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 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
• 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, 2019to 2020 has been omitted from this Annual Report on Form 10-K and may be found in "Item 7. 36 -------------------------------------------------------------------------------- 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, 2020filed with the SECon 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.
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 Koreaand 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 millionand $34.3 millionfor the years ended December 31, 2021and 2020, respectively. The automotive market accounted for 50% and 53% of our revenue for the years ended December 31, 2021and 2020, respectively. Meanwhile, the security surveillance market accounted for 50% and 47% of our revenue for the years ended December 31, 2021and 2020, respectively. We recognized $32.1 millionand $18.2 millionof revenue on sales into the automotive market for the years ended December 31, 2021and 2020, respectively. In addition, we recognized $32.6 millionand $16.1 millionof revenue on sales into the security surveillance market for the years ended December 31, 2021and 2020, respectively. We recorded net income of $17.3 millionand $3.3 millionfor the years ended December 31, 2021and 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, 2021and 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 37
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, 2021and 2020, our research and development expense was $6.4 millionand $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, Chinaand 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, 2021and 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 Trumpissued 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 Bidenissued 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 ComplexCompanies whohave 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 Bidensigned 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, 2022clarifying 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 Statesand 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. 38
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 Organizationcharacterized 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 Koreaand Taiwanhave 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, 2021and 2020, Hikvision, the largest security surveillance manufacturer in Chinaand 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, 2019and 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 whouse 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 Chinatrade 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. 39 -------------------------------------------------------------------------------- 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 Statesafter 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 regionto 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
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.
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 40
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.
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 $ 34,339Cost 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 $ 132Research and development 580 543
Sales, general and administrative 1,109,811 Total
$ 1,845 $ 1,48641 --------------------------------------------------------------------------------
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 $ 30,36888 % Revenue increased by $30.4 million, or 88%, for the year ended December 31, 2021as compared to the year ended December 31, 2020. This was primarily due to a $16.6 millionincrease in security surveillance market revenue as a result of a 106% increase in shipment volume, and a $13.8 millionincrease in automotive market revenue due to a 44% increase in shipment volume. Our product pricing has increased in our target markets.
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 % 42
Revenue Cost and Gross Margin
Year Ended December 31, Change 2021 2020 Amount % (dollars in thousands) Cost of revenue
$ 29,660 $ 16,132 $ 13,52884 % Gross margin 54 % 53 % Cost of revenue increased $13.5 million, or 84%, for the year ended December 31, 2021as compared to the year ended December 31, 2020. Gross margin increased to 54% for the year ended December 31, 2021from 53% for the year ended December 31, 2020. Cost of revenue increased primarily due to a $12.7 millionincrease in cost of goods sold primarily due to a 73% increase in the volume of shipments, a $0.8 millionincrease 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, 2021as compared to the year ended December 31, 2020. This decrease was primarily due to a $1.3 milliondecrease in tape-out expenses associated with the development of new products, offset by a $0.3 millionincrease in personnel costs and a $0.1 millionincrease 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
Selling, general and administrative expenses increased by
$1.5 million, or 21%, for the year ended December 31, 2021as compared to the year ended December 31, 2020. This increase was due to a $0.5 millionincrease in personnel costs, a $0.5 millionincrease 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 millionincrease in stock-based compensation, and a $0.2 millionincrease 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
Provision for Income Taxes Year Ended December 31, Change 2021 2020 Amount % (dollars in thousands) Provision for income taxes
$ 2,627 $ 574 $ 2,053358 % The provision for income taxes increased by $2.1 million, or 358%, for the year ended December 31, 2021as 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, 2021were $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
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, 2021as 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 millionand 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 millionnet 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 million44
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.
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
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.
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 Statesand other tax jurisdictions based on an estimate of the ultimate resolution of whether, and the extent to which, additional 45
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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