AMBARELLA INC

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Organization and Summary of Significant Accounting Policies

Organization

Ambarella, Inc. (the Company) was incorporated in the Cayman Islands on January 15, 2004. The Company is a leading developer of low-power semiconductor solutions offering high-definition (HD) and Ultra HD compression, advanced image signal processing, and powerful artificial intelligence (AI) processing. The Company combines its processor design capabilities with its expertise in video and image processing, algorithms and software to provide a technology platform that is designed to be easily scalable across multiple applications and enable rapid and efficient product development. The Company’s system-on-a-chip, or SoC, designs fully integrate high-definition video processing, image processing, AI computer vision algorithms, audio processing and system functions onto a single chip. These low power SoCs deliver exceptional video and image quality and can extract valuable data from high-resolution video and radar streams. The Company is currently addressing a broad range of human and computer vision applications, including video security, advanced driver assistance systems (ADAS), electronic mirrors, drive recorders, driver/cabin monitoring systems, autonomous driving, and industrial and robotic applications.

The Company sells its solutions to leading original equipment manufacturers, or OEMs, who include the Company’s SoCs in their products, and original design manufacturers, or ODMs, who include the Company’s SoCs in the products that they supply to OEMs, globally.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and, therefore, do not include all information and notes normally provided in audited financial statements. The accounting policies are described in the “Notes to Consolidated Financial Statements” in the Annual Report on Form 10-K for the 2024 fiscal year filed with the SEC on March 29, 2024 (the Form 10-K) and updated, as necessary, in this Form 10-Q. The year-end condensed consolidated balance sheet data presented for comparative purposes was derived from audited financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair statement have been included. The results of operations for any interim period are not necessarily indicative of, nor comparable to, the results of operations for any other interim period or for a full fiscal year. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Form 10-K.

Basis of Consolidation

The Company’s fiscal year ends on January 31. The condensed consolidated financial statements of the Company and its subsidiaries have been prepared in conformity with U.S. GAAP. All intercompany transactions and balances have been eliminated upon consolidation.

Significant Accounting Policies

There have been no material changes to the Company’s significant accounting policies described in Note 1 - Organization and Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2024.

Concentration of Risk

The Company’s products are manufactured, assembled and tested by third-party contractors located primarily in Asia. The Company does not have long-term agreements with these contractors. A significant disruption in the operations of one or more of these contractors would impact the production of the Company’s products which could have a material adverse effect on its business, financial condition and results of operations.

A substantial portion of the Company’s revenue is derived from sales through its two major distributors and one ODM. WT Microelectronics Co., Ltd., formerly Wintech Microelectronics Co., Ltd., or WT, serves as a non-exclusive sales representative and fulfillment partner in Asia other than Japan, and Hakuto Co., Ltd., or Hakuto, serves as a Japanese distributor. Chicony Electronics Co., Ltd., or Chicony, is an ODM that manufactures devices incorporating the Company’s solutions on behalf of multiple end-customers. Termination of the relationships with these customers could result in a temporary or permanent loss of revenue. Furthermore, any credit issues from these customers could impair their abilities to make timely payment to the Company. See Note 15 for additional information regarding revenue and credit concentration with these customers.

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, marketable debt securities and accounts receivable. The Company maintains its cash primarily in checking accounts with reputable financial institutions. Cash deposits held with these financial institutions may exceed the amount of insurance provided on such deposits. The Company has not experienced any losses on deposits of its cash. In order to limit the exposure of each investment, the cash equivalents and marketable debt securities consist primarily of money market funds, fixed deposit accounts, commercial paper, corporate bonds, asset-backed securities and U.S. government securities which management assesses to be highly liquid. The Company does not hold or issue financial instruments for trading purposes.

The Company performs ongoing credit evaluation of its customers and adjusts credit limits based upon payment history and customers’ credit worthiness. The Company regularly monitors collections and payments from its customers.

Restricted Cash

Amounts included in restricted cash represent those required to be set aside to secure certain transactions in a foreign entity. As of July 31, 2024 and January 31, 2024, restricted cash was immaterial, respectively. The following table presents cash, cash equivalents and restricted cash reported on the condensed consolidated balance sheets, and the totals are presented on the condensed consolidated statements of cash flows:

Recent Accounting Pronouncements

There has been no adoption of any new and recently issued accounting pronouncements.

2. Financial Instruments and Fair Value

The Company maintains its cash primarily in accounts with reputable financial institutions. The Company also invests a portion of its cash in money market funds and debt securities that are denominated in United States dollars, as well as non-marketable equity investments in privately-held companies. The debt security investment portfolio consists of commercial paper, corporate bonds, asset-backed securities and U.S. government securities. All of the money market funds and debt security investments are classified as available-for-sale securities and reported at fair value in the condensed consolidated balance sheets as follows:

The following table provides the breakdown of unrealized losses from available-for-sale securities as of July 31, 2024 and January 31, 2024, respectively, aggregated by investment category and length of time that individual securities have been in a continuous loss position:

The contractual maturities of available-for-sale securities at July 31, 2024 and January 31, 2024 were as follows:

The unrealized gains and losses on the available-for-sale securities were primarily caused by fluctuations in market value and interest rates as a result of the economic environment. In accordance with ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, the Company estimates the expected losses at an individual security level whenever a security’s fair value is below its amortized cost basis using the discounted cash flow method. The credit-related portion of the loss is recognized in other income, net, in the condensed consolidated statements of operations but is limited to the difference between the fair value and the amortized cost basis of the security, adjusted for accrued interest. The non-credit-related portion of the loss is recognized in accumulated other comprehensive loss in the condensed consolidated balance sheets. The credit-related losses were not material for the three and six months ended July 31, 2024 and 2023, respectively.

The following fair value hierarchy is applied for disclosure of the inputs used to measure fair value of available-for-sale securities. This hierarchy prioritizes the inputs into three broad levels as follows:

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments.

Level 3—Unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value. The inputs require significant management judgment or estimation.

The Company measures the fair value of money market funds using quoted prices in active markets for identical assets and classifies them within Level 1. The fair value of other debt securities are obtained based on quoted prices for similar assets in active markets and are classified within Level 2.

The following tables present the fair value of available-for-sale securities measured on a recurring basis as of July 31, 2024 and January 31, 2024, respectively:

In addition to available-for-sale securities, the Company also has fixed deposit accounts that are classified as cash equivalents. As of July 31, 2024 and January 31, 2024, the carrying value of fixed deposit accounts was approximately $9.6 million and $7.0 million, respectively, which represented their fair value within level 1 hierarchy.

Interest income from financial instruments, including amortization of premiums and accretion of discounts, as well as realized gains and losses from available-for-sale securities, are recorded in other income, net, in the condensed consolidated statements of operations. For the three months ended July 31, 2024 and 2023, interest income and realized gains and losses, net, were approximately $2.1 million and $1.9 million, respectively. For the six months ended July 31, 2024 and 2023, interest income and realized gains and losses, net, were approximately $4.4 million and $3.2 million, respectively.

The Company's non-marketable equity investments in privately-held companies are measured at cost, adjusted for subsequent observable price change or any impairment. Upon determining that an impairment or observable price change exists, the Company records any adjustment to the fair value through other income, net, in the condensed consolidated statements of operations. There was no significant change in the fair value and there wasno impairment loss related to equity investment for the three and six months ended July 31, 2024. There was approximately $1.2 million of impairment recognized for the three and six months ended July 31, 2023. As of July 31, 2024 and January 31, 2024, the non-marketable equity investment was approximately $1.2 million, respectively, and recorded in other non-current assets in the condensed consolidated balance sheets.

3. Inventories

Inventories at July 31, 2024 and January 31, 2024 consisted of the following:

4. Property and Equipment, Net

Depreciation expense was approximately $1.2 million and $1.2 million for the three months ended July 31, 2024 and 2023, respectively, and was approximately $2.4 million and $2.3 million for the six months ended July 31, 2024 and 2023, respectively. Property and equipment at July 31, 2024 and January 31, 2024 consisted of the following:

5. Goodwill and Intangible Assets, Net

Goodwill represents the excess of the purchase price over the fair value of net tangible and identifiable intangible assets acquired in a business combination.

Intangible assets primarily consist of software licenses as well as developed technology, customer relationships and trade name that were acquired from business combinations.

The Company enters into certain software license agreements with third parties from time-to-time. The software licenses consist of noncancelable on-premise internal-use software and software with alternative use that is to be sold, leased or otherwise marketed as part of a product. The licenses have been capitalized as intangible assets, and the corresponding future payments have been recorded as liabilities at net present value. As of July 31, 2024, software license liabilities of approximately $7.8 million were recorded in accrued and other current liabilities and approximately $3.5 million were recorded in other long-term liabilities in the condensed consolidated balance sheets.

The components of intangible assets as of July 31, 2024 and January 31, 2024 were as follows:

The amortization expense associated with software licenses was approximately $3.0 million and $2.8 million for the three months ended July 31, 2024 and 2023, respectively, and was approximately $6.0 million and $5.4 million for the six months ended July 31, 2024 and 2023, respectively. The amortization expense associated with acquisition-related intangible assets, including developed technology, customer relationships and trade name, was approximately $1.2 million and $1.2 million for the three months ended July 31, 2024 and 2023, respectively, and was approximately $2.4 million and $2.4 million for the six months ended July 31, 2024 and 2023, respectively. As of July 31, 2024, the Company has not commenced amortization with respect to approximately $3.7 million of software licenses with alternative uses that are to be sold, leased or otherwise marketed as part of products. Once the associated products are available for general release to customers, the Company will commence amortization on a product-by-product basis over the remaining estimated economic life of the products. The expected future amortization expense related to the intangible assets as of July 31, 2024 is as follows:

Goodwill and intangible assets are tested for impairment at least annually, in the fourth fiscal quarter, or more frequently if events or changes in circumstances indicate that they may be impaired. There wereno goodwill and intangible asset impairments for the three and six months ended July 31, 2024 and 2023, respectively.

6. Accrued and Other Current Liabilities

Accrued and other current liabilities at July 31, 2024 and January 31, 2024 consisted of the following:

The timing of SoC development and invoicing from outside foundries usually results in the fluctuation of accrued product development costs. The accrued employee compensation primarily consists of accrued payroll and accrued employee benefits, as well as employee stock purchase plan withholding. For the accrued employee compensation, approximately $4.1 million of annual bonus was paid in the first quarter of fiscal year 2025, of which $1.1 million was paid in cash and $3.0 million was settled with fully vested restricted stock units.

7. Leases

In the second quarter of fiscal year 2025, the Company extended its existing Shanghai office lease for an additional 36 months beginning December 1, 2024 to November 30, 2027 and extended its existing Shenzhen office lease for an additional 28 months beginning October 1, 2024 to January 31, 2027. The Company also extended the lease for its Italy office for an additional 22 months beginning July 1, 2024 to April 30, 2026. An aggregate of approximately $3.3 million of additional operating lease right-of-use assets and corresponding lease liabilities were recorded in the condensed consolidated balance sheets as a result of these lease extensions.

The operating lease expense was approximately $1.0 million and $0.9 million for the three months ended July 31, 2024 and 2023, respectively, and was approximately $2.0 million and $1.8 million for the six months ended July 31, 2024 and 2023, respectively. The Company's short-term leases and finance leases were not material as of July 31, 2024 and January 31, 2024, respectively.

Supplemental cash flow information related to the operating leases is as follows:

As of July 31, 2024, the weighted average remaining lease term is 2.13 years, and the weighted average discount rate is 3.69 percent. Future minimum lease payments for the lease liabilities are as follows:

8. Deferred Revenue

Deferred revenue is primarily related to nonrecurring engineering charges that are either invoiced or paid but for which the related performance obligations are not yet satisfied, as well as, for product shipments, a portion of the transaction price that exceeds the weighted average selling price for products sold to date under tiered-pricing contracts that contain material rights. During the six months ended July 31, 2024 and 2023, the amount recognized as revenue that was included in the deferred revenue balance at the end of prior fiscal year was approximately $0.6 million and $0.9 million, respectively.

As of July 31, 2024, the amount of remaining unsatisfied performance obligations on contracts, primarily consisting of product purchase orders and nonrecurring engineering service agreements with original contract duration of more thanone year, was approximately $13.2 million, of which approximately 97% isexpected to be recognized within the next 12 months. This does not include amounts which have an original expected contract duration of one year or less.

9. Other Long-Term Liabilities

Other long-term liabilities at July 31, 2024 and January 31, 2024 consisted of the following:

10. Capital Stock

Preference shares

There wereno preference shares issued and outstanding as of July 31, 2024 and January 31, 2024, respectively.

Ordinary shares

In the first quarter of fiscal year 2025, the Company added 506,506 shares to the ordinary shares reserved for issuance, pursuant to an “evergreen” provision contained in the Amended and Restated 2012 Employee Stock Purchase Plan, or ESPP. Pursuant to such provision, for each fiscal year, the number of ordinary shares reserved for issuance under the ESPP is automatically increased by a number equal to the lesser of (i)1,500,000 ordinary shares, (ii) one and one quarter percent (1.25%) of the aggregate number of ordinary shares outstanding on February 1st of each fiscal year, or (iii) an amount determined by the Company’s Board of Directors or a duly authorized committee of the Board of Directors.

In the second quarter of fiscal year 2025, the Company's shareholders approved to add an additional 1,750,000 shares to the ordinary shares reserved for issuance under the Amended and Restated 2021 Equity Incentive Plan, or 2021 EIP. Subject to adjustments upon changes in capitalization as provided under the 2021 EIP, the maximum aggregate number of ordinary shares that may be subject to awards and issued under the 2021 EIP will be equal to (a)3,100,000 shares plus (i) any shares subject to awards granted under the Company’s 2012 Equity Incentive Plan (the “Prior Plan”) that, after the date the Prior Plan was terminated, are cancelled, expire or otherwise terminate without having been exercised in full or are forfeited to or repurchased by the Company due to failure to vest, and (ii) any shares that, as of immediately prior to the termination of the Prior Plan, were reserved but not issued pursuant to any awards granted under the Prior Plan and are not subject to any awards thereunder, with the maximum number of ordinary shares to be added to the 2021 EIP pursuant to clauses (i) and (ii) equal to 6,834,208 shares.

As of July 31, 2024 and January 31, 2024, the following ordinary shares were reserved for future issuance under the Company’s equity plans and employee stock purchase plan:

Share repurchase program

On May 29, 2024, the Company’s Board of Directors approved an extension of the Company's existing share repurchase program for an additional twelve months through June 30, 2025. There wereno ordinary shares repurchased in the six months ended July 31, 2024. As of July 31, 2024, there was approximately $49.0 million available for repurchases under the current repurchase program through June 30, 2025. Repurchases may be made from time-to-time through open market purchases, 10b5-1 plans or privately negotiated transactions subject to market conditions, applicable legal requirements and other relevant factors. The repurchase program does not obligate the Company to acquire any particular amount of ordinary shares, and it may be suspended at any time at the Company’s discretion. The repurchase program is funded using the Company’s working capital and any repurchased shares are recorded as authorized but unissued shares.

11. Stock-based Compensation

The following table presents the classification of stock-based compensation for the periods indicated:

As of July 31, 2024, approximately $3.2 million of stock-based compensation expense was accrued in accrued and other current liabilities in the condensed consolidated balance sheets. Total unrecognized compensation cost related to unvested stock options at July 31, 2024 was $4.1 million and is expected to be recognized over a weighted-average period of 0.81 years. Total unrecognized compensation cost related to unvested restricted stock units at July 31, 2024 was approximately $157.7 million and is expected to be recognized over a weighted-average period of 2.26 years.

The following table sets forth the weighted-average assumptions used to estimate the fair value of employee stock purchase plan awards for the periods indicated:

The following table summarizes stock option activities for the period indicated:

The intrinsic value of options outstanding and exercisable is calculated based on the difference between the fair market value of the Company’s ordinary shares on the reporting date and the exercise price. The closing price of the Company’s ordinary shares on July 31, 2024 was $52.64, as reported by The Nasdaq Global Select Market. The intrinsic value of exercised options is calculated based on the difference between the fair market value of the Company’s ordinary shares on the exercise date and the exercise price.

The following table summarizes restricted stock unit activities for the period indicated:

As of July 31, 2024, the aggregate intrinsic value of unvested restricted stock units was $124.4 million.

12. Net Loss Per Ordinary Share

The following table sets forth the computation of basic and diluted loss per ordinary share for the periods indicated:

The following weighted-average potentially dilutive securities were excluded from the computation of diluted net loss per ordinary share as their effect would have been antidilutive:

13. Income Taxes

The following table provides details of income taxes for the periods indicated:

The Company recorded an expense for income taxes of $0.7 million and $1.5 million for the three and six months ended July 31, 2024, respectively. The Company recorded a benefit for income taxes of $3.4 million and $1.8 million for the three and six months ended July 31, 2023, respectively. The increases in income tax expense for the three and six months ended July 31, 2024, as compared to the same periods in the prior fiscal year, were primarily due to tax benefit from the release of $3.6 million of valuation allowance on the deferred tax assets of Oculii Corp, or Oculii, in fiscal year 2024 that did not recur in the current fiscal year.

The Company files federal and state income tax returns in the United States and in various foreign jurisdictions. The Company’s fiscal years 2021 through 2024 are generally open and subject to potential examination by U.S. federal tax authorities. The Company’s fiscal years 2020 through 2024 are generally open and subject to potential examination by state tax authorities. The Company’s fiscal years 2017 to 2024 remain open to examination by foreign tax authorities. Fiscal years outside of the normal statute of limitations remain open to audit by tax authorities due to tax attributes generated in those earlier years, which have been carried forward and may be audited in subsequent years when utilized.

The Company regularly assesses the likelihood of adverse outcomes resulting from potential tax examinations to determine the adequacy of its provision for income taxes. These assessments can require considerable estimates and judgments. As of July 31, 2024, the gross amount of unrecognized tax benefits was approximately $23.0 million. If the estimates of income tax liabilities prove to be less than the ultimate assessment, then a further charge to expense could be required. If events occur, and the payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities could result in tax benefits being recognized in the period in which the Company determines the liabilities are no longer necessary. It is reasonably possible that within the next 12 months the Company's unrecognized tax benefits could potentially be reduced by up to $9.0 million.

14. Commitments and Contingencies

Contract Manufacturer Commitments

The Company’s components and products are procured and built by independent contract manufacturers based on sales forecasts. These forecasts include estimates of future demand, historical trends, analysis of sales and marketing activities, and adjustment of overall market conditions. The Company regularly issues purchase orders to independent contract manufacturers which are cancelable upon agreement between the Company and third-party manufacturers. These manufacturing purchase commitments typically provide the Company with flexibility to cancel, reschedule or adjust requirements based upon business needs but the Company may incur certain costs depending on the production stage of the products. As of July 31, 2024 and January 31, 2024, total manufacturing purchase commitments were approximately $57.5 million and $30.7 million, respectively. The Company also reviews and assesses the need for any expected loss liabilities on quarterly basis for all products that it does not expect to sell for which it has committed purchases from suppliers and records the liabilities in accrued and other current liabilities in the condensed consolidated balance sheets. There wereno material loss liabilities recorded in the condensed consolidated balance sheets from adverse purchase commitments as of July 31, 2024 and January 31, 2024.

Contract Service Commitment

In the second quarter of fiscal year 2025, the Company entered into a noncancellable service contract with a third party provider for certain services of its IT infrastructure. As of July 31, 2024, the noncancellable service agreement was approximately $5.2 million. There wasno material noncancellable service agreement as of January 31, 2024.

Indemnification

The Company, from time to time, in the normal course of business, indemnifies certain vendors with whom it enters into contractual relationships. The Company has agreed to hold the other party harmless against third-party claims in connection with the Company’s future products. The Company also indemnifies certain customers against third-party claims related to certain intellectual property and product liability matters. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to the limited history of prior indemnification claims and the unique facts and circumstances that are likely to be involved in each particular claim. The Company hasnot made payments under these obligations as of July 31, 2024, andno liabilities have been recorded for these obligations in the condensed consolidated balance sheets as of July 31, 2024 and January 31, 2024, respectively.

Other Matters

From time to time, the Company is subject to commercial disputes, employment issues, intellectual property claims and litigation, in the ordinary course of its business. Although the ultimate disposition of asserted claims cannot be predicted with certainty, it is the Company’s belief that the outcome of any such claims, either individually or on a combined basis, will not have a material adverse effect on its consolidated financial position. The results of any litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources, and other factors. As of July 31, 2024 and January 31, 2024, there wereno accruals for contingent liabilities related to such matters recorded in the condensed consolidated balance sheets.

15. Segment Reporting

The Company operates inone operating and reporting segment related to the development and sales of low-power, HD, Ultra HD video compression, image processing and AI computer vision solutions. The Chief Executive Officer of the Company has been identified as the Chief Operating Decision Maker (the CODM) and manages the Company’s operations as a whole. For the purpose of evaluating financial performance and allocating resources, the CODM reviews financial information presented on a consolidated basis accompanied by information by customer and geographic region.

Geographic Revenue

The following table sets forth the Company’s revenue by geographic region based on bill-to location for the periods indicated.

Substantially all of the Company’s property and equipment were located in the Asia Pacific region, United States and Europe. As of July 31, 2024, the net amount of these fixed assets located in these regions was approximately $4.7 million, $3.2 million and $1.1 million, respectively. As of January 31, 2024, the net amount of these fixed assets located in these regions was approximately $5.3 million, $3.9 million and $1.2 million, respectively.

Major Customers

For the three months ended July 31, 2024, the customers representing 10% or more of revenue were WT and Hakuto, which accounted for approximately 62.5% and 10.2% of total revenue, respectively. For the six months ended July 31, 2024, the customer representing 10% or more of revenue was WT, which accounted for approximately 62.2% of total revenue. In the prior fiscal year, the customers representing 10% or more of revenue were WT and Chicony, which accounted for approximately 53.9% and 13.7% of total revenue for the three months ended July 31, 2023, respectively, and accounted for approximately 51.5% and 14.8% of total revenue for the six months ended July 31, 2023, respectively.

Accounts receivable with WT and Hakuto were approximately $11.4 million and $0.7 million as of July 31, 2024, respectively. Accounts receivable with WT and Chicony were approximately $10.3 million and $7.0 million as of January 31, 2024, respectively.