Peraso Inc. - Quarter Report: 2014 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, 2014

 

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, 2014, 49,777,187 shares of the Registrant’s common stock, $0.01 par value, were outstanding.

 

 

Table of Contents

 

MOSYS, INC.

 

FORM 10-Q
September 30, 2014

 

TABLE OF CONTENTS

 

PART I —	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited):
	Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013	3
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2014 and 2013	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013	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, 2014			December 31, 2013
ASSETS
Current assets
Cash and cash equivalents		$	4,685		$	4,364
Short-term investments		21,917			32,192
Accounts receivable, net		175			148
Inventories		846			567
Prepaid expenses and other current assets		1,009			1,104
Total current assets		28,632			38,375
Long-term investments		7,055			13,926
Property and equipment, net		961			706
Goodwill		23,134			23,134
Intangible assets, net		905			1,655
Other assets		200			193
Total assets		$	60,887		$	77,989
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	797		$	276
Accrued expenses and other liabilities		2,320			1,909
Deferred revenue		76			170
Total current liabilities		3,193			2,355
Long-term liabilities		238			216
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; 49,766 shares and 48,894 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively		498			489
Additional paid-in capital		198,503			192,723
Accumulated other comprehensive income (loss)		(7		)	13
Accumulated deficit		(141,538		)	(117,807		)
Total stockholders’ equity		57,456			75,418
Total liabilities and stockholders’ equity		$	60,887		$	77,989

 

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,
		2014			2013			2014			2013
Net revenue
Product		$	437		$	90		$	1,993		$	211
Royalty and other		716			867			2,241			3,201
Total net revenue		1,153			957			4,234			3,412
Cost of net revenue		447			158			2,046			254
Gross profit		706			799			2,188			3,158
Operating expenses
Research and development		7,507			6,243			20,993			17,546
Selling, general and administrative		1,689			1,595			4,976			4,678
Gain on sale of assets		—			—			—			(630		)
Total operating expenses		9,196			7,838			25,969			21,594
Loss from operations		(8,490		)	(7,039		)	(23,781		)	(18,436		)
Other income, net		30			122			115			166
Loss before income taxes		(8,460		)	(6,917		)	(23,666		)	(18,270		)
Income tax provision		23			28			65			68
Net loss		$	(8,483	)	$	(6,945	)	$	(23,731	)	$	(18,338	)
Other comprehensive income (loss), net of tax:
Net unrealized gains (losses) on available-for-sale securities		(17		)	51			(20		)	(19		)
Comprehensive loss		$	(8,500	)	$	(6,894	)	$	(23,751	)	$	(18,357	)
Net loss per share
Basic and diluted		$	(0.17	)	$	(0.14	)	$	(0.48	)	$	(0.42	)
Shares used in computing net loss per share
Basic and diluted		49,634			48,164			49,441			44,173

 

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,
		2014			2013
Cash flows from operating activities:
Net loss		$	(23,731	)	$	(18,338	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		313			565
Stock-based compensation		3,596			2,800
Amortization of intangible assets		750			750
Gain on sale of assets		—			(630		)
Other non-cash items		—			13
Changes in assets and liabilities:
Accounts receivable		(27		)	233
Prepaid expenses and other assets		357			(173		)
Inventories		(190		)	(195		)
Deferred revenue		(94		)	(276		)
Accounts payable		(118		)	(198		)
Accrued expenses and other liabilities		433			(2,268		)
Net cash used in operating activities		(18,711		)	(17,717		)
Cash flows from investing activities:
Purchases of property and equipment		(289		)	(120		)
Net proceeds from sale of assets		—			630
Proceeds from sales and maturities of marketable securities		32,985			40,967
Purchases of marketable securities		(15,859		)	(53,885		)
Net cash provided by (used in) investing activities		16,837			(12,408		)
Cash flows from financing activities:
Net proceeds from issuance of common stock		2,195			2,024
Proceeds from sale of common stock, net of issuance costs		—			27,746
Net cash provided by financing activities		2,195			29,770
Net increase (decrease) in cash and cash equivalents		321			(355		)
Cash and cash equivalents at beginning of period		4,364			2,529
Cash and cash equivalents at end of period		$	4,685		$	2,174

 

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’s strategy and primary business objective is to be an IP-rich fabless semiconductor company focused on the development and sale of integrated circuit (IC) products. Prior to 2011, the Company’s primary business activities were designing, developing, marketing and licensing high-performance semiconductor memory and high-speed parallel and serial interface, or SerDes, intellectual property (IP) used by the semiconductor industry and communications, networking and storage equipment manufacturers. Since 2011, the Company has developed two IC product lines under the “Bandwidth Engine” and “LineSpeed” product names. Bandwidth Engine ICs combine the Company’s proprietary high-density embedded memory with its high-speed 10 gigabits per second and higher interface technology. The LineSpeed IC product line is comprised of non-memory based, high-speed SerDes devices with gearbox or retimer functionality that convert lanes of data received on line cards or by optical modules into different configurations and/or ensure signal integrity. Both product lines are being marketed to networking and telecommunications systems companies. 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, 2013 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, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014 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 inventories as a separate line item, which was previously included in the prepaid expenses and other current assets line item of the condensed consolidated balance sheets.  Revenue line items have been reclassified to create a separate line item for product revenue and to include licensing revenue in the royalty and other line item.  The amounts for the prior periods have been reclassified to be consistent with the current year presentation and have no impact on previously reported total assets, total stockholders’ equity or net loss.

 

Use of Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and 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 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, 2014 or December 31, 2013.

 

Revenue Recognition

 

General

 

The Company generates revenue from the sales of IC products and licensing of its IP. 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.

 

Royalty

 

The Company’s licensing contracts typically also provide for royalties based on the licensee’s 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.

 

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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 or 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 sheets.

 

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. Support and maintenance revenue is recognized ratably over the period during which the obligation exists, typically 12 months. Licensing revenue was $7,000 and $52,000 for the three months ended September 30, 2014 and 2013, respectively, and $54,000 and $340,000 for the nine months ended September 30, 2014 and 2013, respectively.

 

Cost of Net Revenue

 

Cost of net 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 uses 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 2014, and concluded no factors indicated impairment of goodwill.

 

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, 2014 and 2013, stock awards to purchase approximately 10,190,000 and 10,662,000 shares, respectively, were excluded from the computation of diluted net loss per share as their inclusion would be anti-dilutive.

 

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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.  All amounts recorded in the three and nine months ended September 30, 2014 and 2013 are not considered significant.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods and services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard will be effective for the Company on January 1, 2017. Early application is not permitted. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method nor has it determined the potential effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures.

 

In August 2014, the FASB Accounting Standards Update No. 2014-15 (ASU 2014-15), Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures.  ASU 2014-15 is effective for annual and interim reporting periods ending after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact the adoption of ASU 2014-15 will have on its consolidated statements and related disclosures.

 

Note 2. Fair Value of Financial Instruments

 

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

 

		September 30, 2014
		Cost			Unrealized Gains			Unrealized Losses			Fair Value
Cash and cash equivalents		$	4,685		$	—		$	—		$	4,685
Short-term investments:
U.S. government-sponsored enterprise bonds		$	2,252		$	1		$	—		$	2,253
Municipal bonds		3,424			1			—			3,425
Corporate notes		12,609			10			(5		)	12,614
Certificates of deposit		3,624			1			—			3,625
Total short-term investments		$	21,909		$	13		$	(5	)	$	21,917
Long-term investments:
U.S. government-sponsored enterprise bonds		$	1,000		$	—		$	(5	)	$	995
Corporate notes		6,070			—			(10		)	6,060
Total long-term investments		$	7,070		$	—		$	(15	)	$	7,055

 

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		December 31, 2013
		Cost			Unrealized Gains			Unrealized Losses			Fair Value
Cash and cash equivalents		$	4,364		$	—		$	—		$	4,364
Short-term investments:
U.S. government-sponsored enterprise bonds		$	6,543		$	—		$	(1	)	$	6,542
Municipal bonds		13,401			11			—			13,412
Corporate notes		7,245			2			(2		)	7,245
Certificates of deposit		4,994			1			(2		)	4,993
Total short-term investments		$	32,183		$	14		$	(5	)	$	32,192
Long-term investments:
U.S. government-sponsored enterprise bonds		$	2,752		$	—		$	—		$	2,752
Municipal bonds		264			—			—			264
Corporate notes		9,466			9			(1		)	9,474
Certificates of deposit		1,440			—			(4		)	1,436
Total long-term investments		$	13,922		$	9		$	(5	)	$	13,926

 

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

 

		September 30, 2014
		Cost			Unrealized Losses			Fair Value
Short-term investments:
Corporate notes		$	2,188		$	(5	)	$	2,183
Total short-term investments		$	2,188		$	(5	)	$	2,183
Long-term investments:
U.S. government-sponsored enterprise bonds		$	1,000		$	(5	)	$	995
Corporate notes		6,070			(10		)	6,060
Total long-term investments		$	7,070		$	(15	)	$	7,055

 

		December 31, 2013
		Cost			Unrealized Losses			Fair Value
Short-term investments:
U.S. government-sponsored enterprise and municipal bonds		$	5,289		$	(1	)	$	5,288
Corporate notes		3,844			(2		)	3,842
Certificates of deposit		3,080			(2		)	3,078
Total short-term investments		$	12,213		$	(5	)	$	12,208
Long-term investments:
U.S. government-sponsored enterprise bonds		$	1,253		$	—		$	1,253
Corporate notes		1,001			(1		)	1,000
Certificates of deposit		1,440			(4		)	1,436
Total short-term investments		$	3,694		$	(5	)	$	3,689

 

As of September 30, 2014 and December 31, 2013, 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):

 

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		September 30, 2014
		Cost			Unrealized Gains			Unrealized Losses			Fair Value
Due within 1 year		$	21,909		$	13		$	(5	)	$	21,917
Due in 1-2 years		7,070			—			(15		)	7,055
Total		$	28,979		$	13		$	(20	)	$	28,972

 

		December 31, 2013
		Cost			Unrealized Gains			Unrealized Losses			Fair Value
Due within 1 year		$	32,183		$	14		$	(5	)	$	32,192
Due in 1-2 years		13,922			9			(5		)	13,926
Total		$	46,105		$	23		$	(10	)	$	46,118

 

The following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) as of September 30, 2014 and December 31, 2013 (in thousands):

 

		September 30, 2014
		Fair Value			Level 1			Level 2			Level 3
Money market funds		$	3,661		$	3,661		$	—		$	—
Certificates of deposit		3,625			—			3,625			—
Corporate notes		18,674			—			18,674			—
U.S. government-sponsored enterprise bonds		3,248			—			3,248			—
Municipal bonds		3,425			—			3,425			—
Total assets		$	32,633		$	3,661		$	28,972		$	—

 

		December 31, 2013
		Fair Value			Level 1			Level 2			Level 3
Money market funds		$	3,012		$	3,012		$	—		$	—
Certificates of deposit		6,429			—			6,429			—
Corporate notes		16,719			—			16,719			—
U.S. government-sponsored enterprise bonds		9,295			—			9,295			—
Municipal bonds		13,675			—			13,675			—
Total assets		$	49,130		$	3,012		$	46,118		$	—

 

There were no transfers in or out of Level 1 and Level 2 securities during the three and nine months ended September 30, 2014 and 2013.

 

Note 3: Balance Sheet Detail

 

		September 30, 2014			December 31, 2013
		(in thousands)
Inventories:
Work-in-process		$	676		$	542
Finished goods		170			25
		$	846		$	567

 

Identifiable intangible assets relating to business combinations and the patent license were as follows (dollar amounts in thousands):

 

		September 30, 2014
		Life (years)		Gross Carrying Amount			Accumulated Amortization			Net Carrying Value
Developed technology		3-5		$	9,240		$	8,809		$	431
Patent license		7		780			306			474
Total				$	10,020		$	9,115		$	905

 

		December 31, 2013
		Life (years)		Gross Carrying Amount			Accumulated Amortization			Net Carrying Value
Developed technology		3-5		$	9,240		$	8,142		$	1,098
Patent license		7		780			223			557
Total				$	10,020		$	8,365		$	1,655

 

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Intangible assets acquired in business combinations, referred to as purchased intangible assets, 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. 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 2014, $0.3 million for 2015 and $0.1 million annually for each of 2016, 2017 and 2018.

 

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 also 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, 2014 or 2013 related to these indemnifications.

 

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

 

Legal Matters

 

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

 

Note 5. Business Segments and Significant Customers

 

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

 

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

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2014			2013			2014			2013
Taiwan		$	485		$	375		$	1,358		$	1,422
Japan		356			217			1,755			956
North America		311			349			1,094			1,007
Rest of Asia		1			16			16			27
Europe		—			—			11			—
Total net revenue		$	1,153		$	957		$	4,234		$	3,412

 

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

 

		Three Months Ended September 30,				Nine Months Ended September 30,
		2014		2013		2014		2013
Customer A		40	%	39	%	31	%	41	%
Customer B		27	%	*		37	%	*
Customer C		10	%	13	%	11	%	12	%
Customer D		*		11	%	*		*

 

*Represents percentages less than 10%

 

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Four customers accounted for 99% of net accounts receivable at September 30, 2014. Two customers accounted for 96% of net accounts receivable at December 31, 2013.

 

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 2013 tax years generally remain subject to examination by federal, state and foreign tax authorities.  As of September 30, 2014, the Company has not recorded any liability for unrecognized tax benefits related to uncertain tax positions.

 

Note 7. Stock-Based Compensation

 

The Company recorded $1.1 million and $1.0 million of stock-based compensation expense for the three months ended September 30, 2014 and 2013, respectively. The Company recorded $3.6 million and $2.8 million of stock-based compensation expense for the nine months ended September 30, 2014 and 2013, 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, 2014 was $4.1 million related to stock options and is expected to be recognized as expense over a weighted average period of approximately 2.13 years. The expense related to restricted stock units is recognized over a three-to-five year vesting period and is based on the fair value of the underlying stock on the dates of grant.  The unamortized compensation cost, net of expected forfeitures, as of September 30, 2014 was $1.2 million related to restricted stock units and is expected to be recognized as expense over a weighted average period of approximately 2.49 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, 2014 and 2013, 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 and Amended and Restated 2010 Equity Incentive Plan (Amended 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, 2013		422		6,727		$	3.86
Additional shares authorized under the Amended 2010 Plan		500		—		—
Restricted stock units granted		(499	)	—		—
Options granted		(49	)	49		$	4.69
Options cancelled		60		(60	)	$	3.42
Options exercised		—		(300	)	$	3.58
Options expired		(60	)	—		3.42
Balance at March 31, 2014		374		6,416		$	3.89
Additional shares authorized under the Amended 2010 Plan		1,500		—		—
Restricted stock units granted		(9	)	—		—
Options cancelled		4		(4	)	$	5.21
Options exercised		—		(52	)	$	1.61
Options expired		(4	)	—		$	5.21
Balance at June 30, 2014		1,865		6,360		$	3.91
Options granted		(120	)	120		$	3.10
Options cancelled		257		(257	)	$	4.55
Options exercised		—		(48	)	$	1.72
Options expired		(257	)	—		$	4.55
Balance at September 30, 2014		1,745		6,175		$	3.88

 

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At the Company’s 2014 Annual Meeting of Stockholders held on June 3, 2014, the Company’s stockholders approved an increase of 1,500,000 shares reserved for issuance under the Amended 2010 Plan.

 

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, 2013		3,178		$	4.42
Granted		118		$	5.22
Cancelled		(40	)	$	4.47
Exercised		(32	)	$	3.88
Balance at March 31, 2014		3,224		$	4.46
Granted		125		$	3.87
Exercised		(20	)	$	1.55
Balance at June 30, 2014		3,329		$	4.45
Granted		95		$	3.11
Exercised		(5	)	$	1.55
Balance at September 30, 2014		3,419		$	4.42

 

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