SITIME Corp

Note 1. The Company and Basis of Presentation

SiTime Corporation (the “Company”) was incorporated in the State of Delaware in December 2003. The Company is a leading provider of Precision Timing solutions to the global electronics industry, providing the timing functionality that is needed for electronics to operate reliably and correctly. The Company's products have been designed to address a wide range of applications across a broad array of end markets. The Company operates a fabless business model and leverages its global network of distributors to address the broad set of end markets that it serves.

The accompanying interim condensed consolidated financial statements have been prepared in conformity with United States (U.S.) generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X, and should be read in conjunction with the Company's audited consolidated financial statements and related notes thereto filed with the U.S. Securities and Exchange Commission (SEC) on Form 10-K for the fiscal year ended December 31, 2023. The interim financial statements are unaudited, but reflect all adjustments which are, in the opinion of management, of a normal, recurring nature necessary to provide a fair statement of results for the interim periods presented. The results of operations for the interim periods shown in this report are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2024, for any future year, or for any other future interim period.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The significant areas requiring the use of management estimates and assumptions include revenue recognition, fair value of earnout liabilities, estimate of reserve for excess and obsolete inventories, and sales reserves. Actual results could differ from those estimates.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Significant Accounting Policies

The Company’s significant accounting policies are disclosed in the Company’s audited consolidated financial statements and related notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2023. There have been no changes to these accounting policies through June 30, 2024.

Recent Accounting Pronouncements

There are currently no new accounting pronouncements with a future effective date that are considered material, or could be material, to us.

Note 2. Acquisitions

On December 1, 2023, we completed our acquisition of Aura's timing business and clock products, and an assembled workforce. The acquisition qualified as a business combination in accordance with ASC 805, Business Combinations and, accordingly, total consideration was first allocated to the fair value of assets acquired as of the date of acquisition, with the excess being recorded as goodwill. The acquisition date fair value of the purchase consideration was $259.2 million, which comprised the following:

The preliminary purchase consideration allocation to the assets acquired based on their respective estimated fair values as of the date of acquisition is as follows:

Following are the supplemental consolidated financial results of the Company on an unaudited pro forma basis, as if the acquisition had been consummated on January 1, 2023:

The supplemental pro forma information presents the combined results of operations for the three and six months ended June 30, 2024 and 2023, as if the acquisition was completed on January 1, 2023, the first day of the fiscal year of 2023. The supplemental pro forma financial information presented above is not necessarily indicative of the financial position or results of operations that would have been realized if the acquisition had been completed on the date indicated. The supplemental pro forma financial information does not reflect synergies that might have been achieved, nor is it indicative of future operating results or financial position. The proforma financial information includes a $6.5 million nonrecurring adjustment related to acquisition costs.

Note 3. Fair Value Measurements

Cash equivalents

At June 30, 2024 and December 31, 2023, highly liquid money market funds of $10.4 million and $0.4 million, respectively, were valued using Level 1 of the fair value hierarchy, quoted prices in active markets for identical assets, and are included in cash equivalents.

Short-term investments in held-to-maturity securities

As of June 30, 2024 and December 31, 2023, the Company had purchased Treasury Bills with maturities ranging from 3 to 12 months, which the Company intends to hold until maturity and has classified as held-to-maturity securities. The held-to-maturity securities are recorded at amortized cost totaling $435.9 million including gross accrued interest of $10.1 million as of June 30, 2024. As of June 30, 2024, the fair value and gross unrealized loss on the held-to-maturity securities was $435.5 million and $0.4 million respectively.

As of December 31, 2023, the amortized cost of the held-to-maturity securities totaled $518.7 million including gross accrued interest of $8.9 million. As of December 31, 2023, the fair value and gross unrealized loss on the held-to-maturity securities $519.0 million and $0.3 million respectively.

These treasury bills were valued using Level 1 of the fair value hierarchy, quoted prices in active markets for identical assets, and are included in short-term investments. The carrying value of our investments is reviewed quarterly for changes in circumstances or the occurrence of events that suggests an investment may not be fully recoverable.

Sales based earnout liability

The estimated fair value of the sales based earnout liability is determined using a Monte Carlo simulation model using significant unobservable fair value inputs and is therefore classified as a Level 3 measurement. The assumptions used in the calculation are based on the revenue projections over the term of the contingent earn-out period, expected volatility, and discount rate. The estimates of fair value are uncertain and changes in any of the estimated inputs used will result in significant adjustments to the fair value. As of June 30, 2024, the Company used a volatility rate of 20%, risk free rate ranging from 4.3% to 5.4%, and an expected term ranging from 0.13 years to 4.38 years.

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities:

There were no transfers between Level 1, Level 2, and Level 3 categories during any of the periods presented.

Note 4. Balance Sheet Components

Accounts Receivable, net

Accounts receivable, net consisted of the following:

Inventories

Inventories consisted of the following:

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following:

Property and Equipment, net

Property and equipment, net consisted of the following:

Depreciation expense related to property and equipment was $3.8 million and $3.3 million for the three months ended June 30, 2024 and 2023, respectively, and $7.4 million and $6.5 million for the six months ended June 30, 2024 and 2023, respectively.

Intangible Assets, net

Intangible assets, net consisted of the following:

Amortization expense for intangible assets was $4.1 million and $0.7 million for the three months ended June 30, 2024 and 2023, respectively, and $6.1 million and $1.3 million for the six months ended June 30, 2024 and 2023, respectively.

The estimated aggregate future amortization expense for intangible assets subject to amortization as of June 30, 2024 is summarized as below:

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

The Company recorded reductions to research and development expenses related to non-recurring engineering service arrangements in the condensed consolidated statements of operations of $0.3 million and $0.5 million during the three months ended June 30, 2024 and 2023, respectively, and $0.7 million and $1.7 million for the six months ended June 30, 2024 and 2023, respectively.

Other Non-current Liabilities

Other non-current liabilities consisted of the following:

Note 5. Leases

The Company leases office space in California, Michigan, Malaysia, Japan, Taiwan, the Netherlands, Finland, Ukraine, and India, all under non-cancellable operating leases with various expiration dates through May 2029.

The remaining lease terms vary from a few months to 5 years. For certain of its leases the Company has options to extend the lease term for periods varying fromone tofive years. These renewal options are not considered in the remaining lease term unless it is reasonably certain that the Company will exercise such options. The Company also has variable lease payments that are primarily comprised of common area maintenance and utility charges.

The table below presents the operating lease-related assets and liabilities recorded on the condensed consolidated balance sheets as of June 30, 2024 and December 31, 2023:

The table below presents certain information related to the lease costs for operating leases for the three and six months ended June 30, 2024 and 2023:

Cash paid for operating lease liabilities was $0.8 million and $0.8 million for the three months ended June 30, 2024 and 2023, respectively.

Cash paid for operating lease liabilities was $1.5 million and $1.5 million for the six months ended June 30, 2024 and 2023, respectively.

Operating Lease Cash Flows

The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the operating lease liabilities recorded on the condensed consolidated balance sheet as of June 30, 2024:

Note 6. Stockholders’ Equity

At-The-Market offering

On February 27, 2024, the Company entered into a Sales Agreement ("Sales Agreement"), with Stifel, Nicolaus & Company, Incorporated ("Stifel"), under which the Company may offer and sell from time to time at its sole discretion, up to an aggregate of 1,200,000 shares of its common stock, par value $0.0001 per share, through Stifel acting as its sales agent. The Company used the net proceeds from the shares of common stock offered and sold to replenish funds expended to satisfy anticipated tax withholding and remittance obligations related to the net settlement upon vesting of restricted stock unit awards (“RSU”) granted to employees under the equity incentive plans. The Company has filed a prospectus supplement pursuant to the Sales Agreement for the offer and sale of up to an aggregate of 1,200,000 shares of its common stock. Subject to the terms and conditions of the Sales Agreement, Stifel will sell the common stock from time to time, based upon instructions from the Company. The Company agreed to pay Stifel a commission of up to 3% of the gross sales proceeds of any common stock sold through Stifel under the Sales Agreement.

During the three months ended June 30, 2024, the Company sold 100,000 shares of its common stock through Stifel under the Sales Agreement at a weighted average price of $127.18 per share resulting in net proceeds to the Company of $12.3 million, after deducting underwriting discounts and commissions of $0.3 million and offering costs of $0.1 million. During the six months ended June 30, 2024, the Company sold 132,500 shares of its common stock through Stifel under the Sales Agreement at a weighted average price of $118.69 per share resulting in net proceeds to the Company of $15.0 million, after deducting underwriting discounts and commissions of $0.3 million and deferred offering costs of $0.4 million.

Equity Incentive Plans

The following table summarizes the RSU, performance based restricted stock units ("PRSU"), and multi-year performance restricted stock units ("MYPSU") activity for the three and six months ended June 30, 2024:

In March 2024, the Compensation Committee approved target bonus amounts based on the achievement of revenue and individual performance goals for the fiscal year 2024 (the "2024 Goals"). The awards for the actual payouts are granted in the quarter following the end of the performance period. The target bonuses were granted based on a fixed dollar amount to be settled in RSUs on the vesting date and hence the awards have been classified as liability-based awards until settled. Such expense is included in the non-cash adjustment within stock-based compensation expense on the condensed consolidated cash flow statements. The liability of $0.9 million for 2024 Goals was recorded as accrued expenses and other current liabilities in the condensed consolidated balance sheet as of June 30, 2024.

In March 2024, the Compensation Committee of the Company approved PRSUs for the fiscal year 2024 with performance goals based on the achievement of relative total stockholder return with athree year performance period (the "2024 TSR PRSU Goals"). The grant-date fair value of each PRSU was determined using Monte Carlo simulation model. The assumptions used in the Monte Carlo simulation included expected volatility of 74.7%, risk free rate of 4.5%, no expected dividend yield and expected term of 2.8 years. The Company recognizes the expense related to the 2024 TSR PRSU Goals on a graded-vesting method over the requisite performance period. These grants are included in the PRSU awards granted in the table above.

The Company also operates a bonus plan for certain employees which are based on a fixed dollar amount to be settled in RSUs. These awards are categorized as liability-based awards until settled. Once settled, these awards are reflected as RSU granted in the above table. Such expense is included in the non-cash adjustment within stock-based compensation expense on the condensed consolidated cash flow statements. The liability of $1.0 million was recorded as accrued expenses and other current liabilities in the condensed consolidated balance sheet as of June 30, 2024.

Stock-Based Compensation

The following table presents the detail of stock-based compensation expense amounts included in the condensed consolidated statement of operations for each of the periods presented:

The following table presents the unrecognized compensation costs and related weighted average period of recognition as of June 30, 2024:

Note 7. Income Taxes

The quarterly provision for income taxes is based on applying the estimated annual effective tax rate to the year to date pre-tax income, plus any discrete items. The Company updates its estimate of its annual effective tax rate at the end of each quarterly period. The estimate takes into account annual forecasted income before income taxes, the geographic mix of income before income taxes and any significant permanent tax items.

The following table presents the provision for income taxes and the effective tax rates for the three and six months ended June 30, 2024 and 2023:

The Company’s effective tax rate may vary from the U.S. federal statutory tax rate due to the change in the mix of earnings in tax jurisdictions with different statutory rates, benefits related to tax credits and the tax impact of non-deductible expenses, existence of full valuation allowance on its deferred tax assets, and other permanent differences between income before income taxes and taxable income.

A valuation allowance is established or maintained when, based on currently available information and other factors, it is more likely than not that all or a portion of the deferred tax assets will not be realized. The Company regularly assesses its valuation allowance against deferred tax assets on a jurisdiction by jurisdiction basis. The Company considers all available positive and negative evidence, including future reversals of temporary differences, projected future taxable income, tax planning strategies and recent financial results. Based on management’s assessment of the realizability of deferred tax assets, the Company continues to maintain a full valuation reserve on its deferred tax assets as of June 30, 2024.

The income tax provision was less than $0.1 million for both the three and six months ended June 30, 2024 and 2023. The effective tax rate was less than 1% for both the three and six months ended June 30, 2024 and 2023. The provision for income taxes is primarily related to the foreign subsidiaries’ local country obligations. The U.S. effective tax rate is less than 1% and is due to minimum state tax. There is no federal provision for income taxes as the Company has sufficient carryforward of net operating losses to offset any operating income earned since inception and has projected an operating loss in the current year.

As of June 30, 2024 and December 31, 2023, the Company had $2.3 million and $2.3 million, respectively, of total unrecognized tax benefits. If the Company is able to eventually recognize these uncertain tax positions, none of the unrecognized benefits would reduce the Company’s effective tax rate due to the full valuation allowance on the Company’s deferred tax assets.

The Company’s policy is to record interest and penalties related to unrecognized tax benefits as income tax expense. For the three and six months ended June 30, 2024 and 2023, the Company recorded immaterial amounts related to the accrual of interest and penalties.

Note 8. Segment, Geographic and Customer Information

The Company operates inone reportable segment related to the sale of Precision Timing solutions to the global electronics industry.

Revenue by geographic area is presented based upon the ship-to location of the customers who purchased the Company’s products which may be different from the geographic locations of the ultimate end customers. The following table sets forth revenue by country for countries with 10% or more of the Company’s revenue during any of the periods presented:

The following table sets forth the Company’s total property and equipment attributable to operations by country as of the periods presented:

Note 9. Commitments and Contingencies

Legal Matters

From time to time, the Company may be a party to various litigation claims in the normal course of business. Legal fees and other costs associated with such actions are expensed as incurred. The Company assesses, in conjunction with legal counsel, the need to record a liability for litigation and contingencies. Accrual estimates are recorded when and if it is determined that such a liability for litigation and contingencies are both probable and reasonably estimable. We did not have any amounts accrued towards these matters as of June 30, 2024

Indemnification

The Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify other parties to such agreements with respect to certain matters. Typically, these obligations arise in the context of contracts that the Company has entered into, under which the Company customarily agrees to hold the other party harmless against losses arising from a breach of representations and covenants or terms and conditions related to such matters as the sale and/or delivery of its products, title to assets sold, certain intellectual property claims, defective products, and specified environmental matters. Further, the Company’s obligations under these agreements may be limited in terms of time, amount, or the scope of its responsibility and in some instances, the Company may have recourse against third-parties for certain payments made under these agreements. It is not possible to predict the maximum potential amount of future payments under these agreements due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, the Company has had no material indemnification claims under these agreements.

Purchase Commitments

The Company purchases components from a variety of suppliers and uses several contract manufacturers to provide manufacturing services for its products. During the normal course of business, in order to manage manufacturing lead times and to help ensure adequate component supply, the Company enters into agreements with the Company’s contract manufacturers and suppliers that allow them to procure inventory based upon criteria as defined by the Company. In addition, the Company has a multi-year agreement to purchase minimum quantities of MEMS wafers and is responsible for research and development, tooling, and samples cost under the agreement. A portion of the Company’s reported purchase commitments arising from these agreements consists of firm, non-cancelable purchase commitments. In certain instances, these agreements allow the Company the option to cancel, reschedule, and adjust the Company’s requirements based on its business needs prior to when production starts. However, in situations where the Company is unable to cancel, reschedule, or adjust the purchase commitment due to changing customer demand, excess inventories could result in material inventory provisions. Total future non-cancelable purchase commitments as of June 30, 2024 were as follows:

Note 10. Net Loss Per Share

The following table summarizes the computation of basic and diluted net loss per share attributable to common stockholders of the Company:

Potential dilutive securities include dilutive common shares from share-based awards attributable to the assumed exercise of restricted stock unit awards using the treasury stock method. Under the treasury stock method, potential common shares outstanding are not included in the computation of diluted net income per share if their effect is anti-dilutive.

Anti-dilutive potential shares from share-based awards are excluded from the calculation of diluted earnings per share if either their exercise price exceeded the average market price during the period, or the share-based awards were determined to be anti-dilutive based on applying the treasury stock method. During the three months ended June 30, 2024 and 2023, the Company had 766,620 and 1,267,359 potential shares from share-based awards that are anti-dilutive, respectively. During the six months ended June 30, 2024 and 2023, the Company had 698,148 and 1,353,845 potential shares from share-based awards that are anti-dilutive, respectively.