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Peraso Inc. - Quarter Report: 2017 March (Form 10-Q)

Table of Contents 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549


FORM 10-Q

(Mark one)

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

For the quarterly period ended March 31, 2017

 

OR

 

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) 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 ☒  NO ☐

 

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 ☒  NO ☐

 

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 ☐

 

Accelerated filer ☐

 

 

 

Non-accelerated filer ☐

 

Smaller reporting company ☒

(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 ☐  No ☒

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR 230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR 240.12b-2). Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

As of April 30, 2017, 6,676,770 shares of the Registrant’s common stock, $0.001 par value, were outstanding.

 

 

 


 

Table of Contents 

MOSYS, INC.

 

FORM 10-Q

March 31, 2017

 

TABLE OF CONTENTS

 

PART I

FINANCIAL INFORMATION

3

 

 

 

Item 1. 

3

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016

3

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2017 and 2016

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

 

 

 

Item 3. 

Qualitative and Quantitative Disclosures About Market Risk

24

 

 

 

Item 4. 

Controls and Procedures

24

 

 

 

PART II — 

OTHER INFORMATION

24

 

 

 

Item 1. 

Legal Proceedings

24

 

 

 

Item 1A. 

Risk Factors

25

 

 

 

Item 6. 

Exhibits

25

 

 

 

 

Signatures

26

 

 

 

 

 


 

Table of Contents 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

MOSYS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except par value)

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2017

    

2016

 

ASSETS

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,330

 

$

8,766

 

Short-term investments

 

 

240

 

 

1,002

 

Accounts receivable, net

 

 

710

 

 

559

 

Inventories

 

 

1,055

 

 

1,451

 

Prepaid expenses and other

 

 

321

 

 

473

 

Total current assets

 

 

7,656

 

 

12,251

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

1,078

 

 

1,274

 

Goodwill

 

 

13,276

 

 

13,276

 

Intangible assets, net

 

 

195

 

 

223

 

Other

 

 

123

 

 

121

 

Total assets

 

$

22,328

 

$

27,145

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

402

 

$

561

 

Accrued expenses and other

 

 

1,913

 

 

2,773

 

Total current liabilities

 

 

2,315

 

 

3,334

 

 

 

 

 

 

 

 

 

Convertible notes payable

 

 

8,699

 

 

8,250

 

Other long-term liabilities

 

 

226

 

 

233

 

Total liabilities

 

 

11,240

 

 

11,817

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; 20,000 shares authorized; none issued and outstanding

 

 

 —

 

 

 —

 

Common stock, $0.001 par value; 120,000 shares authorized; 6,677 shares and 6,630 shares issued and outstanding at March 31, 2017 and December 31, 2016 respectively

 

 

 7

 

 

 7

 

Additional paid-in capital

 

 

229,506

 

 

229,341

 

Accumulated deficit

 

 

(218,425)

 

 

(214,020)

 

Total stockholders’ equity

 

 

11,088

 

 

15,328

 

Total liabilities and stockholders’ equity

 

$

22,328

 

$

27,145

 

 

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

 

 

 

March 31, 

 

 

    

2017

    

2016

 

Net revenue

 

 

 

 

 

 

 

Product

 

$

955

 

$

1,120

 

Royalty and other

 

 

257

 

 

331

 

Total net revenue

 

 

1,212

 

 

1,451

 

 

 

 

 

 

 

 

 

Cost of net revenue

 

 

602

 

 

863

 

Gross profit

 

 

610

 

 

588

 

Operating expenses

 

 

 

 

 

 

 

Research and development

 

 

3,485

 

 

5,232

 

Selling, general and administrative

 

 

1,314

 

 

1,516

 

Restructuring charges

 

 

 —

 

 

676

 

Total operating expenses

 

 

4,799

 

 

7,424

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(4,189)

 

 

(6,836)

 

Interest expense

 

 

(224)

 

 

(33)

 

Other income, net

 

 

13

 

 

24

 

Loss before income taxes

 

 

(4,400)

 

 

(6,845)

 

Income tax provision

 

 

 5

 

 

20

 

Net loss

 

$

(4,405)

 

$

(6,865)

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

Net unrealized gains (losses) on available-for-sale securities

 

 

 —

 

 

16

 

Comprehensive loss

 

$

(4,405)

 

$

(6,849)

 

Net loss per share

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.66)

 

$

(1.05)

 

Shares used in computing net loss per share

 

 

 

 

 

 

 

Basic and diluted

 

 

6,647

 

 

6,567

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(4,405)

 

$

(6,865)

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

196

 

 

291

 

Stock-based compensation

 

 

185

 

 

605

 

Amortization of intangible assets

 

 

28

 

 

28

 

Amortization of debt issuance costs

 

 

11

 

 

 —

 

Accrued interest

 

 

210

 

 

33

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(151)

 

 

(69)

 

Inventories

 

 

396

 

 

129

 

Prepaid expenses and other assets

 

 

173

 

 

(238)

 

Accounts payable

 

 

(219)

 

 

(721)

 

Accrued expenses and other liabilities

 

 

(602)

 

 

(411)

 

Net cash used in operating activities

 

 

(4,178)

 

 

(7,218)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

 —

 

 

(200)

 

Proceeds from sales and maturities of marketable securities

 

 

2,364

 

 

12,429

 

Purchases of marketable securities

 

 

(1,602)

 

 

(8,197)

 

Net cash provided by investing activities

 

 

762

 

 

4,032

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net proceeds from issuance of common stock

 

 

(20)

 

 

197

 

Proceeds from the issuance of notes payable, net of issuance costs

 

 

 —

 

 

7,879

 

Payments on capital lease obligations

 

 

 —

 

 

(27)

 

Net cash provided by (used in) financing activities

 

 

(20)

 

 

8,049

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

(3,436)

 

 

4,863

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

8,766

 

 

5,640

 

Cash and cash equivalents at end of period

 

$

5,330

 

$

10,503

 

Supplemental disclosure:

 

 

 

 

 

 

 

Issuance of convertible notes in settlement of accrued interest

 

$

420

 

$

 —

 

 

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

 

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 intellectual property (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 on a basis that assumes that the Company will continue as a going concern and contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business and 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, 2016 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 months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 or for any other future period.

Liquidity

The Company incurred a net loss of $4.4 million for the quarter ended March 31, 2017 and had an accumulated deficit of $218.4 million as of March 31, 2017. In addition, the Company incurred net losses of approximately $32.0 million and $31.5 million for the years ended December 31, 2016 and 2015, respectively.  These and prior year losses have resulted in significant negative cash flows for almost a decade and have required the Company to raise substantial amounts of additional capital during this period. To date, the Company has primarily financed its operations through multiple offerings of common stock to investors and affiliates, as well as asset sale transactions. In March 2016, the Company entered into a 10% Senior Secured Convertible Note Purchase Agreement with the purchasers of $8.0 million principal amount of 10% Senior Secured Convertible Notes due August 15, 2018 (the Notes), at par, in a private placement transaction. The Notes bear interest at the annual rate of 10%. Accrued interest is payable semi-annually in cash or in-kind through the issuance of identical new Notes, or with a combination of the two, at the Company’s option. Since issuance of the Notes, the Company has made the interest payments in-kind through the issuance of additional notes totaling approximately $0.8 million.  Further, the Notes restrict the ability of the Company to incur any indebtedness for borrowed money, unless such indebtedness by its terms is expressly subordinated to the Notes in right of payment and to the security interest of the Note holder(s) in respect to the priority and enforcement of any security interest in property of the Company securing such new debt; provided that the Note holder(s) security interest and cash payment rights under the Notes shall be subordinate to a maximum of $5 million of indebtedness for a secured accounts receivable line of credit facility under certain conditions (See Note 8).

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The Company expects to continue to incur operating losses for the foreseeable future as it secures customers for and continues to invest in the commercialization of its IC products. The Company will need to increase revenues substantially beyond levels that it has attained in the past in order to generate sustainable operating profit and sufficient cash flows to continue doing business without raising additional capital from time to time.  As a result of the Company’s expected operating losses and cash burn for the foreseeable future, recurring losses from operations, and the need to repay the Notes and accrued interest in 2018, if the Company is unable to raise sufficient capital through additional debt or equity arrangements, there will be uncertainty regarding the Company’s ability to maintain liquidity sufficient to operate its business effectively, which raises substantial doubt as to the Company’s ability to continue as a going concern within one year from the date of issuance of these condensed consolidated financial statements. These condensed consolidated financial statements do not include any adjustments that might result from this uncertainty. There can be no assurance that such additional capital, whether in the form of debt or equity financing, will be sufficient or available and, if available, that such capital will be offered on terms and conditions acceptable to the Company. As further discussed in Note 9, in April 2017, the Company, committed to effect a reduction in its workforce and associated operating expenses, net loss and cash burn as part of its efforts to sustain its business.  The Company will primarily focus its resources on producing and selling its existing products, and will substantially curtail new product development.  If the Company is unsuccessful in these efforts, it will need to implement additional cost reduction strategies, which  could further affect its near- and long-term business plan. These efforts may include, but are not limited to, further reducing headcount and curtailing business activities.

 

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 ends on December 31 of each calendar year.

 

Use of Estimates

 

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

 

Cash Equivalents and Investments

 

The Company has invested its excess cash in money market accounts, certificates of deposit, 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

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estimates to the pricing information it receives from advisors. The Company’s Level 2 securities include cash equivalents and available-for-sale securities, which consist primarily of certificates of deposit, corporate debt, and government agency and municipal debt securities from issuers with high-quality credit ratings. The Company’s investment advisors obtain pricing data from independent sources, such as Standard & Poor’s, Bloomberg and Interactive Data Corporation, and rely on comparable pricing of other securities because the Level 2 securities 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 March 31, 2017 or December 31, 2016.

 

Inventory

 

The Company values its inventories at the lower of cost, which approximates actual cost on a first-in, first-out basis, or market value. The Company records inventory reserves for estimated obsolescence or unmarketable inventories based upon assumptions about future demand and market conditions. Once a reserve is established, it is maintained until the product to which it relates is sold or otherwise disposed of. If actual market conditions are less favorable than those expected by management, additional adjustment to inventory valuation may be required. Charges for obsolete and slow moving inventories are recorded based upon an analysis of specific identification of obsolete inventory items and quantification of slow moving inventory items.  The Company recorded no inventory write-downs during the three months ended March 31, 2017 or 2016.

 

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.

 

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 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

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customer shipments and remaining inventory on hand. The associated deferred margin is included in the accrued expenses and other line item in the condensed consolidated balance sheets.

 

Royalty

 

The Company’s licensing contracts typically 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.

 

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 include engineering support to assist in the commencement of production of a licensee’s products.

 

Goodwill

 

In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-04, Simplifying the Test for Goodwill Impairment, which eliminates step 2, the computation of the implied fair value of goodwill to determine the amount of impairment, from the goodwill impairment test. In computing the implied fair value of goodwill for step 2 under current accounting standards, the Company calculates the fair value of its assets and liabilities (including unrecognized assets and liabilities) as if acquired or assumed in a business combination. Under the amendments in this update, the Company will determine the amount of goodwill impairment, by comparing the step 1 fair value of the reporting unit with its carrying amount. To the extent the carrying value of a reporting unit exceeds its step 1 fair value, a goodwill impairment charge is recognized. ASU No. 2017-04 is effective for the Company for annual and interim impairment tests beginning January 1, 2020 with early adoption permitted. The Company has elected to early adopt the new standard effective January 1, 2017, because the ASU significantly simplifies the evaluation of goodwill for impairment. The impact of this standard for the Company will depend on the outcomes of future goodwill impairment tests.

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 step one impairment test. If the qualitative assessment warrants further analysis, the Company compares the step one fair value of the reporting unit to its carrying value. The step one 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. If the carrying value of the reporting unit’s goodwill exceeds its step one fair value, then the Company must record an impairment charge equal to the difference. As of March 31, 2017, the Company’s fair value exceeded its carrying value of net assets and, as such, there was no impairment of goodwill.

 

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 determine the step one fair value, 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.

 

Reverse Stock Split

On February 14, 2017, the Company filed a certificate of amendment to its amended and restated certificate of incorporation with the Secretary of State of the State of Delaware to effect a one-for-ten reverse stock split of the Company’s shares of common stock. Such amendment and ratio were previously approved by the Company’s stockholders and board of directors, respectively.

 

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On February 16, 2017, the Company effected the one-for-10 reverse stock split of its common stock.  As a result of the reverse stock split, every ten shares of the Company’s pre-reverse split outstanding common stock was combined and reclassified into one share of common stock. Proportionate voting rights and other rights of common stock holders were not affected by the reverse stock split. No fractional shares were issued in connection with the reverse stock split; stockholders who would otherwise hold a fractional share of common stock received cash in an amount equal to the product obtained by multiplying (i) the closing sale price of the Company’s common stock on the effective date of the reverse stock split, by (ii) the number of shares of the Company’s common stock held by the stockholder that would otherwise have been exchanged for the fractional share interest. All stock options and restricted stock units outstanding and common stock reserved for issuance under the Company’s equity incentive plans immediately prior to the reverse stock split were adjusted by dividing the number of affected shares of common stock by 10 and, as applicable, multiplying the exercise price by 10, as a result of the reverse stock split. The common stock par value was adjusted to $0.001 in conjunction with the reverse stock split.

 

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.

 

The following table sets forth securities outstanding which were excluded from the computation of diluted net loss per share as their inclusion would be anti-dilutive (in thousands):

 

 

 

 

 

 

 

 

 

March 31, 

 

March 31, 

 

 

    

2017

    

2016

 

 

 

 

 

 

 

Options outstanding to purchase common stock

 

508

 

794

 

Employee stock purchase plan

 

 —

 

36

 

Unvested restricted common stock units

 

89

 

12

 

Convertible debt

 

973

 

889

 

Total

 

1,570

 

1,731

 

 

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 months ended March 31, 2017 and 2016 were not considered significant.

 

Debt Issuance Costs

 

Debt issuance costs are capitalized and amortized to interest expense using the effective interest method.  Unamortized debt issuances costs are presented in the condensed consolidated balance sheets as a direct deduction from the carrying amount of the related debt liability and accounted for as debt discounts.

 

Note 2: Fair Value of Financial Instruments

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

 

 

 

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

Cash and cash equivalents

    

$

5,330

    

$

 —

    

$

 —

    

$

5,330

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate notes

 

 

240

 

 

 —

 

 

 —

 

 

240

 

Total short-term investments

 

$

240

 

$

 —

 

$

 —

 

$

240

 

 

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December 31, 2016

 

 

 

 

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

Cash and cash equivalents

    

$

8,766

    

$

 —

    

$

 —

    

$

8,766

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored enterprise bonds

 

$

762

 

$

 —

 

$

 —

 

$

762

 

Corporate notes

 

 

240

 

 

 —

 

 

 —

 

 

240

 

Total short-term investments

 

$

1,002

 

$

 —

 

$

 —

 

$

1,002

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) as of March 31, 2017 and December 31, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

 

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

Municipal bonds

 

$

300

 

$

 —

 

$

300

 

$

 —

 

Corporate notes

 

 

3,913

 

 

 

 

3,913

 

 

 

Total assets

 

$

4,213

 

$

 —

 

$

4,213

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

Money market funds

    

$

84

    

$

84

    

$

    

$

 

U.S. government-sponsored enterprise bonds

 

 

3,767

 

 

 

 

3,767

 

 

 

Municipal bonds

 

 

4,027

 

 

 —

 

 

4,027

 

 

 —

 

Corporate notes

 

 

480

 

 

 

 

480

 

 

 

Total assets

 

$

8,358

 

$

84

 

$

8,274

 

$

 —

 

 

There were no transfers in or out of Level 1 and Level 2 securities during the three months ended March 31, 2017 and 2016.

 

Note 3. Balance Sheet Detail

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2017

    

2016

 

 

 

(in thousands)

 

Inventories:

 

 

 

 

 

 

 

Work-in-process

 

$

856

 

$

1,270

 

Finished goods

 

 

199

 

 

181

 

 

 

$

1,055

 

$

1,451

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

 

    

 

    

Gross

    

 

 

    

Net

 

 

 

Life

 

Carrying

 

Accumulated

 

Carrying

 

 

 

(years)

 

Amount

 

Amortization

 

Amount

 

Patent license

 

7

 

 

$ 780

 

 

$ 585

 

 

$ 195

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

    

 

    

Gross

    

 

 

    

Net

 

 

 

Life

 

Carrying

 

Accumulated

 

Carrying

 

 

 

(years)

 

Amount

 

Amortization

 

Amount

 

Patent license

 

7

 

 

$ 780

 

 

$ 557

 

 

$ 223

 

 

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 2017 and $0.1 million 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 months ended March 31, 2017 or 2016 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 investments and accounts receivable. Cash, cash equivalents and short‑term investments are deposited with high credit‑quality institutions.

 

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The Company recognized revenue from shipment of ICs and licensing of its technologies to customers by geographical location as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

 

North America

 

$

822

 

$

788

 

Taiwan

 

 

171

 

 

247

 

Japan

 

 

169

 

 

392

 

Rest of world

 

 

50

 

 

24

 

Total net revenue

 

$

1,212

 

$

1,451

 

 

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

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31, 

 

 

 

    

2017

 

2016

 

 

Customer A

 

46

%  

*

%

 

Customer B

 

11

%  

15

%

 

Customer C

 

11

%  

26

%

 

Customer D

 

*

%  

46

%

 


*Represents less than 10%

 

One customer accounted for 76% of net accounts receivable at March 31, 2017. One customer accounted for 72% of net accounts receivable at December 31, 2016.

 

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.  All tax returns from 2012 to 2016 may be subject to examination by the Internal Revenue Service, California and other states. Returns filed in foreign jurisdictions may be subject to examination for the years 2008 to 2016.  As of March 31, 2017, 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 March 31, 2017 was $1.5 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 March 31, 2017 was $0.4 million related to RSUs and is expected to be recognized as expense over a weighted-average period of approximately 1.9 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 months ended March 31, 2017 and 2016, there were no such tax benefits associated with the exercise of stock options due to the Company’s loss positions.

 

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Valuation Assumptions

 

There were no stock options granted during the three months ended March 31, 2016.  The fair value of the Company’s stock options granted for the three months ended March 31, 2017 was estimated on the grant dates using the Black-Scholes valuation option-pricing model with the following assumptions:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

   

2017

 

Risk-free interest rate

 

1.6%

 

Volatility

 

70.2%

 

Expected life (years)

 

4.0

 

Dividend yield

 

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 2010 Equity Incentive Plan (the Plan) is presented below (in thousands, except exercise price):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options outstanding

 

 

 

 

 

 

 

Weighted

 

 

 

Shares

 

 

 

Average

 

 

 

Available

 

Number of

 

Exercise

 

 

    

for Grant

    

Shares

    

Prices

 

Balance at January 1, 2017

 

114

 

522

 

$

13.88

 

Additional shares authorized under the Plan

 

50

 

 —

 

 

 

Restricted stock units cancelled and returned to the Plan

 

 5

 

 —

 

 

 

Options granted

 

(1)

 

 1

 

$

2.36

 

Options cancelled and returned to the Plan

 

15

 

(15)

 

$

6.94

 

Balance at March 31, 2017

 

183

 

508

 

$

14.06

 

 

The Company also has awarded options to new employees outside of the Plan 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 RSU activity under the Plan is presented below (in thousands, except for fair value):

 

 

 

 

 

 

 

 

 

    

 

    

Weighted

 

 

 

 

 

Average

 

 

 

Number of

 

Grant-Date

 

 

 

Shares

 

Fair Value

 

Non-vested shares at January 1, 2017

 

148

 

$

8.13

 

Vested

 

(54)

 

$

11.64

 

Cancelled

 

(5)

 

$

5.30

 

Non-vested shares at March 31, 2017

 

89

 

$

6.16

 

 

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In the quarter ended March 31, 2017, the Company paid approximately $20,000 for employee income taxes related to net share settlement of RSUs.

 

The total intrinsic value of the RSUs outstanding as of March 31, 2017 was $0.2 million.

 

The following table summarizes significant ranges of outstanding and exercisable options as of March 31, 2017 (in thousands, except contractual life and exercise price):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options Outstanding

 

Options Exercisable

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining

 

Weighted

 

 

 

Weighted

 

 

 

 

 

 

 

 

Contractual

 

Average

 

 

 

Average

 

Aggregate

 

 

 

Number

 

Life

 

Exercise

 

Number

 

Exercise

 

Intrinsic

 

Range of Exercise Price

 

Outstanding

 

(in Years)

 

Price

 

Exercisable

 

Price

 

value

 

$2.36 - $7.19

    

44

    

6.27

    

$

5.06

    

10

    

$

5.30

    

 

 

 

$7.20 - $16.99

 

312

 

4.84

 

$

7.20

 

62

 

$

7.20

 

 

 

 

$17.00 - $36.69

 

115

 

3.96

 

$

25.50

 

100

 

$

26.26

 

 

 

 

$36.70 - $61.09

 

33

 

3.17

 

$

45.43

 

33

 

$

45.43

 

 

 

 

$61.10 - $61.10

 

 4

 

0.07

 

$

61.10

 

 4

 

$

61.10

 

 

 

 

$2.36 - $61.10

 

508

 

4.62

 

$

14.06

 

209

 

$

23.20

 

$

 —

 

Vested and expected to vest

 

474

 

4.58

 

$

14.54

 

 

 

 

 

 

$

 —

 

Exercisable

 

209

 

3.95

 

$

23.20

 

 

 

 

 

 

$

 —

 

 

There were no stock options exercised during the three months ended March 31, 2017 or 2016.

 

 

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 September 1, 2010, the Company commenced the first offering period under the ESPP. In May 2015, the Company’s stockholders approved an amendment increasing the number of shares reserved for issuance by 2,000,000 shares. 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.

 

In February 2017, the Compensation Committee of the Board of Directors elected to suspend the ESPP plan.  ESPP Plan participants were refunded their payroll contributions for the then open purchase period

 

Note 8. Convertible Notes

 

On March 14, 2016, the Company entered into a 10% Senior Secured Convertible Note Purchase Agreement (the Purchase Agreement) with the purchasers of $8,000,000 principal amount of 10% Senior Secured Convertible Notes due August 15, 2018 (the Notes), at par, in a private placement transaction effected pursuant to an exemption from the registration requirements under the Securities Act of 1933, as amended. The conversion price of the Notes is $9.00 per share and is subject to adjustment upon certain events, as set forth in the Purchase Agreement. Pursuant to a security agreement entered into by the Company, the Notes are secured by a security interest in all of the assets of the Company.

 

The Notes bear interest at the annual rate of 10%. Accrued interest is payable semi-annually in cash or in-kind through the issuance of identical new Notes, or with a combination of the two, at the Company’s option. The Notes are noncallable and nonredeemable by the Company. The Notes are redeemable at the election of the holders if the Company experiences a fundamental change (as defined in the Notes), which generally would occur in the event (i) any person acquires beneficial ownership of shares of common stock of the Company entitling such person to exercise at least 40% of the total voting power of all of the shares of capital stock of the Company entitled to vote generally in elections of directors, (ii) an acquisition of the Company by another person through a merger or consolidation, or the

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sale, transfer or lease of all or substantially all of the Company’s assets, or (iii) the Company’s current directors cease to constitute a majority of the board of directors of the Company within a 12-month period, disregarding for this purpose any director who voluntarily resigns as a director or dies while serving as a director. The redemption price is 120% of the principal amount of the Note to be repurchased plus accrued and unpaid interest as of the redemption date.

 

The conversion price of $9.00 per share of common stock shall be reset, if, prior to the maturity date, the Company sells new shares of capital stock, or other securities convertible into or exercisable for capital stock, in a financing with one or more accredited investors that yields proceeds to the Company (net of transaction fees, expenses and discounts and commission) of at least $1,000,000 at a price lower than the then applicable conversion price in effect immediately before the closing of such financing; provided that in no event shall the applicable conversion price be reset to less than $8.50 per share of common stock.  The Notes are subject to anti-dilution adjustments for stock splits, stock dividends, and the like.

 

No Note holder shall be entitled to convert such holder’s Notes if effective upon the applicable conversion date (i) the holder would have beneficial ownership of more than 9.9% of the voting capital stock of the Company as determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended, (with exceptions specified in the Purchase Agreement), or (ii) if the shares are being acquired or held with a purpose or effect of changing or influencing control of the Company, or in connection with or as a participant in any transaction having that purpose or effect, as determined in the sole discretion of the board of directors of the Company. There is no required sinking fund for the Notes. The Notes have not been registered for resale, and the holder(s) do not have registration rights.

 

The Notes restrict the ability of the Company to incur any indebtedness for borrowed money, unless such indebtedness by its terms is expressly subordinated to the Notes in right of payment and to the security interest of the Note holder(s) in respect to the priority and enforcement of any security interest in property of the Company securing such new debt; provided that the Note holder(s) security interest and cash payment rights under the Notes shall be subordinate to a maximum of $5,000,000 of indebtedness for a secured accounts receivable line of credit facility provided to the Company by a bank or institutional lender; and, provided further, that in no event may the amount of indebtedness to which the  security interest of the Note holder(s) is subordinated exceed the outstanding balance of accounts receivable less than 90 days old for which the Company has not recorded an allowance for doubtful accounts pledged under such credit facility.

 

The Notes define an event of default generally as any failure by the Company to pay an amount owed under the Notes when due (subject to cure periods), a default with respect to other indebtedness of the Company  resulting  in acceleration of such indebtedness, the commencement of bankruptcy or insolvency proceedings, or the cessation of business.  If an event of default occurs under the Notes, the holder(s) of a majority-in-interest of the outstanding principal amount of the Notes may declare the outstanding principal amount thereof to be immediately due and payable and pursue all available remedies, including taking possession of the assets of the Company and selling them to pay the amount of debt then due, plus expenses, in accordance with applicable laws and procedures.

 

The Company incurred debt issuance costs of approximately $0.1 million, which were recorded as a debt discount and are being amortized to interest expense over the repayment period for the loan using the effective interest rate method.  The interest expense related to the debt discount during the three months ended March 31, 2017 was approximately $11,000 and the remaining unamortized debt discount was approximately $0.1 million.

 

In August 2016, the first semi-annual interest payment was made in-kind with the issue of an additional note (Interest Note) to the Purchasers.  The Interest Note has a principal amount of approximately $336,000 and has terms identical to the Notes.  In February 2017, the second semi-annual interest payment was made in-kind with the issue of an additional note (Second Interest Note) to the Purchasers.  The Second Interest Note has a principal amount of approximately $420,000 and has terms identical to the Notes.  As of March 31, 2017, the Notes, Interest Note and Second Interest Note could be converted into a maximum of 1,030,085 shares of common stock at $8.50 per share, excluding the effects of future payments of interest in-kind.

 

Future repayments on outstanding convertible notes payable of $8.8 million (excluding unamortized discount of $0.1 million as of March 31, 2017) are due in August 2018.

 

 

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Note 9. Subsequent Event

 

In April 2017, the Company committed to effect a reduction in the Company’s workforce and associated operating expenses, net loss and cash burn.  The Company will primarily focus its resources on producing and selling its existing products, and will substantially curtail new product development. The Company will reduce headcount by up to 60% with the majority of the reductions occurring in its Santa Clara facility. The Company anticipates that it will fully implement the planned reductions by the end of the second quarter of 2017.  As a result of these reductions, the Company expects to incur approximately $0.6 million of charges for severance benefits and other one-time headcount termination costs. The Company expects that substantially all of these charges will be recognized and paid during the second quarter of 2017.

 

 

 

 

 

 

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

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying condensed consolidated financial statements and notes included in this report. This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which include, without limitation, statements about the market for our technology, our strategy, competition, expected financial performance and capital raising efforts, all information disclosed under Item 3 of this Part I, and other aspects of our business identified in our most recent annual report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2016 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 “Company Overview,” “Liquidity and Capital Resources; Changes in Financial Condition,” “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, 2016. 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

 

We are a fabless semiconductor company focused on the development and sale of integrated circuits, or ICs, for the high-speed networking, communications, storage and data center markets. Our solutions deliver time-to-market, performance, power, area and economic benefits for system original equipment manufacturers, or OEMs. We have developed two families of ICs under the Bandwidth Engine® and LineSpeed™ product names. Bandwidth Engine ICs combine our proprietary 1T-SRAM® high-density embedded memory, integrated macro functions and high-speed serial interface, or SerDes, I/O, with our intelligent access technology and a highly efficient interface protocol. The LineSpeed IC product line, which was announced in March 2013, is comprised of non-memory, high-speed SerDes I/O devices with clock data recovery, gearbox and retimer functionality, which convert lanes of data received on line cards or by optical modules into different configurations and/or ensure signal integrity. 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. Currently, we are focused on developing differentiated IP-rich IC products and are dedicating all our research and development, marketing and sales budget to these IC products.

Our future success and ability to achieve and maintain profitability are dependent on the marketing and sales of our IC products into networking, communications and other markets requiring high-bandwidth memory access.

 

We incurred a net loss of $4.4 million for the quarter ended March 31, 2017 and had an accumulated deficit of $218.4 million as of March 31, 2017. In addition, we incurred net losses of approximately $32.0 million and $31.5 million for the years ended December 31, 2016 and 2015, respectively.  These and prior year losses have resulted in significant negative cash flows for almost a decade and have required us to raise substantial amounts of additional capital during this period. To date, we have primarily financed our operations through multiple offerings of common stock to investors and affiliates, as well as asset sale transactions. In March 2016, we entered into a 10% Senior Secured Convertible Note Purchase Agreement with the purchasers of $8.0 million principal amount of 10% Senior Secured Convertible Notes due August 15, 2018 (the Notes), at par, in a private placement transaction. The Notes bear interest at the annual rate of 10%. Accrued interest is payable semi-annually in cash or in-kind through the issuance of identical new Notes, or with a combination of the two, at our option. Since issuance of the Notes, we have made the interest payments in-kind through the issuance of additional notes totaling approximately $0.8 million.  Further, the Notes restrict our ability to incur any indebtedness for borrowed money, unless such indebtedness by its terms is expressly subordinated to the Notes in right of payment and to the security interest of the Note holder(s) in respect to the priority and enforcement of any security interest in our property securing such new debt; provided that the Note holder(s) security interest and cash payment rights under the Notes shall be subordinate to a maximum of $5 million of indebtedness for a secured accounts receivable line of credit facility under certain conditions.

 

We expect to continue to incur operating losses for the foreseeable future as it secures customers for and continues to invest in the commercialization of our IC products. We will need to increase revenues substantially beyond levels that

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it has attained in the past in order to generate sustainable operating profit and sufficient cash flows to continue doing business without raising additional capital from time to time.  As a result of our expected operating losses and cash burn for the foreseeable future, recurring losses from operations, and the need to repay the Notes and accrued interest in 2018, if we are unable to raise sufficient capital through additional debt or equity arrangements, there will be uncertainty regarding our ability to maintain liquidity sufficient to operate our business effectively, which raises substantial doubt as to our ability to continue as a going concern within one year from the date of issuance of these consolidated financial statements. These consolidated financial statements do not include any adjustments that might result from this uncertainty. There can be no assurance that such additional capital, whether in the form of debt or equity financing, will be sufficient or available and, if available, that such capital will be offered on terms and conditions acceptable to us. As further discussed in Note No. 9 to the Condensed Consolidated Financial Statements, in April 2017, we committed to effect a reduction in our workforce and associated operating expenses, net loss and cash burn as part of our efforts to sustain our business. We will primarily focus our resources on producing and selling our existing products, and will substantially curtail new product development.  If we are unsuccessful in these efforts, we will need to implement additional cost reduction strategies, which could further affect our near- and long-term business plan. These efforts may include, but are not limited to, further reducing headcount and curtailing business activities.

 

Sources of Revenue

 

Product.  Product revenue is generally recognized at the time of shipment to our customers. An estimated allowance may be 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 account 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.

 

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.

 

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 Generally Accepted Accounting Principals (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, 2016. As of March 31, 2016, there have been no material changes to our significant accounting policies and estimates, except that we adopted ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, effective January 1, 2017, as discussed in Note 1 to the Condensed Consolidated Financial Statements.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 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. In March, April and May 2016, the FASB issued additional updates to the new revenue standard relating to reporting revenue on a gross versus net basis, identifying performance obligations and licensing arrangements, and narrow-scope improvements and practical expedients, respectively. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it

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becomes effective. The accounting standard is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017. Early adoption is permitted for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. ASU 2014-09 provides for one of two methods of transition: retrospective application to each prior period presented; or recognition of the cumulative effect of retrospective application of the new standard in the period of initial application.  We do not intend to early adopt this standard and plan to use the full retrospective approach to the transition.  We do not expect that the adoption of ASU 2014-09 will have a material impact on our consolidated financial statements. However, assuming all other revenue recognition criteria have been met, it is likely that ASU 2014-09 would require us to recognize revenue and cost relating to distributor sales upon product delivery, subject to estimated allowances for distributor price adjustments and rights of return.

In February 2016, the FASB issued ASU No. 2016-02 (ASU 2016-02), Leases.  ASU 2016-02 requires lessees to recognize a right-of-use asset and a lease liability equal to the present value of the lease payments for virtually all leases not classified as short term. Consistent with current U.S. GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily depend on its classification as a finance or operating lease. The ASU also will require disclosures to provide additional qualitative and quantitative information about the amounts recorded in the financial statements.  ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018, with early adoption permitted.  The new standard requires a modified retrospective transition for application at the beginning of the earliest comparative period presented. We are currently evaluating the impact that ASU 2016-02 will have on our consolidated financial statements and related disclosures.

 

 

Results of Operations

 

Net Revenue.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 Change

 

 

    

2017

    

2016

    

2016 to 2017

 

 

 

(dollar amounts in thousands)

 

Product -three months ended

 

$

955

 

$

1,120

 

$

(165)

    

(15)

%

Percentage of total net revenue

 

 

79

%  

 

77

%  

 

 

 

 

 

 

Product revenue decreased for the three months ended March 31, 2017 compared with the same period of 2016 primarily due to lower shipment volumes of our Bandwidth Engine products.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 Change

 

 

    

2017

    

2016

    

2016 to 2017

 

 

 

(dollar amounts in thousands)

 

Royalty

 

$

257

 

$

331

 

$

(74)

 

(22)

%

Percentage of total net revenue

 

 

21

%  

 

23

%  

 

 

 

 

 

 

Royalty revenue includes revenues generated from licensing agreements.  Royalty revenue decreased due to a decrease in shipment volumes by licensees whose products incorporate our licensed IP.

 

Cost of Net Revenue and Gross Profit.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 Change

 

 

    

2017

    

2016

    

2016 to 2017

 

 

 

(dollar amounts in thousands)

 

Cost of net revenue

 

$

602

 

$

863

 

$

(261)

 

(30)

%

Percentage of total net revenue

    

 

50

%  

 

59

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 Change

 

 

    

2017

    

2016

    

2016 to 2017

 

 

 

(dollar amounts in thousands)

 

Gross profit

 

$

610

 

$

588

 

$

22

 

 4

%

Gross margin

    

 

50

%  

 

41

%  

 

 

 

 

 

 

Cost of net revenue is primarily comprised of direct and indirect costs related to the sale of IC products.

 

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Cost of net revenue decreased for the three months ended March 31, 2017 compared with the same period of 2016 primarily due to reduced shipment volumes and reduced product manufacturing costs.

 

Gross margin increased for the three months ended March 31, 2017, compared with the same period of 2016, primarily due to the increase in gross profit from our product sales due to reduced manufacturing costs, partially offset by the decrease in royalty revenue which has no corresponding costs.

 

Research and Development.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 Change

 

 

    

2017

    

2016

    

2016 to 2017

 

 

 

(dollar amounts in thousands)

 

Research and development

 

$

3,485

 

$

5,232

 

 

(1,747)

    

$

(33)

%

Percentage of total net revenue

    

 

288

%  

 

361

%  

 

 

 

 

 

 

 

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 decrease for the three months ended March 31, 2017 compared with the same period in 2016 was primarily due to reduced personnel, product development and qualification, computer-aided design software and stock-based compensation expenses.

 

We expect research and development expenses to decrease in 2017 as compared with 2016 due to reductions in personnel as a result of our restructuring activity in the second quarter of 2017 (discussed in Note 9 of the Notes to the Consolidated Condensed Financial Statements), as well as further reduced new product development and qualification and computer-aided design software expenses.

 

Research and development expenses included stock-based compensation expense of $0.2 million and $0.4 million for the three months ended March 31, 2017 and 2016, respectively.

 

Selling, General and Administrative.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 Change

 

 

    

2017

    

2016

    

2016 to 2017

 

 

 

(dollar amounts in thousands)

 

Selling, general and administrative

 

$

1,314

 

$

1,516

 

$

(202)

    

(13)

%

Percentage of total net revenue

    

 

108

%  

 

104

%  

 

 

 

 

 

 

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

 

The decrease for the three months ended March 31, 2017 compared with the same period in 2016 was primarily due to lower compensation costs, including stock-based compensation charges. We expect SG&A expenses to decrease slightly in 2017, as compared with 2016, due to the effects of our restructuring activity in the second quarter of 2017, partially offset by increased commission expenses due to expected increases in product revenue.

 

Selling, general and administrative expenses included stock-based compensation expense of $0.1 million and $0.2 million for the three months ended March 31, 2017 and 2016, respectively.

 

Restructuring Charges.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

Year-Over-Year Change

 

 

    

2017

    

2016

    

2016 to 2017

 

 

 

(dollar amounts in thousands)

 

Restructuring charges

 

$

 —

 

$

676

 

$

(676)

    

(100)

%

Percentage of total net revenue

 

 

 —

%  

 

47

%  

 

 

 

 

 

 

In the first quarter of 2016, we recorded restructuring charges attributable to a reduction in force in the United States and the closure of operations at our Indian subsidiary.  We expect to incur additional restructuring charges in

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2017, as, in the quarter ending June 30, 2017, we committed to effect a reduction in our workforce and associated operating expenses. 

 

Interest expense and other income, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 Change

 

 

    

2017

    

2016

    

2016 to 2017

 

 

 

(dollar amounts in thousands)

 

Interest expense and other income (expense), net

 

$

(211)

 

$

(9)

 

$

202

    

2,244

%

Percentage of total net revenue

    

 

(17)

%  

 

(1)

%  

 

 

 

 

 

 

Interest expense and other income (expense), net primarily consisted of interest expense on our senior secured convertible notes, partially offset by interest income on our investments, as well as foreign currency transaction activity and other non-operating items. We paid the accumulated interest for the six-month period ended February 15, 2017 in-kind through the issuance of an identical new senior secured convertible note.

 

Income Tax Provision.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 Change

 

 

    

2017

    

2016

    

2016 to 2017

 

 

 

(dollar amounts in thousands)

 

Income tax provision

 

$

 5

 

$

20

 

$

(15)

    

(75)

%

Percentage of total net revenue

    

 

< 1

%  

 

 1

%  

 

 

 

 

 

 

The income tax provisions for the three months ended March 31, 2017 and 2016 were primarily attributable to taxes on earnings of our foreign subsidiaries and branches. We expect our income tax provision to decline in future periods, as we ceased operations at our Indian subsidiary in 2016. 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 be unable to realize the benefit of our net operating losses, which are primarily generated in the United States. 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 March 31, 2017, we had cash, cash equivalents and short-term investments of $5.6 million and had total working capital of $5.3 million. Our primary capital requirements are to fund working capital, including development of our IC products.

 

Net cash used in operating activities was $4.2 million for the first three months of 2017, which primarily resulted from our net loss of $4.4 million, partially offset by non-cash charges, including stock-based compensation expense of $0.2 million and depreciation and amortization expenses of $0.2 million.

 

Net cash used in operating activities was $7.2 million for the first three months of 2016, which primarily resulted from our net loss of $6.9 million and $1.3 million in net reductions in assets and liabilities, partially offset by non-cash charges, including stock-based compensation expense of $0.6 million and depreciation and amortization expenses of $0.3 million.  The changes in assets and liabilities primarily related to the timing of payments to vendors.

 

Net cash provided by investing activities was $0.8 million for the first three months of 2017, and included net amounts transferred to cash and cash equivalents from investments of $0.8 million, which did not impact our liquidity.

 

Net cash provided by investing activities was $4.0 million for the first three months of 2016, and included net amounts transferred to cash and cash equivalents from investments of $4.2 million, which did not impact our liquidity, partially offset by $0.2 million for purchases of fixed assets.

 

Net cash used in financing activities for the first three months of 2017 consisted primarily of payments of income taxes related to the issuance of common stock upon vesting of restricted stock units.

 

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Our proceeds from financing activities for the first three months of 2016 of $8.0 million consisted primarily of net proceeds received from the issuance of senior secured convertible notes and proceeds from the purchases of common stock under our employee stock purchase plan.

 

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;

·

inventory levels, timing of product shipments and length of billing and collection cycles;

·

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;

·

profitability of our business; and

·

whether interest payments on the Notes are paid in cash or, at our election, in kind through the issuance of new Notes with identical terms for the accrued interest.

Going Concern - Working Capital

We expect our cash expenditures to continue to exceed receipts in 2017, as our revenues will not be sufficient to offset our operating expenses. The condensed consolidated financial statements presented in Item 1 of this Report have been prepared assuming that we will continue as a going concern, and do not include any adjustments that might result from the outcome of this uncertainty. We have incurred recurring losses from operations, had recurring negative cash flows, and have a significant accumulated deficit. These conditions raise substantial doubt about our ability to continue as a going concern. We are currently seeking additional financing in order to meet our cash requirements for the foreseeable future. We may not be able to obtain additional financing as needed on acceptable terms, or at all, which may require us to reduce our operating costs and other expenditures, including reductions of personnel, salaries and capital expenditures. As further discussed in Note No. 9 of the condensed consolidated financial statements, in April 2017, we committed to effect a reduction in our workforce and associated operating expenses, net loss and cash burn as part of our efforts to sustain our business. We will primarily focus our resources on producing and selling our existing products, and will substantially curtail new product development.  If we are unsuccessful in these efforts, we will need to implement additional cost reduction strategies, which could further affect our near- and long-term business plan. These efforts may include, but are not limited to, further reducing headcount and curtailing business activities. Any such actions undertaken might limit our opportunities to realize plans for revenue growth and we might not be able to reduce our costs in amounts sufficient to achieve break-even or profitable operations.

If we were to raise additional capital through sales of our equity securities, our stockholders would suffer dilution of their equity ownership. If we engage in debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness, prohibit us from paying dividends, repurchasing our stock or making investments, and force us to maintain specified liquidity or other ratios, any of which could harm our business, operating results and financial condition. If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:

·

develop or enhance our products;

·

continue to expand our product development and sales and marketing organizations;

·

acquire complementary technologies, products or businesses;

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·

expand operations, in the United States or internationally;

·

hire, train and retain employees; or

·

respond to competitive pressures or unanticipated working capital requirements.

Our failure to do any of these things could seriously harm our ability to execute our business strategy and may force us to curtail our existing operations.

 

Contractual Obligations

 

The impact that our contractual obligations as of March 31, 2017 are expected to have on our liquidity and cash flow in future periods is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment Due by Period

 

 

 

 

 

 

Less than

 

 

 

 

 

 

 

More than

 

 

    

Total

    

1 year

    

1-3 years

    

3-5 years

    

5 years

 

Operating leases

 

$

2,616

 

$

759

 

$

1,536

 

$

321

 

$

 —

 

Software licenses

 

 

883

 

 

625

 

 

258

 

 

 —

 

 

 —

 

 

 

$

3,499

 

$

1,384

 

$

1,794

 

$

321

 

$

 —

 

 

As of March 31, 2017, our software licenses were primarily for computer-aided design software.

 

ITEM 3. Qualitative and Quantitative Disclosures about Market Risk

 

Our investment portfolio consists of money market accounts, certificates of deposit, commercial paper, corporate debt, government-sponsored enterprise bonds and municipal bonds. 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 $4.2 million as of March 31, 2017 and earned an average annual interest rate of approximately 0.5% during the first quarter of 2017, 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 March 31, 2017, our disclosure controls and procedures were effective.

 

Changes in Internal Control over Financial Reporting.  During the first quarter of 2017, 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.

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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, 2016, which we filed with the Securities and Exchange Commission on March 30, 2017.

 

 

 

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 March 31, 2017, filed with the SEC on May 12, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2017 and 2016, (ii) the Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016, (iii) the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016, 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: May 12, 2017

 

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 March 31, 2017, filed with the SEC on May 12, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2017 and 2016, (ii) the Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016, (iii) the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016, and (iv) Notes to Condensed Consolidated Financial Statements.

 

 

27