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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 June 30, 2021

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 July 31, 2021: 24,166,062.

Table of Contents

GSI TECHNOLOGY, INC.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2021

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

21

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

Item 4.

Controls and Procedures

28

PART II — OTHER INFORMATION

Item 1A.

Risk Factors

28

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

43

Item 6.

Exhibits

44

Signatures

45

1

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1.Financial Statements

GSI TECHNOLOGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

June 30,

March 31,

2021

  

2021

    

(In thousands, except share
and per share amounts)

ASSETS

Cash and cash equivalents

   

$

44,490

    

$

44,234

Short-term investments

 

7,048

 

9,717

Accounts receivable, net

 

4,619

 

3,665

Inventories

 

3,931

 

4,343

Prepaid expenses and other current assets

 

1,798

 

1,487

Total current assets

 

61,886

 

63,446

Property and equipment, net

 

7,492

 

7,328

Operating lease right-of-use assets

564

677

Long-term investments

 

4,281

 

5,792

Goodwill

7,978

7,978

Intangible assets, net

2,197

2,256

Deposits

 

139

 

135

Total assets

 

$

84,537

 

$

87,612

LIABILITIES AND STOCKHOLDERS’ EQUITY

Accounts payable

 

$

1,925

 

$

1,567

Lease liabilities, current

323

375

Accrued expenses and other liabilities

 

4,791

 

5,520

Total current liabilities

 

7,039

 

7,462

Income taxes payable

 

9

 

9

Lease liabilities, non-current

268

324

Contingent consideration, non-current

4,247

4,225

Total liabilities

 

11,563

 

12,020

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: 24,166,062 and 24,020,276 shares, respectively

 

24

 

24

Additional paid-in capital

 

49,328

 

47,722

Accumulated other comprehensive loss

 

(35)

 

(20)

Retained earnings

 

23,657

 

27,866

Total stockholders’ equity

 

72,974

 

75,592

Total liabilities and stockholders’ equity

 

$

84,537

 

$

87,612

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 June 30,

2021

2020

    

(In thousands, except per share amounts)

Net revenues

    

$

8,791

    

$

6,621

Cost of revenues

 

4,009

 

3,571

Gross profit

 

4,782

 

3,050

Operating expenses:

Research and development

6,103

5,825

Selling, general and administrative

3,040

2,920

Total operating expenses

 

9,143

 

8,745

Loss from operations

 

(4,361)

 

(5,695)

Interest income, net

23

114

Other expense, net

(43)

(8)

Loss before income taxes

 

(4,381)

 

(5,589)

Provision (benefit) for income taxes

(172)

487

Net loss

 

$

(4,209)

 

$

(6,076)

Net loss per share:

Basic

 

$

(0.17)

 

$

(0.26)

Diluted

 

$

(0.17)

 

$

(0.26)

Weighted average shares used in per share calculations:

Basic

24,095

23,440

Diluted

24,095

23,440

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

3

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GSI TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

Three Months Ended June 30,

2021

2020

    

(In thousands)

Net loss

    

$

(4,209)

    

$

(6,076)

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

 

(15)

 

25

Total comprehensive loss

 

$

(4,224)

 

$

(6,051)

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 June 30, 2021

(In thousands, except share amounts)

Balance, March 31, 2021

24,020,276

$

24

$

47,722

$

(20)

$

27,866

$

75,592

Issuance of common stock under employee stock option plans

145,786

783

783

Stock-based compensation expense

823

823

Net loss

(4,209)

(4,209)

Net unrealized loss on available-for-sale investments

(15)

(15)

Balance, June 30, 2021

24,166,062

$

24

$

49,328

$

(35)

$

23,657

$

72,974

Three months ended June 30, 2020

Balance, March 31, 2020

23,229,286

$

23

$

40,176

$

71

$

49,371

$

89,641

Issuance of common stock under employee stock option plans

378,487

1

2,338

2,339

Stock-based compensation expense

755

755

Net loss

(6,076)

(6,076)

Net unrealized gain on available-for-sale investments

25

25

Balance, June 30, 2020

23,607,773

$

24

$

43,269

$

96

$

43,295

$

86,684

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)

Three Months Ended June 30,

2021

2020

    

(In thousands)

Cash flows from operating activities:

Net loss

   

$

(4,209)

    

$

(6,076)

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

Allowance for doubtful accounts and other

 

(69)

 

17

Provision for excess and obsolete inventories

 

160

 

159

Non-cash lease expense

113

152

Depreciation and amortization

 

246

 

354

Stock-based compensation

 

823

 

755

Amortization of premium on investments

 

32

 

1

Changes in assets and liabilities:

Accounts receivable

 

(885)

 

2,475

Inventory

 

252

 

(580)

Prepaid expenses and other assets

 

(315)

 

214

Accounts payable

 

44

 

(115)

Accrued expenses and other liabilities

 

(813)

 

(931)

Net cash used in operating activities

 

(4,621)

 

(3,575)

Cash flows from investing activities:

Purchase of investments

(5,250)

Maturities of short-term investments

 

4,133

6,000

Purchases of property and equipment

 

(39)

(50)

Net cash provided by investing activities

 

4,094

 

700

Cash flows from financing activities:

Proceeds from issuance of common stock under employee stock plans

 

783

2,339

Net cash provided by financing activities

 

783

 

2,339

Net increase (decrease) in cash and cash equivalents

 

256

 

(536)

Cash and cash equivalents at beginning of the period

 

44,234

51,506

Cash and cash equivalents at end of the period

 

$

44,490

 

$

50,970

Non-cash investing and financing activities:

Purchases of property and equipment through accounts payable and
accruals

$

314

$

16

Supplemental cash flow information:

Net cash paid for income taxes

 

$

38

 

$

52

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

6

Table of Contents

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, 2021.

The consolidated results of operations for the three months ended June 30, 2021 are not necessarily indicative of the results to be expected for the entire fiscal year.

Significant accounting policies

Except for the changes in the approach to intraperiod tax allocation, the methodology for calculating income taxes in an interim period, the recognition of deferred tax liabilities for outside basis differences and the simplification of other aspects of accounting for income taxes, which were updated as a result of adopting a new accounting standard, 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, 2021.

Risk and uncertainties

The COVID-19 pandemic has affected many of the countries in which the Company, its customers, suppliers and other business partners conduct business. Governments in affected regions have implemented, and may continue to implement, safety precautions which include 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 both in and outside of affected areas and have had significant negative impacts on businesses and financial markets worldwide.

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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. Since March 2020, except for the Company’s employees located in Taiwan, the majority of its employees have worked from home around the world. In May 2021, with the surge in COVID-19 infections in Taiwan, the Company’s Taiwan employees have begun working from home under alternating schedules. The Company has 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. Supply chain shortages and the impact of rising COVID infections in Taiwan that have recently impacted the operations of our manufacturing partners are expected to impact our fulfillment of sales in the near term, and possibly for the remainder of the calendar year. Final testing of the Company’s products is conducted in house. Shipping and receiving operations are being maintained by a skeleton crew with minimal impact. The Company’s revenues have been and are expected to continue to be impacted by changes in customer buying patterns and communication limitations related to COVID-19 restrictions that require a significant number of its customer contacts to work from home. The Company’s results continue to demonstrate the challenges that the Company is facing 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 are also impacting the Company as it enters new markets and engages 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, have been unavailable due to COVID-19 related restrictions. The Company has adapted its sales strategies for the COVID-19 environment, where it cannot do face-to-face meetings and conduct secure meetings with government and defense customers, but the Company is still not operating at an optimal level.

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 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 at this time, if the pandemic continues, it may have an adverse effect on the Company’s results of operations, financial position, including potential impairments, and liquidity in fiscal year 2022 and into fiscal year 2023. This includes results from new information that may emerge concerning COVID-19, the rollout and 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.

Accounting pronouncements recently adopted

In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” as part of its initiative to reduce complexity in the accounting standards. The standard eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also clarifies and simplifies other aspects of the accounting for income taxes. The Company adopted ASU No. 2019-12 in the quarter ended June 30, 2021. Implementation of this guidance did not have a material impact on the Company’s consolidated financial statements and related disclosures.

Accounting pronouncements not yet effective for fiscal 2022

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

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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 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, 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 June 30, 2021.

The majority of the Company’s revenue is derived from sales of SRAM products which represent approximately 99% of total revenues in the three months ended June 30, 2021.

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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 42.7% and 26.9% of the Company’s net revenues in the three months ended June 30, 2021 and 2020, 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 June 30,

2021

2020

(In thousands)

Contract manufacturers

   

$

3,863

   

$

2,168

Distribution

4,710

4,323

OEMs

218

130

$

8,791

$

6,621

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 June 30,

2021

2020

(In thousands, except per share amounts)

Net loss

    

$

(4,209)

    

$

(6,076)

Denominators:

Weighted average shares—Basic

24,095

23,440

Dilutive effect of employee stock options

Dilutive effect of employee stock purchase plan options

Weighted average shares—Dilutive

 

24,095

 

23,440

Net loss per common share—Basic

 

$

(0.17)

$

(0.26)

Net loss per common share—Diluted

 

$

(0.17)

$

(0.26)

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 June 30,

2021

2020

    

(In thousands)

Shares underlying options and ESPP shares

5,648

4,069

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NOTE 4—BALANCE SHEET DETAIL

June 30, 2021

March 31, 2021

(In thousands)

Inventories:

Work-in-progress

   

$

2,206

    

$

1,561

Finished goods

 

1,702

 

2,764

Inventory at distributors

 

23

 

18

 

$

3,931

 

$

4,343

June 30, 2021

March 31, 2021

(In thousands)

Accounts receivable, net:

Accounts receivable

   

$

4,670

    

$

3,785

Less: Allowances for doubtful accounts and other

 

(51)

 

(120)

 

$

4,619

 

$

3,665

June 30, 2021

March 31, 2021

(In thousands)

Prepaid expenses and other current assets:

Prepaid tooling and masks

$

680

$

584

Prepaid income taxes

6

1

Other receivables

183

291

Other prepaid expenses and other current assets

929

611

$

1,798

$

1,487

June 30, 2021

March 31, 2021

(In thousands)

Property and equipment, net:

Computer and other equipment

$

18,399

$

18,359

Software

4,408

4,097

Land

3,900

3,900

Building and building improvements

3,735

3,735

Furniture and fixtures

102

102

Leasehold improvements

877

877

31,421

31,070

Less: Accumulated depreciation

(23,929)

(23,742)

$

7,492

$

7,328

Depreciation expense was $187,000 and $296,000 for the three months ended June 30, 2021 and 2020, respectively.

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The following tables summarize the components of intangible assets and related accumulated amortization balances at June 30, 2021 and March 31, 2021 (in thousands):

As of June 30, 2021

    

Gross
Carrying
Amount

    

Accumulated
amortization

    

Net Carrying
Amount

 

Intangible assets:

    

    

 

Product designs

$

590

$

(590)

$

Patents

4,220

(2,023)

2,197

Software

80

(80)

Total

$

4,890

$

(2,693)

$

2,197

As of March 31, 2021

    

Gross
Carrying
Amount

    

Accumulated
Amortization

    

Net Carrying
Amount

 

Intangible assets:

Product designs

$

590

$

(590)

$

Patents

4,220

(1,964)

2,256

Software

80

(80)

Total

$

4,890

$

(2,634)

$

2,256

Amortization of intangible assets included in cost of revenues was $59,000 and $58,000 for the three months ended June 30, 2021 and 2020, respectively.

As of June 30, 2021, the estimated future amortization expense of intangible assets in the table above is as follows (in thousands):

Fiscal year ending March 31,

2022 (Remaining nine months)

$

175

2023

233

2024

233

2025

233

2026

233

Thereafter

1,090

Total

$

2,197

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June 30, 2021

March 31, 2021

(In thousands)

Accrued expenses and other liabilities:

Accrued compensation

$

3,665

$

4,173

Accrued commissions

263

217

Income taxes payable

198

Miscellaneous accrued expenses

863

932

$

4,791

$

5,520

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 March 31, 2021 and June 30, 2021. 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 2021 and concluded that there was no impairment, as the fair value of its sole reporting unit exceeded its carrying value. The Company believes that the fair value established during the fiscal 2021 annual goodwill impairment testing was reasonable, and no triggering event has taken place subsequent to the fiscal 2021 annual assessment.

NOTE 6—INCOME TAXES

The current portion and long portion of the Company’s unrecognized tax benefits was $0 at both June 30, 2021 and March 31, 2021. As of June 30, 2021, $3.3 million of unrecognized tax benefits had been recorded as a reduction to net deferred tax assets.  As of June 30, 2021, the Company’s net deferred tax assets of $13.7 million were subject to a valuation allowance of $13.7 million. As of March 31, 2021, the Company’s net deferred tax assets of $13.0 million were subject to a valuation allowance of $13.0 million.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted. The CARES Act is an approximate $2 trillion emergency economic stimulus package passed in response to the COVID-19 global pandemic. The CARES Act includes aid to small businesses in the form of loans and grants and other efforts to stabilize the U.S. economy. The Consolidated Appropriations Act (“CAA”) which was signed into law in 2020 extended some of the CARES Act programs along with adding new stimulus provisions. In March 2021, the American Rescue Plan Act of 2021 (“ARPA”) was also passed which further extended several CARES Act relief programs and other assistance. The Company has not filed, and does not intend to file, for funding related to the CARES Act, the CAA or ARPA due to its strong balance sheet and liquidity position with $55.8 million in cash and cash equivalents, short-term investments and long-term investments and no debt outstanding as of June 30, 2021. The Company currently has no plans to defer payroll taxes, to layoff or furlough employees or to modify leases and stock compensation plans. Also included in the CARES Act are numerous income tax provisions including changes to the net operating loss rules. During fiscal year 2021, the Company recorded a $378,000 tax benefit resulting from the carryback of the Company’s fiscal year 2020 federal net operating loss to fiscal year 2018 due to the five-year net operating loss carryback provision from the CARES Act. The Company believes that the CAA and ARPA will not have a significant impact on it.

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 2012 through 2021 remain open to examination by federal tax authorities, and fiscal years 2011 through 2021 remain open to examination by California tax authorities. During the quarter ended June 30, 2020, the Company settled an income tax audit in Israel for fiscal years 2016 through 2019 that resulted in a discrete tax provision of $479,000 and a tax liability of $713,000 as of June 30, 2020 that was paid in the quarter ended September 30, 2020.

For the three months ended June 30, 2021 and June 30,2020, the Company incurred income tax expense (benefit) of ($172,000) and $487,000 on net losses before income taxes of ($4.4 million) and ($5.6 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 0.05% and (4.0%) as of June 30, 2021 and 2020, respectively. The annual effective tax rates as of June 30, 2021 and 2020 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 June 30, 2021, the Level 1 category included money market funds of $20.2 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 June 30, 2021, the Level 2 category included short-term investments of $7.0 million and long-term investments of $4.3 million, 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 June 30, 2021, 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) in any of those inputs in isolation would result in a significantly higher (lower) 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, 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 March 31, 2021, the Company used a

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risk-adjusted discount rate of approximately 14.5% to adjust the probability-weighted cash flows to their present value using probabilities ranging from 0% to 15% for the remaining contingent events. The contingent consideration liability is included in contingent consideration, non-current on the Consolidated Balance Sheet at June 30, 2021 and March 31, 2021 in the amount of $4.2 million and $4.2 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

    

June 30, 2021

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

Assets:

Money market funds

$

20,185

$

20,185

$

$

Marketable securities

11,329

11,329

Total

$

31,514

$

20,185

$

11,329

$

Liabilities:

Contingent consideration

$

4,247

$

$

$

4,247

Fair Value Measurements at Reporting Date Using

Quoted Prices

in Active

Significant

Markets for

Other

Significant

Identical Assets

Observable

Unobservable

and Liabilities

Inputs

Inputs

    

March 31, 2021

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

Assets:

Money market funds

$

22,992

$

22,992

$

$

Marketable securities

15,509

15,509

Total

$

38,501

$

22,992

$

15,509

$

Liabilities:

Contingent consideration

$

4,225

$

$

$

4,225

The following table sets forth the changes in fair value of contingent consideration for the three months ended June 30, 2021 and 2020, respectively:

Three Months Ended June 30,

    

2021

    

2020

(In thousands)

Contingent consideration, beginning of period

$

4,225

$

3,898

Change due to accretion

22

24

Contingent consideration, end of period

$

4,247

$

3,922

Short-term and long-term investments

All of the Company’s short-term and long-term investments are classified as available-for-sale.  Available-for-sale debt securities with maturities greater than twelve months are classified as long-term investments when they are not intended for use in current operations.  Investments in available-for-sale securities are reported at fair value with unrecognized gains (losses), net of tax, as a component of accumulated other comprehensive loss in the Condensed Consolidated Balance Sheets.  The Company had money market funds of $20.2 million and $23.0 million at June 30, 2021 and March 31, 2021, respectively, included in cash and cash equivalents on the Condensed

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Consolidated Balance Sheets.  The Company monitors its investments for impairment periodically and records appropriate reductions in carrying values when declines are determined to be other-than-temporary.

The following table summarizes the Company’s available-for-sale investments:

June 30, 2021

Gross

Gross

Unrealized

Unrealized

Fair

    

Cost

    

Gains

    

Losses

    

Value

 

(In thousands)

Short-term investments:

Certificates of deposit

$

1,500

$

10

$

$

1,510

Supranational obligations

1,011

1,011

Agency bonds

4,510

17

4,527

Total short-term investments

$

7,021

$

27

$

$

7,048

Long-term investments:

Certificates of deposit

$

3,250

$

14

$

(1)

$

3,263

Supranational obligations

1,019

(1)

1,018

Total long-term investments

$

4,269

$

14

$

(2)

$

4,281

March 31, 2021

Gross

Gross

Unrealized

Unrealized

Fair

    

Cost

    

Gains

    

Losses

    

Value

 

(In thousands)

Short-term investments:

Certificates of deposit

$

1,495

$

13

$

$

1,508

Supranational obligations

2,273

1

2,274

Agency bonds

5,911

24

5,935

Total short-term investments

$

9,679

$

38

$

$

9,717

Long-term investments:

Certificates of deposit

$

3,750

$

19

$

(1)

$

3,768

Supranational obligations

1,023

(1)

1,022

Agency bonds

1,001

1

1,002

Total long-term investments

$

5,774

$

20

$

(2)

$

5,792

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position as of June 30, 2021 and March 31, 2021, respectively.