced in future quarters, given the continued uncertainty. Since early March 2020, we have taken actions intended to protect the health and safety of our employees, customers, business partners, and suppliers. Following guidance from the U.S. Centers for Disease Control and Prevention, the U.S. Occupational Health and Safety Administration, state and local health authorities, and existing crisis management policies, we developed and implemented comprehensive health and safety measures at all of our locations, including: establishing a central response team; distributing information and carrying out education initiatives; implementing social distancing requirements;

distributing breathing masks, disposable gloves, and thermometers to employees who must be physically on premises to perform their work; implementing temperature checks at the entrances to our manufacturing facility; extensive and frequent disinfecting of our workspaces; modifying our meal services to minimize physical contact; requiring and enabling work-from-home for those employees who do not need to be physically on premises to perform their work effectively; and suspending travel. We expect to maintain these measures until we determine the pandemic is adequately contained for purposes of our business, and we may take further actions we consider to be in the best interests of our employees, customers, business partners, and suppliers or in response to government mandate or requirement.

While our facilities currently are operational, the further spread of and the measures set forth above may negatively influence our operations, as well as those of our customers, business partners, and suppliers. As described above, we experienced certain supply chain constraints associated with during the first quarter of 2020, and such constraints contributed to lower revenue, higher costs, and reduced productivity, although we do not consider the cumulative impact of such constraints to have had a material influence on our financial performance. However, there can be no assurance that future circumstances associated with the pandemic will not have a material negative influence on our operations and, in turn, our financial performance.

We have experienced absenteeism associated with employee self-quarantine due to exposure to although as of the date of this report we continue to operate with three shifts in our factory, and our engineering, sales, and administrative departments continue to function. However, the productivity of our factory may be reduced further if absenteeism increases or if an employee is diagnosed with which likely would require further restrictive health and safety measures, including factory closure, to be implemented.

We have not yet experienced significant disruption of our supply chain due to the pandemic. During the period when China was under strict restrictions, we did experience delays in delivery of certain raw materials, but these delays did not materially influence our operational or financial performance for the first quarter of 2020. We are closely monitoring the performance and financial health of our business partners and suppliers, but an extended period of operational constraints brought about by could cause financial hardship within our supply chain, thereby potentially disrupting our access to raw materials. Additionally, restrictions or disruptions of transportation, such as reduced availability of cargo transport by ship or air could result in higher costs and inbound and outbound delays.

Although there is uncertainty regarding the extent to which will continue to influence our operational and financial results, in the future, the Company’s high level of liquidity, flexible operational model, existing raw material inventories, and increased use of second-sources for critical raw materials support management’s belief the Company will be able to effectively conduct business until the pandemic passes.

We are monitoring the rapidly changing circumstances, and may take additional actions to address risks as they evolve, particularly if federal and state governments so require. Because much of the potential negative influence of is associated with risks outside of our control, we cannot estimate the extent of such influence on our financial or operational performance, or when such influence might occur.

Please refer to Item 1A, “Risk Factors” below for updates to our risk factors associated with the pandemic.

Please refer to the Company’s Annual Report on Form for the year ended December 31, 2019 for a summary of the Company’s critical accounting policies and estimates.