Ambarella
Annual Report 2019

Plain-text annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 31, 2020 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: 001-35667 AMBARELLA, INC. (Exact name of registrant as specified in its charter) Cayman Islands (State or other jurisdiction of incorporation or organization) 3101 Jay Street Santa Clara, California (Address of principal executive offices) 98-0459628 (I.R.S. Employer Identification No.) 95054 (Zip Code) Registrant’s telephone number, including area code: (408) 734-8888 Securities registered pursuant to Section 12(b) of the Act: Title of each class Ordinary Shares, $0.00045 Par Value Per Share Trading Symbol AMBA Name of each exchange on which registered The Nasdaq Global Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☒ NO ☐ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐ NO ☒ 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 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 (§232.405 of this chapter) 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 Non-accelerated filer Emerging growth company ☒ ☐ ☐ Accelerated filer Smaller reporting 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 Act). YES ☐ NO ☒ The aggregate market value of the voting and non-voting ordinary shares held by non-affiliates of the Registrant as of July 31, 2019, was approximately $1.4 billion based upon the closing price reported for such date on the NASDAQ Global Market. For purposes of this disclosure, ordinary shares held by persons known to the Registrant (based on information provided by such persons and/or the most recent schedule 13Gs filed by such persons) to beneficially own more than 5% of the Registrant’s ordinary shares and ordinary shares held by officers and directors of the Registrant have been excluded because such persons may be deemed to be affiliates. This determination is not necessarily a conclusive determination for other purposes. Number of ordinary shares, $0.00045 par value, outstanding as of March 23, 2020: 34,208,549 shares. Certain information is incorporated into Part III of this report by reference to the Proxy Statement for the Registrant’s annual meeting of shareholders to be held on or about June 4, 2020 to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. DOCUMENTS INCORPORATED BY REFERENCE  Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures TABLE OF CONTENTS PART I PART II Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. Item 10. Item 11. Item 12. Item 13. Item 14. Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services PART III Exhibits and Financial Statement Schedules Summary Item 15. Item 16. Exhibits Signatures Power of Attorney PART IV 2 Page 4 16 40 40 41 41 41 43 45 60 61 62 62 62 63 63 63 63 63 64 95 96 98 98 FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The forward-looking statements are contained principally in, but not limited to, the sections titled “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as elsewhere in this Annual Report on Form 10-K. Forward-looking statements are identified by the use of the words “would,” “could,” “will,” “may,” “expect,” “believe,” “should,” “anticipate,” “outlook,” “if,” “future,” “intend,” “plan,” “estimate,” “predict,” “potential,” “target,” “seek,” “continue,” “foreseeable” or “forecast” and similar words and phrases, including the negatives of these terms, or other variations of these terms, that denote future events. Forward-looking statements include, but are not limited to, information concerning our possible or assumed future results of operations, competitive position, industry environment, potential growth opportunities and the effects of competition, our product development strategy and areas of focus, our market opportunity, our ability to develop new solutions, including our ability to integrate and apply acquired technologies to our solutions, our future financial and operating performance, sales and marketing strategy, investment strategy and the results of our investments, research and development, customer and supplier relationships, inventory levels, customer demand and our ability to secure design wins, industry trends, our cash needs and capital requirements, and expectations about seasonality, taxes, and operating expenses. These statements reflect our current views with respect to future events and our potential financial performance and are subject to risks and uncertainties that could cause our actual results and financial position to differ materially and adversely from what is projected or implied in any forward-looking statements included in this Annual Report on Form 10-K. Factors that could affect such forward-looking statements include, but are not limited to, risks associated with revenue being generated from new customers or design wins, neither of which is assured; our ability to retain and expand customer relationships and to achieve design wins; the potential impact of the COVID-19 pandemic on our operations or the operations of our supply chain or our customers; the commercial success of our customers’ products; our growth strategy; our ability to anticipate future market demands and future needs and preferences of our customers; our ability to introduce new and enhanced solutions; the expansion of our current markets and our ability to successfully enter new markets; anticipated trends and challenges, including competition, in the markets in which we operate; our expectations regarding the adoption of computer vision technology; economic and geopolitical factors beyond our control; our ability to effectively generate and manage growth; our ability to retain key employees; the potential for intellectual property disputes or other litigation; the risks described under Item 1A of Part I—“Risk Factors,” Item 7 of Part II—“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Annual Report on Form 10-K; and those discussed in other documents we file with the Securities and Exchange Commission. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We have no obligation (and expressly disclaim any such obligation) to update or alter any forward-looking statements, whether as a result of new information or otherwise except as otherwise required by securities regulations. For purposes of this Annual Report, the terms “Ambarella”, “the Company”, “we”, “us” and “our” refer to Ambarella, Inc. and its consolidated subsidiaries. 3 ITEM 1. BUSINESS Overview PART I Ambarella is a leading developer of semiconductor solutions for video that enable high-definition, or HD, video capture, analysis, sharing and display. In the last ten years, we have primarily focused on providing video and image processors for professional and consumer camera devices, such as internet protocol, or IP, security cameras, wearable sports cameras, drones and aftermarket automotive video recorders. Over the last several years, our development efforts have focused on creating advanced artificial intelligence, or AI, computer vision algorithms and high-performance, low-power hardware platforms to enhance processing acceleration, which we refer to as our CVflow™ architecture. The CVflow architecture supports a variety of computer vision algorithms, including stereovision, object identification and motion detection, obstacle detection and avoidance, terrain mapping technology, and face recognition, and allows customers to differentiate their products by porting their own algorithms and neural networks to our CVflow- based chips. This computer vision technology is allowing us to address a broader range of markets and applications. Our system-on-a-chip, or SoC, designs fully integrate HD video processing, image processing, computer vision functionality, audio processing, and system functions onto a single chip, delivering exceptional video and image quality at high compression rates, differentiated functionality and low power consumption. We combine our processor design capabilities with our expertise in video and image processing, computer vision algorithms and software development to provide a technology platform that is designed to be easily scalable across multiple applications in a variety of markets and enable rapid and efficient product development for our customers. The flexibility of our technology platform enables us to deliver our solutions for numerous applications in multiple markets. We are focusing on the following end markets: • • Security Cameras. We are a leader in professional and consumer IP security camera markets, with solutions that deliver exceptional computer vision performance, industry-leading compression efficiency, low power consumption, and outstanding image quality, including high dynamic range (HDR), low-light processing and dewarp, in a secure manner on the camera device, sometimes referred to as the system’s edge. Embedded computer vision intelligence can support advanced analytics such as motion detection, object detection and facial recognition. We address the following security camera markets: ▪ ▪ Professional IP Security Cameras. These cameras are used for video monitoring and security surveillance in professional applications. Our solutions enable the streaming of multiple video streams to enable remote monitoring at multiple locations. Embedded computer vision intelligence supports advanced analytics, including people counting and tracking, facial recognition and retail behavior analysis. Consumer IP Security Cameras. Consumer security cameras are designed for home or small business use and may be connected to cloud services and applications via home networks using WiFi. These cameras may require very low bitrate operation to support HD resolution over limited bandwidth connections, while small form factors or battery powered devices may require very low power operation. Form factors include smart video door bells, video enabled lights, and video enabled smart home speakers. Automotive Cameras. We sell solutions into several automotive markets for both original equipment manufacturer, or OEM, and aftermarket applications. We address the following automotive market applications: ▪ ▪ ▪ Automotive Video Recorders. These small video cameras are mounted on board vehicles to record traffic accidents and help establish records for insurance and liability purposes. We offer solutions for both aftermarket and OEM drive recording devices, some of which include advanced driver assistance systems (ADAS) features. Smart Electronic Mirrors. These small cameras and liquid crystal display (LCD) displays are used to augment or, in some cases replace, optical rear view and side view mirrors to provide a wider, unobstructed field of view, and help detect objects in blind spots. Surround View / 360° Systems. Our 360-degree surround view solution uses multiple cameras to present a single, unified image of the vehicle from a top-down, bird’s eye view. Offering both two-dimensional, or 2D, and three-dimensional, or 3D, operations, intelligent parking assist features, as well as recording and streaming capabilities, our four-channel surround view systems provide drivers with unobstructed, distortion-free views of the vehicle from every side. 4 ▪ ▪ ▪ Front ADAS Cameras. These forward-facing cameras are positioned behind the rearview mirror, enabling functions such as automatic emergency braking, lane departure warning, forward collision warning, intelligent headlight control, and speed assistance functions, many of which are required by the European New Car Assessment Program, or NCAP. Front ADAS cameras require rapid computer vision processing at high resolutions, which is critical for long-distance object detection with a wide field- of-view, and extremely low power due to their inherently small form factor. Cabin and Driver Monitoring System (DMS) Cameras. These interior mounted cameras allow tracking of driver alertness and passenger-related data that can assist with the deployment of safety features (e.g., airbags). Our solutions process our customers’ interior-sensing algorithms at high speeds and with low power consumption, and are effective even at night via onboard RGB- InfraRed processing. Our DMS solutions can be integrated with supplementary camera applications, including electronic mirror, front-camera ADAS, and high-resolution recording. Partial to Fully Autonomous Driving. Our autonomous technologies have performed successfully in a variety of demanding scenarios, including the Defense Advanced Research Projects Agency (DARPA) Grand Challenge (2005), a trip from Italy to China in full autonomous mode (2010), and driverless navigation at highway speeds (2015). We continue to advance our research in critical areas of autonomous vehicle development, such as vehicle detection, obstacle detection, pedestrian detection, lane detection, traffic sign recognition, stereovision processing, and terrain mapping, as well as issues related to commercialization and mass production, enabling us to design optimal platforms for applications ranging from Level2+ autopilot to full autonomy. We are working with automotive suppliers to port their own ADAS algorithms to our platform to enable differentiated products. • • Industrial and Robotic Applications. Our solutions add intelligence to a range of robotics applications, including autonomous delivery vehicles, consumer robots, and industrial/machine vision solutions that we believe will be part of future smart home automation and smart cities. Our advanced vector processors handle an array of complex algorithms, from low-level perception functions and neural networks to higher-level autonomous software stacks, while our video processing pipeline enables operation in challenging lighting conditions such as high-contrast scenes and extremely low-light environments, all with low power consumption. We address the following industrial and robotic market applications: ▪ ▪ ▪ Access Control and Smart Sensors. Our sensing solutions are engineered to quickly extract input from the physical environment, analyze the incoming data and deliver the appropriate feedback, with low-latency and low-power responsiveness. Applications include access control, security panels and smart video locks. Logistics and Cargo Monitoring. Our industrial and machine vision solutions are designed to monitor production lines, detect product defects, track inventory, and guide assembly robots, resulting in improved quality control, a reduction in errors, and cost savings. Robotic Products and Automated Guided Vehicles. With stereovision capabilities as well as convolutional neural network (CNN)-based object classification, our solutions are suited for a variety of fully autonomous vehicles. Primary applications include consumer products such as robotic vacuums, toy robots and AI-powered personal assistants, and specialized industrial robotic vehicles for agriculture, warehouses, and delivery. Consumer Applications. Durable cameras that provide HD video quality increasingly include embedded connectivity to share and display video. Our low power, high-resolution and connected solutions can be found in a variety of cameras in this end market, including wearable body cameras, sports action cameras, social media cameras, drones for capturing aerial video or photographs, smart video-enabled locks, and home access control systems. For our fiscal years ended January 31, 2020, 2019 and 2018, we recorded revenue of $228.7 million, $227.8 million and $295.4 million, respectively. For the fiscal years ended January 31, 2020 and 2019, we incurred net losses of $44.8 million and $30.4 million, respectively. For fiscal year ended January 31, 2018, we recorded net income of $18.9 million. We have generated cash from operations in each fiscal year starting from 2009. We sell our solutions to leading original design manufacturers, or ODMs, and original equipment manufacturers, or OEMs, globally. In the automotive market, we may sell our solutions to Tier-1 suppliers that develop and sell devices incorporating our solutions to automotive OEMs. We refer to ODMs and Tier-1 suppliers as our customers and OEMs as our end customers, except as otherwise indicated or as the context otherwise requires. 5 We employ a fabless manufacturing strategy and are currently shipping the majority of our solutions in the 28 nanometer, or nm, and 14nm process nodes, although our most recently introduced SoCs are developed in the 10nm process node. Currently, the substantial majority of our SoCs are supplied by Samsung Electronics Co., Ltd., or Samsung. As of January 31, 2020, we had 761 employees worldwide, approximately 81% of whom are in research and development. Our headquarters are located in Santa Clara, California, and we also have research and development design centers in Taiwan, China and Italy and business development offices in Taiwan, China, Japan and South Korea. Ambarella was founded and incorporated in the Cayman Islands in January 2004. Our registered address is PO Box 309GT, Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands. The address of our U.S. operating subsidiary is Ambarella Corporation, 3101 Jay Street, Santa Clara, California. The Securities and Exchange Commission, or SEC, maintains a website at www.sec.gov that contains reports, proxy, and information statements, and other information regarding registrants that file electronically. You may also obtain copies of our Forms 10-K, 10-Q, 8-K, and other filings with the SEC, and all amendments to these filings, free of charge, by visiting the Investor Relations page on our website (http://investor.ambarella.com) as soon as reasonably practicable following our filing of any of these reports with the SEC. Information on our website is not incorporated into this Annual Report on Form 10-K or our other securities filings and is not a part of such filings. Our Competitive Strengths Our platform technology solutions provide performance attributes that satisfy the stringent demands of the camera market, enable integration of HD video and image capture capabilities in portable devices, and provide computer vision capabilities that address the evolving needs of the IP security, automotive and industrial and robotic markets. We believe that our leadership in HD video and image processing applications is the result of our competitive strengths, including: • • • Proprietary Computer Vision Architecture. Our proprietary AI computer vision processing architecture, known as CVflow, uses a flexible computer vision hardware engine programmed with a high level algorithm description to achieve increased performance while minimizing die size and power consumption. The CVflow architecture specifies data flow connections between a set of optimized computer vision operators, such as the convolution and matrix multiply functions that are specifically optimized for deep learning algorithms. The CVflow architecture supports a variety of computer vision algorithms, including stereo obstacle detection and terrain mapping technology, object identification and motion detection, and allows customers to differentiate their products by porting their own algorithms and neural networks to our CVflow-based chips. High-Performance, Low Power Video and Image Algorithm Expertise. Our solutions provide Full HD and Ultra HD, or UHD, video at exceptional resolution and frame rates. Our extensive algorithm expertise, which facilitates efficient video and image compression, enables our solutions to achieve low power consumption without compromising performance. Our solutions achieve high storage and transmission efficiencies through innovative and complex video and image compression algorithms that significantly reduce the output bitrate. This smaller storage footprint directly benefits the performance of our solutions in several ways, including lower memory storage requirements and reduced bandwidth needs for transmission, which is more conducive to sharing content between devices. These benefits are particularly important in transcoding, the digital-to-digital conversion of one encoding format to another, and video cloud applications. Our solutions can enable high-performance image capture of up to 30 32-megapixel still images per second. Our solutions can deliver clear images in low light conditions because of our 3D motion compensated temporal filtering, or MCTF, and multiple exposure processing. Additionally, our wide dynamic range (WDR) and HDR processing capabilities provide greater dynamic range between the lightest and darkest areas of an image, permitting captured still images to reveal details that would otherwise be lost against a bright background. Our advanced de-warping capability enables cameras to use wide angle lenses to capture images from a wide area, making it ideal for a variety of IP security camera applications, as well as 3D electronic image stabilization and surround view for automotive applications. Proprietary Video Processing Architecture. Our proprietary video processing architecture is designed to efficiently integrate our advanced compression algorithms into our SoCs to offer exceptional storage and transmission efficiencies at lower power across multiple products and end markets. We engineered our very-large-scale integration, or VLSI, architecture with a focus on high-performance video compression as opposed to solutions that are based on a still image processing architecture with add-on video capabilities. Due to our primary focus on video processing compression, we believe that our solutions offer exceptional performance metrics with lower power requirements and reduced die sizes. Our integrated algorithms and architecture also enable simultaneous processing of multiple video and image streams. 6 • • Highly Integrated SoC Solutions Based on a Scalable Platform. Our product families leverage our core high-performance video processing architecture combined with an extensive set of integrated peripherals, which enables our platform to address the requirements of a variety of applications and end markets. Traditional solutions have generally relied upon significant customization to meet the specific requirements of each market, resulting in longer design cycles and higher development costs. Our flexible and highly-scalable platform enables us to address multiple markets with reduced design cycles and costs. Our platform also enables us to develop fully integrated SoC solutions that provide the system functionalities required by our customers on a single chip. Our extensive system integration expertise enables us to integrate core video processing functionality with many peripheral functions such as multiple inputs and outputs, lens controllers, flash controllers and remote control interfaces to reduce system complexity and interoperability issues. Furthermore, we have successfully migrated our process nodes from 130nm to 10nm since our founding and have a proven track record of developing and delivering multiple solutions with first-pass silicon success. Comprehensive and Flexible Software. Our years of investment in developing and optimizing our comprehensive and flexible software serve as the foundation of our high-performance video application solutions. Key components of our software include highly customized middleware that integrates many unique features for efficient scheduling and other system-level functions, and firmware that is optimized to reduce power requirements and improve performance. In addition, we provide to our customers fully-functional software development kits with a suite of application programming interfaces or APIs, which allow them to rapidly integrate our solution, adjust product specifications and provide additional functionality to their systems, thereby enabling them to differentiate their product offerings and reduce time to market. We also provide software tools to map algorithms from commonly used computer vision frameworks such as Caffe or Tensorflow into our proprietary CVflow architecture. Products We have a wide range of products in our portfolio, including products that have commercially shipped, products for which we have shipped engineering samples and products that are under development. We typically introduce two to three new silicon products per year which, when combined with our flexible software development kits, allow us to offer product families addressing the specific needs of a wide range of end markets. In addition to enabling small device size and low power consumption, our SoC solutions make possible differentiated functionalities, such as simultaneous video and image capture, multiple-stream video capture, image stabilization and wireless connectivity. Moreover, we believe that AI computer vision functionality on the SoC, such as face recognition, object identification and avoidance and motion detection, will continue to expand the addressable market for our SoC solutions. Our HD video and image processing SoCs, based on our proprietary video processing architecture, are highly configurable and enable our customers to deliver exceptional quality video and still imagery in small, easy-to-use devices with low power requirements. Our computer vision architecture, incorporated into our new computer vision, or CV, family of SoCs, extract and process data from video stream, enabling our customers to develop intelligent camera systems. Our customized software solutions include firmware, middleware and software development kits to optimize system-level functions and allow rapid integration of our solution into customer products and tailor specifications to customer requirements. We also provide customers in all of our core markets with guidelines known as reference designs so that they can efficiently incorporate our solutions into their product designs. Product families that have been introduced in the last two fiscal years include: • • Our 10nm CV22 SoC, which we announced in January 2018, is the second chip in our CVflow family and provides computer vision processing required for intelligent home monitoring, automotive, drone, and wearable cameras. The CV22 SoC encodes H.264 Advanced Video Coding, or AVC, and H.265 high efficiency video coding, or HEVC, video at rates of up to 4Kp60, with multi-stream support. The CV22 SoC includes a quad-core 1.2 GHz ARM® Cortex® A53 CPU with NEONTM DSP extensions and floating point unit to provide power for features such as 360 degree de-warping and lens distortion correction, multi-exposure HDR and WDR processing, light emitting diode, or LED, flicker mitigation, and multi-sensor support for multi-imager cameras. Our 10nm CV2 SoC, which we announced in March 2018, is the third chip in our CVflow family and provides computer vision and stereovision processing required for the next generation of intelligent automotive, security, and drone cameras. The CV2 SoC encodes AVC and HEVC video at rates of up to 4Kp90, with multi-stream support. The CV2 SoC includes a quad-core 1.2 GHz ARM® Cortex® A53 CPU with NEONTM digital signal processing, or DSP, extensions and floating point unit to provide power for features such as 360- degree de-warping and lens distortion correction, multi-exposure HDR and WDR processing, LED flicker mitigation, and multi-sensor support for multi-imager cameras. 7 • • • Our 10nm CV25 SoC, which we announced in January 2019, provides computer vision processing required for the next generation of affordable and intelligent home monitoring, professional surveillance, and aftermarket automotive solutions, including smart dash- cameras, driver monitoring systems (DMS), and electronic mirrors. We believe that the CV25 SoC will enable cameras to perform advanced AI features like object detection, facial recognition in real-time on the camera rather than in the cloud. The CV25 SoC encodes AVC and HEVC video at rates of up to 4Kp30, and uses SmartAVCTM and SmartHEVCTM intelligent rate control to achieve low bitrates and minimize cloud storage costs. The CV25 SoC also includes a quad-core 1 GHz ARM® Cortex®-A53 CPU with NEONTM DSP extensions and floating point unit. Our S6Lm SoC, which we announced in April 2019, is designed for a wide range of professional IP and home monitoring cameras and includes 4K HDR processing and multi-streaming. The S6Lm SoC delivers 5Mp30 + 720p30 + 5Mp1 maximum encoding performance. The S6Lm SoC features a quad-core ARM Cortex A53 CPU for advanced analytics, including object and person detection to reduce false alarms and maximize battery life in battery-powered designs. The S6Lm uses our next-generation image signal processor to deliver high- quality imaging in low-light conditions, while its HDR processing extracts high image detail in high-contrast scenes. Our CV22FS and CV2FS SoCs, which we announced in January 2020, are ASIL-B compliant versions of our CV22 and CV2 SoCs to enable safety-critical applications for the automotive market. Featuring low power consumption, the CV22FS and CV2FS are designed to enable Tier-1 suppliers and OEMs to surpass the European New Car Assessment Program (NCAP) performance requirements within the power consumption constraints of single-box, windshield-mounted forward ADAS cameras. Other potential applications for the processors include electronic mirrors with blind spot detection (BSD), interior driver and cabin monitoring cameras, and around view monitors (AVM) with parking assist. 8 The chart below describes our current product lines and target markets: Technology Our semiconductor processing solutions enable computer vision processing, HD and UHD (up to 3840x2160p60) video and image processing, video compression, sharing and display while offering exceptional power, size and performance characteristics. Key differentiators of our technology include: • • • • • • • algorithms to compress video signals with high compression and power efficiency at multiple operating points; algorithms for high-speed image processing with high image quality and power efficiency; flexible CVflow computer vision processing engines to support UHD performance levels for deep learning and stereo-based algorithms with power and die size efficiency; optimized deep learning algorithms for multi class object detection, including vehicles, pedestrians, cycles, traffic signs and traffic lights; stereo obstacle detection to provide robust safety in the event of obstacles that are not in the training data; full autonomous algorithm stack for automotive and drone applications, including fusion for multiple cameras and sensor modalities, mapping and localization algorithms and planning; scalable architecture that covers the gamut of consumer and professional HD video camera and encoding applications from Full HD to UHD performance levels; 9 • • • • • • • ability to encode multiple video streams simultaneously to support simultaneous recording and video streaming or streaming to multiple devices with different resolutions; ability to capture, process and encode multiple image sensors simultaneously to support multiple viewpoints, including surround view and virtual reality applications; algorithms to stabilize video from camera motion in challenging conditions, such as sports and drone cameras; low-power architecture with minimal system memory footprint; programmable architecture that balances flexibility, quality, power and die size; full software development kit comprised of APIs to facilitate integration into customers’ products; and powerful CPUs and dedicated hardware to support advanced analytics functions. Our technology platform, comprised of our video, image and computer vision processors, is based on a high-performance, low-power architecture supported by a high level of system integration. The building blocks of our platform are illustrated below: Our technology platform enables the capture of high-resolution still images and HD video while simultaneously encoding HD video for high-quality storage and lower resolution video for Internet sharing and wireless networking. Multi stream video capture enhances the consumer experience by offering the ability to instantaneously share captured video without having to go through a transcoding process. Our computer stereo vision processing solutions provide the ability to detect generic objects without training, allowing more robust decisions to be made in applications such as autonomous driving. AmbaClear Our proprietary image signal processing architecture, known as AmbaClear, incorporates advanced algorithms to convert raw sensor data to high- resolution still and HD video images concurrently. Image processing algorithms include sensor, lens and color correction, demosaicing, which is a process used to reconstruct a full color image from incomplete color samples, noise filtering, detail enhancement and image format conversion. For example, raw sensor data can be captured at up to 16-megapixel resolution at 60 frames per second and filtered down to two megapixels for HD video processing while selected 16-megapixel frames are concurrently processed by the still image processor. This image processing reduces noise in the input video and improves video quality resulting in better storage and transmission efficiencies. Our WDR and HDR processing capabilities handle greater dynamic range between the lightest and darkest areas of an image, permitting video images to reveal details that would otherwise be lost against a bright background. Our advanced de-warping capability enables cameras to use wide angle lenses to capture images from a wide area, making it ideal for a variety of IP security camera and surround view applications. 10 AmbaCast Our proprietary HD video processing architecture, known as AmbaCast, incorporates advanced algorithms for motion estimation, motion- compensated 3D temporal filtering, mode decision and rate control. Successful implementation of these computationally intensive steps has helped us maximize compression efficiency. We support all three compression profiles—baseline, main and high—as specified in the H.264 video compression standard. We also support the main profile H.265 video compression standard with up to 2x better compression efficiency compared to our H.264 video compression technology. CVflow Our proprietary computer vision processing architecture, known as CVflow, uses a flexible computer vision hardware engine programmed with a high level algorithm description to achieve increased performance while minimizing die size and power consumption. This description allows the hardware to maximize use of its resources by exploiting all available parallelism without software intervention. The CVflow architecture specifies data flow connections between a set of optimized computer vision operators, such as the convolution and matrix multiply functions that are specifically optimized for deep learning algorithms. The CVflow architecture supports a variety of computer vision algorithms, including stereo obstacle detection and terrain mapping technology. Our platform allows customers to differentiate their products by porting their own algorithms and neural networks to our CVflow- based chips using industry-standard training tools and frameworks. Computer Vision Technology Computer vision is a core technology that complements our image processing and video compression technology. Our current SoC solutions have up to four high performance ARM processors with NEONTM acceleration that provide a flexible and cost-effective manner in which to run computer vision algorithms. We are focusing on developing advanced computer vision algorithms and high-performance, low-power hardware acceleration, which is critical to our current video markets, including IP security, wearable, and drone cameras, as well as automotive cameras for OEM applications. A significant feature of our computer vision SoCs is support for stereo obstacle detection, which utilizes stereo cameras to perceive depth. We believe that stereo depth information provides an important augmentation to monocular computer vision processing, resulting in an extra margin of safety for autonomous driving and other applications. Monocular processing depends on training to detect obstacles, and may not detect obstacles that are not represented in the training set. Stereo cameras detect obstacles without relying on training because the depth information is used to directly construct a three-dimensional model of the camera’s surroundings, including any obstacles. Design Methodology The success of our technology platform stems from our algorithm-driven design methodology. We test and verify our algorithms on our proprietary architectural model prior to implementing our algorithms in hardware. Our advanced verification methodology validates our approach through simultaneous modeling of architecture, algorithms and the hardware itself. This redundant approach enables us to identify and remediate any weaknesses early in the development cycle, providing a solid foundation on which we build our hardware implementation, and enhances our ability to achieve first-pass silicon success. We have a history of using several process nodes from 130nm through 10nm. In fiscal year 2017, we began investing in development of our next generation SoCs in the 10nm process node, and we announced our first 10nm SoC in January 2018. We possess extensive expertise in video and imaging algorithms as well as deep sub-micron digital and mixed-signal design experience. SoC Solution Our SoC designs integrate HD and UHD video processing, image processing, applications processing and system functions onto a single chip, delivering exceptional video and image quality with differentiated features, including advanced wireless connectivity. Our multi-core DSP architecture is highly scalable and balances software programmability with hardware-accelerated performance to achieve extremely low power consumption and maximize camera battery life. The programmable architecture provides our customers with the flexibility they need to quickly develop a wide range of differentiated products. Additionally, our SoCs integrate mixed signal (analog/digital) functionality and high speed interfaces required for interfacing to advanced high-speed CMOS sensors and industry standard interfaces such as USB 3.0 and HDMI 2.0. Our newest SoCs also feature our fully- programmable and highly-efficient CVflow architecture to provide significant computer vision performance with very low power consumption. 11 Software Development Kits We provide to our customers fully-functional software development kits with a suite of application programming interfaces or APIs, which allow customers to rapidly integrate our solution, adjust product specifications and provide additional functionality to their systems, thereby enabling them to differentiate their product offerings and reduce time to market. We have software development kits for all of our core markets. For example, in the security market, we provide a fully-featured IP Camera Software Development Kit, or the IP Camera SDK, based on a LinuxTM operating system. The IP Camera SDK includes middleware software with multi-streaming capability, control for our 4K H.264/H.265 encoder hardware, support for peripherals such as sensors and Wi-Fi chipsets, and other functions needed to build a 4K Ultra HD multi-streaming IP camera. We also provide extensions to the IP Camera SDK to address specific submarket segments such as doorbells and battery-powered cameras, which can take advantage of the fast-boot, low power, and advanced multi-view video modes of our chips. We also provide a toolkit to accelerate the development of computer vision algorithms onto our hardware. We provide tools to map algorithms from commonly used computer vision frameworks such as Caffe or Tensorflow into our proprietary CVflow architecture. We also provide a framework for development of higher-level computer vision tasks. This enables our customers to write complex computer vision algorithms with multiple tasks running in parallel, as would be required in applications such as autonomous driving. Customers We sell our solutions to leading original design manufacturers, or ODMs, and original equipment manufacturers, or OEMs, globally. In the automotive market, we may sell our solutions to Tier-1 suppliers that develop and sell devices incorporating our solutions to automotive OEMs. We refer to ODMs and Tier-1 suppliers as our customers and OEMs as our end customers, except as otherwise indicated or as the context otherwise requires. In the camera market, our video processing solutions are designed into products from leading OEMs including Axis Communications AB, Avigilon Corporation, Dahua Technology Co., Ltd., DJI, Denso Ten Limited, Garmin Ltd., Hikvision Digital Technology Co., JVC Kenwood Corporation and affiliated entities, Nest Labs (owned by Google LLC, which is owned by Alphabet, Inc.), Pelco by Schneider Electric SE, Ring, Inc. (owned by Amazon, Inc.), Robert Bosch GmbH and affiliated entities, Thinkware Corporation, Vivotek, and XiaoYi Technology Co., Ltd., who source our solutions from ODMs including Chicony Electronics Co., Ltd., Dynacolor, Inc., Flex Ltd. and affiliated entities, Goertek Inc., affiliated entities of Hon Hai Precision Industry Co., Ltd., Jabil Circuit, Inc., Sercomm Corporation, Sky Light Digital Ltd., and Topview Optronics Corp. Sales to customers in Asia accounted for approximately 90%, 87% and 79% of our total revenue in the fiscal years ended January 31, 2020, 2019 and 2018, respectively. As many of our OEM end customers or their ODM manufacturers are located in Asia, we anticipate that a majority of our revenue will continue to come from sales to customers in that region. Although a large percentage of our sales are made to customers in Asia, we believe that a significant number of the products designed by these customers and incorporating our SoCs are then sold to consumers globally. To date, all of our sales have been denominated in U.S. dollars. We work closely with our end customer OEMs and ODMs throughout their product design cycles that often last six to twelve months for the camera market, although new products within the camera market may have longer design cycles, particularly those implementing advanced AI features. Product design cycles for certain portions of the automotive market generally last longer than twelve months, particularly for products containing user safety features. As a result, we are able to develop long-term relationships with our customers as our technology becomes embedded in their products. Consequently, we believe we are well positioned to not only be designed into our customers’ current products, but also to continually develop next- generation HD video and image processing solutions for their future products. The product life cycles in the camera market typically range from six to 18 months. We expect that product lifecycles in the automotive OEM and the industrial and robotics markets will typically be longer than 24 months, as new product introductions occur less frequently. For many of our solutions, early engagement with our customers’ technical staff is necessary for success. In fiscal year 2020, the customers representing 10% or more of revenue were Wintech Microelectronics Co., Ltd., or Wintech, our Asia-based distributor, and Chicony Electronics Co., Ltd., or Chicony, a direct ODM customer that manufactures products for multiple end-customers, which accounted for approximately 60% and 18% of total revenue, respectively. We currently rely, and expect to continue to rely, on a limited number of customers for a significant portion of our revenue. 12 Sales and Marketing We sell our solutions worldwide using our direct sales force and our distributors. We have direct sales personnel covering the United States, Asia and Europe, and we operate sales offices in Santa Clara, California and Hong Kong, and business development offices in China, Japan, South Korea, and Taiwan. In addition, in each of these locations we employ a staff of field applications engineers to provide direct engineering support locally to our customers. Our sales cycles typically require a significant investment of time and a substantial expenditure of resources before we can realize revenue from the sale of our solutions, if any. Our typical sales cycle consists of a multi-month sales and development process involving our customers’ system designers and management and our sales personnel and software engineers. If successful, this process culminates in a customer’s decision to use our solutions in its system, which we refer to as a design win. Our sales efforts are typically directed to the OEM of the product that will incorporate our video and image processing solution, but the eventual design and incorporation of our SoC into the product may be handled by an ODM or Tier-1 supplier on behalf of the OEM. Volume production may begin within six to 18 months after a design win, depending on the complexity of our customer’s product and other factors upon which we may have little or no influence. Once our solutions have been incorporated into a customer’s design, they are likely to be used for the life cycle of the customer’s product. Conversely, a design loss to a competitor will likely preclude any opportunity for future revenue from such customer’s product. Our sales are generally made pursuant to purchase orders received approximately four to 18 weeks prior to the scheduled product delivery date, depending upon agreed terms with our customers and the current manufacturing lead time at the time the purchase order is received. These purchase orders may be cancelled without charge upon notification within an agreed period of time in advance of the delivery date, which may be as short as 30 days. Due to the scheduling requirements of our foundry, assembly and test contractors, we generally provide our contractors with our production forecasts and place firm orders for products with our suppliers up to 20 weeks prior to the anticipated delivery date, usually without a purchase order from our own customers. Our standard warranty provides that our SoCs containing defects in materials, workmanship or performance may be returned for a refund of the purchase price or for replacement, at our discretion. We may agree to different warranty terms with specific customers from time to time. Manufacturing We employ a fabless business model and use third-party foundries and assembly and test contractors to manufacture, assemble and test our solutions. This outsourced manufacturing approach allows us to focus our resources on the design, sales and marketing of our solutions and avoid the cost associated with owning and operating our own manufacturing facility. Our engineers work closely with foundries and other contractors to increase yields, lower manufacturing costs and improve quality. In addition, we believe outsourcing many of our manufacturing and assembly activities provides us the flexibility needed to respond to new market opportunities, simplifies our operations and significantly reduces our capital requirements. We do not have a guaranteed level of production capacity from any of our suppliers’ facilities to produce our solutions. We carefully qualify each of our suppliers and their subcontractors and processes in order to meet the extremely high-quality and reliability standards required of our solutions. Backlog Our sales are primarily made through standard purchase orders for delivery of products. Our manufacturing production is based on estimates and advance non-binding commitments from customers as to future purchases. We follow industry practice that allows customers to cancel, change or defer orders with limited advance notice prior to shipment. Given this practice, we do not believe that backlog is a reliable indicator of future revenue levels. Wafer Fabrication We have a history of using several process nodes from 130nm through 10nm. We aim to use the most advanced manufacturing process technology appropriate for our products that is available from our third-party foundries. As a result, we periodically evaluate the benefits of migrating our solutions to smaller geometry process technologies in order to improve performance and reduce costs. We believe this strategy will help us remain competitive. While we currently manufacture the majority of our solutions in the 28nm and 14nm process nodes utilizing the services of several different foundries, our most recent products are manufactured in the 10nm process node. Currently, the majority of our SoCs are supplied by Samsung in facilities located in Austin, Texas and South Korea, from whom we have the option to purchase both fully-assembled and tested products as well as tested die in wafer form for assembly. We also have products supplied by Global Foundries, Global UniChip Corporation, or GUC, in Taiwan. The wafers used by GUC in the assembly of our products are manufactured by Taiwan Semiconductor Manufacturing Co., Ltd., or TSMC, in Taiwan. 13 Assembly and Testing Samsung subcontracts the assembly and initial testing of the assembled chips it supplies to us to Signetics Corporation and STATS ChipPAC Ltd. In the case of purchases of tested die from Samsung, we contract the assembly to Advanced Semiconductor Engineering, Inc., or ASE. GUC subcontracts the assembly of the products it supplies to us to ASE and Powertech Technology Inc. Final testing of all of our products is handled by King Yuan Electronics Co., Ltd. or Sigurd Corporation under the supervision of our engineers. All test software and related processes for our products are developed by our engineers. We continually monitor the results of testing at all of our test contractors to ensure that our testing procedures are properly implemented. As part of our total quality assurance program, our quality management system has been certified to ISO 9001:2000 standards. Our foundry vendors are also ISO 9001 certified. Research and Development We believe our technology is a competitive advantage and we engage in substantial research and development efforts to develop new products and integrate additional features and capabilities into our HD and UHD video processing solutions, such as AI computer vision capabilities. We believe that our continued success depends on our ability to both introduce improved versions of our existing solutions and to develop new solutions for the markets that we serve. As of January 31, 2020, 81% of our employees are engaged in research and development. Our research and development team is comprised of both semiconductor and software designers. Our semiconductor design team has extensive experience in large-scale semiconductor design, including architecture description, logic and circuit design, implementation and verification. Our software design team has extensive experience in development and verification of software for the HD video market. Because the integration of hardware and software is a key competitive advantage of our solutions, our hardware and software design teams work closely together throughout the product development process. The experience of our hardware and software design teams enables us to effectively assess the tradeoffs and advantages when determining which features and capabilities of our solutions should be implemented in hardware and in software. We have assembled a core team of experienced engineers and systems designers in four research and development design centers located in the United States, China, Italy, and Taiwan. Competition The global semiconductor market in general, and the video and image processing markets in particular, are highly competitive. We expect competition to increase and intensify as more and larger semiconductor companies enter our markets and as we enter new markets, such as the OEM automotive market. Increased competition could result in price pressure, reduced profitability and loss of market share, any of which could materially and adversely affect our business, revenue and operating results. Our competitors range from large, international companies offering a wide range of semiconductor products to smaller companies specializing in narrow markets. In the IP security camera market, our primary competitors include AMLogic Inc., Fullhan Microelectronics Co., Ltd., Geo Semiconductor, Inc., HiSilicon Technologies Co., Ltd., or HiSilicon, which is owned by Huawei Technologies Co., Ingenic Semiconductor Co., Ltd., Intel Corporation, or Intel, Movidius Ltd., a subsidiary of Intel, Novatek Microelectronics Corp., or Novatek, OmniVision Technologies, Inc., or OmniVision, Qualcomm Incorporated, or Qualcomm, Realtek Semiconductor Corp., SigmaStar Technology Corp., or SigmaStar, Socionext Inc., or Socionext, an entity created from the merger of the system LSI businesses of Fujitsu Ltd. and Panasonic Corporation, or Panasonic, and Texas Instruments Incorporated, or Texas Instruments, as well as vertically integrated divisions of IP Security camera device OEMs, including Axis Communications AB, Hanwha Techwin, and Sony Corporation, or Sony. In the automotive camera market, we compete against Allwinner Technology Co., Ltd., Alpha Imaging Technology Corp., Core Logic, Inc., Mobileye, an Intel company, Novatek, NVIDIA Corporation, or NVIDIA, NXP Semiconductors N.V., OmniVision, Qualcomm, Renesas Electronics Corporation, SigmaStar, Sunplus Technology Co. Ltd., Texas Instruments and Xilinx Inc. In the wearable sports camera market, our primary competitors are vertically integrated divisions of camera device OEMs, including Sony, Panasonic, HiSilicon and Socionext. Our primary competitors in the drone camera market include HiSilicon, Intel, NVIDIA and Qualcomm. Certain of our customers and suppliers also have divisions that produce products competitive with ours. Our ability to compete successfully depends on elements both within and outside of our control, including industry and general economic trends. Many of our competitors are substantially larger, have greater financial, technical, marketing, distribution, customer support and other resources, are more established than we are, and have significantly better brand recognition and broader product offerings which may enable them to develop and enable new technology into product solutions better or faster than us and to better withstand adverse economic or market conditions in the future. 14 Our ability to compete successfully in the rapidly evolving HD video market depends on several factors, including: • • • • • • • • • the design and manufacturing of new solutions, including software, that anticipate the video processing and integration needs of our customers’ next-generation products and applications; performance of our computer vision solutions, as measured by convolutional neural network performance, video and still picture image quality, resolution and frame processing rates; power consumption efficiency of our solutions; the ease of implementation of our products by customers; the strength of customer relationships; the selection of the foundry process technology and architecture tradeoffs to meet customers’ product requirements in a timely manner; reputation and reliability; customer support; and the cost of the total solution. We believe we compete favorably with respect to these factors, particularly because our solutions typically provide high-performance and low power consumption video, CNN performance, efficient integration of our advanced algorithms, exceptional storage and transmission efficiencies at lower power, highly-integrated SoC solutions based on a scalable platform, and comprehensive and flexible software. We cannot ensure, however, that our solutions will continue to compete favorably or that we will be successful in the face of increasing competition from new products introduced by existing or new competitors. Intellectual Property We rely on a combination of intellectual property rights, including patents, trade secrets, copyrights and trademarks, and contractual protections, to protect our core technology and intellectual property. As of January 31, 2020, we had 175 issued patents in the United States, 64 of which were continuation patents, six patents issued in Europe, six issued patents in China, six issued patents in Japan and 85 pending patent applications in the United States. The issued patents in the United States expire beginning in 2024 through 2038. Many of our issued patents and pending patent applications relate to image and video processing and HD video compression. We may not receive competitive advantages from any rights granted under our patents, and our patent applications may not result in the issuance of any new patents. In addition, any patent we hold may be opposed, contested, circumvented, designed around by a third party or found to be unenforceable or invalidated. Others may develop technologies that are similar or superior to our proprietary technologies, duplicate our proprietary technologies or design around patents owned or licensed by us. In addition to our own intellectual property, we also use third-party licenses for certain technologies embedded in our SoC solutions. These are typically non-exclusive contracts provided under royalty-accruing or paid-up licenses. These licenses are generally perpetual or automatically renewed for so long as we continue to pay any maintenance fees that may be due. To date, maintenance fees have not constituted a significant portion of our capital expenditures. While we do not believe our business is dependent to any significant degree on any individual third-party license, we expect to continue to use and may license additional third-party technology for our solutions. We generally control access to and use of our confidential information through employing internal and external controls, including contractual protections with employees, contractors and customers. We rely in part on U.S. and international copyright laws to protect our mask work. All employees and consultants are required to execute confidentiality agreements in connection with their employment and consulting relationships with us. We also require them to agree to disclose and assign to us all inventions conceived or made in connection with the employment or consulting relationship. Despite our efforts to protect our intellectual property, unauthorized parties may still copy or otherwise obtain and use our software, technology or other information that we regard as proprietary intellectual property. In addition, we continue to operate internationally, and effective patent, copyright, trademark and trade secret protection may not be available or may be limited in foreign countries. 15 Seasonality Our business has tended to be seasonal with higher revenue in our third fiscal quarter as our customers typically increase their production to meet holiday shopping season or year-end demand for their products. We also may experience seasonally lower demand in our first fiscal quarter in the Asia- based portion of the IP security camera market as a result of industry seasonality and the impact of ODM and OEM factory closures associated with the Chinese New Year holiday. Employees At January 31, 2020, we employed a total of 761 people, including 178 in the United States, 528 in Asia, primarily in China and Taiwan, and 55 in Europe. We also engage temporary employees and consultants. None of our employees are either represented by a labor union or subject to a collective bargaining agreement. We have not experienced any work stoppages, and we consider our relations with our employees to be good. ITEM 1A. Risk Factors Certain factors may have a material adverse effect on our business, financial condition and results of operations. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks actually occurs, our business, financial condition, results of operations, and future prospects could be materially and adversely affected. In that event, the trading price of our ordinary shares could decline, and you could lose part or all of your investment. Risks Related to Our Business and Our Industry If our customers do not design our solutions into their product offerings, or if our customers’ product offerings are not commercially successful, our business would suffer. We sell our video and image processing system-on-a-chip, or SoC, solutions to original equipment manufacturers, or OEMs, who include our SoCs in their products, and to original design manufacturers, or ODMs, who include our SoCs in the products that they supply to OEMs. We generally refer to ODMs as our customers and OEMs as our end customers, except as otherwise indicated or as the context otherwise requires. Our video and image processing SoCs are generally incorporated into our customers’ products at the design stage, which is referred to as a design win. As a result, we rely on OEMs to design our solutions into the products that they design and sell. Without these design wins, our business would be significantly harmed. We often incur significant expenditures developing a new SoC solution without any assurance that any OEM will select our solution for design into its own product. Once an OEM designs a competitor’s device into its product, it becomes significantly more difficult for us to sell our SoC solutions to that OEM because changing suppliers involves significant cost, time, effort and risk for the OEM. We anticipate that it will take longer and require more resources and greater expenditures to achieve design wins, and likely take longer to generate revenue from such design wins in the new markets we are targeting, such as the OEM automotive and robotics markets, than our legacy camera markets. In addition, trade tensions between the United States and China and potential new export restrictions, as discussed in subsequent risk factors, may make it more difficult to secure future design wins with China customers. Even if an OEM designs one of our SoC solutions into its product, we cannot be assured that the OEM’s product will be commercially successful over time or at all. For example, in the past we have secured design wins for camera products that were never commercially released by our customer or did not sell in volumes initially forecast by the customer, as a result of factors beyond our control. If other products or other product categories incorporating our SoC solutions are not commercially successful or experience rapid decline, our revenue and business will suffer. Similarly, if an OEM designs one of our SoC solutions into its product, we are not assured that we will receive or continue to receive new design wins from that OEM, which could negatively impact our business. 16 If we fail to penetrate new markets, our revenue and financial condition could be harmed. Years ago, a substantial portion of our revenue was generated from sales of our SoCs to OEMs and ODMs of HD video cameras, including IP security cameras, wearable cameras and drones. Our revenue from several of these markets, however, has experienced significant declines. As a result, we believe that our future revenue growth, if any, will significantly depend on our ability to expand within the camera markets with our new artificial intelligence, or AI, computer vision SoC solutions, particularly in emerging markets such as the OEM automotive, robotics and industrial markets, as well as the existing professional IP security and home security and monitoring camera markets. Each of these markets presents distinct and substantial risks and, in many cases, requires us to develop new functionality or software to address the particular requirements of that market. We anticipate that as we continue to move into new markets, such as the OEM automotive, robotics and industrial markets, we will likely face competition from larger competitors with greater resources and more history in these markets. If any of these markets do not develop as we currently anticipate, or if the development of such markets is delayed or impacted by factors outside of our control, such as the COVID-19 pandemic, or if we are unable to penetrate them successfully with our solutions, our revenue could decline, and our financial condition would be negatively impacted. Some of these markets are primarily served by only a few large, multinational OEMs with substantial negotiating power relative to us and, in some instances, with internal solutions that are competitive to our products. Meeting the technical requirements and securing design wins with any of these companies will require a substantial investment of our time and resources and we cannot assure you that we will secure design wins from these or other companies or that we will achieve meaningful revenue from the sales of our solutions into these markets. If we fail to penetrate these or other new markets we are targeting, our financial condition would likely suffer. Moreover, if we are successful in achieving design wins in these new markets, it will likely take longer to generate revenue from such design wins than in our current markets. The COVID-19 pandemic could adversely affect our business in a material way. In December 2019, COVID-19 began to impact the population of Wuhan, China. Currently COVID-19 has spread internationally and been declared a pandemic, affecting the populations of the United States as well as many foreign countries. The outbreak has resulted in significant governmental measures being implemented to control the spread of COVID-19, including, among others, restrictions on travel, manufacturing and the movement of employees in many regions of the world, and the imposition of remote or work from home conditions in many of our offices, including the United States. The majority of our SoCs are manufactured in South Korea and assembled and tested by third parties in Taiwan. In addition, certain of our logistics and shipping operations are in Taiwan and Hong Kong. We also have other operations in China, Japan, South Korea, Taiwan and the United States. If the remote or work from home conditions in any of our offices continues for an extended period of time, we may experience delays in product development, a decreased ability to support our customers, reduced design win activity, and overall lack of productivity. Pandemics and epidemics such as the current COVID-19 outbreak or other widespread public health problems could negatively impact our business. If, for example, COVID-19 continues to progress in ways that significantly disrupt the manufacture, shipment and buying patterns of our products or the products of our customers, this may materially negatively impact our operating results for the first quarter of fiscal 2021 and subsequent periods, including revenue, gross margins, operating margins, cash flows and other operating results and our overall business. Our customers may also experience closures of their manufacturing facilities or inability to obtain other components, either of which could negatively impact demand for our solutions. COVID-19 has negatively impacted the overall economy and, as a result of the foregoing, will likely negatively impact our operating results for fiscal year 2021 and may do so in a material way. Our target markets may not grow or develop as we currently expect and are subject to market risks, any of which could harm our business, revenue and operating results. We are focusing our development resources on addressing computer vision applications, primarily in the professional IP security and home security and monitoring camera markets, the OEM automotive and robotics markets, with our computer vision solutions. The application of computer vision functionality in these markets is relatively new, and we may be unable to predict the timing or development of these markets with accuracy. For example, a slower than expected adoption rate for computer vision technology in the IP security camera market could slow the demand for our new solutions. Similarly, a slower than anticipated adoption of electronic mirrors, advanced driving assistance systems and autonomous driving functionality could reduce demand for our new computer vision solutions. If our key target markets, such as automotive cameras, IP security cameras and cameras for robotic applications, do not grow, grow slower, or do not develop in ways that we currently expect, demand for our video and image processing SoCs may not materialize as expected, and our business and operating results could suffer. 17 Our customers may cancel their orders, change production quantities or delay production. If we fail to accurately forecast demand for our solutions, revenue shortfalls or excess, obsolete or insufficient inventory could result. Our customers typically do not provide us with firm, long-term purchase commitments. A substantially majority of our sales are made on a purchase order basis, which permits our customers to cancel, change or delay their product purchase commitments with little or no notice to us and often without penalty to them. Because production lead times often exceed the amount of time required by our customers to fill their orders, we often must build SoCs in advance of receiving orders from customers, relying on an imperfect demand forecast to project volumes and product mix. Our SoCs are incorporated into products manufactured by or for our end customers, and as a result, demand for our solutions is influenced by the demand for our customers’ products. Our ability to accurately forecast demand can be adversely affected by a number of factors, including inaccurate forecasting by our customers, miscalculations by our customers of their inventory requirements, changes in market conditions including reductions in market activity due to the COVID-19 pandemic, adverse changes in our product order mix and fluctuating demand for our customers’ products. Even after an order is received, our customers may cancel these orders, request a decrease in production quantities or request a delay in the delivery of our solutions. Any such cancellation, decrease or delay subjects us to a number of risks, most notably that our projected sales will not materialize on schedule or at all, leading to unanticipated revenue shortfalls and excess or obsolete inventory that we may be unable to sell to other customers. Alternatively, if we are unable to project customer requirements accurately, we may not build enough SoCs, which could lead to delays in product shipments and lost sales opportunities in the near term, as well as force our customers to identify alternative sources, which could affect our ongoing relationships with these customers. We have in the past had customers significantly increase their requested production quantities with little or no advance notice. If we do not fulfill customer demands in a timely manner, our customers may cancel their orders and we may be subject to customer claims for cost of replacement. In addition, the rapid pace of innovation in our industry could render portions of our inventory obsolete. Excess or obsolete inventory levels could result in unexpected expenses or increases in our reserves that could adversely affect our business, operating results and financial condition. In addition, any significant future cancellations or deferrals of product orders could harm our margins, increase our write-offs due to product obsolescence and restrict our ability to fund our operations. We depend on a limited number of customers and end customers for a significant portion of our revenue. If we fail to retain or expand our customer relationships, our revenue could decline. We derive a significant portion of our revenue from a limited number of ODMs who build products on behalf of a limited number of OEMs and from a limited number of OEMs to whom we ship directly. We anticipate that this customer concentration will continue for the foreseeable future. In fiscal year 2020, the customers representing 10% or more of our revenue were Wintech Microelectronics Co., Ltd., or Wintech, the Company’s distributor, and Chicony Electronics Co., Ltd., or Chicony, a direct ODM customer, which accounted for approximately 60% and 18% of total revenue, respectively. We believe that our operating results for the foreseeable future will continue to depend on sales to a relatively small number of customers and end customers. In the future, these customers may decide not to purchase our SoC solutions at all, may purchase fewer solutions than they did in the past or may alter their purchasing patterns. As substantially all of our sales to date have been made on a purchase order basis, these customers may cancel, change or delay product purchase commitments with little or no notice to us and often without penalty and may make our revenue volatile from period to period, which has happened in the past. The loss of a significant customer, or substantial reduction in purchases by a significant customer, could happen again at any time and without notice, and such loss would likely harm our financial condition and results of operations. Moreover, because several of our largest OEM customers have a dominant position in their markets, a loss of a significant customer may not be easily replaced. Our ability to sell our products to several China customers has been restricted. On October 9, 2019, our security camera customers Hangzhou Hikvision Digital Technology Co., Ltd, or Hikvision, and Zhejiang Dahua Technology Co., Ltd., or Dahua, were added to the Entity List of the Bureau of Industry and Security, or BIS, of the U.S. Department of Commerce, which imposes limitations on the supply of certain U.S. items to the listed entities. While the addition of Hikvision and Dahua to the Entity List negatively impacts our ability to ship items subject to BIS regulations, including US-produced SoC solutions, to these entities, we have determined that that we are able to ship some foreign-produced SoC products to the listed entities in compliance with applicable law. Notwithstanding our ability to continue to supply some SoC products to the listed entities, these customers may seek to obtain similar or substitute products from our competitors that are not subject to these limitations, or to develop similar or substitute products themselves. We also cannot be certain what additional actions the U.S. government may take with respect to Hikvision and Dahua, or our other China customers, including changes to the Entity List restrictions, export regulations, tariffs or other trade restrictions, or whether the Chinese government may take any actions in response to U.S. government action that may adversely affect our ability to do business with our China customers. We are unable to predict the duration of the restrictions imposed by the U.S. government in October 2019 or of any additional governmental actions, any of which could have a long-term adverse effect on our business, operating results and financial condition. 18 Global economic and political conditions, including possible trade tariffs and trade restrictions, may have an impact on our business and financial condition in ways that we currently cannot predict. Beyond the BIS actions relating to Hikvision and Dahua, general trade tensions between the United States and China have been escalating, which has, in our view, created and will continue to create an uncertain business environment. If additional tariffs or trade restrictions are imposed on our SoC solutions or the products of our customers, or trade restrictions are imposed on our ability to conduct business with certain customers, there could be a negative impact on our operations and financial performance. H.R. 5515 - John S. McCain National Defense Authorization Act for Fiscal Year 2019, which was recently enacted into law, negatively impacts Hikvision and Dahua’s ability to sell products into the U.S. security camera market and could decrease their demand for our solutions. Similarly, changes in export classification requirements, such as those proposed by U.S. Congress, could impact our ability to supply our solutions to certain companies or in certain countries. Even in the absence of new restrictions, tariffs or changes in export classifications, it is possible that foreign customers could take actions to reduce dependence on the supply of components, including our solutions, that could be subject to new export classifications or trade restrictions. There are also risks that the Chinese government may, among other things, require the use of local suppliers, compel companies that do business in China to partner with local companies to conduct business and provide incentives to government-backed local customers to buy from local suppliers. The materialization of these risks could have a material adverse effect on our business and financial condition. We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets. The U.S. and various foreign governments have imposed controls, export license requirements and restrictions on the import or export of certain products, technologies and software. We must export our products in compliance with U.S. export controls, including the Commerce Department’s Export Administration Regulations. We may not always be successful in obtaining necessary export licenses, and our failure to obtain required import or export approval for our products or limitations on our ability to export or sell our products imposed by these laws may harm both our international and domestic sales and adversely affect our revenue. Noncompliance with these laws could have negative consequences, including government investigations, penalties and reputational harm. Compliance with export and import regulations have not had a significant impact on our business to date, but changes in our products or changes in export, import and economic sanctions laws and regulations may delay our introduction of new products in international markets, prevent our customers from deploying our products internationally or, in some cases, prevent the export or import of our products to or from certain countries altogether. Any change in export or import regulations or legislation, shift or change in enforcement, or change in the countries, persons or technologies targeted by these regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations. In such event, our business and results of operations could be adversely affected. Our primary inventory warehouse is located in Hong Kong and may be affected by recent political, social and economic conditions in Hong Kong. We operate a warehouse facility in Hong Kong through which the substantial majority of our finished SoCs are shipped to customers or logistic partners. Hong Kong has recently experienced significant political unrest and social strife, including protests that resulted in the closing of the Hong Kong international airport on August 12, 2019 for two days. While we have not been materially impacted by these problems to date, continued deterioration in political, social or economic conditions in Hong Kong or future unforeseen problems, such as health pandemics, could affect deliveries of our SoCs to our customers or logistic partners, possibly resulting in business interruptions, substantially delayed or lost sales, loss of inventory, or increased expenses that cannot be passed on to customers, any of which could ultimately have a material adverse effect on our business and financial results. In such an eventuality, we could be forced to relocate our warehouse operations, either temporarily or permanently, to another potentially costlier location or find alternative potentially costlier methods of shipping our finished SoCs to customers and logistic partners. While we are taking measures to attempt to maintain the continuity of our product delivery operations notwithstanding the impact on the use of our Hong Kong facility of the continued or deteriorating conditions in Hong Kong or other future unforeseen problems there, we cannot ensure that these measures will be successful in eliminating disruptions in our business. 19 We do not have long-term supply contracts with our third-party manufacturing vendors, and they may not allocate sufficient capacity to us at reasonable prices to meet future demands for our solutions. The semiconductor industry is subject to intense competitive pricing pressure from customers and competitors. Accordingly, any increase in the cost of our solutions, whether by adverse purchase price variances or adverse manufacturing cost variances, will reduce our gross margins and operating profit. We currently do not have long-term supply contracts with most of our primary third-party vendors, and we negotiate pricing with our main vendors on a purchase order-by-purchase order basis. Therefore, they are not obligated to perform services or supply product to us for any specific period, in any specific quantities, or at any specific price, except as may be provided in a particular purchase order. The ability of our foundry vendors to provide us with a product, which is solely sourced at each foundry, is limited by their available capacity, existing obligations and technological capabilities. Foundry capacity may not be available when we need it or at reasonable prices. None of our third-party foundry or assembly and test vendors have provided contractual assurances to us that adequate capacity will be available to us to meet our anticipated future demand for our solutions. Moreover, availability of foundry capacity at our primary foundry vendor has tightened recently, which could limit the volume of products we can produce and/or delay production of new products, both of which would negatively impact our business and operations. Our foundry and assembly and test vendors may allocate capacity to the production of other companies’ products while reducing deliveries to us on short notice. In particular, other companies that are larger and better financed than we are or that have long-term agreements with our foundry or assembly and test vendors may cause our foundry or assembly and test vendors to reallocate capacity to them, decreasing the capacity available to us. Converting or transferring manufacturing from a primary location or supplier to a backup provider could be expensive and would likely take at least two or more quarters. There are only a few foundries, including Samsung and Taiwan Semiconductor Manufacturing Co., Ltd., or TSMC, that are currently available for certain advanced process technologies that we utilize or may utilize, such as 10 or 7 nanometer, or nm. Accordingly, as we continue to develop solutions in advanced process nodes, we will be increasingly dependent upon such foundries. The unavailability of one or both of these foundries could significantly impact our ability to produce our new products or delay production, which would negatively impact our business. If, in the future, we enter into arrangements with suppliers that include additional fees to expedite delivery, nonrefundable deposits or loans in exchange for capacity commitments or commitments to purchase specified quantities over extended periods, such arrangements may be costly, reduce our financial flexibility and be on terms unfavorable to us, if we are able to secure such arrangements at all. To date, we have not entered into any such arrangements with our suppliers. If we need additional foundry or assembly and test subcontractors because of increased demand or the inability to obtain timely and adequate deliveries from our current vendors, we may not be able to do so cost-effectively, if at all. If we fail to develop and introduce new or enhanced solutions on a timely basis, our ability to attract and retain customers could be impaired and our competitive position could be harmed. We operate in a dynamic environment characterized by rapidly changing technologies and technological obsolescence. To compete successfully, we must design, develop, market and sell enhanced solutions that provide increasingly higher levels of performance and functionality and that meet the cost expectations of our customers. Our existing or future solutions could be rendered obsolete by the introduction of new products by our competitors; convergence of other markets with or into the camera market; the market adoption of products based on new or alternative technologies; the emergence of new industry standards for video compression; or the requirement of additional functionality included in video processors, such as artificial intelligence functionality. In addition, the markets for our solutions are characterized by frequent introduction of next-generation and new products, short product life cycles, increasing demand for added functionality and significant price competition. As we develop and introduce new solutions, we face the risk that customers may not value or be willing to bear the cost of incorporating these newer solutions into their products, particularly if they believe their customers are satisfied with current solutions. Regardless of the improved features or superior performance of the newer solutions, customers may be unwilling to adopt our new solutions due to design or pricing constraints. If we or our customers are unable to manage product transitions in a timely and cost-effective manner, our business and results of operations would suffer. Our failure to anticipate or timely develop new or enhanced solutions in response to technological shifts could result in decreased revenue and our competitors achieving design wins that we sought. In particular, we may experience difficulties with product design, development of new software, manufacturing, marketing or qualification that could delay or prevent our development, introduction or marketing of new or enhanced solutions. In addition, for some markets, such as the automotive OEM market, we expect that we will need to establish relationships with third-party suppliers or software providers in order to effectively market our solutions to end-customers. Failure to establish these relationships could harm our ability to achieve design wins. Delays in product development could impair our relationships with our customers and negatively impact sales of our solutions under development. If we fail to introduce new or enhanced solutions that meet the needs of our customers or penetrate new markets in a timely fashion, we will lose market share, and our operating results will be adversely affected. 20 Achieving design wins is subject to lengthy competitive selection processes that require us to incur significant costs. Even if we begin a product design, a customer may decide to cancel or change its product plans, resulting in no revenue from such expenditures. We are focused on selling our video and image processing solutions to ODMs and OEMs for incorporation into their products at the design stage. These efforts to achieve design wins typically are lengthy, especially in emerging markets such as the OEM automotive market, and in any case can require us to both incur design and development costs and dedicate scarce engineering resources in pursuit of a single customer opportunity. We may not prevail in the competitive selection process, and even when we do achieve a design win, we may never generate any revenue despite incurring development expenditures. For example, in the past we had achieved certain design wins and projected substantial future revenue as a result of such design wins. Subsequently, based on factors outside of our control, the applicable end customers abruptly cancelled the projects, with no notice to us, resulting in a loss of projected revenue. In addition, even if an OEM designs one of our SoC solutions into one of its products, we cannot be assured that we will secure new design wins from that OEM for future products. Further, even after securing a design win, we have experienced and may again experience delays in generating revenue from our solutions as a result of the lengthy product development cycle typically required, if we generate any revenue at all as a result of any such design win. Our customers generally take a considerable amount of time to evaluate our solutions. The typical time from early engagement by our sales force to actual product introduction runs from nine to 12 months, though it will likely take significantly longer in new markets such as the OEM automotive and robotics markets. The delays inherent in these lengthy sales cycles increase the risk that a customer will decide to cancel, curtail, reduce or delay its product plans, causing us to lose anticipated sales. In addition, any delay or cancellation of a customer’s plans could harm our financial results, as we may have incurred significant expense and generated no revenue. If we were unable to generate revenue after incurring substantial expenses to develop any of our solutions, our business would suffer. We expect competition to increase in the future, which could have an adverse effect on our revenue and market share. The global semiconductor market in general, and the video and image processing markets in particular, are highly competitive. We compete in different target markets to various degrees on the basis of a number of competitive factors, including our solutions’ performance, features, energy efficiency, size, ease with which our solution may be integrated into our customers’ products, customer support, reliability and price, as well as on the basis of our reputation. We expect competition to increase and intensify as more and larger semiconductor companies enter our markets and as existing competitors improve or expand their product offerings. We also expect that the trend among large OEMs to seek to develop their own semiconductor solutions will continue and expand, particularly in camera markets experiencing consolidation, such as the IP security market. In addition, in our newer markets, such as the OEM automotive and robotics markets, we will face competition from larger competitors with longer histories in these markets. Increased competition could result in price pressure, reduced profitability and loss of market share, any of which could harm our business, revenue and operating results. Our competitors range from large, international companies offering a wide range of semiconductor products to smaller companies specializing in narrow markets. In the IP security camera market, our primary competitors include AMLogic Inc., Fullhan Microelectronics Co., Ltd., Geo Semiconductor, Inc., HiSilicon Technologies Co., Ltd., or HiSilicon, which is owned by Huawei Technologies Co., Ingenic Semiconductor Co., Ltd., Intel Corporation, or Intel, Movidius Ltd., a subsidiary of Intel, Novatek Microelectronics Corp., or Novatek, OmniVision Technologies, Inc., or OmniVision, Qualcomm Incorporated, or Qualcomm, Realtek Semiconductor Corp., SigmaStar Technology Corp., or SigmaStar, Socionext Inc., or Socionext, an entity created from the merger of the system LSI businesses of Fujitsu Ltd. and Panasonic Corporation, or Panasonic, and Texas Instruments Incorporated, or Texas Instruments, as well as vertically integrated divisions of IP Security camera device OEMs, including Axis Communications AB, Hanwha Techwin, and Sony Corporation, or Sony. In the automotive camera market, we currently compete against Allwinner Technology Co., Ltd., Alpha Imaging Technology Corp., Core Logic, Inc., Mobileye, an Intel company, Novatek, NXP Semiconductors N.V., OmniVision, Qualcomm, Renesas Electronics Corporation, SigmaStar, Sunplus Technology Co. Ltd., Texas Instruments and Xilinx Inc. In the wearable sports camera market, our primary competitors are vertically integrated divisions of camera device OEMs, including Sony, Panasonic, HiSilicon and Socionext. Our primary competitors in the drone camera market include HiSilicon, Intel, NVIDIA Corporation and Qualcomm. Certain of our customers and suppliers also have divisions that produce products competitive with ours and other customers may seek to vertically integrate competitive solutions in the future. In addition, certain third-party developers of technology competitive to our solutions have licensed their technology, including image signal processing and computer vision IP, which potentially enables a greater number of competitors to offer competitive solutions. 21 Our ability to compete successfully depends on elements both within and outside of our control. Many of our competitors are substantially larger, have greater financial, technical, marketing, distribution, customer support and other resources, are more established than we are and have significantly better brand recognition and broader product offerings than us, which may enable them to develop and enable new technology into product solutions better or faster than us and to better withstand adverse economic or market conditions in the future. Our ability to compete will depend on a number of factors, including: • • • • • • • • • • • • our ability to anticipate market and technology trends and successfully develop solutions that meet market needs; our success in identifying and penetrating new markets, applications and customers; our ability to understand the price points and performance metrics of competing products in the marketplace; our solutions’ performance and cost-effectiveness relative to that of competing products; our ability to gain access to leading design tools and product specifications at the same time as our competitors; our ability to develop and maintain relationships with key OEMs and ODMs; our products’ effective implementation of video processing standards; our ability to protect our intellectual property; our ability to expand international operations in a timely and cost-efficient manner; our ability to deliver products in volume on a timely basis at competitive prices; our ability to support our customers’ incorporation of our solutions into their products; and our ability to recruit design and application engineers with expertise in image video and image processing technologies and sales and marketing personnel. Our competitors may also establish cooperative relationships among themselves or with third parties or acquire companies that provide similar products to ours. As a result, new competitors or alliances may emerge that could acquire significant market share. Any of these factors, alone or in combination with others, could harm our business and result in a loss of market share and an increase in pricing pressure. Fluctuations in our operating results on a quarterly and annual basis could cause the market price of our ordinary shares to decline. Our revenue and operating results have fluctuated significantly from period to period in the past and are likely to do so in the future. In particular, our business has tended to be seasonal with higher revenue in our third quarter as our customers typically increase their production to meet holiday shopping season or year-end demand for their products. We also may experience seasonally lower demand in our first quarter as a result of industry seasonality and the impact of ODM and OEM factory closures associated with the Chinese New Year holiday. As a result, you should not rely on period-to- period comparisons of our operating results as an indication of our future performance. In future periods, our revenue and results of operations may be below the expectations of analysts and investors, which could cause the market price of our ordinary shares to decline. Factors that may affect our operating results include: • • • • • • • • fluctuations in demand, sales cycles, product mix, and prices for our products; the forecasting, scheduling, rescheduling or cancellation of orders by our customers; shifts in consumer or manufacturer preferences and any resultant change in demand for video and image capture devices into which our solutions are incorporated; changes in the competitive dynamics of our markets, including new entrants or pricing pressures; delays in our customers’ ability to manufacture and ship products that incorporate our solutions caused by internal and external factors beyond our control; our ability to successfully define, design and release new solutions in a timely manner that meet our customers’ needs; changes in manufacturing costs, including wafer, test and assembly costs, mask costs, manufacturing yields and product quality and reliability; timely availability of adequate manufacturing capacity from our manufacturing subcontractors; 22 • • • • • • • • the timing of product announcements by our competitors or by us; incurrence of research and development and related new products expenditures; write-downs of inventory for excess quantities and technological obsolescence; future accounting pronouncements and changes in accounting policies; volatility in our share price, which may lead to higher stock-based compensation expense; volatility in our effective tax rate; general socioeconomic and political conditions in the countries where we operate or where our products are sold or used, including the COVID-19 pandemic, U.S.-China relations and the conditions in Hong Kong; and costs associated with litigation, especially related to intellectual property. Moreover, the semiconductor industry has historically been cyclical in nature, reflecting overall economic conditions as well as budgeting and buying patterns of consumers. We expect these cyclical conditions to continue. As a result, our quarterly operating results are difficult to predict, even in the near term. Our expense levels are relatively fixed in the short term and are based, in part, on our expectations of future revenue. If revenue levels are below our expectations, we may experience material adverse impacts on our business, including declines in margins and profitability, or incur losses. For example, our revenue declined 23% in fiscal year 2019 compared to fiscal year 2018, and we incurred our first annual net losses since our initial public offering, or IPO, in 2012. For the twelve months ended January 31, 2020, our revenue increased by 0.4% compared to the same period in fiscal year 2019, and we incurred a net loss of $44.8 million. We may experience similar declines in revenue or net losses in the future, which would harm our operating results. While we intend to continue to invest in research and development, we may be unable to make the substantial investments that are required to remain competitive in our business. The semiconductor industry requires substantial investment in research and development in order to bring to market new and enhanced solutions. Our research and development expense was $129.7 million, $128.1 million and $115.5 million in fiscal years 2020, 2019 and 2018, respectively. We expect to increase our research and development expenditures as compared to prior periods as part of our strategy of focusing on the development of innovative video and image processing solutions with increased functionality, such as computer vision capabilities, and as we target new markets, such as the automotive OEM and robotics markets. We are unable to predict whether we will have sufficient resources to achieve the level of investment in research and development required to remain competitive. For example, development in the latest process nodes, such as 10nm and 7nm, can cost significantly more than required to develop in larger process nodes, such as 28nm or 14nm. This added cost could prevent us from being able to maintain a technology advantage over larger competitors that have significantly more resources to invest in research and development. In addition, we cannot assure you that the technologies which are the focus of our research and development expenditures will become commercially successful or generate any revenue. The average selling prices of video and image processing solutions in our target markets have historically decreased over time and will likely do so in the future, which could harm our revenue and gross margins. Average selling prices of semiconductor products in the markets we serve have historically decreased over time, and we expect such declines to continue to occur for our solutions over time. Our gross margins and financial results will suffer if we are unable to offset reductions in our average selling prices by reducing our costs, developing new or enhanced SoC solutions on a timely basis with higher selling prices or gross margins, or increasing our sales volumes. Additionally, because we do not operate our own manufacturing, assembly or testing facilities, we may not be able to reduce our costs as rapidly as companies that operate their own facilities, and our costs may even increase, which could also reduce our gross margins. In the past, we have reduced the prices of our SoC solutions in anticipation of future competitive pricing pressures, new product introductions by us or our competitors and other factors. Recently, we have experienced competitive pricing pressures at the low ends of the automotive aftermarket camera market and China-based IP security camera market. We expect that we will have to address pricing pressures again in the future, particularly in markets experiencing consolidation, which could require us to reduce the prices of our SoC solutions and harm our operating results. 23 If we do not generate revenue growth, we may not be able to execute our business plan and our operating results could suffer. You should not rely on our revenue, gross margins or operating results for any prior quarterly or annual periods as an indication of our future operating performance. In years past, we experienced significant growth in a short period of time. Our revenue increased from $21.5 million in fiscal year 2008 to $316.4 million in fiscal year 2016. Recently, however, we have not sustained this growth rate. Our revenue decreased to $295.4 million in fiscal year 2018 and to $227.8 million in fiscal year 2019, resulting in the first annual net losses since our IPO in 2012. In fiscal year 2020, our revenue increased by 0.4% compared to the same period in fiscal year 2019. We continue to invest in the development of new technology and solutions and expect our research and development expenditures to increase compared to prior periods. Accordingly, if we are unable to generate or maintain adequate revenue growth, our financial results could suffer and our stock price could decline. If we are unable to manage any future growth, we may not be able to execute our business plan and our operating results could suffer. Our business has grown rapidly in the past. Our future operating results depend to a large extent on our ability to successfully manage any expansion and growth, including the challenges of managing a company with an executive management team in the United States and the majority of its employees in Asia. We are increasing our investment in research and development and other functions to grow our business and address new markets, such as the OEM automotive and robotics markets. To manage our growth successfully and handle the responsibilities of being a public company, we believe we must effectively, among other things: • • • • • recruit, hire, train and manage additional qualified engineers for our research and development activities, particularly in our offices in Asia and especially for the positions of semiconductor design and systems, applications engineering and computer vision development; add additional sales and business development personnel; add additional finance and accounting personnel; maintain and improve our administrative, financial and operational systems, procedures and controls; and enhance our information technology support for enterprise resource planning and design engineering by adapting and expanding our systems and tool capabilities, and properly training new hires as to their use. We are likely to incur the costs associated with these increased investments earlier than some of the anticipated benefits, and the return on these investments, if any, may be lower, may develop more slowly than we expect or may not materialize. In addition, development of products to address emerging markets, such as the OEM automotive and robotics markets, could negatively impact our ability to develop new products for our current markets, which may harm our financial condition, particularly in the near term. If we are unable to manage growth effectively, we may not be able to take advantage of market opportunities or develop new solutions, and we may fail to satisfy customer product or support requirements, maintain product quality, execute our business plan or respond to competitive pressures. 24 We may have difficulty accurately predicting our future revenue and appropriately budgeting our expenses. The rapidly evolving nature of the markets in which we sell our solutions, combined with substantial uncertainty concerning how these markets may develop, the considerable amount of time our customers generally take to evaluate our solutions, and other factors beyond our control, limits our ability to accurately forecast quarterly or annual revenue. We continue to expand our staffing and increase our expenditures in anticipation of future revenue growth. If our revenue does not increase as anticipated, we could incur significant losses due to our higher expense levels if we are not able to decrease our expenses in a timely manner to offset any shortfall in future revenue. A substantial portion of our revenue is processed through a single distributor and the loss of this distributor may cause disruptions in our shipments, which may adversely affect our operations and financial condition. We sell a significant percentage of our solutions through a single distributor, Wintech Microelectronics Co., Ltd., or Wintech, which serves as our non-exclusive sales representative in Asia, other than Japan. Approximately 60%, 58% and 59% of our revenue was derived from sales through Wintech for the fiscal years ended January 31, 2020, 2019 and 2018, respectively. We anticipate that a significant portion of our revenue will continue to be derived from sales through Wintech in the foreseeable future. In November 2019, WPG Holdings Co., or WPG, a Taiwan distributor, announced an unsolicited bid to acquire up to 30% of Wintech. While the outcome of WPG’s bid is unknown at this time, an acquisition of Wintech by WPG could have an adverse impact on our relationship with Wintech. Our current agreement with Wintech is effective until September 2022, unless it is terminated earlier by either party for any or no reason with 60 days written notice or by failure of the breaching party to cure a material breach within 30 days following written notice of such material breach by the non-breaching party. Our agreement with Wintech will automatically renew for additional successive 12-month terms unless at least 60 days before the end of the then-current term either party provides written notice to the other party that it elects not to renew the agreement. Termination of the relationship with Wintech, either by us or by Wintech, could result in a temporary or permanent loss of revenue. We may not be successful in finding suitable alternative distributors on satisfactory terms, or at all, and this could adversely affect our ability to effectively sell our solutions in certain geographical locations or to certain end customers. Furthermore, Wintech, or any successor or other distributors we do business with, may face issues obtaining credit, which could impair their ability to make timely payments to us. We are subject to risks associated with our distributors' product inventories. We sell many of our products to customers through distributors who maintain their own inventory of our products for sale to ODMs and end customers. We allow limited price adjustments on sales to distributors. Price adjustments may be effected by way of credits for future product or by cash payments to the distributor, either in arrears or in advance, using estimates based on historical transactions. Upon the adoption of ASC 606 on February 1, 2018, we recognize revenue on sales to distributors upon shipment and transfer of control (known as “sell-in” revenue recognition) based on the amount of consideration expected to be received. To the extent that the actual consideration received is materially different from estimated variable consideration recognized, we may be required to adjust revenue in subsequent periods. If our distributors are unable to sell an adequate amount of their inventory of our products in a given quarter to ODMs and end customers, or if they decide to decrease their inventories for any reason, such as adverse global economic conditions or a downturn in technology spending, our sales to these distributors and our revenues may decline. We also face the risk that our distributors may purchase, or for other reasons accumulate, inventory levels of our products in any particular quarter in excess of future anticipated sales to end customers. If such sales do not occur in the time frame anticipated by these distributors for any reason, these distributors may substantially decrease the amount of product they order from us in subsequent periods until their inventory levels realign with end-customer demand, which would harm our business and could adversely affect our revenues in such subsequent periods. Our reserve estimates associated with products stocked by our distributors are based largely on reports that our distributors provide to us on a weekly or monthly basis. To date, we believe this resale and channel inventory data have been generally accurate. To the extent that these data are inaccurate or not received in a timely manner, we may not be able to make reserve estimates for future periods accurately or at all. Deterioration of the financial conditions of our customers could adversely affect our operating results. Deterioration of the financial condition of our distributors or customers could adversely impact our collection of accounts receivable. We regularly review the collectability and creditworthiness of our distributors and customers to determine an appropriate allowance for doubtful receivables. Based on our review of our distributors and customers, we currently have only immaterial reserves for uncollectible accounts. If our uncollectible accounts, however, were to exceed our current or future allowance for doubtful receivables, our operating results would be negatively impacted. 25 The loss of any of our key personnel could seriously harm our business. We believe our future success depends in large part upon the continuing services of the members of our senior management team and various engineering and other technical personnel. If one or more of our senior executives or other key personnel are unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all, our business may be disrupted, and our financial condition and results of operations may be materially and adversely affected. In addition, if any member of our senior management team or any of our other key personnel joins a competitor or forms a competing company, we may experience material disruption of our operations and development plans and lose customers, know-how and key professionals and staff members, and we may incur increased operating expenses as the attention of other senior executives is diverted to recruit replacements for key personnel. We rely on highly skilled personnel and, if we are unable to hire, retain or motivate key personnel, we may not be able to grow effectively. Our performance largely depends on the talents and efforts of highly skilled individuals. Our future success depends on our continuing ability to identify, hire, develop, motivate, and retain highly skilled personnel for all areas of our organization. Our industry is characterized by high demand and intense competition for talent. The pool of qualified candidates is limited, particularly in Silicon Valley and parts of Asia for very-large-scale integration, or VLSI, and computer vision engineers, and certain of our competitors and potential competitors with greater resources have directly targeted our employees. In addition, our compensation arrangements, such as our equity award programs, may not always be successful in attracting new employees and retaining and motivating our existing employees. Our continued ability to compete effectively, and to grow our business, depends on our ability to attract new employees and to retain and motivate our existing employees. We are subject to the cyclical nature of the semiconductor industry. The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence, price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand. The industry experienced a significant downturn during the 2008-2009 global recession. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. Any future downturns could harm our business and operating results. Furthermore, any significant upturn in the semiconductor industry could result in increased competition for access to third-party foundry and assembly capacity. We are dependent on the availability of this capacity to manufacture and assemble our SoC solutions. None of our third-party foundry or assembly contractors has provided assurances that adequate capacity will be available to us in the future. The complexity of our solutions could result in unforeseen delays or expenses from undetected defects, errors or bugs in hardware or software which could reduce the market adoption of our new solutions, damage our reputation with current or prospective customers and adversely affect our operating costs. Highly complex SoC solutions such as ours frequently contain defects, errors and bugs when they are first introduced or as new versions are released. We have in the past and may in the future experience these defects, errors and bugs. If any of our solutions have reliability, quality or compatibility problems, we may not be able to successfully correct these problems in a timely manner or at all. In addition, if any of our proprietary features contain defects, errors or bugs when first introduced or as new versions of our solutions are released, we may be unable to timely correct these problems. Consequently, our reputation may be damaged and customers may be reluctant to buy our solutions, which could harm our ability to retain existing customers and attract new customers, and could adversely affect our financial results. In addition, these defects, errors or bugs could interrupt or delay sales to our customers. If any of these problems are not found until after we have commenced commercial production of a new product, we may incur significant additional development costs and product recall, repair or replacement costs. These problems may also result in claims against us by our customers or others. 26 Camera manufacturers incorporate components supplied by multiple third parties, and a supply shortage or delay in delivery of these components could delay orders for our solutions by our customers. Our customers purchase components used in the manufacture of their cameras from various sources of supply, often involving several specialized components, including lenses, sensors, and memory chips. Any supply shortage or delay in delivery by third-party component suppliers, or a third-party supplier’s cessation or shut down of its business, may prevent or delay production of our customers’ products. As a result of delays in delivery or supply shortages of third-party components, orders for our solutions may be delayed or canceled and our business may be harmed. For example, a disruption in the availability of image sensors from Sony Corporation as a result of the April 14, 2016 Kumamoto, Japan earthquake impacted our customers’ ability to build or launch cameras and, as a result, negatively impacted the timing and scope of demand for our SoCs in the second and third quarters of fiscal year 2017. Similarly, our ability to generate design wins in some markets, such as the automotive OEM market, requires us to collaborate with third-party software suppliers in order to offer a complete solution to customers. Our inability to successfully collaborate with such third-party suppliers, or such suppliers’ inability to develop and deliver software, could harm our ability to achieve design wins and harm our business. Errors or defects within a camera system or in the manner in which the various components interact could prevent or delay production of our customers’ products, which could harm our business. We outsource our wafer fabrication, assembly and testing operations to third parties, and if these parties fail to produce and deliver our products according to requested demands in specification, quantity, cost and time, our reputation, customer relationships and operating results could suffer. We rely on third parties for substantially all of our manufacturing operations, including wafer fabrication, assembly and testing. Currently, the majority of our SoCs are supplied by Samsung in facilities located in Austin, Texas and South Korea, from whom we have the option to purchase both fully assembled and tested products as well as tested die in wafer form for assembly. Samsung subcontracts the assembly and initial testing of the assembled chips it supplies to us to Signetics Corporation and STATS ChipPAC Ltd. In the case of purchases of tested die from Samsung, we contract the assembly to Advanced Semiconductor Engineering, Inc., or ASE. We also have products supplied by Global UniChip Corporation, or GUC, in Taiwan, from whom we purchase fully assembled and tested products. The wafers used by GUC in the assembly of our products are manufactured by TSMC in Taiwan. The assembly is done by GUC subcontracted assembly suppliers ASE, and Powertech Technology Inc, or PTI. Final testing of all of our products is handled by King Yuan Electronics Co., Ltd. or Sigurd Corporation under the supervision of our engineers. We depend on these third parties to supply us with material of a requested quantity in a timely manner that meets our standards for yield, cost and manufacturing quality. We do not have any long-term supply agreements with any of our manufacturing suppliers. If one or more of these vendors terminates its relationship with us, or if we encounter any problems with our manufacturing supply chain, including available capacity constraints, our ability to ship our solutions to our customers on time and in the quantity required would be adversely affected, which in turn could cause an unanticipated decline in our sales and damage our customer relationships. If our foundry vendors do not achieve satisfactory yields or quality, our reputation and customer relationships could be harmed. The fabrication of our video and image processing SoC solutions is a complex and technically demanding process. Minor deviations in the manufacturing process can cause substantial decreases in yields, and in some cases, cause production to be suspended. Our foundry vendors, from time to time, experience manufacturing defects and reduced manufacturing yields, including in the fabrication of our SoCs. Changes in manufacturing processes or the inadvertent use of defective or contaminated materials by our foundry vendors could result in lower than anticipated manufacturing yields or unacceptable performance of our SoCs. Many of these problems are difficult to detect at an early stage of the manufacturing process and may be time consuming and expensive to correct. Poor yields from our foundry vendors, or defects, integration issues or other performance problems in our solutions, could cause us significant customer relations and business reputation problems, harm our financial results and give rise to financial or other damages to our customers. Our customers might consequently seek damages from us for their losses. A product liability claim brought against us, even if unsuccessful, would likely be time consuming and costly to defend. Each of our SoC solutions is manufactured at a single location. If we experience manufacturing problems at a particular location, we would be required to transfer manufacturing to a new location or supplier. Converting or transferring manufacturing from a primary location or supplier to a backup fabrication facility could be expensive and could take two or more quarters. During such a transition, we would be required to meet customer demand from our then-existing inventory, as well as any partially finished goods that could be modified to the required product specifications. We do not seek to maintain sufficient inventory to address a lengthy transition period because we believe it is uneconomical to keep more than minimal inventory on hand. As a result, we may not be able to meet customer needs during such a transition, which could delay shipments, cause production delays, result in a decline in our sales and damage our customer relationships. 27 We may experience difficulties in transitioning to new wafer fabrication process technologies or in achieving higher levels of design integration, which may result in reduced manufacturing yields, delays in product deliveries and increased costs. We aim to use the most advanced manufacturing process technology appropriate for our products that is available from our third-party foundries. As a result, we periodically evaluate the benefits of migrating our solutions to smaller geometry process technologies in order to improve performance and reduce costs. We believe this strategy will help us remain competitive. We may face difficulties, delays and increased expense as we transition our products to new processes, such as the 7nm process node, and potentially to new foundries. We depend on Samsung and TSMC, as the principal foundries for our products, to transition to new processes successfully. We cannot assure you that Samsung or TSMC will be able to effectively manage such transitions or that we will be able to maintain our relationship with Samsung or TSMC or develop relationships with new foundries. Moreover, as we utilize more advanced process nodes beyond 10nm, we are increasingly dependent upon Samsung and TSMC, who are the only foundries currently available for certain advanced process technologies. If we or our foundry vendors experience significant delays in transitioning to smaller geometries or fail to efficiently implement transitions, we could experience reduced manufacturing yields, delays in product deliveries and increased costs, all of which could harm our relationships with our customers and our operating results. We rely on third-party vendors to supply software development tools to us for the development of our new products, and we may be unable to obtain the tools necessary to develop or enhance new or existing products. We rely on third-party software development tools to assist us in the design, simulation and verification of new products or product enhancements. To bring new products or product enhancements to market in a timely manner, or at all, we need software development tools that are sophisticated enough or technologically advanced enough to complete our design, simulations and verifications. In the future, the design requirements necessary to meet consumer demands for more features and greater functionality from our solutions may exceed the capabilities of available software development tools. Unavailability of software development tools may result in our missing design cycles or losing design wins, either of which could result in a loss of market share or negatively impact our operating results. Because of the importance of software development tools to the development and enhancement of our solutions, our relationships with leaders in the computer-aided design industry, including Cadence Design Systems, Inc., Mentor Graphics Corporation and Synopsys, Inc., are critical to us. If these relationships are not successful, we may be unable to develop new products or product enhancements in a timely manner, which could result in a loss of market share, a decrease in revenue or negatively impact our operating results. Our failure to adequately protect our intellectual property rights could impair our ability to compete effectively or defend ourselves from litigation, which could harm our business, financial condition and results of operations. Our success depends, in part, on our ability to protect our intellectual property. We rely primarily on patent, copyright, trademark and trade secret laws, as well as confidentiality and non-disclosure agreements and other contractual protections, to protect our proprietary technologies and know-how, all of which offer only limited protection. The steps we have taken to protect our intellectual property rights may not be adequate to prevent misappropriation of our proprietary information or infringement of our intellectual property rights, and our ability to prevent such misappropriation or infringement is uncertain, particularly in countries outside of the United States. The failure of our patents to adequately protect our technology might make it easier for our competitors to offer similar products or technologies, which would harm our business. For example, our patents and patent applications could be opposed, contested, circumvented, designed around by our competitors or be declared invalid or unenforceable in judicial or administrative proceedings. Our foreign patent protection is generally not as comprehensive as our U.S. patent protection and may not protect our intellectual property in some countries where our products are sold or may be sold in the future. Many U.S.-based companies have encountered substantial intellectual property infringement in foreign countries, including countries where we sell products. Even if foreign patents are granted, effective enforcement in foreign countries may not be available. For example, the legal environment relating to intellectual property protection in certain emerging market countries where we operate is relatively weaker, often making it difficult to create and enforce such rights. We may not be able to effectively protect our intellectual property rights in these emerging markets or elsewhere. If such an impermissible use of our intellectual property or trade secrets were to occur, our ability to sell our solutions at competitive prices may be adversely affected and our business, financial condition, operating results and cash flows could be materially and adversely affected. 28 We may in the future need to initiate infringement claims or litigation in order to try to protect our intellectual property rights. Litigation, whether we are a plaintiff or a defendant, can be expensive, time-consuming and may divert the efforts of our technical staff and management, which could harm our business, whether or not such litigation results in a determination favorable to us. Litigation also puts our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not being issued. Additionally, any enforcement of our patents or other intellectual property may provoke third parties to assert counterclaims against us. If we are unable to protect our proprietary rights or if third parties independently develop or gain access to our or similar technologies, our business, revenue, reputation and competitive position could be harmed. Third parties’ assertions of infringement of their intellectual property rights could result in our having to incur significant costs and cause our operating results to suffer. The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights and positions, which has resulted in protracted and expensive litigation for many companies. Certain of our customers have received, and we expect, particularly to the extent we gain greater market visibility, that in the future we may receive, communications from others alleging our infringement of their patents, trade secrets or other intellectual property rights. In addition, certain of our end customers have been the subject of lawsuits alleging infringement of intellectual property rights by products incorporating our solutions, including the assertion that the alleged infringement may be attributable, at least in part, to our technology. Lawsuits resulting from such allegations could subject us to significant liability for damages and invalidate our proprietary rights, though this has not occurred to date. Any potential intellectual property litigation also could force us to do one or more of the following: • • • • • • stop selling products or using technology that contain the allegedly infringing intellectual property; incur significant legal expenses; pay substantial damages to the party whose intellectual property rights we may be found to be infringing; redesign those products that contain the allegedly infringing intellectual property; attempt to obtain a license to the relevant intellectual property from third parties, which may not be available on reasonable terms or at all; or lose the opportunity to license our technology to others or to collect royalty payments based upon successful protection and assertion of our intellectual property against others. Any significant impairment of our intellectual property rights from any litigation we face could harm our business and our ability to compete. Any potential dispute involving our patents or other intellectual property could affect our customers, which could trigger our indemnification obligations to them and result in substantial expense to us. In any potential dispute involving our patents or other intellectual property, our customers could also become the target of litigation. Certain of our customers have received notices from third parties claiming to have patent rights in certain technology and inviting our customers to license this technology, and certain of our end customers have been the subject of lawsuits alleging infringement of patents by products incorporating our solutions, including the assertion that the alleged infringement may be attributable, at least in part, to our technology. Because we generally indemnify our customers for intellectual property claims made against them for products incorporating our technology, any litigation could trigger technical support and indemnification obligations under some of our license agreements, which could result in substantial expense to us. Because some of our ODMs and OEMs are larger than we are and have greater resources than we do, they may be more likely to be the target of an infringement claim by third parties than we would be, which could increase our chances of becoming involved in a future lawsuit. If any such claims were to succeed, we might be forced to pay damages on behalf of our ODMs or OEMs that could increase our expenses, disrupt our ability to sell our solutions and reduce our revenue. In addition to the time and expense required for us to supply support or indemnification to our customers, any such litigation could severely disrupt or shut down the business of our customers, which in turn could hurt our relations with our customers and cause the sale of our products to decrease. 29 We are subject to warranty and product liability claims and to product recalls. From time to time, we are subject to warranty claims that may require us to make significant expenditures to defend these claims or pay damage awards. In the future, we may also be subject to product liability claims resulting from failure of our solutions or if products we design, manufacture, or sell, cause personal injury or property damage, even where the cause is unrelated to product defects. These risks will likely increase as our products are introduced into new devices, markets, or applications, including autonomous and semi-autonomous automotive, drone and robotic applications. In the event of a warranty claim, we may also incur costs if we compensate the affected customer. We maintain product liability insurance, but this insurance is limited in amount and subject to significant deductibles. There is no guarantee that our insurance will be available or adequate to protect against all claims. We also may incur costs and expenses relating to a recall of one of our customers’ products containing one of our devices. The process of identifying a recalled product in consumer devices that have been widely distributed may be lengthy and require significant resources, and we may incur significant replacement costs, contract damage claims from our customers and reputational harm. Costs or payments made in connection with warranty and product liability claims and product recalls could harm our financial condition and results of operations, as well as harm our reputation and cause the market value of our ordinary shares to decline. A breach of our security systems may have a material adverse effect on our business. Our security systems are designed to maintain the physical security of our facilities and information systems and protect our customers’, suppliers’ and employees’ confidential information. Accidental or willful security breaches or other unauthorized access by third parties to our facilities or our information systems or the existence of computer viruses in our data or software could expose us to a risk of information loss and misappropriation of proprietary and confidential information. Security breaches, computer malware and computer hacking attacks have become more prevalent and sophisticated. Experienced computer programmers and hackers may be able to penetrate our security controls and misappropriate or compromise our confidential information or that of third parties or create system disruptions. Computer programmers and hackers also may be able to develop and deploy viruses, worms and other malicious software programs that attack our information systems and cause disruptions of our business. Data security breaches may also result from non-technical means, for example, actions by an employee. Any theft or misuse of this information could result in, among other things, damage to our reputation, allegations by our customers that we have not performed our contractual obligations, litigation by affected parties and possible financial obligations for liabilities and damages related to the theft or misuse of this information, any of which could have a material adverse effect on our business, financial condition, our reputation, and our relationships with our customers and partners. We also rely on a number of third-party “cloud- based” service providers of corporate infrastructure services relating to, among other things, human resources, electronic communication services and some finance functions, and we are, of necessity, dependent on the security systems of these providers. Any security breaches or other unauthorized access by third parties to the systems of our cloud-based service providers or the existence of computer viruses in their data or software could expose us to a risk of information loss and misappropriation of confidential information. Since the techniques used to obtain unauthorized access or to sabotage systems change frequently and are often not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. We rely on third parties to provide services and technology necessary for the operation of our business. Any failure of one or more of our vendors, suppliers or licensors to provide such services or technology could harm our business. We rely on third-party vendors to provide critical services, including, among other things, services related to accounting, human resources, information technology and network monitoring that we cannot or do not create or provide ourselves. We depend on these vendors to ensure that our corporate infrastructure will consistently meet our business requirements. The ability of these third-party vendors to successfully provide reliable and high- quality services is subject to technical and operational uncertainties that are beyond our control. While we may be entitled to damages if our vendors fail to perform under their agreements with us, our agreements with these vendors limit the amount of damages we may receive. In addition, we do not know whether we will be able to collect on any award of damages or that these damages would be sufficient to cover the actual costs we would incur as a result of any vendor’s failure to perform under its agreement with us. Upon expiration or termination of any of our agreements with third-party vendors, we may not be able to replace the services provided to us in a timely manner or on terms and conditions, including service levels and cost, that are favorable to us, and a transition from one vendor to another vendor could subject us to operational delays and inefficiencies until the transition is complete. 30 We are subject to governmental laws, regulations and other legal obligations related to privacy and data protection. The legislative and regulatory framework for privacy and data protection issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. We collect personally identifiable information, or PII, and other data as part of our business processes and activities. This data is subject to a variety of U.S. and international laws and regulations, including oversight by various regulatory or other governmental bodies. Many foreign countries and governmental bodies, including the European Union and other relevant jurisdictions where we conduct business, have laws and regulations concerning the collection and use of PII and other data obtained from their residents or by businesses operating within their jurisdictions that are currently more restrictive than those in the U.S. For example, effective May 2018, the European Union adopted the General Data Protection Regulation that imposed more stringent data protection requirements and provided for greater penalties for noncompliance. Any inability, or perceived inability, to adequately address privacy and data protection concerns, even if unfounded, or to comply with applicable laws, regulations, policies, industry standards, contractual obligations or other legal obligations, could result in additional cost and liability to us, damage our reputation and adversely affect our business. Failure to comply with the U.S. Foreign Corrupt Practices Act, or FCPA, and similar laws associated with our activities outside of the United States could subject us to penalties and other adverse consequences. We face significant risks if we fail to comply with the FCPA and other anti-corruption laws that prohibit improper payments or offers of payment to foreign governments and political parties by us for the purpose of obtaining or retaining business. In many foreign countries, particularly in countries with developing economies, it may be a local custom that businesses operating in such countries engage in business practices that are prohibited by the FCPA or other applicable laws and regulations. Although we implemented an FCPA compliance program, we cannot assure you that all of our employees and agents, as well as those companies to which we outsource certain of our business operations, will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. Any violation of the FCPA or other applicable anti-corruption laws could result in severe criminal or civil sanctions and, in the case of the FCPA, suspension or debarment from U.S. government contracting, which could have a material and adverse effect on our reputation, business, financial condition, operating results and cash flows. We, our customers and third-party contractors are subject to increasingly complex environmental regulations and compliance with these regulations may delay or interrupt our operations and adversely affect our business. We face increasing complexity in our procurement, design, and research and development operations as a result of requirements relating to the materials composition of our products, including the European Union’s, or EU’s, Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment, or RoHS, directive, which restricts the content of lead and certain other hazardous substances in specified electronic products put on the market in the EU and similar Chinese legislation relating to marking of electronic products which became effective in March 2007. Failure to comply with these and similar laws and regulations could subject us to fines, penalties, civil or criminal sanctions, contract damage claims, and take-back of non- compliant products, which could harm our business, reputation and operating results. The passage of similar requirements in additional jurisdictions or the tightening of these standards in jurisdictions where our products are already subject to such requirements could cause us to incur significant expenditures to make our products compliant with new requirements, or could limit the markets into which we may sell our products. Our failure to comply with present and future environmental, health and safety laws could cause us to incur substantial costs, result in civil or criminal fines and penalties and decreased revenue, which could adversely affect our operating results. Failure by our foundry vendors or other suppliers to comply with applicable environmental laws and requirements could cause disruptions and delays in our product shipments, which could adversely affect our relations with our ODMs and OEMs and adversely affect our business and results of operations. 31 Regulations related to “conflict minerals” may force us to incur additional expenses, may make our supply chain more complex and may result in damage to our reputation with customers. Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, the Securities and Exchange Commission, or the SEC, has adopted requirements for companies that use certain minerals and metals, known as conflict minerals, in their products, whether or not these products are manufactured by third parties. These requirements require companies to perform due diligence, disclose and report whether or not such minerals originate from the Democratic Republic of the Congo and adjoining countries. These requirements could adversely affect the sourcing, availability and pricing of minerals used in the manufacture of semiconductor devices, including our products. While these requirements continue to be subject to administrative uncertainty, we have incurred, and may continue to incur, costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. Since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation. In such event, we may also face difficulties in satisfying customers who require that all of the components of our products are certified as conflict mineral free. Rapidly changing industry standards could make our video and image processing solutions obsolete, which would cause our operating results to suffer. We design our video and image processing solutions to conform to video compression standards, including MPEG-2, H.264 Advanced Video Coding (AVC) and H.265 High Efficiency Video Coding (HEVC), set by industry standards setting bodies such as ITU-T Video Coding Experts Group and the ISO/IEC Moving Picture Experts Group. Generally, our solutions comprise only a part of a camera device. All components of these devices must uniformly comply with industry standards in order to operate efficiently together. We depend on companies that provide other components of the devices to support prevailing industry standards. Many of these companies are significantly larger and more influential in driving industry standards than we are. Some industry standards may not be widely adopted or implemented uniformly, and competing standards may emerge that may be preferred by our customers or by consumers. If our customers or the suppliers that provide other device components adopt new or competing industry standards with which our solutions are not compatible, or if the industry groups fail to adopt standards with which our solutions are compatible, our existing solutions would become less desirable to our customers. If our solutions are not in compliance with prevailing industry standards for a significant period of time, we could miss opportunities to achieve crucial design wins, which could harm our business. As a result, our sales would suffer, and we could be required to make significant expenditures to develop new SoC solutions to ensure compliance with relevant standards. The use of open source software in our products, processes and technology may expose us to additional risks and compromise our proprietary intellectual property. Our products, processes and technology sometimes utilize and incorporate software that is subject to an open source license. Open source software is typically freely accessible, usable and modifiable. Certain open source software licenses, such as the GNU General Public License, require a user who intends to distribute the open source software as a component of the user’s software to disclose publicly part or all of the source code to the user’s software. In addition, certain open source software licenses require the user of such software to make any derivative works of the open source code available to others on terms unfavorable to us or at no cost. This can subject previously proprietary software to open source license terms. While we monitor the use of open source software in our products, processes and technology and try to ensure that no open source software is used in such a way as to require us to disclose the source code to the related product, processes or technology when we do not wish to do so, such use could inadvertently occur. Additionally, if a third-party software provider has incorporated certain types of open source software into software we license from such third-party for our products, processes or technology, we could, under certain circumstances, be required to disclose the source code to our products, processes or technology. This could harm our intellectual property position and our business, results of operations and financial condition. Some of our operations and a significant portion of our customers and our subcontractors are located outside of the United States, which subjects us to additional risks, including increased complexity and costs of managing international operations and geopolitical instability. We have research and development design centers and business development offices in China, Japan, Italy, South Korea and Taiwan, and we expect to continue to conduct business with companies that are located outside the United States, particularly in Asia. We purchase wafers from foreign foundries, have our solutions assembled and tested by subcontractors located in Asia, and supply our solutions to customers located outside of the United States. Even customers of ours that are based in the United States often use contract manufacturers based in Asia to manufacture their products, and these contract manufacturers typically purchase products directly from us. As a result of our international focus, we face numerous challenges and risks, including: • increased complexity and costs of managing international operations; 32 • • • • • • • • • • • • • • • • • longer and more difficult collection of receivables; difficulties in enforcing contracts generally; regional economic instability; geopolitical instability and military conflicts; limited protection of our intellectual property and other assets; compliance with local laws and regulations and unanticipated changes in local laws and regulations, including tax laws and regulations; trade and foreign exchange restrictions and higher tariffs; travel restrictions; timing and availability of import and export licenses and other governmental approvals, permits and licenses, including export classification requirements; foreign currency exchange fluctuations relating to our international operating activities; restrictions imposed by the U.S. government on our ability to do business with certain companies or in certain countries as a result of international political conflicts; transportation delays and other consequences of limited local infrastructure, and disruptions, such as large scale outages or interruptions of service from utilities or telecommunications providers; heightened risk of terrorist acts; local business and cultural factors that differ from standards and practices in the U.S.; differing employment practices and labor relations; regional health issues, pandemics, and natural disasters; and work stoppages. Our third-party contractors and their suppliers are concentrated in South Korea, Taiwan and Japan, a region subject to earthquakes and other natural disasters. Any disruption to the operations of these contractors could cause significant delays in the production or shipment of our products. The majority of our products are manufactured by or receive components from third-party contractors located in South Korea, Taiwan and Japan. The risk of an earthquake or tsunami in South Korea, Taiwan, Japan and elsewhere in the Pacific Rim region is significant due to the proximity of major earthquake fault lines. For example, in December 2006 a major earthquake occurred in Taiwan and in March 2011 a major earthquake and tsunami occurred in Japan. Although we are not aware of any significant damage suffered by our third-party contractors as a result of those natural disasters, the occurrence of additional earthquakes or other natural disasters could result in the disruption of our foundry vendor or assembly and test capacity. A disruption in the availability of image sensors from Sony Corporation as a result of the 2016 Kumamoto, Japan earthquake impacted our customers’ ability to build or launch cameras and, as a result, negatively impacted the timing and scope of demand for our SoCs in fiscal year 2017. Any disruption resulting from such events could cause significant delays in the production or shipment of our products until we are able to shift our manufacturing, assembling or testing from the affected contractor to another third-party vendor. We may not be able to obtain alternate capacity on favorable terms, or at all. 33 If our operations are interrupted, our business and reputation could suffer. Our operations and those of our manufacturers are vulnerable to interruption caused by technical breakdowns, computer hardware and software malfunctions, software viruses, infrastructure failures, regional health issues and pandemics, fires, earthquakes, floods, power losses, telecommunications failures, terrorist attacks, wars, Internet failures and other events beyond our control. Any disruption in our services or operations could result in a reduction in revenue or a claim for substantial damages against us, regardless of whether we are responsible for that failure. The outbreak of COVID-19 has resulted in significant governmental measures being implemented to control the spread of the virus, including, among others, restrictions on travel, manufacturing and the movement of employees in many regions of the world, and the imposition of remote or work from home conditions in many of our offices, including the United States. If the remote or work from home conditions continues for an extended period of time, we may experience delays in product development, a decreased ability to support our customers, reduced design win activity, and overall lack of productivity. We rely on our computer equipment, database storage facilities and other office equipment, which are located primarily in the seismically active San Francisco Bay Area and Taiwan. If we suffer a significant database or network facility outage, our business could experience disruption until we fully implement our back-up systems. We are subject to regulatory compliance requirements, including Section 404 of the Sarbanes-Oxley Act of 2002, which are costly to comply with, and our failure to comply with these requirements could harm our business and operating results. We are subject to disclosure and compliance requirements associated with being a public company, including but not limited to compliance with Section 404 of the Sarbanes-Oxley Act of 2002. For example, Section 404 of the Sarbanes-Oxley Act requires that our management report on, and our independent auditors attest to, the effectiveness of our internal control structure and procedures for financial reporting. Compliance with Section 404 requires a significant amount of time, expenses and diversion of internal resources. If we or our auditors discover a material weakness in our internal controls, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in our financial statements and harm our stock price. In addition, if we fail to maintain effective controls over financial reporting, we could be subject to sanctions or investigations by The NASDAQ Stock Market, the SEC, or other regulatory authorities. Irrespective of compliance with Section 404, any failure of our internal controls could have a material adverse effect on our stated results of operations and harm our reputation. Furthermore, investor perceptions of our company may suffer, and this could cause a decline in the market price of our ordinary shares. Changes to financial accounting standards may affect our results of operations and could cause us to change our business practices. We prepare our consolidated financial statements to conform to generally accepted accounting principles, or GAAP, in the United States. These accounting principles are subject to interpretation by the American Institute of Certified Public Accountants, the SEC and various bodies formed to interpret and create accounting rules and regulations. Changes in those accounting rules, including the new revenue recognition guidance and the associated adoption efforts, which are currently underway, could have a significant effect on our financial results, require significant resources, pose challenges in forecasting revenue and may affect our reporting of transactions completed before a change is announced. Changes to those rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. The complexity of calculating our tax provision may result in errors that could result in restatements of our financial statements. We are incorporated in the Cayman Islands and our operations are subject to income and transaction taxes in the United States, China, Hong Kong, Japan, Italy, South Korea, Taiwan and other jurisdictions in which we do business. Due to the complexity associated with the calculation of our tax provision, we have hired independent tax advisors to assist us. If we or our independent tax advisors fail to resolve or fully understand certain issues, there may be errors that could result in us having to restate our financial statements. Restatements are generally costly and could adversely impact our results of operations or have a negative impact on the trading price of our ordinary shares. Changes in effective tax rates or adverse outcomes resulting from examination of our income tax returns could adversely affect our results. Our future effective tax rates could be adversely affected if our earnings are lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, tax effects of share-based compensation, or by changes in tax laws, regulations, accounting principles or interpretations thereof. For example, changes in tax laws, including the U.S. federal tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017, or Tax Act, as well as other factors, could cause us to experience fluctuations in our tax obligations and effective tax rates and otherwise adversely affect our tax positions and/or our tax liabilities. 34 The Tax Act requires complex computations not previously provided in U.S. tax law. The U.S. Department of Treasury has broad authority to issue regulations and interpretative guidance that may significantly impact how we will apply the law and impact our results of operations in the period issued. As such, the application of accounting guidance for such items is currently uncertain. Further, compliance with the Tax Act and the accounting for such provisions require accumulation of information not previously required or regularly produced. While we have completed our accounting for the effects of the Tax Act, additional regulatory guidance may still be issued by the applicable taxing authorities which could materially affect our tax obligations and effective tax rate. In addition, our income tax returns are subject to continuous examination by the Internal Revenue Service, or IRS, and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. We cannot assure you that the outcomes from these continuous examinations will not have an adverse effect on our operating results and financial condition. Unfavorable tax law changes, an unfavorable governmental review of our tax returns, changes in our geographical earnings mix or imposition of withholding taxes on repatriated earnings could adversely affect our effective tax rate and our operating results. Our operations are subject to certain taxes, such as income and transaction taxes, in the Cayman Islands, the United States, China, Hong Kong, Japan, Italy, South Korea, Taiwan and other jurisdictions in which we do business. A change in the tax laws in the jurisdictions in which we do business, including an increase in tax rates or an adverse change in the treatment of an item of income or expense, possibly with retroactive effect, could result in a material increase in the amount of taxes we incur. In particular, past proposals have been made to change certain U.S. tax laws relating to foreign entities with U.S. connections, which may include us. For example, previously proposed legislation has considered treating certain foreign corporations as U.S. domestic corporations (and therefore taxable on all of their worldwide income) if the management and control of the foreign corporation occurs, directly or indirectly, primarily within the United States. If such legislation were enacted, we could, depending on the precise form, be subject to U.S. taxation notwithstanding our domicile outside the United States. In addition, on October 5, 2015 the Organization for Economic Co-operation and Development, or OECD, which represents a coalition of member countries, released its final reports from the BEPS Action Plans. The final reports include recommendations covering a number of issues, including country-by-country reporting, permanent establishment rules, transfer pricing rules and tax treaties. These changes, which have been or are in the process of being adopted by numerous countries, could increase uncertainties and may adversely affect our provision for income taxes. In December, 2018, the Cayman Islands passed the International Tax Co-Operation (Economic Substance) Law, 2018. Effective as of January 1, 2019, the new legislation requires Cayman Islands companies carrying one or more relevant activity to maintain a substantial economic presence in the Cayman Islands. Effective from December 31, 2019, we have structured our activities to comply with the new law. However, the legislation remains subject to further clarification and interpretation and accordingly, there is no guarantee that we will be deemed to be compliant. Furthermore, this legislation may require us to make additional changes to the activities we carry on in the Cayman Islands, which could increase our cost of operations, and we could be subject to penalties for lack of compliance. As a result, we are not able to determine the impact on our operations and net income as of the current period. We are subject to periodic audits or other reviews by tax authorities in the jurisdictions in which we conduct our activities. Any such audit, examination or review requires management’s time, diverts internal resources and, in the event of an unfavorable outcome, may result in additional tax liabilities or other adjustments to our historical results. Because we conduct operations in multiple jurisdictions, our effective tax rate is influenced by the amounts of income and expense attributed to each such jurisdiction. If such amounts were to change so as to increase the amounts of our net income subject to taxation in higher-tax jurisdictions, or if we were to commence operations in jurisdictions assessing relatively higher tax rates, our effective tax rate could be adversely affected. In addition, we may determine that it is advisable from time to time to repatriate earnings from subsidiaries under circumstances that could give rise to imposition of potentially significant withholding taxes by the jurisdictions in which such amounts were earned, without our receiving the benefit of any offsetting tax credits, which could also adversely impact our effective tax rate. 35 We may be classified as a passive foreign investment company which could result in adverse U.S. federal income tax consequences for U.S. holders of our ordinary shares. Based on the current and anticipated valuation of our assets and the composition of our income and assets, we do not expect to be considered a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for our 2020 fiscal year or the foreseeable future. However, a separate determination must be made at the close of each taxable year as to whether we are a PFIC for that taxable year, and we cannot assure you that we will not be a PFIC for our 2020 fiscal year or any future taxable year. Under current law, a non-U.S. corporation will be considered a PFIC for any taxable year if either (a) at least 75% of its gross income is passive income or (b) at least 50% of the value of its assets, generally based on an average of the quarterly values of the assets during a taxable year, is attributable to assets that produce or are held for the production of passive income. PFIC status depends on the composition of our assets and income and the value of our assets (which may be based in part on the value of our ordinary shares which may fluctuate), including, among others, a pro rata portion of the income and assets of each subsidiary in which we own, directly or indirectly, at least 25% by value of the subsidiary’s equity interests, from time to time. Because we currently hold, and expect to continue to hold, a substantial amount of cash or cash equivalents, and because the calculation of the value of our assets may be based in part on the value of our ordinary shares which may fluctuate and may fluctuate considerably given that market prices of technology companies historically often have been volatile, we may be a PFIC for any taxable year. If we were treated as a PFIC for any taxable year during which a U.S. holder held ordinary shares, certain adverse U.S. federal income tax consequences could apply for such U.S. holder. Changes in our United States federal income tax classification, or that of our subsidiaries, could result in adverse tax consequences to our 10% or greater U.S. shareholders. The Tax Act may have changed the consequences to U.S. shareholders that own, or are considered to own, as a result of the attribution rules, ten percent or more of the voting power or value of the stock of a non-U.S. corporation (a 10% U.S. shareholder) under the U.S. Federal income tax law applicable to owners of U.S. controlled foreign corporations, or CFCs. Prior to the Tax Act, we did not believe that we, or any of our non-U.S. subsidiaries, were considered a CFC, which is a determination made daily based on whether the 10% U.S. shareholders together own, or are considered to own as a result of the attribution rules, more than fifty percent of the voting power or value of a non-U.S. corporation. The Tax Act repealed Internal Revenue Code Section 958(b)(4), which, unless clarified in future regulations or other guidance, may result in classification of certain of the Company’s foreign subsidiaries as CFCs with respect to any single 10% U.S. shareholder. This may be the result without regard to whether 10% U.S. shareholders together own, directly or indirectly, more than fifty percent of the voting power or value of the Company as was the case under prior rules. The repeal is effective as of the last taxable year of CFCs beginning before January 1, 2018 and for the taxable year of 10% U.S. shareholders in which the CFCs' taxable year ends. Fluctuations in exchange rates between and among the currencies of the countries in which we do business may adversely affect our operating results. Our sales have been historically denominated in U.S. dollars. An increase in the value of the U.S. dollar relative to the currencies of the countries in which our end customers operate could impair the ability of our end customers to cost-effectively integrate our SoCs into their devices which may materially affect the demand for our solutions and cause these end customers to reduce their orders, which would adversely affect our revenue and business. We may experience foreign exchange gains or losses due to the volatility of other currencies compared to the U.S. dollar. A significant portion of our solutions are sold to camera manufacturers located outside the United States, primarily in Asia. Sales to customers in Asia accounted for approximately 90%, 87% and 79% of our total revenue in fiscal years 2020, 2019 and 2018, respectively. Because most of our end customers or their ODM manufacturers are located in Asia, we anticipate that a majority of our future revenue will continue to come from sales to that region. Although a large percentage of our sales are made to customers in Asia, we believe that a significant number of the products designed by these customers and incorporating our SoCs are then sold to consumers globally. In addition, if in the future we sell products or purchase inventory in currencies other than the U.S. dollar, our exposure to foreign currency risk could become more significant. A significant number of our employees are located in Asia, principally Taiwan and China. Therefore, a portion of our payroll as well as certain other operating expenses are paid in currencies other than the U.S. dollar, such as the New Taiwan Dollar and the Chinese Yuan Renminbi. Our operating results are denominated in U.S. dollars and the difference in exchange rates in one period compared to another may directly impact period-to-period comparisons of our operating results. Furthermore, currency exchange rates, particularly the exchange rates between the Chinese Yuan Renminbi and the U.S. dollar and between the New Taiwan Dollar and the U.S. dollar, have been especially volatile in the recent past and these currency fluctuations may make it difficult for us to predict our operating results. 36 We have not implemented any hedging strategies to mitigate risks related to the impact of fluctuations in currency exchange rates. Even if we were to implement hedging strategies, not every exposure can be hedged and, where hedges are put in place based on expected foreign exchange exposure, they are based on forecasts which may vary or which may later prove to have been inaccurate. Failure to hedge successfully or anticipate currency risks accurately could adversely affect our operating results. We may make acquisitions in the future that could disrupt our business, cause dilution to our shareholders, reduce our financial resources and harm our business. In the future, we may acquire other businesses, products or technologies. Other than our acquisition of VisLab S.r.l., or VisLab, in June 2015, we have not made any acquisitions to date and do not have any agreements or commitments for any specific acquisition at this time. Our ability to make and successfully integrate acquisitions is unproven. Our acquisition of VisLab and any future acquisitions may not strengthen our competitive position and may be viewed negatively by our customers, financial markets or investors, and we may not achieve our goals in a timely manner, or at all. In addition, any acquisitions we make could lead to difficulties in integrating personnel, technologies and operations from the acquired businesses and in retaining and motivating key personnel from these businesses. Acquisitions may disrupt our ongoing operations, divert management from their primary responsibilities, subject us to additional liabilities, increase our expenses and adversely impact our business, operating results, financial condition and cash flows. Acquisitions may also reduce our cash available for operations and other uses, and could also result in an increase in amortization expense related to identifiable assets acquired, potentially dilutive issuances of equity securities or the incurrence of debt, any of which could harm our business. We cannot predict our future capital needs, and we may not be able to obtain additional financing to fund our operations. We may need to raise additional funds in the future. Any required additional financing may not be available on terms acceptable to us, or at all. If we raise additional funds by issuing equity securities or convertible debt, investors may experience significant dilution of their ownership interest, and the newly-issued securities may have rights senior to those of the holders of our ordinary shares. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operational flexibility and would also require us to incur interest expense. If additional financing is not available when required or is not available on acceptable terms, we may have to scale back our operations or limit our production activities, and we may not be able to expand our business, develop or enhance our products, take advantage of business opportunities or respond to competitive pressures which could result in lower revenue and reduce the competitiveness of our products. Our marketable securities portfolio could experience a decline in market value, which could materially and adversely affect our financial results. As of January 31, 2020, we had approximately $211.1 million in debt security investments. These investments consisted primarily of money market funds, commercial paper, asset-backed securities, U.S. government securities and debt securities of corporations. We currently do not use derivative financial instruments to adjust our investment portfolio risk or income profile. These investments, as well as any cash deposited in bank accounts, are subject to general credit, liquidity, market and interest rate risks, which may be exacerbated by unusual events, such as the COVID-19 pandemic, the Eurozone crisis and the U.S. debt ceiling crisis, which affected various sectors of the financial markets and led to global credit and liquidity issues. If the global credit market continues to experience volatility or deteriorates, our investment portfolio may be impacted and some or all of our investments may experience other-than-temporary impairment which could adversely impact our financial results and position. Risks Related to Ownership of Our Ordinary Shares The market price of our ordinary shares may be volatile, which could cause the value of your investment to decline. Since our initial public offering in October 2012, the market price of our ordinary shares has been highly volatile. The trading price of our ordinary shares is likely to remain volatile and could be subject to wide fluctuations in price in response to various factors, some of which are beyond our control. These factors include: • • • • changes in financial estimates, including our ability to meet our future revenue and operating profit or loss projections; fluctuations in our operating results or those of other semiconductor or comparable companies; fluctuations in the economic performance or market valuations of companies perceived by investors to be comparable to us; economic developments in the semiconductor industry as a whole; 37 • • • • • • • • • • • general economic conditions, including conditions caused by pandemics, and slow or negative growth of related markets; trade and other geopolitical activities affecting markets we address; announcements by us or our competitors of acquisitions, new products, significant contracts or orders, commercial relationships or capital commitments; our ability to develop and market new and enhanced solutions on a timely basis; changes in the demand for our customers’ products; commencement of or our involvement in litigation; disruption to our operations; any major change in our board of directors or management; political or social conditions in the markets where we sell our products; changes in governmental regulations; and changes in earnings estimates or recommendations by securities analysts. In addition, the stock market in general, and the market for semiconductor and other technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors may cause the market price of our ordinary shares to decrease, regardless of our actual operating performance. These trading price fluctuations may also make it more difficult for us to use our ordinary shares as a means to make acquisitions or to use options to purchase our ordinary shares to attract and retain employees. If the market price of our ordinary shares declines, you may not realize any return on your investment in us and may lose some or all of your investment. In addition, in the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources. If securities analysts or industry analysts downgrade our ordinary shares, publish negative research or reports or fail to publish reports about our business, our stock price and trading volume could decline. The trading market for our ordinary shares will be influenced by the research and reports that industry or securities analysts publish about us, our business and our market. If one or more analysts adversely changes their recommendation regarding our stock or our competitors’ stock, our stock price would likely decline. If one or more analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets which in turn could cause our stock price or trading volume to decline. Our actual operating results may differ significantly from our guidance and investor expectations, which would likely cause our stock price to decline. From time to time, we may release guidance in our earnings releases, earnings conference calls or otherwise, regarding our future performance that represent our management’s estimates as of the date of release. If given, this guidance, which will include forward-looking statements, will be based on projections prepared by our management. Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. The principal reason that we expect to release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. With or without our guidance, analysts and other investors may publish expectations regarding our business, financial performance and results of operations. We do not accept any responsibility for any projections or reports published by any such third persons. Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions of the guidance furnished by us will not materialize or will vary significantly from actual results. If our actual performance does not meet or exceed our guidance or investor expectations, the trading price of our ordinary shares is likely to decline. 38 The price of our ordinary shares could decrease as a result of shares being sold in the market. Sales of a substantial number of our ordinary shares in the public market, or the perception that these sales might occur, could cause the market price of our ordinary shares to decline. We filed registration statements on Form S-8 under the Securities Act to register shares for issuance under our 2004 Stock Plan, 2012 Equity Incentive Plan and the Amended and Restated 2012 Employee Stock Purchase Plan. Our 2012 Equity Incentive Plan and the Amended and Restated 2012 Employee Stock Purchase Plan provide for automatic increases in the shares reserved for issuance under these plans which could result in additional dilution to our shareholders. These shares can be freely sold in the public market upon issuance and vesting, subject to restrictions provided under the terms of the applicable plan and/or the option agreements entered into with option holders. We may also issue ordinary shares or securities convertible into ordinary shares from time to time in connection with a financing, acquisition or otherwise. Any such issuance could result in substantial dilution to our existing shareholders and cause the trading price of our stock to decline. We do not intend to pay dividends on our ordinary shares and, consequently, a shareholder’s ability to achieve a return on its investment will depend on appreciation in the price of our ordinary shares. We have never declared or paid any cash dividends on our ordinary shares and do not currently intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, shareholders are not likely to receive any dividends on their ordinary shares for the foreseeable future and the success of an investment in our ordinary shares will depend upon any future appreciation in their value. There is no guarantee that our ordinary shares will appreciate in value or even maintain the price at which our shareholders have purchased their shares. Investors seeking cash dividends should not purchase our ordinary shares. Provisions of our memorandum and articles of association and Cayman Islands corporate law may discourage or prevent an acquisition of us which could adversely affect the value of our ordinary shares. Provisions of our memorandum and articles of association and Cayman Islands law may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following: • • • • • • • the division of our board of directors into three classes; the right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of directors or due to the resignation or departure of an existing board member; prohibition of cumulative voting in the election of directors which would otherwise allow less than a majority of shareholders to elect director candidates; the requirement for the advance notice of nominations for election to our board of directors or for proposing matters that can be acted upon at a shareholders’ meeting; the ability of our board of directors to issue, without shareholder approval, such amounts of preference shares as the board of directors deems necessary and appropriate with terms set by our board of directors, which rights could be senior to those of our ordinary shares; the elimination of the rights of shareholders to call a special meeting of shareholders and to take action by written consent in lieu of a meeting; and the required approval of a special resolution of the shareholders, being a two-thirds vote of shares held by shareholders present and voting at a shareholder meeting, to alter or amend the provisions of our post-offering memorandum and articles of association. 39 Holders of our ordinary shares may face difficulties in protecting their interests because we are incorporated under Cayman Islands law. Our corporate affairs are governed by our amended and restated memorandum and articles of association, by the Companies Law (as the same may be supplemented or amended from time to time) of the Cayman Islands and by the common law of the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as under statutes or judicial precedent in existence in jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States and provides significantly less protection to investors. There is no legislation specifically dedicated to the rights of investors in securities and thus no statutorily defined private cause of action specific to investors such as those provided under the Securities Act or the Securities Exchange Act of 1934, as amended. In addition, shareholders of Cayman Islands companies may not have standing to initiate shareholder derivative actions in U.S. federal courts. Therefore, you may have more difficulty in protecting your interests in the face of actions by our management, directors or controlling shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States due to the comparatively less developed nature of Cayman Islands law in this area. Shareholders of Cayman Islands exempted companies, such as our company, have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists of shareholders of the company. Our directors have discretion under our articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest. Subject to limited exceptions, under Cayman Islands law, a minority shareholder may not bring a derivative action against the board of directors. Holders of our ordinary shares may have difficulty obtaining or enforcing a judgment against us because we are incorporated under the laws of the Cayman Islands. It may be difficult or impossible for you to bring an action against us in the Cayman Islands if you believe your rights have been infringed under U.S. securities laws. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will in certain circumstances recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. While there is no binding authority on this point, this is likely to include, in certain circumstances, a non-penal judgment of a United States court imposing a monetary award based on the civil liability provisions of the U.S. federal securities laws. The Grand Court of the Cayman Islands may stay proceedings if concurrent proceedings are being brought elsewhere. There is uncertainty as to whether the Grand Court of the Cayman Islands would recognize or enforce judgments of United States courts obtained against us predicated upon the civil liability provisions of the securities laws of the United States or any state thereof and whether the Grand Court of the Cayman Islands would hear original actions brought in the Cayman Islands against us predicated upon the securities laws of the United States or any state thereof. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES Our corporate headquarters are located in Santa Clara, California, consisting of approximately 58,700 square feet of facility spaces under leases that expire in August 2025. These facilities accommodate our principal sales, marketing, research and development, finance, and administration activities. We lease approximately 82,300 square feet of facility spaces in Hsinchu, Taiwan under lease agreements that expire in December 2020. The Taiwan facilities accommodate research and development, business development, operations, and administration support. We lease approximately 39,800 square feet of facility spaces in Shanghai and Shenzhen, China, under leases that expire in November 2021 and September 2020, respectively, to support research and business development. We lease approximately 12,100 square feet of office space in Italy for research and development under lease agreement that expire in December 2048. We lease additional facilities in Hong Kong for sales and inventory warehousing and in Japan and South Korea for our local business development personnel under leases that expire in November 2021, April 2021 and September 2020, respectively. 40 We believe that our existing facilities are well maintained and in good operating condition, and are sufficient for our needs for the foreseeable future. The following table lists our major locations and primary usage as of January 31, 2020: Major Locations United States: Santa Clara, California Asia Pacific: Hsinchu, Taiwan Shanghai, China Shenzhen, China Kowloon, Hong Kong Shin-Yokohama, Japan SeongNam, South Korea Europe: Parma, Italy Approximate Square Footage Usage 58,700 Corporate Headquarters; Sales; Marketing; Research and Development; Finance; Administration 82,300 20,600 19,200 9,000 1,300 1,500 Research and Development; Business Development; Operations; Administration Research and Development; Business Development Research and Development; Business Development Sales; Warehousing Business Development Business Development 12,100 Research and Development ITEM 3. LEGAL PROCEEDINGS We are not engaged in any material legal proceedings at this time. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our ordinary shares have been traded on the NASDAQ Global Market under the symbol “AMBA” since October 10, 2012. Prior to that date, there was no public trading market for our ordinary shares. On March 16, 2020, there were 28 shareholders of record holding our ordinary shares. We cannot estimate the number of beneficial owners since many brokers and other institutions hold our shares on behalf of shareholders. Share Performance Graph This performance graph shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the Securities and Exchange Commission, or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing. 41 The following graph shows a comparison from February 1, 2015 through January 31, 2020 of the cumulative total return for our ordinary shares, the NASDAQ Composite Index and the Philadelphia Semiconductor Index. The comparisons in the graph are historical and are not intended to forecast or be indicative of possible future performance of our ordinary shares. Comparison of 5 year Cumulative Total Return Dividends We have never declared or paid any cash dividends on our ordinary shares and do not currently intend to do so in the foreseeable future. Securities Authorized for Issuance under Equity Compensation Plans For information about our equity compensation plans, see Note 11, “Employee Benefits and Stock-based Compensation” of the Notes to Consolidated Financial Statements included in this report. Purchases of Equity Securities by the Issuer There were no shares repurchased in fiscal year 2020. On May 29, 2019, our Board of Directors authorized a program to repurchase up to $50.0 million of our ordinary shares through June 30, 2020. Repurchases may be made from time-to-time through open market purchases, 10b5-1 plans or privately negotiated transactions subject to market conditions, applicable legal requirements and other relevant factors. The repurchase program does not obligate us to acquire any particular amount of ordinary shares, and it may be suspended at any time at our discretion. The repurchase program is funded using our working capital and any repurchased shares are recorded as authorized but unissued shares. As of January 31, 2020, $50.0 million was available for repurchases through June 30, 2020. Recent Sales of Unregistered Securities None. 42 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial data as of and for the last five fiscal years, and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 8, “Financial Statements and Supplementary Data,” and other financial data included elsewhere in this report. Our historical results of operations are not necessarily indicative of results of operations to be expected for any future period. Selected Consolidated Statements of Operations Data: 2020 2019 Year Ended January 31, 2018 (in thousands, except per share data) 2017 2016 Revenue Income (loss) from operations Net income (loss) Net income (loss) per share attributable to ordinary shareholders: Basic Diluted Selected Consolidated Balance Sheet Data: Cash, cash equivalents and marketable debt securities Working capital Total assets Total liabilities Total shareholders' equity $ $ $ $ $ $ 228,732 $ (49,649) $ (44,792) $ 227,768 $ (40,420) $ (30,447) $ 295,402 $ 24,431 $ 18,852 $ 310,297 $ 60,363 $ 57,810 $ 316,373 84,679 76,508 (1.35) $ (1.35) $ (0.93) $ (0.93) $ 0.57 $ 0.55 $ 1.77 $ 1.68 $ 2.42 2.27 2020 2019 As of January 31, 2018 (in thousands) 2017 2016 404,748 $ 397,737 527,276 79,204 448,072 358,908 $ 370,566 466,853 47,364 419,489 434,591 $ 440,047 546,649 64,462 482,187 405,394 $ 414,139 512,271 57,637 454,634 307,893 320,828 410,615 61,159 349,456 On June 25, 2015, we completed the acquisition of VisLab S.r.l., for $30.0 million in cash. Of this total purchase price, $4.1 million was attributed to intangible assets, $25.3 million was attributed to goodwill, and $0.6 million was attributed to net assets acquired. A deferred tax liability of $1.3 million related to the intangible assets was recorded to account for the difference between financial reporting and tax basis at the acquisition date, with an addition to goodwill. In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes. To simplify the presentation, the new guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. We adopted this standard in the fourth quarter of fiscal year 2016 on a prospective basis. The adoption of this new guidance resulted in all deferred tax assets and liabilities being classified as noncurrent in the consolidated balance sheets as of January 31, 2016. The prior periods were not restated for this presentation standard. Upon adoption of Accounting Standards Update No. 2015-05, Intangible - Goodwill and Other - Internal-Use Software (Subtopic 350-40), we account for a noncancelable on premise internal-use software license as the acquisition of an intangible asset and the incurrence of a liability to the extent that all or a portion of the software licensing fees are not paid on or before the license acquisition date. The intangible asset and related liability are recorded at net present value and interest expense is recorded over the payment term. As of January 31, 2020, there were $13.7 million of intangible assets, net of amortization expense, $4.4 million of current liabilities and $8.2 million of noncurrent liabilities related to these noncancelable internal-use software licenses recorded in the consolidated balance sheets. Effective February 1, 2018, we adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”) using a modified retrospective method with the cumulative effect recognized in the beginning retained earnings. The consolidated financial statements for the fiscal years ended January 31, 2020 and 2019 are reported under Topic 606, whereas the consolidated financial statements for the fiscal year 2018 and prior years are reported under Topic 605. In the fourth quarter of fiscal year 2019, we released $8.0 million of valuation allowance related to prior year federal research and development credit carryforwards, which resulted in a significant increase in deferred tax assets as of January 31, 2019. 43 Effective February 1, 2019, we adopted ASC Topic 842, Leases (“ASC 842”), using the alternative transition method with an adjustment to the opening balance in the period of adoption without adjustment of comparative period financial statements. Under this new guidance, we recognize leases as right-of-use (“ROU”) assets and corresponding lease liabilities at the lease commencement date based on the present value of future lease payments, while recognizing lease expenses under straight-line method through the lease term. The renewal options are included in the ROU and liability calculation if it is reasonably certain that we will exercise the option. The consolidated financial statements for the fiscal year ended January 31, 2020 are reported under Topic 842, whereas the consolidated financial statements for the fiscal year 2019 and prior years are reported under Topic 840. As of January 31, 2020, there were approximately $9.9 million of ROU assets, net of amortization expense, $2.2 million of short-term lease liabilities, and $8.0 million of long- term lease liabilities related to the leases recorded in the consolidated balance sheets. See Note 1, “Organization and Summary of Significant Accounting Policies” and Note 8, “Leases” of the Notes to Consolidated Financial Statements included in this report for more details of our lease accounting policy and the impact of adoption of this new guidance. 44 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We are a leading developer of semiconductor solutions for video that enable high-definition, or HD, video capture, analysis, sharing and display. In the last ten years, we have primarily focused on providing video and image processors for professional and consumer camera devices, such as internet protocol, or IP, security cameras, wearable sports cameras, drones and aftermarket automotive video recorders. Over the last several years, our development efforts focused on creating advanced artificial intelligence, or AI, computer vision algorithms and high-performance, low-power hardware platforms to enhance processing acceleration, which we refer to as our CVflow™ architecture. The CVflow architecture supports a variety of computer vision algorithms, including stereovision, object identification and motion detection, obstacle detection and avoidance, terrain mapping technology, and face recognition, and allows customers to differentiate their products by porting their own algorithms and neural networks to our CVflow-based chips. Our system-on-a-chip, or SoC, designs fully integrate HD video processing, image processing, AI, computer vision, or CV, functionality, audio processing, and system functions onto a single chip, delivering exceptional video and image quality at high compression rates, differentiated functionality and low power consumption. These computer vision-based technologies are allowing us to address a broader range of markets and applications, including IP security cameras, automotive cameras, consumer cameras, and industrial and robotic markets and applications. Our revenue over the last three years has been generated primarily from sales of our SoC solutions for incorporation into specialized video and image capture devices such as wearable sports cameras, automotive aftermarket cameras, IP security cameras and cameras incorporated into drones. Our revenue from several of these markets, however, has recently experienced significant declines. As a result, we believe that our future revenue growth, if any, will significantly depend upon our ability to expand within the camera markets, particularly in the professional IP security and home security and monitoring camera markets, as well as emerging markets such as the original equipment manufacturer, or OEM, automotive and industrial and robotics markets. We expect our research and development expenditures to increase in comparison to prior periods as we devote additional resources to the development of innovative video and image processing solutions with increased functionality, such as computer vision capabilities, and as we target new markets. We sell our SoC solutions to leading original design manufacturers, or ODMs, and OEMs globally, and in the automotive market, we also sell to Tier-1 suppliers. We refer to ODMs and Tier-1 automotive suppliers as our customers and OEMs as our end customers, except as otherwise indicated or as the context otherwise requires. Our solutions enable the creation of high-quality video content in IP security cameras, for both professional use and home security and monitoring, automotive cameras, wearable cameras, drones, and virtual reality cameras, also referred to as 360° cameras. We also recently introduced, and continue to develop, solutions to address emerging markets, such as the incorporation of computer vision functionalities for AI-enabled security cameras, AI-based driving applications, including auto-parking, driver monitoring systems, advanced blind spot detection, object detection, and deep learning algorithms for HD mapping solutions, OEM automotive ADAS applications and industrial and robotics markets. Our sales cycles typically require a significant investment of time and a substantial expenditure of resources before we can realize revenue from the sale of our solutions, if any. Our typical sales cycle consists of a multi-month sales and development process involving our customers’ system designers and management and our sales personnel and software engineers. If successful, this process culminates in a customer’s decision to use our solutions in its system, which we refer to as a design win. Our sales efforts are typically directed to the OEM of the product that will incorporate our video and image processing solution, but the eventual design and incorporation of our SoC into the product may be handled by an ODM or Tier-1 supplier on behalf of the OEM. Volume production may begin within six to 18 months after a design win, depending on the complexity of our customer’s product and other factors upon which we may have little or no influence. Once our solutions have been incorporated into a customer’s design, they are likely to be used for the life cycle of the customer’s product. Conversely, a design loss to a competitor will likely preclude any opportunity for future revenue from such customer’s product. Even if we obtain a design win and our SoC remains a component through the life cycle of a customer’s product, the volume and timing of actual sales of our SoCs to the customer depend upon the production, release and market acceptance of that product, none of which are within our control. A portable consumer device typically has a product life cycle of six to 18 months, while an IP security camera typically has a product life cycle of 12 to 24 months. We anticipate that product lifecycles will typically be longer than 24 months in the OEM automotive and industrial and robotics markets, as new product introductions occur less frequently in these markets. 45 Fiscal Year 2020 Financial Highlights and Trends • • • • • • • We recorded revenue of $228.7 million in fiscal year 2020, an increase of 0.4% as compared to fiscal year 2019. The increase in revenue was primarily attributable to higher revenue from consumer IP security camera and sports camera markets. In the consumer IP security camera market, growth was led by the home security and monitoring market in the North America region, together with shipment penetration into Asia and Europe regions. In the sports camera market, incorporation of our solutions into newly launched action camera products resulted in higher demand from Dajiang Innovation Technology Inc., or DJI, in fiscal year 2020. The increased revenue was partially offset by decreased revenue in the automotive, professional IP security camera and other consumer markets, including non-sports wearable camera, virtual reality and drone markets. Lower revenue from automotive markets, including the automotive aftermarket and OEM video recorder market, was caused by a significant slowdown in the automotive industry in the first half of fiscal year 2020 and promotional activity in fiscal year 2019 from a large automotive customer that did not recur in the current fiscal year. In the professional IP security camera market, despite significant growth in the Asia region and increased adoption of our computer vision-based solutions, lower demand from one of our largest China customers and customers in other regions resulted in a net revenue decrease in fiscal year 2020. We recorded an operating loss of $49.6 million in fiscal year 2020, as compared to an operating loss of $40.4 million in fiscal year 2019. The increased operating loss was primarily due to decreased gross profit and increased operating expenses. The increased operating expenses, mainly in support of new applications for the automotive markets as well as the development of computer vision-based solutions, related primarily to increased engineering headcount and increased stock-based compensation expense. These headcount-related increases were partially offset by the recognition of approximately $4.3 million of research and development grants from a foreign government. In addition, due to the timing and number of chips in development in fiscal year 2020, chip tape-out fees and other engineering costs decreased from the prior year further offsetting the headcount related expense increases. We generated cash flows from operating activities of $39.4 million in fiscal year 2020, as compared to $24.5 million in fiscal year 2019. The increased cash flows from operating activities were primarily due to increased cash receipts associated with the timing of payments from customers and increased liabilities associated with the timing of payments to suppliers. The increased cash flows from operating activities were partially offset by increased inventory purchases associated with higher volumes of SoC shipments in fiscal year 2020. Effective February 1, 2019, we adopted Accounting Standards Codification (“ASC”) Topic 842, Leases. Under this new guidance, we recognize leases as right-of-use (“ROU”) assets and corresponding lease liabilities at the lease commencement date based on the present value of future lease payments, while recognizing lease expenses under the straight-line method through the lease term. As of January 31, 2020, there were approximately $9.9 million of ROU assets, net of amortization expense, and $10.2 million of lease liabilities recorded in the consolidated balance sheets. In fiscal year 2020, there was approximately $3.0 million of lease expense recorded in the consolidated statements of operations. We exercised the renewal option to extend our current U.S. office lease for a period of 63 months and renewed our Shanghai office lease for another two years in fiscal year 2020. We also signed a separate lease for additional space for our U.S. office for a period of 56 months. In addition, our wholly-owned subsidiary VisLab S.r.l., or VisLab, was granted a land lease for 35 years with an obligation to construct a building on the land in Parma, Italy (“Parma lease”). We will be responsible for the costs of construction and subsequently occupy the building for the remainder of the lease term. At the end of the lease, the land together with the building and all of the improvements will revert to the lessor. The renewed leases for the current U.S. office and Shanghai office have been recorded in the consolidated balance sheets, while the lease associated with the additional space for our U.S. office and the Parma lease will be recorded as ROU assets and lease liabilities upon the respective lease commencement date. The total estimated future undiscounted cash payments for these leases are approximately $9.4 million for our U.S. office, $1.3 million for the Shanghai office and $2.2 million for the Parma building as of January 31, 2020. In fiscal year 2020, we entered into software license agreements with Cadence Design Systems, Inc. (“Cadence”) with the commitment to pay an aggregate amount of $12.7 million through October 2022. The present value of these future payments has been recorded as an intangible asset and corresponding liabilities in the consolidated balance sheets. On May 29, 2019, our Board of Directors authorized an additional repurchase of up to $50.0 million of our ordinary shares through June 30, 2020. Repurchases may be made from time-to-time through open market purchases, 10b5-1 plans or privately negotiated transactions subject to market conditions, applicable legal requirements and other relevant factors. The repurchase program does not obligate us to acquire any particular amount of ordinary shares, and it may be suspended at any time at our discretion. The repurchase program is funded using our working capital and any repurchased shares are recorded as authorized but unissued shares. There were no shares repurchased in fiscal year 2020. As of January 31, 2020, $50.0 million was available for repurchases through June 30, 2020. 46 Factors Affecting Our Performance Spread of COVID-19 Could Adversely Affect our Business in a Material Way. The COVID-19 pandemic has resulted in significant governmental measures being implemented to control the spread of the virus, including, among others, restrictions on travel and the imposition of remote or work from home conditions in many of the locations where we have offices. While we have not yet experienced a significant disruption of our operations as a result of the COVID-19 pandemic, if the remote or work from home conditions in any of our offices continues for an extended period of time, we may experience delays in product development, a decreased ability to support our customers, reduced design win activity, and overall lack of productivity. Similarly, while we have not yet experienced a major disruption in our supply chain as a result of the COVID-19 pandemic, if there is a significant outbreak that impacts Samsung’s ability to manufacture our SoCs or our third-party contractors’ ability to assemble, test and ship our products, we could experience delays or reductions in our ability to ship products to our customers. The pandemic may also impact our customers’ ability to manufacture their products, which could reduce their demand for our solutions. While we don’t know and cannot quantify specific impacts, we expect we may be negatively affected if we encounter supply chain problems, reductions in demand due to our customers or end customers having problems, or other unexpected COVID-19 ramifications. Ability to Capitalize on Computer Vision Trends. We expect that computer vision functionality will become an increasingly important requirement in many of our current and future markets, including IP security, automotive, and industrial and robotics, and certain consumer markets. As a result, we believe that our ability to develop advanced AI computer vision technology, enable and support customer product development in emerging applications, such as ADAS, advanced blind spot detection, object detection, people recognition, retail analytics, and machine learning, and gain customer acceptance of our technology platform and solutions, will be critical to our future success. Moreover, achieving design wins, particularly for computer vision-centric applications in the IP security, automotive and robotics markets, is vital to our ability to generate revenue growth. As such, we closely monitor design wins by customer and end market. However, a design win may not successfully materialize into revenue, and even if it does result in revenue, the amount generated by each design win can vary significantly. Ability to Develop and Introduce New or Enhanced Solutions. We operate in a dynamic environment characterized by rapidly changing technologies and technological obsolescence. To compete successfully, we must design, develop, market and sell enhanced solutions with increased levels of performance and functionality that meet the expectations of our customers. As such, we continuously invest in our research and development projects, especially computer vision technologies. However, failure to anticipate or timely develop new or enhanced solutions in response to technology shifts and trends could result in decreased revenue and our competitors achieving design wins we sought. Moreover, any reliability or quality problems with our solutions could harm our reputation, increase additional development and replacement costs, and prevent us from retaining existing customers and attracting new customers. Pricing, Product Cost and Margin. Our pricing and margins depend on the volumes and features of the solutions we provide to our customers. Additionally, we make significant investments in new solutions for both cost improvements and new features that we expect to drive revenue and maintain margins. In general, solutions incorporated into more complex configurations, such as those used in high-performance camera applications or, in the future, advanced driver assistance systems, have higher prices and higher gross margins as compared to solutions sold into lower-performing, more competitive camera applications. Our average selling price can vary by market and application due to market-specific supply and demand, the maturation of products launched in previous years and the launch of new products by us or our competitors. We continually monitor the cost of our solutions. As we rely on third-party manufacturers for the manufacture of our products, we maintain a close relationship with these suppliers to continually monitor production yields, component costs and design efficiencies. Shifting Consumer Preferences. Our revenue is also subject to consumer preferences, regarding form factor and functionality, and how those preferences impact the video and image capture electronics that we support. For example, improved smartphone video capture capabilities led to the decline of video cameras aimed at the video and image capture market. The current video and image capture market is now characterized by a greater volume of more specialized video and image capture devices that are less likely to be replaced with smartphones, such as wearable, IP security, drone and automotive cameras. This increasing specialization of video capture devices has changed our customer base and end markets and has impacted our revenue. In the future, we expect further changes will continue to impact our business performance in those markets. 47 Continued Concentration of Revenue by End Market. Historically, our revenue has been significantly concentrated in a small number of end markets and we developed technologies to provide solutions for new markets as they emerged, such as the sports camera, IP security, drone and automotive video recorder camera markets. Since fiscal year 2018, the IP security camera markets and automotive markets, including the OEM and aftermarket video recorder market, have been our largest end markets and sales into these markets collectively generated the majority of our revenue. We believe, however, that continued expansion into new markets is required to facilitate revenue growth and customer diversification. We have recently introduced solutions to address emerging applications and markets, such as the incorporation of computer vision functionalities for AI-enabled security cameras, AI-based driving applications and industrial and robotics markets. While we will continue to seek to expand our end market exposure, we anticipate that sales to a limited number of end markets will continue to account for a significant percentage of our total revenue for the foreseeable future. Our end market concentration may cause our financial performance to fluctuate significantly from period to period based on the success or failure of products that our SoCs are designed into as well as the overall growth or decline in the video capture markets in which we compete. In addition, we derive a significant portion of our revenue from a limited number of ODMs who build products on behalf of a limited number of OEMs and from a limited number of OEMs to whom we ship directly. We believe that our operating results for the foreseeable future will continue to depend on sales to a relatively small number of customers. Ability to Capitalize on Connectivity Trends. Mobile connected devices are ubiquitous today and play an increasingly prominent role in consumers’ lives. The constant connectivity provided by these devices has created a demand for connected electronic peripherals such as video and image capture devices. Our ability to capitalize on these trends by supporting our end customers in the development of connected peripherals that seamlessly cooperate with other connected devices and allow consumers to distribute and share video and images with online media platforms is critical for our success. We have added wireless communication functionality into our solutions for wearable, IP security, drone and automotive video recorder cameras. The combination of our compression technology with wireless connectivity enables wireless video streaming and uploading of videos and images to the Internet. Our solutions enable IP security camera systems to stream video content to either cloud infrastructure or connected mobile devices, and our solutions for wearable and drone cameras allow consumers to quickly stream or upload video and images to social media platforms. Sales Volume. A typical design win that successfully launches into the marketplace can generate a wide range of sales volumes for our solutions, depending on the end market demand for our customers’ products. Our ability to accurately forecast demand can be adversely affected by a number of factors, including the reputation of the end customer, market penetration, product capabilities, size of the end market that the product addresses, our end customers’ ability to sell their products, miscalculations by our customers of their inventory requirements, changes in market conditions, adverse changes in our product order mix and fluctuating demand for our customers’ products. In certain cases, we may provide volume discounts on sales of our solutions, which may be offset by lower manufacturing costs related to higher volumes. In general, our customers with greater market penetration and better branding tend to develop products that generate larger volumes over the product life cycle. Customer Product Life Cycle. We estimate our customers’ product life cycles based on the customer, type of product and end market. We typically commence commercial shipments from six to 18 months following a design win; however, in some markets, more lengthy product and development cycles are possible, depending on the scope and nature of the project, such as in the automotive OEM market. A portable consumer device typically has a product life cycle of six to 18 months, and an IP security camera typically has a product life cycle of 12 to 24 months. We anticipate that product development and product life cycles will typically be longer than 24 months in the OEM automotive, Tier-1 automotive suppliers and robotics markets, as new product introductions typically occur less frequently in these markets. 48 Results of Operations The following table sets forth our historical operating results for the periods indicated: Revenue Cost of revenue Gross profit Operating expenses: Research and development Selling, general and administrative Total operating expenses Income (loss) from operations Other income, net Income (loss) before income taxes Provision (benefit) for income taxes Net income (loss) 2020 Year Ended January 31, 2019 (dollars in thousands) 2018 $ 228,732 $ 96,023 132,709 227,768 $ 89,624 138,144 129,724 52,634 182,358 (49,649) 8,021 (41,628) 3,164 (44,792) $ 128,084 50,480 178,564 (40,420) 5,868 (34,552) (4,105) (30,447) $ $ 295,402 107,669 187,733 115,510 47,792 163,302 24,431 1,298 25,729 6,877 18,852 The following table sets forth our historical operating results as a percentage of revenue of each line item for the periods indicated: Revenue Cost of revenue Gross profit Operating expenses: Research and development Selling, general and administrative Total operating expenses Income (loss) from operations Other income, net Income (loss) before income taxes Provision (benefit) for income taxes Net income (loss) 2020 Year Ended January 31, 2019 2018 100% 42 58 57 23 80 (22) 4 (18) 2 (20)% 100% 39 61 56 22 78 (17) 2 (15) (2) (13)% 100% 36 64 39 16 55 9 — 9 2 7% Revenue We derive substantially all of our revenue from the sale of HD and Ultra HD video and image processing SoC solutions to IP security OEMs, IP security ODMs, OEM automotive or Tier-1 automotive suppliers, either directly or through our distributors. In recent years, our SoC solutions have been primarily used in camera markets, such as IP security, automotive video recorder, drone and wearable cameras. Although we expect these camera markets, in particular the IP security and automotive camera market, to continue to generate revenue for the foreseeable future, we have recently introduced new SoCs targeting emerging computer vision applications in the IP security, OEM automotive and robotics markets. We derive a substantial portion of our revenue from sales made indirectly through one of our distributors, Wintech Microelectronics Co., Ltd., or Wintech, and directly to one of our ODM customers, Chicony Electronics Co., Ltd., or Chicony. We have historically experienced seasonal fluctuations in our quarterly revenue with our third fiscal quarter normally being the highest revenue quarter. This fluctuation has been driven primarily by increased sales in IP security and consumer camera markets as our customers build inventories in preparation for the holiday shopping season. Our average selling prices fluctuate based on the mix of our solutions sold in a period which reflects the impact of both changes in unit sales of existing solutions as well as the introduction and sales of new solutions. Our solutions are typically characterized by a life cycle that begins with higher average selling prices and lower volumes, followed by broader market adoption, higher volumes and average selling prices that are lower than initial levels. 49 The end markets into which we sell our products have seen significant changes as consumer preferences have evolved in response to new technologies. As a result, the composition and timing of our revenue may differ meaningfully during periods of technology or consumer preference changes. We expect shifts in consumer use of video capture to continue to change over time, as computer vision specialized use cases emerge and video capture continues to proliferate. Cost of Revenue and Gross Margin Cost of revenue includes the cost of materials such as wafers processed by third-party foundries, costs associated with packaging, assembly and testing, and our manufacturing support operations such as logistics, planning and quality assurance. Cost of revenue also includes indirect costs such as warranty, inventory valuation reserves and other general overhead costs. We expect that our gross margin may fluctuate from period to period as a result of changes in average selling price, product mix and the introduction of new products by us or our competitors. In general, solutions incorporated into more complex configurations, such as those used in high-performance cameras, and in future advanced automotive OEM applications, have had or are expected to have higher prices and higher gross margins, as compared to solutions sold into the lower-performance, more competitive camera applications. As semiconductor products mature and unit volumes sold to customers increase, their average selling prices typically decline. These declines may be paired with improvements in manufacturing yields and lower wafer, packaging and test costs, which offset some of the margin reduction that could result from lower selling prices. We believe that our gross margin will decline in the future as we continue to penetrate the highly competitive camera market and, in particular, the IP security market. Research and Development Research and development expense consists primarily of personnel costs, including salaries, stock-based compensation and employee benefits. The expense also includes costs of development incurred in connection with our collaborations with our foundry vendors, costs of licensing intellectual property from third parties for product development, costs of development for software and hardware tools, cost of fabrication of mask sets for prototype products, and allocated depreciation and facility expenses, net of any research and development grants. All research and development costs are expensed as incurred. We expect our research and development expense to increase in absolute dollars as we continue to enhance and expand our product features and offerings and increase headcount for new SoC development and development of computer vision technology, especially for the OEM automotive market. Selling, General and Administrative Selling, general and administrative expense consists primarily of personnel costs, including salaries, stock-based compensation and employee benefits for our sales, marketing, finance, human resources, information technology and administrative personnel. The expense also includes professional service costs related to accounting, tax, legal services, and allocated depreciation and facility expenses. We expect our selling, general and administrative expense to increase in absolute dollars as we continue to maintain the infrastructure and expand the size of our sales and marketing organization to support our business strategy of addressing new opportunities with our computer vision technology. Other Income, Net Other income, net, consists primarily of interest and other income from investments in debt securities, interest income from cash deposits with financial institutions and in fiscal year 2019 a grant from a foreign government. Provision (Benefit) for Income Taxes We are incorporated and domiciled in the Cayman Islands and also conduct business in several countries such as the United States, China, Taiwan, Hong Kong, Italy, South Korea and Japan, and we are subject to taxation in those jurisdictions. Our worldwide operating income is subject to varying tax rates, and our effective tax rate is highly dependent upon the geographic distribution of our earnings or losses and the tax laws and regulations in each geographical region. It is also subject to fluctuation from changes in the valuation of our deferred tax assets and liabilities; tax benefits from excess stock- based compensation deductions; transfer pricing adjustments and the tax effects of nondeductible compensation. We have historically had lower effective tax rates as a substantial percentage of our operations are conducted in lower-tax jurisdictions. If our operational structure was to change in such a manner that would increase the amount of operating income subject to taxation in higher-tax jurisdictions, or if we were to commence operations in jurisdictions assessing relatively higher tax rates, our effective tax rate could fluctuate significantly on a quarterly basis and/or be adversely affected. 50 Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. Although we believe our reserves are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in our historical provision for income taxes and accruals. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of uncertain tax position reserves and changes to reserves that are considered appropriate, as well as the related net interest and penalties. Significant judgment is also required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made. Comparison of the Fiscal Years Ended January 31, 2020, 2019 and 2018 Revenue Revenue Year Ended January 31, 2019 2020 Change 2020 2019 2018 Amount % Amount % $ 228,732 $ 227,768 $ 295,402 $ (dollars in thousands) 964 0.4% $ (67,634) (22.9)% Revenue increased for fiscal year 2020, as compared to fiscal year 2019, primarily attributable to higher revenue from consumer IP security camera and sports camera markets. In the consumer IP security camera market, growth was led by the home security and monitoring market in the North America region, together with shipment penetration into Asia and Europe regions. In the sports camera market, incorporation of our solutions into newly launched action camera products resulted in higher demand from DJI in fiscal year 2020. The increased revenue was partially offset by decreased revenue in the automotive, professional IP security camera and other consumer markets, including non-sports wearable camera, virtual reality and drone markets. Lower revenue from automotive markets, including the automotive aftermarket and OEM video recorder market, was caused by a significant slowdown in the automotive industry in the first half of fiscal year 2020 and promotional activity in fiscal year 2019 from a large automotive customer that did not recur in the current fiscal year. In the professional IP security camera market, despite significant growth in the Asia region and increased adoption of our computer vision-based solutions, lower demand from one of our largest China customers and customers in other regions resulted in a net revenue decrease in fiscal year 2020. Revenue decreased for fiscal year 2019, as compared to fiscal year 2018, primarily due to declines in revenue from wearable camera markets, including the sports camera, virtual reality and non-sports wearable camera markets. The decrease was also attributable to lower revenue from the drone market as a result of a major customer in the drone market shifting its consumer-based drones to competitive solutions, as well as continued weakness from smaller drone customers. The declines in revenue in the wearable camera and drone markets were partially offset by revenue growth in the automotive and IP security camera markets. The revenue growth in the automotive camera market was primarily due to a significant increase in shipments of OEM automotive video recorders in the Japan and China regions, offset by lower revenue from the automotive aftermarket. In the consumer IP security camera market, growth was led by the home security and monitoring market in the North America region, partially offset by a decline in revenue from the Asia region. The increased revenue in the IP security market was also attributable to revenue growth in the professional IP security camera market outside the China region, offset by a decline in revenue from a major Chinese customer. Cost of Revenue and Gross Margin Cost of revenue Gross profit Gross margin Year Ended January 31, 2019 2018 2020 $ 96,023 132,709 $ 89,624 138,144 $ 107,669 187,733 Change 2020 2019 $ Amount (dollars in thousands) 6,399 (5,435) — 63.6% % Amount % 7.1% $ (18,045) (49,589) (3.9)% — (2.7)% (16.8)% (26.4)% (2.9)% 58.0% 60.7% 51 Cost of revenue increased for fiscal year 2020, as compared to fiscal year 2019, primarily due to higher volumes of SoC shipments in the IP security camera, sports camera and drone markets. Cost of revenue decreased for fiscal year 2019, as compared to fiscal year 2018, primarily due to lower shipments of higher cost SoCs associated with lower revenue in the wearable camera and drone markets. The decrease in cost of revenue was partially offset by increased shipments of SoCs for the IP security camera and automotive OEM markets. Gross margin decreased in fiscal year 2020, as compared to fiscal year 2019, primarily due to a higher percentage of our total revenue coming from the professional IP security camera market at lower average selling prices than we obtained in the prior fiscal year. Gross margin decreased in fiscal year 2019, as compared to fiscal year 2018, primarily due to an increase in the percentage of our total revenue that was derived from the lower gross margin IP security camera market combined with the decline in revenue from the higher gross margin sports camera and drone markets. Research and Development Research and development Year Ended January 31, 2019 2020 Change 2020 2019 2018 Amount % Amount % $ 129,724 $ 128,084 $ 115,510 $ (dollars in thousands) 1,640 1.3% $ 12,574 10.9% Research and development expense increased for fiscal year 2020, as compared to fiscal year 2019, primarily due to increases in engineering headcount associated with computer vision technology development for our current markets, as well as new markets such as the automotive OEM and robotics markets. Our engineering headcount increased to 563 at January 31, 2020 compared to 554 at January 31, 2019, which resulted in an increase in salary-related expenses of approximately $3.1 million in fiscal year 2020. The increased research and development expense was also attributable to additional stock-based compensation expense of approximately $4.4 million in fiscal year 2020, as a result of the issuance of stock to newly hired employees, our annual evergreen stock program for existing employees, the performance stock program for executives and our annual employee bonus program. The increases were partially offset by approximately $4.3 million of research and development grants from a foreign government in fiscal year 2020. SoC development costs also decreased by approximately $1.4 million for the twelve months ended January 31, 2020, as compared to the same period in the prior fiscal year, due to project timing and the number of chips in development. Research and development expense increased for fiscal year 2019, as compared to fiscal year 2018, primarily due to increases in engineering headcount and chip development cost associated with the computer vision technology development for our current markets, as well as new markets such as the automotive OEM and robotics markets. Our engineering headcount increased to 554 at January 31, 2019 compared to 519 at January 31, 2018, which resulted in an increase in salary-related expenses of approximately $7.0 million in fiscal year 2019. The increased research and development expense was also attributable to additional stock-based compensation expense of approximately $2.9 million in fiscal year 2019, as a result of the issuance of options and restricted stock units for newly hired employees, our annual evergreen stock program for existing employees, and performance stock program for executives. SoC development related costs increased by approximately $3.8 million for fiscal year 2019, as compared to fiscal year 2018, due to the timing and number of chips in development. Selling, General and Administrative Selling, general and administrative $ 52,634 $ 50,480 $ Year Ended January 31, 2019 2020 Change 2020 2019 2018 Amount % Amount % (dollars in thousands) 2,154 47,792 $ 4.3% $ 2,688 5.6% Selling, general and administrative expense increased for fiscal year 2020, as compared to fiscal year 2019, primarily due to increased headcount to support our business development in IP security, automotive OEM and robotics markets, which resulted in an increase in salary-related expenses of approximately $1.1 million in fiscal year 2020. The increase was also attributable to additional stock-based compensation expense of approximately $1.8 million as a result of the issuance of stock to newly hired employees, our annual evergreen stock program for existing employees, the performance stock program for executives and our annual employee bonus program. The increase was partially offset by approximately $0.6 million less expenditures on professional services. 52 Selling, general and administrative expense increased for fiscal year 2019, as compared to fiscal year 2018, primarily due to increased headcount to support our business development in IP security, automotive OEM and robotics markets, which resulted in an increase in salary-related expenses of approximately $1.8 million in fiscal year 2019. The increase was also attributable to additional stock-based compensation expense of approximately $1.1 million as a result of the issuance of options and restricted stock units for newly hired employees, our annual evergreen stock program for existing employees and performance stock program for executives. Other Income, Net Other income, net $ 8,021 $ 5,868 $ Year Ended January 31, 2019 2020 Change 2020 2019 2018 Amount % Amount % (dollars in thousands) 2,153 1,298 $ 36.7% $ 4,570 352.1% The increase in other income, net, for fiscal year 2020, as compared to fiscal year 2019, was primarily due to an aggregate of approximately $3.4 million of additional interest and other income from our deposits and debt security investments. The increase is primarily the result of larger invested balances and debt securities purchased at discounts. The increase was partially offset by approximately $1.8 million related to a grant from a foreign government associated with research and development activities that was recognized as other income in fiscal year 2019. This ongoing grant is classified in research and development expense in fiscal year 2020 based on how the grant proceeds were utilized. The increase in other income, net, for fiscal year 2019, as compared to fiscal year 2018, was primarily due to an aggregate of approximately $2.7 million of additional interest and other income from our deposits and debt security investments. The increase is primarily the result of larger invested balances, interest rate increases and debt securities purchased at discounts. In fiscal year 2019, we added an additional $100.0 million of capital in debt security investments. The increase was also attributable to a grant of approximately $1.8 million from a foreign government related to research and development activities which can, at our discretion, be used to satisfy certain types of future tax or social insurance liabilities. Provision (Benefit) for Income Taxes Year Ended January 31, 2019 2020 Change 2020 2019 2018 Amount % Amount % Provision (benefit) for income taxes Effective tax rate $ 3,164 $ (8)% (4,105) $ 12% 6,877 $ (dollars in thousands) 7,269 — 27% (177.1)% $ (10,982) — (20)% (159.7)% (15)% Income tax expense increased in fiscal year 2020, as compared to fiscal year 2019, primarily due to the 2019 release of $8.0 million of valuation allowance related to prior year federal research and development credit carryforwards in fiscal year 2019, as well as a decrease in the proportion of profits generated in lower tax jurisdictions, partially offset by an increase in tax benefits from excess stock-based compensation deductions. Income tax expense and the effective tax rate decreased in fiscal year 2019, as compared to fiscal year 2018, primarily due to the 2019 release of $8.0 million of valuation allowance related to prior year federal research and development credit carryforwards, as well as the reduction in the U.S. federal statutory rate from 35% to 21%, partially offset by a decrease in the proportion of profits generated in lower tax jurisdictions and losses incurred in jurisdictions for which we were not able to recognize a related tax benefit. 53 Liquidity and Capital Resources Cash Flows The following table summarizes our cash flows for the periods indicated: Net cash provided by operating activities Net cash used in investing activities Net cash provided by (used in) financing activities Net increase (decrease) in cash, cash equivalents and restricted cash $ $ 39,414 $ (8,576) 6,516 37,354 $ 24,472 $ (79,142) (97,953) (152,623) $ 85,404 (9,600) (52,003) 23,801 2020 Year Ended January 31, 2019 (in thousands) 2018 Net Cash Provided by Operating Activities Fiscal year 2020 compared to fiscal year 2019: Cash provided by operating activities increased primarily due to increased cash receipts associated with the timing of payments from customers and increased liabilities associated with the timing of payments to suppliers. The increased cash flows from operating activities were partially offset by increased inventory purchases associated with higher volumes of SoC shipments in fiscal year 2020. Fiscal year 2019 compared to fiscal year 2018: Cash provided by operating activities decreased primarily due to decreased net income as a result of lower revenue and increased operating expenses. The decrease in cash flows from operating activities also was attributable to decreased liabilities associated with the timing of payments to suppliers and decreased cash receipts associated with the timing of payments from customers. The decrease was partially offset by decreased inventory purchases associated with lower revenue in fiscal year 2019. Net Cash Used in Investing Activities Fiscal year 2020 compared to fiscal year 2019: Net cash used in investing activities decreased primarily due to an additional $87.5 million in cash receipts from the sale and maturity of debt securities, which was partially offset by approximately $18.1 million of additional investments in debt securities. The decrease was also attributable to approximately $1.1 million in reductions to capital expenditures on property and equipment purchases. Fiscal year 2019 compared to fiscal year 2018: Net cash used in investing activities increased primarily due to approximately $133.0 million of additional investments in debt securities. The increased cash used in investing activities was partially offset by an increase of approximately $62.7 million in cash receipts from the sale and maturity of debt securities. Net Cash Provided by (Used in) Financing Activities Fiscal year 2020 compared to fiscal year 2019: Net cash provided by financing activities increased primarily due to $99.9 million of cash used for repurchasing our ordinary shares under the stock repurchase program in fiscal year 2019 while there were no repurchases in fiscal year 2020. The increase was also attributable to approximately $5.3 million of additional cash proceeds from option exercises and employee stock purchase withholding. The increase was partially offset by additional payments of approximately $0.7 million in fiscal year 2020 for intangible assets purchases. Fiscal year 2019 compared to fiscal year 2018: Net cash used in financing activities increased primarily due to additional payments of $45.1 million in cash for the repurchase of our ordinary shares under a stock repurchase program. The increased cash used in financing activities also was attributable to additional payments of $0.4 million in cash for intangible assets purchased, primarily software licenses, as well as approximately $0.4 million less in cash proceeds from option exercises in fiscal year 2019. Stock Repurchase Program On May 29, 2019, our Board of Directors authorized the repurchase of up to $50.0 million of our ordinary shares through June 30, 2020. Since the inception of the repurchase programs in June 2016, a total of $275.0 million has been authorized, and we have repurchased a total of 3,985,876 shares for approximately $174.8 million in cash. As of January 31, 2020, $50.0 million remained available for repurchases under the current repurchase program through June 30, 2020. Repurchases under the program may be made from time-to-time through open market purchases, 10b5-1 plans or privately negotiated transactions subject to market conditions, applicable legal requirements and other relevant factors. The repurchase program does not obligate us to acquire any particular amount of ordinary shares, and it may be suspended at any time at the company's discretion. Repurchases are funded using working capital and any repurchased shares are recorded as authorized but unissued shares. 54 Sources of Liquidity As of January 31, 2020 and 2019, we had cash, cash equivalents and marketable debt securities of approximately $404.7 million and $358.9 million, respectively. During the past three fiscal years, we invested a total of $200.0 million in highly liquid, short-term marketable debt securities. As of January 31, 2020, these securities had a fair value of approximately $211.1 million with unrealized gains of approximately $0.8 million caused by fluctuations in market value. We hold these investments as available-for-sale securities and mark them to market. Operating and Capital Expenditure Requirements As of January 31, 2020, we had cash, cash equivalents and marketable debt securities of approximately $404.7 million. We believe that our existing cash balances will be sufficient to meet our anticipated cash requirements through at least the next 12 months. In the future, we expect our operating and capital expenditures to increase as we increase headcount, expand our business activities, and implement and enhance our information technology platforms. As we expand our operations, we may require more working capital. If our available cash balances are insufficient to satisfy our future liquidity requirements, we may seek to sell equity or convertible debt securities or borrow funds commercially. The sale of equity and convertible debt securities may result in dilution to our shareholders, and those securities may have rights senior to those of our ordinary shares. If we raise additional funds through the issuance of convertible debt securities, these securities could contain covenants that would restrict our operations. We may require additional capital beyond our currently anticipated amounts. Additional capital may not be available to us on reasonable terms, or at all. Our short- term and long-term capital requirements will depend on many factors, including the following: • • • • • • our ability to generate cash from operations; our ability to control our costs; the expansion of our research and development of new technologies and products to address new markets and applications; the emergence of competing or complementary technologies or products; the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights or participating in litigation-related activities; and our acquisition of complementary businesses, products and technologies. Contractual Obligations, Commitments and Contingencies The following table summarizes our outstanding contractual obligations as of January 31, 2020: Contractual Obligations Technology licenses (1) Purchase obligations (2) Unrecognized tax benefits, including interest (3) Total Payment Due by Period as of January 31, 2020 (in thousands) Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years All Other 13,214 35,933 8,260 57,407 $ 4,728 35,933 — 40,661 $ 8,486 — — 8,486 $ $ — — — — $ — — — — $ — — 8,260 8,260 (1) (2) (3) Technology license obligations represent future cash payments for noncancelable internal-use software licenses which are used in product design. Purchase obligations consist primarily of inventory purchase obligations with our independent contract manufacturers. Unrecognized tax benefits, including interest, represent our liabilities for uncertain tax positions as of January 31, 2020. We are unable to reasonably estimate the timing of payments in individual years due to uncertainties in the timing of the effective settlement of tax positions. 55 Stock Options and Restricted Stock Units Grants of stock-based awards are key components of the compensation packages we provide to attract and retain certain employees to align their interests with the interests of existing shareholders. We recognize that these stock-based awards will dilute existing shareholders and have sought to limit the number of shares granted while providing competitive compensation packages. As of January 31, 2020, we had a total of 3.7 million ordinary shares subject to outstanding stock options and unvested restricted stock units, which will potentially dilute our earnings per share. This potential dilution will only result if outstanding options vest and are exercised and restricted stock units vest and are settled. As of January 31, 2020, 87% of our outstanding options had exercise prices less than the then market price of our ordinary shares on such date. Off-Balance Sheet Arrangements As of January 31, 2020, we did not engage in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities. Recent Accounting Pronouncements See Note 1, “Organization and Summary of Significant Accounting Policies—Recent Accounting Pronouncements” of the Notes to the Consolidated Financial Statements, included in Part IV, Item 15 of this report, for a full description of recent accounting standards, including the respective dates of adoption and effects on our consolidated financial position, results of operations and cash flows. Critical Accounting Policies and Significant Management Estimates The preparation of audited consolidated financial statements in conformity with U.S. generally accepted accounting principles, or GAAP, requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reported periods. On an ongoing basis, we evaluate our estimates and assumptions, including those related to (i) the collectability of accounts receivable; (ii) write down of excess and obsolete inventories; (iii) intangible assets and goodwill; (iv) the estimated useful lives of long-lived assets; (v) impairment of long-lived assets and financial instruments; (vi) warranty obligations; (vii) the valuation of stock-based compensation awards and financial instruments; (viii) the probability of performance objectives achievement; (ix) the realization of tax assets and estimates of tax liabilities, including reserves for uncertain tax positions; and (x) the recognition and disclosure of contingent liabilities. These estimates and assumptions are based on historical experience and on various other factors which we believe to be reasonable under the circumstances. We may engage third-party valuation specialists to assist with estimates related to the valuation of financial instruments, assets and stock awards associated with various contractual arrangements. Such estimates often require the selection of appropriate valuation methodologies and significant judgment. Actual results could differ from these estimates under different assumptions or circumstances and such differences could be material. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgment and estimates: Revenue Recognition Effective February 1, 2018, we adopted ASC 606, Revenue from Contracts with Customers. As a result, we recognize revenue when control of goods and services is transferred to our customers. Revenue recognition is evaluated through the following five steps: (i) identification of the contract, or contracts, with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when or as a performance obligation is satisfied. 56 The sale of semiconductor products accounts for the substantial majority of our consolidated revenue. Sales agreements with customers are renewable periodically and contain terms and conditions with respect to payment, delivery, warranty, supply and other rights. We consider an accepted customer purchase order, governed by sales agreement, to be the contract with the customer. For each contract, we consider the promise to transfer tangible products to be the identified performance obligation. Product sales contracts may include volume-based tiered pricing or rebates that are fulfilled in cash or product. In determining the transaction price, we account for the right of returns, cash rebates, commissions and other pricing adjustments as variable consideration and estimate these amounts based on the expected amount to be provided to customers and reduce the revenue recognized. We estimate sales returns and rebates based on our historical patterns of return and pricing credits. As our standard payment terms are 30 days to 60 days, the contracts have no financing component. Under ASC 606, we estimate the total consideration to be received by using the expected value method for each contract, compute weighted average selling price for each unit shipped in cases where there is a material right due to the presence of volume-based tiered pricing, allocate the total consideration between the identified performance obligations, and recognize revenue when control of our goods and services is transferred to our customers. We consider product control to be transferred at a point in time upon shipment or delivery because we have a present right to payment at that time, the customer has legal title to the asset, we have transferred physical possession of the asset, and the customer has significant risk and rewards of ownership of the asset. We also enter into fixed-price engineering service agreements with certain customers. These agreements may include multiple performance obligations, such as software development services, licensing of intellectual property and post-contract customer support, or PCS. These multiple performance obligations are highly interdependent, highly interrelated, are typically not sold separately and do not have standalone selling prices. They are all inputs to generate one combined output which is incorporating our SoC into the customer’s product. Accordingly, we determine that they are not separately identifiable and shall be treated as a single performance obligation. Customers usually pay based on milestones achieved. Because payments received do not correspond directly with the value of our performance to date, for fixed-price engineering services arrangements, revenue is recognized using the time-based straight line method, which best depicts our performance toward complete satisfaction of the performance obligation based on the nature of such professional services. Revenues from engineering service agreements were not material for the fiscal years ended January 31, 2020, 2019 and 2018, respectively. Timing of revenue recognition may differ from the timing of invoicing to our customers. We record contract assets when revenue is recognized prior to invoicing. The contract assets are primarily related to satisfied but unbilled performance obligations associated with our engineering service agreements at the reporting date. As of January 31, 2020 and 2019, the contract assets for these unbilled receivables were not material. Contract liabilities consist of deferred revenue. Our deferred revenue is primarily related to the portion of a transaction price that exceeds the weighted average selling price for products sold to date under tiered-pricing contracts which contain material rights. This deferred revenue is expected to be recognized over the course of the contract when products are delivered for future pricing below the weighted average selling price of the contract. For the twelve months ended January 31, 2020 and 2019, we did not recognize any material revenue adjustment, respectively, related to performance obligations satisfied in prior periods released from this deferred revenue. As of January 31, 2020 and 2019, the respective deferred revenues were not material. Additionally, the transaction price allocated to unsatisfied, or partially unsatisfied, purchase orders for contracts that are greater than a year was not material as of January 31, 2020 and 2019, respectively. We also elect not to disclose the value of unsatisfied or partially unsatisfied performance obligations due to original expected contract duration of one year or less and elect to exclude amounts collected from customers for all sales taxes from the transaction price. Cash Equivalents and Marketable Debt Securities We consider all highly liquid debt security investments with original maturities of less than three months at the time of purchase to be cash equivalents. Debt security investments that are highly liquid with original maturities at the time of purchase greater than three months are considered marketable debt securities. We classify these investments as “available-for-sale” securities carried at fair value, based on quoted market prices of similar assets, with the unrealized gains or losses reported, net of tax, as a separate component of shareholders’ equity and included in accumulated other comprehensive income (loss) in the consolidated balance sheets. The amortization of premiums and accretion of discounts and the realized gains and losses are both recorded in other income, net, in the consolidated statements of operations. We review our investments for possible other-than-temporary impairments on a regular basis. If any loss on investment is believed to be other-than-temporary, a charge will be recorded and a new cost basis in the investment will be established. In evaluating whether a loss on a security is other-than-temporary, we consider the following factors: (i) general market conditions, (ii) the duration and extent to which the fair value is less than cost and (iii) our intent and ability to hold the investment. For securities in an unrealized loss position which is deemed to be other-than-temporary, the difference between the security’s then-current amortized cost basis and fair value is separated into (i) the amount of the impairment related to the credit loss (i.e., the credit loss component) and (ii) the amount of the impairment related to all other factors (i.e., the non-credit loss component). The credit loss component is recognized in earnings. The non- credit loss component is recognized in accumulated other comprehensive loss. Due to the relative short term nature of the investments, there have been no other-than-temporary impairments recorded to date. 57 Inventory Valuation We record inventories at the lower of cost or net realizable value. The cost includes materials and other production costs and is computed using standard cost on a first-in, first-out basis. Inventory reserves are recorded for estimated obsolescence or unmarketable inventories based on forecast of future demand and market conditions. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period. Once inventory is written down, a new accounting cost basis is established and, accordingly, any associated reserve is not released until the inventory is sold or scrapped. There were no material inventory losses recognized for the fiscal years ended January 31, 2020, 2019 and 2018, respectively. Noncancelable Software License We account for a noncancelable on premise internal-use software license as the acquisition of an intangible asset and the incurrence of a liability to the extent that all or a portion of the software licensing fees are not paid on or before the license acquisition date. The intangible asset and related liability are recorded at net present value and interest expense is recorded over the payment term. Goodwill and In-Process Research and Development Goodwill and in-process research and development (“IPR&D”) are required to be tested for impairment at least annually in the fourth fiscal quarter or sooner whenever events or changes in circumstances indicate that the assets may be impaired. We have a single reporting unit for goodwill impairment test purposes based on our business and reporting structure. We do not amortize goodwill. Acquired IPR&D is capitalized at fair value as an intangible asset and amortization commences upon completion of the underlying projects. When a project underlying reported IPR&D is completed, the corresponding amount of IPR&D is reclassified as an amortizable purchased intangible asset and is amortized over its estimated useful life. Leases Effective February 1, 2019, we adopted Accounting Standards Codification (“ASC”) Topic 842, Leases, using the alternative transition method with an adjustment to the opening balance in the period of adoption without adjustment of comparative period financial statements. Under this new guidance, we recognize leases as operating lease right-of-use (“ROU”) assets and corresponding lease liabilities at the lease commencement date based on the present value of future lease payments, while recognizing lease expenses under the straight-line method through the lease term. We also elected the other available practical expedients, and have elected not to recognize ROU assets and lease liabilities that arise from short-term (12 months or less) leases and not to reassess the following for existing leases as of February 1, 2019: (i) whether contracts are or contain leases, (ii) lease classification, and (iii) initial direct costs. We do not combine lease components with non-lease components, and as a result, the non-lease components are accounted for separately. In determining the present value of lease payments, we use the implicit interest rate if readily determinable. When the implicit rate is not readily determinable, we use our incremental borrowing rate based on the information available at the lease commencement date. Our leases mainly include our worldwide office facilities which are classified as operating leases. Certain leases include renewal options that are under our discretion. The renewal options are included in the ROU assets and liability calculation if it is reasonably certain that we will exercise the option. As of February 1, 2019, we recognized approximately $8.6 million of operating lease ROU assets, net of previously recognized prepaid rent and accrued liabilities, and corresponding lease liabilities of $8.7 million. Our short-term leases and finance leases are immaterial as of January 31, 2020 and February 1, 2019, respectively. 58 Stock-Based Compensation We measure stock-based compensation for equity awards granted to employees and directors based on the estimated fair value on the grant date, and recognize that compensation as expense using the straight-line attribution method for service condition awards or using the graded-vesting attribution method for awards with performance conditions over the requisite service period, which is typically the vesting period of each award. We determine the fair value of restricted stock and restricted stock units with service or performance conditions based on the fair market value of our ordinary shares on the grant date. We use the Black-Scholes option pricing model to determine the fair value of stock options. Determining the fair value of stock options on the grant date requires the input of various assumptions, including stock price of the underlying ordinary share, the exercise price of the stock option, expected volatility, expected term, risk-free interest rate and dividend rate. In prior fiscal years, the expected term was calculated using the simplified method, and the expected volatility was calculated based on the weighted average of historical volatilities of our own stock price and the share prices of similar companies that are publicly available for a period commensurate with the expected term. Starting from fiscal year 2019, we calculate expected volatility based on our own historical stock price for a period commensurate with the expected term, which is computed based on our own historical exercise behavior. The risk-free interest rate is derived from an average of the U.S. Treasury constant maturity rates for the respective periods most closely commensurate with the expected term. The expected dividend yield is zero because we have not historically paid dividends and have no present intention to pay dividends. We use the Lattice pricing model and perform Monte Carlo Simulation to evaluate the fair value of awards with market conditions, including assumptions of historical volatility and risk-free interest rate commensurate with the vesting term. Upon adoption of ASU 2016-09, we elect to account for forfeitures as they occur. Net Income (Loss) Per Ordinary Share Basic earnings (losses) per share is computed by dividing net income (loss) available to ordinary shareholders by the weighted-average number of ordinary shares outstanding during the period. Diluted earnings (losses) per share is computed by dividing net income (loss) available to ordinary shareholders by the weighted-average number of ordinary shares outstanding during the period increased to include the number of additional ordinary shares that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, shares to be purchased under the Company’s employee stock purchase plan, unvested restricted stock and restricted stock units. The dilutive effect of potentially dilutive securities is reflected in diluted earnings (losses) per share by application of the treasury stock method. Income Taxes We record income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. In estimating future tax consequences, generally all expected future events other than enactments or changes in the tax law or rates are considered. Valuation allowances are provided when necessary to reduce deferred tax assets to the amount expected to be realized. We apply authoritative guidance for the accounting for uncertainty in income taxes. The guidance requires that tax effects of a position be recognized only if it is “more likely than not” to be sustained based solely on its technical merits as of the reporting date. Upon estimating our tax positions and tax benefits, we consider and evaluate numerous factors, which may require periodic adjustments and which may not reflect the final tax liabilities. We adjust our financial statements to reflect only those tax positions that are more likely than not to be sustained under examination. As part of the process of preparing consolidated financial statements, we are required to estimate our taxes in each of the jurisdictions in which we operate. We estimate actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as accruals and allowances not currently deductible for tax purposes. These differences result in deferred tax assets, which are included in the consolidated balance sheets. In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in the consolidated statements of operations become deductible expenses under applicable income tax laws, or loss or credit carryforwards are utilized. In assessing whether deferred tax assets may be realized, we consider whether it is more likely than not that some portion or all of deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. We make estimates and judgments about our future taxable income based on assumptions that are consistent with our plans and estimates. Should the actual amounts differ from estimates, the amount of valuation allowance could be materially impacted. Any adjustment to the deferred tax asset valuation allowance would be recorded in the consolidated income statement for the periods in which the adjustment is determined to be required. 59 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We had cash, cash equivalents and marketable debt securities totaling $404.7 million and $358.9 million at January 31, 2020 and 2019, respectively. Our cash is deposited in checking accounts with reputable financial institutions. The cash equivalents and marketable debt securities consist primarily of investments in money market funds, certificates of deposit, asset-backed securities, commercial paper, U.S. government securities, and debt securities of corporations. Our cash is held for working capital purposes. We do not enter into investments for trading or speculative purposes. Liquidity and Interest Rate Fluctuation Risks The primary objectives of our investment activities are to preserve capital, provide liquidity and maximize income without significantly increasing risk. Some of the securities we invest in are subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk, we maintain our portfolio in a variety of debt securities with high liquidity and low credit risk. We do not enter into investments for trading or speculative purposes. A 10% change in interest rates will not have a material impact on our future interest income or investment fair value. The liquidity risk and the risk associated with fluctuating interest rates are limited to our investment portfolio. Foreign Currency Risk To date, all of our product sales and inventory purchases have been denominated in U.S. dollars. We therefore have not had any foreign currency risk associated with these two activities. The functional currency of all of our entities is the U.S. dollar. Our operations outside of the United States incur operating expenses and hold assets and liabilities denominated in foreign currencies, principally the New Taiwan Dollar and the Chinese Yuan Renminbi. Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly the exchange rates between the Chinese Yuan Renminbi and the U.S. dollar and between the New Taiwan Dollar and the U.S. dollar. As we grow our operations, our exposure to foreign currency risk could become more significant. To date, we have not entered into any foreign currency exchange contracts and currently do not expect to enter into foreign currency exchange contracts for trading or speculative purposes. 60 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial Statements The financial statements required by this Item are set forth as a separate section of this Annual Report on Form 10-K. See Item 15 for a listing of financial statements provided in the section titled “Financial Statements.” Supplementary Data (Unaudited) The following table sets forth unaudited supplementary quarterly financial data for the two year period ended January 31, 2020. In management’s opinion, the unaudited data has been prepared on the same basis as the audited information and includes all adjustments necessary for a fair presentation of the data for the periods presented. Jan. 31, 2020 Oct. 31, 2019 Jul. 31, 2019 For the Three Months Ended Apr. 30, 2019 Jan. 31, 2019 Oct. 31, 2018 Jul. 31, 2018 Apr. 30, 2018 Revenue Cost of revenue Gross profit Operating expenses: Research and development Selling, general and administrative Total operating expenses Loss from operations Other income, net Loss before income taxes Provision (benefit) for income taxes Net loss Net loss per share attributable to ordinary shareholders: Basic Diluted (in thousands, except per share data) $ 57,212 $ 67,922 $ 56,410 $ 47,188 $ 51,070 $ 57,286 $ 62,474 $ 56,938 22,046 23,896 28,819 23,973 19,335 20,416 22,701 34,892 33,316 39,103 32,437 27,853 30,654 34,585 24,461 38,013 33,807 32,480 30,420 33,017 32,638 31,653 13,341 13,791 12,425 13,077 12,382 12,354 47,148 46,271 42,845 46,094 45,020 44,007 (9,422) (13,832) 993 1,713 (8,429) (12,119) 592 862 31,664 13,178 44,842 (9,950) 792 (9,158) 848 $ (12,981) $ (4,309) $ (10,191) $ (17,311) $ (4,543) $ (9,021) $ (6,877) $ (10,006) (7,168) (10,408) (18,241) (14,366) 3,351 1,917 (11,015) (5,251) (6,472) (942) 32,129 12,566 44,695 (6,682) 732 (5,950) 927 2,196 2,195 (8,213) (16,045) 1,266 1,978 $ $ (0.39) $ (0.39) $ (0.13) $ (0.13) $ (0.31) $ (0.31) $ (0.53) $ (0.53) $ (0.14) $ (0.14) $ (0.28) $ (0.28) $ (0.21) $ (0.21) $ (0.30) (0.30) Net loss per ordinary share for the year is computed independently and may not equal the sum of the quarterly net loss per ordinary share. Effective February 1, 2019, we adopted Accounting Standards Codification (“ASC”) Topic 842, Leases (“ASC 842”), using the alternative transition method with an adjustment to the opening balance in the period of adoption without adjustment of comparative period financial statements. Under this new guidance, we recognize leases as operating lease right-of-use (“ROU”) assets and corresponding lease liabilities at the lease commencement date based on the present value of future lease payments, while recognizing lease expenses under the straight-line method through the lease term. The renewal options are included in the ROU assets and liability calculation if it is reasonably certain that we will exercise the option. The quarterly financial data for the period ended January 31, 2020 were reported under Topic 842, whereas the quarterly financial data for the period ended January 31, 2019 were reported under Topic 840. See Note 1, “Organization and Summary of Significant Accounting Policies” and Note 8, “Leases” of the Notes to Consolidated Financial Statements included in this report for more details of our lease accounting policy and the impact of adoption of this new guidance. Our quarterly revenues and operating results are difficult to forecast. Therefore, we believe that period-to-period comparisons of our operating results will not necessarily be meaningful, and should not be relied upon as an indication of future performance. Also, operating results may fall below our expectations and the expectations of analysts or investors in one or more future quarters. If this were to occur, the market price of our ordinary shares would likely decline. For further information regarding the quarterly fluctuation of our revenues and operating results, see Item 1A, “Risk Factors— Fluctuations in our operating results on a quarterly and annual basis could cause the market price of our ordinary shares to decline”. 61 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. The term “disclosure controls and procedures” (as defined in Rules 13a- 15(e) and 15d- 15(e)) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of January 31, 2020, our disclosure controls and procedures were effective at the reasonable assurance level. Management’s Report on Internal Control over Financial Reporting Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management has evaluated the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, management has concluded that our internal control over financial reporting was effective as of January 31, 2020. The effectiveness of our internal control over financial reporting as of January 31, 2020 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which appears herein. Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting during the Company’s fiscal quarter ended January 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Inherent Limitations of Disclosure Controls and Internal Control over Financial Reporting Because of their inherent limitations, our disclosure controls and procedures and our internal control over financial reporting may not prevent material errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to risks, including that the controls may become inadequate because of changes in conditions or that the degree of compliance with our policies or procedures may deteriorate. ITEM 9B. OTHER INFORMATION Not applicable. 62 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information responsive to this item is incorporated herein by reference to our Proxy Statement for our 2020 annual meeting of shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. We have a Code of Business Conduct and Ethics for all of our directors, officers and employees. We also have a Code of Ethics for Finance Team applicable to our Chief Executive Officer, Chief Financial Officer and other Senior Financial Officers. These documents are available on our website at http://investor.ambarella.com/corporate-governance. To date, there have been no waivers under our Code of Business Conduct and Ethics and Code of Ethics for Finance Team. We will post any amendments or waivers, if and when granted, of our Code of Business Conduct and Ethics and Code of Ethics for Finance Team on our website. ITEM 11. EXECUTIVE COMPENSATION The information responsive to this item is incorporated herein by reference to our Proxy Statement for our 2020 annual meeting of shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information responsive to this item is incorporated herein by reference to our Proxy Statement for our 2020 annual meeting of shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information responsive to this item is incorporated herein by reference to our Proxy Statement for our 2020 annual meeting of shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information responsive to this item is incorporated herein by reference to our Proxy Statement for our 2020 annual meeting of shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. 63 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) (1) Financial Statements PART IV The following consolidated financial statements of the Registrant and Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm, are included herewith: Financial Statement Description • Report of Independent Registered Public Accounting Firm • Consolidated Balance Sheets As of January 31, 2020 and 2019 • Consolidated Statements of Operations For the Years Ended January 31, 2020, 2019 and 2018 • Consolidated Statements of Comprehensive Income (Loss) For the Years Ended January 31, 2020, 2019 and 2018 • Consolidated Statements of Shareholders’ Equity For the Years Ended January 31, 2020, 2019 and 2018 • Consolidated Statements of Cash Flows For the Years Ended January 31, 2020, 2019 and 2018 • Notes to Consolidated Financial Statements Page 65 68 69 70 71 72 73 (a) (2) Financial Statement Schedule Financial statement schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or the notes thereto. (b) Exhibits The exhibits listed below in the accompanying “Exhibits Index” are filed or incorporated by reference as part of this Annual Report on Form 10-K. 64 Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Ambarella, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Ambarella, Inc. and its subsidiaries (the “Company”) as of January 31, 2020 and 2019, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the period ended January 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of January 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended January 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Change in Accounting Principles As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in fiscal year 2020 and the manner in which it accounts for revenue from contracts with customers in fiscal year 2019. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 65 Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Accounting for Income Taxes As described in Notes 1 and 13 to the consolidated financial statements, the Company's accounting for income taxes requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in its financial statements or tax returns. As disclosed by the Company, management evaluates the realization of tax assets and estimates of tax liabilities, including reserves for uncertain tax positions. Management considers and evaluates numerous factors, which may require periodic adjustments and which may not reflect the final tax liabilities. Management adjusts its financial statements to reflect only those tax positions that are more likely than not to be sustained under examination, and considers whether a valuation allowance should be established against its deferred tax assets based on the consideration of all available evidence. As part of the process of preparing consolidated financial statements, the Company is required to estimate its taxes in each of the jurisdictions in which it operates. Valuation allowances are provided when necessary to reduce deferred tax assets to the amount expected to be realized. The Company’s worldwide operating income is subject to varying tax rates and its effective tax rate is highly dependent upon the geographic distribution of its earnings or losses and the tax laws and regulations in each geographical region. The Company’s effective tax rate of (8%) for the year ended January 31, 2020 is different than the U.S. federal statutory rate of 21%. The principal considerations for our determination that performing procedures relating to accounting for income taxes is a critical audit matter are there was significant judgment by management in determining the income tax provision and other tax positions, specifically in the determination of taxable income or loss by jurisdiction taxed or benefited at rates other than the U.S. federal statutory rate, and the recognition and measurement of deferred tax assets, valuation allowances, and uncertain tax positions. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing audit procedures and evaluating audit evidence. The audit effort involved the use of professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained. 66 Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to accounting for income taxes, including those related to the assessment of uncertain tax positions, determination of operating income or loss by jurisdiction taxed or benefited at rates other than the U.S. federal statutory rate, and the recognition and measurement of deferred tax assets and valuation allowances. These procedures also included, among others, (i) testing the calculation of the income tax provision, including the accuracy of taxable income by jurisdiction, (ii) evaluating the reasonableness of cost plus percentages for entities selected for testing based on management’s methodology for determining taxable income or loss by jurisdiction, (iii) evaluating the recognition and measurement of valuation allowances, and (iv) evaluating the recognition and measurement of uncertain tax positions, including management’s assessment of the technical merits of tax positions and estimates of the amount of tax benefit expected to be sustained for the uncertain tax position selected for testing. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of management’s judgment and estimates related to management’s methodology for determining taxable income or loss by jurisdiction, which included evaluation of management’s application of relevant rules for determining arm’s length compensation for services. /s/ PricewaterhouseCoopers LLP San Jose, California March 27, 2020 We have served as the Company’s auditor since 2008. 67 AMBARELLA, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) January 31, 2020 January 31, 2019 ASSETS Current assets: Cash and cash equivalents Marketable debt securities Accounts receivable, net Inventories Restricted cash Prepaid expenses and other current assets Total current assets Property and equipment, net Deferred tax assets, non-current Intangible assets, net Operating lease right-of-use assets, net Goodwill Other non-current assets Total assets LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable Accrued and other current liabilities Operating lease liabilities, current Income taxes payable Deferred revenue, current Total current liabilities Operating lease liabilities, non-current Other long-term liabilities Total liabilities Commitments and contingencies (Note 14) Shareholders' equity: Preference shares, $0.00045 par value per share, 20,000,000 shares authorized and no shares issued and outstanding at January 31, 2020 and January 31, 2019, respectively Ordinary shares, $0.00045 par value per share, 200,000,000 shares authorized at January 31, 2020 and January 31, 2019, respectively; 33,805,609 shares issued and outstanding at January 31, 2020; 32,303,540 shares issued and outstanding at January 31, 2019 Additional paid-in capital Accumulated other comprehensive income Retained earnings Total shareholders’ equity Total liabilities and shareholders' equity $ $ $ 231,403 $ 173,345 18,487 22,971 9 4,975 451,190 5,614 10,400 17,826 9,935 26,601 5,710 527,276 $ 14,910 34,970 2,181 691 701 53,453 7,975 17,776 79,204 194,047 164,861 26,212 18,252 11 6,206 409,589 6,728 10,587 10,936 — 26,601 2,412 466,853 12,801 24,700 — 993 529 39,023 — 8,341 47,364 — — 15 261,220 768 186,069 448,072 527,276 $ 15 188,516 97 230,861 419,489 466,853 See accompanying notes to consolidated financial statements. 68 AMBARELLA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data) Revenue Cost of revenue Gross profit Operating expenses: Research and development Selling, general and administrative Total operating expenses Income (loss) from operations Other income, net Income (loss) before income taxes Provision (benefit) for income taxes Net income (loss) Net income (loss) per share attributable to ordinary shareholders: Basic Diluted Weighted-average shares used to compute net income (loss) per share attributable to ordinary shareholders: Basic Diluted 2020 Year Ended January 31, 2019 2018 $ $ $ $ 228,732 $ 96,023 132,709 129,724 52,634 182,358 (49,649) 8,021 (41,628) 3,164 (44,792) $ 227,768 $ 89,624 138,144 128,084 50,480 178,564 (40,420) 5,868 (34,552) (4,105) (30,447) $ (1.35) $ (1.35) $ (0.93) $ (0.93) $ 295,402 107,669 187,733 115,510 47,792 163,302 24,431 1,298 25,729 6,877 18,852 0.57 0.55 33,083,562 33,083,562 32,713,606 32,713,606 33,224,803 34,583,150 See accompanying notes to consolidated financial statements. 69 AMBARELLA, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) Net income (loss) Other comprehensive income (loss), net of tax: Unrealized gains (losses) on investments Other comprehensive income (loss), net of tax Comprehensive income (loss) 2020 Year Ended January 31, 2019 2018 $ (44,792) $ (30,447) $ 18,852 671 671 (44,121) $ 376 376 (30,071) $ (209) (209) 18,643 $ See accompanying notes to consolidated financial statements. 70 AMBARELLA, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (in thousands, except share data) Balance--January 31, 2017 Outstanding Ordinary Shares Shares Amount 33,369,032 $ Additional Paid-in Capital 212,276 $ Accumulated Other Comprehensive Income (Loss) Retained Earnings Exercise of stock options Vesting of restricted stock units Employee stock purchase plan Stock repurchase Stock-based compensation expense related to stock awards granted to employees and consultants Net unrealized gains (losses) on investments - net of taxes Net income (loss) Balance--January 31, 2018 Cumulative effect of change in accounting principle Exercise of stock options Vesting of restricted stock units Employee stock purchase plan Stock repurchase Stock-based compensation expense related to stock awards granted to employees and consultants Net unrealized gains (losses) on investments - net of taxes Net income (loss) Balance--January 31, 2019 Exercise of stock options Vesting of restricted stock units Employee stock purchase plan Stock-based compensation expense related to stock awards granted to employees and consultants Net unrealized gains (losses) on investments - net of taxes Net income (loss) Balance--January 31, 2020 175,187 932,454 107,736 (1,094,795) — — — 33,489,614 — 232,205 920,826 146,887 (2,485,992) — — — 32,303,540 366,886 957,319 177,864 15 $ — — — — — — — 15 — — — — — — — — 15 — — — 2,191 — 4,646 (54,788) 56,861 — — 221,186 — 1,285 — 5,136 (99,903) 60,812 — — 188,516 5,695 — 5,967 (70) $ 242,413 $ — — — — — — — — — (209) — (279) — — 18,852 261,265 — — — — — — 376 — 97 — — — 43 — — — — — — (30,447) 230,861 — — — Total 454,634 2,191 — 4,646 (54,788) 56,861 (209) 18,852 482,187 43 1,285 — 5,136 (99,903) 60,812 376 (30,447) 419,489 5,695 — 5,967 — — — 33,805,609 $ — — — 15 $ 61,042 — — 261,220 $ — 671 — 768 $ — — (44,792) 186,069 $ 61,042 671 (44,792) 448,072 See accompanying notes to consolidated financial statements. 71 AMBARELLA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) 2020 Year Ended January 31, 2019 2018 $ (44,792) $ (30,447) $ 18,852 Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization Amortization/accretion of marketable debt securities Stock-based compensation Deferred income taxes Other non-cash items, net Changes in operating assets and liabilities: Accounts receivable Inventories Prepaid expenses and other current assets Other non-current assets Accounts payable Accrued liabilities Income taxes payable Deferred revenue Lease liabilities Other long-term liabilities Net cash provided by operating activities Cash flows from investing activities: Purchase of investments Sales of investments Maturities of investments Purchase of property and equipment Net cash used in investing activities Cash flows from financing activities: Proceeds from exercise of stock options and employee stock purchase plan Stock repurchase Payment for intangible assets Net cash provided by (used in) financing activities Net increase (decrease) in cash, cash equivalents and restricted cash Cash, cash equivalents and restricted cash at beginning of period Cash, cash equivalents and restricted cash at end of period Supplemental disclosure of cash flow information: Cash paid for income taxes Supplemental disclosure of noncash investing activities: Unpaid liabilities related to intangible and fixed assets purchases $ $ $ See accompanying notes to consolidated financial statements 72 11,631 (969) 66,871 187 (71) 7,725 (4,719) 1,057 (3,298) 2,109 5,079 (302) 172 (2,851) 1,585 39,414 (225,913) 96,363 122,795 (1,821) (8,576) 11,960 — (5,444) 6,516 37,354 194,058 231,412 $ 7,221 (670) 60,812 (6,945) 350 5,082 5,131 (2,202) (155) (7,014) (8,302) 57 265 — 1,289 24,472 (207,841) 66,211 65,428 (2,940) (79,142) 6,686 (99,904) (4,735) (97,953) (152,623) 346,681 194,058 $ 4,770 172 56,861 2,092 165 7,302 (3,238) 379 (33) (140) 1,430 368 (7,026) — 3,450 85,404 (74,863) 10,900 58,050 (3,687) (9,600) 7,091 (54,788) (4,306) (52,003) 23,801 322,880 346,681 1,811 $ 1,409 $ 845 12,284 $ 933 $ 9,008 AMBARELLA, INC. Notes to Consolidated Financial Statements 1. Organization and Summary of Significant Accounting Policies Organization Ambarella, Inc. (the “Company”) was incorporated in the Cayman Islands on January 15, 2004. The Company is a leading developer of low-power semiconductor solutions offering high-definition (HD) and Ultra HD compression, image processing, and deep neural network processing. The Company combines its processor design capabilities with its expertise in video and image processing, algorithms and software to provide a technology platform that is designed to be easily scalable across multiple applications and enable rapid and efficient product development. The Company’s system-on-a-chip, or SoC, designs fully integrate high-definition video processing, image processing, artificial intelligence (AI) computer vision algorithms, audio processing and system functions onto a single chip, delivering exceptional video and image quality, differentiated functionality and low power consumption. The Company is currently addressing a broad range of human and computer vision applications, including professional and consumer security cameras, automotive cameras such as advanced driver assistance systems (ADAS), electronic mirrors, drive recorders, driver/cabin monitoring systems, autonomous driving, and industrial and robotic applications. The Company sells its solutions to leading original design manufacturers, or ODMs, and original equipment manufacturers, or OEMs, globally. Basis of Consolidation The Company’s fiscal year ends on January 31. The consolidated financial statements of the Company and its subsidiaries have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”). All intercompany transactions and balances have been eliminated in consolidation. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reported periods. Actual results could differ from those estimates. On an ongoing basis, management evaluates its estimates and assumptions, including those related to (i) the collectability of accounts receivable; (ii) write down of excess and obsolete inventories; (iii) intangible assets and goodwill; (iv) the estimated useful lives of long-lived assets; (v) impairment of long-lived assets and financial instruments; (vi) warranty obligations; (vii) the valuation of stock-based compensation awards and financial instruments; (viii) the probability of performance objectives achievement; (ix) the realization of tax assets and estimates of tax liabilities, including reserves for uncertain tax positions; and (x) the recognition and disclosure of contingent liabilities. These estimates and assumptions are based on historical experience and on various other factors which the Company believes to be reasonable under the circumstances. The Company may engage third-party valuation specialists to assist with estimates related to the valuation of financial instruments, assets and stock awards associated with various contractual arrangements. Such estimates often require the selection of appropriate valuation methodologies and significant judgment. Actual results could differ from these estimates under different assumptions or circumstances and such differences could be material. Concentration of Risk The Company’s products are manufactured, assembled and tested by third-party contractors located primarily in Asia. The Company does not have long-term agreements with these contractors. A significant disruption in the operations of one or more of these contractors would impact the production of the Company’s products which could have a material adverse effect on its business, financial condition and results of operations. A substantial portion of the Company’s revenue is derived from sales through one of its distributors, Wintech Microelectronics Co., Ltd., or Wintech, which serves as its non-exclusive sales representative in Asia other than Japan, and directly to one ODM customer, Chicony Electronics Co., Ltd., or Chicony. Termination of the relationships with these customers could result in a temporary or permanent loss of revenue. Furthermore, any credit issues from these customers could impair their abilities to make timely payment to the Company. See Note 15 for additional information regarding revenue and credit concentration with these customers. 73 Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, marketable debt securities and accounts receivable. The Company maintains its cash primarily in checking accounts with reputable financial institutions. Cash deposits held with these financial institutions may exceed the amount of insurance provided on such deposits. The Company has not experienced any losses on deposits of its cash. In order to limit the exposure of each investment, the cash equivalents and marketable debt securities consist primarily of money market funds, certificates of deposit, asset-backed securities, commercial paper, U.S. government securities and debt securities of corporations which management assesses to be highly liquid. The Company does not hold or issue financial instruments for trading purposes. The Company performs ongoing credit evaluation of its customers and adjusts credit limits based upon payment history and customers’ credit worthiness. The Company regularly monitors collections and payments from its customers. Foreign Currency Transactions The U.S. dollar is the functional currency for the Company and its subsidiaries. Monetary assets and liabilities denominated in non-U.S. currencies are re-measured to U.S. dollars using current exchange rates in effect at the balance sheet date. Nonmonetary assets and liabilities are re-measured to U.S. dollars using historical exchange rates. Monetary and other accounts are re-measured to U.S. dollars using average exchange rates in effect during each period. Gains or losses from foreign currency re-measurement are included in other income, net in the consolidated statements of operations, and, to date, have not been material. Fair Value of Financial Instruments Fair value accounting is applied to all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed in the financial statements on a recurring basis. The carrying amounts reflected in the consolidated balance sheets for cash equivalents, accounts receivable, accounts payable, accrued liabilities and other current liabilities, approximate fair value due to the short-term nature. Cash Equivalents and Marketable Debt Securities The Company considers all highly liquid debt security investments with original maturities of less than three months at the time of purchase to be cash equivalents. Debt security investments that are highly liquid with original maturities at the time of purchase greater than three months are considered marketable debt securities. The Company classifies these investments as “available-for-sale” securities carried at fair value, based on quoted market prices of similar assets, with the unrealized gains or losses reported, net of tax, as a separate component of shareholders’ equity and included in accumulated other comprehensive income (loss) in the consolidated balance sheets. The amortization of premiums and accretion of discounts and the realized gains and losses are both recorded in other income, net, in the consolidated statements of operations. The Company reviews its investments for possible other-than-temporary impairments on a regular basis. If any loss on investment is believed to be other-than-temporary, a charge will be recorded and a new cost basis in the investment will be established. In evaluating whether a loss on a security is other-than-temporary, the Company considers the following factors: (i) general market conditions, (ii) the duration and extent to which the fair value is less than cost and (iii) the Company’s intent and ability to hold the investment. For securities in an unrealized loss position which is deemed to be other-than-temporary, the difference between the security’s then-current amortized cost basis and fair value is separated into (i) the amount of the impairment related to the credit loss (i.e., the credit loss component) and (ii) the amount of the impairment related to all other factors (i.e., the non-credit loss component). The credit loss component is recognized in earnings. The non- credit loss component is recognized in accumulated other comprehensive loss. Due to the relative short term nature of the investments, there have been no other-than-temporary impairments recorded to date. 74 Restricted Cash Amounts included in restricted cash represent those required to be set aside to secure certain transactions in a foreign entity. As of January 31, 2020 and 2019, the restricted cash was immaterial, respectively. The following table presents cash, cash equivalents and restricted cash reported on the consolidated balance sheets, and the sums are presented on the consolidated statements of cash flows: Cash and cash equivalents Restricted cash Total as presented in the consolidated statements of cash flows 2020 As of January 31, 2019 (in thousands) $ $ 231,403 $ 9 231,412 $ 194,047 $ 11 194,058 $ 2018 346,672 9 346,681 Trade Accounts Receivable and Allowances for Doubtful Accounts Trade accounts receivable are recorded at the invoiced amount and do not include finance charges. The Company performs ongoing credit evaluation of its customers and generally requires no collateral. The Company assesses the need for allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments by considering factors such as historical collection experience, credit quality, aging of the accounts receivable balances and current economic conditions that may affect a customer’s ability to pay. There were no material write-offs of accounts receivable for the fiscal years ended January 31, 2020, 2019 and 2018, respectively. There was no material allowance for doubtful accounts recorded as of January 31, 2020 and 2019, respectively. Inventories The Company records inventories at the lower of cost or net realizable value. The cost includes materials and other production costs and is computed using standard cost on a first-in, first-out basis. Inventory reserves are recorded for estimated obsolescence or unmarketable inventories based on forecast of future demand and market conditions. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period. Once inventory is written down, a new accounting cost basis is established and, accordingly, any associated reserve is not released until the inventory is sold or scrapped. There were no material inventory losses recognized for the fiscal years ended January 31, 2020, 2019 and 2018, respectively. Property and Equipment Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful life for computer equipment, computer software, machinery, equipment and furniture and fixtures. Leasehold improvements are amortized over the shorter of the lease term or their estimated useful lives. Repairs and maintenance are charged to expense as incurred. Noncancelable Internal-Use Software License The Company accounts for a noncancelable on premise internal-use software license as the acquisition of an intangible asset and the incurrence of a liability to the extent that all or a portion of the software licensing fees are not paid on or before the license acquisition date. The intangible asset and related liability are recorded at net present value and interest expense is recorded over the payment term. 75 Leases Effective February 1, 2019, the Company adopted Accounting Standards Codification (“ASC”) Topic 842, Leases, using the alternative transition method with an adjustment to the opening balance in the period of adoption without adjustment of comparative period financial statements. Under this new guidance, the Company recognizes leases as operating lease right-of-use (“ROU”) assets and corresponding lease liabilities at the lease commencement date based on the present value of future lease payments, while recognizing lease expenses under straight-line method through the lease term. The Company also elected the other available practical expedients, and has elected not to recognize ROU assets and lease liabilities that arise from short-term (12 months or less) leases and not to reassess the following for existing leases as of February 1, 2019: (i) whether contracts are or contain leases, (ii) lease classification, and (iii) initial direct costs. The Company does not combine lease components with non-lease components, and as a result, the non-lease components are accounted for separately. In determining the present value of lease payments, the Company uses the implicit interest rate if readily determinable. When the implicit rate is not readily determinable, the Company uses its incremental borrowing rate based on the information available at the lease commencement date. The Company's leases mainly include its worldwide office facilities which are classified as operating leases. Certain leases include renewal options that are under the Company's discretion. The renewal options are included in the ROU assets and liability calculation if it is reasonably certain that the Company will exercise the option. As of February 1, 2019, the Company recognized approximately $8.6 million of operating lease ROU assets, net of previously recognized prepaid rent and accrued liabilities, and corresponding lease liabilities of $8.7 million. The Company's short-term leases and finance leases are immaterial as of January 31, 2020 and February 1, 2019, respectively. Goodwill and In-Process Research and Development The Company does not amortize goodwill. Acquired in-process research and development, or IPR&D, is capitalized at fair value as an intangible asset and amortization commences upon completion of the underlying projects. When a project underlying reported IPR&D is completed, the corresponding amount of IPR&D is reclassified as an amortizable purchased intangible asset and is amortized over its estimated useful life. As of January 31, 2020, there was no IPR&D amortized. Impairment of Long-Lived Assets Including Goodwill and Other Acquired Intangible Assets The Company reviews property and equipment and intangible assets, excluding goodwill, for impairment at least annually in the fourth fiscal quarter or whenever events or changes in circumstances indicate that the carrying amount of an asset, or asset group, may not be recoverable. Determination of recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset, or asset group to estimated undiscounted future cash flows expected to be generated by the asset, or asset group. If the carrying amount of an asset or asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset or asset group exceeds the estimated fair value of the asset or asset group. Fair value is determined based on the estimated discounted future cash flows expected to be generated by the asset or asset group. Events or changes in circumstances that may indicate that an asset is impaired include significant decreases in the market value of an asset, significant underperformance relative to expected historical or projected future results of operations, a change in the extent or manner in which an asset is utilized, significant declines in the estimated fair value of the overall Company for a sustained period, shifts in technology, loss of key management or personnel, changes in the Company’s operating model or strategy and competitive forces. There has been no occurrence of events to date that would trigger an impairment analysis. As such, no impairment charge has been recognized as of January 31, 2020. The Company tests the goodwill for impairment at least annually in the fourth fiscal quarter, or sooner whenever events or changes in circumstances indicate that the asset may be impaired. The Company has a single reporting unit for goodwill impairment test purposes based on its business and reporting structure. The Company is permitted to first assess qualitative factors to determine whether the two step goodwill impairment test is necessary. Further testing is only required if the Company determines, based on the qualitative assessment, that it is more likely than not that a reporting unit’s fair value is less than its carrying amount. Otherwise, no further impairment testing is required. Qualitative factors include industry and market considerations, overall financial performance, and other relevant events and factors affecting the reporting unit. No goodwill impairment has been identified to date based on the Company’s qualitative factors assessment. 76 Equity Investment The Company accounts for its investment in a privately held company as an equity investment and reports the investment in other non-current assets in the consolidated balance sheets. The Company chooses to measure this equity investment that does not have readily determinable fair value at cost minus any recorded impairments, adjusted for observable price changes in transactions for an identical or similar investment of the same issuer. Upon determining that an impairment or observable price change exists, the Company records any adjustment to the fair value of the investment through net income. To date, there have been no identified events or changes in circumstances that may have a significant effect on the fair value of this investment and the Company has not recognized any impairment losses related to this investment nor have there been any observable price changes. Revenue Recognition Effective February 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers. As a result, the Company recognizes revenue when control of its goods and services is transferred to its customers. Revenue recognition is evaluated through the following five steps: (i) identification of the contract, or contracts, with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when or as a performance obligation is satisfied. The sale of semiconductor products accounts for the substantial majority of the Company’s consolidated revenue. Sales agreements with customers are renewable periodically and contain terms and conditions with respect to payment, delivery, warranty, supply and other rights. The Company considers an accepted customer purchase order, governed by sales agreement, to be the contract with the customer. For each contract, the Company considers the promise to transfer tangible products to be the identified performance obligation. Product sales contracts may include volume-based tiered pricing or rebates that are fulfilled in cash or product. In determining the transaction price, the Company accounts for the right of returns, cash rebates, commissions and other pricing adjustments as variable consideration and estimates these amounts based on the expected amount to be provided to customers and reduces the revenue recognized. The Company estimates sales returns and rebates based on the Company’s historical patterns of return and pricing credits. As the Company’s standard payment terms are 30 days to 60 days, the contracts have no financing component. Under ASC 606, the Company estimates the total consideration to be received by using the expected value method for each contract, computes weighted average selling price for each unit shipped in cases where there is a material right due to the presence of volume-based tiered pricing, allocates the total consideration between the identified performance obligations, and recognizes revenue when control of its goods and services is transferred to its customers. The Company considers product control to be transferred at a point in time upon shipment or delivery because the Company has a present right to payment at that time, the customer has legal title to the asset, the Company has transferred physical possession of the asset, and the customer has significant risk and rewards of ownership of the asset. The Company also enters into fixed-price engineering service agreements with certain customers. These agreements may include multiple performance obligations, such as software development services, licensing of intellectual property and post-contract customer support, or PCS. These multiple performance obligations are highly interdependent, highly interrelated, are typically not sold separately and do not have standalone selling prices. They are all inputs to generate one combined output which is incorporating the Company’s SoC into the customer’s product. Accordingly, the Company determines that they are not separately identifiable and shall be treated as a single performance obligation. Customers usually pay based on milestones achieved. Because payments received do not correspond directly with the value of the Company’s performance to date, for fixed-price engineering services arrangements, revenue is recognized using the time-based straight line method, which best depicts the Company’s performance toward complete satisfaction of the performance obligation based on the nature of such professional services. Revenues from engineering service agreements were not material for the fiscal years ended January 31, 2020, 2019 and 2018, respectively. Timing of revenue recognition may differ from the timing of invoicing to the Company’s customers. The Company records contract assets when revenue is recognized prior to invoicing. The Company’s contract assets are primarily related to satisfied but unbilled performance obligations associated with its engineering service agreements at the reporting date. As of January 31, 2020 and 2019, the contract assets for these unbilled receivables were not material. The Company’s contract liabilities consist of deferred revenue. The deferred revenue is primarily related to the portion of a transaction price that exceeds the weighted average selling price for products sold to date under tiered-pricing contracts which contain material rights. This deferred revenue is expected to be recognized over the course of the contract when products are delivered for future pricing below the weighted average selling price of the contract. For the twelve months ended January 31, 2020 and 2019, the Company did not recognize any material revenue adjustment, respectively, related to performance obligations satisfied in prior periods released from this deferred revenue. As of January 31, 2020 and 2019, the respective deferred revenues were not material. Additionally, the transaction price allocated to unsatisfied, or partially unsatisfied, purchase orders for contracts that are greater than a year was not material as of January 31, 2020 and 2019, respectively. The Company also elects not to disclose the value of unsatisfied or partially unsatisfied performance obligations due to original expected contract duration of one year or less and elects to exclude amounts collected from customers for all sales taxes from the transaction price. 77 Cost of Revenue Cost of revenue includes cost of materials, cost associated with packaging and assembly, testing and shipping, cost of personnel, stock-based compensation, logistics and quality assurance, warranty cost, royalty expense, write-downs of inventories and allocation of overhead. Warranty Costs The Company typically provides warranty on its products. The Company accrues for the estimated warranty costs at the time when revenue is recognized. The warranty accruals are regularly monitored by management based upon historical experience and any specifically identified failures. While the Company engages in extensive product quality assessment, actual product failure rates, material usage or service delivery costs could differ from estimates and revisions to the estimated warranty liability would be required. There was no warranty accrual as of January 31, 2020 and 2019, respectively. Research and Development Research and development costs are expensed as incurred and consist primarily of personnel costs, product development costs, which include engineering services, development software and hardware tools, license fees, costs of fabrication of masks for prototype products, other development materials costs, depreciation of equipment and tools and allocation of facility costs, net of any research and development grants. As of January 31, 2020, there was approximately $1.2 million of grants recorded in prepaid expenses and other current assets and approximately $3.2 million of grants recorded in other non-current assets in the consolidated balance sheets. Selling, General and Administrative Selling, general and administrative expenses consist of personnel costs, travel and trade show costs, legal expenses, other professional services and occupancy costs. Advertising expenses were not material for the fiscal years ended January 31, 2020, 2019 and 2018, respectively. Stock-Based Compensation The Company measures stock-based compensation for equity awards granted to employees and directors based on the estimated fair value on the grant date, and recognizes that compensation as expense using the straight-line attribution method for service condition awards or using the graded-vesting attribution method for awards with performance conditions over the requisite service period, which is typically the vesting period of each award. The Company determines the fair value of restricted stock and restricted stock units with service or performance conditions based on the fair market value of its ordinary shares on the grant date. The Company uses the Black-Scholes option pricing model to determine the fair value of stock options. Determining the fair value of stock options on the grant date requires the input of various assumptions, including stock price of the underlying ordinary share, the exercise price of the stock option, expected volatility, expected term, risk-free interest rate and dividend rate. In prior fiscal years, the expected term was calculated using the simplified method, and the expected volatility was calculated based on the weighted average of historical volatilities of the Company’s stock price and the share prices of similar companies that are publicly available for a period commensurate with the expected term. Starting from fiscal year 2019, the Company calculates expected volatility based on its own historical stock price for a period commensurate with the expected term, which is computed based on its own historical exercise behavior. The risk-free interest rate is derived from an average of the U.S. Treasury constant maturity rates for the respective periods most closely commensurate with the expected term. The expected dividend yield is zero because the Company has not historically paid dividends and has no present intention to pay dividends. The Company uses the Lattice pricing model and Monte Carlo Simulation to evaluate the fair value of awards with market conditions, including assumptions of historical volatility and risk-free interest rate commensurate with the vesting term. Upon adoption of ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting in the first quarter of fiscal year 2017, the Company elects to account for forfeitures as they occur. Income Taxes The Company records income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in its financial statements or tax returns. In estimating future tax consequences, generally all expected future events other than enactments or changes in the tax law or rates are considered. Valuation allowances are provided when necessary to reduce deferred tax assets to the amount expected to be realized. 78 The Company applies authoritative guidance for the accounting for uncertainty in income taxes. The guidance requires that tax effects of a position be recognized only if it is “more likely than not” to be sustained based solely on its technical merits as of the reporting date. Upon estimating its tax positions and tax benefits, the Company considers and evaluates numerous factors, which may require periodic adjustments and which may not reflect the final tax liabilities. The Company adjusts its financial statements to reflect only those tax positions that are more likely than not to be sustained under examination. As part of the process of preparing consolidated financial statements, the Company is required to estimate its taxes in each of the jurisdictions in which it operates. The Company estimates actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as accruals and allowances not currently deductible for tax purposes. These differences result in deferred tax assets, which are included in the consolidated balance sheets. In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in the consolidated statements of operations become deductible expenses under applicable income tax laws, or loss or credit carryforwards are utilized. In assessing whether deferred tax assets may be realized, the Company considers whether it is more likely than not that some portion or all of deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. The Company makes estimates and judgments about its future taxable income based on assumptions that are consistent with its plans and estimates. Should the actual amounts differ from estimates, the amount of valuation allowance could be materially impacted. Any adjustment to the deferred tax asset valuation allowance would be recorded in the consolidated income statement for the periods in which the adjustment is determined to be required. Net Income (Loss) Per Ordinary Share Basic earnings (losses) per share is computed by dividing net income (loss) available to ordinary shareholders by the weighted-average number of ordinary shares outstanding during the period. Diluted earnings (losses) per share is computed by dividing net income (loss) available to ordinary shareholders by the weighted-average number of ordinary shares outstanding during the period increased to include the number of additional ordinary shares that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, shares to be purchased under the Company’s employee stock purchase plan, unvested restricted stock and restricted stock units. The dilutive effect of potentially dilutive securities is reflected in diluted earnings (losses) per share by application of the treasury stock method. Comprehensive Income (Loss) Comprehensive income (loss) includes unrealized gains or losses from available-for-sale securities that are excluded from net income (loss). Recent Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), to introduce a new impairment model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses (“CECL”). Under the new CECL model, an entity is required to estimate the expected credit losses on available-for-sale (AFS) debt securities only when the fair value is below the amortized cost of the asset and is no longer based on an impairment being “other-than-temporary”. The new model also requires the impairment calculation on an individual security level and requires an entity use present value of cash flows when estimating the expected credit losses. The credit-related losses are required to be recognized through earnings and non-credit related losses are reported in other comprehensive income. In April 2019, the FASB further clarified the scope of the credit losses standard and addressed issues related to accrued interest receivable balances, recoveries, variable interest rates and prepayment. The ASU will be effective for public entities in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The new guidance will require modified retrospective application to all outstanding instruments, with a cumulative effect adjustment recorded to opening retained earnings as of the beginning of the first period in which the guidance becomes effective. The Company is currently evaluating the impact of adoption of this new guidance but does not expect it will have a material impact on its consolidated financial statements and disclosures. 79 In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test of Goodwill Impairment, to eliminate the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. This new guidance will be applied prospectively and is effective for annual and interim periods beginning after December 15, 2019. The Company does not believe the adoption of this new guidance will have a material impact on its consolidated financial statements and disclosures. In August 2018, the FASB issued 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. Under this new guidance, the entities will no longer be required to disclose the amount of and the reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The guidance is effective for fiscal years beginning after December 15, 2019 and for the interim periods within those fiscal years. Early adoption is permitted. The Company did not early adopt and believes the adoption of this new guidance will not have a material impact on its consolidated financial statements and disclosures. In August 2018, the FASB issued 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. Under this new guidance, the entities are required to capitalize implementation costs related to a hosting arrangement that is a service contract and amortize the costs over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. The guidance is effective for fiscal years beginning after December 15, 2019 and for the interim periods within those fiscal years. Early adoption is permitted. The Company did not early adopt and believes the adoption of this new guidance will not have a material impact on its consolidated financial statements and disclosures. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 25, Financial Instruments. The new guidance further clarifies that equity instruments without readily determinable fair values for which an entity has elected the measurement alternative should be remeasured to fair value as of the date that an observable transaction occurred. The FASB also amended the guidance to clarify that the nonrecurring fair value disclosure is applicable to equity instruments accounted for under the measurement alternative. The ASU will be effective for public entities in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted and requires a prospective method for those related to equity securities without readily determinable fair values that are measured using the measurement alternative. The Company did not early adopt and believes the adoption of this new amendment will not have a material impact on its consolidated financial statements and disclosures. In November 2019, the FASB issued ASU 2019-08, Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements – Share-Based Consideration Payable to a Customer. Under this new guidance, a share-based payment award issued to a customer should be measured at the grant date fair value and recorded as a reduction of the transaction price in revenue. Changes in the measurement of the share-based payments after the grant date that are due to the form of the consideration are not included in the transaction price and are recorded elsewhere in the income statement. The award is measured and classified under ASC 718 for its entire life, unless the award is modified after it vests and the grantee is no longer a customer. The new guidance is effective for public entities that have adopted ASU 2018-07 in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company did not early adopt and believes the adoption of this new guidance will not have a material impact on its consolidated financial statements and disclosures. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments are effective for public entities in fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The Company did not early adopt and believes the adoption of this new guidance will not have a material impact on its consolidated financial statements and disclosures. 80 2. Financial Instruments and Fair Value The Company invests a portion of its cash in debt securities that are denominated in United States dollars. The investment portfolio consists of money market funds, certificates of deposit, asset-backed securities, commercial paper, U.S. government securities and debt securities of corporations. All of the investments are classified as available-for-sale securities and reported at fair value in the consolidated balance sheets as follows: Amortized Cost Unrealized Gains Unrealized Losses Fair Value As of January 31, 2020 Money market funds Commercial paper Corporate bonds Asset-backed securities U.S. government securities $ Total cash equivalents and marketable debt securities $ 8,284 $ 63,390 95,053 23,062 20,524 210,313 $ (in thousands) — $ — 653 69 48 770 $ — $ — — (2) — (2) $ 8,284 63,390 95,706 23,129 20,572 211,081 Amortized Cost Unrealized Gains Unrealized Losses Fair Value As of January 31, 2019 Money market funds Certificates of Deposit Commercial paper Corporate bonds Asset-backed securities U.S. government securities $ Total cash equivalents and marketable debt securities $ 8,914 $ 7,012 68,233 87,250 11,607 21,993 205,009 $ (in thousands) — $ — — 170 3 3 176 $ — $ — — (60) (6) (13) (79) $ 8,914 7,012 68,233 87,360 11,604 21,983 205,106 Included in cash equivalents Included in marketable debt securities $ Total cash equivalents and marketable debt securities $ As of January 31, 2020 January 31, 2019 (in thousands) 37,736 173,345 211,081 $ $ 40,245 164,861 205,106 The contractual maturities of the investments at January 31, 2020 and 2019 were as follows: Due within one year Due within one to three years $ Total cash equivalents and marketable debt securities $ As of January 31, 2020 January 31, 2019 (in thousands) 146,267 64,814 211,081 $ $ 151,991 53,115 205,106 The unrealized losses on the available-for-sale securities were caused by fluctuations in market value and interest rates as a result of the economic environment. As the decline in market value was attributable to changes in market conditions and not credit quality, and because the Company neither intended to sell nor was it more likely than not that it will be required to sell these investments prior to a recovery of par value, the Company did not consider these investments to be other-than temporarily impaired as of January 31, 2020 and 2019, respectively. 81 The following fair value hierarchy is applied for disclosure of the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows: Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities. Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments. Level 3—Unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value. The inputs require significant management judgment or estimation. The Company measures the fair value of money market funds and certificates of deposit using quoted prices in active markets for identical assets and classifies them within Level 1. The fair value of the Company’s investments in other debt securities are obtained based on quoted prices for similar assets in active markets and are classified within Level 2. The following tables present the fair value of the financial instruments measured on a recurring basis as of January 31, 2020 and 2019, respectively: Money market funds Commercial paper Corporate bonds Asset-backed securities U.S. government securities Total cash equivalents and marketable debt securities Money market funds Certificates of Deposit Commercial paper Corporate bonds Asset-backed securities U.S. government securities Total cash equivalents and marketable debt securities 3. Inventories Inventories at January 31, 2020 and 2019 consisted of the following: Total 8,284 63,390 95,706 23,129 20,572 211,081 Total 8,914 7,012 68,233 87,360 11,604 21,983 205,106 $ $ $ $ $ $ $ $ As of January 31, 2020 Level 1 Level 2 Level 3 (in thousands) 8,284 $ — — — — $ 8,284 — $ 63,390 95,706 23,129 20,572 202,797 $ As of January 31, 2019 Level 1 Level 2 Level 3 (in thousands) 8,914 7,012 $ — — — — $ 15,926 — $ 68,233 87,360 11,604 21,983 189,180 $ — — — — — — — — — — — — Work-in-progress Finished goods Total As of January 31, 2020 2019 (in thousands) $ $ 10,133 $ 12,838 22,971 $ 9,430 8,822 18,252 82 4. Property and Equipment, net Depreciation expense was approximately $2.8 million, $2.6 million and $1.8 million for the fiscal years ended January 31, 2020, 2019 and 2018, respectively. Property and equipment at January 31, 2020 and 2019 consisted of the following: Computer equipment and software Machinery and equipment Furniture and fixtures Leasehold improvements Construction in progress Less: accumulated depreciation and amortization Total property and equipment, net As of January 31, 2020 2019 (in thousands) $ $ $ 10,282 6,317 969 2,356 63 19,987 (14,373) $ 5,614 9,098 5,659 969 2,331 330 18,387 (11,659) 6,728 5. Intangible Assets The intangible assets primarily consist of $4.1 million of IPR&D from the acquisition of VisLab S.r.l., or VisLab, in June 2015 and $13.7 million of noncancelable software licenses, net of amortization expense. Acquired IPR&D is capitalized at fair value and the amortization commences upon completion of the underlying projects. Once research and development efforts are completed, the corresponding amount of IPR&D is reclassified as an amortizable purchased intangible asset and is amortized over its estimated useful life. As of January 31, 2020, there was no IPR&D amortized. The Company will determine the project incorporating the VisLab IPR&D to be completed when a related chip begins mass production to address the level 3 and above advanced driving assistance systems markets. The Company enters into certain internal-use noncancelable software license agreements with third parties from time-to-time. The licenses have been capitalized as intangible assets, and the corresponding future payments have been recorded as liabilities at net present value. As of January 31, 2020, $4.4 million was recorded in accrued and other current liabilities and $8.2 million was recorded in other long-term liabilities in the consolidated balance sheets. The carrying amounts of intangible assets as of January 31, 2020 and 2019 were as follows: As of January 31, 2020 As of January 31, 2019 In-process research and development Internal-use software license Total acquired intangible assets Gross Carrying Amount $ $ 4,100 27,203 31,303 Accumulated Amortization (in thousands) — $ (13,477) (13,477) $ $ $ Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount 4,100 $ 13,726 17,826 $ 4,100 14,448 18,548 $ $ $ — (7,612) (7,612) $ 4,100 6,836 10,936 The amortization expense related to these software licenses was approximately $5.9 million, $4.7 million, and $3.0 million for the fiscal years ended January 31, 2020, 2019, and 2018 respectively. The expected annual amortization expense related to these software licenses as of January 31, 2020 is as follows: Fiscal Year 2021 2022 2023 2024 2025 Thereafter Total future amortization expenses: There were no intangible asset impairments for the fiscal years ended January 31, 2020, 2019 and 2018, respectively. 83 As of January 31, 2020 (in thousands) 5,789 4,519 3,418 — — — 13,726 $ $ 6. Goodwill On June 25, 2015, the Company completed the acquisition of VisLab, a privately-held Italian company that develops computer vision and intelligent control systems for automotive and other commercial applications, including advanced driver assistance systems and several generations of autonomous vehicle driving systems, for $30.0 million in cash. As a result, there was $25.3 million attributed to goodwill, $4.1 million attributed to intangible assets and $0.6 million attributed to net assets acquired. A deferred tax liability of $1.3 million related to the intangible assets was recorded to account for the difference between financial reporting and tax basis at the acquisition date, with an addition to goodwill. The Company does not amortize goodwill. There were no goodwill impairments for the fiscal years ended January 31, 2020, 2019 and 2018, respectively. 7. Accrued and Other Current Liabilities Accrued and other current liabilities at January 31, 2020 and 2019 consisted of the following: Accrued employee compensation Accrued rebates Accrued product development costs Software license liabilities, current Other accrued liabilities Total accrued and other current liabilities As of January 31, 2020 2019 (in thousands) $ $ 16,874 $ 54 10,885 4,388 2,769 34,970 $ 10,645 311 6,393 4,879 2,472 24,700 The increased employee compensation liabilities were primarily due to approximately $5.8 million of stock-based compensation expense associated with the Company’s annual bonus program that will be settled by restricted stock units. The timing of SoC development progress and payments to outside foundries resulted in fluctuation of the accrued product development costs. The current software license liabilities mainly consisted of approximately $3.9 million of short-term liabilities associated with the $12.7 million of license agreements with Cadence Design Systems, Inc. (“Cadence”) that was entered in fiscal year 2020. 8. Leases The Company has entered into various operating leases for its worldwide office buildings and research and development facilities. For the fiscal year ended January 31, 2020, the Company exercised the renewal option to extend its U.S. office lease for a period of 63 months beginning from June 1, 2020 through August 31, 2025 and renewed its Shanghai office lease for another two years beginning from December 1, 2019 to November 30, 2021. The Company accounted these two renewed contracts as lease modifications and recorded an increase to the operating lease right-of-use assets and corresponding operating lease liabilities by approximately $4.0 million, respectively, in the consolidated balance sheets. The Company also signed a separate lease for additional space for its U.S. office for a period of 56 months beginning from January 1, 2021 through August 31, 2025 and will record it in the balance sheet upon commencement date on January 1, 2021. The total estimated future undiscounted cash payments for this lease are approximately $1.7 million. In August 2019, VisLab, a wholly-owned subsidiary, was granted a land lease for 35 years with an obligation to construct a building on the land in line with architectural requirements from the lessor in Parma, Italy (“Parma lease”). The Company will be responsible for the costs of construction and occupy the building after completion of construction for the remainder of the lease term. At the end of the lease, the land together with the building and all of the improvements will revert to the lessor. The Parma lease will be recorded in the balance sheet upon completion of the building construction, which is expected to be two years after the lease inception date. Any payments made prior to completion of construction will be recorded as prepayments of the lease in other non-current assets in the consolidated balance sheets. The total estimated future undiscounted cash payments are approximately $2.2 million, of which $1.8 million will be paid in the first two years and the remaining balance of $0.4 million will be paid over the remainder of the lease term. For the fiscal year ended January 31, 2020, the Company recorded approximately $3.0 million of operating lease expense under ASC 842. Approximately $4.6 million and $5.3 million of operating lease expense recorded for the fiscal years ended January 31, 2019 and 2018, respectively, under ASC 840. The Company's short-term leases and finance leases are immaterial as of January 31, 2020. 84 The cumulative effect of the changes made to the consolidated balance sheets as of February 1, 2019 for the adoption of ASC 842 was as follows: Balance as of January 31, 2019 Adjustment (in thousands) Opening Balance as of February 1, 2019 Operating lease right-of-use assets Prepaid expenses and other current assets Accrued and other current liabilities Operating lease liabilities, current Operating lease liabilities, non-current $ $ $ $ $ — 6,206 24,700 $ $ $ — $ $ — $ 8,581 $ (174) (279) $ 2,534 $ $ 6,152 Supplemental cash flow information related to leases is as follows: Cash paid for operating leases included in operating cash flows Supplemental non-cash information related to lease liabilities arising from obtaining right-of-use assets Leased assets obtained in exchange for operating lease liabilities arising from lease modifications $ $ $ Twelve Months Ended January 31, 2020 (in thousands) 8,581 6,032 24,421 2,534 6,152 2,851 299 4,021 As of January 31, 2020, the weighted average remaining lease term is 5.02 years, and the weighted average discount rate is 4.43 percent. Future minimum lease payments for the lease liabilities, excluding the additional space for the U.S. office and the Parma lease described above, are as follows: Fiscal Year 2021 2022 2023 2024 2025 Thereafter Total future annual minimum lease payments Less: interest Total lease liabilities As of January 31, 2020 (in thousands) $ $ Prior to the adoption of the new lease guidance, future minimum undiscounted lease payments as of January 31, 2019 were as follows: Fiscal Year 2020 2021 2022 2023 2024 Thereafter Total future annual minimum lease payments As of January 31, 2019 (in thousands) $ $ 2,522 2,371 1,645 1,694 1,740 1,210 11,182 (1,026) 10,156 2,592 1,040 356 143 147 576 4,854 The increased liabilities, as compared to the minimum lease payments as of January 31, 2019, were primarily attributable to a renewal option exercised and lease modifications during the fiscal year ended January 31, 2020. 85 9. Other Long-Term Liabilities Other long-term liabilities at January 31, 2020 and 2019 consisted of the following: Unrecognized tax benefits, including interest Deferred tax liabilities, non-current Software license liabilities, non-current Other long-term liabilities Total other long-term liabilities 2020 As of January 31, (in thousands) 2019 $ $ 8,261 1,288 8,159 68 17,776 $ $ 6,732 1,293 310 6 8,341 The increased software license liabilities were primarily due to the $12.7 million of license agreements with Cadence entered in fiscal year 2020 that resulted in approximately $8.0 million of long-term liabilities accrued in the other long-term liabilities in the consolidated balance sheets as of January 31, 2020. 10. Capital Stock Preference shares After completion of the Company’s initial public offering, or IPO in 2012, a total of 20,000,000 preference shares, with a $0.00045 par value per share, were authorized. There were no preference shares issued and outstanding as of January 31, 2020 and 2019, respectively. Ordinary shares As of January 31, 2020 and January 31, 2019, the following ordinary shares were reserved for future issuance under the EIP and ESPP: Shares reserved for options, restricted stock and restricted stock units Shares reserved for employee stock purchase plan As of January 31, 2020 6,045,108 2,059,504 2019 5,915,654 1,833,574 Shares repurchased On May 29, 2019, the Company’s Board of Directors authorized a program to repurchase up to $50.0 million of the Company’s ordinary shares commencing immediately through June 30, 2020. Since the inception of the repurchase programs in June 2016, a total of $275.0 million has been authorized and a total of 3,985,876 shares have been repurchased for approximately $174.8 million in cash. Repurchases may be made from time-to-time through open market purchases, 10b5-1 plans or privately negotiated transactions subject to market conditions, applicable legal requirements and other relevant factors. The repurchase program does not obligate the Company to acquire any particular amount of ordinary shares, and it may be suspended at any time at the Company’s discretion. The repurchase program is funded using the Company’s working capital and any repurchased shares are recorded as authorized but unissued shares. There were no shares repurchased in fiscal year 2020. As of January 31, 2020, there was $50.0 million available for repurchases under the repurchase program through June 30, 2020. 11. Employee Benefits and Stock-based Compensation 401(k) Plan The Company maintains a defined contribution 401(k) plan (the “401(k) Plan”) for all of its eligible U.S. employees. Under the 401(k) Plan, eligible employees may contribute up to the Internal Revenue Service annual contribution limitation. The Company is responsible for administrative costs of the Plan. The Company has not had any matching contributions to date. 86 Stock Option Plans 2004 Stock Plan. The 2004 Stock Plan provides for the grant of incentive stock options (“ISOs”) within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), nonstatutory stock options (“NSOs”), stock purchase rights to acquire restricted stock and restricted stock units. Upon the completion of the IPO, no additional awards will be granted under the 2004 Plan and the 2004 Plan was terminated. However, all outstanding stock options and other awards previously granted under the 2004 Plan will remain subject to the terms of the 2004 Plan. 2012 Equity Incentive Plan. The 2012 Equity Incentive Plan, or EIP, permits the grant of ISOs, within the meaning of Section 422 of the Code, to employees of the Company and any of the Company’s subsidiary corporations, and the grant of NSOs, stock appreciation rights, restricted stock, restricted stock units, performance units, performance shares, deferred stock units and dividend equivalents to employees, directors and consultants of the Company and any of the Company’s subsidiary corporations’ employees and consultants. The exercise price of ISOs granted to a holder of more than 10% of the voting power of all classes of the Company’s shares shall be no less than 110% of fair market value on the grant date. The exercise price of ISOs granted to other employees and NSOs shall be no less than 100% of fair market value on the grant date. Options granted under the Plan have a term of up to 10 years from grant date. Options granted to new employees generally vest 25% on the first anniversary service date of the grant and remainder vest ratably over the following 36 months. Restricted stock and restricted stock units granted to new employees generally vest as to 1/4th of the shares on the first anniversary service date of the grant and 1/16th of the shares vest every 3 months thereafter, so as to be 100% vested on the fourth anniversary of the vesting commencement date. Vesting schedules for other service condition, market condition or performance condition awards vary and are subject to approval by the board of directors; provided that the performance condition associated awards shall not vest at all until the performance conditions are achieved and are subject to the award’s holders continuing to provide services to the Company through such vesting dates. The performance condition awards are automatically forfeited in their entirety, without any cost to or action by the Company, if there has been no achievement of the performance. The holders of restricted stock have voting power and other rights with respect to such shares, provided, however, that such shares are held in escrow and subject to forfeiture until the shares vested. In the first quarter of fiscal year 2020 and 2019, the Company added 1,453,659 and 1,507,032 ordinary shares, respectively, to the ordinary shares reserved for issuance, pursuant to an “evergreen” provision contained in the EIP. Pursuant to such provision, on February 1st of each fiscal year, the number of ordinary shares reserved for issuance under the EIP is automatically increased by a number equal to the lesser of (i) 3,500,000 ordinary shares, (ii) four and one half percent (4.5%) of the aggregate number of ordinary shares outstanding on January 31st of the preceding fiscal year, or (iii) a lesser number of shares that may be determined by the Company’s Board of Directors. Amended and Restated 2012 Employee Stock Purchase Plan. The Amended and Restated 2012 Employee Stock Purchase Plan, or ESPP, permits eligible participants to purchase ordinary shares at a discount through contributions up to 15% of their eligible compensation, subject to any IRS limitations. The ESPP provides each offering and purchasing period of six months in duration. The purchase price is 85% of the lower of the closing price of the Company’s ordinary shares on the first trading day of each offering period or on the purchase date. In the first quarter of fiscal year 2020 and 2019, the Company added 403,794 and 418,620 ordinary shares, respectively, to the ordinary shares reserved for issuance, pursuant to an “evergreen” provision contained in the ESPP. Pursuant to such provision, on February 1st of each fiscal year, the number of ordinary shares reserved for issuance under the ESPP is automatically increased by a number equal to the lesser of (i) 1,500,000 ordinary shares, (ii) one and one quarter percent (1.25%) of the aggregate number of ordinary shares outstanding on such date, or (iii) an amount determined by the Company’s Board of Directors or a duly authorized committee of the Board of Directors. 87 Stock-based Compensation The following table presents the classification of stock-based compensation for the periods indicated: Stock-based compensation: Cost of revenue Research and development Selling, general and administrative Total stock-based compensation 2020 Year Ended January 31, 2019 (in thousands) 2018 $ $ 1,184 41,842 23,845 66,871 $ $ 1,261 37,432 22,119 60,812 $ $ 1,306 34,575 20,980 56,861 For the twelve months ended January 31, 2020, approximately $5.8 million of stock-based compensation expense was accrued in accrued and other current liabilities in the consolidated balance sheets. As of January 31, 2020, total unrecognized compensation cost related to unvested stock options was $3.9 million and is expected to be recognized over a weighted-average period of 2.49 years. Total unrecognized compensation cost related to unvested restricted stock units was $113.8 million and is expected to be recognized over a weighted-average period of 2.49 years. The restricted stock awards were fully vested as of January 31, 2020. The following table sets forth the weighted-average assumptions used to estimate the fair value of the stock options and employee stock purchase plan awards for the periods indicated: Stock Options: Volatility Risk-free interest rate Expected term (years) Dividend yield Employee stock purchase plan awards: Volatility Risk-free interest rate Expected term (years) Dividend yield 2020 Year Ended January 31, 2019 2018 52% 1.82% 6.01 0% 47% 2.23% 0.5 0% 54% 2.77% 5.41 0% 45% 2.15% 0.5 0% 53% 2.08% 6.08 0% 44% 1.03% 0.5 0% 88 Starting from fiscal year 2019, the Company calculates expected volatility for stock options based on its own historical stock price for a period commensurate with the expected term. In the prior fiscal year, the Company calculated expected volatility for stock options based on the weighted average of historical volatilities of its own stock price and the stock prices of similar companies that are publicly available for a period commensurate with the expected term. The Company calculates expected volatility for ESPP based on its own historical stock price for a period commensurate with the offering period. The following table summarizes stock option activities for the periods indicated: Option Outstanding Weighted- Average Exercise Price Shares Weighted- Average Grant-date Fair Value 28.28 Outstanding at January 31, 2017 Granted Exercised Forfeited Expired Outstanding at January 31, 2018 Granted Exercised Forfeited Expired Outstanding at January 31, 2019 Granted Exercised Forfeited Expired Outstanding at January 31, 2020 Exercisable at January 31, 2020 1,703,524 $ 132,250 (175,187) (27,721) (21,522) 1,611,344 116,600 (232,205) (20,974) (15,701) 1,459,064 66,850 (366,886) (14,931) (19,451) 1,124,646 $ 960,567 $ 21.66 54.66 $ 12.50 56.97 36.31 24.56 42.73 $ 5.54 53.50 54.35 28.31 50.56 $ 15.52 46.29 64.53 32.93 30.24 Weighted- Total Intrinsic Value of options Average Remaining Contractual Exercised (in thousands) Term (in years) Aggregate Intrinsic Value (in thousands) $ 7,446 21.75 $ 8,867 25.35 $ 13,263 4.35 $ 3.65 $ 31,295 29,573 The intrinsic value of options outstanding and exercisable is calculated based on the difference between the fair market value of the Company’s ordinary shares on the reporting date and the exercise price. The closing price of the Company’s stock was $59.14 on January 31, 2020, as reported by The NASDAQ Global Market. The intrinsic value of exercised options is calculated based on the difference between the fair market value of the Company’s stock on the exercise date and the exercise price. The following table summarizes restricted stock and restricted stock units activities for the periods indicated: Unvested at January 31, 2017 Granted Vested Forfeited Unvested at January 31, 2018 Granted Vested Forfeited Unvested at January 31, 2019 Granted Vested Forfeited Unvested at January 31, 2020 89 Weighted- Average Grant-Date Fair Value 56.76 47.11 47.55 54.72 56.45 40.03 53.27 53.57 48.49 54.54 51.24 54.26 50.30 Shares 2,175,673 $ 1,052,235 (1,006,130) (118,497) 2,103,281 1,367,751 (994,500) (81,016) 2,395,516 1,329,288 (1,012,581) (94,957) 2,617,266 $ Total fair value as of the respective vesting dates of restricted stock and restricted stock units vested for the fiscal years ended January 31, 2020, 2019 and 2018 was approximately $52.1 million, $42.9 million, and $52.1 million, respectively. As of January 31, 2020, the aggregate intrinsic value of unvested restricted stock units was $154.8 million. 12. Net Income (Loss) Per Ordinary Share The following table sets forth the computation of basic and diluted net income (loss) per ordinary share for the periods indicated: Numerator: Net income (loss) Denominator: Weighted-average ordinary shares - basic Effect of dilutive securities: Employee stock options Restricted stock and restricted stock units Employee stock purchase plan Weighted-average ordinary shares - diluted Net income (loss) per ordinary share: Basic Diluted Year Ended January 31, 2020 2018 2019 (in thousands, except share and per share data) $ (44,792) $ (30,447) $ 18,852 33,083,562 32,713,606 33,224,803 — — — 33,083,562 — — — 32,713,606 961,797 390,145 6,405 34,583,150 $ $ (1.35) $ (1.35) $ (0.93) $ (0.93) $ 0.57 0.55 The following weighted-average potentially dilutive securities were excluded from the computation of diluted net income (loss) per ordinary share as their effect would have been antidilutive: Options to purchase ordinary shares Restricted stock and restricted stock units Employee stock purchase plan 2020 913,678 1,139,269 8,530 2,061,477 Year Ended January 31, 2019 1,190,607 1,522,903 26,831 2,740,341 2018 280,907 907,208 15,506 1,203,621 13. Income Taxes Income (loss) before income taxes consisted of the following for the periods indicated: U.S. operations Non-U.S. operations Income (loss) before income taxes 2020 Year Ended January 31, 2019 (in thousands) 2018 $ $ 845 $ (42,473) (41,628) $ 1,381 $ (35,933) (34,552) $ 2,683 23,046 25,729 90 Income tax provision (benefit) consisted of the following for the periods indicated: Current: U.S. federal tax U.S. state taxes Non-U.S. foreign taxes Deferred: U.S. federal tax U.S. state taxes Non-U.S. foreign taxes Provision (benefit) for income taxes 2020 Year Ended January 31, 2019 (in thousands) 2018 $ $ $ 1,440 3 1,540 2,983 182 — (1) 181 3,164 $ $ 1,290 2 1,561 2,853 (7,077) — 119 (6,958) (4,105) $ 3,321 4 1,435 4,760 2,185 — (68) 2,117 6,877 The Company consists of a Cayman Islands parent company with various foreign and U.S. Subsidiaries. Moreover, effective from December 31, 2019, the Company has structured its activities to comply with the International Tax Co-Operation (Economic Substance) Law, 2018 in the Cayman Islands. As part of the new structure, the Company is the general partner of a Canadian limited partnership, the ultimate beneficial owner, and is allocated all of the earnings of the partnership. The primary jurisdiction where our foreign earnings are derived is the Cayman Islands, where the Company is domiciled. Under the current laws of the Cayman Islands, the Company is not subject to tax on its income. For purposes of the reconciliation between the provision (benefit) for income taxes at the statutory rate and the effective tax rate, a notional U.S. 21.0%, 21.0% and 33.8% rates are applied to pretax income (loss) as a result of the following for the periods indicated, respectively: Provision at U.S. notional statutory rate U.S. state taxes Non-U.S. foreign tax differential Stock-based compensation U.S. R&D credit Valuation allowance Change in tax rate Other Provision (benefit) for income taxes 2020 Year Ended January 31, 2019 (in thousands) 2018 $ $ (8,742) $ 3 10,458 4,172 (3,109) — — 382 3,164 $ (7,256) $ 2 9,226 4,715 (2,770) (7,990) — (32) (4,105) $ 8,699 2 (6,424) 4,645 (2,408) (1) 2,252 112 6,877 91  On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law in the United States. The tax legislation contains several provisions that impacted the Company, including the reduction of the corporate income tax rate from 35% to 21%, acceleration of business asset expensing, and a reduction in the amount of executive pay that may qualify as a tax deduction, among others. The income tax benefit recorded for the fiscal year ended January 31, 2019 includes the impact of the Tax Act. Temporary differences that gave rise to significant portions of the Company’s deferred tax assets and liabilities at January 31, 2020 and 2019 were as follows: Deferred tax assets: Federal and state credits Expenses not currently deductible Operating lease liabilities Stock-based compensation Foreign deferred Gross deferred tax assets Valuation allowance Total deferred tax assets Deferred tax liabilities Property and equipment Operating lease assets Net deferred tax assets As of January 31, 2020 2019 (in thousands) $ $ $ $ 21,275 593 2,023 3,203 132 27,226 (14,670) $ 12,556 (1,469) (1,974) $ 9,113 19,426 575 — 3,202 122 23,325 (12,526) 10,799 (1,505) — 9,294 Tax valuation allowance for the periods indicated below were as follows: Tax Valuation Allowance Year ended January 31, 2020 Year ended January 31, 2019 Year ended January 31, 2018 Balance at Beginning of Period Additional Charged to Expenses Additions Charged to Other Account (in thousands) Deductions Charged to Expenses or Other Accounts Balance at End of Period $ $ $ 12,526 18,538 15,061 2,144 1,978 3,477 — — — — $ (7,990) $ — $ 14,670 12,526 18,538 The Company conducts its business in several countries and regions and is subject to taxation in those jurisdictions. The Company is incorporated in the Cayman Islands with foreign affiliates in the U.S., Canada, China, Taiwan, Italy and other foreign countries and regions. As such, the Company’s worldwide operating income is subject to varying tax rates and its effective tax rate is highly dependent upon the geographic distribution of its earnings or losses and the tax laws and regulations in each geographical region. Consequently, the Company has experienced lower effective tax rates as a substantial amount of its operations are conducted in lower-tax jurisdictions. If the Company’s operational structure was to change in such a manner that would increase the amount of operating income subject to taxation in higher-tax jurisdictions, or if the Company was to commence operations in jurisdictions assessing relatively higher tax rates, its effective tax rate could fluctuate significantly on a quarterly basis and/or be adversely affected. Dividend distributions received from the Company’s U.S. subsidiary and certain other foreign subsidiaries may be subject to local country withholding taxes when, and if, distributed. Deferred tax liabilities have not been recorded on unremitted earnings of certain subsidiaries because management’s intent is to indefinitely reinvest any undistributed earnings in those subsidiaries. If dividend distributions from those subsidiaries were to occur, the liability as of January 31, 2020 would be $11.9 million. Cumulative undistributed earnings of foreign subsidiaries for which no deferred taxes have been provided approximated $78.5 million at January 31, 2020. 92 As of January 31, 2020 and 2019, the Company had deferred tax assets (net of deferred tax liabilities) before valuation allowance, of $23.8 million and $21.8 million, respectively. The Company assesses whether a valuation allowance should be established against its deferred tax assets based on the consideration of all available evidence, using a “more likely than not” standard. In the fourth quarter of fiscal year 2019, the Company determined that, based on its cumulative profits before taxes and estimates of future forecasts of continued profitability in the United States, sufficient positive evidence existed to conclude that the valuation allowance on the U.S. federal research and development credit carryforwards was no longer needed. Accordingly, the Company realized approximately $8.0 million in deferred tax assets and a corresponding decrease in income tax expense related to the release of the valuation allowance for the U.S. federal research and development credit carryforwards. The Company has $81.3 million and $15.7 million of federal and California net operating loss carryforwards as of January 31, 2020. The federal and California net operating loss carryforwards begin to expire in fiscal year 2035, if not utilized. For financial statement purposes these carry forwards are offset by uncertain tax positions. The Company also has Federal and California state research and development credit carryforwards of approximately $20.4 million and $23.2million, respectively, at January 31, 2020. The Federal credits begin to expire in fiscal year 2033. The California credits can be carried forward indefinitely. The Company reports its U.S. state deferred tax assets and related valuation allowance, net of the U.S federal tax rate of 21%. As of January 31, 2020, the Company has recorded a valuation allowance of $14.7 million against all of its U.S. state deferred tax assets due to uncertainty regarding the future utilization of these deferred tax assets. Utilization of the research credit carryforwards may be subject to an annual limitation due to the ownership percentage change limitations as defined by the U.S. Internal Revenue Code Section 382, as amended, and similar state provisions. The annual limitation may result in the expiration of the U.S. Federal and state research credit carryforwards before utilization. The Company does not expect any tax credit carryforwards to expire as a result of a Section 382 limitation. The Company applies the provisions of FASB’s guidance on accounting for uncertainty in income taxes. As of January 31, 2020, the Company had approximately $42.7 million in unrecognized tax benefits, $36.2 million of which would affect the Company’s effective tax rate if recognized. The remainder of the unrecognized tax benefits would not affect the effective tax rate due to the full valuation recorded for state deferred tax assets. The following table sets forth a reconciliation of the beginning and ending amount of unrecognized tax benefits: Beginning balance: Additions based on tax positions related to the current year Additions for tax positions of prior years Reductions for tax positions in prior years Settlements for prior periods Lapse of applicable statute of limitations Ending balance: $ 2020 Year Ended January 31, 2019 (in thousands) 2018 $ 37,531 $ 34,117 $ 37,977 4,964 252 — — (52) $ 42,695 3,922 109 (552) — (65) $ 37,531 7,892 28 (11,313) — (467) 34,117 The Company classified $7.5 million and $6.3 million of income tax liabilities as other long term liabilities as of January 31, 2020 and 2019, respectively, because payment of cash or settlement is not anticipated within one year from the balance sheet date. The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. The Company recorded $358,000, $263,000 and $37,000 of interest expense and penalties related to uncertain tax positions for the fiscal years ended January 31, 2020, 2019 and 2018, respectively. The Company recorded noncurrent liabilities of $760,000 and $403,000 related to interest and penalties for uncertain tax positions at January 31, 2020 and 2019, respectively. The primary jurisdiction where our foreign earnings are derived is the Cayman Islands, where the Company is domiciled. The Company files income tax returns in the U.S. federal jurisdiction as well as many U.S. state and foreign jurisdictions. The tax years 2013 to 2019 remain open to examination by U.S. federal tax authorities. The tax years 2009 to 2019 remain open to examination by U.S. state tax authorities. The tax years 2014 to 2019 remain open to examination by foreign tax authorities. Fiscal years outside of the normal statute of limitations remain open to audit by tax authorities due to tax attributes generated in those earlier years, which have been carried forward and may be audited in subsequent years when utilized. 93 The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs. Although timing of the resolution and/or closure of audits is highly uncertain, the Company does not believe it is reasonably possible that its unrecognized tax benefits would materially change in the next 12 months. As of January 31, 2020, the Company’s long-term income taxes payable, including estimated interest and penalties, was approximately $8.3 million. The Company was unable to make a reasonably reliable estimate of the timing of payments in individual years due to uncertainties in the timing of tax audits, if any, or their outcomes. On July 27, 2015, in Altera Corp. v. Commissioner, the United States Tax Court issued an opinion invalidating the 2003 final Treasury regulations that requires participants in a qualified cost-sharing arrangement to share stock-based compensation. At this time, the U.S. Department of the Treasury has not withdrawn the requirement to include stock-based compensation in intercompany cost-sharing arrangements from its regulations. In February 2016, the IRS appealed the ruling to the United States Court of Appeals for the Ninth Circuit. On June 7, 2019, a three-judge panel from the Ninth Circuit issued an opinion (“Altera Ninth Circuit Panel Opinion”) that reversed the Tax Court Decision. On July 22, 2019, the taxpayer requested a rehearing before the full Ninth Circuit but was denied on November 12, 2019. On February 10, 2020, Altera Corp. filed a petition to appeal the decision with the Supreme Court of the United States. Due to the uncertainty related to the final resolution of this issue, the Company has not recorded tax benefits in its consolidated statements of operations for the fiscal year ended January 31, 2020. The Company will continue to monitor ongoing developments and potential impacts to its consolidated financial statements. 14. Commitments and Contingencies Contract Manufacturer Commitments The Company’s components and products are procured and built by independent contract manufacturers based on sales forecasts. These forecasts include estimates of future demand, historical trends, analysis of sales and marketing activities, and adjustment of overall market conditions. The Company regularly issues purchase orders to independent contract manufacturers which are cancelable only upon the agreement between the Company and the third- party. As of January 31, 2020 and 2019, total manufacturing purchase commitments were approximately $35.9 million and $28.2 million, respectively. Indemnification The Company, from time to time, in the normal course of business, indemnifies certain vendors with whom it enters into contractual relationships. The Company has agreed to hold the other party harmless against third-party claims in connection with the Company’s future products. The Company also indemnifies certain customers against third-party claims related to certain intellectual property matters. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to the limited history of prior indemnification claims and the unique facts and circumstances that are likely to be involved in each particular claim. The Company has not made payments under these obligations and no liabilities have been recorded for these obligations on the consolidated balance sheets as of January 31, 2020 and 2019, respectively. 15. Segment Reporting The Company operates in one reportable segment related to the development and sales of low-power, high-definition (HD), Ultra HD video compression, image processing and computer vision solutions. The Chief Executive Officer of the Company has been identified as the Chief Operating Decision Maker (the “CODM”) and manages the Company’s operations as a whole. For the purpose of evaluating financial performance and allocating resources, the CODM reviews financial information presented on a consolidated basis accompanied by information by customer and geographic region. 94 Geographic Revenue The following table sets forth the Company’s revenue by geographic region based on bill-to location for the periods indicated. Taiwan Asia Pacific Europe North America other than United States United States Total revenue 2020 Year Ended January 31, 2019 (in thousands) 2018 $ $ 137,946 $ 66,867 11,134 8,402 4,383 228,732 $ 132,199 $ 66,981 18,244 7,028 3,316 227,768 $ 174,486 57,862 45,185 11,110 6,759 295,402 Substantially all of the Company’s property and equipment were located in the United States, Asia Pacific region and Europe. As of January 31, 2020, the net amount of these fixed assets located in these regions was approximate $1.7 million, $2.8 million and $1.1 million, respectively. As of January 31, 2019, the net amount of these fixed assets located in these regions was approximately $2.1 million, $3.2million and $1.4 million, respectively. Major Customers The customers representing 10% or more of revenue and accounts receivable for the fiscal year ended January 31, 2020 were Wintech and Chicony which accounted for approximately 60% and 18% of total revenue, respectively. For the fiscal year ended January 31, 2019, the customers representing 10% or more of revenue and accounts receivables were Wintech and Chicony which accounted for approximately 58% and 16% of total revenue, respectively. For the fiscal year ended January 31, 2018, the customers representing 10% or more of revenue and accounts receivable were Wintech and GoPro Inc., or GoPro, which accounted for approximately 59% and 12% of total revenue, respectively. Accounts receivable from Wintech and Chicony accounted for approximately $3.8 million and $10.8 million as of January 31, 2020, respectively. Accounts receivable from Wintech and Chicony accounted for approximately $14.3 million and $6.9 million as of January 31, 2019, respectively. 16. Related-Party Transactions The Company considers an entity to be a related party if it owns more than 10% of the Company’s total voting stock at the end of each reporting period or if an officer or employee of an entity also serves on the Company’s board of directors or if it is a significant shareholder and has material business transactions with the Company. The Company enters into software license agreements with Cadence from time to time. The Chief Executive Officer of Cadence, who is also a Director of Cadence, was a member of the Company’s Board of Directors until June 7, 2017. Starting from fiscal year 2019, Cadence was no longer a related party of the Company. The Company paid $3.6 million of license fee to Cadence for the fiscal years ended January 31, 2020, 2019 and 2018, respectively. License amortization expense related to these agreements included in research and development expense was approximately $4.2 million, $3.4 million and $3.2 million for the fiscal years ended January 31, 2020, 2019 and 2018, respectively. 17. Subsequent Events From February 1, 2020 to March 26, 2020, the Company repurchased a total of 25,719 shares for approximately $1.0 million in cash. As of March 26, 2020, there was approximately $49.0 million available for repurchases under the Company’s repurchase program through June 30, 2020. ITEM 16. FORM 10-K SUMMARY None. 95 Exhibit Number EXHIBITS INDEX Description 2.1(1) Quota Purchase Agreement, dated as of June 25, 2015, by and among the Registrant, the University of Parma, Alberto Broggi, Massimo Bertozzi, Paolo Grisler, Pietro Cerri, Rean Fedriga, Paolo Medici, Luca Bombini, Stefano Cattani, Mirko Felisa, Pier Paolo Porta, and Paolo Zani. 3.1(2) 4.1 10.1.1(2)* 10.1.2(3)* 10.1.3(2)* 10.2.1(4)* 10.2.2(2)* 10.2.3(2)* 10.2.4(2)* 10.2.5(4)* 10.3(1)* 10.4(2)* 10.5(8)* Amended and Restated Memorandum of Association and Second Amended and Restated Articles of Association of Ambarella, Inc. Description of Share Capital of Ambarella, Inc. Amended and Restated 2004 Stock Plan Form of Stock Option Agreement under Amended and Restated 2004 Stock Plan Form of Restricted Stock Unit Award Agreement under Amended and Restated 2004 Stock Plan Amended and Restated 2012 Equity Incentive Plan Form of Stock Option Agreement under 2012 Equity Incentive Plan Form of Restricted Stock Agreement under 2012 Equity Incentive Plan Form of Restricted Stock Unit Agreement under 2012 Equity Incentive Plan Form of Performance-Based Restricted Stock Unit Agreement under 2012 Equity Incentive Plan Amended and Restated 2012 Employee Stock Purchase Plan Form of Indemnification Agreement Offer Letter entered into by Ambarella Corp. with Kevin C. “Casey” Eichler dated July 26, 2018 10.6.1(3)* Form of Change of Control and Severance Agreement, entered into by Ambarella, Inc. with the Chief Executive Officer, Chief Financial Officer and Chief Technology Officer 10.6.2(8)* Form of Amended and Restated Change of Control and Severance Agreement, entered into by Ambarella, Inc. with executive officers other than the Chief Executive Officer, Chief Financial Officer and Chief Technology Officer 10.7.7(9)* Description of Executive Bonus Plan for Fiscal Year 2020 10.8.1(5) 10.8.2(5) Sales Representative Agreement dated January 31, 2011 by and between Ambarella, Inc. and WT Microelectronics Co., Ltd. Amendment No. 1 to Sales Representative Agreement dated February 1, 2012 by and between Ambarella, Inc. and WT Microelectronics Co., Ltd. 10.8.3(6) Amendment No. 2 to Sales Representative Agreement dated October 1, 2012 by and between Ambarella, Inc. and WT Microelectronics Co., Ltd. 10.8.4(1) Amendment to the Sales Representative Agreement dated August 1, 2015 by and between Ambarella, Inc. and WT Microelectronics Co., Ltd. 10.8.4(10) 10.9.1(7) 10.9.2(1) Amendment to the Sales Representative Agreement dated June 1, 2019 by and between Ambarella, Inc. and WT Microelectronics Co., Ltd. Lease Agreement dated March 1, 2013 by and between Ambarella Corporation and Westcore Jay, LLC. Second Amendment to Lease Agreement dated as of August 27, 2015 by and between Ambarella Corporation and DPF JAY OWNER, LLC. 10.9.3(11) Standard Lease between Ambarella Corporation and The Realty Associates Fund XI Portfolio, L.P., dated as of August 8, 2019 21.1 List of subsidiaries of Ambarella, Inc. 96 23.1 24.1 31.1 31.2 Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm Power of Attorney (included in signature page) Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended 32.1± Certification of Principal Executive Officer and Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350 101.INS 101.SCH 101.CAL 101.DEF 101.LAB 101.PRE Inline XBRL Instance Document – the instance document does not appear in the Interactive Data file because its XBRL tags are embedded within the Inline XBRL document Inline XBRL Taxonomy Schema Linkbase Document Inline XBRL Taxonomy Calculation Linkbase Document Inline XBRL Taxonomy Definition Linkbase Document Inline XBRL Taxonomy Labels Linkbase Document Inline XBRL Taxonomy Presentation Linkbase Document 104 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) * ± The cover page from the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2020, has been formatted in Inline XBRL and included in Exhibit 101 Incorporated by reference to the Form 10-Q filed on September 8, 2015. Incorporated by reference to the Form S-1/A (No. 333-174838) filed on September 13, 2012. Incorporated by reference to the Form S-1 (No. 333-174838) filed on June 10, 2011. Incorporated by reference to the Form 10-K filed on March 30, 2017. Incorporated by reference to the Form S-1/A (No. 333-174838) filed on September 26, 2012. Incorporated by reference to the Form S-1/A (No. 333-174838) filed on October 5, 2012. Incorporated by reference to the Form 10-K filed on April 4, 2013. Incorporated by reference to the Form 10-Q filed on September 7, 2018. Incorporated by reference to the Form 8-K filed on March 6, 2019. Incorporated by reference to the Form 10-Q filed on September 6, 2019. Incorporated by reference to the Form 10-Q filed on December 6, 2019. Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 hereto are deemed to accompany this Form 10-K and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. 97 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 27, 2020. SIGNATURES AMBARELLA, INC. By: /s/ Kevin C. Eichler Kevin C. Eichler, Chief Financial Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Kevin C. Eichler as his true and lawful agent, proxy and attorney-in-fact, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to (i) act on, sign, and file with the Securities and Exchange Commission any and all amendments to this Annual Report on Form 10-K, together with all schedules and exhibits thereto, (ii) act on, sign, and file such certificates, instruments, agreements and other documents as may be necessary or appropriate in connection therewith, and (iii) take any and all actions that may be necessary or appropriate to be done, as fully for all intents and purposes as he might or could do in person, hereby approving, ratifying and confirming all that such agent, proxy and attorney-in-fact or any of his substitutes may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on March 27, 2020. Signature /s/ Feng-Ming Wang Feng-Ming Wang /s/ Kevin C. Eichler Kevin C. Eichler /s/ Les Kohn Les Kohn /s/ Chenming C. Hu Chenming C. Hu /s/ Christopher B. Paisley Christopher B. Paisley /s/ Jeff Richardson Jeff Richardson /s/ Hsiao-Wuen Hon Hsiao-Wuen Hon /s/ Andrew W. Verhalen Andrew W. Verhalen /s/ Teresa H Meng Teresa H Meng Title President, Chief Executive Officer, Executive Chairman and Director (Principal Executive Officer) Chief Financial Officer (Principal Financial and Accounting Officer) Chief Technical Officer and Director Director Director Director Director Director Director 98 DESCRIPTION OF SHARE CAPITAL Exhibit 4.1 General The following is a summary of certain important terms of the share capital of Ambarella, Inc. (the “company,” “we,” “us” and “our”). Because it is only a summary, it does not contain all the information that may be important to you. For a complete description you should refer to our amended and restated memorandum and articles of association and the applicable provisions of the Companies Law (2020 Revision) of the Cayman Islands (the “Companies Law”) and the common law of the Cayman Islands. Our authorized share capital consists of 200,000,000 ordinary shares, $0.00045 par value per share, and 20,000,000 preference shares, $0.00045 par value per share. Ordinary Shares Voting Rights Each holder of our ordinary shares is entitled to one vote for each ordinary share held on all matters submitted to a vote of the shareholders, including the election of directors. Our amended and restated memorandum and articles of association do not provide for cumulative voting rights, including in respect of the election of directors. Accordingly, holders of a majority of the ordinary shares eligible to vote in any election of directors can elect all of the directors standing for election, if they should so choose. Dividend Rights Subject to preferences that may be applicable to any then outstanding preference shares, holders of our ordinary shares are entitled to receive dividends, if any, as may be declared from time to time by our board of directors out of legally available funds. Variation of Rights of Shares All or any of the special rights attached to any class of our shares may, unless otherwise provided by the terms of issue of the shares of that class, from time to time be varied with the sanction of an ordinary resolution passed at a separate general meeting of the holders of the shares of that class. Liquidation In the event of our liquidation, dissolution or winding up, holders of our ordinary shares will be entitled to share ratably in the net assets legally available for distribution to shareholders after the payment of all of our debts and other liabilities and the satisfaction of any liquidation preference granted to the holders of any then outstanding shares of preference shares. Other Rights and Preferences Holders of our ordinary shares have no preemptive, conversion, subscription or other rights, and there are no redemption or sinking fund provisions applicable to our ordinary shares. The rights, preferences and privileges of the holders of our ordinary shares are subject to and may be adversely affected by, the rights of the holders of any series of our preference shares that we may designate and issue in the future. Preference Shares Under our amended and restated memorandum and articles of association, our board of directors has the authority, without further action by the shareholders, to issue up to 20,000,000 preference shares in one or more series, to establish from time to time the number of shares to be included in each such series, to fix the rights, preferences and privileges of the shares of each wholly unissued series and any qualifications, limitations or restrictions thereon, and to increase or decrease the number of shares of any such series, but not below the number of shares of such series then outstanding. Our board of directors may authorize the issuance of preference shares with voting or conversion rights that could adversely affect the voting power or other rights of the holders of the ordinary shares. The issuance of preference shares, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in our control and may adversely affect the market price of the ordinary shares and the voting and other rights of the holders of ordinary shares. Anti-Takeover Effects of Cayman Islands Law and Our Amended and Restated Memorandum and Articles of Association Provisions of our memorandum and articles of association and Cayman Islands law may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following: • • • • • • • the division of our board of directors into three classes; the right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of directors or due to the resignation or departure of an existing board member; prohibition of cumulative voting in the election of directors which would otherwise allow less than a majority of shareholders to elect director candidates; the requirement for the advance notice of nominations for election to our board of directors or for proposing matters that can be acted upon at a general meeting; the ability of our board of directors to issue, without shareholder approval, such amounts of preference shares as the board of directors deems necessary and appropriate with terms set by our board of directors, which rights could be senior to those of our ordinary shares; the elimination of the rights of shareholders to call an extraordinary general meeting and to take action by written consent in lieu of a meeting; and the required approval of a special resolution of the shareholders, being a two-thirds vote of shares held by shareholders present and voting at a general meeting, to alter or amend the provisions of our memorandum and articles of association. Differences in Corporate Law The Companies Law is modeled after similar laws in the United Kingdom and differs from laws applicable to U.S. corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the Companies Law applicable to us and the laws applicable to companies incorporated in the United States and their shareholders. Mergers and Similar Arrangements Mergers and Similar Arrangements. In certain circumstances the Companies Law allows for mergers or consolidations between two Cayman Islands companies, or between a Cayman Islands company and a company incorporated in another jurisdiction (provided that is facilitated by the laws of that other jurisdiction). Where the merger or consolidation is between two Cayman Islands companies, the directors of each company must approve a written plan of merger or consolidation containing certain prescribed information. That plan of merger or consolidation must then be authorized by either (i) a special resolution of the shareholders of each company and (ii) such other authorization, if any, as may be specified in such constituent company’s articles of association. No shareholder resolution is required for a merger between a parent company (i.e., a company that owns issued shares that together represent at least 90% of the votes at a general meeting of a subsidiary company) and its subsidiary company, if a copy of the plan of merger is given to every member of the subsidiary company, unless the member agrees otherwise. The consent of each holder of a fixed or floating security interest of a constituent company must be obtained, unless the court waives such requirement. If the Cayman Islands Registrar of Companies is satisfied that the requirements of the Companies Law (which includes certain other formalities) have been complied with, the Registrar of Companies will register the plan of merger or consolidation. Where the merger or consolidation involves an overseas company, the procedure is similar, except that with respect to the overseas company, the director of the Cayman Islands company is required to make a declaration to the effect that, having made due inquiry, such director is of the opinion that the requirements set out below have been met: (i) that the merger or consolidation is permitted or not prohibited by the constitutional documents of the overseas company and by the laws of the jurisdiction in which the overseas company is existing, and that those laws and any requirements of those constitutional documents have been or will be complied with; (ii) that no petition or other similar proceeding has been filed and remains outstanding or order made or resolution adopted to wind up or liquidate the overseas company in the jurisdiction in which the overseas company is existing; (iii) that no receiver, trustee, administrator or other similar person has been appointed in any jurisdiction and is acting in respect of the overseas company, its affairs or its property or any part thereof; (iv) that no scheme, order, compromise or other similar arrangement has been entered into or made in any jurisdiction whereby the rights of creditors of the overseas company are and continue to be suspended or restricted; and (v) that there are no other reasons why it would be against the public interest to allow the merger or consolidation. Where the surviving company is the Cayman Islands company, the director of the Cayman Islands company is further required to make a declaration to the effect that, having made due inquiry, such director is of the opinion that the requirements set out below have been met: (i) that the overseas company is able to pay its debts as they fall due and that the merger or consolidated is bona fide and not intended to defraud unsecured creditors of the overseas company; (ii) that in respect of the transfer of any security interest granted by the overseas company to the surviving or consolidated company (a) consent or approval to the transfer has been obtained, released or waived, (b) the transfer is permitted by and has been approved in accordance with the constitutional documents of the overseas company, and (c) the laws of the jurisdiction of the overseas company with respect to the transfer have been or will be complied with; (iii) that the overseas company will, upon the merger or consolidation becoming effective, cease to be incorporated, registered or exist under the laws of the relevant foreign jurisdiction; and (iv) that there is no other reason why it would be against the public interest to permit the merger or consolidation. Where the above procedures are adopted, the Companies Law provides for a right of dissenting shareholders to be paid a payment of the fair value of their shares upon their dissenting to the merger or consolidation if they follow a prescribed procedure. In essence, that procedure is as follows: (i) the shareholder must give written objection to the merger or consolidation to the constituent company before the vote on the merger or consolidation, including a statement that the shareholder proposes to demand payment for their shares if the merger or consolidation is authorized by the vote; (ii) within 20 days following the date on which the merger or consolidation is approved by the shareholders, the constituent company must give written notice to each shareholder who made a written objection; (iii) a shareholder must within 20 days following receipt of such notice from the constituent company, give the constituent company a written notice of their intention to dissent including, among other details, a demand for payment of the fair value of their shares; (iv) within seven days following the date of the expiration of the period set out in clause (ii) above or seven days following the date on which the plan of merger or consolidation is filed, whichever is later, the constituent company, the surviving company or the consolidated company must make a written offer to each dissenting shareholder to purchase their shares at a price that the company determines is the fair value and if the company and the shareholder agree the price within 30 days following the date on which the offer was made, the company must pay the shareholder such amount; and (v) if the company and the shareholder fail to agree a price within such 30-day period, within 20 days following the date on which such 30-day period expires, the company (and any dissenting shareholder) must file a petition with the Cayman Islands Grand Court to determine the fair value and such petition must be accompanied by a list of the names and addresses of the dissenting shareholders with whom agreements as to the fair value of their shares have not been reached by the company. At the hearing of that petition, the court has the power to determine the fair value of the shares together with a fair rate of interest, if any, to be paid by the company upon the amount determined to be the fair value. Any dissenting shareholder whose name appears on the list filed by the company may participate fully in all proceedings until the determination of fair value is reached. These rights of a dissenting shareholder are not be available in certain circumstances, for example, to dissenters holding shares of any class in respect of which an open market exists on a recognized stock exchange or recognized interdealer quotation system at the relevant date or where the consideration for such shares to be contributed are shares of any company listed on a national securities exchange or shares of the surviving or consolidated company. Moreover, Cayman Islands law also has separate statutory provisions that facilitate the reconstruction or amalgamation of companies in certain circumstances. These provisions are commonly referred to in the Cayman Islands as “schemes of arrangement” and will generally be more suited for complex mergers or other transactions involving widely held companies, which may be tantamount to a merger. In the event that a merger was sought pursuant to a scheme of arrangement (the procedures of which are more rigorous and take longer to complete than the procedures typically required to consummate a merger in the United States), the arrangement in question must be approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made and who must in addition represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a meeting, or meeting summoned for that purpose. The convening of the meetings and subsequently the terms of the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder would have the right to express to the court the view that the transaction should not be approved, the court can be expected to approve the arrangement if it satisfies itself that: • • • • we are not proposing to act illegally or beyond the scope of our corporate authority and the statutory provisions as to majority vote have been complied with; the shareholders have been fairly represented at the meeting in question; the arrangement is such as a businessperson would reasonably approve; and the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law or that would amount to a “fraud on the minority.” If a scheme of arrangement or takeover offer (as described below) is approved, any dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of United States corporations, providing rights to receive payment in cash for the judicially determined value of the shares. Squeeze-out Provisions. When a takeover offer is made and, within four months, accepted by holders of 90% of the shares to which the offer relates, the offeror may, within a two-month period, require the holders of the remaining shares to transfer such shares on the terms of the offer. An objection can be made to the Grand Court of the Cayman Islands but this is unlikely to succeed unless there is evidence of fraud, bad faith, collusion or inequitable treatment of the shareholders. Further, transactions similar to a merger, reconstruction and/or an amalgamation may in some circumstances be achieved through other means to these statutory provisions, such as a share capital exchange, asset acquisition or control, through contractual arrangements, of an operating business. Shareholders’ Suits Shareholders’ Suits. Our Cayman Islands counsel is not aware of any reported class action having been brought in a Cayman Islands court. Derivative actions have been brought in the Cayman Islands courts, and the Cayman Islands courts have confirmed their availability. In principle, we will normally be the proper plaintiff and a claim against, for example, our officers or directors usually may not be brought by a shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority and be applied by a court in the Cayman Islands, exceptions to the foregoing principle apply in circumstances in which: • • • a company is acting or proposing to act illegally or beyond the scope of its authority; the act complained of, although not beyond the scope of the authority, could be effected if duly authorized by more than the number of votes which have actually been obtained; or those who control the company are perpetrating a “fraud on the minority.” A shareholder may have a direct right of action against us where the individual rights of that shareholder have been infringed or are about to be infringed. Indemnification. The Companies Law does not limit the extent to which a company’s memorandum and articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our amended and restated memorandum and articles of association provides for indemnification of officers and directors for losses, damages, costs and expenses incurred in their capacities as such, except through their own actual fraud or willful default. Cayman Islands law does not restrict transactions with directors, requiring only that directors exercise a duty of care and owe a fiduciary duty to the companies for which they serve. Under our amended and restated memorandum and articles of association, subject to any separate requirement for audit committee approval under the applicable rules of Nasdaq or unless disqualified by the chairman of the relevant board meeting, so long as a director discloses the nature of such director’s interest in any contract or arrangement which such director is interested in, such a director may vote in respect of any contract or proposed contract or arrangement in which such director is interested and may be counted in the quorum at such meeting. Transfer Agent and Register The transfer agent and registrar for our ordinary shares is Computershare Trust Company, N.A. Stock Exchange Listing Our ordinary shares have been approved for listing on The Nasdaq Global Market under the symbol “AMBA.” LIST OF SUBSIDIARIES OF THE REGISTRANT Exhibit 21.1 Subsidiary Ambarella Corporation Ambarella International Limited Ambarella International LP Ambarella Japan KK Ambarella Limited Ambarella Shanghai Co., Ltd. Ambarella Taiwan Ltd. Spondias Corporation VisLab S.r.l. Jurisdiction Delaware Hong Kong Canada Japan Hong Kong China Taiwan Cayman Islands Italy CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Exhibit 23.1 We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-184506, 333-187730, 333-195078, 333-203094, 333-210405, 333-217037, 333-224052 and 333-230603) of Ambarella, Inc. of our report dated March 27, 2020 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP San Jose, California March 27, 2020 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended. Exhibit 31.1 I, Feng-Ming Wang, certify that: 1. I have reviewed this Annual Report on Form 10-K of Ambarella, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: March 27, 2020 /s/ Feng-Ming Wang Feng-Ming Wang President and Chief Executive Officer (Principal Executive Officer) CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended. Exhibit 31.2 I, Kevin C. Eichler, certify that: 1. I have reviewed this Annual Report on Form 10-K of Ambarella, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: March 27, 2020 /s/ Kevin C. Eichler Kevin C. Eichler Chief Financial Officer (Principal Financial and Accounting Officer) CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 32.1 I, Feng-Ming Wang, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Ambarella, Inc. on Form 10-K for the fiscal year ended January 31, 2020 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations of Ambarella, Inc. Date: March 27, 2020 By: Name: Title: /s/ Feng-Ming Wang Feng-Ming Wang President and Chief Executive Officer I, Kevin C. Eichler, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Ambarella, Inc. on Form 10-K for the fiscal year ended January 31, 2020 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations of Ambarella, Inc. Date: March 27, 2020 By: Name: Title: /s/ Kevin C. Eichler Kevin C. Eichler Chief Financial Officer 

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