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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to            

Commission File Number 001-33387

GSI Technology, Inc.

(Exact name of registrant as specified in its charter)

Delaware

77-0398779

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

1213 Elko Drive

Sunnyvale, California 94089

(Address of principal executive offices, zip code)

(408331-8800

(Registrant’s telephone number, including area code)

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

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on which Registered

Common Stock, $0.001 par value

GSIT

The Nasdaq Stock Market LLC

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes    No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 12b-2 of the Exchange Act.

Large accelerated filer  

Accelerated filer  

Non-accelerated filer  

Smaller reporting company  

Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes    No  

The number of shares of the registrant’s common stock outstanding as of October 31, 2022: 24,553,753.

Table of Contents

GSI TECHNOLOGY, INC.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2022

Page

PART I — FINANCIAL INFORMATION

Item 1.

Financial Statements

2

Condensed Consolidated Balance Sheets

2

Condensed Consolidated Statements of Operations

3

Condensed Consolidated Statements of Comprehensive Loss

4

Condensed Consolidated Statements of Stockholders’ Equity

5

Condensed Consolidated Statements of Cash Flows

6

Notes to Condensed Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

Item 4.

Controls and Procedures

28

PART II — OTHER INFORMATION

Item 1A.

Risk Factors

29

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

48

Item 6.

Exhibits

48

Signatures

49

1

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1.Financial Statements

GSI TECHNOLOGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

September 30, 

March 31, 

2022

  

2022

    

(In thousands, except share
and per share amounts)

ASSETS

Cash and cash equivalents

   

$

32,803

    

$

36,971

Short-term investments

 

5,422

 

6,992

Accounts receivable, net

 

4,819

 

4,518

Inventories

 

5,532

 

4,655

Prepaid expenses and other current assets

 

1,649

 

1,555

Total current assets

 

50,225

 

54,691

Property and equipment, net

 

7,156

 

7,359

Operating lease right-of-use assets

984

889

Long-term investments

 

628

 

3,345

Goodwill

7,978

7,978

Intangible assets, net

1,906

2,023

Deposits

 

124

 

137

Total assets

 

$

69,001

 

$

76,422

LIABILITIES AND STOCKHOLDERS’ EQUITY

Accounts payable ($83 and $32 to a related party)

 

$

1,645

 

$

1,474

Lease liabilities, current

543

537

Accrued expenses and other liabilities

 

5,813

 

6,850

Total current liabilities

 

8,001

 

8,861

Deferred tax liability

 

11

 

11

Lease liabilities, non-current

381

361

Contingent consideration, non-current

1,908

2,738

Total liabilities

 

10,301

 

11,971

Commitments and contingencies (Note 9)

Stockholders’ equity:

Preferred stock: $0.001 par value authorized: 5,000,000 shares; issued and outstanding: none

 

 

Common Stock: $0.001 par value authorized: 150,000,000 shares; issued and outstanding: 24,553,753 and 24,486,239 shares, respectively

 

25

 

24

Additional paid-in capital

 

54,560

 

53,083

Accumulated other comprehensive loss

 

(179)

 

(154)

Retained earnings

 

4,294

 

11,498

Total stockholders’ equity

 

58,700

 

64,451

Total liabilities and stockholders’ equity

 

$

69,001

 

$

76,422

The accompanying notes are an integral part of these condensed consolidated financial statements.

2

Table of Contents

GSI TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three Months Ended September 30, 

Six Months Ended September 30, 

2022

2021

2022

2021

    

(In thousands, except per share amounts)

(In thousands, except per share amounts)

Net revenues

   

$

8,953

    

$

7,797

    

$

17,862

    

$

16,588

Cost of revenues ($140, $67, $197 and $80 to a related party)

 

3,351

 

3,620

 

6,895

 

7,629

Gross profit

 

5,602

 

4,177

 

10,967

 

8,959

Operating expenses:

Research and development

 

6,395

5,907

13,014

12,010

Selling, general and administrative

 

2,412

2,787

5,100

5,827

Total operating expenses

 

8,807

 

8,694

 

18,114

 

17,837

Loss from operations

 

(3,205)

 

(4,517)

 

(7,147)

 

(8,878)

Interest income, net

 

55

18

77

41

Other expense, net

 

(41)

(26)

(37)

(69)

Loss before income taxes

 

(3,191)

 

(4,525)

 

(7,107)

 

(8,906)

Provision (benefit) for income taxes

 

37

42

97

(130)

Net loss

 

$

(3,228)

 

$

(4,567)

 

$

(7,204)

 

$

(8,776)

Net loss per share:

Basic

 

$

(0.13)

 

$

(0.19)

 

$

(0.29)

 

$

(0.36)

Diluted

 

$

(0.13)

 

$

(0.19)

 

$

(0.29)

 

$

(0.36)

Weighted average shares used in per share calculations:

Basic

 

24,554

 

24,229

24,538

24,162

Diluted

 

24,554

 

24,229

24,538

24,162

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

Table of Contents

GSI TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

Three Months Ended September 30, 

Six Months Ended September 30, 

2022

2021

2022

2021

    

(In thousands)

(In thousands)

Net loss

   

$

(3,228)

    

$

(4,567)

    

$

(7,204)

    

$

(8,776)

Net unrealized gain (loss) on available-for-sale investments

 

2

 

(16)

 

(25)

 

(31)

Total comprehensive loss

 

$

(3,226)

 

$

(4,583)

 

$

(7,229)

 

$

(8,807)

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

Table of Contents

GSI TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

Accumulated

Additional

Other

Total

Common Stock

Paid-in

Comprehensive

Retained

Stockholders'

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Earnings

    

Equity

Three months ended September 30, 2022

(In thousands, except share amounts)

Balance, June 30, 2022

24,553,753

$

25

$

53,899

$

(181)

$

7,522

$

61,265

Stock-based compensation expense

661

661

Net loss

(3,228)

(3,228)

Net unrealized gain on available-for-sale investments

2

2

Balance, September 30, 2022

24,553,753

$

25

$

54,560

$

(179)

$

4,294

$

58,700

Three months ended September 30, 2021

Balance, June 30, 2021

24,166,062

$

24

$

49,328

$

(35)

$

23,657

$

72,974

Issuance of common stock under employee stock option plans

162,066

814

814

Stock-based compensation expense

716

716

Net loss

(4,567)

(4,567)

Net unrealized loss on available-for-sale investments

(16)

(16)

Balance, September 30, 2021

24,328,128

$

24

$

50,858

$

(51)

$

19,090

$

69,921

Accumulated

Additional

Other

Total

Common Stock

Paid-in

Comprehensive

Retained

Stockholders'

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Earnings

    

Equity

Six months ended September 30, 2022

(In thousands, except share amounts)

Balance, March 31, 2022

24,486,239

$

24

$

53,083

$

(154)

$

11,498

$

64,451

Issuance of common stock under employee stock option plans

67,514

1

178

179

Stock-based compensation expense

1,299

1,299

Net loss

(7,204)

(7,204)

Net unrealized loss on available-for-sale investments

(25)

(25)

Balance, September 30, 2022

24,553,753

$

25

$

54,560

$

(179)

$

4,294

$

58,700

Six months ended September 30, 2021

Balance, March 31, 2021

24,020,276

$

24

$

47,722

$

(20)

$

27,866

$

75,592

Issuance of common stock under employee stock option plans

307,852

1,597

1,597

Stock-based compensation expense

1,539

1,539

Net loss

(8,776)

(8,776)

Net unrealized loss on available-for-sale investments

(31)

(31)

Balance, September 30, 2021

24,328,128

$

24

$

50,858

$

(51)

$

19,090

$

69,921

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

Table of Contents

GSI TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Six Months Ended September 30, 

2022

2021

    

(In thousands)

Cash flows from operating activities:

Net loss

   

$

(7,204)

    

$

(8,776)

Adjustments to reconcile net loss to net cash used in operating activities:

Allowance for doubtful accounts and other

 

(10)

 

(80)

Provision for excess and obsolete inventories

 

89

 

265

Non-cash lease expense

281

206

Change in fair value of contingent consideration

(830)

45

Depreciation and amortization

 

510

 

501

Stock-based compensation

 

1,299

 

1,539

Amortization of premium on investments

 

12

 

45

Changes in assets and liabilities:

Accounts receivable

 

(291)

 

92

Inventories

 

(966)

 

(371)

Prepaid expenses and other assets

 

(81)

 

(416)

Accounts payable

 

205

 

165

Accrued expenses and other liabilities

 

(1,387)

 

(593)

Net cash used in operating activities

 

(8,373)

 

(7,378)

Cash flows from investing activities:

Purchase of investments

(3,250)

Maturities of short-term investments

 

4,250

6,133

Purchases of property and equipment

 

(224)

(393)

Net cash provided by investing activities

 

4,026

 

2,490

Cash flows from financing activities:

Proceeds from issuance of common stock under employee stock plans

 

179

1,597

Net cash provided by financing activities

 

179

 

1,597

Net decrease in cash and cash equivalents

 

(4,168)

 

(3,291)

Cash and cash equivalents at beginning of the period

 

36,971

44,234

Cash and cash equivalents at end of the period

 

$

32,803

 

$

40,943

Non-cash investing and financing activities:

Purchases of property and equipment through accounts payable and
accruals

$

$

4

Operating lease right-of-use assets exchanged for lease obligations

376

Supplemental cash flow information:

Net cash paid for income taxes

 

$

82

 

$

25

The accompanying notes are an integral part of these condensed consolidated financial statements.

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GSI TECHNOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1—THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The accompanying unaudited condensed consolidated financial statements of GSI Technology, Inc. and its subsidiaries (“GSI” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission.  Accordingly, the interim financial statements do not include all of the information and footnotes required by GAAP for annual financial statements.  These interim financial statements contain all adjustments (which consist of only normal, recurring adjustments) that are, in the opinion of management, necessary to state fairly the interim financial information included therein.  The Company believes that the disclosures are adequate to make the information not misleading.  However, these financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2022.

The consolidated results of operations for the six months ended September 30, 2022 are not necessarily indicative of the results to be expected for the entire fiscal year.

Reclassifications

Certain amounts in the fiscal 2022 condensed consolidated financial statements have been reclassified to conform to the fiscal 2023 presentation.

Significant accounting policies

There have been no material changes to our significant accounting policies that were disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2022.

Risk and uncertainties

The COVID-19 global pandemic has affected the business activities of the Company, its customers, suppliers and other business partners. Governments in affected regions have implemented, and may continue to implement, safety precautions including quarantines, travel restrictions, business closures, cancellations of public gatherings and other measures as they deem necessary. Many organizations and individuals, including the Company and its employees, are taking additional steps to avoid or reduce infection, including limiting travel and working from home. These measures are disrupting normal business operations and have had significant negative impacts on businesses and financial markets worldwide.

The Company continues to monitor its operations and government recommendations and has made modifications to its normal operations because of the COVID-19 global pandemic. The Company has instituted many preventative measures and is regularly evaluating those measures and others as it continues to better understand its current and future operating environment. The majority of our employees around the world worked from home for extended timeframes due to the pandemic. The Company maintained a substantial portion of its manufacturing operational capacity at its primary manufacturing support facility located in Hsin Chu, Taiwan where the Company’s suppliers are located and where all of the Company’s products are manufactured. Since the outbreak of COVID-19, aside from supply chain shortages from the lengthening of lead times for wafers and assembly services and the impact of ongoing and expected price increases, including a 20% increase in the cost of wafers received in early calendar 2022 and a 6% increase expected in early calendar 2023, the Company has experienced minimal impact, and continues to experience minimal impact, on its manufacturing operations in Taiwan. Final

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testing of the Company’s products is conducted in house in both the US and Taiwan. Shipping and receiving operations were maintained by a skeleton crew with minimal impact. The Company’s revenues were impacted by changes in customer buying patterns and communication limitations related to COVID-19 restrictions that required a significant number of its customer contacts to work from home. The Company’s results for the fiscal years ended March 31, 2022 and 2021 demonstrated the challenges that the Company has faced during the COVID-19 global pandemic, which has restricted the activities of the Company’s sales force and distributors, reduced customer demand and caused the postponement of investment in certain customer sectors. These challenges have also impacted the Company as it entered new markets and engaged with target customers to sell its new APU product. Industry conferences and on-site training workshops, which are typically used for building a sales pipeline, were limited, and continue to be limited due to COVID-19 related restrictions. The Company adapted its sales strategies for the COVID-19 environment, where it could not do face-to-face meetings and conduct secure meetings with government and defense customers. In addition to the continuing COVID-19 global pandemic, the recent military conflict in Ukraine, the rapid rise in energy prices, worldwide inflationary pressures, rising interest rates and decline in the global economic environment may have an adverse impact on the Company’s business and financial condition.

The disruption to the marketplace resulting from the COVID-19 global pandemic that the Company continues to experience is unlike anything the Company has ever had to deal with. While the Company continues to monitor the business metrics that it has historically used to predict its financial performance, the Company is uncertain as to whether these metrics will operate consistently with its historical experience.

The Company believes that during the next 12 months the COVID-19 global pandemic could impact general economic activity and demand in its end markets. Although the Company cannot estimate the length or gravity of the impact of the COVID-19 outbreak, if the pandemic continues, it will have an adverse effect on the Company’s results of operations, financial position, including potential impairments, and liquidity in fiscal year 2023. This expectation includes results from new information that may emerge concerning COVID-19, the effectiveness of vaccines and any actions taken to contain or treat COVID-19, as well as the economic impact on local, regional, national and international customers and markets. The Company has made estimates of the impact of COVID-19 within its condensed consolidated financial statements and there may be changes to those estimates in future periods that could be material.

Accounting pronouncements not yet effective for fiscal 2023

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For trade and other receivables, loans, and other financial instruments, the Company will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted beginning April 1, 2019. Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the effective date. The Company is currently evaluating the impact of this standard on its condensed consolidated financial statements.

NOTE 2—REVENUE RECOGNITION

The Company determines revenue recognition through the following steps: (1) identification of the contract with a customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, we satisfy a performance obligation.

The majority of the Company’s customer contracts, which may be in the form of purchase orders, contracts or purchase agreements, contain performance obligations for delivery of agreed upon products. Delivery of all performance obligations contained within a contract with a customer typically occurs at the same time (or within the

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same accounting period). Transfer of control typically occurs at the point at which delivery has occurred, title and the risks and rewards of ownership have passed to the customer, and the Company has a right to payment. For all transactions apart from consignment sales, the Company will generally recognize revenue upon shipment of the product. For consignment sales, which are infrequent, revenue is recognized at the time that the product is pulled from consignment warehouses.

Because all of the Company’s performance obligations relate to contracts with a duration of less than one year, the Company has elected to apply the optional exemption practical expedient provided in ASC 606 and, therefore, is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period.

The Company adjusts the transaction price for variable consideration. Variable consideration is not typically significant and primarily results from stock rotation rights and quick pay discounts provided to certain distributors. As a practical expedient, the Company is recognizing the incremental costs of obtaining a contract, specifically commission expenses that have a period of benefit of less than twelve months, as an expense when incurred. Additionally, the Company has adopted an accounting policy to recognize shipping costs that occur after control transfers to the customer as a fulfillment activity.

The Company’s contracts with customers do not typically include extended payment terms. Payment terms vary by contract type and type of customer and generally range from 30 to 60 days from shipment. Additionally, the Company has right to payment upon shipment.

The Company records revenue net of sales tax, value added tax, excise tax and other taxes collected concurrent with product sales. The impact of such taxes on products sales is immaterial. The Company has also elected to recognize the cost for freight and shipping when control over the products sold passes to customers and revenue is recognized.

The Company warrants its products to be free of defects generally for a period of three years. The Company estimates its warranty costs based on historical warranty claim experience and includes such costs in cost of revenues. Warranty costs and the accrued warranty liability were not material as of September 30, 2022.

The majority of the Company’s revenue is derived from sales of SRAM products which represent approximately 96% and 98% of total revenues in the six months ended September 30, 2022 and 2021, respectively.

Nokia, the Company’s largest customer, purchases products directly from the Company and through contract manufacturers and distributors. Based on information provided to the Company by its contract manufacturers and distributors, purchases by Nokia represented approximately 14% and 24% of the Company’s net revenues in the three months ended September 30, 2022 and 2021, respectively, and 14% and 34% of the Company’s net revenues in the six months ended September 30, 2022 and 2021, respectively.

See “Note 12 — Segment and Geographic Information” for revenue by shipment destination.

The following table presents the Company’s revenue disaggregated by customer type.

Three Months Ended September 30, 

Six Months Ended September 30, 

2022

2021

2022

2021

(In thousands)

(In thousands)

Contract manufacturers

   

$

1,671

   

$

1,988

   

$

3,206

   

$

5,852

Distribution

6,813

5,500

14,118

10,209

OEMs

469

309

538

527

$

8,953

$

7,797

$

17,862

$

16,588

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NOTE 3—NET LOSS PER COMMON SHARE

The Company uses the treasury stock method to calculate the weighted average shares used in computing diluted net loss per share. The following table sets forth the computation of basic and diluted net loss per share:

Three Months Ended September 30, 

Six Months Ended September 30, 

2022

2021

2022

2021

(In thousands, except per share amounts)

(In thousands, except per share amounts)

Net loss

   

$

(3,228)

    

$

(4,567)

    

$

(7,204)

    

$

(8,776)

Denominators:

Weighted average shares—Basic

 

24,554

24,229

24,538

24,162

Dilutive effect of employee stock options

Dilutive effect of employee stock purchase plan options

 

Weighted average shares—Dilutive

 

24,554

 

24,229

 

24,538

 

24,162

Net loss per common share—Basic

 

$

(0.13)

 

$

(0.19)

 

$

(0.29)

$

(0.36)

Net loss per common share—Diluted

 

$

(0.13)

 

$

(0.19)

 

$

(0.29)

$

(0.36)

The following shares of common stock underlying outstanding stock options, determined on a weighted average basis, were excluded from the computation of diluted net loss per share as they had an anti-dilutive effect:

Three Months Ended September 30, 

Six Months Ended September 30, 

2022

2021

2022

2021

(In thousands)

(In thousands)

Shares underlying options and ESPP shares

   

8,277

6,266

8,204

5,828

NOTE 4—BALANCE SHEET DETAIL

September 30, 2022

March 31, 2022

    

(In thousands)

Inventories:

Work-in-progress

   

$

3,582

    

$

3,085

Finished goods

 

1,941

 

1,555

Inventory at distributors

 

9

 

15

 

$

5,532

 

$

4,655

September 30, 2022

March 31, 2022

    

(In thousands)

Accounts receivable, net:

Accounts receivable

   

$

4,890

    

$

4,599

Less: Allowances for doubtful accounts and other

 

(71)

 

(81)

 

$

4,819

 

$

4,518

September 30, 2022

March 31, 2022

    

(In thousands)

Prepaid expenses and other current assets:

Prepaid tooling and masks

$

436

$

68

Other receivables

249

226

Other prepaid expenses and other current assets

964

1,261

$

1,649

$

1,555

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September 30, 2022

March 31, 2022

    

(In thousands)

Property and equipment, net:

Computer and other equipment

$

18,566

$

18,415

Software

4,428

4,425

Land

3,900

3,900

Building and building improvements

3,739

3,735

Furniture and fixtures

103

102

Leasehold improvements

906

878

31,642

31,455

Less: Accumulated depreciation

(24,486)

(24,096)

$

7,156

$

7,359

Depreciation expense was $196,000 and $197,000 for the three months ended September 30, 2022 and 2021, respectively, and $393,000 and $384,000 for the six months ended September 30, 2022 and 2021.

The following tables summarize the components of intangible assets and related accumulated amortization balances at September 30, 2022 and March 31, 2022 (in thousands):

As of September 30, 2022

    

Gross
Carrying
Amount

    

Accumulated
Amortization

    

Net Carrying
Amount

 

Intangible assets:

    

    

 

Product designs

$

590

$

(590)

$

Patents

4,220

(2,314)

1,906

Software

80

(80)

Total

$

4,890

$

(2,984)

$

1,906

As of March 31, 2022

    

Gross
Carrying
Amount

    

Accumulated
Amortization

    

Net Carrying
Amount

 

Intangible assets:

Product designs

$

590

$

(590)

$

Patents

4,220

(2,197)

2,023

Software

80

(80)

Total

$

4,890

$

(2,867)

$

2,023

Amortization of intangible assets included in cost of revenues was $58,000 and $58,000 for the three months ended September 30, 2022 and 2021, respectively, and $117,000 and $117,000 for the six months ended September 30, 2022 and 2021.

The Company reviews identifiable amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Determination of recoverability is based on the lowest level of identifiable estimated undiscounted cash flows resulting from use of the asset and its eventual disposition. Measurement of any impairment loss is based on the excess of the carrying value of the asset over its fair value. Based on the uncertainty of forecasts, events such as the failure to generate revenue from future product launches could result in impairment in the future. The Company identified a potential impairment indicator for the finite lived intangible assets and performed a recoverability test by comparing the sum of the estimated undiscounted future cash flows of the asset group to the carrying amount as of March 31, 2022. The result of the recoverability test indicated that the sum of the expected future cash flows was greater than the carrying amount of the finite lived intangible assets. Based on the uncertainty of forecasts inherent with a new product, events such as the failure to generate forecasted revenue from the APU product could result in a non-cash impairment charge in future periods.

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As of September 30, 2022, the estimated future amortization expense of intangible assets in the table above is as follows (in thousands):

Fiscal year ending March 31,

2023 (remaining six months)

$

117

2024

233

2025

233

2026

233

2027

233

Thereafter

857

Total

$

1,906

September 30, 2022

March 31, 2022

    

(In thousands)

Accrued expenses and other liabilities:

Accrued compensation

$

3,972

$

5,524

Accrued commissions

314

232

Income taxes payable

132

127

Miscellaneous accrued expenses

1,395

967

$

5,813

$

6,850

NOTE 5—GOODWILL

Goodwill represents the difference between the purchase price and the estimated fair value of the identifiable assets acquired and liabilities assumed in a business combination. The Company tests for goodwill impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset is more likely than not impaired. The Company has one reporting unit. The Company assesses goodwill for impairment on an annual basis on the last day of February in the fourth quarter of its fiscal year.

The Company had a goodwill balance of $8.0 million as of both September 30, 2022 and March 31, 2022. The goodwill resulted from the acquisition of MikaMonu Group Ltd. in fiscal 2016.

The Company completed its annual impairment test during the fourth quarter of fiscal 2022 and concluded that there was no impairment, as the fair value of its sole reporting unit exceeded its carrying value. The Company believes that no triggering event has taken place through September 30, 2022. However, with the macroeconomic uncertainty and decline in the Company’s stock price, there could be a non-cash charge for impairment in a future period should the decline in stock price subsequent to September 30, 2022 be sustained, due to a potential loss of significant customers, or due to a weakened demand for its products. As additional facts and circumstances evolve, the Company will continue to observe and assess whether an impairment trigger has occurred. To the extent it becomes more likely than not that the fair value of the Company is less than its carrying amount, the Company will be required to perform a quantitative impairment test, which may result in a non-cash impairment charge in future periods.

NOTE 6—INCOME TAXES

The current portion and long-term portion of the Company’s income tax liability related to unrecognized tax benefits was $0 at both September 30, 2022 and March 31, 2022. As of September 30, 2022, $3.6 million of unrecognized tax benefits had been recorded as a reduction to net deferred tax assets. Due to historical losses in the U.S., the Company has a full valuation allowance on its U.S. federal and state deferred tax assets. Management continues to evaluate the realizability of deferred tax assets and the related valuation allowance.

Management believes that within the next twelve months the Company will not have a significant reduction in uncertain tax benefits, including interest and penalties, related to positions taken with respect to credits and loss carryforwards on previously filed tax returns.

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The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the provision for income taxes in the Condensed Consolidated Statements of Operations.

The Company is subject to taxation in the United States and various state and foreign jurisdictions.  Fiscal years 2013 through 2022 remain open to examination by federal tax authorities, and fiscal years 2012 through 2022 remain open to examination by California tax authorities. Fiscal years 2020, 2021 and 2022 are subject to audit by the Israeli tax authorities.

For the six months ended September 30, 2022 and September 30, 2021, the Company incurred income tax expense (benefit) of $97,000 and ($130,000) on net losses before income taxes of ($7.1 million) and ($8.9 million), respectively. The provision (benefit) was calculated using the annualized effective tax rate method. The Company’s estimated annual effective income tax rate, including discrete items, was approximately (1.69%) and 0.49% as of September 30, 2022 and 2021, respectively. The annual effective tax rates as of September 30, 2022 and 2021 vary from the United States statutory income tax rate primarily due to valuation allowances in the United States, whereby pre-tax losses do not result in the recognition of corresponding income tax benefits and expenses and the foreign tax differential.

NOTE 7—FINANCIAL INSTRUMENTS

Fair value measurements

Authoritative accounting guidance for fair value measurements provides a framework for measuring fair value and related disclosures. The guidance applies to all financial assets and financial liabilities that are measured on a recurring basis. The guidance requires fair value measurement to be classified and disclosed in one of the following three categories:

Level 1: Valuations based on quoted prices in active markets for identical assets and liabilities.  The fair value of available-for-sale securities included in the Level 1 category is based on quoted prices that are readily and regularly available in an active market.  As of September 30, 2022, the Level 1 category included money market funds of $11.5 million, which were included in cash and cash equivalents on the Condensed Consolidated Balance Sheets.

Level 2: Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly. The fair value of available-for-sale securities included in the Level 2 category is based on the market values obtained from an independent pricing service that were evaluated using pricing models that vary by asset class and may incorporate available trade, bid and other market information and price quotes from well-established independent pricing vendors and broker-dealers. As of September 30, 2022, the Level 2 category included short-term investments of $5.4 million and long-term investments of $628,000, which were comprised of certificates of deposit, government and agency securities.

Level 3: Valuations based on inputs that are unobservable and involve management judgment and the reporting entity’s own assumptions about market participants and pricing.  As of September 30, 2022, the Company’s Level 3 financial instruments measured at fair value on the Condensed Consolidated Balance Sheets consisted of the contingent consideration liability related to the acquisition of MikaMonu. The fair value of the contingent consideration liability was initially determined as of the acquisition date using unobservable inputs. These inputs included the estimated amount and timing of future cash flows, the probability of success (achievement of the various contingent events) and a risk-adjusted discount rate of approximately 14.8% used to adjust the probability-weighted cash flows to their present value. Significant increases (decreases) to the estimated amount and timing of future cash flows or the probability of success would result in a significantly higher (lower) fair value measurement. Conversely, a significant increase or (decrease) in the risk-adjusted discount rate would result in a significantly (lower) higher fair value measurement. Generally, changes used in the assumptions for future cash flows and probability of success would be accompanied by a directionally similar change in the fair value measurement and expense. Conversely, changes in the risk-adjusted discount rate would be accompanied by a directionally opposite change in the related fair value measurement and expense. Subsequent to the acquisition date,

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at each reporting period, the contingent consideration liability is re-measured to fair value with changes recorded in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. During the most recent re-measurement of the contingent consideration liability as of September 30, 2022, the Company used a risk-adjusted discount rate of approximately 16.3% to adjust the probability-weighted cash flows to their present value using probabilities ranging from 0% to 80% for the remaining contingent events. The contingent consideration liability is included in contingent consideration, non-current on the Consolidated Balance Sheet at September 30, 2022 and March 31, 2022 in the amount of $1.9 million and $2.7 million, respectively.

The fair value of financial assets measured on a recurring basis is as follows (in thousands):

Fair Value Measurements at Reporting Date Using

Quoted Prices

in Active

Significant

Markets for

Other

Significant

Identical Assets

Observable

Unobservable

and Liabilities

Inputs

Inputs

    

September 30, 2022

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

Assets:

Money market funds

$

11,483

$

11,483

$

$

Marketable securities

6,050

6,050

Total

$

17,533

$

11,483

$

6,050

$