VICOR CORP - Quarter Report: 2022 March (Form 10-Q)

 

FORM

 

 

 

ion File Number

 

(978)

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).    

  ☑    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.  ☐

12b-2

 

 

 

See accompanying notes.

 

-1-

See accompanying notes.

 

-2-

 

 

See accompanying notes.

 

-3-

 

See accompanying notes.

 

-4-

 

 

See accompanying notes.

 

-5-

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements of Vicor Corporation and its consolidated subsidiaries (collectively, the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, these interim financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

10-K

10-K”).

Inventories

Inventories were as follows (in thousands):

 

Short-Term and Long-Term Investments

As of March 31, 2022 and December 31,2021, the Company held $20,003,000 and $45,215,000, respectively, of short-term investments, consisting of obligations of the U.S. Treasury, all of which were debt securities with original maturities greater than three months but less than one year at the time of purchase.

As of March 31, 2022 and December 31, 2021, the Company held one auction rate security with a par value of $3,000,000 and an estimated fair value of approximately $2,536,000 and $2,639,000,

 

-6-

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements

March 31, 2022

(unaudited)

 

Details of our investments are as follows (in thousands):

 

 

The following is a summary of the available-for-sale securities (in thousands)

 

As of March 31, 2022, the Failed Auction Security had been in an unrealized loss position for greater than 12 months.

The amortized cost and estimated fair value of the available-for-sale securities on March 31, 2022, by type and contractual maturities, are shown below (in thousands):

 

 

Fair Value Measurements

The Company accounts for certain financial assets at fair value, defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions market participants would use in pricing an asset or liability. A three-level hierarchy is used to show the extent and level of judgment used to estimate fair value measurements.

 

-8-

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements

March 31, 2022

(unaudited)

Assets and liabilities measured at fair value on a recurring basis included the following as of March 

,

(in thousands):

 

Assets and liabilities measured at fair value on a recurring basis included the following as of December 

,

(in thousands):

 

The change in the estimated fair value calculated for the investment valued on a recurring basis utilizing Level 

inputs (i.e., the Failed Auction Security) for the three months ended March 

,

was as follows (in thousands):

 

Management utilized a probability weighted discounted cash flow model to determine the estimated fair value as of March 

,

.

 

-9-

 

5.

 

 

 

-10-

 

 

Deferred expenses are included in Other current assets in the accompanying Condensed Consolidated Balance Sheets.

 

-11-

 

The Company records deferred revenue, which represents a contract liability, when cash payments are received or due in advance of performance under a contract with a customer. The Company recognized revenue of approximately $155,000 and $671,000 for the three months ended March 31, 2022 and 2021, respectively, that was included in deferred revenue at the beginning of the respective period.

Stock-Based Compensation

The Company uses the Black-Scholes option pricing model to calculate the fair value of stock option awards, whether they possess time-based vesting provisions or performance-based vesting provisions, and awards granted under the Vicor Corporation 2017 Employee Stock Purchase Plan (“ESPP”), as of their grant date. Stock-based compensation expense was as follows (in thousands):

 

Compensation expense by type of award was as follows (in thousands):

 

Rental Income

Income, net under the Company’s operating lease agreement, for its owned facility leased to a third party in California, was approximately $198,000 for the three months ended March 31, 2022 and 2021.

8.

The benefit for income taxes 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.

 

-12-

The effective tax rates were lower than the statutory tax rates for the three months ended March 31, 2022 and 2021 primarily due to the Company’s full valuation allowance position against domestic deferred tax assets. The benefit for income taxes for the three months ended March 31, 2022 and 2021 included estimated federal, state and foreign income taxes in jurisdictions in which the Company does not have sufficient tax attributes, offset by excess tax benefits related to stock based compensation during those periods.

As of March 31, 2022, the Company has a valuation allowance of approximately $43,329,000

The Company was informed in September 2021 by the Internal Revenue Service of their intention to examine the Company’s 2019 Federal income tax return. There are no other audits or examinations in process in any other jurisdiction.

 

-13-

 

Net Income per Share

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

 

Commitments and Contingencies

At March 31, 2022, the Company had approximately $32,330,000 of capital expenditure commitments, principally for manufacturing equipment, and approximately $6,781,000 of capital expenditure items which had been received and included in Property, plant and equipment in the accompanying Condensed Consolidated Balance Sheets, but not yet paid for.

 

-14-

On November 24, 2015, the District Court ordered the Texas Action stayed pending completion of certain inter partes reexamination (“IPRx”) proceedings initiated by the Company at the United States Patent and Trademark Office (“USPTO”). In these IPRx proceedings, the Company challenged the validity of the SynQor patent claims asserted in the Texas Action. On November 16, 2021, the District Court issued an order lifting the stay. At a hearing on February 2, 2022, the District Court issued an order denying all pending summary judgment and other motions without prejudice. The District Court further authorized the Company to file new motions for summary judgment, to be considered on an expedited schedule. The Company filed a motion for summary judgment of on February 4, 2022. The District Court has not yet ruled on that motion. On March 1, 2022, the Company also filed a motion for involuntary dismissal of the ‘290 patent from the case. The District Court has also not yet ruled on that motion. On April 5, 2022, the Court entered a scheduling order setting a trial date of October 17, 2022.

The current status of the IPRx proceedings is as follows:

 

 

 

 

On January 23, 2018, the 20-year 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 that date. In addition, any amended claims that may issue as a result of any of the still-pending IPRx proceedings will have no effective term and cannot be the basis for any liability by the Company. As noted above, the IPRx proceedings relating to the asserted claims of the ‘190 and ‘290 patents remain pending or on appeal. 

 

-15-

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements

March 31, 2022

(unaudited)

 

In addition to the SynQor matter, the Company is involved in certain other litigation and claims incidental to the conduct of its business. While the outcome of lawsuits and claims against the Company cannot be predicted with certainty, management does not expect any current litigation or claims will have a material adverse impact on the Company’s financial position or results of operations.

Impact of Recently Issued Accounting Standards

ew pronouncements issued but not effective until after March 31, 2022 are not expected to have a material impact on the Company’s consolidated financial statements.

 

-16-

VICOR CORPORATION

Management’s Discussion and Analysis of

Financial Condition and Results of Operation

March 31,

 

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

Cautionary Note Regarding Forward-Looking Statements

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, 2021. 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 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 and are subject to risks and uncertainties. Forward-looking statements are identified by the use of words denoting uncertain, future events, such as “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “future,” “goal,” “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, but are not limited to, statements regarding: our expectations that the Company has adequate resources to respond to financial and operational risks associated with the novel coronavirus and regarding our and our customers’ ability to effectively conduct business during the pandemic; our ability to address certain supply chain risks; our 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 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; anticipated new and existing customer wins; 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, including the expansion of our Andover facility and the introduction of new manufacturing processes, and the timing, location, and funding thereof; our belief that cash generated from operations together with our available cash and cash equivalents and short-term investments will be sufficient to fund planned operational needs, capital equipment purchases, and planned construction, 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 above, as well as those described in the Company’s Annual Report on Form for the year ended December 31, 2021 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.” 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 Any forward-looking statement made in this Quarterly Report on Form is based on information currently available to us and speaks only as of the date on which it is made. 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.

 

-17-

VICOR CORPORATION

Management’s Discussion and Analysis of

Financial Condition and Results of Operation

March 31, 2022

 

The Brick Products category largely consists of our broad and well-established families of integrated power converters, incorporating multiple conversion stages, used in conventional power systems architectures. 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.

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, customer forecasts, and 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, which are often associated with the cyclicality of the electronics industry, regional macroeconomic and trade-related circumstances, and events (most recently evidenced by the pandemic), have caused our operating results to vary meaningfully. Our quarterly gross margin as a percentage of net revenues may vary, depending on production volumes, average selling prices, average unit costs, the mix of products sold during that quarter, and the level of importation of raw materials subject to tariffs. Our quarterly operating margin as a percentage of net revenues

VICOR CORPORATION

Management’s Discussion and Analysis of

Financial Condition and Results of Operation

March 31, 2022

 

Ongoing / Potential Impacts of the Pandemic on the Company

COVID-19

COVID-19

COVID-19

COVID-19,

COVID-19

We are closely monitoring the operating performance and financial health of our customers, business partners, and suppliers, but an extended period of operational constraints brought about by the pandemic could cause financial hardship within our customer base and supply chain. Such hardship may continue to disrupt customer demand and limit our customers’ ability to meet their obligations to us. Similarly, such hardship within our supply chain could continue to restrict our access to raw materials or services. 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. We have taken steps to address certain supply chain risks, and we believe our actions have mitigated those risks to date; however, there are no assurances that those steps will continue to mitigate risks in the remainder of 2022 and beyond.

Although there is uncertainty regarding the extent to which the pandemic will continue to impact 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 manufacturing inputs together support management’s belief the Company will be able to effectively conduct business until the pandemic passes.

COVID-19

The following summarizes our financial performance for the first quarter of 2022, compared to the fourth quarter of 2021:

 

 

 

 

-19-

VICOR CORPORATION

Management’s Discussion and Analysis of

Financial Condition and Results of Operation

March 31, 2022

 

 

 

 

 

Net revenues for the first quarter of 2022 were $88,282,000, a decrease of $514,000, or 0.6%, as compared to $88,796,000 for the first quarter of 2021. Net revenues, by product line, for the three months ended March 31, 2022 and 2021 were as follows (dollars in thousands):

 

The increase in net revenues for Advanced Products was primarily the result of growth in the data center and high performance computing business, primarily in the United States and Asia Pacific markets. The decrease in net revenues for Brick Products was primarily due to unfavorable market conditions in the United States and Asia Pacific markets.

Gross margin for the first quarter of 2022 decreased $7,099,000, or 15.9%, to $37,601,000, from $44,700,000 for the first quarter of 2021. Gross margin, as a percentage of net revenues, decreased to 42.6% for the first quarter of 2022, compared to 50.3% for the first quarter of 2021. The decrease in gross margin dollars and gross margin percentage was primarily due to an unfavorable change in product mix, a negative impact from production inefficiencies associated with initial production volumes of new products, and certain supply chain cost increases.

 

-20-

VICOR CORPORATION

Management’s Discussion and Analysis of

Financial Condition and Results of Operation

March 31, 2022

 

Selling, general, and administrative expenses were $18,568,000 for the first quarter of 2022, an increase of $1,614,000, or 9.5%, from $16,954,000 for the first quarter of 2021. Selling, general, and administrative expenses as a percentage of net revenues increased to 21.0% for the first quarter of 2022 from 19.1% for the first quarter of 2021. The components of the $1,614,000 increase in selling, general and administrative expenses for the first quarter of 2022 from the first quarter of 2021 were as follows (dollars in thousands):

 

 

 

-21-

VICOR CORPORATION

Management’s Discussion and Analysis of

Financial Condition and Results of Operation

March 31, 2022

 

Research and development expenses were $14,253,000 for the first quarter of 2022, an increase of $1,227,000, or 9.4%, compared to $13,026,000 for the first quarter of 2021. As a percentage of net revenues, research and development expenses increased to 16.1% for the first quarter of 2022 from 14.7% for the first quarter of 2021. The components of the $1,227,000 increase in research and development expenses were as follows (dollars in thousands):