Peraso Inc. - Quarter Report: 2013 September (Form 10-Q)

Table of Contents

 

 

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, 2013

 

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) 415-4500

(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, 2013, 48,411,904 shares of the Registrant’s common stock, $0.01 par value, were outstanding.

 

 

Table of Contents

 

MOSYS, INC.

 

FORM 10-Q
September 30, 2013

 

TABLE OF CONTENTS

 

PART I —	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited):
	Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012	3
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2013 and 2012	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Qualitative and Quantitative Disclosures About Market Risk	22
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, 2013			December 31, 2012
ASSETS
Current assets
Cash and cash equivalents		$	2,174		$	2,529
Short-term investments		33,409			30,798
Accounts receivable, net		54			287
Prepaid expenses and other current assets		1,768			1,362
Total current assets		37,405			34,976
Long-term investments		17,671			7,383
Property and equipment, net		780			1,238
Goodwill		23,134			23,134
Intangible assets, net		1,904			2,654
Other assets		137			149
Total assets		$	81,031		$	69,534
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	195		$	393
Accrued expenses and other liabilities		1,642			3,947
Deferred revenue		205			481
Total current liabilities		2,042			4,821
Long-term liabilities		208			171
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; 48,322 shares and 40,054 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively		483			401
Additional paid-in capital		189,657			157,143
Accumulated other comprehensive income (loss)		(8		)	11
Accumulated deficit		(111,351		)	(93,013		)
Total stockholders’ equity		78,781			64,542
Total liabilities and stockholders’ equity		$	81,031		$	69,534

 

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

 

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MOSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except per share data)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2013			2012			2013			2012
Net revenue
Licensing and other		$	141		$	248		$	550		$	1,113
Royalty		816			1,079			2,862			3,374
Total net revenue		957			1,327			3,412			4,487
Cost of net revenue
Licensing and other		158			53			254			289
Total cost of net revenue		158			53			254			289
Gross profit		799			1,274			3,158			4,198
Operating expenses
Research and development		6,243			7,026			17,546			21,220
Selling, general and administrative		1,595			1,738			4,678			6,092
Gain on sale of assets		—			(1,435		)	(630		)	(3,291		)
Total operating expenses		7,838			7,329			21,594			24,021
Loss from operations		(7,039		)	(6,055		)	(18,436		)	(19,823		)
Other income, net		122			61			166			121
Loss before income taxes		(6,917		)	(5,994		)	(18,270		)	(19,702		)
Income tax provision		28			79			68			139
Net loss		$	(6,945	)	$	(6,073	)	$	(18,338	)	$	(19,841	)
Other comprehensive loss, net of tax:
Net unrealized gains (losses) on available-for-sale securities		51			27			(19		)	25
Comprehensive loss		$	(6,894	)	$	(6,046	)	$	(18,357	)	$	(19,816	)
Net loss per share
Basic and diluted		$	(0.14	)	$	(0.15	)	$	(0.42	)	$	(0.51	)
Shares used in computing net loss per share
Basic and diluted		48,164			39,299			44,173			38,919

 

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,
		2013			2012
Cash flows from operating activities:
Net loss		$	(18,338	)	$	(19,841	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		565			730
Stock-based compensation		2,800			2,991
Amortization of intangible assets		750			1,496
Gain on sale of assets		(630		)	(3,291		)
Other non-cash items		13			(27		)
Changes in assets and liabilities:
Accounts receivable		233			968
Prepaid expenses and other assets		(368		)	161
Deferred revenue		(276		)	(257		)
Accounts payable		(198		)	(211		)
Accrued expenses and other liabilities		(2,268		)	(203		)
Net cash used in operating activities		(17,717		)	(17,484		)
Cash flows from investing activities:
Purchases of property and equipment		(120		)	(257		)
Net proceeds from sale of assets		630			3,437
Proceeds from sales and maturities of marketable securities		40,967			29,175
Purchases of marketable securities		(53,885		)	(50,497		)
Net cash used in investing activities		(12,408		)	(18,142		)
Cash flows from financing activities:
Proceeds from issuance of common stock		2,024			3,146
Proceeds from sale of common stock, net of issuance costs		27,746			—
Repurchase of common stock (Note 4)		—			(1,444		)
Payments on capital lease obligations		—			(134		)
Net cash provided by financing activities		29,770			1,568
Net decrease in cash and cash equivalents		(355		)	(34,058		)
Cash and cash equivalents at beginning of period		2,529			40,025
Cash and cash equivalents at end of period		$	2,174		$	5,967

 

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 has been designing, developing, marketing and licensing high-performance semiconductor memory and high-speed parallel and serial interface (SerDes) 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 proprietary high-density embedded memory with its high-speed 10 Gigabits per second and higher interface (I/O) technology. In March 2013, the Company announced another IC product line under the “LineSpeed” product name. LineSpeed  ICs are non-memory based, high-speed SerDes devices with gearbox or retimer functionality, which convert lanes of data received on line cards into different configurations and/or ensure signal integrity.  Both product lines are initially being marketed to networking and telecommunications systems companies.  The Company’s strategy and primary business objective is to become an IP-rich fabless semiconductor company focused on development and sale of IC products. The Company’s future success and ability to achieve and maintain profitability depends on its success in developing a market for its 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, 2012 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, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013 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.

 

Reclassification

 

Certain prior year amounts have been reclassified to conform to the current year presentation. The reclassification includes reclassifying unbilled contracts receivable into the prepaid expenses and other current assets line item of the condensed consolidated balance sheets. The amount for the prior period has been reclassified to be consistent with the current year presentation and has no impact on previously reported total assets, total stockholders’ equity, net loss or comprehensive loss.

 

Use of Estimates

 

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses recognized during the reported period. Actual results could differ from those estimates.

 

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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. Realized gains and losses and declines in the value judged to be other than temporary are included in the other income, net line item in the condensed consolidated statements of operations and comprehensive loss. 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:

 

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 consisted 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 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 and generally does not require collateral from its customers. 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 grants credit only to customers deemed creditworthy in the judgment of management. There was no allowance for doubtful accounts receivable at September 30, 2013 or December 31, 2012.

 

Revenue Recognition

 

General

 

The Company generates revenue from the licensing of its IP and sales of IC products. 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 or customer purchase orders.

 

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, revenues are 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.

 

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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. The Company allocates revenue among the deliverables 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 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.

 

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 estimate 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.

 

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.

 

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 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.

 

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IC products

 

The Company sells products both directly to customers, as well as through distributors. Revenue from sales directly to customers is generally recognized at the time of shipment. The Company records an estimated allowance, at the time of shipment, for future returns and other charges against revenue consistent with the terms of sale. IC product revenue and costs relating to sales made through distributors with rights of return and stock rotation are deferred until the distributors sell the product to end customers due to the Company’s inability to estimate future returns and credits to be issued. Distributors are generally able to return up to 10% of their purchases for slow, non-moving or obsolete inventory for credit every six months. At the time of shipment to distributors, an accounts receivable for the selling price is recorded, as there is a legally enforceable right to receive payment, and inventory is relieved, as legal title to the inventory is transferred upon shipment. Revenues are recognized upon receiving notification from the distributors that products have been sold to end customers. Distributors provide information regarding products and quantity, end customer shipments and remaining inventory on hand. The associated deferred margin is included in the deferred revenues line item in the condensed consolidated balance sheet. The Company recorded initial IC product revenue in 2012, and a significant reserve for returns has been recorded due to the product’s early stage of testing and deployment in customer systems. IC product revenue was not significant for the three and nine months ended September 30, 2013 and 2012, and has been included in the licensing and other revenue line item in the condensed consolidated statements of operations and comprehensive loss.

 

Cost of Revenue

 

Cost of licensing and other revenue consists primarily of direct and indirect costs of IC product sales and engineering personnel costs directly related to maintenance and support services specified in licensing agreements.  Maintenance and support typically includes engineering support to assist in the commencement of production of a licensee’s products.

 

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 first assesses qualitative factors to determine whether it is more-likely-than-not that the fair value of the reporting unit is less than the carrying amount as a basis for determining whether it is necessary to perform the two-step impairment test. If the qualitative assessment warrants further analysis, 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 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. As the Company used the market approach to assess impairment in the second step of the analysis, 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. The Company performed step one of the annual impairment test in September 2013, and determined that its goodwill was not impaired.

 

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 were as follows (dollar amounts in thousands):

 

		September 30, 2013
		Life (years)		Gross Carrying Amount			Accumulated Amortization			Net Carrying Value
Developed technology		3-5		$	9,240		$	7,921		$	1,319
Patent license		7		780			195			585
Total				$	10,020		$	8,116		$	1,904

 

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		December 31, 2012
		Life (years)		Gross Carrying Amount			Accumulated Amortization			Net Carrying Value
Developed technology		3-5		$	9,240		$	7,255		$	1,985
Customer relationships		3		390			390			—
Subtotal purchased intangible assets				9,630			7,645			1,985
Patent license		7		780			111			669
Total				$	10,410		$	7,756		$	2,654

 

The related amortization expense was $0.3 million for each of the three months ended September 30, 2013 and 2012. The related amortization expense was $0.8 million and $1.5 million for the nine months ended September 30, 2013 and 2012, respectively. Amortization expense has been included in research and development expense in the condensed consolidated statements of operations and comprehensive loss.  The estimated aggregate amortization expense to be recognized in future years is approximately $0.3 million for the remainder of 2013, $1.0 million for 2014, $0.3 million for 2015 and $0.1 million annually for 2016 through 2018.

 

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, 2013 and 2012, stock awards to purchase approximately 10,662,000 and 10,990,000 shares, respectively, were excluded from the computation of diluted net loss per share as their inclusion would be anti-dilutive.

 

Comprehensive Loss

 

Comprehensive loss includes unrealized gains and losses on available-for-sale securities.  Realized gains and losses on available-for-sale securities are reclassified from accumulated other comprehensive loss and included in other income, net in the condensed consolidated statements of operations and comprehensive loss.

 

Note 2. Fair Value of Financial Instruments

 

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

 

		September 30, 2013
		Cost			Unrealized Gains			Unrealized Losses			Fair Value
Cash and cash equivalents		$	2,174		$	—		$	—		$	2,174
Short-term investments:
U.S. government debt securities		$	20,753		$	12		$	(3	)	$	20,762
Corporate notes		7,643			2			(1		)	7,644
Certificates of deposit		5,005			1			(3		)	5,003
Total short-term investments		$	33,401		$	15		$	(7	)	$	33,409
Long-term investments:
U.S. government debt securities		$	5,220		$	3		$	(1	)	$	5,222
Corporate notes		10,307			1			(13		)	10,295
Certificates of deposit		2,160			1			(7		)	2,154
Total long-term investments		$	17,687		$	5		$	(21	)	$	17,671

 

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		December 31, 2012
		Cost			Unrealized Gains			Unrealized Losses			Fair Value
Cash and cash equivalents		$	2,529		$	—		$	—		$	2,529
Short-term investments:
U.S. government debt securities		$	15,852		$	6		$	(2	)	$	15,856
Corporate notes		14,471			8			(4		)	14,475
Certificates of deposit		467			—			—			467
Total short-term investments		$	30,790		$	14		$	(6	)	$	30,798
Long-term investments:
U.S. government debt securities		$	6,330		$	2		$	—		$	6,332
Corporate notes		1,050			1			—			1,051
Total long-term investments		$	7,380		$	3		$	—		$	7,383

 

The estimated fair values of available-for-sale securities with unrealized losses were as follows (in thousands):

 

		September 30, 2013
		Cost			Unrealized Losses			Fair Value
Short-term investments:
U.S. government debt securities		$	2,041		$	(3	)	$	2,038
Corporate notes		3,270			(1		)	3,269
Certificates of deposit		3,320			(3		)	3,317
Total short-term investments		$	8,631		$	(7	)	$	8,624
Long-term investments:
U.S. government debt securities		$	3,758		$	(1	)	$	3,757
Corporate notes		9,286			(13		)	9,273
Certificates of deposit		1,680			(7		)	1,673
Total long-term investments		$	14,724		$	(21	)	$	14,703

 

		December 31, 2012
		Cost			Unrealized Losses			Fair Value
Short-term investments:
U.S. government debt securities		$	2,546		$	(2	)	$	2,544
Corporate notes		5,668			(4		)	5,664
Total short-term investments		$	8,214		$	(6	)	$	8,208

 

As of September 30, 2013 and December 31, 2012, all of the available-for-sale securities with unrealized losses had been in a loss position for less than 12 months.

 

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

 

		September 30, 2013
		Cost			Unrealized Gains			Unrealized Losses			Fair Value
Due within 1 year		$	33,401		$	15		$	(7	)	$	33,409
Due in 1-2 years		17,687			5			(21		)	17,671
Total		$	51,088		$	20		$	(28	)	$	51,080

 

		December 31, 2012
		Cost			Unrealized Gains			Unrealized Losses			Fair Value
Due within 1 year		$	30,790		$	14		$	(6	)	$	30,798
Due in 1-2 years		7,380			3			—			7,383
Total		$	38,170		$	17		$	(6	)	$	38,181

 

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The following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) as of September 30, 2013 and December 31, 2012 (in thousands):

 

		September 30, 2013
		Fair Value			Level 1			Level 2			Level 3
Money market funds		$	1,682		$	1,682		$	—		$	—
Certificates of deposit		7,397			—			7,397			—
Corporate notes		17,939			—			17,939			—
U.S. government debt securities		25,984			—			25,984			—
Total assets		$	53,002		$	1,682		$	51,320		$	—

 

		December 31, 2012
		Fair Value			Level 1			Level 2			Level 3
Money market funds		$	1,407		$	1,407		$	—		$	—
U.S. government debt securities		22,289			—			22,289			—
Corporate notes		16,226			—			16,226			—
Certificates of deposit		467			—			467			—
Total assets		$	40,389		$	1,407		$	38,982		$	—

 

There were no transfers in or out of Level 1 and Level 2 securities during the three and nine months ended September 30, 2013 and 2012. As of September 30, 2013 and December 31, 2012, the Company had no Level 3 financial assets or financial liabilities measured at fair value on a recurring basis.

 

Note 3: Sale of I/O Technology

 

In March 2012, the Company entered into an asset purchase agreement for the sale of a portion of its intellectual property pertaining to its high-speed serial I/O technology for a gain of approximately $4.3 million. As part of the agreement, the Company provided certain technology transfer support services, and 15 employees of the Company’s India subsidiary accepted employment with the purchaser. The Company received approximately $2.2 million, net of transaction costs, in cash upon execution of the agreement. The agreement provided for an additional $1.9 million (the “Holdback”) to be paid upon providing technology transfer support services, achievement of certain contractually agreed-upon development milestones and expiration of an indemnification period.  In July 2012 and March 2013, $1.3 million and $0.6 million, respectively, of Holdback payments were received, and no further amounts are due to the Company.  These amounts have been recorded as gains on sale of assets and reductions of operating expenses in the condensed consolidated statements of operations and comprehensive loss.

 

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, 2013 or 2012 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 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.

 

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In September 2010, a claimant filed suit against the Company seeking a contractual payment of approximately 200,000 shares of the Company’s common stock, among other claims. In November 2010, the suit went to arbitration, and, in December 2010, the Company filed a counter claim against the claimant.  On April 3, 2012, the arbitrator ruled against the Company and awarded the claimant a cash award of approximately $1.4 million, which was paid in the second quarter of 2012 and has been recorded as a repurchase of common stock in the condensed consolidated statement of cash flows.  The Company repurchased the disputed shares in the second quarter of 2012, and the shares were retired.  In the first quarter of 2012, the value of the disputed shares, $0.8 million as of the arbitration settlement date, was recorded as a reduction to stockholders’ equity as a stock repurchase.  The remaining amount of $0.6 million was recorded as a selling, general and administrative expense in the Company’s condensed consolidated statements of operations and comprehensive loss.

 

Note 5. Business Segments and Significant Customers

 

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

 

The Company recognized net revenue from customers in North America, Asia and Europe as follows (in thousands):

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2013			2012			2013			2012
Taiwan		$	375		$	473		$	1,422		$	1,244
North America		349			600			1,007			2,217
Japan		217			247			956			940
Rest of Asia		16			—			27			—
Europe		—			7			—			86
Total net revenue		$	957		$	1,327		$	3,412		$	4,487

 

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

 

		Three Months Ended September 30,				Nine Months Ended September 30,
		2013		2012		2013		2012
Customer A		39	%	36	%	41	%	27	%
Customer B		13	%	34	%	12	%	32	%
Customer C		11	%	*		*		*

 

*Represents percentages less than 10%

 

Two customers accounted for 100% of net accounts receivable at September 30, 2013. Three customers accounted for 100% of net accounts receivable at December 31, 2012.

 

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 currently under tax examination in India.  The 2003 through 2012 tax years generally remain subject to examination by federal, state and foreign tax authorities.  As of September 30, 2013, the Company has not recorded any liability for unrecognized tax benefits related to uncertain tax positions.

 

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Note 7. Stock-Based Compensation

 

The Company recorded $1.0 million and $0.9 million of stock-based compensation expense for the three months ended September 30, 2013 and 2012, respectively. The Company recorded $2.8 million and $3.0 million of stock-based compensation expense for the nine months ended September 30, 2013 and 2012, 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, 2013 was $6.1 million and is expected to be recognized as expense over a weighted average period of approximately 2.69 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, 2013 and 2012, 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 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, 2012		1,265		6,872		$	4.05
Additional shares authorized under the 2010 Plan		500		—		—
Options granted		(176	)	176		$	3.48
Options cancelled		471		(471	)	$	5.48
Options exercised		—		(169	)	$	2.80
Options expired		(378	)	—		5.78
Balance at March 31, 2013		1,682		6,408		$	3.97
Options granted		(1,140	)	1,140		$	4.46
Restricted stock units granted		(35	)	—		$	—
Options cancelled		113		(113	)	$	7.04
Options exercised		—		(69	)	$	3.34
Options expired		(91	)	—		7.85
Balance at June 30, 2013		529		7,366		$	3.98
Options granted		(228	)	228		$	3.98
Options cancelled		469		(469	)	$	6.15
Options exercised		—		(117	)	$	2.66
Options expired		(350	)	—		6.80
Balance at September 30, 2013		420		7,008		$	3.88

 

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

 

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, 2012		3,358		$	4.29
Granted		151		$	4.21
Cancelled		(1	)	$	1.50
Exercised		(94	)	$	1.55
Balance at March 31, 2013		3,414		$	4.37
Exercised		(31	)	$	1.54
Balance at June 30, 2013		3,383		$	4.39
Granted		136		$	3.59
Exercised		(32	)	$	1.54
Balance at September 30, 2013		3,487		$	4.39

 

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A summary of restricted stock unit activity under 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, 2013		—		$	—
Restricted stock units granted		35		$	4.46
Non-vested shares at June 30, 2013		35		$	4.46
Vested		(8	)	$	4.46
Non-vested shares at September 30, 2013		27		$	4.46

 

The following table summarizes significant ranges of outstanding and exercisable options as of September 30, 2013 (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 - $3.23		3,009		3.47		$	2.57		$	3,459		1,874		2.77		$	2.25		$	2,749
$3.24 - $4.25		2,771		4.16		$	3.80		186			1,514		3.40		$	3.84		76
$4.26 - $5.61		3,759		3.95		$	4.90		—			2,545		1.75		$	5.10		—
$5.62 - $9.00		956		3.07		$	6.07		—			662		2.84		$	6.10		—
		10,495		3.79		$	4.05		$	3,645		6,595		2.53		$	4.10		$	2,825

 

As of September 30, 2013, the Company had 9.9 million shares subject to outstanding options fully vested and expected to vest, after estimated forfeitures, with a remaining contractual life of 3.63 years, weighted average exercise price of $4.06 and aggregate intrinsic value of $3.5 million.

 

The total fair value of shares subject to outstanding options vested during the nine months ended September 30, 2013 and 2012 calculated using the Black-Scholes valuation method was $2.5 million and $1.7 million, respectively. The total intrinsic value of employee stock options exercised during the nine months ended September 30, 2013 and 2012 was $0.8 million and $2.3 million, respectively.

 

Options to purchase 6.2 million shares with a weighted average exercise price of $4.43 per share were exercisable at September 30, 2012.

 

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, 2013 and 2012 was estimated on the grant date using a Black-Scholes valuation option-pricing model with the following assumptions:

 

		Three Months Ended September 30,				Nine Months Ended September 30,
Employee stock options:		2013		2012		2013		2012
Risk-free interest rate		1.0% - 1.7%		0.2% - 0.6%		0.5% – 1.7%		0.2% – 0.8%
Volatility		57.7% – 62.9%		65.2% – 73.1%		57.7% – 62.9%		65.2% – 73.1%
Expected life (years)		4.0-5.0		4.0		4.0-5.0		4.0
Dividend yield		0%		0%		0%		0%

 

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