CREDO TECHNOLOGY GROUP HOLDING LTD Management’s Report of Financial Condition and Results of Operations (Form 10-K)
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in those forward-looking statements. Factors that could cause or contribute to such differences include those identified below and those discussed in the section titled "Risk Factors." For a discussion and analysis of our financial condition and results of operations for our fiscal year ended
April 30, 2020, and a comparison of our fiscal years ended April 20, 2021and 2020, see the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our prospectus dated January 26, 2022. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. Overview Credo is an innovator in providing secure, high-speed connectivity solutions that deliver improved power and cost efficiency as data rates and corresponding bandwidth requirements increase exponentially throughout the data infrastructure market. Our connectivity solutions are optimized for optical and electrical Ethernet applications, including the emerging 100G, 200G, 400G and 800G port markets. Our products are based on our proprietary SerDes and DSP technology. Our product families include ICs, AECs and SerDes Chiplets. Our IP solutions primarily are comprised of SerDes IP development and licensing. Data generation has increased dramatically over the past ten years, creating new and complicated challenges in both circuit and system design. Our proprietary SerDes and DSP technologies enable us to disrupt competition in existing markets, lead the way into emerging markets, and innovate to create new market opportunities. While many others in the data infrastructure industry struggle to meet customers' increasing performance and energy efficiency requirements, we continue to innovate to deliver groundbreaking solutions. A recent example is the announcement of our HiWire Switch cable and open-source implementation with Microsoft that helps realize Microsoft's vision for a network-managed dual-ToR architecture, overcoming complex and slow legacy enterprise approaches, simplifying deployment, and improving connection reliability in the datacenter. The multi-billion dollar data infrastructure market that we serve is driven largely by hyperscalers, HPC and 5G infrastructure. The demands for increased bandwidth, improved power and cost efficiency, and heightened security have simultaneously and dramatically expanded as work, education, and entertainment have rapidly digitized across billions of end-point users. 69 --------------------------------------------------------------------------------
Since our creation in 2008, we have reached several important milestones:
•From 2008 to 2012, we developed our proprietary, low-power, mixed-signal SerDes architecture which could scale from 25Gbps/lane to 50Gbps/lane and ultimately to 100Gbps/lane.
•In 2013, we began commercializing our core SerDes technology by providing connectivity solutions for electrical and optical links in data centers.
•In 2014, we signed our first product contract with non-recurring engineering services (NRE) as well as our first IP license agreement.
•In 2016, we began production shipments of our Line Card PHY products.
•In 2017, we developed a 3.2 Tbps chip for 12.8 Tbps high-bandwidth switches. This chiplet included 64 lanes of 50 Gbps SerDes and was built in 28 nm using TSMC’s Chip-on-Wafer-on-Substrate (CoWoS) packaging technology.
• In 2018, we created AEC, a new category of data center system products, starting with developing 400G
• In 2019, we developed new DSP SerDes architectures optimizing performance and power trade-offs for 400G and 800G solutions targeting
•In 2020, we demonstrated the industry's first 40Gbs PAM3 SerDes in silicon. In addition, we engineered breakthrough
Line Card PHYsand Optical PAM4 DSPs with leading performance and power for 50G/lane and 100G/lane solutions. •In 2021, we launched new AEC solutions targeting ToR-to-NIC connections. Our solutions enabled dual-ToR server racks to seamlessly "switch" data traffic to the redundant ToR if a ToR port failed. [[Image Removed: crdo-20220430_g7.jpg]] We design, market and sell both product and IP solutions. We help define industry conventions and standards within the markets we target by collaborating with technology leaders and standards bodies. We contract with a variety of manufacturing partners to build our products based on our proprietary SerDes and DSP technologies. We develop standard solutions we can sell broadly to our end markets and also develop tailored solutions designed to address specific customer needs. Once developed, these tailored solutions can generally be broadly leveraged across our portfolio and we are able to sell the product or license the IP into the broader market. 70 -------------------------------------------------------------------------------- During fiscal 2022 and 2021, we generated $106.5 millionand $58.7 millionin total revenue, respectively. Product sales and product engineering services revenue comprised 77% and 63% of our total revenue in fiscal 2022 and 2021, respectively, and IP license and IP license engineering services revenue represented 23% and 37% of our total revenue in fiscal 2022 and 2021, respectively. Geographically, 36% and 75% of our total revenue in fiscal 2022 and 2021, respectively, was generated from customers in North America, and 64% and 25% of our total revenue in fiscal 2022 and 2021, respectively, was generated from customers in the rest of the world, primarily in Asia. During fiscal 2022 and 2021, we generated $22.2 millionand $27.5 millionin net loss, respectively. We derive the substantial majority of our revenue from a limited number of customers, and we anticipate we will continue to derive a significant portion of our revenue from a limited number of customers for the foreseeable future. We expect that as our products are more widely adopted and as our number of customers increase, customer concentration will decrease.
Our business model
We are a product-focused business with a strong foundation in IP, pioneering comprehensive connectivity solutions that deliver bandwidth, scalability, and end-to-end signal integrity for next-generation platforms. We also develop IP solutions to address the specific and complex needs of our customers. We earn revenue from these IP solutions primarily through licensing fees and royalties. In addition to product sales and IP license revenue, we also generated revenue from providing engineering services as part of our product and license arrangements with certain customers. Product sales and product engineering services revenue comprised 77% and 63% of our total revenue in fiscal 2022 and 2021, respectively, and IP license and IP license engineering services revenue represented 23% and 37% of our total revenue in fiscal 2022 and 2021, respectively. Over time, we expect to generate an increased proportion of our revenue from sales of our products. We expect to see a long-term benefit from improvements in our operating leverage as our business continues to gain scale. We utilize a fabless business model, working with a network of third parties to manufacture, assemble and test our connectivity products. This approach allows us to focus our engineering and design resources on our core competencies and to control our fixed costs and capital expenditures. We employ a two-pronged sales strategy targeting both the end users of our products, as well as the suppliers of our end users. By engaging directly with the end user, we are able to better understand the needs of our customers and cater our solutions to their most pressing connectivity requirements. This strategy has enabled us to become the preferred vendor to a number of our customers who, in turn, in some cases, require their suppliers, OEMs, ODMs and optical module manufacturers to utilize our solutions.
Composition of revenues and associated gross margins
We are a product-focused business with a strong foundation in IP and, as such, our customers engage with us through the purchase of our products or the licensing of our IP. In some instances, customers will engage us to develop tailored products or IP licenses to meet their specific application requirements. We charge these customers incremental fees for this tailored development which are in addition to product sales or IP license revenue, and we recognize these additional fees as product engineering or IP license engineering services revenue. By providing tailored engineering services to our customers, we believe we strengthen our customer relationships, enable additional sales and establish ourselves for potential long-term revenue opportunities from associated product sales or IP license revenue. 71
-------------------------------------------------------------------------------- A summary of our revenue and associated gross margin by these revenue sources for fiscal 2022 and 2021 is presented below (in thousands, except percentages): Year Ended April 30, 2022 2021 Revenue: Product sales
$ 73,721 $ 27,477Product engineering services 7,741 9,579
Total product sales and product engineering services 81,462 37,056 IP license
IP license engineering services 1,706
Total IP license and IP license engineering services 25,015 21,641 Total revenue
$ 106,477 $ 58,697Gross margin: Product sales 45.6 % 41.5 % Product engineering services 75.2 % 66.9 % Total product sales and product engineering services 48.4 % 48.1 % IP license 100.0 % 100.0 % IP license engineering services 72.9 % 73.0 % Total IP license and IP license engineering services 98.2 % 94.5 % Total gross margin 60.1 % 65.2 %
Over time, we expect our revenue from product sales and IP licensing to become a greater proportion of total revenue compared to engineering services.
We incur certain costs associated with introducing new products to market which impact the gross margin associated with product sales. Over time, as revenue from our product sales increases, we expect these product introduction costs to decrease as a percentage of product sales revenue resulting in a higher gross margin on product sales revenue.
Factors affecting our performance
Our results of operations and financial condition have been and will continue to be influenced by a number of factors, including the following:
Design wins with new and existing customers
Our solutions enable our end customers to differentiate their product offerings and position themselves to meet the demands of increasingly advanced networks. We work closely with our end customers to understand their product roadmaps and strategies and help them develop new products. Our goal is to develop solutions that support their product roadmap and development. If an end customer has tested our product, verified that it meets their requirements and the customer has informed us that the end customer intends to have our customer build it into their product, we consider it a design win. We consider design wins important to our future success. The selection process is typically lengthy and may require us to incur significant design and development expenditures in pursuit of a design win with no assurance that our solutions will be selected. In addition, some design wins result in significant revenue and some do not, and the timing of such revenue is difficult to predict as it depends on the success of the end customer's product that uses our solutions. Thus, some design wins result in orders and significant revenue shortly after the design win is awarded and other design wins do not result in significant orders and revenue for several months or longer after the initial design win (if at all). As a result, the degree to which we are successful in achieving design wins and the speed and level at which end customers ramp 72
the volume production of the products in which our product is designed will impact our success and financial results in future periods.
Customer demand and pipeline
Demand for our products is dependent on conditions in the markets in which our customers operate, which are subject to cyclicality and competitive conditions. We believe our relationships with the end customers of our products and the long-term implications of decisions to adopt our solutions, provide us with valuable visibility into customer demand. Furthermore, our customers generally provide us with periodic forecasts of their requirements. This provides an opportunity for us to monitor and refine our business operations and plans. The majority of our product sales are made pursuant to standard purchase orders. Changes in customer forecasts or the timing of orders from customers expose us to the risks of inventory shortages or excess inventory. Cancellations of orders could result in the loss of anticipated sales without allowing us sufficient time to reduce and manage our operating expenses.
Product pricing and gross margins
Our revenue is also impacted by changes in the number and average selling prices of our products. Our products are typically characterized by a life cycle that begins with higher average selling prices and lower volumes, followed by broader market adoption, leading to higher volumes, and average selling prices lower than initial levels. Our product gross margins will be affected by the extent to which these declines are paired with improvements in manufacturing yields and lower wafer, assembly and test costs that offset some of the margin reduction that results from lower average selling prices as well as the extent to which we introduce new products with higher initial average selling prices and achieve market acceptance. Our gross margins may also be affected by changes in the price of silicon wafers, copper cables, printed circuit boards (PCBs), testing costs and commodities, and the extent to which we are able to offset any increases in our costs through increases prices to our customers, productivity actions or other means. In
August 2021, TSMC, on which we rely as the foundry for all our semiconductor products, began informing its customers that it plans to increase the prices of its most advanced chips by roughly 10% and its less advanced chips by up to 20%, effective in late 2021 or early 2022 as a result of a global supply shortage that began in 2020. If we are unable to offset the increased costs associated with this price increase through pricing increases on our products, our gross margins may decrease. Our product gross margins may also fluctuate from period to period as a result of changes in average selling prices due to new product introductions or existing product transitions into larger scale commercial volumes and manufacturing costs as well as our product and customer mix.
We develop and sell state-of-the-art connectivity solutions for digital infrastructures that aim to replace existing solutions and support our customers’ future applications and needs. Our success depends on our customers’ adoption of our new technology and the preference of our solutions over competing offerings or other current or future technologies.
We operate in industries characterized by rapidly changing technologies, industry standards and technological obsolescence. We work closely with our customers to understand their product roadmaps and strategies to forecast their future needs. This helps inform our technology roadmap and development priorities. We also monitor forecasts by industry analysts and the adoption curve of technology as well as potential competing forces which could hinder adoption of our solutions. Our revenue growth is dependent on our ability to continually develop and introduce new products to meet the changing technology and performance requirements of our customers, diversify our revenue base and generate new revenue to replace, or build upon, the success of previously introduced products which may be rapidly maturing. As a result, our revenue is impacted, to a more significant extent, by product life cycles for a variety of products and to a much lesser extent, if any, by any single product. In order to remain competitive, we have made, and expect to continue to make, significant expenses in research and 73
-------------------------------------------------------------------------------- development, and our research and development expenses in a particular period may be significantly impacted by specific product or engineering initiatives that we undertake to maintain our competitiveness and expand our product portfolio. If we fail to anticipate or respond appropriately to new developments in technology, or to timely develop competitive new or enhanced products or technologies, our revenue could decrease and we could lose design wins to our competitors.
Industry trends and cyclicality
We continue to evaluate trends within the industry that affect our business performance. We design and develop high-speed connectivity solutions that deliver improved power and cost efficiency for the data infrastructure market. This market is driven by hyperscalers, HPC and 5G infrastructure. Accordingly, our revenue and business performance are influenced by the deployment and timing of broader market adoption of next generation technologies in data centers, particularly by hyperscalers, and in the HPC and 5G markets. The semiconductor industry is cyclical and is characterized by rapid technological change, evolving standards, product obsolescence, price erosion, and fluctuations in product supply and demand. Any prolonged or significant downturn in our industry generally could adversely affect our business and reduce demand for our products and otherwise harm our financial condition and results of operations.
Impact of COVID-19
The ongoing COVID-19 pandemic has significantly impacted global economic activity and caused business disruption worldwide. It has prompted governments and businesses to take unprecedented measures, including restrictions on travel, temporary business closures, quarantines and shelter-in-place orders. Since the onset of the pandemic in
March 2020, most of our employees have transitioned to remote work, and we have temporarily prohibited most business travel. We have complied with the recommendations of government health agencies in each jurisdiction in which we operate throughout the pandemic. We formed a task force to track the spread of COVID-19 and other relevant metrics to stay informed and took several precautions to operate safely. We are very proud of the response of our employees, suppliers and customers to the demands of the pandemic. Our collective response meant that the impact to our business was significantly mitigated, and we believe the overall impact was relatively limited as a result. However, there has inevitably been some impact on our end customers - potentially delaying or scaling down purchasing decisions - that may have reduced our sales. Stay at home orders may have reduced our ability to most effectively market and sell our products and solutions while our research and development functions may have been impacted from being off-site. Over the longer term, we may see some positive impacts on our business as a result of the COVID-19 pandemic. We believe the COVID-19 pandemic accelerated requirements for increased bandwidth and lower latency, reduced power, and heightened the need for effective security as previously centralized work, school, and entertainment connections have disseminated across myriad end-point users.
While we are optimistic that the global pandemic response will continue to support improving conditions, we are actively monitoring the impact of the COVID-19 pandemic on our financial condition, liquidity, operations, customers, suppliers, our industry and our workforce.
The extent and nature of the impact of the COVID-19 pandemic on our business and financial performance will be influenced by a variety of factors, including the duration and spread of the pandemic, as well as future spikes of COVID-19 infections or the emergence of additional COVID-19 variants that may result in additional preventative and mitigative measures. These factors may affect the timing and magnitude of demand from customers and the availability of portions of the supply chain, logistical services and component supply and may have a material net negative impact on our business and 74 -------------------------------------------------------------------------------- financial results. For additional information regarding the potential impact of the COVID-19 pandemic on our business, see "Risk Factors-Risks Related to Our Business-The ongoing COVID-19 pandemic has disrupted and will likely continue to disrupt normal business activity and may adversely impact our operations and financial results." Customer Warrant On
December 28, 2021, we issued a warrant to Amazon.com NV Investment Holdings LLC(Holder) to purchase an aggregate of up to 4,080,000 of our ordinary shares at an exercise price of $10.74per share (the Customer Warrant). The exercise period of the Customer Warrant is through the seventh anniversary of the issue date. Upon issuance of the Customer Warrant, 40,000 of the shares issuable upon exercise of the Customer Warrant vested immediately and the remainder of the shares issuable will vest in tranches over the contract term based on the amount of global payments by Holder and its affiliates to us, up to $201.0 millionin aggregate payments. Upon a change of control of us (including certain transfers of 50% or more of the voting power in the Company to a new person or group) in which the consideration to be received by our then existing shareholders consists solely of cash, the Customer Warrant, to the extent vested, will be deemed automatically net exercised immediately before the consummation of such change of control, and the remaining unvested shares under the Customer Warrant will thereafter automatically terminate. Upon a change of control of us in which the consideration to be received by our then existing shareholders consists of securities or other non-cash consideration, then we will cause the acquiring, surviving, or successor party to assume the obligations of the Customer Warrant, and the Customer Warrant will thereafter be exercisable for the same securities or other non-cash consideration that a holder of our ordinary shares would have been entitled to receive in connection with such transaction if such holder held the same number of shares as were purchasable under the Customer Warrant if the Customer Warrant had been exercised in full immediately before the consummation of such change of control, subject to further adjustment from time to time in accordance with the provisions of the Customer Warrant. The Customer Warrant is accounted for as an equity instrument. When management determines that it is probable that a tranche of the Customer Warrant will vest and we recognize the related revenue, the grant date fair value of the associated tranche will be recognized in shareholders' equity and the underlying expense will be amortized as a reduction of revenue in proportion to the amount of related revenue recognized.
Components of our operating results
Our revenues consist of sale of our products, licensing of our IP and providing product engineering and IP license engineering services. Product sales primarily consists of shipment of our ICs and AEC products. IP license revenue includes fees from licensing of our SerDes IP and related support and royalties. Product engineering and IP license engineering services revenue consists of engineering fees associated with integration of our technology solutions into our customers' products and IP, respectively. Our customers are primarily OEMs who design and manufacture end market devices for the communications and enterprise networks markets. Our revenue is driven by various trends in these markets. Our revenue is also impacted by changes in the number and average selling prices of our IC products. We recognize revenue upon transfer of control of promised goods and services in an amount that reflects the consideration we expect to receive in exchange for those goods and services. Where an arrangement includes multiple performance obligations, the transaction price is allocated to these on a relative standalone selling price (SSP) basis. We determine the SSP based on an observable standalone selling price when it is available, as well as other factors, including the price charged to customers and our overall pricing objectives, while maximizing observable inputs. Our policy is to record revenue net of 75
-------------------------------------------------------------------------------- any applicable sales, use or excise taxes. Changes in our contract assets and contract liabilities primarily result from the timing difference between our performance and the customer's payment. We fulfill our obligations under a contract with a customer by transferring products or services in exchange for consideration from the customer. We recognize a contract asset when we transfer products or services to a customer and the right to consideration is conditional on something other than the passage of time. Accounts receivable are recorded when the customer has been billed or the right to consideration is unconditional. We recognize deferred revenue when we have received consideration or an amount of consideration is due from the customer and we have a future obligation to transfer products or services. Product Sales - We transact with customers primarily pursuant to standard purchase orders for delivery of products and generally allow customers to cancel or change purchase orders within limited notice periods prior to the scheduled shipment date. We offer standard performance warranties of twelve months after product delivery and do not allow returns, other than returns due to warranty issues. We recognize product sales when we transfer control of promised goods in an amount that reflects the consideration to which we expect to be entitled to in exchange for those goods, net of accruals for estimated sales returns and rebates. IP License Revenue - Our licensing revenue consists of a perpetual license, support and maintenance, and royalties. Our license arrangements do not typically grant the customer the right to terminate for convenience and where such rights exist, termination is prospective, with no refund of fees already paid by the customer. In connection with the license arrangements, we offer support and maintenance to assist customers in bringing up and qualifying the final product. Revenue from customer support is deferred and earned over the support period, which is typically one year. In certain cases, we also charge licensees royalties related to the distribution or sale of products that use our technologies. Such royalties are reported to us on a quarterly basis. We estimate the sales-based royalties earned each quarter primarily based on our customers' reporting of sales activity incurred in that quarter. We recognize the estimated royalty revenue when it is probable that reversal of such amounts will not occur. Any differences between actual royalties owed by a customer and the quarterly estimates are recognized when updated information becomes available. Product Engineering and IP License Engineering Services Revenue - Some product and IP license revenue contracts includes non-recurring engineering services deliverables. We recognize revenue from these agreements over time as services are provided or at a point in time upon completion and acceptance by the customer of contract deliverables, depending on the terms of the arrangement. Revenue is deferred for any amounts billed or received prior to delivery of services. We believe the input method, based on time spent by our engineers, best depicts the efforts expended to transfer services to the customers. Certain contracts may include multiple performance obligations for which we allocate revenue to each performance obligation based on relative SSP. We determine SSPs based on observable evidence. When SSPs are not directly observable, we use the adjusted market assessment approach or residual approach, if applicable. We also consider the constraint on estimates of variable consideration when estimating the total transaction price. We record liabilities for amounts that are collected in advance of the satisfaction of performance obligations under deferred revenue.
Cost of revenue includes cost of materials, such as wafers processed by third-party foundries, cost associated with packaging and assembly, testing and shipping, cost of personnel, including stock-based compensation, depreciation of equipment associated with manufacturing support, logistics and quality assurance, warranty cost, amortization of intellectual property purchased from third parties, write-down of inventories, and amortization of production mask costs. Costs of revenue includes cost of product sales revenue, cost of product engineering services revenue and cost of IP license engineering services revenue. Cost of revenue relating to IP license revenue was not material for fiscal 2022 and 2021. 76
Research and development costs
Research and development expenses include costs incurred in carrying out research and development activities and include salaries, stock-based compensation, employee benefits, occupancy costs, engineering mask costs of pre-production, overhead and prototype wafers, packaging and testing costs. Research and development costs are expensed as incurred.
We believe that continued investment in our products is important to our future growth and, therefore, we expect our research and development expenditures to continue to increase in absolute dollars.
Selling, general and administrative expenses
Selling expenses consist of personnel costs including salaries, benefits, and share-based compensation expense, field application engineering support, samples to customers, shipping costs, and travel & entertainment costs.
We expect selling expenses to increase in absolute dollars as we increase our sales and marketing staff and continue to increase our engagement with customers.
General and administrative expenses primarily include personnel costs, including salaries, benefits and stock-based compensation, related to corporate, finance, legal and human resources functions, professional fees contractors and professional services, audit and compliance costs, insurance costs and corporate overhead. including allocated facility expenses.
We expect general and administrative expenses to increase in absolute dollars as we grow our operations and incur additional expenses associated with operating as a public company. These expenses as a result of operating as a public company include expenses necessary to comply with the rules and regulations applicable to companies listed on a national securities exchange and related compliance and reporting obligations pursuant to the rules and regulations of the
SEC, as well as higher expenses for general and director and officer insurance, investor relations and other professional services.
Impairment charges mainly consist of depreciation of property, plant and equipment for assets that are no longer in service.
Other income and expenses, net
Other income and expense, net, primarily includes interest income from significant financing items related to IP license revenue contracts, and foreign exchange gains and losses.
Provision for income taxes
Current income tax expense or benefit represents the amount of income taxes expected to be payable or refundable for the current year. Under this method, deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and net operating loss and credit carryforward. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. We account for uncertain tax positions in accordance with ASC 74010, Accounting for Uncertainty in Income Taxes. We recognize the tax effects of an uncertain tax position only if it is more likely than not to be sustained based solely on its technical merits as of the reporting date and only in an amount more likely than not to be sustained upon review by the tax authorities. Interest and penalties related to uncertain tax positions are classified in the consolidated financial statements as income tax expense. 77 --------------------------------------------------------------------------------
The following table sets out information from our consolidated statements of earnings expressed as a percentage of total revenue:
Year Ended April 30, 2022 2021 Revenue: Product sales 69.2 % 46.8 % Product engineering services 7.3 % 16.4 % IP license 21.9 % 29.4 % IP license engineering services 1.6 % 7.4 % Total revenue 100.0 % 100.0 % Cost of revenue: Cost of product sales revenue 37.6 % 27.4 % Cost of product engineering services revenue 1.8 % 5.4 % Cost of IP license engineering services revenue 0.5 % 2.0 % Total cost of revenue 39.9 % 34.8 % Gross margin 60.1 % 65.2 % Operating expenses: Research and development 45.0 % 59.4 % Selling, general and administrative 32.8 % 48.8 % Impairment charges 2.9 % - % Total operating expenses 80.7 % 108.2 % Operating loss (20.6) % (43.0) % Other income (expense), net (0.2) % (0.1) % Loss before income taxes (20.8) % (43.1) % Provision for income taxes - % 3.8 % Net loss (20.8) % (46.9) %
Comparison of completed exercises
Revenue Year Ended April 30, 2022 2021 % Change (in thousands, except percentages) Product sales $ 73,721
$ 27,477168.3 % Product engineering services 7,741 9,579 (19.2) % IP license 23,309 17,273 34.9 % IP license engineering services 1,706 4,368 (60.9) % Total revenue $ 106,477 $ 58,69781.4 % Revenue for fiscal 2022 increased by $47.8 millionprimarily due to increases in product sales and IP license revenues, which increased by $46.2 millionand $6.0 million, respectively, offset by decreases in product and IP license engineering services revenues of $1.8 millionand $2.7 million, respectively. 78 -------------------------------------------------------------------------------- The increase in product sales revenue was primarily due to an increase in the number of IC units sold and revenue relating to AEC cables that were introduced in fiscal 2021. The number of IC units sold increased by 118% in the year ended April 30, 2022. Revenue from product sales comprised 69% and 47% of our total revenue in fiscal 2022 and 2021, respectively. The increase in IP license revenue was driven by additional IP licenses delivered to customers. Cost of Revenue Year Ended April 30, 2022 2021 % Change (in thousands, except percentages) Cost of product sales revenue $ 40,082 $ 16,071149.4 % Cost of product engineering services revenue 1,918 3,168 (39.5) % Cost of IP license engineering services revenue 462 1,180 (60.8) % Total cost of revenue $ 42,462 $ 20,419108.0 %
Cost of product sales increased by
Gross profit and gross margin
Year Ended April 30, 2022 2021 % Change (in thousands, except percentages) Gross profit
$ 64,015 $ 38,27867.2 % Gross margin 60.1 % 65.2 % Gross margin decreased by 5.1 percentage points in fiscal 2022 primarily driven by an increase in our product sales revenue as a percentage of overall revenue as noted above. Product sales gross margin increased by 4.1 percentage points in fiscal 2022 primarily from our product sales business gaining scale. We expect to see an additional long-term benefit from improvements in our operating leverage as our business continues to gain scale. Research and Development Year Ended April 30, 2022 2021 % Change (in thousands, except percentages) Research and development $ 47,949 $ 34,84537.6 % % of total revenue 45.0 % 59.4 % Research and development expense for fiscal 2022 increased by $13.1 millioncompared to fiscal 2021. The increase was due primarily to a $9.1 millionincrease in personnel costs as a result of new hires for product development, a $3.1 millionincrease in design activities and higher engineering activities relating to testing and laboratory supplies for new product development and a $1.6 milliondecrease in allocation of research and development expense to costs of engineering services due to less engineering hours incurred relating to non-recurring engineering service revenue arrangements, which was offset by a $2.7 milliondecrease in share-based compensation expense driven by a one-time share repurchase transaction from employees in fiscal 2021. 79 --------------------------------------------------------------------------------
Selling, general and administrative expenses
Year Ended April 30, 2022 2021 % Change (in thousands, except percentages) Selling, general and administrative
$ 34,900 $ 28,66721.7 % % of total revenue 32.8 % 48.8 % Selling, general and administrative expense for fiscal 2022 increased by $6.2 millioncompared to the same period in fiscal 2021. The increase was due primarily to a $3.8 millionincrease in personnel costs as a result of higher selling, general and administrative headcount, a $2.4 millionincrease in professional services spending and general increases in selling, general and administrative expense as we built out our public company infrastructure, which was offset by a $2.0 milliondecrease in share-based compensation expense driven by a one-time share repurchase transaction from employees in fiscal 2021. Impairment Charges Year Ended April 30, 2022 2021 % Change (in thousands, except percentages) Impairment charges $ 3,134$ - 100.0 % % of total revenue 2.9 % - %
The impairment charges incurred during the 2022 financial year were mainly related to an impairment of property, plant and equipment that did not reach production qualification.
Provision (benefit) for income taxes
Year Ended April 30, 2022 2021 % Change (in thousands, except percentages) Provision (benefit) for income taxes
$ (37) $ 2,215(101.7) % % of total revenue - % 3.8 % Provision (benefit) for income taxes in fiscal 2022 decreased by $2.3 million. The decrease was due to the one-time charge in fiscal 2021 relating to the initial establishment of valuation allowance associated with U.S.research and development credits and the increase in the U.S.deferred tax benefits associated with stock-based compensation in fiscal 2022, which were offset by an increase in withholding taxes in foreign jurisdictions in fiscal 2022.
Cash and capital resources
Our activities consist primarily of selling our products, licensing our IP, providing IP customization services and conducting research and development of our products and technology. Since our inception through
April 30, 2022, our operations have been financed primarily by the sale of convertible preferred shares and ordinary shares, and cash generated from our customers. As of April 30, 2022, we had $259.3 millionin cash and cash equivalents, and working capital of $305.7 million. Our principal use of cash is to fund our operations and invest in research and development to support our growth. We believe our existing cash and cash equivalents and other components of working capital will be sufficient to meet our 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 sales and marketing and research and development expenditures, and the continuing market acceptance of our solutions. In the event that 80 -------------------------------------------------------------------------------- we need to borrow funds or issue additional equity, we cannot assure you that any such additional financing will be available on terms acceptable to us, if at all. If we are unable to raise additional capital when we need it, our business, results of operations and financial condition would be adversely affected.
The following table summarizes our cash flows for the periods indicated.
April 30, 20222021 (in thousands)
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Cash flows used in operating activities
Net cash used in operating activities was
$30.8 millionfor fiscal 2022. The cash outflows from operating activities for fiscal 2022 were primarily due to $22.2 millionof net loss and $29.6 millionof cash outflows for working capital purposes, partially offset by $21.0 millionof non-cash items. The cash outflows from working capital for fiscal 2022 were primarily driven by an increase in accounts receivable, inventories and contract assets, partially offset by an increase in accounts payable, deferred revenue, and accrued expenses and other liabilities. Net cash used in operating activities was $42.4 millionfor fiscal 2021. The cash outflows from operating activities for fiscal 2021 were primarily due to $27.5 millionof net loss and $21.3 millionof cash outflows from working capital, partially offset by $6.5 millionof non-cash items. The cash outflows from working capital for fiscal 2021 were primarily driven by increases in inventories, prepaid and other current assets, and other long-term assets, as well as a decrease in accrued expenses and other liabilities.
Cash flows used in investing activities
Net cash used in investing activities of
$17.6 millionand $6.1 millionin fiscal 2022 and 2021, respectively, was attributable to purchases of property and equipment. Purchases of property and equipment primarily related to mask sets purchases for new products introduced or in process of being introduced and laboratory equipment used for research and development purposes.
Cash flow from financing activities
Net cash provided by financing activities of
$204.2 millionfor fiscal 2022 was primarily attributable to $194.2 millionin proceeds from our IPO, net of underwriting discounts and commissions, and offering costs, $2.7 millionin proceeds from exercises of share options and $7.2 millionin proceeds from the issuance of convertible preferred shares, net of issuance costs. Net cash provided by financing activities of $77.9 millionin fiscal 2021 was primarily attributable to $1.4 millionin proceeds from exercises of share options and $99.3 millionin proceeds from the issuance of convertible preferred shares, net of issuance costs. This cash inflow was partially offset by $22.9 millionin payments for repurchases of ordinary shares.
Critical accounting estimates
We prepare our financial statements in conformity with GAAP. The preparation of financial statements in accordance with GAAP requires certain estimates, assumptions and judgments to be made that may affect our consolidated financial statements. Accounting policies that have a significant impact on our results are described in Note 2 to our consolidated financial statements included elsewhere in this filing. The accounting policies discussed in this section are those that we consider to be the most critical. We consider an accounting policy to be critical if the policy is subject to a material level of judgment and if changes in those judgments are reasonably likely to materially impact our results. 81
-------------------------------------------------------------------------------- We base our estimates and judgments on our historical experience, knowledge of current conditions, and our beliefs of what could occur in the future, given the available information. Estimates are used for, but not limited to, write-down for excess and obsolete inventories, the SSP for each distinct performance obligation included in customer contracts with multiple performance obligations, variable consideration from revenue contracts, determination of the fair value of share awards and customer warrant, valuation of ordinary shares and the realization of tax assets and estimates of tax reserves. Actual results may differ from those estimates and such differences may be material to the financial statements.
We continue to monitor and evaluate our critical estimates in light of developments, and as events continue to evolve and additional information becomes available, our estimates may change significantly in future periods.
We recognize revenue upon transfer of control of promised goods and services in an amount that reflects the consideration we expect to receive in exchange for those goods and services. Where an arrangement includes multiple performance obligations, the transaction price is allocated to these on a relative standalone selling price (SSP) basis. We determine the SSP based on an observable standalone selling price when it is available, as well as other factors, including the price charged to customers and our overall pricing objectives, while maximizing observable inputs. The determination of the SPP for certain of our IPs requires fair value estimate under income approach, involving the estimation of future cash flow expected to be generated from the IPs. Our policy is to record revenue net of any applicable sales, use or excise taxes. We transact with customers primarily pursuant to standard purchase orders for delivery of products and generally allow customers to cancel or change purchase orders within limited notice periods prior to the scheduled shipment date. We offer standard performance warranties of twelve months after product delivery and do not allow returns, other than returns due to warranty issues. We recognize product sales when we transfer control of promised goods in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods, net of accruals for estimated sales returns and rebates. We account for the warrant issued to
Amazon.com NV Investment Holdings LLCas an equity instrument, based on the specific terms of the warrant agreement. We analyze the probability of vesting of each tranche of the warrant based on the demand forecast from the customer. When we determine that it is probable that a tranche of the warrant will vest and we recognize the related revenue, the grant date fair value of the associated tranche will be recognized in shareholders' equity and the underlying expense will be amortized as a reduction of revenue in proportion to the amount of related revenue recognized.
We value our inventory, which includes raw materials, assembly and test, and other manufacturing costs, at the lower of cost and net realizable value. Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out basis. Net realizable value is the estimated selling price of our products in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. We regularly review inventory quantities on hand and non-cancellable purchase commitments, and record write-downs for excess and obsolete inventory based primarily on the shipment history and our estimated forecast of product demand. These factors are impacted by market and economic conditions, technology changes, new product introductions and changes in strategic direction. If the future demand for our products is less favorable than our forecasts, the value of the inventories may be required to be reduced, which could result in additional expense to us and affect our results of operations. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions that we use to calculate our inventory reserve. However, if estimates regarding customer demand are inaccurate or changes in technology affect demand for certain products in an unforeseen manner, we may be exposed to losses or gains that could be material. 82
Share-based compensation is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service vesting period. We amortize share-based compensation expense for time-based awards under the straight-line attribution method over the vesting period. The fair value of each restricted stock unit is estimated based on the market price of the Company's ordinary shares on the date of grant less the expected dividend yield. We estimate the fair value of share purchase awards on the date of grant using the Black-Scholes option-pricing model.
Forfeitures are recorded when they occur. Previously recognized expenses are reversed for the portion of awards canceled before vesting as cancellations occur.
Valuation of common shares
Prior to our IPO, as there had been no public market for our equity instruments, the estimated fair value of our ordinary shares was determined by members of our board of directors, with input from management, as of the grant date, considering our most recently available independent third-party valuation of our ordinary shares and our directors' assessment of additional objective and subjective factors that it believed were relevant and which may have changed between the effective date of the most recent valuation and the date of the grant. The independent third-party valuations had generally been performed quarterly in accordance with the guidance outlined in the AICPA Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation (AICPA's Practice Aid). In conducting the valuations, the independent third-party valuation specialist considered all objective and subjective factors that it believed to be relevant for each valuation conducted in accordance with AICPA's Practice Aid, including management's best estimate of our business condition, prospects and operating performance at each valuation date. In valuing our ordinary shares, the fair value of our business was determined using various valuation methods, including combinations of the income approach (discounted cash flow method) and the market approach (public company market multiple method) with input from management. The income approach involves applying an appropriate risk-adjusted discount rate to projected cash flows based on forecasted revenue and costs. The market approach estimates value based on a comparison of the subject company to comparable public companies in a similar line of business. From the comparable companies, a representative market value multiple was determined, which was applied to our operating results to estimate the enterprise value of our company. Once the enterprise value was determined under the market approach, we derived the equity value of our company and used the option pricing model to allocate that value among the various classes of securities to arrive at the fair value of the ordinary shares.
Following our IPO, we use the public market price to value our equity-based awards. Increases and decreases in the market price of our common stock will increase and decrease the fair value of our equity-based awards granted in future periods.
Recent accounting pronouncements
For more information, see Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Accounting election of the JOBS law
We are an "emerging growth company," as defined in the JOBS Act. The JOBS Act provides that an "emerging growth company" can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an "emerging growth company" to delay the adoption of some accounting standards until those standards would otherwise apply to private 83
companies. We have elected to use the extended transition period under the JOBS Act until the earlier of the date we (i) are no longer an "emerging growth company" or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
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