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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)

 

Delaware

 

77-0291941

(State or other jurisdiction

 

(I.R.S. Employer

of Incorporation or organization)

 

Identification Number)

 

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):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 



Table of Contents

 

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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Table of Contents

 

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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Table of Contents

 

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.

 

5



Table of Contents

 

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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Table of Contents

 

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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Table of Contents

 

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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Table of Contents

 

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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Table of Contents

 

 

 

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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Table of Contents

 

 

 

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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Table of Contents

 

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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Table of Contents

 

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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Table of Contents

 

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

 

 

14



Table of Contents

 

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%

 

 

15



Table of Contents

 

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 historical volatility of the Company’s stock price over the expected term of the options. 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 2,000,000 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 offering period under the ESPP. On February 28, 2013, approximately 147,000 shares of common stock were issued at an aggregate purchase price of $426,000 under the ESPP.  On August 30, 2013, approximately 128,000 shares of common stock were issued at an aggregate purchase price of $381,000 under the ESPP.  As of September 30, 2013, there were approximately 1,061,000 shares authorized and unissued under the ESPP.

 

Note 8. Stockholder’s Equity

 

In the second quarter of 2013, the Company completed a public offering and issued approximately 7.5 million shares of its common stock for approximately $27.7 million in net proceeds.  The Company’s chief executive officer purchased 250,000 shares at the public offering price.

 

Note 9. Related Party Transactions

 

In February 2012, the Company entered into a strategic development and marketing agreement with Credo Semiconductor (Hong Kong) Ltd. (Credo), a privately-funded, fabless semiconductor company, to develop, market and sell integrated circuits. Two of the Company’s executive officers between them loaned a total of $250,000 to Credo for a portion of the seed funding needed by Credo to commence its integrated circuit design efforts.  These loans may be converted into minority equity interests in Credo. The agreement calls for the Company to pay approximately $1.4 million to Credo upon Credo achieving certain development and verification milestones towards the development of IC products and provides the Company with exclusive sales and marketing rights for such IC products. In 2012, Credo achieved a number of the milestones set forth in the agreement, and the Company paid Credo $1.1 million. In the first nine months of 2013, the Company paid Credo an additional $1.2 million for achievement of additional development milestones, as well as for mask costs and wafer purchases from third-party vendors.  All amounts incurred have been recorded as research and development expense.  As of September 30, 2013, the first $1.9 million of gross profits generated by the sale of these integrated circuits will be retained by the Company, and, thereafter, the gross profits will be shared equally.  In the first half of 2013, the Company announced the availability of prototype samples of the LineSpeed products developed pursuant to the strategic development and marketing agreement.  In October 2013, the Company agreed to pay Credo an additional $0.6 million for further product development work.

 

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Table of Contents

 

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 12, 2013 as amended by a Form 10-K/A, which we filed on May 14, 2013 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, 2012. 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.

 

Company Overview

 

Our strategy and primary business objective is to become a fabless semiconductor company focused on the development and sale of integrated circuits, or ICs, for the high-speed networking, communications, storage and computing markets. Our technology delivers time-to-market, performance, power and economic benefits for system original equipment manufacturers, or OEMs. We have developed a family of ICs, called Bandwidth Engine®, which combines our proprietary 1T-SRAM® high-density embedded memory and high-speed serial interface, or SerDes, I/O, with our intelligent access technology and a highly efficient interface protocol. In March 2013, we announced another IC product line under the LineSpeed™ product name.  LineSpeed ICs are non-memory, high-speed SerDes I/O devices with gearbox and retimer functionality, which convert lanes of data received on line cards into different configurations and/or ensure signal integrity. Certain LineSpeed products have been developed under a strategic development and marketing agreement with Credo Semiconductor Ltd., or Credo.  For those products developed by Credo, the first $1.9 million of gross profits generated by us from the sale of these products will be retained by us as reimbursement of the development costs. Thereafter, all gross profits from the sale of the Credo-developed products worldwide will be shared equally by Credo and us.

 

Historically, our primary business was the design, development, marketing, sale and support of differentiated intellectual property, or IP, including embedded memory and high-speed parallel and SerDes I/O used in advanced systems-on-chips, or SoCs. Since the beginning of 2010, we have invested an increasing amount of our research and development resources towards development of our IC products. Our future success and ability to achieve and maintain profitability will be dependent on the manufacturing, marketing and sales of our IC products into networking, communications and other end-customer applications markets requiring high performance. During 2011, we began placing less emphasis on IP licensing and deploying more resources towards our IC product development and marketing efforts. We have been focused on monetizing our IP portfolio to fund the change in our business. Towards this end, we have completed asset sales for proceeds of approximately $39.3 million, including our December 2011 patent sale and March 2012 SerDes technology sale. We are using the proceeds from these sales to partially fund our investment in our IC products. We still maintain a large patent portfolio with over 100 patents granted and pending with more in process.

 

Revenue from IP licensing and royalties represented the majority of our revenues for 2012, and we expect revenue from IP licensing and royalties to continue to represent the majority of our revenues for 2013. As a result of our reduced licensing activities, we expect our licensing and royalty revenue to decrease in future periods. Our expectation is that over time our revenue will transition from primarily licensing and royalty to predominately IC product sales. To date, we have not generated significant revenue from sales of our IC products.  We are currently supporting existing design-win customers and actively pursuing additional design wins for the use of our ICs in networking and communication equipment. We have established initial pricing of our IC products ordered to date, but longer-term volume prices will be subject to negotiations with our customers and may vary substantially from these initial prices. Based on our current expense levels and assumptions about future IC product revenue, we believe we would need IC product revenues of approximately $14 million per quarter to achieve positive cash flows. However, this is only an estimate and is subject to potentially significant changes in our future operations and material variations in IC product shipment volumes, product pricing, operating expense levels and other future expenditures, as described below under “—Liquidity and Capital Resources; Changes in Financial Condition.”

 

Sources of Revenue

 

Licensing.  Licensing revenue consists of fees earned from license agreements, development services, prepaid pre-production royalties, and support and maintenance.  Our licensing revenue consists primarily of fees for providing circuit design, layout and design verification and granting licenses to customers that embed our technology into their products. The vast majority of our contracts allow for milestone billing based on work performed. Fees billed prior to revenue recognition are recorded as deferred revenue.

 

Royalty.  Royalty revenue represents amounts earned under provisions in our memory licensing contracts that require our licensees to report royalties and make payments at a stated rate based on actual units manufactured or sold by licensees for products that include our memory IP. Our license agreements require the licensee to report the manufacture or sale of products that include our technology after the end of the quarter in which the sale or manufacture occurs, and we recognize royalties in the quarter in which we receive the licensee’s report.

 

The timing and level of royalties are difficult to predict. They depend on the licensee’s ability to market, produce and sell products incorporating our technology. Many of the products of our licensees that are currently subject to licenses from us are used in consumer products, such as electronic game consoles, for which demand can be seasonal.

 

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IC product.  IC product revenue, which is included in licensing and other revenue, is generally recognized at the time of shipment to our customers. An estimated allowance is recorded, 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 our inability to estimate future returns and credits to be issued.  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, inventory is relieved, as legal title to the inventory is transferred upon shipment, and the associated deferred margin is recorded as deferred revenues in the condensed consolidated balance sheets.  Revenues are recognized upon receiving notification from the distributors that products have been sold to end customers.

 

Critical Accounting Policies and Estimates

 

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis we make these estimates based on our historical experience and on assumptions that we consider reasonable under the circumstances. Actual results may differ from these estimates, and reported results could differ under different assumptions or conditions. Our significant accounting policies and estimates are disclosed in Note 1 of the “Notes to Consolidated Financial Statements” in our Annual Report on Form 10-K for the year ended December 31, 2012.  As of September 30, 2013, there have been no material changes to our significant accounting policies and estimates.

 

Results of Operations

 

Net Revenue.

 

 

 

September 30,

 

Change

 

 

 

2013

 

2012

 

2012 to 2013

 

 

 

(dollar amounts in thousands)

 

Licensing and other — three months ended

 

$

141

 

$

248

 

$

(107

)

(43

)%

Percentage of total net revenue

 

15

%

19

%

 

 

 

 

Licensing and other — nine months ended

 

$

550

 

$

1,113

 

$

(563

)

(51

)%

Percentage of total net revenue

 

16

%

25

%

 

 

 

 

 

Licensing and other revenue decreased for the three and nine months ended September 30, 2013, compared with the same periods of 2012, primarily due to the decline in the number and value of license agreements. We did not execute any new license agreements in the first nine months of 2013, and we do not expect to enter into new license agreements during the remainder of 2013. Revenue from the sale of our IC products was included in this line item, and was not considered significant for the three and nine months ended September 30, 2013 and 2012.

 

 

 

September 30,

 

Change

 

 

 

2013

 

2012

 

2012 to 2013

 

 

 

(dollar amounts in thousands)

 

Royalty — three months ended

 

$

816

 

$

1,079

 

$

(263

)

(24

)%

Percentage of total net revenue

 

85

%

81

%

 

 

 

 

Royalty — nine months ended

 

$

2,862

 

$

3,374

 

$

(512

)

(15

)%

Percentage of total net revenue

 

84

%

75

%

 

 

 

 

 

Royalty revenue decreased for the three months ended September 30, 2013, compared with the same period of 2012, primarily due to a decrease in shipments by fabless semiconductor companies that incorporate our licensed IP and royalties received from a major foundry partner.  Royalties decreased for the nine months ended September 30, 2013, compared with the same period of 2012, primarily due to a decrease in shipments by fabless semiconductor companies that incorporate our licensed IP.

 

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Cost of Net Revenue and Gross Profit.

 

 

 

September 30,

 

Change

 

 

 

2013

 

2012

 

2012 to 2013

 

 

 

(dollar amounts in thousands)

 

Cost of net revenue — three months ended

 

$

158

 

$

53

 

$

105

 

198

%

Percentage of total net revenue

 

17

%

4

%

 

 

 

 

Cost of net revenue — nine months ended

 

$

254

 

$

289

 

$

(35

)

(12

)%

Percentage of total net revenue

 

7

%

6

%

 

 

 

 

 

 

 

September 30,

 

Change

 

 

 

2013

 

2012

 

2012 to 2013

 

 

 

(dollar amounts in thousands)

 

Gross profit — three months ended

 

$

799

 

$

1,274

 

$

(475

)

(37

)%

Percentage of total net revenue

 

83

%

96

%

 

 

 

 

Gross profit — nine months ended

 

$

3,158

 

$

4,198

 

$

(1,040

)

(25

)%

Percentage of total net revenue

 

93

%

94

%

 

 

 

 

 

Cost of net revenue consists of personnel and related overhead allocation costs for engineers assigned to revenue-generating licensing arrangements and direct and indirect costs related to the sale of IC products.

 

Cost of net revenue increased for the three months ended September 30, 2013, compared with the same periods of 2012, primarily due to an increase in IC material and testing costs.  Cost of net revenue decreased for the nine months ended September 30, 2013, compared with the same period of 2012, primarily due to the lack of new licensing agreements and limited engineering services required on existing contracts, partially offset by an increase in IC material, testing and reserve costs, which resulted in negative IC gross margins.  Cost of net revenue included stock-based compensation expense of $3,000 for the three months ended September 30, 2012, and $7,000 and $49,000 for the nine months ended September 30, 2013 and 2012, respectively.  No stock-based compensation expense was recorded in cost of net revenue during the three months ended September, 30, 2013.

 

Gross profit decreased for the three and nine months ended September 30, 2013, compared with the same periods of 2012, primarily due to the decrease in our revenue.  Gross margin percentage decreased for the three and nine months ended September 30, 2013, compared with the same periods of 2012, primarily due to the increase in IC material costs.

 

Research and Development.

 

 

 

September 30,

 

Change

 

 

 

2013

 

2012

 

2012 to 2013

 

 

 

(dollar amounts in thousands)

 

Research and development — three months ended

 

$

6,243

 

$

7,026

 

$

(783

)

(11

)%

Percentage of total net revenue

 

652

%

529

%

 

 

 

 

Research and development — nine months ended

 

$

17,546

 

$

21,220

 

$

(3,674

)

(17

)%

Percentage of total net revenue

 

514

%

473

%

 

 

 

 

 

Our research and development expenses include costs related to the development of our IC products and amortization of intangible assets. We expense research and development costs as they are incurred.

 

The $0.8 million decrease for the three months ended September 30, 2013, compared with the same period a year ago, was primarily due to lower personnel costs resulting from lower headcount coupled with lower computer-aided design, or CAD, software tools costs.

 

Research and development expenses included stock-based compensation expense of $0.6 million for each of the three months ended September 30, 2013 and 2012.

 

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The $3.7 million decrease for the nine months ended September 30, 2013, compared with the same period a year ago, was primarily due to lower personnel costs resulting from lower headcount, reduced amortization costs related to intangible assets and lower CAD software tools costs, partially offset by increased consulting costs incurred for engineering design services.

 

Research and development expenses included stock-based compensation expense of $1.9 million and $2.1 million for the nine months ended September 30, 2013 and 2012, respectively.

 

Selling, General and Administrative (SG&A).

 

 

 

September 30,

 

Change

 

 

 

2013

 

2012

 

2012 to 2013

 

 

 

(dollar amounts in thousands)

 

SG&A — three months ended

 

$

1,595

 

$

1,738

 

$

(143

)

(8

)%

Percentage of total net revenue

 

167

%

131

%

 

 

 

 

SG&A — nine months ended

 

$

4,678

 

$

6,092

 

$

(1,414

)

(23

)%

Percentage of total net revenue

 

137

%

136

%

 

 

 

 

 

Selling, general and administrative expenses consist primarily of personnel and related overhead costs for sales, marketing, finance, human resources and general management.

 

Selling, general and administrative expenses decreased $0.1 million for the three months ended September 30, 2013, compared with the same period a year ago, as a result of lower personnel and legal costs.

 

Selling, general and administrative expenses for the nine months ended September 30, 2013 were 23% lower, compared with the same period a year ago, primarily because the comparable period of 2012 included a $0.6 million arbitration judgment and related legal fees incurred in the first quarter of 2012, as well as lower personnel costs.

 

Selling, general and administrative expenses included stock-based compensation expense of $0.3 million for each of the three months ended September 30, 2013 and 2012. Selling, general and administrative expenses included stock-based compensation expense of $0.9 million and $0.8 million for the nine months ended September 30, 2013 and 2012, respectively.

 

We expect total selling, general and administrative expenses to increase in absolute dollars in the fourth quarter of 2013 compared to the third quarter as year-end compliance costs are incurred.

 

Other Income, net.

 

 

 

September 30,

 

Change

 

 

 

2013

 

2012

 

2012 to 2013

 

 

 

(dollar amounts in thousands)

 

Other income, net — three months ended

 

$

122

 

$

61

 

$

61

 

100

%

Percentage of total net revenue

 

13

%

5

%

 

 

 

 

Other income, net — nine months ended

 

$

166

 

$

121

 

$

45

 

37

%

Percentage of total net revenue

 

5

%

3

%

 

 

 

 

 

Other income, net primarily consisted of interest income on our investments, offset by foreign exchange transaction losses and other non-operating items.

 

Income Tax Provision.

 

 

 

September 30,

 

Change

 

 

 

2013

 

2012

 

2012 to 2013

 

 

 

(dollar amounts in thousands)

 

Income tax provision — three months ended

 

$

28

 

$

79

 

$

(51

)

(65

)%

Percentage of total net revenue

 

3

%

6

%

 

 

 

 

Income tax provision — nine months ended

 

$

68

 

$

139

 

$

(71

)

(51

)%

Percentage of total net revenue

 

2

%

3

%

 

 

 

 

 

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The provision for the three and nine months ended September 30, 2013 and 2012 was attributable to taxes on earnings of our foreign subsidiaries and branches. We believe that, based on the history of our operating losses and other factors, the weight of available evidence indicates that it is more likely than not that we will not be able to realize the benefit of our net operating losses. Accordingly, a full valuation reserve has been recorded against our net deferred tax assets.

 

Liquidity and Capital Resources; Changes in Financial Condition

 

Cash Flows

 

As of September 30, 2013, we had cash, cash equivalents and short and long-term investments of $53.3 million and had total working capital of $35.4 million.  In the second quarter of 2013, we recorded $27.7 million in net proceeds from the sale of 7.5 million shares of our common stock in a public offering. Our primary capital requirements are to fund working capital, including development of our IC products, and any acquisitions that we make that require cash considerations or expenditures.

 

Net cash used in operating activities was $17.7 million for the first nine months of 2013, which primarily resulted from the net loss of $18.3 million, a gain on sale of assets of $0.6 million and $2.9 million in the net reduction of assets and liabilities, partially offset by non-cash charges, including stock-based compensation expense of $2.8 million and depreciation and amortization expenses of $1.3 million.  The changes in assets and liabilities primarily related to the timing of payments to vendors.

 

Net cash used in operating activities was $17.5 million for the first nine months of 2012, which primarily resulted from the net loss of $19.8 million, which was partially offset by the $3.3 million gain on the sale of assets and adjusted for non-cash charges consisting of stock-based compensation of $3.0 million and depreciation and amortization of $2.2 million.  The changes in assets and liabilities primarily related to the timing of billing our customers, collection of receivables and payments to vendors.

 

Net cash used in investing activities was $12.4 million for the first nine months of 2013, and included net amounts transferred from cash and cash equivalents to investments of $12.9 million, which did not impact our liquidity, and $0.1 million for purchases of fixed assets, partially offset by $0.6 million in proceeds from the sale of assets.

 

Net cash used in investing activities of $18.1 million for the first nine months of 2012 included net amounts transferred from cash to marketable securities of $21.3 million that did not impact our liquidity and $3.4 million in net proceeds from the sale of SerDes technology in March 2012.

 

Our proceeds from financing activities for the first nine months of 2013 of $29.8 million consisted of net proceeds received from the sale of common stock though a public offering and proceeds from the exercise of stock options and purchases of common stock under our employee stock purchase plan.  Our financing activities for the first nine months of 2012 consisted of proceeds from the exercise of stock options and sales under our employee stock purchase plan, offset by a payment made to repurchase shares of common stock to comply with an arbitration judgment.

 

Our future liquidity and capital requirements are expected to vary from quarter to quarter, depending on numerous factors, including:

 

·                  level of revenue;

 

·                  cost, timing and success of technology development efforts;

 

·                  fabrication costs, including mask costs of our ICs, currently under development;

 

·                  variations in manufacturing yields, materials costs and other manufacturing risks;

 

·                  costs of acquiring other businesses and integrating the acquired operations; and

 

·                  profitability of our business.

 

We expect our cash expenditures to continue to exceed receipts in 2013 by $18 million to $20 million, as our revenues will not be sufficient to offset our operating expenses, which include significant research and development expenditures for the expansion and fabrication of our IC products. We believe our existing cash, cash equivalents and investments, along with our existing capital and cash generated from operations, if any, to be sufficient to meet our capital requirements for the foreseeable future.  There can be no assurance that our capital is sufficient to fund operations until such time as we begin to achieve positive cash flows. We might decide

 

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to raise additional capital, and there can be no assurance that such funding will be available to us on favorable terms, if at all. The failure to raise capital when needed could have a material adverse effect on our business and financial condition.

 

Contractual Obligations

 

The impact that our contractual obligations as of September 30, 2013 are expected to have on our liquidity and cash flow in future periods is as follows (in thousands):

 

 

 

Payment Due by Period

 

 

 

Total

 

Less than 1 year

 

1-3 years

 

3-5 years

 

More than
5 years

 

Operating Leases

 

$

5,155

 

$

760

 

$

1,449

 

$

1,490

 

$

1,456

 

Purchase Commitments

 

6,246

 

2,690

 

3,556

 

 

 

 

 

$

11,401

 

$

3,450

 

$

5,005

 

$

1,490

 

$

1,456

 

 

As of September 30, 2013, our purchase commitments were for licenses related to computer-aided design software.

 

ITEM 3. Qualitative and Quantitative Disclosures about Market Risk

 

Our investment portfolio consists of money market accounts, certificates of deposit, corporate debt, government agency and municipal debt securities. The portfolio dollar-weighted average maturity of these investments is within 12 months.  Our primary objective with this investment portfolio is to invest available cash while preserving principal and meeting liquidity needs.  No single security should exceed 5% of the portfolio or $2.0 million at the time of purchase. In accordance with our investment policy, we place investments with high credit quality issuers and limit the amount of credit exposure to any one issuer. These securities, which approximated $53.0 million as of September 30, 2013 and earned an average annual interest rate of approximately 0.2% during the first nine months of 2013, are subject to interest rate and credit risks. We do not have any investments denominated in foreign currencies, and, therefore, are not subject to foreign currency risk on such investments.

 

ITEM 4. Controls and Procedures

 

Disclosure Controls and Procedures.  Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on this evaluation, our management concluded that as of September 30, 2013, our disclosure controls and procedures were effective.

 

Changes in Internal Control over Financial Reporting.  During the third quarter of 2013, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II—OTHER INFORMATION

 

ITEM 1. Legal Proceedings

 

The discussion of legal matters in Note 4 of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report under the heading “Legal Matters” is incorporated by reference in response to this Part II, Item 1.

 

ITEM 1A. Risk Factors

 

We face many significant risks in our business, some of which are unknown to us and not presently foreseen.  These risks could have a material adverse impact on our business, financial condition and results of operations in the future.  We have disclosed a number of material risks under Item 1A of our annual report on Form 10-K for the year ended December 31, 2012, which we filed with the Securities and Exchange Commission on March 12, 2013, as amended by a Form 10-K/A, which we filed with the Securities and Exchange Commission on May 14, 2013.

 

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ITEM 6. Exhibits

 

(a)

 

Exhibits

 

 

 

 

 

 

 

 

 

31.1

 

Rule 13a-14 certification

 

 

31.2

 

Rule 13a-14 certification

 

 

32.1

 

Section 1350 certification

 

 

101

 

The following financial information from MoSys, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2013, filed with the SEC on November 8, 2013, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2013 and 2012, (ii) the Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012, (iii) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012, and (iv) Notes to Condensed Consolidated Financial Statements.

 

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Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Dated: November 8, 2013

 

MOSYS, INC.

 

 

 

 

 

 

 

By:

/s/ Leonard Perham

 

 

Leonard Perham

 

 

President and Chief Executive Officer

 

 

 

 

By:

/s/ James W. Sullivan

 

 

James W. Sullivan

 

 

Vice President of Finance and Chief Financial Officer

 

 

(Principal Financial Officer)

 

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EXHIBIT INDEX

 

31.1

 

Rule 13a-14 certification

31.2

 

Rule 13a-14 certification

32.1

 

Section 1350 certification

101

 

The following financial information from MoSys, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2013, filed with the SEC on November 8, 2013, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2013 and 2012, (ii) the Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012, (iii) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012, and (iv) Notes to Condensed Consolidated Financial Statements.

 

25