Peraso Inc. - Quarter Report: 2011 September (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

(Mark one)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2011

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from           to

 

Commission file number 000-32929

 

 

MOSYS, Inc.

(Exact name of registrant as specified in its charter)

 

 

3301 Olcott Street

Santa Clara, California, 95054

(Address of principal executive office and zip code)

 

(408) 418-7500

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.   YES x NO o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   YES x NO o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

As of November 1, 2011, 38,345,877 shares of the Registrant’s common stock, $0.01 par value, were outstanding.

 

 

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MOSYS, INC.

 

FORM 10-Q
September 30, 2011

 

TABLE OF CONTENTS

 

PART I —	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited):
	Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010	3
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Qualitative and Quantitative Disclosures About Market Risk	21
Item 4.	Controls and Procedures	22
PART II —	OTHER INFORMATION	22
Item 1	Legal Proceedings	22
Item 1A.	Risk Factors	22
Item 6.	Exhibits	23
	Signatures	24

 

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PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

MOSYS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except par value)

 

		September 30, 2011			December 31, 2010
ASSETS
Current assets
Cash and cash equivalents		$	5,781		$	14,340
Short-term investments		12,524			15,011
Accounts receivable, net		602			1,079
Unbilled contracts receivable		107			202
Prepaid expenses and other current assets		2,985			3,377
Total current assets		21,999			34,009
Long-term investments		8,061			8,193
Property and equipment, net		1,654			2,160
Goodwill		23,134			23,134
Intangible assets, net		4,274			6,238
Other assets		348			232
Total assets		$	59,470		$	73,966
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	1,114		$	839
Accrued expenses and other liabilities		2,232			2,623
Accrued acquisition-related liabilities		500			1,500
Deferred revenue		1,212			1,801
Total current liabilities		5,058			6,763
Long-term liabilities		108			146
Commitments and contingencies (Note 4)
Stockholders’ equity
Preferred stock, $0.01 par value; 20,000 shares authorized; none issued and outstanding		—			—
Common stock, $0.01 par value; 120,000 shares authorized; 38,307 shares and 37,225 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively		383			372
Additional paid-in capital		149,131			143,336
Accumulated other comprehensive income (loss)		(11		)	4
Accumulated deficit		(95,199		)	(76,655		)
Total stockholders’ equity		54,304			67,057
Total liabilities and stockholders’ equity		$	59,470		$	73,966

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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MOSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)
(In thousands, except per share data)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2011			2010			2011			2010
Net revenue
Licensing		$	756		$	1,494		$	3,319		$	5,060
Royalty		1,351			2,282			5,619			6,535
Total net revenue		2,107			3,776			8,938			11,595
Cost of net revenue
Licensing		356			735			1,515			2,058
Total cost of net revenue		356			735			1,515			2,058
Gross profit		1,751			3,041			7,423			9,537
Operating expenses
Research and development		6,648			6,779			19,369			19,456
Selling, general and administrative		1,952			2,435			6,583			7,541
Total operating expenses		8,600			9,214			25,952			26,997
Loss from operations		(6,849		)	(6,173		)	(18,529		)	(17,460		)
Other income and expense, net		10			8			44			200
Loss before income taxes		(6,839		)	(6,165		)	(18,485		)	(17,260		)
Income tax provision		24			33			59			91
Net loss		$	(6,863	)	$	(6,198	)	$	(18,544	)	$	(17,351	)
Net loss per share
Basic and diluted		$	(0.18	)	$	(0.19	)	$	(0.49	)	$	(0.55	)
Shares used in computing net loss per share
Basic and diluted		38,090			31,946			37,700			31,616

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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MOSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

		Nine Months Ended September 30,
		2011			2010
Cash flows from operating activities:
Net loss		$	(18,544	)	$	(17,351	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		839			740
Stock-based compensation		2,474			2,296
Amortization of intangible assets		1,964			2,147
Provision for doubtful accounts		106			—
Other non-cash items		18			48
Changes in assets and liabilities, net of business acquired:
Accounts receivable		371			(54		)
Unbilled contracts receivable		95			1,063
Prepaid expenses and other assets		1,031			1,043
Deferred revenue		(589		)	(1,101		)
Accounts payable		(355		)	1,352
Accrued expenses and other liabilities		(289		)	(763		)
Net cash used in operating activities		(12,879		)	(10,580		)
Cash flows from investing activities:
Purchases of property and equipment		(349		)	(1,274		)
Net cash paid for purchase of Prism Circuits, Inc. and MagnaLynx, Inc.		(1,000		)	(7,936		)
Proceeds from sales and maturities of marketable securities		30,314			49,786
Purchases of marketable securities		(27,712		)	(32,968		)
Net cash provided by investing activities		1,253			7,608
Cash flows from financing activities:
Proceeds from issuance of common stock		3,207			1,800
Payments on capital lease obligations		(140		)	(61		)
Net cash provided by financing activities		3,067			1,739
Net decrease in cash and cash equivalents		(8,559		)	(1,233		)
Cash and cash equivalents at beginning of period		14,340			7,123
Cash and cash equivalents at end of period		$	5,781		$	5,890

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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MOSYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1. The Company and Summary of Significant Accounting Policies

 

The Company

 

MoSys, Inc. (the Company) was incorporated in California in September 1991, and reincorporated in September 2000 in Delaware. The Company designs, develops, markets and licenses high-performance semiconductor memory and high-speed parallel and serial interface intellectual property (IP) used by the semiconductor industry and communications, networking and storage equipment manufacturers. In February 2010, the Company announced the commencement of a new product initiative to develop a family of integrated circuit (IC) products under the “Bandwidth Engine” product name. Bandwidth Engine ICs combine the Company’s high-density embedded memory with its high-speed 10 Gigabits per second interface (I/O) technology and are initially being marketed to networking systems companies and designers of advanced systems on chips designs. To date, the Company has not generated any revenue from the sale of Bandwidth Engine ICs.

 

The accompanying condensed consolidated financial statements of the Company have been prepared without audit in accordance with the rules and regulations of the Securities and Exchange Commission (SEC).  The condensed consolidated balance sheet at December 31, 2010 has been derived from the audited consolidated financial statements at that date. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted in accordance with these rules and regulations. The information in this report should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in its most recent annual report on Form 10-K filed with the SEC.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to summarize fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The operating results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011 or for any other future period.

 

Basis of Presentation

 

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. The Company’s fiscal year is the calendar year.

 

Use of Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues recognized under the percentage of completion method and expenses recognized during the reported period. Actual results could differ from those estimates.

 

Cash Equivalents and Investments

 

The Company has invested its excess cash in money market accounts, certificates of deposit, corporate debt, government agency and municipal debt securities and considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Investments with original maturities greater than three months and remaining maturities less than one year are classified as short-term investments. Investments with remaining maturities greater than one year are classified as long-term investments. Management generally determines the appropriate classification of securities at the time of purchase. All securities are classified as available-for-sale. The Company’s available-for-sale short-term and long-term investments are carried at fair value, with the unrealized holding gains and losses reported in accumulated other comprehensive income (loss). Realized gains and losses and declines in the value judged to be other than temporary are included in the other income and expense, net line item in the condensed consolidated statements of operations. The cost of securities sold is based on the specific identification method.

 

Fair Value Measurements

 

The Company measures the fair value of financial instruments using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows:

 

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Level 1—Inputs used to measure fair value are unadjusted quoted prices that are available in active markets for the identical assets or liabilities as of the reporting date.

 

Level 2—Pricing is provided by third party sources of market information obtained through the Company’s investment advisors rather than models. The Company does not adjust for or apply any additional assumptions or estimates to the pricing information it receives from advisors. The Company’s Level 2 securities include cash equivalents and available-for-sale securities, which consist primarily of certificates of deposit, corporate debt, and government agency and municipal debt securities from issuers with high quality credit ratings. The Company’s investment advisors obtain pricing data from independent sources, such as Standard & Poor’s, Bloomberg and Interactive Data Corporation, and rely on comparable pricing of other securities because the Level 2 securities it holds are not actively traded and have fewer observable transactions. The Company considers this the most reliable information available for the valuation of the securities.

 

Level 3—Unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment are used to measure fair value. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions. The determination of fair value for Level 3 investments and other financial instruments involves the most management judgment and subjectivity.

 

Allowance for Doubtful Accounts

 

The Company establishes an allowance for doubtful accounts to ensure that its trade receivables balances are not overstated due to uncollectibility. The Company performs ongoing customer credit evaluations within the context of the industry in which it operates. A specific allowance of up to 100% of the invoice value is provided for any problematic customer balances. Delinquent account balances are written off after management has determined that the likelihood of collection is remote. The Company performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral from its customers. The Company grants credit only to customers deemed creditworthy in the judgment of management. The Company maintains an allowance for doubtful accounts receivable based upon the expected collectibility of all accounts receivable. The allowance for doubtful accounts was $194,000 and $125,000 at September 30, 2011 and December 31, 2010, respectively.

 

Revenue Recognition

 

General

 

The Company generates revenue from the licensing of its IP, and customers pay fees for licensing, development services, royalties and maintenance and support. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery or performance has occurred, the sales price is fixed or determinable, and collectibility is reasonably assured. Evidence of an arrangement generally consists of signed agreements. When sales arrangements contain multiple deliverables (e.g., license and services), the Company reviews each deliverable to determine the separate units of accounting that exist within the agreement. If more than one unit of accounting exists, the consideration payable to the Company under the agreement is allocated to each unit of accounting using the relative fair value method. Revenue is recognized for each unit of accounting when the revenue recognition criteria have been met for that unit of accounting.

 

Licensing

 

Licensing revenue consists of fees earned from license agreements, development services and support and maintenance. For stand-alone license agreements or license deliverables in multi-deliverable arrangements that do not require significant development, modification or customization, revenue is recognized when all revenue recognition criteria have been met. Delivery of the licensed technology is typically the final revenue recognition criterion met, at which time revenue is recognized. If any of the criteria are not met, revenue recognition is deferred until such time as all criteria have been met.

 

Effective with the first quarter of 2011, the Company allocates revenue among license deliverables in multi-deliverable arrangements using the relative selling price method. Revenue allocated to each element is recognized when the basic revenue recognition criteria is met for each element. Under GAAP, the Company is required to apply a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value (VSOE), (ii) third-party evidence of selling price (TPE) and (iii) best estimate of the selling price (ESP). In general, the Company is unable to establish VSOE or TPE for its license fees and development services; therefore, revenue is allocated to these elements based on the Company’s ESP, which the Company determines after considering multiple factors such as management approved pricing guidelines, geographic differences, market conditions, competitor pricing strategies, internal costs and gross margin objectives. These factors may vary over time depending upon the unique facts and circumstances related to each deliverable. If the facts and circumstances underlying the factors considered change or should future facts and circumstances lead the Company to consider additional factors, the Company’s ESP for license fee and development services could change. If the Company’s arrangements entered into or materially modified on or after

 

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January 1, 2011 were subject to the previous accounting guidance, the reported net revenue amount would have remained consistent with reported amounts for the three and nine months ended September 30, 2011.

 

For license agreements involving deliverables that do require significant production, modification or customization, and where the Company has significant experience in meeting the design specifications in the contract and the direct labor hours related to services under the contract can be reasonably estimated, the Company recognizes revenue over the period in which the contract services are performed. For these arrangements, the Company recognizes revenue using the percentage of completion method. Under this method, revenue recognized in any period depends on the Company’s progress toward completion of projects in progress. Significant management judgment and discretion are used to estimate total direct labor hours. These judgmental elements include determining that the Company has the experience to meet the design specifications and estimating the total direct labor hours to perform the contract services, based on experience in developing prior licensees’ designs. The direct labor hours for the development of the licensee’s design are estimated at the beginning of the contract. As the direct labor hours are incurred, they are used as a measure of progress towards completion. During the contract performance period, the Company reviews estimates of direct labor hours to complete the contracts and will revise its estimates of revenue and gross profit under the contract if it revises the estimations of the direct labor hours to complete. The Company’s policy is to reflect any revision in the contract gross profit estimate in reported income or loss in the period in which the facts giving rise to the revision become known. Under the percentage of completion method, provisions for estimated losses on uncompleted contracts are recorded in the period in which such losses are determined to be likely. If the amount of revenue recognized under the percentage of completion accounting method exceeds the amount of billings to a customer, the excess amount is recorded as an unbilled contracts receivable.

 

For contracts involving design specifications that the Company has not previously met or if inherent risks make estimates doubtful, the contract is accounted for under the completed contract method.  Under this method, the Company defers the recognition of all revenue until the design meets the contractual design specifications, and the cost of revenue is expensed as incurred. When the Company has experience in meeting design specifications but the lack of significant experience or inherent risks prevent the Company from reasonably estimating the direct labor hours related to services to meet a design specification, the Company defers the recognition of revenue.

 

The Company provides support and maintenance under many of its license agreements. Under these arrangements, the Company provides unspecified upgrades, design rule changes and technical support. No other upgrades, products or other post-contract support are provided. Support and maintenance revenue is recognized at its fair value established by VSOE, ratably over the period during which the obligation exists, typically 12 months. These arrangements are generally renewable annually by the customer.

 

Under limited circumstances, the Company also recognizes prepaid pre-production royalties as licensing revenue. These are lump sum payments made when the Company enters into licensing agreements that cover future shipments of a product that is not commercially available from the licensee. The Company characterizes such payments as licensing revenue because they are paid as part of the initial license fee and not with respect to products being produced by the licensee. These payments are non-cancelable and non-refundable.

 

Royalty

 

The Company’s licensing contracts typically also provide for royalties based on licensees’ use of the Company’s memory technology in their currently shipping commercial products. The Company recognizes revenue on royalties in the quarter in which it receives the licensee’s report. Under limited circumstances, the Company may also recognize prepaid post-production royalties as revenue upon execution of the contract, which are paid in a lump sum after the licensee commences production of the royalty-bearing product and applied against future unit shipments regardless of the actual level of shipments by the licensee. The criteria for revenue recognition of prepaid royalties are that a formal agreement with the licensee is executed, no deliverables, development or support services related to prepaid royalties are required, the fees are non-refundable and not contingent upon future product shipments by the licensee, and the fees are payable by the licensee in a time period consistent with the Company’s normal billing terms. If any of these criteria are not met, the Company defers revenue recognition until such time as all criteria have been met.

 

Cost of Revenue

 

Cost of licensing revenue consists primarily of engineering personnel and overhead allocation costs directly related to development services specified in agreements. These services typically include customization of the Company’s technologies for the licensee’s particular IC design and may include engineering support to assist in the commencement of production of a licensee’s products. The Company recognizes cost of licensing revenue in the following manner:

 

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·                  If licensing revenue is recognized using the percentage of completion method, the associated cost of licensing revenue is recognized in the period in which the Company incurs the engineering costs. If revenue is deferred, the corresponding costs are capitalized in other current assets and charged to cost of licensing revenue when the related revenue is recognized.

 

·                  If licensing revenue is recognized using the completed contract method, to the extent that the amount of engineering cost does not exceed the amount of the related licensing revenue, the cost of licensing revenue is deferred on a contract-by-contract basis from the time the Company has established technological feasibility of the product to be developed under the license contract. Technological feasibility is established when the Company has completed all activities necessary to demonstrate that the licensee’s product can be produced to meet the performance specifications when incorporating its technology. Deferred costs are capitalized in other current assets and charged to cost of licensing revenue when the related revenue is recognized.

 

Goodwill

 

The Company reviews goodwill for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. The Company uses a two-step impairment test. In the first step, the Company compares the fair value of the reporting unit to its carrying value. The fair value of the reporting unit is determined using the market approach. If the fair value of the reporting unit exceeds the carrying value of net assets of the reporting unit, goodwill is not impaired, and the Company is not required to perform further testing. If the carrying value of the net assets of the reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second step in order to determine the implied fair value of the reporting unit’s goodwill and compare it to the carrying value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then the Company must record an impairment charge equal to the difference. The Company has determined that it has a single reporting unit for purposes of performing its goodwill impairment test. The Company performed the annual impairment test in September 2011, and the test did not indicate impairment of goodwill, as the fair value exceeded the carrying value of the reporting unit by approximately 61%. As the Company used the market approach to assess impairment, the price of its common stock is an important component of the fair value calculation. If the Company’s stock price continues to experience significant price and volume fluctuations, this will impact the fair value of the reporting unit, which can lead to potential impairment in future periods. As of September 30, 2011, the Company had not identified any factors to indicate there was an impairment of its goodwill and determined that no additional impairment analysis was required.

 

Purchased Intangible Assets

 

Intangible assets acquired in business combinations are accounted for based on the fair value of assets purchased and are amortized over the period in which economic benefit is estimated to be received. Identifiable intangible assets relating to business combinations were as follows (dollar amounts in thousands):

 

		September 30, 2011
		Life (years)		Gross Carrying Amount			Accumulated Amortization			Net Carrying Value
Developed technology		3-5		$	9,240		$	5,054		$	4,186
Customer relationships		3		390			302			88
Contract backlog		1		750			750			—
Non-compete agreements		1.5		140			140			—
Total				$	10,520		$	6,246		$	4,274

 

		December 31, 2010
		Life (years)		Gross Carrying Amount			Accumulated Amortization			Net Carrying Value
Developed technology		3-5		$	9,240		$	3,188		$	6,052
Customer relationships		3		390			204			186
Contract backlog		1		750			750			—
Non-compete agreements		1.5		140			140			—
Total				$	10,520		$	4,282		$	6,238

 

The related amortization expense was $0.7 million and $2.0 million for the three and nine months ended September 30, 2011, respectively. The amortization expense was $0.7 million and $2.1 million for the three and nine months ended September 30, 2010, respectively. Amortization expense has been included in research and development expense in the condensed consolidated statements

 

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of operations.  The estimated aggregate amortization expense to be recognized in the future is approximately $0.7 million for the remainder of 2011, $1.6 million for 2012, $0.9 million for 2013, $0.9 million for 2014 and $0.2 million for 2015.

 

Per Share Amounts

 

Basic net loss per share is computed by dividing net loss for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share gives effect to all potentially dilutive common shares outstanding during the period. Potentially dilutive common shares consist of incremental shares of common stock issuable upon the exercise of stock options, vesting of stock awards and purchases under the employee stock purchase plan. As of September 30, 2011 and 2010, stock awards to purchase approximately 10,129,000 and 10,699,000 shares, respectively, were excluded from the computation of diluted net loss per share as their inclusion would be anti-dilutive.

 

Comprehensive Loss

 

Comprehensive loss, as defined, includes all changes in equity (net assets) during a period from non-owner sources. The components of comprehensive loss for the three and nine months ended September 30, 2011 and 2010 were as follows (in thousands):

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2011			2010			2011			2010
Net loss		$	(6,863	)	$	(6,198	)	$	(18,544	)	$	(17,351	)
Change in net unrealized gains (losses) on available-for-sale securities		(23		)	14			(15		)	(21		)
Comprehensive loss		$	(6,886	)	$	(6,184	)	$	(18,559	)	$	(17,372	)

 

Recent Accounting Pronouncements

 

In September 2011, the Financial Accounting Standards Board (FASB) issued ASU No. 2011-08, Intangibles-Goodwill and Other — Testing Goodwill for Impairment.  Under this updated guidance, an entity is permitted to first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test.   The effective date of this guidance is for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  The Company does not believe the adoption of this guidance will have a material effect on its consolidated financial statements.

 

Note 2. Fair Value of Financial Instruments

 

The estimated fair values of financial instruments outstanding were as follows (in thousands):

 

		September 30, 2011
		Cost			Unrealized Gains			Unrealized Losses			Fair Value
Cash and cash equivalents		$	5,781		$	—		$	—		$	5,781
Short-term investments:
U.S. government debt securities		$	8,763		$	1		$	—		$	8,764
Corporate notes		3,037			4			(1		)	3,040
Certificates of deposit		720			—			—			720
Total short-term investments		$	12,520		$	5		$	(1	)	$	12,524
Long-term investments:
U.S. government debt securities		$	3,000		$	—		$	(1	)	$	2,999
Corporate notes		3,876			—			(14		)	3,862
Certificates of deposit		1,200			1			(1		)	1,200
Total long-term investments		$	8,076		$	1		$	(16	)	$	8,061

 

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		December 31, 2010
		Cost			Unrealized Gains			Unrealized Losses			Fair Value
Cash and cash equivalents		$	14,340		$	—		$	—		$	14,340
Short-term investments:
U.S. government debt securities		$	8,711		$	1		$	(2	)	$	8,710
Corporate notes		5,115			6			(5		)	5,116
Certificates of deposit		1,185			—			—			1,185
Total short-term investments		$	15,011		$	7		$	(7	)	$	15,011
Long-term investments:
U.S. government debt securities		$	6,204		$	—		$	(2	)	$	6,202
Corporate notes		1,507			6			—			1,513
Certificates of deposit		480			—			(2		)	478
Total long-term investments		$	8,191		$	6		$	(4	)	$	8,193

 

As of September, 30, 2011 and December 31, 2010, all of the available-for-sale securities with unrealized losses had been in a loss position for less than 12 months. Total fair value of available-for-sale securities with unrealized losses was $11.7 million at September 30, 2011.

 

Cost and fair value of investments based on two maturity groups were as follows (in thousands):

 

		September 30, 2011
		Cost			Unrealized Gains			Unrealized Losses			Fair Value
Due within 1 year		$	12,520		$	5		$	(1	)	$	12,524
Due in 1-2 years		8,076			1			(16		)	8,061
Total		$	20,596		$	6		$	(17	)	$	20,585

 

		December 31, 2010
		Cost			Unrealized Gains			Unrealized Losses			Fair Value
Due within 1 year		$	15,011		$	7		$	(7	)	$	15,011
Due in 1-2 years		8,191			6			(4		)	8,193
Total		$	23,202		$	13		$	(11	)	$	23,204

 

The following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) as of September 30, 2011 (in thousands):

 

		September 30, 2011
		Fair Value			Level 1			Level 2			Level 3
Money market funds		$	5,321		$	5,321		$	—		$	—
Certificates of deposit		1,920			—			1,920			—
Corporate notes		6,902			—			6,902			—
U.S. government debt securities		11,763			—			11,763			—
Total assets		$	25,906		$	5,321		$	20,585		$	—

 

There were no transfers in or out of Level 1 and Level 2 securities during the three and nine months ended September 30, 2011. There were no Level 3 financial assets as of September 30, 2011.

 

Note 3.          Acquisitions

 

MagnaLynx

 

In March 2010, the Company acquired all of the outstanding stock of MagnaLynx, Inc. (MagnaLynx), a provider of semiconductor interface technology. Under the terms of the merger agreement, the Company paid approximately $2.2 million to settle debt and certain other liabilities of MagnaLynx and approximately $1.2 million to MagnaLynx shareholders. An additional $0.5 million, referred to as the indemnification holdback, is payable 18 months after the closing, net of any costs related to indemnification claims that may arise during such 18 month period. The full amount of the indemnification holdback was paid in October 2011.  In addition, the Company paid an additional $1.0 million to the former shareholders of MagnaLynx in the second quarter of 2011, as earn-out consideration based on MagnaLynx meeting certain contractually agreed-upon development milestones. This earn-out consideration was included in the acquisition price because the Company expected that it was more likely than not that the objectives related to this earn-out would be met.

 

The Company recorded a total acquisition price as follows (in thousands):

 

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Cash		$	3,355
Acquisition-related earn-out		1,000
Indemnification holdback		500
Liabilities assumed by MoSys		32
Total acquisition price		$	4,887

 

The allocation of the acquisition price for net tangible and intangible assets was as follows (in thousands):

 

Net tangible assets		$	100
Intangible asset - developed technology		4,440
Goodwill		347
Total acquisition price		$	4,887

 

Goodwill represents the excess of the acquisition price of an acquired business over the fair value of the underlying net tangible and intangible assets. Included in the goodwill amount is the value of the acquired workforce, which has significant expertise in low-power interface IP. The goodwill recognized is expected to be deductible for income tax purposes.

 

The value of the identifiable intangible asset was determined by using future cash flow assumptions. The intangible asset, which is considered developed technology, is being amortized on a straight-line basis over its estimated life of five years.

 

Note 4. Commitments and Contingencies

 

Indemnifications

 

In the ordinary course of business, the Company enters into contractual arrangements under which it may agree to indemnify the counterparties from any losses incurred relating to breach of representations and warranties, failure to perform certain covenants, or claims and losses arising from certain events as outlined within the particular contract, which may include, for example, losses arising from litigation or claims relating to past performance. Such indemnification clauses may not be subject to maximum loss clauses. The Company has entered into indemnification agreements with its officers and directors. No material amounts were reflected in the Company’s condensed consolidated financial statements for the three and nine months ended September 30, 2011 or 2010 related to these indemnifications.

 

The Company has not estimated the maximum potential amount of indemnification liability under these agreements due to the limited history of prior claims and the unique facts and circumstances applicable to each particular agreement. To date, the Company has not made any material payments related to these indemnification agreements.

 

Legal Matters

 

The Company is not a party to any material legal proceeding that the Company believes is likely to have a material adverse effect on its consolidated financial position or results of operations. From time to time, the Company may be subject to legal proceedings and claims in the ordinary course of business. These claims, even if not meritorious, could result in the expenditure of significant financial resources and diversion of management efforts.

 

Note 5. Business Segments and Significant Customers

 

The Company operates in one business segment and uses one measurement of profitability for its business. Revenue attributed to the United States and to all foreign countries is based on the geographical location of the customer.

 

The Company recognized revenue from licensing of its technologies to customers in North America, Asia and Europe as follows (in thousands):

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2011			2010			2011			2010
United States		$	638		$	1,519		$	3,072		$	4,529
Japan		511			1,394			2,721			4,900
Taiwan		785			760			2,422			2,042
Europe		173			—			715			—
Other Asia		—			103			8			124
Total		$	2,107		$	3,776		$	8,938		$	11,595

 

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Customers who accounted for at least 10% of total revenues were as follows:

 

		Three Months Ended September 30,				Nine Months Ended September 30,
		2011		2010		2011		2010
Customer A		37	%	20	%	27	%	17	%
Customer B		17	%	9	%	14	%	9	%
Customer C		13	%	1	%	5	%	2	%
Customer D		—	%	23	%	14	%	21	%
Customer E		—	%	13	%	3	%	5	%

 

Five customers accounted for 100% of net accounts receivable at September 30, 2011. Four customers accounted for 99% of net accounts receivable at December 31, 2010.

 

Note 6. Income Tax Provision

 

The Company determines deferred tax assets and liabilities based upon the differences between the financial statement and tax bases of the Company’s assets and liabilities using tax rates in effect for the year in which the Company expects the differences to affect taxable income. A valuation allowance is established for any deferred tax assets for which it is more likely than not that all or a portion of the deferred tax assets will not be realized.

 

The Company files U.S. federal and state and foreign income tax returns in jurisdictions with varying statutes of limitations.  The Company is not currently under any tax jurisdiction examination.  The 2003 through 2010 tax years generally remain subject to examination by federal, state and foreign tax authorities.  As of September 30, 2011, the Company did not have any unrecognized tax benefits or recognize any interest or penalties related to unrecognized tax benefits.

 

Note 7. Stock-Based Compensation

 

The Company recorded $0.9 million and $0.8 million of stock-based compensation expense for the three months ended September 30, 2011 and 2010, respectively. The Company recorded $2.5 million and $2.3 million of stock-based compensation expense for the nine months ended September 30, 2011 and 2010, respectively. The expense relating to stock-based awards is recognized on a straight-line basis over the requisite service period, usually the vesting period, based on the grant-date fair value. The unamortized compensation cost, net of expected forfeitures, as of September 30, 2011 was $4.4 million and is expected to be recognized as expense over a weighted average period of approximately 2.17 years.

 

The Company presents the tax benefits resulting from tax deductions in excess of the compensation cost recognized from the exercise of stock options as financing cash flows in the condensed consolidated statements of cash flows. For the three and nine months ended September 30, 2011 and 2010, there were no such tax benefits associated with the exercise of stock options due to the Company’s loss position.

 

Common Stock Options and Restricted Stock

 

A summary of the option and restricted stock unit activity under the Company’s Amended and Restated 2000 Stock Option and Equity Incentive Plan (Amended 2000 Plan) and 2010 Equity Incentive Plan (2010 Plan), referred to collectively as the “Plans,” is presented below (in thousands, except exercise price):

 

				Options Outstanding
		Available for Grant		Number of Shares		Weighted Average Exercise Prices
Balance at December 31, 2010		3,650		5,594		$	4.64
Additional shares authorized under the 2010 Plan		500		—		—
Options granted		(120	)	120		$	5.94
Options cancelled		2		(323	)	$	3.86
Options exercised		—		(200	)	$	3.51
Balance at March 31, 2011		4,032		5,191		$	4.76
Options granted		(334	)	334		$	5.92
Options cancelled		—		(242	)	$	7.67
Options exercised		—		(251	)	$	3.62
Balance at June 30, 2011		3,698		5,032		$	4.75
Options granted		(121	)	121		$	5.18
Options cancelled		3		(90	)	$	6.64
Options exercised		—		(55	)	$	1.67
Balance at September 30, 2011		3,580		5,008		$	4.76

 

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On June 30, 2011, the Company’s executive vice president of engineering resigned from the Company and agreed to act as a consultant for an indefinite period.  As compensation for the consulting services, an option to purchase 675,000 shares of the Company’s common stock granted to the executive vice president on June 26, 2009, of which the unvested and unexercised portion would have otherwise terminated by its terms following the termination of employment with the Company, will remain in effect and continue to vest in accordance with its vesting terms during the term of the consulting agreement.  The Company accounts for this option as a variable award and the fair value compensation expense will be recognized each period over the remaining vesting term of the option. As a result of the option modification, the Company recognized $0.2 million of stock-based compensation expense during the quarter and nine months ended September 30, 2011.

 

A summary of restricted stock award and restricted stock unit activity for grants outside of the Plans is presented below (in thousands, except fair value):

 

		Number of Shares		Weighted Average Grant-Date Fair Value
Non-vested shares at March 31, 2011 and December 31, 2010		31		$	1.60
Vested		(16	)	$	1.60
Non-vested shares at September 30, 2011 and June 30, 2011		15		$	1.60

 

The Company also has awarded shares to new employees outside the Plans and may continue to do so outside the 2010 Plan, as a material inducement to the acceptance of employment with the Company. These grants must be approved by the compensation committee of the board of directors, a majority of the independent directors or an authorized executive officer, as specified under the Listing Rules of the Nasdaq Stock Market.

 

A summary of the inducement grant option activity is presented below (in thousands, except exercise price):

 

		Options Outstanding
		Number of Shares		Weighted Average Exercise Prices
Balance at December 31, 2010		4,812		$	2.92
Exercised		(52	)	$	1.55
Balance at March 31, 2011		4,760		$	2.93
Granted		400		$	6.06
Cancelled		(2	)	$	1.50
Exercised		(152	)	$	1.55
Balance at June 30, 2011		5,006		$	3.22
Cancelled		(36	)	$	1.55
Exercised		(47	)	$	1.54
Balance at September 30, 2011		4,923		$	3.25

 

The following table summarizes significant ranges of outstanding and exercisable options and inducement grants, excluding restricted stock award and restricted stock unit activity, as of September 30, 2011 (in thousands, except contractual life and exercise price):

 

		Options Outstanding										Options Exercisable
Range of Exercise Price		Number Outstanding		Weighted Average Remaining Contractual Life (in Years)		Weighted Average Exercise Price			Aggregate Intrinsic value			Number Exercisable		Weighted Average Remaining Contractual Life (in Years)		Weighted Average Exercise Price			Aggregate Intrinsic value
$1.50 - $2.50		3,656		3.43		$	1.69		$	7,208		1,766		3.42		$	1.69		$	3,484
$2.51 - $5.00		2,935		4.01		$	4.18		224			1,818		3.69		$	4.11		102
$5.01 - $7.50		2,693		4.70		$	5.87		—			1,606		4.16		$	5.86		—
$7.51 - $15.00		647		1.42		$	8.63		—			647		1.42		$	8.63		—
		9,931		3.81		$	4.01		$	7,432		5,837		3.49		$	4.36		$	3,586

 

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As of September 30, 2011, the Company had 9.3 million shares subject to outstanding options fully vested and expected to vest, after estimated forfeitures, with a remaining contractual life of 3.77 years, weighted average exercise price of $4.03 and aggregate intrinsic value of $6.9 million.

 

The total fair value of shares subject to outstanding options vested during the nine months ended September 30, 2011 and 2010 calculated using the Black-Scholes valuation method was $1.2 million and $1.3 million, respectively. The total intrinsic value of employee stock options exercised during the nine months ended September 30, 2011 and 2010 was $2.2 million and $1.8 million, respectively.

 

Options to purchase 5.8 million and 5.0 million shares with weighted average exercise prices of $4.36 and $4.84 per share were exercisable at September 30, 2011 and 2010, respectively.

 

Valuation Assumptions and Expense Information

 

The fair value of the Company’s share-based payment awards for the three and nine months ended September 30, 2011 and 2010 was estimated on the grant date using a Black-Scholes valuation method and an option-pricing model with the following assumptions:

 

		Three Months Ended September 30,				Nine Months Ended September 30,
		2011		2010		2011		2010
Employee stock options:
Risk-free interest rate		0.2% – 0.7%		1.3% – 1.4%		0.2% – 1.7%		1.3% – 2.1%
Volatility		40.7% – 61.3%		63.4% – 63.5%		40.7% – 63.8%		63.0% – 72.7%
Expected life (years)		4.0		4.0		4.0		4.0
Dividend yield		0%		0%		0%		0%

 

The risk-free interest rate was derived from the Daily Treasury Yield Curve Rates as published by the U.S. Department of the Treasury as of the grant date for terms equal to the expected terms of the options. The expected volatility was based on the combination of: 1) four-year historical volatility and 2) implied volatility of the Company’s stock price. The expected term of options granted was derived from historical data based on employee exercises and post-vesting employment termination behavior. A dividend yield of zero is applied because the Company has never paid dividends and has no intention to pay dividends in the near future.

 

The stock-based compensation expense recorded is adjusted based on estimated forfeiture rates. An annualized forfeiture rate has been used as a best estimate of future forfeitures based on the Company’s historical forfeiture experience. The stock-based compensation expense will be adjusted in later periods if the actual forfeiture rate is different from the estimate.

 

Employee Stock Purchase Plan

 

In June 2010, the Company’s stockholders approved the 2010 Employee Stock Purchase Plan (ESPP). A total of 2.0 million shares of common stock have been reserved for issuance under the ESPP. The ESPP, which is intended to qualify under Section 423 of the Internal Revenue Code, is administered by the board of directors or the compensation committee of the board of directors. The ESPP provides that eligible employees may purchase up to $25,000 worth of the Company’s common stock annually over the course of two six-month offering periods. The purchase price to be paid by participants is 85% of the price per share of the Company’s common stock either at the beginning or the end of each six-month offering period, whichever is less. On September 1, 2010, the Company commenced the first six month offering period under the ESPP. On February 29, 2011, approximately 149,000 shares of common stock were issued at an aggregate purchase price of $581,000 under the ESPP.  On August 31, 2011, approximately 164,000 shares of common stock were issued at an aggregate purchase price of $558,000 under the ESPP.

 

Note 8. Subsequent Events

 

The Company has evaluated subsequent events through the date the preparation of these unaudited condensed consolidated financial statements was complete and did not identify any material recognizable subsequent events.

 

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying condensed consolidated financial statements and notes included in this report. This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which include, without limitation, statements about the market for our technology, our strategy, competition, expected financial performance, all information disclosed under Item 3 of this Part I, and other aspects of our business identified in our most recent annual report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2011 and in other reports that we file from time to time with the Securities and Exchange Commission. Any statements about our business, financial results, financial condition and operations contained in this Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” or similar expressions are intended to identify forward-looking statements. Our actual results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors, including the risk factors described below in Risk Factors and elsewhere in this report and under Item 1A of our annual report on Form 10-K for the year ended December 31, 2010. We undertake no obligation to update publicly any forward-looking statements for any reason, except as required by law, even as new information becomes available or events occur in the future.

 

Overview

 

To date, our primary business has been defining, designing, marketing and licensing differentiated embedded memory and high-speed parallel and serial interface (I/O), intellectual property (IP), for advanced Systems on Chips (SOCs), designs. The 1T-SRAM is our high-density, high-performance patented memory solution that represents an alternative to traditional volatile embedded memory. Our I/O IP includes physical layer (PHY) circuitry that allows integrated circuits (ICs) to communicate with one another in the networking, storage, computer and consumer market segments. Our PHY IP supports serial interface technologies, such as 10G Base KR, XAUI, PCI Express and SATA, as well as parallel interfaces like DDR3. Our IP customers typically include fabless semiconductor companies, integrated device manufacturers (IDMs) and foundries. We generate revenue from the licensing of our IP, and our customers pay us fees for one or more of the following: licensing, development services, royalties and/or maintenance and support. Royalty revenues are typically earned under our memory license agreements when our licensees manufacture or sell products that incorporate any of our memory technologies.

 

In February 2010, we announced a new product initiative to develop a family of integrated circuit products under the “Bandwidth Engine” product name. Our Bandwidth Engine family of ICs combines our 1T-SRAM high-density embedded memory with our high-speed 10 Gigabits per second (Gbps) serial I/O technology and is initially being marketed to networking systems companies.  Bandwidth Engine ICs have been designed to increase system performance by using a serial I/O to increase the accesses per second between the processor and memory components in networking systems. Since the beginning of 2010, we have invested a significant amount of our financial and engineering resources towards the development of our Bandwidth Engine family of ICs. We shipped initial samples of our first Bandwidth Engine ICs to prospective customers in December 2010, and, in November 2011, we announced two design wins for low volume applications.

 

Our strategy and primary business objective is to become a fabless semiconductor company focused on the development and sale of Bandwidth Engine ICs to the networking equipment systems providers and their subsystem and component vendors. Our future success and ability to achieve and maintain profitability will be dependent on our success in developing a market for our Bandwidth Engine ICs. We have begun to dedicate more of our engineering resources and the engineering budget to our integrated circuit efforts and expect that this trend will continue as we place more emphasis on integrated circuit product sales as opposed to IP sales.  As a result, we have begun placing less emphasis on IP licensing and deploying more resources for our IC product development and marketing efforts, and our competitiveness and the demand for our IP have declined since the beginning of the year.  We do not expect to generate significant revenue from our Bandwidth Engine ICs until the second half of 2012 or later and believe that IC revenues are not likely to approximate the revenues generated from licensing and royalties until at least 2013.  As a result of our reduced licensing activities, it will be challenging for us to grow or maintain our licensing revenue at current levels, and we do not expect our royalty revenue to grow in future periods, and we believe that our licensing revenues in future periods are likely to be lower than they were in 2011.

 

Sources of Revenue

 

We currently generate two types of IP revenue: licensing and royalties.

 

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