Signal management

TECHPOINT, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)

Information Regarding Forward-Looking Statements

This Annual Report on Form10-K includes forward-looking statements. All
statements other than statements of historical facts contained in this Annual
Report on Form 10-K, 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 revenues, cost of sales

and running costs;

• our market opportunity and our ability to effectively manage or maintain

our growth;

• our ability to attract and retain end customers in our current or future activities

          target markets;


     •    our ability to continue to develop new technologies and obtain and

maintain the intellectual property rights protecting these technologies;

• our ability to form and develop partnerships with technology partners and

consulting partners;

• our ability to maintain, protect and improve our intellectual property;

  • our ability to successfully defend litigation brought against us;


  • new product releases and timing;

• anticipated trends, key drivers and challenges in our business and the

the competition we face;

• the effect of the COVID-19 pandemic on our business and the success of

          any measures we have taken or may take in the future in response
          thereto;


     •    laws and regulations applicable to our business, including export
          restrictions;

• the planned dates for the payment of dividends and the timetable for receipt of dividends,

          and our plans to pay dividends in the future


  • 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 Annual Report on Form 10-K 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 Annual Report
on Form 10-K speaks only as of the date on which it is made. We do not intend to
update any of these forward-looking statements after the date of this Annual
Report on Form 10-K, except as required by law.

The following discussion and analysis should be read together with the
consolidated financial statements and related notes that appear in this Annual
Report on Form 10-K. This discussion contains forward-looking statements based
upon current expectations, assumptions, estimates and projections. These
forward-looking statements involve risks and uncertainties. Our actual results
may differ materially from those indicated in these forward-looking statements
as a result of certain factors, as more fully described in "Risk Factors"
included in Part I, Item 1A or in other parts of this Annual Report on Form
10-K. A discussion of changes in our results from the year ended December 31,
2019 to 2020 has been omitted from this Annual Report on Form 10-K and may be
found in "Item 7.

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Management's Discussion and Analysis of Financial Condition and Results of
Operations" of our Annual Report on Form 10-K for the year ended December 31,
2020 filed with the SEC on March 12, 2021. In this Annual Report on Form 10-K,
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 Annual Report on Form 10-K contains references to our
trademarks and to trademarks belonging to other entities. Solely for
convenience, trademarks and trade names referred to in this report, including
logos, artwork and other visual displays, may appear without the ® or ™ symbols,
but such references are not intended to indicate, in any way, that we will not
assert, to the fullest extent under applicable law, our rights or the rights of
the applicable licensor to these trademarks and trade names. We do not intend
our use or display of other companies' trade names or trademarks to imply a
relationship with, or endorsement or sponsorship of us by, any other companies.

Overview

We are a fabless semiconductor company that designs, markets and sells
mixed-signal integrated circuits for multiple video applications in the security
surveillance and automotive markets. Our integrated circuits are enabling the
transition from standard definition ("SD") video to high definition ("HD") video
in the security surveillance and automotive markets.

Our solutions take HD video signals from a camera and convert them into analog
signals for reliable long-distance transmission, then convert the HD analog
signal into the appropriate format for video processing and display. Our HD
analog technology operates at the same 1080p HD resolution as digital HD, but
processes video in an HD analog format and transmits the video in this same
analog format, thereby eliminating the need for any compression or
decompression. Our integrated circuits are based on our proprietary architecture
and mixed signal technologies that we believe provide high video quality, enable
high levels of integration and are cost effective. Our integrated circuits are
used by security surveillance manufacturers, such as Hikvision in China, IDIS in
South Korea and AVTech in Taiwan. These three manufacturers are each a leading
security surveillance manufacturer in their respective countries.

We derive our revenue from sales of our mixed-signal integrated circuits into
the security surveillance and automotive markets. We began shipping our products
in 2013 and to date, we have sold over 261 million integrated circuits. Our
revenue was $64.7 million and $34.3 million for the years ended December 31,
2021 and 2020, respectively. The automotive market accounted for 50% and 53% of
our revenue for the years ended December 31, 2021 and 2020, respectively.
Meanwhile, the security surveillance market accounted for 50% and 47% of our
revenue for the years ended December 31, 2021 and 2020, respectively. We
recognized $32.1 million and $18.2 million of revenue on sales into the
automotive market for the years ended December 31, 2021 and 2020, respectively.
In addition, we recognized $32.6 million and $16.1 million of revenue on sales
into the security surveillance market for the years ended December 31, 2021 and
2020, respectively. We recorded net income of $17.3 million and $3.3 million for
the years ended December 31, 2021 and 2020, 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 years ended December 31, 2021 and 2020, 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, extending the life cycles of our products. Conversely, if a
competitor secures the design win, it may be difficult for us to sell into the
end-customer's application for an extended period. Our sales cycle typically
ranges from three to six months for the security surveillance market and one to
three years for the automotive market. Due to the length of our product
development and sales cycle, the majority of our revenue for any period is
likely to be weighted toward products introduced for sale in the prior one or
two years. As a result, our present revenue is not necessarily

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representative of future sales, as our future sales will likely consist of a different range of products, some of which are currently in development.

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. For the years ended
December 31, 2021 and 2020, our research and development expense was $6.4
million and $7.2 million, 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
December 31, 2021, we had 78 employees, 24 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 38% and 28% of our
revenue for the years ended December 31, 2021 and 2020, 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 and are not expected to directly
impact our business.

The above conclusions are as of the date of filing of this Annual Report on Form
10-K. 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.

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Key Factors Affecting Our Results of Operations

COVID-19 Pandemic. In December 2019, a respiratory illness caused by a novel
coronavirus disease ("COVID-19") was reported in Wuhan, Hubei Province, China,
and, in March 2020, the World Health Organization characterized COVID-19 as a
pandemic. As our products are primarily sold in Asia, we are particularly
impacted by shutdowns and government actions in the countries impacted in that
region. We continue to actively monitor the impact of COVID-19 on our financial
condition, liquidity, operations, suppliers, industry, and workforce and
accommodate and comply with regional restrictions as appropriate. These actions
include monitoring the impact on our workforce and the economic impact on our
customers and markets. We have made estimates of the impact of COVID-19 within
our financial statements and there may be changes to those estimates in future
periods.

The COVID-19 pandemic 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. These measures by government authorities 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 twelve months ended December 31, 2021.

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 depends on our ability to continually target new and retain
existing end-customers that make large orders. For the years ended December 31,
2021 and 2020, Hikvision, the largest security surveillance manufacturer in
China and one of our end-customers, accounted for 38% and 28% of our revenue,
respectively. Although large customers can help us increase our revenue and
improve our results of operations, reliance on large customers is a risk to our
business. For example, Section 889 of the 2019 National Defense Authorization
Act 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.

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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 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 costs.

Components of Consolidated Statements of Income

Income

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 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.

Revenue cost

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 costs

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 may cause our research and development costs to

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increase in absolute dollars going forward as we increase our investments in new product development and our workforce 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 tax

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 (FDII) deduction, stock-based compensation and
change in valuation allowance.

Operating results

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

                                                 Year Ended
                                                December 31,
                                            2021         2020
Revenue                                   $ 64,707     $ 34,339
Cost of revenue (1)                         29,660       16,132
Gross profit                                35,047       18,207
Operating expenses:
Research and development (1)                 6,371        7,244
Selling, general and administrative (1)      8,791        7,265
Total operating expenses                    15,162       14,509
Income from operations                      19,885        3,698
Other income - net                              29          218
Income before income taxes                  19,914        3,916
Provision for income taxes                   2,627          574
Net income                                $ 17,287     $  3,342



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



                                          Year Ended
                                         December 31,
                                       2021        2020
Cost of revenue                       $   156     $   132
Research and development                  580         543

Sales, general and administrative 1,109,811 Total

                                 $ 1,845     $ 1,486


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The following table presents the consolidated statements of income for each period presented as a percentage of sales:

                                          Year Ended
                                         December 31,
                                      2021      2020
Revenue                                 100 %     100 %
Cost of revenue                          46        47
Gross profit                             54        53
Operating expenses:
Research and development                 10        21
Selling, general and administrative      13        21
Total operating expenses                 23        42
Income from operations                   31        11
Other income - net                        -         1
Income before income taxes               31        12
Provision for income taxes                4         2
Net income                               27 %      10 %




Revenue

            Year Ended December 31,             Change
              2021             2020         Amount       %
                        (dollars in thousands)
Revenue   $     64,707       $  34,339     $ 30,368       88 %




Revenue increased by $30.4 million, or 88%, for the year ended December 31, 2021
as compared to the year ended December 31, 2020. This was primarily due to a
$16.6 million increase in security surveillance market revenue as a result of a
106% increase in shipment volume, and a $13.8 million increase in automotive
market revenue due to a 44% increase in shipment volume. Our product pricing has
increased in our target markets.

Turnover per Geographic region

The table below shows revenue by geographic area as a percentage of total revenue for the periods presented:

                    Year Ended
                   December 31,
                2021      2020
China              69 %      64 %
Taiwan             16        19
South Korea        11        14
Japan               3         2
Other               1         1
Total revenue     100 %     100 %


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Revenue Cost and Gross Margin

                    Year Ended December 31,             Change
                      2021             2020         Amount       %
                                  (dollars in thousands)
Cost of revenue   $     29,660       $  16,132     $ 13,528       84 %
Gross margin                54 %            53 %


Cost of revenue increased $13.5 million, or 84%, for the year ended December 31,
2021 as compared to the year ended December 31, 2020. Gross margin increased to
54% for the year ended December 31, 2021 from 53% for the year ended December
31, 2020. Cost of revenue increased primarily due to a $12.7 million increase in
cost of goods sold primarily due to a 73% increase in the volume of shipments, a
$0.8 million increase as a result of an increase in inventory write-downs,
decreased utilization of previously reserved inventory, increased warranty
expense and product mix. Gross margin was positively impacted by these changes.

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

Research and development costs

                               Year Ended December 31,              Change
                               2021               2020         Amount        %
                                             (dollars in thousands)
Research and development   $      6,371       $      7,244     $  (873 )     (12 )%



Research and development expense decreased $0.9 million, or 12%, for the year
ended December 31, 2021 as compared to the year ended December 31, 2020. This
decrease was primarily due to a $1.3 million decrease in tape-out expenses
associated with the development of new products, offset by a $0.3 million
increase in personnel costs and a $0.1 million increase in product costs related
to design, prototype and software expense.

Selling, general and administrative expenses

                                          Year Ended December 31,              Change
                                          2021               2020         Amount       %
                                                       (dollars in thousands)

Selling, general and administrative expenses $8,791 $7,265 $1,526 21%


Selling, general and administrative expenses increased by $1.5 million, or 21%,
for the year ended December 31, 2021 as compared to the year ended December 31,
2020. This increase was due to a $0.5 million increase in personnel costs, a
$0.5 million increase in professional service fees due to additional
administrative efforts associated with operating as a U.S. company that is
publicly traded in Japan, a $0.3 million increase in stock-based compensation,
and a $0.2 million increase in other administrative costs.

Other Income - net

                         Year Ended December 31,              Change
                        2021                2020         Amount        %
                                       (dollars in thousands)
Other income - net   $       29         $        218     $  (189 )     (87 )%


Other income – net for the year ended December 31, 2021 decreased by $0.2 millionor 87%, compared to the financial year ended December 31, 2020primarily due to net interest income on investments.

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Provision for Income Taxes

                                Year Ended December 31,             Change
                                 2021              2020        Amount        %
                                             (dollars in thousands)
Provision for income taxes   $       2,627       $     574     $ 2,053       358 %


The provision for income taxes increased by $2.1 million, or 358%, for the year
ended December 31, 2021 as compared to the year ended December 31, 2020. The
increase in the provision for income taxes was primarily due to an increase in
taxable income.

Cash 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 December 31, 2021
were $42.3 million. We believe our existing cash, cash equivalents, short-term
investments and cash we expect to generate from operations, will be sufficient
to meet our anticipated cash needs for at least the next 12 months. Our future
capital requirements will depend on many factors, including our growth rate, the
timing and extent of our spending to support research and development
activities, the timing and cost of establishing additional sales and marketing
capabilities, the introduction of new and enhanced products and our costs to
implement new manufacturing technologies or potentially acquire and integrate
other companies or assets. In the event that additional financing is required
from outside sources, we may not be able to raise it on terms acceptable to us
or at all. Any debt financing obtained by us in the future could also involve
restrictive covenants relating to our capital-raising activities and other
financial and operational matters, which may make it more difficult for us to
obtain additional capital and to pursue business opportunities, including
potential acquisitions. Additionally, if we raise additional funds through
further issuances of equity, convertible debt securities or other securities
convertible into equity, our existing stockholders could suffer significant
dilution in their percentage ownership, and any new equity securities we issue
could have rights, preferences and privileges senior to those of holders of our
common stock. If we are unable to obtain adequate financing or financing on
terms satisfactory to us when we require it, our ability to continue to grow or
support our business and to respond to business challenges could be
significantly limited.

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

                                                           Year Ended
                                                          December 31,
                                                        2021         2020
Net cash provided by operating activities             $ 14,247     $  2,725

Net cash provided by (used in) investing activities 1,183 (2,093 ) Net cash provided by (used in) financing activities (135 ) 61 Net increase in cash and cash equivalents

             $ 15,295     $    693


Operational activities

Our primary source of cash from operating activities has been from cash
collections from our customers. Our cash flows significantly increased in the
year ended December 31, 2021 as compared to 2020, primarily due to an increase
in revenues of $30.4 million, or 88%, partially offset by an increase in cost of
revenue of $13.5 million, or 84%. Research and development decreased $0.9
million and was offset by an increase in selling, general and administration
expense of $1.5 million.

Investing Activities

During the year ended December 31, 2021, cash provided by investing activities
was $1.2 million, primarily due to a $1.5 million net cash inflow due to
proceeds from maturities of debt securities net of purchases. During the year
ended December 31, 2020, cash used in investing activities was $2.1 million,
primarily due to a $1.6 million

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cash outflow due to the purchase of debt securities net of maturities. Other investing activities for both years consisted of purchases of property, plant and equipment.

Fundraising activities

During the year ended December 31, 2021, cash used in financing activities was
$0.1 million, primarily due to payments for shares withheld for tax withholdings
on vesting of restricted stock units, partially offset by net proceeds from the
exercise of stock options.

Material requirements of contractual and other obligations

We are obligated to make future payments under certain operating leases. Our ongoing contractual obligations as of December 31, 2021 are summarized in the following table (in thousands):

Payments due by period

                                          Total         Less than 1 year          1 to 3 years        More than 3 years
Operating leases                        $    1,035     $               556       $           479     $                 -
Purchase commitments                         6,819                   6,631                   188                       -
Total                                   $    7,854     $             7,187       $           667     $                 -




See Note 5 to the financial statements for a discussion of our commitments and
contingencies. We believe that the liquidity provided by operating, investing
and financing activities is adequate to meet our contractual obligations as
described above.

Off-balance sheet arrangements

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

Critical accounting estimates

Our accounting policies and recent accounting pronouncements are further described in Note 1 to the consolidated financial statements.

Inventory valuation allowances

Inventory is valued net of allowances for unsalable or obsolete work in process
and finished goods. The valuation allowance is adjusted for excess and obsolete
inventory based on inventory age, shipment history and the forecast of demand
over a specific future period. Actual future write-offs of inventory for
salability and obsolescence reasons may differ from estimates and calculations
used to determine valuation allowances due to changes in customer demand,
customer negotiations, technology shifts and other factors.

Income taxes

In determining net income for financial statement purposes, we must make certain
estimates and judgments in the calculation of tax provisions and the resultant
tax liabilities and in the recoverability of deferred tax assets that arise from
temporary differences between the tax and financial statement recognition of
revenue and expense.

In the ordinary course of global business, there may be many transactions and
calculations where the ultimate tax outcome is uncertain. The calculation of tax
liabilities involves dealing with uncertainties in the interpretation and
application of complex tax laws, and significant judgment is necessary to (i)
determine whether, based on the technical merits, a tax position is more likely
than not to be sustained and (ii) measure the amount of tax benefit that
qualifies for recognition. We recognize potential liabilities for anticipated
tax audit issues in the United States and other tax jurisdictions based on an
estimate of the ultimate resolution of whether, and the extent to which,
additional

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taxes will be due. Although we believe the estimates are reasonable, there can be no assurance that the ultimate outcome of these matters will not differ from what is reflected in the historical tax provisions and charges.

As part of our financial process, we must assess the likelihood that our
deferred tax assets can be recovered. If recovery is not likely, the provision
for taxes must be increased by recording a reserve in the form of a valuation
allowance for the deferred tax assets that are estimated not to be ultimately
recoverable. Our judgment regarding future recoverability of our deferred tax
assets may change due to various factors, including changes in U.S. or
international tax laws and changes in market conditions and their impact on our
assessment of taxable income in future periods. These changes, if any, may
require adjustments to the valuation allowances and an accompanying reduction or
increase in net income in the period when such determinations are made.

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