Peraso Inc. - Quarter Report: 2015 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

(Mark one)

 

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

 

For the quarterly period ended June 30, 2015

 

OR

 

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

 

For the transition period from                to               

 

Commission file number 000-32929

 

 

MOSYS, INC.

(Exact name of registrant as specified in its charter)

 

 

3301 Olcott Street

Santa Clara, California, 95054

(Address of principal executive office and zip code)

 

(408) 418-7500

(Registrant’s telephone number, including area code)

 

 

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

 

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

 

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

 

 

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

 

As of July 31, 2015, 65,227,825 shares of the Registrant’s common stock, $0.01 par value, were outstanding.

 

 

Table of Contents

 

MOSYS, INC.

 

FORM 10-Q

June 30, 2015

 

TABLE OF CONTENTS

 

PART I —	FINANCIAL INFORMATION	3
Item 1.	Financial Statements (Unaudited):	3
	Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014	3
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2015 and 2014	4
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Qualitative and Quantitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	21
PART II —	OTHER INFORMATION	22
Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	22
Item 6.	Exhibits	22
	Signatures	23

 

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PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

MOSYS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except par value)

 

		June 30,			December 31,
		2015			2014
ASSETS
Current assets
Cash and cash equivalents		$	5,602		$	3,110
Short-term investments		26,384			20,439
Accounts receivable, net		420			177
Inventories		1,260			881
Prepaid expenses and other		990			887
Total current assets		34,656			25,494
Long-term investments		3,286			2,245
Property and equipment, net		698			854
Goodwill		23,134			23,134
Other assets		616			899
Total assets		$	62,390		$	52,626
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	464		$	495
Accrued expenses and other		2,205			2,350
Total current liabilities		2,669			2,845
Long-term liabilities		248			241
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; 65,193 shares and 49,793 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively		652			498
Additional paid-in capital		224,190			199,541
Accumulated other comprehensive loss		(9		)	(10		)
Accumulated deficit		(165,360		)	(150,489		)
Total stockholders’ equity		59,473			49,540
Total liabilities and stockholders’ equity		$	62,390		$	52,626

 

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 June 30,						Six Months Ended June 30,
		2015			2014			2015			2014
Net revenue
Product		$	543		$	975		$	723		$	1,556
Royalty and other		451			774			1,047			1,525
Total net revenue		994			1,749			1,770			3,081
Cost of net revenue		563			1,022			800			1,599
Gross profit		431			727			970			1,482
Operating expenses
Research and development		5,789			6,432			12,682			13,486
Selling, general and administrative		1,550			1,490			3,164			3,287
Total operating expenses		7,339			7,922			15,846			16,773
Loss from operations		(6,908		)	(7,195		)	(14,876		)	(15,291		)
Other income, net		29			55			52			85
Loss before income taxes		(6,879		)	(7,140		)	(14,824		)	(15,206		)
Income tax provision		27			21			47			42
Net loss		$	(6,906	)	$	(7,161	)	$	(14,871	)	$	(15,248	)
Other comprehensive income (loss), net of tax:
Net unrealized gains (losses) on available-for-sale securities		(5		)	6			1			(3		)
Comprehensive loss		$	(6,911	)	$	(7,155	)	$	(14,870	)	$	(15,251	)
Net loss per share
Basic and diluted		$	(0.11	)	$	(0.14	)	$	(0.25	)	$	(0.31	)
Shares used in computing net loss per share
Basic and diluted		64,737			49,511			59,539			49,344

 

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)

 

		Six Months Ended June 30,
		2015			2014
Cash flows from operating activities:
Net loss		$	(14,871	)	$	(15,248	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		287			206
Stock-based compensation		2,044			2,522
Amortization of intangible assets		265			500
Changes in assets and liabilities:
Accounts receivable		(243		)	(159		)
Inventories		(379		)	127
Prepaid expenses and other assets		14			(226		)
Accounts payable		(54		)	286
Accrued expenses and other liabilities		(130		)	68
Net cash used in operating activities		(13,067		)	(11,924		)
Cash flows from investing activities:
Purchases of property and equipment		(131		)	(104		)
Proceeds from sales and maturities of marketable securities		20,741			22,807
Purchases of marketable securities		(27,726		)	(13,792		)
Net cash (used in) provided by investing activities		(7,116		)	8,911
Cash flows from financing activities:
Proceeds from the sale of common stock, net of issuance costs		21,368			—
Proceeds from issuance of common stock		1,307			1,689
Net cash provided by financing activities		22,675			1,689
Net increase (decrease) in cash and cash equivalents		2,492			(1,324		)
Cash and cash equivalents at beginning of period		3,110			4,364
Cash and cash equivalents at end of period		$	5,602		$	3,040

 

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 communications 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, 2014 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 six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015 or for any other future period.

 

Basis of Presentation

 

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

 

Use of Estimates

 

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

 

Reclassification

 

Certain prior year amounts have been reclassified to conform to the current year presentation.  Previously reported intangible asset amounts have been included in the other assets line item of the condensed consolidated balance sheets.  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.

 

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Cash Equivalents and Investments

 

The Company has invested its excess cash in money market accounts, certificates of deposit, commercial paper, corporate debt, government-sponsored enterprise bonds and municipal bonds 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 loss. 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:

 

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 uncollectability. 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 either June 30, 2015 or December 31, 2014.

 

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 collectability is reasonably assured. Evidence of an arrangement generally consists of signed agreements or customer purchase orders.

 

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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 may record 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 generally 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 account 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 deferred margin recorded on sales to distributors where the product has not sold through to end customers is included in the accrued expenses and other line item in the condensed consolidated balance sheets.

 

Royalty

 

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

 

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. There was no licensing revenue for the three or six months ended June 30, 2015.  Licensing revenue was $6,000 and $47,000 for the three and six months ended June 30, 2014, 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. As of June 30, 2015, the Company had not identified any factors to indicate there was an impairment of its goodwill and determined that no additional impairment analysis was required.

 

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 June 30, 2015 and 2014, stock awards to purchase approximately 9,363,000 and 10,226,000 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 six months ended June 30, 2015 and 2014 are not considered significant.

 

Note 2: Fair Value of Financial Instruments

 

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

 

		June 30, 2015
		Cost			Unrealized Gains			Unrealized Losses			Fair Value
Cash and cash equivalents		$	5,602		$	—		$	—		$	5,602
Short-term investments:
U.S. government-sponsored enterprise bonds		$	8,197		$	—		$	(1	)	$	8,196
Corporate notes		13,482			1			(4		)	13,479
Municipal bonds		3,101			—			—			3,101
Certificates of deposit		1,108			—			—			1,108
Commercial paper		500			—			—			500
Total short-term investments		$	26,388		$	1		$	(5	)	$	26,384
Long-term investments:
Corporate notes		3,291			—			(5		)	3,286
Total long-term investments		$	3,291		$	—		$	(5	)	$	3,286

 

		December 31, 2014
		Cost			Unrealized Gains			Unrealized Losses			Fair Value
Cash and cash equivalents		$	3,110		$	—		$	—		$	3,110
Short-term investments:
U.S. government-sponsored enterprise bonds		$	1,250		$	—		$	—		$	1,250
Municipal bonds		841			—			—			841
Corporate notes		15,921			2			(6		)	15,917
Certificates of deposit		2,430			1			—			2,431
Total short-term investments		$	20,442		$	3		$	(6	)	$	20,439
Long-term investments:
U.S. government-sponsored enterprise bonds		$	1,000		$	—		$	(2	)	$	998
Corporate notes		1,252			—			(5		)	1,247
Total long-term investments		$	2,252		$	—		$	(7	)	$	2,245

 

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

 

		June 30, 2015
		Cost			Unrealized Losses			Fair Value
Short-term investments:
U.S. government-sponsored enterprise bonds		$	3,617		$	(1	)	$	3,616
Corporate notes		8,180			(4		)	8,176
Total short-term investments		$	11,797		$	(5	)	$	11,792
Long-term investments:
Corporate notes		3,291			(5		)	3,286
Total long-term investments		$	3,291		$	(5	)	$	3,286

 

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		December 31, 2014
		Cost			Unrealized Losses			Fair Value
Short-term investments:
Corporate notes		$	13,006		$	(6	)	$	13,000
Total short-term investments		$	13,006		$	(6	)	$	13,000
Long-term investments:
U.S. government-sponsored enterprise bonds		$	1,000		$	(2	)	$	998
Corporate notes		1,252			(5		)	1,247
Total long-term investments		$	2,252		$	(7	)	$	2,245

 

As of June 30, 2015 and December 31, 2014, 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 (in thousands):

 

		June 30, 2015
		Cost			Unrealized Gains			Unrealized Losses			Fair Value
Due within 1 year		$	26,388		$	1		$	(5	)	$	26,384
Due in 1-2 years		3,291			—			(5		)	3,286
Total		$	29,679		$	1		$	(10	)	$	29,670

 

		December 31, 2014
		Cost			Unrealized Gains			Unrealized Losses			Fair Value
Due within 1 year		$	20,442		$	3		$	(6	)	$	20,439
Due in 1-2 years		2,252			—			(7		)	2,245
Total		$	22,694		$	3		$	(13	)	$	22,684

 

The following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) as of June 30, 2015 and December 31, 2014 (in thousands):

 

		June 30, 2015
		Fair Value			Level 1			Level 2			Level 3
Money market funds		$	4,043		$	4,043		$	—		$	—
U.S. government-sponsored enterprise bonds		8,196			—			8,196			—
Corporate notes		16,765			—			16,765			—
Municipal bonds		3,101			—			3,101			—
Certificates of deposit		1,223			—			1,223			—
Commercial paper		500			—			500			—
Total assets		$	33,828		$	4,043		$	29,785		$	—

 

		December 31, 2014
		Fair Value			Level 1			Level 2			Level 3
Money market funds		$	1,837		$	1,837		$	—		$	—
U.S. government-sponsored enterprise bonds		2,248			—			2,248			—
Municipal bonds		1,243			—			1,243			—
Corporate notes		17,164			—			17,164			—
Certificates of deposit		2,676			—			2,676			—
Total assets		$	25,168		$	1,837		$	23,331		$	—

 

There were no transfers in or out of Level 1 and Level 2 securities during the three or six months ended June 30, 2015 and 2014.

 

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Note 3. Balance Sheet Detail

 

		June 30, 2015			December 31, 2014
		(in thousands)
Inventories:
Work-in-process		$	1,159		$	651
Finished goods		101			230
		$	1,260		$	881

 

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

 

		June 30, 2015
		Life (years)		Gross Carrying Amount			Accumulated Amortization			Net Carrying Value
Developed technology		3-5		$	9,240		$	9,240		$	—
Patent license		7		780			390			390
Total				$	10,020		$	9,630		$	390

 

		December 31, 2014
		Life (years)		Gross Carrying Amount			Accumulated Amortization			Net Carrying Value
Developed technology		3-5		$	9,240		$	9,031		$	209
Patent license		7		780			334			446
Total				$	10,020		$	9,365		$	655

 

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. The net carrying value of identifiable assets has been included in the other assets line item in the condensed consolidated balance sheets. 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 less than $0.1 million for the remainder of 2015 and $0.1 million annually for 2016 through 2018.

 

Note 4. Commitments and Contingencies

 

Indemnification

 

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 or six months ended June 30, 2015 or 2014 related to these indemnifications.

 

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

 

Legal Matters

 

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

 

Note 5. Business Segments, Concentration of Credit Risk 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.

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, cash equivalents, short-term and long-term investments and accounts receivable. Cash, cash equivalents and short-term and long term investments are deposited with high credit-quality institutions.

 

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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 June 30,						Six Months Ended June 30,
		2015			2014			2015			2014
United States		$	549		$	433		$	726		$	783
Taiwan		257			536			736			873
Japan		142			776			254			1,399
Europe		32			—			32			11
Rest of world		14			4			22			15
Total net revenue		$	994		$	1,749		$	1,770		$	3,081

 

Customers who accounted for at least 10% of total net revenue were:

 

		Three Months Ended June 30,				Six Months Ended June 30,
		2015		2014		2015		2014
Customer A		33	%	13	%	22	%	*
Customer B		24	%	31	%	40	%	28	%
Customer C		16	%	*		12	%	11	%
Customer D		11	%	42	%	10	%	11	%

 

*Represents less than 10%

 

Three customers accounted for 74% of net accounts receivable at June 30, 2015. Three customers accounted for 97% of net accounts receivable at December 31, 2014.

 

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.  2004 through 2014 tax years generally remain subject to examination by federal, state and foreign tax authorities.  As of June 30, 2015, the Company has not recorded any liability for unrecognized tax benefits related to uncertain tax positions.

 

Note 7. Stock-Based Compensation

 

The expense relating to stock options 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 June 30, 2015 was $3.4 million related to stock options and is expected to be recognized as expense over a weighted average period of approximately 2.3 years.  The expense related to restricted stock units (RSUs) 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 June 30, 2015 was $0.8 million related to RSUs and is expected to be recognized as expense over a weighted average period of approximately 1.8 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 six months ended June 30, 2015 and 2014, there were no such tax benefits associated with the exercise of stock options due to the Company’s loss position.

 

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Valuation Assumptions

 

The fair value of the Company’s share-based payment options for the three and six months ended June 30, 2015 and 2014 was estimated on the grant dates using the Black-Scholes valuation option-pricing model with the following assumptions:

 

		Three Months Ended June 30,				Six Months Ended June 30,
Employee stock options:		2015		2014		2015		2014
Risk-free interest rate		1.7% - 1.7%		1.6% - 1.7%		0.6% – 1.7%		1.5% – 1.7%
Volatility		55.7% – 55.7%		55.9% – 56.7%		55.7% – 57.7%		55.9% – 57.5%
Expected life (years)		4.0-5.0		4.0-5.0		4.0-5.0		4.0-5.0
Dividend yield		0%		0%		0%		0%

 

The risk-free interest rate was derived from the Daily Treasury Yield Curve Rates as published by the U.S. Department of the Treasury as of the grant date for terms equal to the expected terms of the options. The expected volatility was based on the 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.

 

Common Stock Options and Restricted Stock

 

A summary of the option and RSU activity under the Company’s Amended and Restated 2000 Stock Option and Equity Incentive Plan (Amended 2000 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, 2014		1,760		5,994		$	3.87
Additional shares authorized under the Amended 2010 Plan		500		—		—
Restricted stock units cancelled		6		—		—
Options granted		(1,323	)	1,323		$	2.05
Options cancelled		153		(153	)	$	5.00
Options exercised		—		(22	)	$	1.60
Options expired		(78	)	—		$	5.79
Balance at March 31, 2015		1,018		7,142		$	3.52
Additional shares authorized under the Amended 2010 Plan		—		—		—
Restricted stock units cancelled		10		—		—
Options granted		(95	)	95		$	2.04
Options cancelled		128		(128	)	$	4.00
Options exercised		—		(40	)	$	1.65
Options expired		(15	)	—		$	4.35
Balance at June 30, 2015		1,046		7,069		$	3.50

 

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, 2014 and March 31, 2015		2,233		$	3.68
Granted		—		—
Cancelled		(2	)	$	3.86
Exercised		(512	)	$	1.55
Expired		(16	)	$	1.55
Balance at June 30, 2015		1,703		$	4.34

 

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A summary of RSU activity under the Plans is presented below (in thousands, except for fair value):

 

		Number of Shares		Weighted Average Grant-Date Fair Value
Non-vested shares at December 31, 2014		394		$	4.61
Vested		(120	)	$	4.60
Cancelled		(6	)	$	4.60
Non-vested shares at March 31, 2015		268		$	4.61
Vested		(3	)	$	4.46
Cancelled		(10	)	$	4.62
Non-vested shares at June 30, 2015		255		$	4.60

 

The total intrinsic value of the restricted stock units outstanding as of June 30, 2015 was $0.5 million.

 

The following table summarizes significant ranges of outstanding and exercisable options as of June 30, 2015 (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			Number Exercisable		Weighted Average Exercise Price			Aggregate Intrinsic Value
$1.50 - $2.05		1,569		9.27		$	2.03		240		$	1.99
$2.06 - $3.10		1,405		2.67		$	2.94		1,011		$	2.89
$3.11 - $3.58		1,423		3.84		$	3.35		1,000		$	3.37
$3.59 - $4.19		1,512		3.59		$	3.89		1,238		$	3.89
$4.20 - $4.54		1,416		5.51		$	4.43		985		$	4.41
$4.55 - $6.11		1,447		2.54		$	5.45		1,306		$	5.51
$1.50 - $6.11		8,772		4.64		$	3.66		5,780		$	4.00		$	16
Vested and expected to vest		8,508		4.51		$	3.69							$	15
Exercisable		5,780		3.11		$	4.00							$	7

 

The aggregate intrinsic value of employee stock options exercised during the six months ended June 30, 2015 and 2014 was approximately $0.3 million and $0.7 million, respectively.

 

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 were initially reserved for issuance under the ESPP in 2010.  On April 16, 2015, the board of directors approved an amendment to the ESPP to increase the number of shares reserved for issuance by 2,000,000 shares, subject to stockholder approval. At the Annual Meeting of Stockholders held on May 26, 2015, the Company’s stockholders approved the increase. 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, 2015, approximately 339,000 shares of common stock were issued at an aggregate purchase price of $518,000 under the ESPP.  As of June 30, 2015, there were approximately 2.4 million shares authorized and unissued under the ESPP.

 

Note 8. Stockholders’ Equity

 

On March 4, 2015, the Company sold 14,375,000 shares of common stock in an equity offering and raised approximately $21.4 million, net of transaction expenses.  Two of the Company’s executive officers between them purchased a total of 406,250 shares at the public offering price.

 

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