The following Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as information contained in "Risk Factors" in Part II, Item 1A and elsewhere in this Quarterly Report on Form 10-Q, contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend that these forward-looking statements be subject to the safe harbor created by those provisions. Forward-looking statements are generally written in the future tense and/or are preceded by words such as "will," "may," "should," "forecast," "could," "expect," "suggest," "believe," "anticipate," "intend," "plan," "future," "potential," "target," "seek," "continue," "if" or other similar words. Forward-looking statements include statements regarding our strategies as well as (1) our ability to predict revenue and reduce costs related to our products or service offerings, (2) our ability to effectively manage our sales channel inventory and product mix to reduce excess inventory and lost sales, (3) our ability to forecast product sales volumes and accordingly manufacture and manage inventory, (4) our ability to generate sales of Motorola brand products sufficient to make that portion of our business profitable, and retain the Motorola brand license for the Motorola brand product we produce, (5) fluctuations in the level or quality of inventory, (6) the sufficiency of our capital resources and the availability of debt and equity financing, (7) the continuing impact of uncertain global economic conditions on the demand for our products, (8) our ability to maintain and scale adequate and secure software platform infrastructure, (9) the impact of competition on demand for our products and services and (10) our competitive position. The following discussion should be read in conjunction with the attached Unaudited Condensed Consolidated Financial Statements and notes thereto, and with our audited consolidated financial statements and notes thereto for the fiscal year endedDecember 31, 2021 , found in our Annual Report on Form 10-K/A filed with theSecurities and Exchange Commission ("SEC") onAugust 19, 2022 . Although we believe that the assumptions underlying the forward-looking statements contained in this Quarterly Report are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements will be accurate. The risks, uncertainties and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements include, but are not limited to, those discussed under the heading "Risk Factors" in Part II, Item 1A hereto and the risks, uncertainties and assumptions discussed from time to time in our other public filings and public announcements. All forward-looking statements included in this document are based on information available to us as of the date hereof. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. Furthermore, past performance in operations and share price is not necessarily indicative of future performance. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise that may arise after the date of this Quarterly Report on Form 10-Q. Overview We deliver a comprehensive WiFi as a Service platform to make everyone's connected home safe and supportive for life and work. We believe the home router must go the way of the mobile phone. Today's routers are simple, single-purpose devices that rarely receive firmware updates and have underdeveloped management applications, making them the #1 target in residential cybersecurity attacks. It can be so much more. The router must offer frequent security updates, helpful apps, extensive personalization options and a delightful interface. That is what Minim delivers- not just the router or just an app, but WiFi as a Service. Technically, it's composed of an intelligent router managed by a smart operating system that leverages cloud computing and AI to analyze and optimize the smart home, combined with intuitive applications to engage with it. We continually seek to improve our product designs and manufacturing approach to elevate product performance and reduce our costs. We pursue a strategy of outsourcing rather than internally developing our hardware product chipsets, which are application-specific integrated circuits that form the technology base for our modems. By outsourcing the chipset technology, we are able to concentrate our research and development resources on modem system design, leverage the extensive research and development capabilities of our chipset suppliers, and reduce our development time and associated costs and risks. As a result of this approach, we are able to quickly develop new products while maintaining a relatively low level of research and development expense as a percentage of net sales. We also outsource aspects of our manufacturing to contract manufacturers as a means of reducing our costs of production, and to provide us with greater flexibility in our production capacity. 15 Generally, our gross margin for a given product depends on a number of factors, including the type of customer to whom we are selling. The gross margin for products sold to retailers tends to be higher than for some of our other customers; but the sales, support, returns, and overhead costs associated with products sold to retailers also tend to be higher. Gross margin for sales to these master distributors tends to be low, since lower pricing to these distributors helps them to cover the support and marketing costs for their country. Our cash and cash equivalents balance onSeptember 30, 2022 was$1.4 million compared to$12.6 million onDecember 31, 2021 . OnSeptember 30, 2022 , we had$5.8 million of outstanding borrowings on our asset-based credit line with availability of$0.5 million and working capital of$19.7 million . The SVB Loan Agreement matures, and all outstanding amounts become due and payable onNovember 1, 2023 . The Company is evaluating financing and equity options and is currently executing plans to reduce inventory levels by purchasing a selection of products while selling existing inventory to improve cash and inventory positions by the end of the 2022 fiscal year. The Company's ability to maintain adequate levels of liquidity depends in part on our ability to sell inventory on hand, increasing SaaS sales, and collect related receivables.
Although the Company has recently experienced losses and has a decrease in sales in the current quarter compared to prior quarters as a result of declining consumer spending in home networking equipment since the peak of the pandemic, our sales are ahead of pre-pandemic sales. In the three and nine months endedSeptember 30, 2022 and 2021, we generated net sales of$13.8 million and$15.0 million , respectively, and$40.0 million and$44.9 million , respectively. There have been no material changes due to the impact of the COVID-19 pandemic on our business from that disclosed in our most recently filed Annual Report. Our most recent Annual Report on Form 10-K/A for the year endedDecember 31, 2021 as filed with theSEC onAugust 19, 2022 provides additional information about our business and operations. Recent Accounting Standards See Note 2 Summary of Significant Accounting Policies, in Notes to Unaudited Consolidated Financial Statements in Item 1 of Part 1 of this Report on 10-Q, for a full description of recent accounting standards, include the expected dates of adoption and estimated effects on the financial condition and results of operations, which are hereby incorporated by reference.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance withU.S. GAAP. These accounting principles require us to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenue and expenses during the periods presented. Management bases its estimates, assumptions and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. To the extent there are material differences between these estimates and actual results, our financial statements may be affected. Our management evaluates its estimates, assumptions and judgments on an ongoing basis. Our critical accounting policies and estimates, which are revenue recognition, product returns, inventory valuation and costs of goods sold, and valuation of deferred tax assets are described under "Critical Accounting Policies and Estimates" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K/A for the year endedDecember 31, 2021 . For the nine months endedSeptember 30, 2022 , there have been no significant changes in our critical accounting policies and estimates. 16 Results of Operations
The following table sets forth certain financial data derived from our
consolidated statements of operations for the three and nine months ended
Three Months Ended Nine Months Ended September 30, September 30, $ % September 30, September 30, $ % 2022 2021 Change Change 2022 2021 Change Change (In thousands, except percentage data) Net sales$ 13,833 $ 15,036 $ (1,203 ) (8.0 )% 39,996$ 44,947 $ (4,951 ) (11.0 )% Cost of goods sold 10,750 10,543 207 2.0 30,183 30,872 (689 ) (2.2 ) Gross profit 3,083 4,493 (1,410 ) (31.4 ) 9,813 14,075 (4,262 ) (30.3 ) Operating expenses: Selling and marketing 3,803 3,500 303 8.7 11,286 9,883 1,403 14.2 General and administrative 1,922 1,371 551 40.2 4,992 3,775 1,217 32.2 Research and development 1,310 1,789 (479 ) (26.8 ) 4,227 4,564 (337 ) (7.4 ) Total operating expenses 7,035 6,660 375 5.6 20,505 18,222 2,283 12.5
Gain on sale of trademark, net - 3,956
3,956 - 3,956 3,956 Operating income (loss) (3,952 ) 1,789 (5,741 ) (320.9 ) (10,692 ) (191 ) (10,501 ) (5,497.9 ) Other income (expense): Interest expense, net (94 ) (81 ) (13 ) (16.0 ) (262 ) (188 ) (74 ) (39.3 ) Other, net - - - - - 20 (20 ) (100 ) Total other income (expense) (94 ) (81 ) (13 ) (16.0 ) (262 ) (168 ) (94 ) (56.0 )
Income (loss) before income taxes (4,046 ) 1,708
(5,754 ) (336.9 ) (10,954 ) (359 ) (10,595 ) (2,951.3 ) Income taxes 16 8 8 100.0 73 41 32 78.0 Net income (loss)$ (4,062 ) $ 1,700$ (5,762 ) (338.9 )%$ (11,027 ) $ (400 )$ (10,627 ) (2,656.8 )%
Comparison of the three and nine months ended
The following table sets forth our revenues by product and the changes in
revenues for the three and nine months ended
Three Months Ended Nine Months Ended September 30, September 30, $ % September 30, September 30, $ % 2022 2021 Change Change 2022 2021 Change Change (In thousands, except percentage data)
Cable modems & gateways$ 13,363 $ 14,562 $ (1,199 ) (8.2 )%$ 38,461 $ 41,957 $ (3,496 ) (8.3 )% Other network products 234 268 (34 ) (12.7 ) 1,010 2,506 (1,496 ) (59.7 ) SaaS 236 206 30 (14.6 ) 525 484 41 8.5 Total$ 13,833 $ 15,036 $ (1,203 ) (8.0 )%$ 39,996 $ 44,947 $ (4,951 ) (11.0 )% The Company's revenues by geographic area are earned entirely inNorth America , with the exception of immaterial sales in regions beyondNorth America , for the three and nine months endedSeptember 30, 2022 and 2021. 17 Net Sales
Our total net sales decreased year-over-year by$1.2 million or 8.0% in the three months endedSeptember 30, 2022 and by$5.0 million or 11.0% in the nine months endedSeptember 30, 2022 . The decrease in net sales is directly attributable to decreased sales of Motorola branded cable modems and gateways. In both 2022 and 2021, we primarily generated our sales by selling cable modems and gateways. Sales related to SaaS offerings increased by$30 thousand or 14.6% in the three months endedSeptember 30, 2022 and increased by$41 thousand or 8.5% during the nine months endedSeptember 30, 2022 . The decrease in the other category of$34 thousand and$1.5 thousand in the three and nine months ended 2022 compared to 2021 is primarily due to a reduction in DSL products and a refocus on new product introductions.
Cost of Goods Sold and Gross Margin
Cost of goods sold consists primarily of the following: the cost of finished products from our third-party manufacturers; overhead costs, including purchasing, product planning, inventory control, warehousing and distribution logistics; third-party software licensing fees; inbound freight; import duties/tariffs; warranty costs associated with returned goods; write-downs for excess and obsolete inventory; amortization of certain acquired intangibles and software development costs; and costs attributable to the provision of service offerings. The decrease in gross profit was attributable to higher cost inventory resulting from inflationary costs and recording inventory reserves on a specific product. We outsource our manufacturing, warehousing and distribution logistics. We believe this outsourcing strategy allows us to better manage our product costs and gross margin. Our gross margin can be affected by a number of factors, including fluctuation in foreign exchange rates, sales returns, changes in average selling prices, end-user customer rebates and other channel sales incentives, changes in our cost of goods sold due to fluctuations and increases in prices paid for components, overhead costs, inbound freight and duty/tariffs, conversion costs, and charges for excess or obsolete inventory. The following table presents net sales and gross margin, for the periods indicated: Three Months Ended Nine Months Ended September 30, September 30, $ % September 30, September 30, $ % 2022 2021 Change Change 2022 2021 Change Change (In thousands, except percentage data)
Net sales$ 13,833 $ 15,036 $ (1,203 ) (8.0 )%$ 39,996 $ 44,947 $ (4,951 ) (11.0 )% Gross margin 22.3 % 29.9 % 24.5 % 31.3 %
Gross profit and gross margin decreased in the three and nine months ended
For the remainder of fiscal 2022, we expect gross margin to be subject to similar variabilities experienced in fiscal 2021. In 2021, we experienced meaningful increase in costs for sea freight transportation as well as costs of materials and components for our products. We expect these costs to remain elevated for the foreseeable future. We continue to experience disruptions from the pandemic, with manufacturing partners being affected by factory uptime, and scarcity of materials and components. Forecasting gross margin percentages is difficult, and there are several risks related to our ability to maintain or improve our current gross margin levels. Our cost of goods sold as a percentage of net sales can vary significantly based upon factors such as: uncertainties surrounding revenue volumes, including future pricing and/or potential discounts as a result of the economy, competition, the timing of sales, and related production level variances; import customs duties and imposed tariffs; changes in technology; changes in product mix; expenses associated with writing off excessive or obsolete inventory; fluctuations in freight costs; manufacturing and purchase price variances; and changes in prices on commodity components. 18 Selling and Marketing Selling and marketing expenses consist primarily of advertising, trade shows, corporate communications and other marketing expenses, product marketing expenses, outbound freight costs, amortization of certain intangibles, personnel expenses for sales and marketing staff, technical support expenses, and facility allocations. The following table presents sales and marketing expenses, for
the periods indicated: Three Months Ended Nine Months Ended September 30, September 30, $ % September 30, September 30, $ % 2022 2021 Change Change 2022 2021 Change Change (In thousands, except percentage data) Selling and marketing $ 3,803 $ 3,500$ 303 8.7 %$ 11,286 $ 9,883$ 1,403 14.2 % Selling and marketing expenses increased in the three months endedSeptember 30, 2022 , as compared to the three months endedSeptember 30, 2021 , primarily due to increases in marketing program campaigns of$433 thousand and Motorola royalty fees of$63 thousand . Selling and marketing expenses increased in the nine months endedSeptember 30, 2022 , as compared to the nine months endedSeptember 30, 2021 , primarily due to an increase in marketing program campaigns of$1.2 million and Motorola royalty fees of$0.2 million . For the remainder of fiscal 2022, we expect our selling and marketing expenses as a percentage of net sales in fiscal 2022 to be above fiscal 2021 levels. Expenses may fluctuate depending on sales levels achieved as certain expenses, such as commissions, are determined based upon the net sales achieved. Forecasting selling and marketing expenses is highly dependent on expected net sales levels and could vary significantly depending on actual net sales achieved in any given quarter. Marketing expenses may also fluctuate depending upon the timing, extent and nature of marketing programs. General and Administrative General and administrative expenses consist of salaries and related expenses for executives, finance and accounting, human resources, information technology, professional fees, including legal costs associated with defending claims against us, allowance for doubtful accounts, facility allocations, and other general corporate expenses. The following table presents general and administrative expenses, for the periods indicated: Three Months Ended Nine Months Ended September 30, September 30, $ % September 30, September 30, $ % 2022 2021 Change Change 2022 2021 Change Change (In thousands, except percentage data)
General and administrative $ 1,922 $ 1,371$ 551 40.2 % $ 4,992 $ 3,775$ 1,217 32.3 % General and administrative expenses increased in the three months endedSeptember 30, 2022 , as compared to the three months endedSeptember 30, 2021 , primarily due to increases in personnel expenses of$405 thousand , including$130 thousand in severance expense, software subscriptions of$87 thousand , and increases in professional fees of$162 thousand . General and administrative expenses increased in the nine months endedSeptember 30, 2022 , as compared to the nine months endedSeptember 30, 2021 , primarily due to increases in personnel expenses of$1.0 million , director fees of$291 thousand , and software subscriptions of$510 thousand , partially offset by a decrease in professional fees of$376 thousand . Future general and administrative expense increases or decreases in absolute dollars are difficult to predict due to the lack of visibility of certain costs, including legal costs associated with defending claims against us, and other factors. 19 Research and Development
Research and development expenses consist primarily of personnel expenses, payments to suppliers for design services, safety and regulatory testing, product certification expenditures to qualify our products for sale into specific markets, prototypes, IT, and other consulting fees. Research and development expenses are recognized as they are incurred. Our research and development organization is focused on enhancing our ability to introduce innovative and easy-to-use products and services. The following table presents research and development expenses, for the periods indicated:
Three Months Ended Nine Months Ended September 30, September 30, $ % September 30, September 30, $ % 2022 2021 Change Change 2022 2021 Change Change
(In thousands, except percentage data)
Research and development $ 1,310 $ 1,789
Research and development expenses decreased in the three months endedSeptember 30, 2022 , as compared to the three months endedSeptember 30, 2021 , primarily due to personnel expenses. Research and development expenses decreased in the nine months endedSeptember 30, 2022 , as compared to the three months endedSeptember 30, 2021 , primarily due to product certification costs. We believe that innovation and technological leadership is critical to our future success, and we are committed to continuing a significant level of research and development to develop new technologies, products and services. We continue to invest in research and development to expand our hardware product offerings focused on premium WiFi 6E, WiFi 6, and software solutions. For the remainder of fiscal 2022, we expect research and development expenses as a percentage of net sales in fiscal 2022 to be in line with or slightly above fiscal 2021 levels. Research and development expenses may fluctuate depending on the timing and number of development activities and could vary significantly as a percentage of net sales, depending on actual net sales achieved in any given year.
Liquidity and Capital Resources
Our principal sources of liquidity are cash and cash equivalents and borrowings under our SVB line-of-credit. As ofSeptember 30, 2022 , we had cash and cash equivalents of$1.4 million as compared to$12.6 million onDecember 31, 2021 . OnSeptember 30, 2022 , we had$5.8 million of borrowings outstanding and$0.5 million available on our$25.0 million SVB line-of-credit and working capital of$19.7 million . We have funded our operations and investing activities primarily through borrowings on our line of credit, the sale of assets and the sale of our common stock.
Our historical cash outflows have primarily been associated with: (1) cash used for operating activities such as the purchase and growth of inventory, expansion of our sales and marketing and research and development infrastructure and other working capital needs; (2) expenditures related to increasing our manufacturing capacity and improving our manufacturing efficiency; (3) capital expenditures related to the acquisition of equipment; and (4) cash used to repay our debt obligations and related interest expense. Fluctuations in our working capital due to timing differences of our cash receipts and cash disbursements also impact our cash inflows and outflows. Cash Flows
The following table presents our cash flows for the periods presented:
Nine Months ended September 30, 2022 2021 Cash used in operating activities$ (11,463 ) $ (10,013 ) Cash used in investing activities (599 ) (635 ) Cash provided by financing activities 929 28,440
Net decrease in cash and cash equivalents
Cash Flows from Operating Activities. Cash used in operating activities of$11.5 million for 2022 reflected our net loss of$11.0 million , adjusted for non-cash expenses, consisting primarily of$0.6 million of depreciation and amortization and$1.0 million of stock-based compensation expense. Uses of cash includes an increase of accounts receivables of$1.4 million and a decrease in accounts payable of$5.5 million . Sources of cash included a decrease of inventories of$2.7 million , decrease of other assets of$0.3 million , increase in accrued expenses of$0.3 million , and increases in deferred revenue of$0.5 thousand . Cash used in operating activities of$10.0 million for 2021 reflected our net loss of$0.4 million , adjusted for non-cash expenses, consisting primarily of stock-based compensation expense of$0.8 million . Uses of cash include an increase of accounts receivables of$2.4 million , increase in inventories of$6.8 million and increase in accounts payable of$0.8 million and accrued expenses of$2.2 million . Sources of cash included an increase in deferred
revenue of$1.1 million . 20
Cash Flows from Investing Activities. In 2022,
In 2021, cash of
Cash Flows from Financing Activities. Cash provided by financing activities in 2022 consisted of a source of cash of$0.7 million from borrowings under our SVB line-of-credit, and$0.2 million in proceeds from the exercise of common stock options.
Cash provided by financing activities in 2021 consisted of a source of cash of$22.7 million in a public offering,$7.1 million from borrowings under our SVB line-of-credit, and$1.2 million in proceeds from the exercises of common stock options. Uses of cash include the repayment of theRosenthal & Rosenthal, Inc. line-of-credit of$2.4 million . Future Liquidity Needs
Our primary short-term needs for capital, which are subject to change, include expenditures related to:
? the acquisition of equipment and other fixed assets for use in our current and
future manufacturing and research and development facilities; ? upgrades to our information technology infrastructure to enhance our capabilities and improve overall productivity;
? support of our commercialization efforts related to our current and future
products, including expansion of our direct sales force and field support
resources; ? the continued advancement of research and development activities.
Our capital expenditures are largely discretionary and within our control. We expect that our product sales and the resulting operating loss as well as the status of each of our product development programs, will significantly impact our cash management decisions. The Company's operations have historically been financed through the issuance of common stock and borrowings. Since inception, the Company has incurred significant losses and negative cash flows from operations. During the nine months endedSeptember 30, 2022 , the Company incurred a net loss of$11.0 million and had negative cash flows from operating activities of$11.5 million . As ofSeptember 30, 2022 , the Company had an accumulated deficit of$70.3 million and cash and cash equivalents of$1.4 million . The SVB Loan Agreement matures, and all outstanding amounts become due and payable onNovember 1, 2023 . These conditions raise substantial doubt about our ability to continue as a going concern within one year from the date of filing these financial statements. The Company's financial statements have been prepared assuming the Company will continue as a going concern and contemplates continuity of operations, realization of assets and satisfaction of liabilities and commitments in the normal course of business. The Company's ability to continue as a going concern is contingent upon, among other factors, the Company's ability to generate sufficient cash flow from operations, decrease operating costs, obtain additional equity or debt financing. The Company is currently executing plans to reduce inventory levels by purchasing a selection of products while selling existing inventory to improve cash and inventory positions by the end of the 2022 fiscal year. We intend to retain any future earnings to support operations and to finance the growth and development of our business, and we do not anticipate paying any dividends in the foreseeable future. Our future liquidity and capital requirements will be influenced by numerous factors, including the extent and duration of any future operating losses, the level and timing of future sales and expenditures, the results and scope of ongoing research and product development programs, working capital required to support our sales growth, funds required to service our debt, the receipt of and time required to obtain regulatory clearances and approvals, our sales and marketing programs, our need for infrastructure to support our sales growth, the continuing acceptance of our products in the marketplace, competing technologies and changes in the market and regulatory environment and cash that may be required to settle our foreign currency hedges. Our ability to fund our longer-term cash needs is subject to various risks, many of which are beyond our control-See "Risk Factors-We may require significant additional capital to pursue our growth strategy, and our failure to raise capital when needed could prevent us from executing our growth strategy." Should we require additional funding, such as additional capital investments, we may need to raise the required additional funds through bank borrowings or public or private sales of debt or equity securities. We cannot assure that such funding will be available in needed quantities or on terms favorable to us, if at all. AtSeptember 30, 2022 , we have Federal and state net operating loss carry forwards of approximately$60.0 million and$26.8 million , respectively, available to reduce future taxable income. A valuation allowance has been established for the full amount of deferred income tax assets as management has concluded that it is more-likely than-not that the benefits from such assets will
Commitments and Contractual Obligations
During the nine months endedSeptember 30, 2022 , except as otherwise disclosed in this Form 10-Q, there were no material changes to our capital commitments and contractual obligations from those disclosed in our Form 10-K/A for the year endedDecember 31, 2021 .
Off-Balance Sheet Arrangements
We did not have any material off-balance sheet arrangements as of
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