A DELAWARE CORPORATION
ARBN: 626 346 325
ANNUAL FINANCIAL REPORT
FOR THE YEAR ENDED
31 DECEMBER 2022
Corporate Directory
Corporate Directory
3
Letter from the CEO
4
Directors’ Report
6
Consolidated Balance Sheets
18
Consolidated Statements of Operations
19
Consolidated Statements of Redeemable Preferred Stock and Stockholders’ Equity
20
Consolidated Statement of Cash Flows
21
Notes to the Consolidated Financial Statements
23
Directors’ Declaration
45
Independent Auditor’s Report
46
Additional Shareholder Information
48
Corporate Directory
3
Company
Pivotal Systems Corporation
48389 Fremont Blvd, Suite 100
Fremont CA, 94538 USA
Phone: +1 (510) 770 9125
Fax: +1 (510) 770 9126
Website: www.pivotalsys.com
Directors
John Hoffman
Executive Chairman
Kevin Hill
Executive Director and Chief Executive Officer
Ryan Benton
Independent Non-Executive Director
Kevin Landis
Non-Executive Director
Peter McGregor
Independent Non-Executive Director
David Michael
Non-Executive Director
Jason Korman
Non-Executive Director
Australian Securities Exchange Representative
Danny Davies
United States Registered Office
c/o Incorporating Services Ltd
3500 South Dupont Highway
Dover, Delaware 19901 USA
Australian Registered Office
c/o Company Matters Pty Limited
Level 12, 680 George Street
Sydney, NSW 2000 Australia
United States Legal Adviser
DLA Piper LLP (US)
555 Mission Street, Suite 2400
San Francisco, California
94105-2933, USA
Australian Legal Adviser
Maddocks
Angel Place Level 27
123 Pitt Street
Sydney, NSW 2000 Australia
Share Registry
Australian CDI registry
US share registry
Link Market Services
American Stock Transfer and Trust Company, LLC
Level 12, 680 George Street
6201, 15th Avenue
Sydney, NSW 2000 Australia
Brooklyn, NY 11219 USA
Telephone:
+61 1300 554 474
Telephone: +1 (718) 921 8386
Facsimile:
+61 2 9287 0303
Securities Exchange Listing
Pivotal Systems Corporation (ASX code: PVS).
Chess Depository Interests (“CDIs”) over shares of the Company’s common stock are quoted on the
Australian Securities Exchange. One CDI represents one fully paid share in the Company.
Letter from the CEO
4
Dear Fellow Shareholders,
On behalf of the Board of Directors, I present the Pivotal Systems Annual Report for the year ended 31
December 2022, my first as the Company’s CEO.
The 2022 financial year was undoubtedly a challenging one for the Company as we entered an industry
cyclical correction and the Semi-Cap component industry slowed down. As a Board, we were disappointed
by the performance of the business and the associated material decline in the share price. We are resolute
in our focus to restore shareholder value in 2023 through a combination of more focused revenue
opportunities, materially reducing the Company’s operating costs without impacting our R&D innovation
and new product development.
During the year, several changes to the Board and senior management team were made.
I was honored to assume the role of CEO of Pivotal Systems on 1 June 2022, where I previously held the
role of COO of the Company since 2020. I have over 25 years of global high technology management
experience including senior roles within Apple, Applied Materials, IBM, Flextronics and Collins Aerospace.
Dr. Joseph Monkowski, Pivotal’s President and Chief Technology Officer (CTO) retired from the Board of
Directors following the Company’s 2022 Annual General Meeting. Dr Monkowski continues as President and
CTO. We thank Joe for his years of dedicated service as a Board member.
On 31 December 2022, Mr John Hoffman, Pivotal’s Executive Chairman and former CEO, retired from the
Company. On behalf of the Board of Directors of Pivotal and our staff and customers, we express our
sincere thanks and gratitude to John for his many years of dedicated service to the Company as CEO and
Executive Chairman since joining the Company in 2010. We wish John all the very best in his retirement.
During the year, our installed base of gas flow controllers (GFCs) was 73,000 units across the globe.
Revenues were down significantly during the year as the cyclical cycle went from a slowdown in chip
manufacture by Integrated Device Manufacturers, and cascaded upstream to Pivotal. The Semi supply
chain are still in a period of uncertainty as our Original Equipment Manufacturers (OEMs) rebalanced their
inventory. The lower customer demand is expected to continue with the Company’s revenue anticipated
to be significantly impacted into the first half of 2023. However, we are anticipating a much improved
second half of 2023. During industry downturns, it is important to qualify products with new customers to
ensure any pick up in demand translates to product sales for the Company, and Pivotal remains keenly
focused on new qualifications.
During 2022, the Company also experienced COVID-19 related supply shortages, particularly PCBA
components. PCBA component shortages had to levels of impact, first was availability and second was
mark-up contributing to increased pressure on our cost of goods and therefore gross profits. Our margins
were also materially impacted by inflationary pressures throughout the supply chain, with cost increases
affecting semi-grade metal as well as sub-systems such as pressure transducers and piezo assemblies.
Despite these short-term headwinds, longer term, the overall WFE sector is anticipated to benefit from
billions of dollars in government initiatives progressively announced through 2021 and into 2022, to expand
domestic chip manufacturing capacity in Europe, Japan, China, South Korea and the United States.
Indeed, in August 2022 the US government signed into law the US$52 billion CHIPS Act, which will provide
funding, certain tax relief and other incentives to companies looking to manufacture semiconductors in
the US. Front end equipment typically comprises in the range of 45-55% of the total capital investment
into a new production facility.
During the year, our production capacity remained at approximately 4,000 units per month with Pivotal
using a completely outsourced contract manufacturing service for mass production.
Letter from the CEO
5
As a technology leader in its segment, Pivotal is well-positioned to capitalize on market share gains at any
point in the cycle as the GFC accuracy and reliability is an enabler for advanced technology, and the
digital self-calibrating device design is an enabler for cost and productivity gains at the IDM.
We did continue to make solid progress with our customers in 2022. Our Atomic Layer Deposition product
development with the leading Japanese OEM continued to progress well, with additional (and successful)
qualifications for Pivotal products at a leading Korean and North American IDMs.
We are committed to the ASX for the foreseeable future. The delisting announced last February 14th is
no longer being considered. The Company’s parallel strategic review process, led by Needham & Co,
reveals multiple indications of interest in the Company from strategic investors, but there is no certainty
to any particular outcome, and the Company sees strong potential to continue its current independent
path, as a result of our new growth strategy and the equity raising that is currently in progress.
Finally, on behalf of our Board of Directors, I would like to thank the Pivotal team for their commitment
and diligence during a difficult year for the business with numerous operational challenges to overcome
to ensure the Company was able to meet or exceed all of our customer requirements.
I would also like to thank our shareholders for their continued patience and support of the Company
despite the very significant decline in our share price and market capitalization. As a Company, we are
committed to preserving our cash, prudently managing our expenditures and delivering long term revenue
growth and profitability. We are anticipating an improved business performance in the second half of
2023 as supply chain bottlenecks moderate and the wafer fabrication equipment market outlook
improves.
Sincerely,
Kevin Hill
Executive Director and Chief Executive Officer
Pivotal Systems Corporation
30 March 2023 (PT) / 31 March 2023 (AEDT)
Directors’ Report
6
The directors present their report for Pivotal Systems Corporation (“Pivotal” or “Company”) together
with the financial statements on the Consolidated Entity (referred to hereafter as the “Consolidated
Entity” or “Group”) consisting of the Company and its subsidiaries for the financial year ended 31
December 2022 and the auditor’s report thereon.
DIRECTORS
The following persons were directors of the Company during the whole of the financial year and up to
the date of this report, unless otherwise stated:
John Hoffman
Executive Chairman and Chief Executive Officer (retired as Chief Executive
Officer on 31 May 2022, retired from Board on 31 December 2022)
Kevin Hill
Executive Director and Chief Executive Officer (appointed to the Board on
1 June 2022)
Ryan Benton
Independent Non-Executive Director
Kevin Landis
Non-Executive Director
Peter McGregor
Independent Non-Executive Director
David Michael
Non-Executive Director
Jason Korman
Non-Executive Director
Dr. Joseph Monkowski
Executive Director and Chief Technical Officer (retired from the Board
on 19 May 2022)
PRINCIPAL ACTIVITIES
Pivotal designs, develops, manufactures and sells high-performance gas flow control products. This
includes the Gas Flow Controller (“GFC”) family of products and Flow Ratio Controllers (“FRC”) for both
etch and deposition applications. The Company’s proprietary hardware and software utilizes advanced
flow intelligence and proprietary algorithms to enable preventative diagnostic capability resulting in the
potential for an order of magnitude increase in fab productivity and capital efficiency for existing and
future technology nodes.
Pivotal is incorporated in Delaware, United States and has offices in Fremont California, USA
(headquarters) and third party contracted manufacturing (“CM”) and assembling facilities in Shenzhen,
China and Dongtan, South Korea.
REVIEW OF OPERATIONS AND FINANCIAL RESULTS
For the full year ending 31 December 2022, the Company recorded revenue of $18.2 million (2021: $29.2
million) which represents a 37.6% decrease driven by a lower demand as customers rebalance their
inventory in part due to contraction in industry demand. As a result, gross profit decreased 82.5% (2021:
$8.9 million).
Operating expenses for the period were $15.5 million (2021: $16.4 million). These expenses include a
12% decrease in R&D costs ($0.8 million). Selling, general and administrative expenses were relatively
flat versus prior year. The Company maintained its focus on inventory management, and careful spending
in R&D projects, improving working capital balances. The Company continued to direct manufacturing
towards fulfillment of backlog shipments.
Loss from Operations was $14.0 million (2021: $7.5 million), substantially higher than the prior period
due to the impact from lower revenues and lower gross profit.
During 2022, Pivotal continued product development and research in three key areas. First, Pivotal’s
focus on performance, creating an Ultra High Speed (UHS) GFC device capable of settling times 10x faster
than any other device available in the industry. Second, Pivotal’s R&D team concentrated on software
enhancements for advanced digital profile control, with over 70 signals to monitor and custom control
ECAT GFC performance. Third, Pivotal partnered with a Korean WFE OEM to develop prototypes for the
fastest and most accurate Flow Ratio Control product platform on the market.
Directors’ Report
7
Atomic Layer Deposition product development with the leading Japanese OEM continues test and
integration on OEM wafer processing equipment, as Pivotal continues to work with this OEM to qualify
for volume production.
Standard GFCs are growing market share in deposition applications following successful silane
qualification for a major North American Logic IDM, and qualification into critical deposition application
with a major North American WFE OEM. These segments are part a deliberate initiative to expand
beyond etch applications serving memory, into foundry/logic and deposition segments.
During 2022 the Company continued to experience supply shortages, such as PCBA component shortages
which were heavily marked up by distributors, contributing to increased pressure on COGS.
GOING CONCERN
The Company has incurred recurring losses and negative cash flows from operating activities since
inception. The Company anticipates that it will continue to incur net losses into the near future. As of
December 31, 2022, the Company had cash of $3.2 million and had an accumulated deficit of
$125.9 million.
The Company believes that cash as of December 31, 2022, of $3.2 million, will not be sufficient to fund
its planned operations for a period of at least 12 months from the date of the issuance of the
accompanying consolidated financial statements. Management expects to incur additional losses in the
future to fund its operations and will need to raise additional capital to fully implement its business plan.
The Company may raise additional capital through the issuance of equity securities, debt financings or
other sources in order to further implement its business plan. However, if such financing is not available
when needed and at adequate levels, the Company will need to reevaluate its operating plan and may
be required to curtail its business operations.
The Company believes that this raises substantial doubt about its ability to continue as a going concern.
The accompanying financial statements have been prepared assuming that the Company will continue as
a going concern, which contemplates the realization of assets and the settlement of liabilities and
commitments in the normal course of business. The accompanying financial statements do not reflect
any adjustments relating to the recoverability and reclassifications of assets and liabilities that might be
necessary if the Company is unable to continue as a going concern.
SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS
The pandemic kickstarted the supply chain shortage in SEMI, and its extended effects such as new virus
outbreaks, labor challenges and geopolitical uncertainties, have fueled it. In 2022, each link of the global
supply chain continued to be disrupted, and there are few signs of recovery in the near term. The
pandemic also prompted a snap back in growth and demand that was remarkable and unpredictable,
causing supply chains to struggle until demand declines to a manageable level and/or capacity and
component supply issues are resolved. Commodities initially saw demand drop precipitously with the
onset of COVID-19 and the shutdown of factories, but since then, consumer spending has created a V-
shaped recovery of the global economy and triggered an unprecedented demand for semiconductors.
Now, we face chip/components shortages, increased lead times from analog suppliers and huge price
increases. Risk has been elevated all along the semiconductor supply chain.
As a result, the Company has experienced significant cost inflation, including higher material,
transportation and energy costs, which negatively impacted its results of operations during the year
ended December 31, 2022. We expect cost inflation to continue to have a negative impact on our results
of operations in 2023 and possibly beyond. To the extent materials, transportation and energy prices
continue to fluctuate, our business and financial results could continue to be materially adversely
impacted. We continue to monitor these risks and rely on our increased pricing to our customers, and
cost savings programs to help mitigate some of the inflationary pressures.
While the Company has been able to supply its customers on time, revenue was below expectations and
receipts from customers dropped commensurately mainly as a result of downstream supply chain issues
that negatively affected the customers’ ability to produce and sell their product, constraining purchases
of GFCs. These customers are forecasting improved demand by the end of 2023, which would result in
Directors’ Report
8
higher revenues for the Company and better corresponding operating cash flows. In addition, in 2022,
the Company has continued to negotiate with key suppliers to mitigate cost disruptions that have
impacted the Company’s profit margins. Further, the Company has taken steps to reduce operating
expenses in both R&D and G&A.
There were no other significant changes in the state of affairs of the Group during the financial year.
DIVIDENDS
No dividends were paid or declared during the year ended 31 December 2022 and the Company does not
intend to pay any dividends for the year ended 31 December 2023 (2022: $Nil).
PRESENTATION CURRENCY
The functional and presentation currency of the Group is United States Dollars (US Dollars). The financial
report is presented in US Dollars with all references to dollars, cents or $’s in these financial statements
presented in US currency, unless otherwise stated.
ROUNDING OF AMOUNTS
Unless otherwise stated, amounts in this report have been rounded to the nearest thousand United States
Dollars.
JURISDICTION OF INCORPORATION
The Company is incorporated in the State of Delaware, United States of America and is a registered
foreign entity in Australia. As a foreign company registered in Australia, the Company is subject to
different reporting and regulatory regimes than Australian companies.
DELAWARE LAW, CERTIFICATE OF INCORPORATION AND BYLAWS
As a foreign company registered in Australia, the Company is not subject to Chapters 6, 6A, 6B and 6C of
the Corporations Act dealing with the acquisition of shares (including substantial shareholdings and
takeovers). Under the provisions of Delaware General Corporation Law (“DGCL”), shares are freely
transferable subject to restrictions imposed by US federal or state securities laws, by the Company’s
certificate of incorporation or bylaws, or by an agreement signed with the holders of the shares at issue.
The Company’s amended and restated certificate of incorporation and bylaws do not impose any specific
restrictions on transfer. However, provisions of the DGCL, the Company’s Certificate of Incorporation
and the Company’s Bylaws could make it more difficult to acquire the Company by means of a tender
offer (takeover), a proxy contest or otherwise, or to remove incumbent officers and Directors of the
Company. These provisions could discourage certain types of coercive takeover practices and takeover
bids that the Board may consider inadequate and to encourage persons seeking to acquire control of the
Company to first negotiate with the Board. The Company believes that the benefits of increased
protection of its ability to negotiate with the proponent of an unfriendly or unsolicited proposal to
acquire or restructure the Company outweigh the disadvantages of discouraging takeover or acquisition
proposals because, among other things, negotiation of these proposals could result in an improvement
of their terms.
Also refer to section 14 of the Additional Shareholder Information section of this Annual Report for
further specific details on restrictions to registration of transfers in the Company’s Bylaws.
MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL YEAR
On 28 March 2023, Pivotal announced an equity raising of 5 for 1 pro-rata accelerated renounceable
entitlement offer to raise up to A$7.9 million (US$5.25 million) at A$0.01 per new CDI. Each new
CDI/Share issued under the Entitlement Offer will rank equally with existing fully paid ordinary
CDIs/Shares on issue.
This equity raising will comprise an accelerated institutional entitlement offer, and a retail entitlement
offer to eligible securityholders. Proceeds from the equity raising will be used to fund operations,
Directors’ Report
9
working capital and general corporate purposes bringing the company to EBITDA positive run rate by year
end 2023 if the full US$5.25 million is raised.
Major shareholders Anzu Partners have committed to take up their full pro-rata entitlement of A$1.4m
and major shareholder Viburnum have committed to take a minimum of A$0.5m. Directors and senior
management have committed to subscribe for their pro-rata entitlements of A$0.1M and have asked if
they can participate in any shortfall. Shareholders and new shortfall investors subscribing for more than
US$500,000 each will be entitled to together nominate one new director to the Board on completion of
the offer. New institutional US investor has committed to taking up a minimum of US$500k of the
shortfall.
The Company has evaluated subsequent events through March 30, 2023, the date these financial
statements were available to be issued, and determined that no additional subsequent events had
occurred that would require disclosure or recognition in these financial statements.
LIKELY DEVELOPMENTS AND EXPECTED RESULTS OF OPERATIONS
The Group’s new growth strategy involves focusing the portfolio on higher return on investment (ROI),
developing a product roadmap fed by the market as well as technology, and reorganizing the team for
disciplined execution to drive profits. This strategy will allow the Company to increase market share
and the available market. The Group’s growth strategy also includes:
1. Launching two new product platforms to attack competitor weak points;
2. Developing superior products with competitive pricing to penetrate and scale chemical vapor
deposition (CVD) applications, doubling the served available market;
3. Enabling sales growth from memory focus to broadly serve all chip segments;
4. Promoting flow control software to accelerate chip manufacturers path to performance and
efficiency;
5. Execute path to profit efficiently across sales, research and development, operations, and
finance;
6. Obtaining positive operating cash flow by reducing cost of sales, improving vendor base and
building optimized design.
ENVIRONMENTAL REGULATION
The Group is not subject to any significant environmental regulation under United States of America
legislation. The Group is committed to the sustainable management of environmental, health, and safety
(EHS) concerns as a core business principle. This includes ensuring compliance with all applicable
government standards and regulations and providing a safe and healthy workplace, while reducing our
environmental footprint. We integrate health, safety, and environmental considerations into all aspects of
our business, including product design and services, to provide productive and responsible solutions by:
•
Striving for zero accidents through the application of an EHS Management System.
•
Implementing pollution prevention control strategies.
•
Committing to continual improvement for our customers, Company, and Group’s personnel.
The Board of Directors considers that adequate systems are in place to manage the Group’s obligations and
is not aware of any breach of environmental requirements as they relate to the Group.
Directors’ Report
10
CORPORATE GOVERNANCE
During FY22, the Company, as a Delaware incorporated corporation listed on the ASX, sought to achieve
substantive compliance with the governance recommendations set out in the ‘Corporate Governance
Principles and Recommendations 4th Edition’, published by the ASX Corporate Governance Council (the
ASX
Principles).
The
Company’s
Corporate
Governance
Statement
can
be
viewed
at
http://www.pivotalsys.com/investors. The Corporate Governance Statement sets out the extent to
which Pivotal has followed the ASX Corporate Governance Council’s Recommendations during the year
ended 31 December 2022.
SHARE OPTIONS
Options to acquire shares of Common Stock in the Company were granted during the financial year. The
number of options outstanding as at the date of this report, and all other movements in share options,
are disclosed in Note 15 to the financial statements.
SECURITIES ON ISSUE
The Company had the following securities on issue as at 31 December 2022:
Common
Stock
Preferred
Stock
Shares of common stock1
159,503,750
-
Shares of preferred stock (i.e. RBI Preferred Stock)
-
10,752
Options over shares of common stock
21,126,463
-
1 Shares of Common Stock are equivalent to 159,503,750 CHESS Depositary Interests.
INFORMATION ON DIRECTORS
Kevin Hill
Executive Director and Chief Executive Officer (appointed to the
Board on 1 June 2022)
Kevin has over 25 years of global high technology management experience. Before joining Pivotal,
Kevin held senior roles within Apple (NASDAQ:AAPL), Applied Materials (NASDAQ:AMAT), IBM
(NYSE:IBM), Flextronics (NASDAQ:FLEX), and Collins Aerospace (NYSE:COL). Kevin has a B.S., United
States Military Academy at West Point, MSBA Boston University, and is a Certified Product Manager.
Special responsibilities:
None
Other directorships:
None
Ryan Benton
Independent Non-Executive Director
Ryan joined the Board in 2015 bringing over 25 years of finance, operations, and transaction experience.
Ryan is the CFO of Tempo Automation and previously served as CFO of Revasum, Inc. (ASX: RVS),
BrainChip Holdings Ltd (ASX: BRN) and as CEO and Board Member at Exar Corporation (NYSE: EXAR), which
was acquired by MaxLinear Corporation (NASDAQ: MXL) in May 2017. Previous roles included senior and
consulting positions at ASM International NV (NASDAQ: ASMI), and eFunds Corporation (NASDAQ: EFDS).
Special responsibilities:
Chairman of the Audit and Risk Management Committee
Member of the Remuneration and Nomination Committee
Other directorships:
Non-executive director - Revasum, Inc. (ASX: RVS) and Tempo
Automation Holdings, Inc. (NASDAQ: TMPO)
Directors’ Report
11
Kevin Landis
Non-Executive Director
Kevin joined the Board in 2012 and is the CEO and CIO of Firsthand Capital Management, an investment
management firm he founded in 1994. Firsthand Capital Management is the investment adviser to
Firsthand Technology Value Fund, Inc. (NASDAQ: SVVC), a publicly traded venture capital fund. Kevin has
over two decades of experience in engineering, market research, product management and investing in
the technology sector. Kevin is Firsthand’s nominee director to the board of Pivotal Systems Corporation.
Special responsibilities:
Member of the Audit and Risk Management Committee
Member of the Remuneration and Nomination Committee
Other directorships:
Non-executive director - Revasum, Inc. (ASX: RVS), Hera Systems, Inc.,
IntraOp Medical Corp., QMAT, Inc. and Silicon Genesis Corp. and
Wrightspeed, Inc.
David Michael
Non-Executive Director
David Michael is Managing Director at Anzu Partners, an investment partnership which invests in
innovative industrial technology companies. In addition to his role at Pivotal Systems, he is also Board
member of Nuburu (industrial lasers), and Terapore (nanofiltration membranes for ultrapure water and
other applications.
Mr. Michael was formerly Senior Partner and Managing Director of The Boston Consulting Group (BCG),
where his career spanned numerous leadership roles across the firm. He formerly led BCG’s Greater China
business and their Asia Technology Practice. He served a range of clients in semiconductors, components,
hardware, software, and services. He was based for 7 years in Silicon Valley and for 16 years in Greater
China. He remains a Senior Advisor to the firm.
Special responsibilities:
Member of the Audit and Risk Management Committee
Member of the Remuneration and Nomination Committee
Other directorships:
Non-executive director - Taiwan Cement Corporation (XTAI:1101),
Nuburu, Axsun, and Terapore
Peter McGregor
Independent Non-Executive Director
Peter McGregor was appointed a non-executive director on 23 August 2018 and has over 30 years’
experience in senior finance and management roles, including having been Chief Executive Officer of
technology company, Think Holdings, Chief Financial Officer of the ASX50 transport company, Asciano,
and a partner in the Investment Banking firm of Goldman Sachs JBWere.
He also spent time as a Managing Director within the Institutional Banking & Markets division of
Commonwealth Bank and was Chief Operating Officer of ASX-listed Australian Infrastructure Fund. Peter
is an experienced company Director, having served as Chairman of the Port of Geelong and as a Director
of Melbourne, Gold Coast and Darwin Airports.
Special responsibilities:
Chairman of the Remuneration and Nomination Committee
Member of the Audit and Risk Management Committee
Other directorships:
Non-executive Director - Imricor Medical Systems, Inc.
Directors’ Report
12
Jason Korman
Non-Executive Director
Jason Korman was appointed a non-executive director on 6 December 2021. Jason is a Partner at
Viburnum Funds, an Australian-based active ownership investment management firm and a major
shareholder of Pivotal with a 16.4% stake in the Company.
Jason has over 10 years’ experience in private equity and investment management across Australia,
Singapore and the USA at BGH Capital, Argand Partners and CHAMP Private Equity. He has been involved
in numerous investments, exits and financings across a range of sectors including technology, education,
manufacturing, chemicals and general industrial. Prior to this, Jason worked in investment banking at
Credit Suisse.
Special responsibilities:
None
Other directorships:
None
John Hoffman
Executive Chairman and Chief Executive Officer (retired as Chief
Executive Officer on 31 May 2022, retired from Board on 31 December
2022)
John Hoffman has over 30 years of global high technology management experience building growth
organizations in both the semiconductor and information technology markets.
Prior to joining Pivotal Systems, John was a Senior VP with Spencer Trask Ventures, a New York based
venture capital firm. While at Spencer Trask, John was primarily involved in the solar and integrated
circuit efforts of the firm. Prior to Spencer Trask, John was the Chief Executive Officer of RagingWire
Enterprise Solutions, an Inc 500 fastest growing private company. John reorganized the company and
enabled record growth in revenue and profitability during his tenure. Prior to RagingWire, John worked
in various general manager roles at Applied Materials for 18 years. He was the President of the billion
dollar “Etch Product Business Group”, VP and GM of the Process Control and Diagnostic Business Group
and the General Manager of the Customer Service Division which grew by over 300% during his tenure.
Special responsibilities:
None
Other directorships:
None
Dr. Joseph Monkowski
Executive Director and Chief Technical Officer (retired from the
Board on 31 May 2022)
Joseph Monkowski has extensive experience in the semiconductor industry focused on providing process
equipment and metrology solutions for next generation device manufacturing.
Prior to joining Pivotal, Joseph was the SVP of Business Development for Advanced Energy Industries,
where he led the company’s M&A strategy to expand its product portfolio and position the company as a
market leader in the semiconductor subsystems space. Previously, he held senior executive positions at
Pacific Scientific, Photon Dynamics and Lam Research, where he served as EVP and CTO. During his
career, Monkowski led efforts to design and build a number of leading CVD and plasma etch systems,
winning the R&D 100 award and multiple Semiconductor International Best Product awards. He has
authored numerous patents and publications.
Special responsibilities:
None
Other directorships:
None
Directors’ Report
13
SECURITIES HELD BY DIRECTORS AND KEY MANAGEMENT PERSONNEL
The directors and key management personnel of the Company are shown together with their holdings of
shares of common stock and options, held directly or indirectly as at 31 December 2022:
Common Stock
Options
Common Stock
Options
Direct
Indirect
John Hoffman (retired as a
Director on 31 December 2022)
1,853,568
4,584,083
-
-
Dr. Joseph Monkowski (retired as
a Director on 19 May 2022)
1,786,646 4,382,490
-
-
Kevin Hill
-
1,440,000
Ryan Benton
195,000
301,000
-
-
Kevin Landis
-
-
-
-
David Michael
-
-
-
-
Peter McGregor
100,000-
200,000
-
-
Jason Korman
-
-
-
-
Ron Warrington
-
1,500,000
-
-
3,835,214
12,407,573
-
-
REMUNERATION REPORT
EXECUTIVE COMPENSATION
This section discusses the principles underlying our policies and decisions with respect to the
compensation of our named executive officers, and all material factors relevant to an analysis of these
policies and decisions. Our named executive officers for the year ended 31 December 2022 were:
John Hoffman
Executive Chairman (retired as a Director on 31 December 2022)
Kevin Hill
Chief Executive Officer and Executive Director
Dr Joseph Monkowski
President, Executive Director and Chief Technical Officer (retired as a Director
on 19 May 2022)
Ron Warrington
Chief Financial Officer
COMPONENTS OF EXECUTIVE COMPENSATION
The principal components of our executive compensation are base salary, cash bonuses under the Senior
Executive Remuneration Scheme, and long-term incentives. Our Remuneration and Nomination
Committee considers that each component of executive compensation must be evaluated and
determined with reference to competitive market data, individual and corporate performance, our
recruiting and retention goals and other information we deem relevant.
Our executive officers are also eligible to participate in our 401(k)-retirement plan as well as medical
and other benefit plans.
The terms of each named executive officer’s compensation are derived from the employment agreements
the Company has entered into with them.
Senior Executive Remuneration Scheme 2020 – 2022
Mr. Hoffman and Dr. Monkowski each were eligible to receive cash bonuses pursuant to the Senior
Executive Incentive Remuneration Scheme 2020-2022 (the “Bonus Plan”), which was adopted on June
23, 2020. The purpose of the Bonus Plan is to motivate and reward the eligible senior leadership team
for their contributions toward the achievement of certain performance goals.
Administration
The Bonus Plan is administered by the Remuneration and Nomination Committee (the “Committee”),
which has the discretionary authority to interpret the provisions of the Bonus Plan, including all decisions
on eligibility to participate, the establishment of performance goals and the payment of awards.
Directors’ Report
14
Performance criteria
Cash bonus targets and corporate performance metrics for specific short-term and long-term
performance periods pursuant to the Bonus Plan are established by the Committee. The Bonus Plan
consists of the Short-Term Incentive Program and the Long-Term Incentive Program.
Short Term Incentive Program
Potential bonuses may be paid to Mr. Hoffman, Dr. Monkowski and other members of the senior leadership
team selected by the Committee of up to 50% of base salary if key performance milestones are met by
the end of the fiscal year. The key performance milestones include financial and business development
goals. A portion of the short-term incentive bonus may also be based upon the discretion of our board of
directors.
Long-Term Incentive Program
Potential bonuses may be paid to Mr. Hoffman, Dr. Monkowski and other members of the senior leadership
team selected by the Committee subject to satisfaction of various performance hurdles, including: (i)
our company achieving certain EBITDA targets for each of fiscal year 2020 to fiscal year 2022; (ii) our
company achieving a market capitalization and share price target at the end of fiscal year 2022; and (iii)
our company closing a change of control transaction at or above the target share price. Determination
of the satisfaction of the performance hurdles will be made by the Committee in the first quarter of
fiscal year 2023 unless a change of control event occurs on an earlier date. The maximum bonus pool
payable under the Long Term Incentive Program is $10 million, with 60% of the actual bonus pool payable
to Mr. Hoffman, Dr. Monkowski and other members of the senior leadership team selected by the
Committee.
No Tax Gross-Ups
We do not make gross-up payments to cover our named executive officers’ personal income taxes that
may pertain to any of the compensation paid or provided by us.
EXECUTIVE COMPENSATION PACKAGES FOR 2022
The components of the executive compensation packages for our named executive officers for the year
ended 31 December 2022 are as follows:
John Hoffman
Executive Chairman
Mr. Hoffman received a fixed remuneration of $225,000 and was eligible to participate in various
customary employee benefit plans of Pivotal. Mr. Hoffman retired on 31 December 2022.
Kevin Hill
Chief Executive Officer and Executive Director
Mr. Hill receives a fixed remuneration package of $360,000 and is eligible to participate in various
customary employee benefit plans of Pivotal. Mr. Hill is entitled to the annual performance bonus at a
target level of 50% of fixed remuneration at the end of the relevant calendar year. Payment is based on
performance criteria determined by the Board. All of Mr. Hill’s unvested Options are subject to
acceleration of vesting upon a change of control of the Company, and certain of his Options vest only
subject to achievement of specified performance metrics and a time-based vesting schedule.
Dr. Joseph Monkowski President, Chief Technical Officer
Dr. Monkowski receives a fixed remuneration package of $325,000 and is eligible to participate in various
customary employee benefit plans of Pivotal. Pursuant to Dr. Monkowski’s Retention Agreement, dated
11 May 2018, if Dr. Monkowski is terminated by the Company without cause or if he resigns for good
reason and Mr. Hoffman signs a general release of claims in favor of the Company and complies with
certain other requirements, the Company must pay Dr. Monkowski severance in an amount equal to
twelve months of his base salary, twelve months of health insurance cover and 100% of his annual target
bonus for the period in which termination occurs. All of Dr. Monkowski’s unvested Options are subject to
acceleration of vesting upon a change of control of the Company, and certain of his Options vest only
subject to achievement of specified performance metrics and a time-based vesting schedule.
Directors’ Report
15
Ron Warrington
Chief Financial Officer
Mr. Warrington receives an annual base salary of $275,000 and is eligible to participate in various
customary employee benefit plans of Pivotal. Under the terms of his offer of employment in August 2021,
Mr. Warrington received an award of options to purchase up to 1,000,000 shares of our common stock
and may receive a target bonus 45% of his base salary, subject to review and approval by the board of
directors. In addition, all of his Options vest subject to a time-based vesting schedule, all of his unvested
Options are subject to acceleration of vesting upon a change of control of the Company and certain of
his Options vest only subject to achievement of specified performance metrics and a time-based vesting
schedule.
NON-EXECUTIVE COMPENSATION
The Board is responsible for determining and reviewing compensation arrangements for each non-
executive director. The non-executive directors for the year ended 31 December 2022 were as follows:
Ryan Benton
Kevin Landis
David Michael
Peter McGregor
Jason Korman
The Company has entered into a non-executive director agreement with Mr. Benton whereby he is
entitled to receive $70,000 per annum for his role as a non-executive director, and a further $15,000 per
annum as chair of the Audit and Risk Committee. The Company has also entered into a non-executive
director agreement with Mr. McGregor whereby he is entitled to receive $70,000 per annum as a non-
executive director, and a further $15,000 per annum as chair of the Remuneration and Nomination
Committee. Mr. Landis, Mr. Michael and Mr. Korman do not receive compensation for their services as a
non-executive director.
REMUNERATION TABLE
Remuneration earned by key management personnel during 2021 and 2022 is summarized as follows:
2021
Salary and
Fees
Bonus
(1)
401k & other
Benefits
Share based
compensation
Total
$
$
$
$
$
John Hoffman
(retired as a Director
on 31 December
2022)
375,000
93,750
28,965
194,675
692,390
Joseph Monkowski
(retired as a Director
on 19 May 2022)
325,000
48,750
29,037
194,675
597,462
Ryan Benton
85,000
-
-
6,016
91,016
Kevin Landis
-
-
-
-
-
David Michael
-
-
-
-
-
Peter McGregor
85,000
-
-
22,222
107,222
Jason Korman
-
-
-
-
-
Ron Warrington
93,576
27,500
6,752
33,217
162,045
Dennis Mahoney
158,567
-
1,000
79,914
239,481
Michael Bohn
201,667
21,500
33,838
21,239
278,244
1,323,810
191,500
99,592
551,958
2,166,860
Directors’ Report
16
2022
Salary and
Fees
Bonus
(1)
401k &
other
Benefits
Share based
compensation
Total
$
$
$
$
$
John Hoffman
(retired as a Director
on 31 December
2022)
225,000
-
29,736
90,159
344,895
Joseph Monkowski
(retired as a Director
on 19 May 2022)
325,000
-
31,670
74,307
430,977
Kevin Hill
360,000
46,320
96,641
502,961
Ryan Benton
85,000
-
-
12,376
97,376
Kevin Landis
-
-
-
-
-
David Michael
-
-
-
-
-
Peter McGregor
77,500
-
-
17,036
94,536
Jason Korman
-
-
-
-
-
Ron Warrington
275,000
-
22,324
126,258
423,582
1,347,500
-
130,050
416,777
1,894,327
(1) The 2021 Bonus was awarded and paid in March 2022. In 2022 there were no bonuses awarded.
END OF REMUNERATION REPORT
Directors’ Report
17
MEETINGS ATTENDED BY BOARD
The number of meetings of directors (including meetings of committees of directors) held during the
year and the number of meetings attended by each director was as follows:
Board of
Directors
Audit & Risk
Management Committee
Remuneration &
Nomination Committee
Eligible Attendance
Eligible
Attendance
Eligible Attendance
John Hoffman
28
28
-
-
-
-
Joseph Monkowski
16
16
-
-
-
-
Kevin Hill
12
12
Ryan Benton
28
25
6
6
2
2
Kevin Landis
28
22
6
6
2
2
David Michael
28
27
6
6
2
2
Peter McGregor
28
28
6
6
2
2
Jason Korman
28
24
-
-
-
-
INDEMNITY AND INSURANCE OF DIRECTORS AND OFFICERS
The Company has entered into customary indemnification agreements under which it has indemnified
directors and officers of the Company for losses incurred, or claims made and associated expenses
incurred, in their capacity as a director or officer, for which they may be held personally liable, subject
to certain limitations and exceptions.
INDEMNITY AND INSURANCE OF AUDITOR
The Company has not, during or since the end of the financial year, indemnified or agreed to indemnify
the auditor of the Company or any related entity against a liability incurred by the auditor.
During the financial year, the Company has not paid a premium in respect of a contract to insure the
auditor of the Company or any related entity.
NON-AUDIT SERVICES
Details of amounts paid or payable to the auditor for non-audit services provided during the year are Nil.
PROCEEDINGS ON BEHALF OF THE COMPANY
No proceedings have been brought or intervened in on behalf of the Company.
On behalf of the directors
Kevin Hill
Director and Chief Executive Officer
30 March 2023 (Fremont PST), 31 March 2023 (Sydney AEDT)
18
PIVOTAL SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
December 31,
December 31,
2021
2022
Assets
Current assets:
Cash and cash equivalents ......................................................... $
3,988
$
3,213
Trade accounts receivable ........................................................
9,008
5,788
Inventories ...........................................................................
6,857
7,410
Prepaid expenses ....................................................................
332
377
Other current assets ................................................................
127
298
Total current assets ..............................................................
20,312
17,086
Property, plant and equipment, net ................................................
336
197
Right of use assets, net ...............................................................
697
420
Other assets .............................................................................
558
215
Total assets ........................................................................ $
21,903
$
17,918
Liabilities, Redeemable Preferred Stock and Stockholders’ Equity
Current liabilities:
Trade accounts payable ............................................................ $
3,770
$
4,020
Accrued expenses ...................................................................
880
1,143
Current portion of long-term debt ................................................
808
1,130
Current portion of operating lease liabilities ....................................
294
327
Other current liabilities ............................................................
276
444
Total current liabilities ..........................................................
6,028
7,064
Operating lease liabilities, less current portion ...................................
473
146
Other liabilities .........................................................................
253
113
Total liabilities ....................................................................
6,754
7,323
Redeemable preferred stock, par value $0.00001 per share, 13,000 shares
authorized as of December 31, 2021 and 2022, 11,528 and 10,752 shares
outstanding as of December 31, 2021 and December 31, 2022; aggregate
liquidation preference of $14,260 and $15,378 as of December 31, 2021
and December 31, 2022 .............................................................
11,319
10,543
Stockholders’ equity:
Common stock, $0.00001 par value; 250,000,000 shares authorized as of
December 31, 2021 and December 31, 2022; 128,546,316 and
159,503,750 shares issued and outstanding as of December 31, 2021 and
December 31, 2022 ...............................................................
1
1
Common prime stock, $0.00001 par value; 120,000,000 shares authorized
as of December 31, 2021 and December 31, 2022; no shares issued and
outstanding as of December 31, 2021 and December 31, 2022 ............
—
—
Additional paid-in capital .............................................................
115,630
125,977
Accumulated deficit ...................................................................
(111,801)
(125,926)
Total stockholders’ equity .......................................................
3,830
52
Total liabilities, redeemable preferred stock and stockholders’ equity ....... $
21,903
$
17,918
The accompanying notes are an integral part of these consolidated financial statements.
19
PIVOTAL SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
Year Ended
December 31,
2021
2022
Net product revenue .................................................. $
27,652
$
17,029
Service revenue .......................................................
1,593
1,214
Total net revenue .....................................................
29,245
18,243
Cost of goods sold .....................................................
19,405
15,992
Cost of service revenue ...............................................
939
697
Total costs of goods and service revenue .........................
20,344
16,689
Gross profit .......................................................
8,901
1,554
Operating expenses:
Research and development .......................................
6,533
5,743
Selling, general and administrative ..............................
9,829
9,794
Total operating expenses .......................................
16,362
15,537
Loss from operations .................................................
(7,461))
(13,983)
Other income (expense):
Interest expense ....................................................
(120))
(71)
)
Foreign currency transaction loss ................................
(12)
(35)
Gain on forgiveness of PPP loan ...................................
906
—
Other expense, net .................................................
(144)
(1)
Other income (expense) .........................................
630
(107)
Loss before provision for income taxes ............................
(6,831))
(14,090)
Provision for income taxes ...........................................
48
35
Net loss ................................................................. $
(6,879))
$
(14,125)
Less deemed dividend to redeemable preferred stockholders .
(368)
(388)
Net loss attributable to common stockholders, basic and
diluted .................................................................. $
(7,247))
$
(14,513)
Net loss per share attributable to common stockholders, basic
and diluted .......................................................... $
(0.06))
$
(0.09)
Weighted average common shares outstanding ...................
123,711,465
155,059,607
The accompanying notes are an integral part of these consolidated financial statements.
20
PIVOTAL SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
Redeemable
Preferred Stock
Common Stock
Additional
Paid-In
Capital
Accumulated
Deficit
Total
Stockholders’
Equity
Shares
Amount
Shares
Par Value
Balance at December 31, 2020 ..
10,000 $
9,795
120,240,769 $
1 $ 108,241 $ (104,922)
$ 3,320
Proceeds from the sale of
redeemable
preferred stock, net of
issuance costs of $4 .........
3,000
2,996
—
—
—
—
—
Issuance of shares upon
institutional placement, net
of issuance costs of $184 ...
—
—
7,137,795
—
6,502
—
6,502
Issuance of common stock
upon stock options exercise
—
—
1,167,752
—
293
—
293
Redeemable preferred stock
redemptions ..................
(1,472)
(1,472)
—
—
(368)
—
(368)
Stock-based compensation ....
—
—
—
—
962
—
962
Net loss ..........................
—
—
—
—
—
(6,879)
(6,879)
Balance at December 31, 2021 .
11,528
11,319
128,546,316
1
115,630
(111,801))
3,830
Issuance of shares upon
funding-rights offering, net
of issuance costs of $703 ....
—
—
30,317,527
—
9,911
—
9,911
Issuance of common stock
upon stock options exercise
—
—
639,907
—
117
—
117
Redeemable preferred stock
redemptions ..................
(776)
(776)
—
—
(388)
—
(388)
Stock-based compensation ...
—
—
—
—
707
—
707
Net loss ..........................
—
—
—
—
—
(14,125)
(14,125)
Balance at December 31, 2022 .
10,752 $
10,543
159,503,750 $
1 $ 125,977 $ (125,926)
$ 52
The accompanying notes are an integral part of these consolidated financial statements
21
PIVOTAL SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended
December 31,
2021
2022
Cash Flows from Operating Activities
Net loss ............................................................................ $
(6,879 ) $
(14,125)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ...............................................
366
228
Non-cash lease expense .......................................................
257
276
Stock-based compensation ...................................................
962
707
Gain on forgiveness of PPP loan .............................................
(906)
—
Gain on sale of property, plant and equipment ............................
(56)
—
Write off of deferred offering costs..........................................
2,190
—
Changes in operating assets and liabilities:
Trade accounts receivable .................................................
(2,246 )
3,220
Inventories ...................................................................
(40)
(553)
Prepaid expenses ............................................................
(18)
(45)
Other current assets ........................................................
34
(171)
Other assets ..................................................................
56
343
Trade accounts payable ....................................................
505
417
Accrued expenses ...........................................................
(1,717)
263
Other liabilities ..............................................................
(538)
28
Operating lease liabilities ..................................................
(264 )
(294)
Net cash used in operating activities ................................
(8,294)
(9,706)
Cash Flows from Investing Activities
Purchase of property, plant and equipment ...............................
(185)
(72)
Net cash used in investing activities .................................
(185)
(72)
Cash Flows from Financing Activities
Proceeds from borrowings on long-term-debt .............................
—
1,500
Payments on borrowings of long-term-debt ................................
(1,000 )
(1,195)
Proceeds from the exercise of stock options ..............................
293
117
Proceeds from the issuance of common stock, net of issuance costs ..
6,502
9,911
Proceeds from issuance of redeemable preferred stock, net of
issuance costs ..................................................................
2,996
—
Payments on redemption of preferred stock ...............................
(1,840)
(1,164)
22
Payment of deferred offering costs .........................................
(2,023)
(167)
Net cash provided by financing activities ...........................
4,928
9,002
Net decrease in cash and cash equivalents ................................
(3,551)
(776)
Cash and cash equivalents at beginning of year ...........................
7,539
3,988
Cash and cash equivalents at end of year .................................. $
3,988 $
3,213
Supplemental disclosures of cash flow information:
Cash paid for income taxes ................................................... $
49 $
35
Cash paid for interest ......................................................... $
96 $
53
Non-cash investing and financing activities:
Purchases of property, plant, and equipment in accounts payable .... $
9 $
—
Deferred issuance costs in accounts payable ............................... $
167 $
—
Gain of forgiveness of PPP loan ............................................... $
906 $
—
Disposal of property, plant and equipment in exchange for note
receivable ........................................................................ $
278 $
—
The accompanying notes are an integral part of these consolidated financial statements.
23
PIVOTAL SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of the Business and Basis of Presentation
Pivotal Systems Corporation, together with its consolidated subsidiary (the Company), designs,
develops and manufactures flow monitoring and control technology products for the global
semiconductor industry. The Company’s proprietary hardware and software utilizes advanced machine
learning to enable preventative diagnostic capability resulting in an order of magnitude increase in fab
productivity and capital efficiency technology nodes. The Company is incorporated in Delaware, United
States and has offices in Fremont, California, USA (headquarters) and third party contracted
manufacturing and assembling facilities in Shenzhen, China and Dongtan, South Korea.
The Company’s securities have been listed for quotation in the form of CHESS Depositary Interests,
or CDIs, on the Australian Securities Exchange (the ASX) and trade under the symbol PVS since July 2,
2018. Legal title to the shares of common stock underlying the CDIs is held by CHESS Depositary
Nominees Pty Ltd (CDN), a wholly owned subsidiary of the ASX. One CDI represents the beneficial
interest in one share of common stock.
Liquidity and Going Concern
The Company has incurred recurring losses and negative cash flows from operating activities since
inception. The Company anticipates that it will continue to incur net losses into the near future. As of
December 31, 2022, the Company had cash of $3.2 million and had an accumulated deficit of
$125.9 million.
The Company believes that cash as of December 31, 2022, of $3.2 million, will not be sufficient to
fund its planned operations for a period of at least 12 months from the date of the issuance of the
accompanying consolidated financial statements. Management expects to incur additional losses in the
future to fund its operations and will need to raise additional capital to fully implement its business
plan. The Company may raise additional capital through the issuance of equity securities, debt
financings or other sources in order to further implement its business plan. However, if such financing is
not available when needed and at adequate levels, the Company will need to reevaluate its operating
plan and may be required to curtail its business operations.
The Company believes that this raises substantial doubt about its ability to continue as a going
concern. The accompanying financial statements have been prepared assuming that the Company will
continue as a going concern, which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. The accompanying financial statements do
not reflect any adjustments relating to the recoverability and reclassifications of assets and liabilities
that might be necessary if the Company is unable to continue as a going concern.
2. Summary of Significant Accounting Policies
Basis of presentation and consolidation
The accompanying consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States (U.S. GAAP) and include the accounts and
results of operations of the Company and its wholly owned subsidiary. All intercompany balances and
transactions 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, liabilities,
and disclosures of contingencies at the date of the consolidated financial statements and the reported
amounts of net revenue and expenses during the reporting period. Such estimates relate to revenue
recognition, the useful lives of fixed assets, leases, allowances for doubtful accounts. Such estimates
also relate to the net realizable value of inventory, accrued liabilities, the valuation of stock-based
24
awards, deferred tax valuation allowances, and other reserves. On an ongoing basis, the Company
evaluates its estimates. Actual results could differ from those estimates, and such differences may be
material to the consolidated financial statements.
Business Segment Information
The Company operates in one segment which involves the technological design, development,
manufacture, and sale of high-performance flow controllers. All the activities of the Company are
interrelated, and each activity is dependent on the others. Accordingly, all significant operating
disclosures are based upon analysis of the Company as one segment. The financial results of this
segment are equivalent to the financial statements of the Company as a whole.
The chief operating decision maker, who is the Company’s chief executive officer, measures
financial performance as a single enterprise and not on legal entity or end market basis. Throughout the
year, the chief operating decision maker allocates capital resources on a project-by-project basis across
the Company’s entire asset base to maximize profitability without regard to legal entity or end market
basis.
Foreign Currency
Transactions in foreign currencies are initially recorded by the Company’s entities at their
respective functional currency spot rates at the date the transaction first qualifies for recognition.
Monetary assets and liabilities denominated in foreign currencies are translated at the functional
currency spot rates of exchange at the reporting date. Non-monetary items that are measured in terms
of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial
transactions. Exchange differences arising on the remeasurement of monetary items are recognized in
the consolidated statements of operations.
Credit Risk and Concentrations
Financial instruments that potentially subject the Company to a concentration of credit risk consist
principally of cash and accounts receivable.
The Company places its cash in high credit quality financial institutions. Substantially all of the
Company’s cash is held at one financial institution that management believes is of high credit quality.
Such deposits may, at times, exceed federally insured limits. In general, the Company’s customers are
not required to provide collateral or any other security to support accounts receivable. The Company
performs ongoing credit evaluations of its customers and maintain an allowance for estimated credit
losses. Bad debt expense was immaterial for the year ended December 31, 2021. For the year ended
December 31, 2022, bad debt expense was $400,000.
Deferred offering costs
The Company capitalizes certain legal, professional accounting and other third-party fees that
are directly associated with in-process equity financings as deferred offering costs, until such financings
are consummated. After consummation of an equity financing, these costs are recorded as a reduction
of the proceeds from the offering, either as a reduction to the carrying value of the preferred stock or
in stockholder’s deficit as a reduction of additional paid-in capital generated as a result of the offering.
In December 2021 the Company wrote off $2,190,000 in deferred offering costs, due to delays and
uncertainties around the Company's public listing in the United States. These expenditures were
included in selling, general and administrative expenses in the statement of operations. No such costs
were incurred in 2022.
Fair Value of Financial Instruments
Certain assets and liabilities are carried at fair value under U.S. GAAP. Fair value is the exchange
price that would be received for an asset or paid to transfer a liability (at exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. The Company establishes a fair value hierarchy that requires an
entity to maximize the use of observable inputs and minimize the use of unobservable inputs when
25
measuring fair value. The standard describes three levels of inputs that may be used to measure fair
value, which are provided below:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs (other than Level 1 prices) such as quoted prices for similar assets or
liabilities, quoted prices in markets that are not active, or other inputs that are observable or can
be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities. Assets and liabilities include financial
instruments whose value is determined using pricing models, discounted cash flow methodologies,
or similar techniques, as well as instruments for which the determination of fair value requires
significant management judgment or examination.
The categorization of a financial instrument within the valuation hierarchy is based on the lowest
level of input that is significant to the fair value measurement.
The carrying value of accounts receivable, accounts payable and accrued expenses approximate
their respective fair value due to the short-term nature of these assets and liabilities. The carrying
value of the term loan and outstanding borrowings under the line of credit agreement approximate fair
value as they bear interest at a rate approximating a market interest rate.
Cash and cash equivalents
The Company considers all highly liquid investments with an original maturity date of three months
or less at the date of purchase to be cash equivalents. Cash is maintained at financial institutions. The
Company maintains all cash in a highly liquid form to meet current obligations.
Trade accounts receivable, net
A receivable is a right to consideration that is unconditional (i.e., only the passage of time is
required before payment is due). Accounts receivables are presented net of an allowance for doubtful
accounts, which is an estimate of amounts that may not be collectible.
The Company manages the collectability of accounts receivable primarily through its review of the
accounts receivable aging. When facts and circumstances dictate the collection of a specific invoice
amount or the balance relating to a customer is in doubt, the Company assesses the impact on amounts
recorded for doubtful accounts and, if necessary, records a charge in the fiscal period that such
assessment is determined. Adjustments to the allowance for doubtful accounts are recorded as selling,
general and administrative expenses in the consolidated statements of operations. Account balances are
written off after all means of collection are exhausted and the potential for non-recovery is determined
to be probable.
Inventories
Inventories are stated at the lower of cost or net realizable value, with cost being determined on a
first-in, first-out basis. The Company records inventory valuation adjustments when conditions exist that
suggest that inventory may be more than anticipated demand, is obsolete based upon expected future
demand for products and market conditions, or quality related rejections. These valuation adjustments
are reported as a reduction to raw materials, work in process and finished goods. The Company
regularly evaluates the ability to realize the value of inventory based on a combination of factors,
including historical usage rates, forecasted sales or usage, and product end of life dates. Assumptions
used in determining management’s estimates of future product demand may prove to be incorrect, in
which case the Company may need to record additional write offs of inventory. Although the Company
performs a detailed review of its forecasts of future product demand, any significant unanticipated
changes in demand could have a significant impact on the value of the Company’s inventory and
reported operating results.
26
Property, Plant and Equipment, Net
Property, plant and equipment, net, including improvements that significantly add to productive
capacity or extend useful life, are stated at historical cost less accumulated depreciation. Depreciation
is computed using the straight-line method over the estimated useful lives of the assets. Maintenance
and repairs expenditures are charged to expense as incurred. Estimated useful lives of the respective
property, plant and equipment assets are as follows:
Asset
Useful Life
Plant and equipment
2 – 5 years
Furniture and fixtures
2 – 5 years
Computers and equipment
3 years
Software
2 years
Leasehold improvements
The shorter of the remaining term of the
lease or estimated useful life
Leases
The Company accounts for leases in accordance with Accounting Standards Codification (ASC) ASC
842, which requires lessees to recognize leases on-balance sheet and disclose key information about
leasing arrangements. ASC 842, Leases was adopted as of January 1, 2019. The Company determines if a
contract contains a lease based on whether it has the right to obtain substantially all the economic
benefits from the use of an identified asset and whether we have the right to direct the use of an
identified asset in exchange for consideration, which relates to an asset which the Company does not
own. Right-of-use (ROU) assets represent the Company’s right to use an underlying asset for the lease
term and lease liabilities represent the Company’s obligation to make lease payments arising from the
lease. ROU assets are recognized as the lease liability, adjusted for lease incentives received and
prepayments made. Lease liabilities are recognized at the present value of the future lease payments at
the lease commencement date. The interest rate used to determine the present value of the future
lease payments is our incremental borrowing rate (IBR) because the interest rate implicit in most of our
leases is not readily determinable.
The IBR is a hypothetical rate based on the Company’s understanding of what its credit rating would
be. Lease payments may be fixed or variable; however, only fixed payments or in-substance fixed
payments are included in the Company’s lease liability calculation. Variable lease payments are
recognized in operating expenses in the period in which the obligation for those payments is incurred.
The ROU asset also includes any initial direct costs and any lease payments made prior to the lease
commencement date and is reduced by any lease incentives received. The ROU asset is amortized on a
straight-line basis as the operating lease cost over the lease term on the consolidated statements of
operations. ROU asset amortization, referred to as non-cash lease expense, along with the change in the
operating lease liabilities are separately presented within the cash flows from operating activities on
the consolidated statements of cash flows.
Impairment of Long-Lived Assets
Long-lived assets are tested for impairment whenever events or changes in business circumstances
indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company
considers in deciding when to perform an impairment review include significant underperformance of
the business in relation to expectations, significant negative industry or economic trends and significant
changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a
long-lived asset for recoverability, the Company compares forecasts of undiscounted cash flows
27
expected to result from the use and eventual disposition of the long-lived asset to its carrying value. If
such assets are considered to be impaired, the impairment to be recognized is measured as the amount
by which the carrying amount of the assets exceeds the fair value of the assets. To date, the Company
has not recorded any impairment losses on long-lived assets. If such assets are not impaired, but their
useful lives have decreased, the remaining net book value is amortized over the revised useful life.
Product Warranties
The Company provides warranties on its products to its customers, generally for one to three years
from the date of shipment. In the event of a failure of a product covered by these warranties, the
Company must repair or replace the product or, if those remedies are insufficient, and at the discretion
of the Company, provide a refund. The Company periodically assesses the adequacy of the warranty
reserve and adjusts the amount as necessary. If there is a material increase in the rate of customer
claims, or the Company’s estimates of probable losses relating to specifically identified warranty
exposures are inaccurate, the Company may need to record a charge against future cost of goods sold.
As of December 31, 2021 and 2022, the Company had accrued warranty reserves of $115,000 and
$267,000, respectively.
Redeemable Preferred Stock
The Company classifies redeemable preferred stock outside of stockholders’ equity because, upon
the occurrence of certain change in control events that are outside the Company’s control, including
liquidation, sale or transfer of the Company’s assets, or events of default, holders of the redeemable
preferred stock can cause redemption for cash. If it becomes probable that the shares will become
redeemable, the Company will re-measure the carrying value of the shares to the redemption value
through the redemption date. As of December 31, 2021 and 2022, no remeasurements were required, as
the Company determined that the shares were not probable of becoming redeemable. The Company
analyzed all embedded derivatives and beneficial conversion features for its redeemable preferred stock
and concluded that none requires bifurcation.
Revenue Recognition
The Company earns revenue from contracts with customers, primarily through the design,
development, manufacture and sale of flow controllers. Contracts are priced based on specific
negotiations with each customer. The Company records revenue under ASC 606, Revenue from Contracts
with Customers (ASC 606).
Under the guidance of ASC 606, revenue is recognized when transfer of control to the customer
occurs in an amount reflecting the consideration that the Company expects to be entitled. To achieve
this core principle, the Company applies the following five step approach:
(1) Identify the contract with a customer — The Company considers distributor or sales
representative agreements, together with purchase orders, as well as individual customer purchase
orders to be customer contracts. A contract exists when it is approved by both parties, each party’s
rights and obligations are identified, payment terms are known, customer has the ability and intent to
pay and the contract has commercial substance. The Company uses judgement in determining the
customer’s ability and intent to pay, which is based on factors such as the customer’s historical
payment experience.
(2) Identify the performance obligations in the contract — Performance obligations are
identified as products and services that will be transferred to the customer that are both capable of
being distinct, whereby the customer can benefit from the product or service either on its own or
together with other resources that are readily available from third parties or from the Company, and
are distinct in the context of the contract, whereby the transfer of the products or services is separately
identifiable from other promises in the contract. Substantially, all the Company’s contracts with
customers contain single performance obligation, such as the sale of flow controllers.
(3) Determine the transaction price — The transaction price is determined based on the
consideration to which the Company expects to be entitled in exchange for transferring products to the
28
customer. The transaction price may include variable consideration. Variable consideration is included
in the transaction price if, in the Company’s judgment, it is probable that no significant future reversal
of cumulative revenue under the contract will occur.
(4) Allocate the transaction price to the performance obligations in the contract — If the
contract contains a single performance obligation, the entire transaction price is allocated to that
performance obligation. Contracts that contain multiple performance obligations require an allocation
of the transaction price to each performance obligations based on a relative standalone selling price
(SSP). For the periods ended December 31, 2021 and 2022, contracts including multiple performance
obligations are infrequent.
(5) Recognize revenue when a performance obligation is satisfied — Revenue is recognized when
control of the product is transferred to the customer (i.e., when the Company’s performance obligation
is satisfied), which typically occurs point in time at shipment or when control of a service is transferred.
The Company records product sales net of discounts, sales returns and allowances.
Service revenue
Service revenue is recognized upon transfer of control of promised services to customers in an
amount that reflects the consideration that the Company expects to receive in exchange for those
products or services. These services are regularly sold on a stand-alone basis. Contracts that include the
provision of services are typically related with repair services, which are generally capable of being
distinct and accounted for as separate performance obligations. Repair services are typically sold on a
time and materials basis and related revenue is recognized once the repaired product is shipped or
delivered to the customer. These services are provided at a point in time.
ASC 606 defines “control” as “the ability to direct the use of, and obtain substantially all of the
remaining benefits from, the asset.” The Company first determines whether control of a service is
transferred over time when at least one of the following criteria is met:
• The customer simultaneously receives and consumes the benefits provided by the entity’s
performance as the entity performs.
• The entity’s performance creates or enhances an asset that the customer controls as the asset is
created or enhanced.
• The entity’s performance does not create an asset with an alternative use to the entity and the
entity has an enforceable right to payment for performance completed to date.
If a performance obligation is satisfied over time, the Company recognizes revenue by measuring
progress toward satisfying the performance obligation in a manner that faithfully depicts the transfer of
goods or services to the customer. Considering that repair services are generally satisfied when the
Company has transferred physical possession of the repaired product, the related revenue is recognized
at a point in time.
Sales channels
The Company sells products and services primarily in the United States and Asia through its direct
sales force, third party distributors and independent sales representatives. When the Company transacts
with a distributor, its contractual arrangement is with the distributor and not with the end user.
Whether the Company transacts business with and receives the order from a distributor or directly from
an end user, its revenue recognition policy and resulting pattern of revenue recognition for the order
are the same.
The Company also uses independent sales representatives to assist in the sales process with certain
customers. Sales representatives are not distributors. If a sales representative is engaged in the sales
process, the Company receives the order directly from and sells the products directly to the end
29
customer. The Company pays a commission to the sales representative, calculated as a percentage of
the related customer payment. Sales representatives commissions are recorded as expenses when
incurred and are classified as sales and marketing expenses in the Company’s consolidated statements
of operations.
Variable consideration
Variable consideration includes returns for which reserves are established. When applicable, these
reserves are based on the amounts earned or claimed on the related sales and are classified as
reductions of accounts receivable. Where appropriate, these estimates take into consideration the
Company’s historical experience, current contractual and statutory requirements, industry data and
forecasted customer buying and payment patterns.
Practical expedients elected
The Company elected certain practical expedients with the adoption of the new revenue
recognition standard. The length of time between revenue recognition and payment is not significant
under any of the Company’s payment terms. However, if the period between revenue recognition and
when the customer pays is one year or less, the Company elected to not account for the significant
financing component. In addition, the Company expenses incremental costs of obtaining a contract as
and when incurred because the expected amortization period of the asset that the Company would have
recognized is one year or less.
Other Revenue Recognition Policies
Shipping and handling activities are not considered a fulfillment cost. The Company records
shipping and handling costs as a cost of goods sold.
Contract Assets and Contract Liabilities
Contract liabilities (deferred revenue) consist of advance consideration received from customers
and billings more than revenue recognized as deferred revenue, which precede the Company’s
satisfaction of the associated performance obligations. The Company’s contract liabilities primarily
result from customer payments received upfront for performance obligations that are satisfied at a
point in time. Contract liabilities are recognized as revenue when the goods are delivered to the
customer. As of December 31, 2021, and 2022, the Company had contract liabilities of $37,000, and $0,
respectively. Revenue recognized from contract liabilities were $538,000 and $37,000 for the periods
ended December 31, 2021, and 2022, respectively. Deferred cost of goods sold was immaterial for the
Company as of December 31, 2021 and 2022.
Due to the relationship between the Company’s performance and the customer’s payment, the
Company typically does not have conditional rights to consideration in exchange for goods or services
transferred to a customer. Generally, the Company has the right to bill the customer as goods are
delivered and services are provided, which results in the Company’s right to payment being
unconditional. Therefore, the Company does not have contract assets as of December 31, 2021, or 2022.
Due to the nature of the product, each contract with a customer has distinct performance
obligations that are capable of being distinct on their own and within the context of the contract. In
addition, based on the contract terms, which generally include performance obligations subject to
cancellation terms, the Company does not have material unsatisfied performance obligations.
Research and Development Expenses
Research and development costs consist primarily of salaries, employee benefits, depreciation,
amortization, overhead, outside contractors, facility expenses, and non-recurring engineering fees.
Expenditures for research and development are charged to expense as incurred.
30
Stock-Based Compensation
The Company recognizes compensation costs for all stock-based compensation awards made to
employees based upon the awards’ grant-date fair value. The fair value of the equity-settled share
options granted throughout the year is estimated as at the date of grant using a Black Scholes Merton
Option Pricing Model. Stock-based compensation expense is recognized evenly over the requisite service
period, which is generally the vesting period. The Company accounts for forfeitures as they occur.
Determining the fair value of the stock-based compensation awards at the grant date requires
judgment, including estimated the expected term of the stock awards and the volatility of the
underlying market-based and projected future cash flow assumptions. Any changes to those estimates
that the Company makes from time to time may have a significant impact on the stock-based
compensation expense recorded and could materially impact the Company’s results of operations.
Income Taxes
The Company accounts for 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 temporary
differences between the financial statement and tax basis of assets and liabilities, as measured by
enacted tax rates anticipated to be in effect when these differences are expected to reverse. This
method also requires the recognition of future tax benefits to the extent that realization of such
benefits is more likely than not. Deferred tax expense or benefit is the result of changes in the deferred
tax assets and liabilities. The Company assesses the likelihood that its deferred tax assets will be
recovered from future taxable income and, to the extent it believes, based upon the weight of available
evidence, it is more likely than not that some or all the deferred tax assets will not be realized, a
valuation allowance is established.
The Company recognizes a liability for potential payments of taxes to various tax authorities related
to uncertain tax positions and other tax matters. The recorded liability is based on a determination of
whether and how much of a tax benefit taken by the Company in its tax filings or positions is “more
likely than not” to be realized. The amount of the benefit that may be recognized in the consolidated
financial statements is the largest amount that has a greater than 50% likelihood of being realized upon
ultimate settlement. To the extent that the assessment of such tax positions changes, the change in
estimate is recorded in the period in which the determination is made. The Company establishes a
liability, which is included in other long-term liabilities in the consolidated balance sheets, for tax-
related uncertainties based on estimates of whether, and the extent to which, additional taxes will be
due. These liabilities are established when the Company believes that certain positions might be
challenged despite the Company’s belief that the tax return positions are fully supportable. The
recorded liability is adjusted considering changing facts and circumstances. The provision for income
taxes includes the impact of the recorded liability and the related changes.
When incurred, the Company recognizes interest and penalties related to uncertain tax positions as
a component of income tax provision in the consolidated statements of operations. Accrued interest and
penalties are included in accrued income taxes in the consolidated balance sheets.
Net Loss Per Share
The Company computes net loss per share in accordance with ASC 260, Earnings Per Share
(ASC 260). Basic net loss per share is computed by dividing net loss attributable to shareholders of the
Company by the weighted-average number of common shares outstanding during the reporting period.
Diluted loss per share is computed similarly to basic net loss per share, except that it includes the
potential dilution that could occur if dilutive securities were exercised. Information about potentially
dilutive and antidilutive shares for the reporting period is provided in Note 14 - Net Loss per Share.
31
Concentrations of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to concentrations of credit risk consist
primarily of cash and accounts receivable. To manage credit risk related to accounts receivables, the
Company evaluates its creditworthiness of its customers and maintains allowances, to the extend
necessary, for potential credit losses based upon the aging of its accounts receivable balances and
known collection issues. There were no expected credit losses as of December 31, 2021 and 2022.
Geographically, the Company has the following revenue information based on the location of its
customers during the years ended December 31, 2021 and 2022 (in thousands):
2021
2022
Asia ........................................................................... $
7,673 $
4,005
North America ...............................................................
21,572
14,238
$
29,245 $ 18,243
The categorization of net sales by geography is determined based on the location the products are
being shipped to.
The following customers accounted for more than 10% of revenues during the years ended
December 31, 2021 and 2022:
2021
2022
Customer A. ...........................................................................
38%
51%
Customer B ............................................................................
17%
18%
Customer C ............................................................................
17%
17%
Customer D .............................................................................
17%
7%
89%
93%
The following customers accounted for more than 10% of trade accounts receivable during the years
ended December 31, 2021 and 2022:
2021
2022
Customer A. ..........................................................................
31%
46 %
Customer B ...........................................................................
28%
19 %
Customer C ...........................................................................
4%
5 %
Customer D ...........................................................................
0%
0 %
Customer E ...........................................................................
14%
9 %
Customer F ...........................................................................
0 %
15 %
77%
94 %
Impact of Recently Issued Accounting Standards
In June 2016, the Financial Accounting Standards Board (FASB) FASB issued ASU No. 2016-13,
“Measurement of Credit Losses on Financial Instruments” (ASU 2016-13), which adds an impairment
model (known as the current expected credit loss (CECL) model) that is based on expected losses rather
than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of
32
expected credit losses, which the FASB believes will result in more timely recognition of such losses.
The ASU is also intended to reduce complexity by decreasing the number of credit impairment models
that entities use to account for debt instruments. The FASB subsequently issued ASU 2018-19, ASU 2019-
04, and ASU 2019-10, which clarified the implementation guidance and effective date of Topic 326.
Topic 326 is effective for the Company beginning fiscal year 2023. The Company is currently evaluating
the impact of the adoption of this standard on the Company’s consolidated financial statements.
There are no recently issued accounting standards which have not been previously adopted which
are expected to have a material impact on the Company’s financial statements.
3. Revenue from Customers
The Company earns revenue from customers, primarily through the design, development,
manufacture, and sale of flow controllers. The following table summarizes net revenues disaggregated
by type of customer for the years ended December 31, 2021 and 2022. The categorization of net
revenues by customer type is determined using various characteristics of the product and the
application into which the Company’s product will be incorporated.
Net revenues by core end market and application were as follows for the years ended December 31,
2021 and 2022 (in thousands):
2021
2022
Customer type:
Integrated device manufacturer (IDM) ............................... $
5,994 $
3,670
Original equipment manufacturer (OEM) ............................
23,251
14,573
Total net revenue ....................................................... $
29,245 $ 18,243
The Company recognizes revenues net of discounts.
Unsatisfied performance obligations primarily represent contracts for products with future delivery
dates. The Company elected to not disclose the amount of unsatisfied performance obligations as these
contracts have original expected durations of less than one year.
4. Trade Accounts Receivable
Trade accounts receivable, net consists of the following (in thousands):
December 31,
2021
December 31,
2022
Trade accounts receivable ...............................................
$
9,008 $
5,243
Other receivables .........................................................
545
Total trade accounts receivable .........................................
$
9,008 $
5,788
33
5. Inventories
Inventories include material, labor and overhead and consists of the following (in thousands):
December 31,
2021
December 31,
2022
Raw materials ............................................................ $
4,276 $
4,525
Work in process ..........................................................
1,357
628
Finished goods ...........................................................
1,224
2,257
Total inventories ........................................................ $
6,857 $
7,410
As of December 31, 2021 and 2022, the Company recorded inventory provisions totaling $994,000
and $775,000, respectively.
6. Property, Plant and Equipment, net
Property, plant and equipment, net is stated at cost, and consists of the following (in thousands):
December 31,
2021
December 31,
2022
Furniture and fixtures ............................................... $
121 $
121
Computers and equipment ..........................................
1,937
2,009
Software ...............................................................
125
125
Leasehold improvements ............................................
130
130
Total property, plant and equipment, gross ......................
2,313
2,385
Less: accumulated depreciation ...................................
(1,976)
(2,188)
Total property, plant and equipment, net ........................ $
336 $
197
The Company recorded depreciation expense in the following
categories of its consolidated statements of operations during
the years ended December 31, 2021 and 2022 (in thousands):
2021
2022
Cost of goods sold ................................................... $
—
$
—
Selling, general and administrative ................................
59
63
Research and development .........................................
284
149
Total depreciation expense ......................................... $
343
$
212
The geographic locations of the Company’s long-lived assets, net, based on physical location of the
assets, as of December 31, 2021 and December 31, 2022 were as follows (in thousands):
December 31,
2021
December 31,
2022
United States .............................................................. $
293 $
188
South Korea ...............................................................
43
9
Total property, plant and equipment, net ............................ $
336 $
197
34
7. Prepaid Expenses
The composition of prepaid expenses is as follows (in thousands):
December 31,
2021
December 31,
2022
Prepaid insurance ........................................................ $
215 $
262
Prepaid expenses ........................................................
117
1151
Total ....................................................................... $
332 $
377
8. Accrued Expenses
The composition of accrued expenses is as follows (in thousands):
December 31,
2021
December 31,
2022
Accrued other ............................................................ $
91 $
─
Accrued expenses .......................................................
254
587
Accrued salaries and wages ............................................
5
7
Accrued vacation ........................................................
530
549
Total ...................................................................... $
880 $
1,143
9. Other Current Liabilities
The composition of other current liabilities is as follows (in thousands):
December 31,
2021
December 31,
2022
Contract liabilities ....................................................... $
37 $
─
Accrued warranties ......................................................
115
267
Deferred product refunds ...............................................
11
─
Deferred gain on sale of property, plant and equipment ...........
113
177
Total ....................................................................... $
276 $
444
Changes in the Company’s accrued warranties account were as follows (in thousands):
Accrued
Warranties
Balance at December 31, 2020 ............................................................ $
115
Warranty expense ...........................................................................
204
Settled and expired warranties ...........................................................
(204)
Balance at December 31, 2021 ............................................................
115
Warranty expense ...........................................................................
466
Settled and expired warranties ...........................................................
(314)
Balance at December 31, 2022 ............................................................ $
267
35
10. Notes Payable
On August 27, 2019, the Company entered into a financing agreement with Bridge Bank, a division
of Western Alliance Bank. The financing agreement includes a revolving line of credit with a maximum
borrowing capacity of $7.0 million (revolving credit line), and a term loan line of credit with a maximum
borrowing capacity of $3.0 million (term loan).
The amount of liquidity available under the revolving credit line is based on the Company’s
balances and composition of eligible customer receivables and inventory, as well as other factors. As of
December 31, 2022, the amount available under the revolving credit line is $2.2 million. Amounts
borrowed under the revolving credit line mature and become due and payable in 24 months from the
date of borrowing, unless extended by the parties. The agreement was amended on September 27,
2021, extending the maturity date of the revolving credit line to September 27, 2023. The revolving
credit line bears interest at a rate equal to 1% above the prime rate, floating on the average
outstanding balance. As of December 31, 2021 and 2022, the outstanding balance of the revolving credit
line was $0 and $1.13 million, respectively. As of December 31, 2022, the interest rate for the revolving
credit line was 9%.
On September 3, 2019, the Company drew $3.0 million on the term loan. As of December 31, 2021
and 2022, the outstanding balance of the term loan plus accrued interest was $808,000 and $0,
respectively.
The financial covenants of the revolving credit line require an adjusted current ratio of at least
1.25:1.00, including liquidity, for which the Company must maintain unrestricted cash and cash
equivalents with the lender of not less than $2.0 million at any time. The Company was in compliance
with the financial covenants of its borrowing facilities outstanding as of December 31, 2021 and
December 31, 2022.
The term loan is secured by all tangible and intangible assets of the Company.
The agreement was amended on August 20, 2021 (2nd amendment) and September 27, 2021 (3rd
amendment). These amendments extended only to the revolving line of credit. The 2nd amendment
extended the term of the agreement by 30 days to September 26, 2021. The 3rd amendment extended
the revolving line of credit maturity date to September 27, 2023, and reduced the liquidity requirement
to $500,000 from $2,000,000, for the remaining 2 year term. These amendments were accounted for as
modifications.
On April 20, 2020, the Company entered a Promissory Note with Western Alliance Bank as the
lender (Lender), pursuant to which the Lender agreed to make a loan to the Company under the Payroll
Protection Program (PPP Loan) offered by the U.S. Small Business Administration (SBA) in a principal
amount of $0.9 million pursuant to Title 1 of the Coronavirus Aid, Relief and Economic Security Act
(CARES). The loan was forgiven in January 2021, resulting in a gain on loan forgiveness of $0.9 million,
which has been recorded within gain on forgiveness of PPP loan on the consolidated statement of
operations.
Maturities of long-term debt, net of debt costs, are as follows (in thousands):
Year Ending December 31,
Future Maturities of
Notes Payable
2023 .................................................................................. $
1,130
Total ................................................................................. $
1,130
36
11. Leases
The Company’s operating lease liabilities as of December 31, 2021 and 2022 are comprised of future
payments related to the Company’s operating lease agreement for office space, and operating lease for
office equipment. Total lease costs for the years ended December 31, 2021 and 2022 were as follows (in
thousands):
2021 2022
Operating lease costs .................................................................. $ 319 $ 303
The following table presents the weighted average remaining lease term, and weighted-average
discount rates related to the Company’s operating leases:
December 31,
2021
December 31,
2022
Weighted average remaining lease term (in months) ..............
28
16
Weighted average discount rate ......................................
7.5%
7.5%
Future minimum payments on operating lease liabilities as of December 31, 2022, are as follows (in
thousands):
Year Ending December 31,
2023 ............................................................................................. $ 350
2024 .............................................................................................
148
Total minimum lease payments .............................................................
498
Less: Imputed interest ........................................................................
(24)
Total ............................................................................................ $
473
12. Commitments and Contingencies
Legal proceedings
From time to time, the Company becomes subject to various legal proceedings and claims, the
outcomes of which are subject to significant uncertainty. The Company records an accrual for legal
contingencies when it is determined that it is probable that a liability has been incurred and the amount
of the loss can be reasonably estimated. In making such determinations, the Company evaluates, among
other things, the degree of probability of an unfavorable outcome and, when it is probable that a
liability has been incurred, the ability to make a reasonable estimate of the loss. If the occurrence of
liability is probable but not estimable, the Company will disclose the nature of the contingency, or if
reasonably possible and estimable, will also provide the likely amount of such loss or range of loss.
Furthermore, the Company does not believe there are any matters that could have a material adverse
effect on financial position, results of operations or cash flows.
Flow Device and Systems, Inc. (“Flow Device”) has filed a lawsuit against the Company in the
United States District Court Central District of California Southern Division (Case No. 8:21-cv-02089)
claiming that certain of the Company’s products infringe U.S. Patent No. 7,204,158, of which Flow
Device purports to be the exclusive licensee. The Company believes this lawsuit is without merit and
will defend itself vigorously. As of the reporting date, the outcome is not determinable, and no
liabilities are accrued as a result.
37
Indemnification
From time to time, the Company has agreed to indemnify and hold harmless certain customers for
potential allegations of infringement of intellectual property rights and patents arising from the use of its
products. To date, the Company has not incurred any costs in connection with such indemnification
arrangements; therefore, there was no accrual of such amounts as of December 31, 2021, or December 31,
2022.
Purchase Commitments
The Company has current third-party purchase obligations for supplies and manufacturing services
with two vendors. The minimum purchase obligations expire by February 2025. The Company made
third-party purchases under the commitments totaling $3.2 million and $3.4 million during the years
ended December 31, 2021 and December 31, 2022, respectively.
The estimated annual minimum purchase commitments with the suppliers were as follows (in
thousands):
Year Ending December 31,
2023 ............................................................................................
2,117
2024 ............................................................................................
2,000
2025 ............................................................................................
250
Total ........................................................................................... $ 4,367
13. Common and Redeemable Preferred Stock
Common Stock
The holders of common stock participate in dividends and the proceeds on the winding up of the
Company in proportion to the number of and amounts paid on the shares held. The fully paid common
stock has a par value of $0.00001 and the Company has designated authorized capital of 250,000,000
shares of common stock.
Holders of common stock are entitled to one vote for each share of common stock held. There shall
be no cumulative voting. Holders are also entitled to receive, when, as and if declared by our board,
out of any assets of the Company legally available therefore, any dividends as may be declared from
time to time by our board.
On February 3, 2022, the Company entered into an underwritten rights offering of 30,317,527 CDIs
to raise maximum gross proceeds of approximately $10.5 million. (Refer to note 17).
Common Prime Stock
The holders of Common Prime Stock are not entitled to any voting rights or powers, except as
otherwise required by law. They are also not entitled to share in any dividends or other distributions of
cash, property or shares of the Company as may be declared by our board on the Common Prime Stock.
The fully paid Common Prime Stock has a par value of $0.00001 and the Company has designated
authorized capital of 120,000,000 shares of Common Prime Stock. At December 31, 2021 and 2022 there
was no common prime stock issued and outstanding.
38
Redeemable Preferred Shares
The authorized capital of the Company includes 13,000 shares of redeemable preferred stock,
$0.00001 par value per share, 13,000 of which have been designated redeemable preferred stock. On
June 2, 2021, the Company received $3.0 million funding from the issuance of 3,000 shares of
redeemable preferred stock to Anzu RBI Mezzanine Preferred LLC (Anzu RBI). The issue costs related
with this financing were $4,000. Anzu RBI is entitled to a non-cumulative priority preference dividend of
2%, payable at the Company’s discretion. There was no dividend payable during 2021 and 2022.
At any time prior to or on the first anniversary of the original issue date, the redemption price is
120% of the original issue price, plus any unpaid dividends. On the day after the first anniversary of the
issuance date, and on each anniversary thereafter, the redemption price increases to the original issue
price plus the product of $250 dollars multiplied by the number of years from original issuance. The
calculation does not include fractional year increases.
As per the Investment Agreement, the “First Redemption” of redeemable preferred stock will be
redeemable based on the aggregate amounts attributed to the prior 10 months (4.0% of net
revenues/month). After the First Redemption, subsequent redemptions of shares of redeemable
preferred stock will occur on a quarterly basis and will be based on an amount equal to 4.0% of the
Company’s previous financial quarter revenues. The number of redeemable preferred shares to be
redeemed during the quarter is based on the established share price, as defined in the Investment
Agreement. If the Company fails to make an anticipated redemption, Anzu RBI may send notice to state
that the anticipated redemption has not been made. The Company would have a 30-day period to make
the anticipated redemption. If the anticipated redemption is not made at the end of the period, the
redeemable preferred stock redemption price would increase to the greater of the current share price
plus $1,000, or $3,000. If the Company fails to make a demanded redemption, the outstanding amount
accrues interest at the lower of 17% or the maximum permissible interest rate which is secured on the
assets of the Company.
The Company is required to deposit an amount equal to 4.0% of the financial quarter revenues into
a bank account to be used for no other purpose than to redeem shares of redeemable preferred stock
pursuant to the Investment Agreement. After the first redemption is made, the Company is no longer
required to make these deposits or maintain the related bank account. While the total value payable is
fixed based on quarterly revenue, the number of shares of redeemable preferred stock to be redeemed
decreases if an anticipated redemption is not made. The Company has no contractual obligation to
redeem shares of redeemable preferred stock. In the event of a failure to make an anticipated
redemption, the Company may indefinitely delay or defer cash settlement at the increased settlement
price.
During the year ended December 31, 2021, the First Redemption occurred, and during 2021 the
Company redeemed 1,472 redeemable preferred shares at $1,250 per share for a total of $1.84 million.
During the year ended December 31, 2022, the Company redeemed 776 redeemable preferred shares at
$1,500 per share for a total of $1.16 million. The amount of consideration paid by the Company to
redeemable preferred stockholders’ in excess of the amount originally contributed by such shareholders
was treated a deemed dividend to the preferred shareholder. The Company recorded deemed dividends
in the amounts of $368,000 and $388,000 for the years ended December 31, 2021 and 2022 respectively.
The Company has adjusted its net loss per share computation to reflect the value given to redeemable
preferred stockholders by the Company (refer to Note 14).
There is no fixed term to the redemption period on the redeemable preferred stock. The Company
will redeem shares of redeemable preferred stock upon the occurrence of insolvency, liquidation or
similar bankruptcy; an event of default; a change of control or if the Company disposes all or
substantially all its assets, property or business.
39
The redeemable preferred stock carries voting rights of one vote per share during a period in which
a dividend or part of a dividend in respect to redeemable preferred stock is in arrears (declared but not
paid), or during the winding up of the Company.
The redeemable preferred stock also carry voting rights of one vote per share, on a proposal:
—
that affects rights attached to redeemable preferred stock;
—
to wind up the Company; or
—
for the disposal of the property, business and undertaking of the Company.
The redeemable preferred stock carries voting rights of one vote per share, on a resolution to
approve:
—
the terms of a share buy-back arrangement, other than the buy-back of redeemable preferred
stock; or
—
a reduction in share capital of the Company, other than a reduction with respect to
redeemable preferred stock.
14. Net Loss per Share
The following table sets forth the computation of basic and diluted net loss per share attributable
to common stockholders (in thousands, except share and per share amounts):
2021
2022
Net loss ................................................. $
(6,879) $
(14,125)
Less: Deemed dividend to redeemable preferred
stockholders ...........................................
(368)
(388)
Net loss attributable to common stockholders ...
(7,247)
)
(14,513)
Weighted average basic and diluted common
share ...................................................
123,711,465
155,059,607
Net loss per share attributable to common
stockholders – basic and diluted ................. $
(0.06 ) $
(0.09)
Basic net loss per share has been computed by dividing the net loss by the weighted-average
number of shares of common stock outstanding during the period. Diluted net loss per share is
calculated by dividing net loss by the weighted average number of shares of common stock and
potentially dilutive securities outstanding during the period. Because the Company is in a net loss
position, diluted net loss per share excludes the effects of common stock equivalents consisting of
issued and outstanding stock options which are antidilutive. It also excludes the impact of redeemable
preferred stock, as they are not convertible into common stock.
The following outstanding potentially dilutive shares were excluded from the computation of
diluted net loss per share attributable to common stockholders for the periods presented, because
including them would have been anti-dilutive (on an as-converted basis):
As of December 31,
2021
2022
Common stock options issued and
outstanding ...................................
16,548,497
21,126,463
16,548,497
21,126,463
40
15. Stock-Based Compensation
The Company grants stock options to its employees, directors, and consultants for a fixed number
of shares with an exercise price equal to or greater than the fair value of the common stock at the date
of grant. Granted options expire no later than 10 years from the date of grant and generally vest over a
four-year period, with 25% vesting on the first anniversary of the grant date and monthly thereafter.
The 2012 Equity Incentive Plan (the Plan) adopted on June 29, 2012, as amended on June 20, 2019,
authorizes the Company to grant incentive stock options and non-statutory stock options to employees,
directors, and consultants for up to 26,965,000 shares of common stock as of December 31, 2021. The
2012 Plan expired on May 18, 2022. There are 14,517,297 unexercised options under the 2012 Plan as of
December 31, 2022 which are outstanding.
The 2022 Equity Incentive Plan (the “2022 Plan”) adopted on April 26, 2022, authorizes the
Company to grant incentive stock options and non-statutory stock options to employees, directors, and
consultants for up to 12,000,000 shares of common stock as of December 31, 2022. Incentive Stock
Options (ISOs) may be granted only to employees. Nonqualified stock options may be granted to
employees, directors and consultants. The Company issues new shares of common stock upon the
exercise of stock options.
The Company granted awards with service conditions. Awards generally vest 25% on the first
anniversary of the grant date and one forty-eighth each month thereafter. The service condition
requires continuous employment for a duration of time that once achieved will vest a portion, or
tranche, of the grant. The awards have contract term of 10 years.
The Company used Black-Scholes option pricing model to estimate the fair value of option awards
using the following assumptions during the years ended December 31, 2021 and 2022:
2021
2022
Expected volatility ..........................................................
59.3% – 67.3% 59.1% - 70.4%
Risk-free interest rate ......................................................
0.59% – 1.06% 1.17% – 4.36%
Expected dividend ...........................................................
—%
—%
Expected term (in years) ...................................................
4 years
1 - 4 years
ASX market price ............................................................
$0.63 – $1.21 $0.05 – $0.63
The expected term of options granted to employees is based on the expected life of the stock
options, giving consideration to the contractual terms and vesting schedules. The expected volatility
reflects the assumption that the historical volatility over a period similar to the life of the options is
indicative of future trends, which may not be the actual outcome. The dividend yield was based on the
Company’s dividend history and the anticipated dividend payout over its expected term. The risk-free
interest rate was based on the U.S. Treasury yield curve in effect at the time of grant and with a
maturity that approximated the Company’s expected term.
41
The following table summarizes the stock awards activity for the fiscal years ended as follows:
Number of
Shares
Weighted-
Average
Exercise Price
Per Share
Weighted-
Average Grant
Date Fair
Value
Weighted-
Average
Remaining
Contractual
Life
(In years)
Outstanding – December 31, 2020 .........
16,734,199 $ 0.57 $ 0.96
5.92
Granted .......................................
2,475,000
1.02
0.47
Exercised ......................................
(1,167,752 )
0.25
Forfeited ......................................
(1,488,542 )
1.17
Expired ........................................
(4,408 )
17.70
Outstanding – December 31, 2021 .........
16,548,497 $ 0.60 $ 0.24
6.09
Granted .......................................
6,873,500
0.10
0.0404
Exercised ......................................
(639,907 )
0.18
Forfeited ......................................
(567,399 )
0.79
Expired ........................................
(1,088,228 )
0.77
Outstanding – December 31, 2022 .........
21,126,463 $ 0.43 $ 0.17
6.03
Vested and expected to vest as of
December 31, 2022 ...........................
19,819,294 $ 0.45
6.36
Options exercisable as of December 31,
2022 ............................................
13,066,312 $ 0.52
4.80
As of December 31, 2022, 13,062,098 options had vested. The Company recognizes forfeitures as
they occur. As of December 31, 2021 and December 31, 2022, the intrinsic value of options outstanding
was $3.5 million and $0, respectively. During the years ended December 31, 2021 and December 31,
2022, the intrinsic value of options exercised was $0.9 million and $0.1 million, respectively. As of
December 31, 2021 and 2022, the aggregate intrinsic value of options vested and expected to vest was
$3.5 million and $0, respectively. As of December 31, 2021 and 2022, the aggregate intrinsic value of
options exercisable was $3.5 million and $0, respectively. During the years ended December 31, 2021
and December 31, 2022, the grant date fair value of shares vested was $2.0 million and $2.6 million,
respectively.
As of December 31, 2022, there was $0.9 million of compensation costs related to non-vested
awards granted under the Company’s equity incentive plans not yet recognized in the financial
statements. The unrecognized compensation cost is expected to be recognized over a weighted average
period of 2.5 years.
The Company recorded stock-based compensation expense in the following expense categories of its
consolidated statements of operations during the years ended December 31, 2021 and 2022 (in
thousands):
2021
2022
Cost of goods sold ..................................................................... $
59 $
50
Research and development ..........................................................
323
141
Selling, general and administrative .................................................
580
516
Total stock-based compensation .................................................... $ 962 $ 707
42
16. Income Taxes
The following table presents a reconciliation of the federal statutory rate of 21% to our effective
tax rate for the years ended December 31 2021, and 2022:
2021
2022
U.S. federal tax benefit at statutory rate .............
21.00%
21.00%
State (tax benefit) income taxes, net of federal
benefit ......................................................
3.03%
5.71%
Change in valuation allowance ..........................
(22.74)%
(26.78)%
Research and development credit (net of reserve) ...
3.02%
1.30%
Other ........................................................
(4.72)%
(1.38)%
Effective tax rate .........................................
(0.41)%
(0.15)%
Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax
purposes. The following table presents the significant components of the Company’s deferred tax assets
and liabilities (in thousands):
December 31,
2021
December 31,
2022
Deferred tax assets:
Net operating loss carryforward .............................. $
12,312 $
15,647
Research and development credits ..........................
1,437
1,738
Depreciation and amortization ...............................
151
190
Section 174 Capitalization
—
1,058
Reserves and accruals .........................................
808
787
Gross deferred tax assets .....................................
14,708
19,420
Valuation allowance ...........................................
(14,485)
(19,237)
Net deferred tax assets
223
183
Deferred tax liabilities:
Right of use asset ...............................................
(170)
(113)
Prepaid expenses ................................................
(53)
(70)
Total deferred tax liabilities
(223)
(183)
Total net deferred tax asset (liabilities) ..................... $
— $
—
Based on historical losses and the expectation of future losses, management cannot conclude that it
is more likely than not that the net deferred tax assets will be realizable. Accordingly, the Company has
provided a full valuation allowance against its net deferred tax assets at December 31, 2021 and 2022.
The Company’s deferred tax assets are primarily related to net operating loss carryforwards. The
Company’s valuation allowance increased by $1.6 million and increased by $4.8 million for the years
ended December 31, 2021, and 2022, respectively. The change in the valuation allowance for both years
is primarily due to the addition of net operating losses carryforward.
As of December 31, 2022, the Company had federal and state net operating loss carry-forwards of
approximately $107.8 million and $47.1 million, respectively, available to reduce future taxable
43
income, if any. The net operating loss carry-forwards will expire beginning 2032 for both federal and
California income tax purposes. The federal net operating losses generated on and after 2018 are
carried forward indefinitely.
As of December 31, 2022, the Company had federal and state research credit carry-forwards of $1.9
and $1.8 million, respectively. Federal tax credits begin to expire in 2037. The state tax credits have no
expiration date.
The Company has not performed a Section 382 study to determine whether it had experienced a
change in ownership and, if so, whether the tax attributes (net operating losses or credits) were
impaired. Under Section 382 of the Internal Revenue Code of 1986, as amended, the Company’s ability
to utilize net operating loss or other tax attributes, such as research tax credits, in any taxable year
may be limited if the Company has experienced an “ownership change.” Generally, a Section 382
ownership change occurs if there is a cumulative increase of more than 50 percentage points in the
stock ownership of one or more stockholders or groups of stockholders who owns at least 5% of a
corporation’s stock within a specified testing period. Similar rules may apply under state tax laws.
A reconciliation of the unrecognized tax benefit for the years ended December 31, 2021 and 2022 is
as follows (in thousands):
2021 2022
Unrecognized tax benefits as of the beginning of the year ..................... $ 576 $ 717
Increase related to prior year tax provisions ......................................
40
55
Increase related to current year tax provisions ...................................
101
88
Unrecognized tax benefits as of the end of the year ............................ $ 717 $ 860
The Company does not expect the unrecognized tax benefits to change significantly over the next
12 months. Interest and penalties are not applicable to those uncertain tax benefits as the Company has
experienced taxable losses since inception and has not utilized any of the tax credits in the prior year or
current year tax returns.
The Company has not been audited by the Internal Revenue Service or any state income or
franchise tax agency. The federal and state income tax returns are open under the statute of limitations
subject to tax examinations for the tax years ended December 31, 2019 through December 31, 2021 and
December 31, 2018 through December 31, 2021, respectively. All the net operating losses and research
and development credit carryforwards that may be used in future years are still subject to inquiry given
the statute of limitation for these items would begin in the year of utilization.
17. Related Party Transactions
On February 3, 2022, the Company entered into an underwritten rights offering of 30,317,527 CDIs
to raise maximum gross proceeds of approximately $10.5 million. One CDI represents one share of
common stock. As a result of this offering, on February 15, 2022, the Company issued 16,410,646 CDIs,
and on February 28, 2022 the Company issued 13,906,881 CDIs and raised $10.1 million, net of $0.6
million issuance costs. $3.9 million of the proceeds were received from Viburnum Funds and $3.7 million
from Anzu Partners, LLC, both related parties of the Company. Mr. John Hoffman and Mr. Joseph
Monkoswki, both Directors of the Company also participated in these rights offering by subscribing CDI’s
for $0.1 million each.
During 2022, the Company made redemption payments to redeemable preferred stockholders for
$1,164,000. The Company recorded $388,000 as deemed dividends in connection with the redemption
premium paid to Anzu RBI during the periods ended December 31, 2022.
44
Potential bonuses may be paid to members of the senior leadership team selected by the
Remuneration and Nomination Committee (“Committee”) subject to satisfaction of various performance
hurdles, including: (i) the Company achieving certain EBITDA targets for each of fiscal year 2021 to
fiscal year 2022; (ii) the Company achieving a market capitalization and share price target at the end of
fiscal year 2022; and (iii) the Company closing a change of control transaction at or above the target
share price. Determination of the satisfaction of the fiscal year 2022 performance hurdles will be made
by the Committee in the first quarter of fiscal year 2023 unless a change of control event occurs on an
earlier date. The maximum bonus pool payable under the Long Term Incentive Program (LTIP) is $10
million, with 60% of the actual bonus pool payable to the Chief Executive Officer, the Chief Technical
Officer, and other members of the senior leadership team selected by the Committee. LTIP Bonuses
earned as of December 31, 2022 were Nil.
18. Subsequent Events
On 28 March 2023, Pivotal announced an equity raising of 5 for 1 pro-rata accelerated
renounceable entitlement offer to raise up to A$7.9 million (US$5.25 million) at A$0.01 per new
CDI. Each new CDI/Share issued under the Entitlement Offer will rank equally with existing fully paid
ordinary CDIs/Shares on issue.
This equity raising will comprise an accelerated institutional entitlement offer, and a retail
entitlement offer to eligible securityholders. Proceeds from the equity raising will be used to fund
operations, working capital and general corporate purposes bringing the company to EBITDA positive run
rate by year end 2023 if the full US$5.25 million is raised.
Major shareholders Anzu Partners have committed to take up their full pro-rata entitlement
of A$1.4m and major shareholder Viburnum have committed to take a minimum of A$0.5m. Directors
and senior management have committed to subscribe for their pro-rata entitlements of A$0.1M and have
asked if they can participate in any shortfall. Shareholders and new shortfall investors subscribing for
more than US$500,000 each will be entitled to together nominate one new director to the Board on
completion of the offer. New institutional US investor has committed to taking up a minimum of
US$500k of the shortfall.
The Company has evaluated subsequent events through March 30, 2023, the date these financial
statements were available to be issued, and determined that no additional subsequent events had
occurred that would require disclosure or recognition in these financial statements.
DIRECTORS’ DECLARATION
45
In accordance with a resolution of the directors of Pivotal Systems Corporation, the directors
of the Company declare that:
1.
The financial statements and notes thereto, comply with accounting principles generally
accepted in the United States (U.S. GAAP).
2.
The financial statements and notes thereto, give a true and fair view of the Company’s
financial position as at 31 December 2021 and of the performance for the year ended on
that date; and
3.
In the directors’ opinion there are reasonable grounds to believe that Pivotal Systems
Corporation will be able to pay its debts as and when they become due and payable.
On behalf of the directors,
Kevin Hill
Chief Executive Officer
30 March 2023 (Fremont PST), 31 March 2023 (Sydney AEDT)
Independent Auditor’s Report
46
Independent Auditor’s Report
47
48
Additional Shareholder’s Information
SHAREHOLDER INFORMATION AS AT 15 MARCH 2023
Additional Shareholder Information required by the Australian Securities Exchange (ASX) Listing Rules is
set out below.
In accordance with the ASX Corporate Governance Council’s, Corporate Governance Principles and
Recommendations (4th edition), the 2021 Corporate Governance Statement, as approved by the Board,
is available on the Company’s website at: https://www.pivotalsys.com/investors. The Corporate
Governance Statement sets out the extent to which Pivotal has followed the ASX Corporate Governance
Council’s 35 specific Recommendations of general application and three additional Recommendations
applicable in certain cases, to the extent applicable to Pivotal during the financial year ended 31
December 2022.
The Company’s securities have been listed for quotation in the form of CHESS Depositary Interests, or
CDIs, on the ASX and trade under the symbol “PVS” since 2 July 2018. Legal title to the shares of common
stock (Shares) underlying the CDIs is held by CHESS Depositary Nominees Pty Ltd (CDN), a wholly owned
subsidiary of the ASX. Each Share is equivalent to 1 CDI.
As at the date of currency indicated above, 153,998,333 CDIs are issued and held by 515 CDI holders
which represents 153,998,333 underlying Shares. 5,505,417 Shares are held by 41 shareholders who have
not elected to hold Company securities in the form of CDIs.
Assuming all Shares were held as CDIs, the Company would have 159,503,750 CDIs on issue.
1. Substantial shareholders
The number of CDIs (assuming all Shares are held as CDIs) held by substantial shareholders and their
associates as advised to the ASX are set out below:
Name
Number
CDIs
% of total
CDIs
Firsthand Capital Mgt
42,239,506
27.43
Viburnum Funds
32,141,394
20.87
Anzu Partners
28,194,189
17.75
2. Number of security holders and securities on issue
Pivotal has issued the following securities:
(a) 5,509,584 fully paid ordinary shares held by 42 shareholders;
(b) 153,998,333 CDIs held by 515 CDI holders;
(c) 10,591 Redeemable RBI Preferred Stock held by 1 holder; being Anzu Industrial USA LLC (now
known as Anzu RBI Mezzanine Preferred LLC);
(d) 20,309,483 unlisted options exercisable at various prices held by 49 option holders.
Details of the Top 20 Shareholders are set out in section 6 below.
3. Voting rights
Shares of common stock
At a meeting of the Company’s stockholders, every stockholder present, in person or by proxy is
entitled to one vote for each share of common stock held on the record date for the meeting on all
matters submitted to a vote of stockholders.
49
CDIs
CDI holders are entitled to one vote for every one CDI they hold. To vote, holders of CDIs must
instruct CDN, as the legal owner of the CDIs, to vote the shares of common stock underlying their
CDIs in a particular manner.
Options
Option holders do not have any voting rights on the options held by them. Shares of common stock
issued to option holders on exercise of their options will have the same voting rights as the holder of
shares of common stock.
Redeemable RBI Preferred Stock
RBI Preferred Stockholders will not be entitled to vote at any general meeting of the Company except
in the following circumstances:
•
On a proposal:
o
that affects rights attached to RBI Preferred Stock;
o
to wind up the Company; or
o
for the disposal of the whole of the property, business and undertaking of the
Company;
•
On a resolution to approve:
o
the terms of a share buy-back agreement;
o
a reduction of the share capital of the Company,
other than a resolution to approve a buy-back or reduction of capital with respect to RBI
Preferred Stock;
•
During a period in which a dividend or part of a dividend in respect of an RBI Preferred Stock
is in arrears; or
•
During the winding-up of the Company.
At a general meeting of the Company at which RBI Preferred Stockholders may vote, they are
entitled:
•
to one vote on a show of hands; and
•
to one vote for each RBI Preferred Stock on a poll.
RBI Preferred Stockholders will have the same rights as holders of shares of Common Stock/CDIs in
the Company to receive notices, reports and audited accounts from the Company and to attend
general meetings.
4. Distribution schedules of security holders
Category
Chess Depositary Interests (CDIs)*
Total Shareholders
Number of Shares
%
1 - 1,000
146
66,903
0.04
1,001 - 5,000
139
386,268
0.24
5,001 - 10,000
79
607,264
0.38
10,001 - 100,000
136
4,955,126
3.11
100,001 and over
57
153,492,356
96.23
Total
557
159,507,917
100.00
*Total shareholders and number of CDIs assuming all common shares held are CDIs.
50
Category
Fully Paid Shares of Common Stock
Total Shareholders
Number of Shares
%
1 - 1,000
16
1,043
0.02
1,001 - 5,000
5
16,814
0.31
5,001 - 10,000
3
20,936
0.38
10,001 - 100,000
9
488,259
8.86
100,001 and over
9
4,982,532
90.43
Total
42
5,509,584
100.00
Category
Chess Depositary Interests (CDIs)
Total CDI Holders
Number of CDIs
%
1 - 1,000
130
65,860
0.04
1,001 - 5,000
134
369,454
0.24
5,001 - 10,000
76
586,328
0.38
10,001 - 100,000
127
4,466,867
2.90
100,001 and over
48
148,509,824
96.44
Total
515
153,998,333
100.00
Category
Unquoted Options
Total Option Holders
Number of Options
%
1 - 1,000
-
-
0.00
1,001 - 5,000
-
-
0.00
5,001 - 10,000
2
16,563
0.08
10,001 - 100,000
18
1,068,957
5.26
100,001 and over
29
19,223,963
94.66
Total
49
20,309,483
100.00
Note that the Unquoted Options as stated above have various exercise prices
and expiry dates.
5. Unmarketable parcel of shares
The number of CDI Holders holding less than a marketable parcel of CDIs (being A$500) is 364
(representing 1,313,000 CDIs).
51
6. Twenty largest shareholders of quoted equity securities
Chess Depositary Interests only
Details of the 20 largest CDI Holders by registered CDI holding are as follows.
Name
No. of CDIs
%
1
HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED
59,537,142
38.66
2
CITICORP NOMINEES PTY LIMITED
28,210,544
18.32
3
J P MORGAN NOMINEES AUSTRALIA PTY LIMITED
14,583,300
9.47
4
CRANPORT PTY LTD
7,945,610
5.16
5
ENTERPRISE PARTNERS MANAGEMENT LLC
7,677,125
4.99
6
ALTOR CAPITAL MANAGEMENT PTY LTD
7,676,808
4.98
7
MR DIMITAR STRAHILOV BELYOVSKI & MRS MAYA
EFTIMOVA BELYOVSKA
3,234,165
2.10
8
MS PHILIPPA CAMERON CUMMINS
2,750,000
1.79
9
ANNBROOK CAPITAL PTY LTD
2,715,000
1.76
10
BNP PARIBAS NOMINEES PTY LTD
2,693,174
1.75
11
SALTINI PTY LTD
1,500,000
0.97
12
SCRATCHING AROUND 4 RETURNS PTY LTD
1,000,000
0.65
12
MICROGOLD CORPORATION PTY LTD
1,000,000
0.65
13
RXC PTY LTD
525,000
0.34
14
MR DAVID GRUNDMANN & MRS MICHELLE
GRUNDMANN
400,000
0.26
15
MR DARSHIL PRAVINBHAI DOSHI
392,338
0.25
16
NATIONAL NOMINEES LIMITED
375,000
0.24
17
MR JOHN ANASSIS
360,576
0.23
18
MR HUGH JAMES PILGRIM
349,351
0.23
19
MR RAKESH MULSHANKAR PANDYA
322,520
0.21
20
MR DIMITAR BELYOVSKI
304,110
0.20
Total
143,551,763
93.22
Balance of register
10,446,570
6.78
Grand total
153,998,333
100.00
Fully Paid Ordinary Shares of Common Stock and CDIs combined
Details of the 20 largest Shareholders by registered shareholding on the basis that all shares of common
stock on issue are held as CDIs are as follows.
Name
No. of Shares
%
1
CHESS DEPOSITORY NOMINEES PTY LIMITED
153,998,333
96.55
2
JOSEPH MONKOWSKI
1,616,164
1.01
3
JOHN HOFFMAN
1,611,771
1.01
4
NORITAKA KOBAYAKAWA
450,000
0.28
5
HOSEUNG CHANG
388,670
0.24
6
JIUYI CHENG
250,000
0.16
7
RYAN BENTON
195,000
0.12
52
Name
No. of Shares
%
8
ADAM MONKOWSKI & MELANIE A GOSSHEIDER
170,972
0.11
9
SOPHIA L SHTILMAN
165,000
0.10
10 CARTER CRUM
134,955
0.08
11 TRAVIS OWENS
100,000
0.06
12 JAMES T FRANKLIN
97,065
0.06
13 JOSEPH BRONSON
83,146
0.05
14 WILLIAM E BRISKO
75,000
0.05
15 WILLIAM ROTHROCK
37,083
0.02
16 MUKUND VENKATESH
36,590
0.02
17 GABRIEL SEGOVIA
25,000
0.02
18 ANNE R REYNOLDS
20,000
0.01
19 JIALING CHEN
14,375
0.01
20 RAYMOND & HILLARY KARNO
10,000
0.01
Total
158,850,153
99.59
Balance Of Register
657,764
0.41
Grand Total
159,507,917
100.00
Subject to rounding
7. The name of the entity’s secretary
The Company has not formally appointed a Company Secretary but has appointed Company Matters
Pty Ltd to provide it with general company secretarial services. Mr Danny Davies has been
appointed as the Company’s ASX Representative pursuant to ASX Listing Rule 12.6.
8. The address and telephone number of the Company’s registered office in Australia; and of its
principal administrative office.
The Company is incorporated in Delaware, United States.
The Company’s registered office in the USA is:
C/- Incorporating Services Ltd, 3500 South Dupont Highway, Dover, Delaware 19901 USA
The Company’s Principal place of business is:
Suite 100, 48389 Fremont Blvd, Fremont, CA 94538 USA.
T: +1 (510) 770 9125
The Company’s registered office in Australia is:
Company Matters Pty Ltd
Level 12, 680 George Street, Sydney NSW 2000
T: +61 (02) 8280 7355
9. The address and telephone number of each office at which a register of securities, register of
depositary receipts or other facilities for registration of transfers is kept.
American Stock Transfer and Trust Company, LLC
6201, 15th Avenue
Brooklyn, NY 11219 USA
Telephone: +1 (718) 921 8386
Link Market Services
Level 12, 680 George Street
53
Sydney NSW 2000 Australia
T: +61 1300 554 474
10. The Company’s securities are not traded on any other exchange other than the ASX.
11. There are no restricted securities or securities subject to voluntary escrow on issue.
Note: Official quotation of the Company’s CDIs occurred on July 2, 2018.
12. Review of operations and activities
A detailed review of operations and activities is reported in the 2022 Annual Report.
13. On market buy-back
There is no current on market buy-back.
14. Other
The Company is incorporated in the State of Delaware, United States of America and is a registered
foreign entity in Australia. As a foreign company registered in Australia, the Company is subject to
different reporting and regulatory regimes than Australian companies.
Pivotal is not subject to Chapters 6, 6A, 6B and 6C of the Corporations Act 2001 (Cth) dealing with
the acquisition of its shares (including substantial holdings and takeovers).
Anti-takeover provisions of Delaware Law, Certificate of Incorporation and Bylaws
Provisions of the Delaware General Corporation Law, the Company’s Certificate of Incorporation and
the Company’s Bylaws could make it more difficult to acquire the Company by means of a tender
offer (takeover), a proxy contest or otherwise, or to remove incumbent officers and Directors of the
Company. These provisions (summarized below) could discourage certain types of coercive takeover
practices and takeover bids that the Board may consider inadequate and to encourage persons
seeking to acquire control of the Company to first negotiate with the Board. The Company believes
that the benefits of increased protection of its ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure the Company outweigh the disadvantages
of discouraging takeover or acquisition proposals because, among other things, negotiation of these
proposals could result in an improvement of their terms.
The Company’s bylaws do not contain any limitations on the acquisition of securities, except that
clause 9 of Article XI, Section 11.1. of the bylaws provides as follows:
“The Corporation may refuse to acknowledge or register any transfer of shares of the
Corporation’s capital stock (including shares in the form of CDIs) held or acquired by a
stockholder (including shares of the Corporation’s capital stock that may be acquired
upon exercise of a stock option, warrant or other right) or shares of the Corporation’s
capital stock which attach to or arise from such shares which are not made:
a.
in accordance with the provisions of Regulation S of the Securities Act of 1933
(U.S.), as amended to date and the rules and regulations promulgated thereunder
(the “U.S. Securities Act”) (Rule 901 through Rule 905 and preliminary notes);
b.
pursuant to registration under the U.S. Securities Act; or
c.
pursuant to an available exemption from registration.”