GSI Technology(GSIT) - 2024 Q2 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Unaudited financial statements for Q3 2023 show decreased assets and equity, increased net losses, and declining revenues, with improved operating cash flow Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | Sep 30, 2023 | Mar 31, 2023 | Change | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $24,669 | $27,212 | ($2,543) | | Total current assets | $35,239 | $41,875 | ($6,636) | | Total assets | $53,100 | $59,876 | ($6,776) | | Total current liabilities | $6,402 | $7,202 | ($800) | | Total liabilities | $7,735 | $8,504 | ($769) | | Total stockholders' equity | $45,365 | $51,372 | ($6,007) | Condensed Consolidated Statements of Operations Three Months Ended September 30, (in thousands, except per share) | Metric | 2023 | 2022 | YoY Change | | :--- | :--- | :--- | :--- | | Net revenues | $5,708 | $8,953 | -36.2% | | Gross profit | $3,121 | $5,602 | -44.3% | | Loss from operations | ($4,093) | ($3,205) | +27.7% | | Net loss | ($4,055) | ($3,228) | +25.6% | | Diluted net loss per share | ($0.16) | ($0.13) | +23.1% | Six Months Ended September 30, (in thousands, except per share) | Metric | 2023 | 2022 | YoY Change | | :--- | :--- | :--- | :--- | | Net revenues | $11,295 | $17,862 | -36.8% | | Gross profit | $6,190 | $10,967 | -43.6% | | Loss from operations | ($9,232) | ($7,147) | +29.2% | | Net loss | ($9,165) | ($7,204) | +27.2% | | Diluted net loss per share | ($0.37) | ($0.29) | +27.6% | Condensed Consolidated Statements of Cash Flows Six Months Ended September 30, Cash Flow Summary (in thousands) | Cash Flow Activity | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | ($6,295) | ($8,373) | +$2,078 | | Net cash provided by investing activities | $2,126 | $4,026 | ($1,900) | | Net cash provided by financing activities | $1,626 | $179 | +$1,447 | | Net decrease in cash and cash equivalents | ($2,543) | ($4,168) | +$1,625 | | Cash and cash equivalents at end of period | $24,669 | $32,803 | ($8,134) | Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, revenue recognition, balance sheet components, and key disclosures including SRAM product concentration, Nokia as a major customer, and a new Space Development Agency agreement - Substantially all revenue is derived from sales of SRAM products, accounting for approximately 98% of total revenues in the first six months of fiscal 2024[47] - Nokia is the largest customer, representing 27% of net revenues in the six months ended September 30, 2023, up from 14% in the same period of 2022[48] - In June 2023, the company entered into a prototype agreement with the Space Development Agency, which includes milestone payments totaling an estimated $1.25 million. The company recognized $260,000 as a reduction to R&D expense in the quarter[91][92] Revenue by Customer Type (Six Months Ended Sep 30, in thousands) | Customer Type | 2023 | 2022 | | :--- | :--- | :--- | | Contract manufacturers | $3,274 | $3,206 | | Distribution | $7,970 | $14,118 | | OEMs | $51 | $538 | | Total | $11,295 | $17,862 | Revenue by Geographic Area (Six Months Ended Sep 30, in thousands) | Region | 2023 | 2022 | | :--- | :--- | :--- | | United States | $6,035 | $8,601 | | China | $481 | $1,198 | | Singapore | $952 | $3,510 | | Netherlands | $1,955 | $1,457 | | Germany | $1,550 | $2,452 | | Rest of the world | $322 | $644 | | Total | $11,295 | $17,862 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses revenue decline due to economic factors and buffer stock, focusing on new APU product development, cost reduction, and maintaining a debt-free balance sheet Overview - The company is a leading provider of semiconductor memory solutions (SRAMs) and is developing in-place associative computing (APU) products for AI and HPC markets[94] - Revenues have been negatively impacted by the global economic environment, including inflationary pressures and rising interest rates, as well as customers working through buffer stock purchased during prior supply chain shortages[95] - In June 2023, the company received a prototype agreement award from the Space Development Agency (SDA) for the development of its next-generation APU2, with milestone payments totaling an estimated $1.25 million[96] - Cost reduction measures announced in November 2022, including a 15% workforce reduction, were implemented to reduce annualized operating expenses by approximately $7.0 million and focus resources on APU technology[100] Results of Operations Comparison of Results of Operations (Three Months Ended Sep 30) | Metric | 2023 (in thousands) | 2022 (in thousands) | YoY Change | | :--- | :--- | :--- | :--- | | Net Revenues | $5,708 | $8,953 | -36.2% | | Gross Profit | $3,121 | $5,602 | -44.3% | | Gross Margin | 54.7% | 62.6% | -7.9 p.p. | | R&D Expenses | $4,700 | $6,400 | -26.6% | | SG&A Expenses | $2,500 | $2,400 | +4.6% | Comparison of Results of Operations (Six Months Ended Sep 30) | Metric | 2023 (in thousands) | 2022 (in thousands) | YoY Change | | :--- | :--- | :--- | :--- | | Net Revenues | $11,295 | $17,862 | -36.8% | | Gross Profit | $6,190 | $10,967 | -43.6% | | Gross Margin | 54.8% | 61.4% | -6.6 p.p. | | R&D Expenses | $9,900 | $13,000 | -24.0% | | SG&A Expenses | $5,500 | $5,100 | +8.4% | - The decrease in net revenues was attributed to the current economic environment and customers working through buffer stock purchased during prior supply chain constraints[115] - The decrease in gross margin was primarily due to changes in the mix of products and customers, with the prior year period benefiting from higher-margin radiation hardened SRAM shipments[118] - Research and development expenses decreased significantly due to cost reduction measures implemented in November 2022 and were partially offset by funding from the SDA award[119] Liquidity and Capital Resources - As of September 30, 2023, principal sources of liquidity were cash, cash equivalents, and short-term investments totaling $25.3 million, down from $30.6 million at March 31, 2023[125] - Net cash used in operating activities for the six months ended September 30, 2023, was $6.3 million, an improvement from $8.4 million used in the prior-year period[126] - Net cash provided by financing activities was $1.6 million, primarily from the issuance of common stock under employee plans and an At-the-Market (ATM) offering[129] - The company believes existing cash and expected cash flow will be sufficient to meet working capital and capital expenditure needs for at least the next 12 months[130] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces minimal foreign currency exchange risk and immaterial interest rate risk due to USD-denominated transactions and a short-term investment portfolio - The company has relatively little exposure to currency exchange risks as revenues and most expenses are denominated in U.S. dollars. It does not currently use hedging instruments[137] - Interest rate sensitivity is considered not material due to the short-term nature of the $25.3 million in cash, cash equivalents, and short-term investments. A 100 basis point change in interest rates is not expected to materially affect the portfolio's fair value[138][140] Item 4. Controls and Procedures Disclosure controls and procedures were ineffective as of September 30, 2023, due to an un-remediated material weakness in reviewing forecasts for contingent consideration and impairment testing - Management concluded that disclosure controls and procedures were not effective as of September 30, 2023[142] - The ineffectiveness is due to a material weakness, first identified in fiscal 2022 and still un-remediated, related to inadequate controls over the review of forecasts used to calculate contingent consideration liability and test goodwill and intangible assets for impairment[143] - A remediation plan is underway, which includes enhancing management's review controls over the forecasts. The material weakness will not be considered remediated until the new controls operate effectively for a sufficient period[144] PART II — OTHER INFORMATION Item 1A. Risk Factors The company faces risks from unpredictable operating results, heavy customer reliance, global economic and geopolitical instability, internal control weaknesses, single-source suppliers, and new product development challenges Risks Related to Our Business and Financial Condition - Operating results fluctuate unpredictably, with quarterly net revenues ranging from $5.4 million to $9.0 million and operating losses from $2.9 million to $5.1 million in the last ten fiscal quarters[158] - The company's largest customer, Nokia, accounted for 27% of net revenues in the six months ended September 30, 2023. A reduction in purchases from Nokia would significantly harm operating results[165] - A material weakness in internal control over financial reporting related to the review of forecasts remains un-remediated as of September 30, 2023, which could impair the ability to produce timely and accurate financial statements[171] - The business is expected to be materially and adversely affected by rising interest rates, worldwide inflation, the conflict in Israel, and the decline in the global economic environment[166] Risks Related to Manufacturing and Product Development - The company is dependent on single-source suppliers for key components, most significantly obtaining wafers for its SRAM and APU products from a single foundry, TSMC[179] - Difficulties in transitioning to smaller geometry process technologies could result in reduced manufacturing yields, product delivery delays, and increased expenses[221] - Complex products may contain design or manufacturing defects, which could lead to loss of revenues, significant warranty costs, and harm to customer relationships[225] Risks Related to Our International Business and Operations - Software development for APU products occurs in Israel, and the evolving military conflict with Hamas that began on October 7, 2023, could harm the business, customers, and operations[226] - A significant portion of manufacturing and testing is conducted in Taiwan, making the business vulnerable to political, social, and economic changes, including potential conflicts involving the People's Republic of China[227] - International business, which accounted for 46.6% of net revenues in the first six months of fiscal 2024, exposes the company to risks such as political instability, tariffs, trade barriers, and foreign exchange fluctuations[230][233] Risks Relating to Our Common Stock and the Securities Market - The trading price of the company's common stock is subject to significant fluctuation and volatility[239] - As of October 31, 2023, executive officers, directors, and their affiliates beneficially owned approximately 32% of the outstanding common stock, allowing them to exercise substantial influence over corporate matters[242] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No shares were repurchased under the company's authorized stock repurchase program during the quarter ended September 30, 2023 - The company did not repurchase any of its shares under its authorized stock repurchase program during the quarter ended September 30, 2023[248] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and Inline XBRL documents - The exhibits filed with the report include CEO and CFO certifications under Sections 302 and 906 of the Sarbanes-Oxley Act, as well as various Inline XBRL data files[249]