Peraso Inc. - Quarter Report: 2019 June (Form 10-Q)

Peraso Inc. - Quarter Report: 2019 June (Form 10-Q)

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10-Q

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 June 30, 2019

☐	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 of Incorporation or organization)		(I.R.S. Employer Identification Number)

2309 Bering Drive

San Jose, California, 95131

(Address of principal executive office and zip code)

(408) 418-7500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

symbol(s)

Name of each exchange

on which registered

Common Stock, par value $0.001 per share

MOSY

Nasdaq Capital Market

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 every Interactive Data File required to be submitted 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 such files). YES ☒ NO ☐

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

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. ☐

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

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 43,552,128 as of August 12, 2019.

MOSYS, INC.

FORM 10-Q

June 30, 2019

TABLE OF CONTENTS


PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited):	1

	Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018	1

	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2019 and 2018	2

	Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2019 and 2018	3

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018	4

	Notes to Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 4.	Controls and Procedures	20

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	21

Item 1A.	Risk Factors	22

Item 6.	Exhibits	23

	Signatures	24

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

MOSYS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except par value)


	June 30, 2019			December 31, 2018
ASSETS
Current assets
Cash and cash equivalents	$	6,372		$	7,104
Short-term investments		1,072			—
Accounts receivable		1,355			1,622
Inventories		601			1,148
Prepaid expenses and other		944			923

Total current assets		10,344			10,797
Property and equipment, net		223			279
Goodwill		420			420
Right-of-use lease asset		250			—
Other		260			260

Total assets	$	11,497		$	11,756

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	88		$	236
Deferred revenue		103			273
Short-term lease liability		197			—
Accrued expenses and other		1,114			1,402

Total current liabilities		1,502			1,911
Long-term liabilities		67			17
Convertible notes payable		2,749			2,671

Total liabilities		4,318			4,599

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; 43,233 shares and 42,967 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively		43			43
Additional paid-in capital		243,095			242,981
Accumulated other comprehensive income		1			—
Accumulated deficit		(235,960	)		(235,867	)

Total stockholders’ equity		7,179			7,157

Total liabilities and stockholders’ equity	$	11,497		$	11,756

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

MOSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands, except per share data)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
Net revenue
Product	$	2,810		$	4,051		$	6,196		$	7,755
Royalty and other		256			547			390			1,051

Total net revenue		3,066			4,598			6,586			8,806
Cost of net revenue		1,228			1,833			2,582			3,434

Gross profit		1,838			2,765			4,004			5,372
Operating expenses
Research and development		981			990			2,134			2,041
Selling, general and administrative		932			1,250			1,904			2,239

Total operating expenses		1,913			2,240			4,038			4,280

Income (loss) from operations		(75	)		525			(34	)		1,092
Interest expense		(56	)		(206	)		(110	)		(427	)
Other income (expense), net		28			(3	)		51			—

Income (loss) before income tax provision		(103	)		316			(93	)		665
Income tax provision		—			1			—			2

Net income (loss)	$	(103	)	$	315		$	(93	)	$	663

Other comprehensive income, net of tax:
Net unrealized gains on available-for-sale securities		1			—			1			—

Comprehensive income (loss)	$	(102	)	$	315		$	(92	)	$	663

Net income (loss) per share
Basic	$	(0.00	)	$	0.04		$	(0.00	)	$	0.08

Diluted	$	(0.00	)	$	0.04		$	(0.00	)	$	0.08

Shares used in computing net income (loss) per share
Basic		43,171			8,171			43,115			8,151
Diluted		43,171			8,409			43,115			8,378

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

MOSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)


								Accumulated
					Additional			Other
	Common Stock				Paid-In			Comprehensive		Accumulated
	Shares		Amount		Capital			Income		Deficit			Total
Balance at December 31, 2018		42,967	$	43	$	242,981			—	$	(235,867	)	$	7,157
Issuance of common stock for release of awards		172		—		(1	)		—		—			(1	)
Stock-based compensation		—		—		(4	)		—		—			(4	)
Net income		—		—		—			—		10			10

Balance at March 31, 2019		43,139		43		242,976			—		(235,857	)		7,162
Issuance of common stock for release of awards		94		—		—			—		—			—
Stock-based compensation		—		—		119			—		—			119
Unrealized gain on available-for-sale investments		—		—		—			1		—			1
Net loss		—		—		—			—		(103	)		(103	)

Balance at June 30, 2019		43,233	$	43	$	243,095		$	1	$	(235,960	)	$	7,179


								Accumulated
					Additional			Other
	Common Stock				Paid-In			Comprehensive		Accumulated
	Shares		Amount		Capital			Income		Deficit			Total
Balance at December 31, 2017		8,068	$	8	$	232,026			—	$	(224,688	)	$	7,346
Cumulative effect of accounting change		—		—		—			—		230			230
Issuance costs for the sale of common stock		—		—		(12	)		—		—			(12	)
Issuance of common stock for release of awards		103		—		(38	)		—		—			(38	)
Stock-based compensation		—		—		93			—		—			93
Net income		—		—		—			—		348			348

Balance at March 31, 2018		8,171		8		232,069			—		(224,110	)		7,967
Stock-based compensation		—		—		159			—		—			159
Net income		—		—		—			—		315			315

Balance at June 30, 2018		8,171	$	8	$	232,228		$	—	$	(223,795	)	$	8,441

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

MOSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Six Months Ended
	June 30,
	2019			2018
Cash flows from operating activities:
Net income (loss)	$	(93	)	$	663
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		111			340
Stock-based compensation		115			252
Amortization of intangible assets		—			55
Amortization of debt issuance costs		—			24
Accrued interest		110			403
Other		(7	)		—
Changes in assets and liabilities
Accounts receivable		267			207
Inventories		547			(528	)
Prepaid expenses and other assets		(21	)		920
Accounts payable		(148	)		58
Deferred revenue and other liabilities		(490	)		(2,592	)

Net cash provided by (used in) operating activities		391			(198	)
Cash flows from investing activities:
Purchases of property and equipment		(55	)		(25	)
Proceeds from maturities of short-term investments		500			—
Purchases of short-term investments		(1,567	)		—

Net cash used in investing activities		(1,122	)		(25	)
Cash flows from financing activities:
Issuance costs for sale of common stock		—			(12	)
Taxes paid to net share settle equity awards		(1	)		(38	)

Net cash used in financing activities		(1	)		(50	)
Net decrease in cash and cash equivalents		(732	)		(273	)
Cash and cash equivalents at beginning of period		7,104			3,868

Cash and cash equivalents at end of period	$	6,372		$	3,595

Supplemental disclosure:
Issuance of convertible notes in settlement of accrued interest	$	78		$	463

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

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 IP-rich fabless semiconductor company focused on the development and sale of integrated circuit (IC) and related firmware products. Its 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 accompanying condensed consolidated financial statements of the Company have been prepared without audit.

The condensed consolidated balance sheet as of December 31, 2018 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 the rules and regulations of the Securities and Exchange Commission (SEC). 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, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 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 ends on December 31 of each calendar year.

Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and 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 invests 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 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 may 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 uncollectibility. The Company performs ongoing customer credit evaluations within the context of the industry in which it operates and generally does not require collateral from its customers. A specific allowance of up to 100% of the invoice value is provided for any problematic customer balances. Delinquent account balances are written off after management has determined that the likelihood of collection is remote. The Company grants credit only to customers deemed creditworthy in the judgment of management. There was no allowance for doubtful accounts receivable at either June 30, 2019 or December 31, 2018.

Inventories

The Company values its inventories at the lower of cost, which approximates actual cost on a first-in, first-out basis, or net realizable 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 material inventory write-downs during the three or six month periods ended June 30, 2019 or 2018.

Revenue Recognition

The Company generates revenue primarily from sales of IC products and licensing of its IP. Revenues are recognized when control is transferred to customers in amounts that reflect the consideration the Company expects to be entitled to receive in exchange for those goods. Revenue recognition is evaluated through the following five steps: (i) identification of the contract, or contracts, with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when or as a performance obligation is satisfied.

IC products

Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied.

The majority of the Company’s contracts have a single performance obligation to transfer products. Accordingly, the Company recognizes revenue when title and risk of loss have been transferred to the customer, generally at the time of shipment of products. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products and is generally based upon a negotiated, formula, list or fixed price. The Company sells its products both directly to customers and through distributors generally under agreements with payment terms typically less than 60 days.

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.

Royalty and other

The Company’s licensing contracts typically provide for royalties based on the licensee’s use of the Company’s memory technology in its currently shipping commercial products. The Company estimates its royalty revenue in the calendar quarter in which the licensee uses the licensed technology. Payments are generally received in the subsequent quarter.

Contract liabilities – deferred revenue

The Company’s contract liabilities consist of advance customer payments and deferred revenue. The Company classifies advance customer payments and deferred revenue as current or non-current based on the timing of when the Company expects to recognize revenue.

During the six months ended June 30, 2019, the Company recognized revenue of $0.3 million that had been included in deferred revenue at December 31, 2018.

See Note 5 for disaggregation of revenue by geography.

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

The Company determines the amount of a potential goodwill impairment by comparing the fair value of the reporting unit with its carrying amount. To the extent the carrying value of a reporting unit exceeds its fair value, a goodwill impairment charge is recognized.

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. 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 an 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. If the carrying value of the reporting unit’s goodwill exceeds its fair value, then the Company must record an impairment charge equal to the difference.

Warrants

As of June 30, 2019 and December 31, 2018, the company had the following outstanding warrants to purchase common stock:


Warrant type	Number of shares		Exercise price		Expiration date
Pre-funded common stock		2,310,776	$	0.001	None
Common stock		662,500	$	2.35	January 2023
Common stock		36,910,809	$	0.30	October 2023

Per Share Amounts

Basic net income (loss) per share is computed by dividing net income (loss) for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted net income (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 and warrants, vesting of stock awards and shares issuable in conjunction with the outstanding convertible notes.

The following table sets forth the computation of basic and diluted net income (loss) per share for the periods indicated (in thousands, except per share amounts):


	Three months ended June 30,					Six months ended June 30,
	2019			2018		2019			2018
Numerator:
Net income (loss)	$	(103	)	$	315	$	(93	)	$	663

Denominator:
Add: weighted-average common shares outstanding		43,171			8,171		43,115			8,151

Total shares: basic		43,171			8,171		43,115			8,151
Add: weighted-average stock options outstanding		—			81		—			72
Add: weighted-average unvested restricted stock units		—			157		—			155

Total shares: diluted		43,171			8,409		43,115			8,378
Net income (loss) per share:
Basic	$	(0.00	)	$	0.04	$	(0.00	)	$	0.08

Diluted	$	(0.00	)	$	0.04	$	(0.00	)	$	0.08

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


	Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018
Options outstanding to purchase common stock		1,628		144		1,628		144
Unvested restricted common stock units		2,148		—		2,148		—
Convertible debt		4,809		2,271		4,809		2,271
Outstanding warrants		39,884		—		39,884		—

Total		48,469		2,415		48,469		2,415

Debt Issuance Costs

Debt issuance costs are capitalized and amortized to interest expense using the effective interest method. Unamortized debt issuance 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.

Recently Adopted Accounting Standards

In 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases. The standard introduces a new lessee model that requires most leases to be recorded on the balance sheet and eliminates the required use of bright-line tests for determining lease classification. In July 2018, the FASB issued the following standards which clarified ASU No. 2016-02 and have the same effective date as the original standard: ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. ASU No. 2018-11 includes an option to not restate comparative periods in transition and elect to use the effective date of ASU No. 2016-02 as the date of initial application of transition. In March 2019, the FASB issued ASU No. 2019-01, Leases (Topic 842): Codification Improvements, which clarifies ASU No. 2016-02 and is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company adopted ASU No. 2016-02, as amended, on January 1, 2019 using the optional transition method provided by the FASB in ASU No. 2018-11. As the Company did not restate comparative periods, the adoption had no impact on previously reported results. The Company elected to use the practical expedient that allowed it to not reassess: (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases as well as the practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component for all asset classes. The adoption of this standard had a material impact on the Company’s condensed consolidated balance sheet due to the recognition of right of use assets and lease liabilities. Upon adoption, the Company recognized right of use assets and lease liabilities of approximately $0.4 million that reflected the present value of future lease payments. The adoption of this standard did not have a material impact on the Company’s condensed consolidated results of operations or cash flows. See Note 9 for further information.

In 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718), Improvements to Employee Share-based Payment Accounting. ASU No. 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company adopted ASU No. 2016-09 effective January 1, 2019, and has applied the effects of the adoption from that date. ASU No. 2016-09 permits entities to make an accounting policy election related to how forfeitures will impact the recognition of compensation cost for stock-based compensation to: estimate the total number of awards for which the requisite service period will not be rendered (as previously required) or account for forfeitures as they occur. Upon the adoption of ASU No. 2016-09, the Company elected to change its accounting policy to account for forfeitures as they occur. Historically, estimated forfeitures were immaterial to the consolidated financial statements. The amendments in the standard that required use of a modified retrospective transition method did not materially impact the Company. Therefore, the Company did not recognize a cumulative-effect adjustment to accumulated deficit upon adoption.

Note 2: Fair Value of Financial Instruments

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


	June 30, 2019
			Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Cash and cash equivalents	$	6,372	$	—	$	—	$	6,372
Short-term investments		1,071		1		—		1,072

	$	7,443	$	1	$	—	$	7,444


	December 31, 2018
			Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Cash and cash equivalents	$	7,104	$	—	$	—	$	7,104

The following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) (in thousands):


	June 30, 2019
	Fair Value		Level 1		Level 2		Level 3
Money market funds	$	3,755	$	3,755	$	—	$	—
Corporate notes and commercial paper	$	1,072	$	—	$	1,072	$	—

	December 31, 2018
	Fair Value		Level 1		Level 2		Level 3
Money market funds	$	632	$	632	$	—	$	—

There were no transfers in or out of Level 1 and Level 2 securities during the three or six months ended June 30, 2019 or 2018.

Note 3. Balance Sheet Detail


	June 30, 2019		December 31, 2018
	(in thousands)
Inventories:
Work-in-process	$	443	$	548
Finished goods		158		600

	$	601	$	1,148

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, 2019 or 2018 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 legal proceeding that the Company believes is likely to have a material adverse effect on its condensed consolidated financial position or results of operations. From time to time the Company may be subject to legal proceedings and claims in the ordinary course of business. These claims, even if not meritorious, could result in the expenditure of significant financial resources and diversion of management efforts.

Note 5. Business Segments, 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 is attributed to the United States and to all foreign countries based on the geographical location of the customer.

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
North America	$	2,587	$	3,384	$	5,074	$	6,741
Japan		346		1,128		1,252		1,842
Taiwan		54		73		128		156
Rest of world		79		13		132		67

Total net revenue	$	3,066	$	4,598	$	6,586	$	8,806

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Customer A		29	%		31	%		26	%		39	%
Customer B		27	%		21	%		21	%		22	%
Customer C		12	%		*	%		13	%		*	%
Customer D		*	%		24	%		15	%		12	%

*	Represents less than 10%

Four customers accounted for 84% of accounts receivable at June 30, 2019. Three customers accounted for 63% of accounts receivable at December 31, 2018.

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 2013 to 2017 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 2009 to 2017. As of June 30, 2019, 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, as of June 30, 2019, was $0.2 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-four year vesting period and is based on the fair value of the underlying stock on the dates of grant. The unamortized compensation cost, as of June 30, 2019, was $0.4 million related to RSUs and is expected to be recognized as expense over a weighted-average period of approximately 2.6 years.

For the three and six months ended June 30, 2019 and 2018, there were no excess tax benefits associated with the exercise of stock options due to the Company’s historical loss positions.

Valuation Assumptions

The fair value of the Company’s stock options granted during the six months ended June 30, 2019 and 2018 was estimated on the grant dates using the Black-Scholes valuation option-pricing model with the following assumptions:


	Six Months Ended
	June 30,
	2019			2018
Risk-free interest rate		2.5	%		2.2	%
Volatility		128.4	%		109.5	%
Expected life (years)		3.0 - 5.0			4.0
Dividend yield		—	%		—	%

There were no stock option grants during the three months ended June 30, 2019 and 2018.

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.

Prior to January 1, 2019, the stock-based compensation expense recorded was adjusted based on estimated forfeiture rates. An annualized forfeiture rate was used as a best estimate of future forfeitures based on the Company’s historical forfeiture experience. Stock-based compensation expense was then adjusted in later periods if the actual forfeiture rate was different from the estimate. Upon the adoption of ASU No. 2016-09 on January 1, 2019, the Company changed its accounting policy and began accounting for forfeitures as they occur. Historically, estimated forfeitures were immaterial to the condensed consolidated financial statements.

Common Stock Options and Restricted Stock

A summary of 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, 2019		4,007			337		$	4.19
Additional shares authorized under the Plan		50			—			—
RSUs granted		(2,028	)		—			—
RSUs cancelled and returned to the Plan		11			—			—
Options granted		(1,297	)		1,297		$	0.20
Options cancelled and returned to the Plan		1			(1	)	$	7.20

Balance at March 31, 2019		744			1,633		$	1.02
RSUs granted		(120	)		—			—
Options cancelled and returned to the Plan		5			(5	)	$	7.20

Balance at June 30, 2019		629			1,628		$	1.00

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, 2019		272		$	1.23
Granted		2,028		$	0.20
Vested		(167	)	$	1.48
Cancelled		(11	)	$	1.26

Non-vested shares at March 31, 2019		2,122		$	0.23
Granted		120		$	0.23
Vested		(94	)	$	0.81

Non-vested shares at June 30, 2019		2,148		$	0.20

The total intrinsic value of the RSUs outstanding as of June 30, 2019 was $0.4 million.

The following table summarizes significant ranges of outstanding and exercisable options as of June 30, 2019 (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
$0.18 - $0.74		1,297		9.60	$	0.20		122	$	0.20	$	—
$0.75 - $1.27		160		4.31	$	0.75		53	$	0.75	$	—
$1.28 - $7.19		51		5.08	$	2.09		23	$	2.94	$	—
$7.20 - $20.49		101		7.15	$	7.20		96	$	7.20	$	—
$20.50 - $46.20		19		5.69	$	21.53		19	$	21.53	$	—

$0.18 - $46.20		1,628		8.74	$	1.00		313	$	3.94	$	—

There were no stock options exercised during the six months ended June 30, 2019 or 2018.

Note 8. Convertible Notes

In March 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. Pursuant to amendments to the Notes and related documents in February and October 2018, the interest rate was reduced to 8%, the maturity date of the Notes was extended to August 15, 2023, and the optional conversion price was reduced from $8.50 of Note principal per share of common stock to $0.5717 of Note principal per share of common stock. The conversion price is subject to adjustment upon certain events, such as stock splits, reverse stock splits, stock dividends and similar kinds of transactions, as set forth in the Purchase Agreement. Pursuant to a security agreement, the Notes are secured by a security interest in all of the assets of the Company.

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 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. Effective February 2018, pursuant to one amendment to the Notes, the redemption price was reduced from 120% to 100% of the principal amount of the Note to be repurchased plus accrued and unpaid interest as of the redemption date.

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 19.9% 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 were amortized to interest expense over the original repayment period using the effective interest rate method. The interest expense related to the debt discount during the six months ended June 30, 2019 and 2018 was approximately zero and approximately $24,000, respectively.

In accordance with the October 2018 amendment to the Notes, the Company used $7.4 million of the proceeds from a public offering of securities effected in October 2018 to repay a portion of the Notes. As of June 30, 2019, the outstanding convertible notes payable of $2.7 million were due in August 2023. In February 2019, a semi-annual interest payment of approximately $78,000 was paid in-kind with the issuance of an additional note (the Interest Note) to the Purchasers. The Interest Note has terms identical to the Notes. As of June 30, 2019, the Notes and Interest Note could be converted into a maximum of 4,808,626 shares of common stock at $0.5717 per share, excluding the effects of future payments of interest in-kind and a beneficial ownership ceiling of 9.9%.

Note 9. Leases

Effective January 1, 2019, the Company adopted ASU No. 2016-02, as amended, using the alternative transition method, which allowed the Company to initially apply the new lease standard at the adoption date (the “effective date method”). Under the effective date method, comparative periods are presented under previous GAAP, Accounting Standards Codification 840, and do not include any retrospective adjustments to reflect the adoption of ASU No. 2016-02. As an accounting policy, the Company has elected not to apply the recognition requirements to short-term leases and not to separate non-lease components from lease components. The Company also has elected the package of transition provisions available for existing contracts, which allowed the Company to carryforward its historical assessments of (i) whether contracts are or contain leases, (ii) lease classification and (iii) initial direct costs. The adoption did not result in a cumulative-effect adjustment to the opening balance of accumulated deficit. As a result of the adoption, the Company recorded an operating lease right-to-use asset of $0.4 million and corresponding short-term and long-term liabilities of $0.2 million and $0.2 million, respectively, as of January 1, 2019. The adoption of ASU No. 2016-02 did not have a material impact on the Company’s condensed consolidated statement of operations and comprehensive income or cash flows as of the adoption date.

The Company identified only one lease to be accounted for under ASU No. 2016-02, and this was the lease for its corporate facility, which expires in October 2020. The right-to-use asset and corresponding liability for the facility lease have been measured at the present value of the future minimum lease payments. The discount rate used to measure the lease asset and liability represents the interest rate on the Notes (8%). Lease expense is recognized on a straight line basis over the lease term, and operating lease expense was $0.1 million for the six months ended June 30, 2019.

Our future minimum payments under our facility operating lease as of June 30, 2019 are listed in the table below (in thousands).


	Operating
Year ended December 31,	lease
2019	$	110
2020		187

Total future lease payments		297
Less: imputed interest		(33	)

Present value of lease liabilities	$	264

Supplemental cash flow information related to the operating lease was as follows (in thousands):


	Six months ended
	June 30, 2019
Cash paid for amounts included in the measurement of lease liabilites:
Operating cash flows for lease	$	109

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 12, 2019 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 under Item 1A of our annual report on Form 10-K for the year ended December 31, 2018. We undertake no obligation to update publicly any forward-looking statements for any reason, except as required by law, even as new information becomes available or events occur in the future.

Company Overview

Our strategy and primary business objective is to be a profitable IP-rich fabless semiconductor company offering ICs that deliver unparalleled memory bandwidth and access rate performance for high-performance data processing in cloud networking, communications, security appliances, video, test and monitoring, and data center systems. Our solutions deliver time-to-market, performance, power, area and economic benefits for system original equipment manufacturers, or OEMs. Our principal product line and source of substantially all of our revenue is the Bandwidth Engine^® product family. 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. Our second-generation Bandwidth Engine, or Bandwidth Engine 2, products are expected to be our primary revenue source through at least 2020, and we expect these products to continue to generate significant revenue thereafter. Despite our limited new product development efforts, we believe our current product portfolio positions us for future growth and profitability. We will continue to seek third-party funding for new product development efforts.

We incurred net losses of approximately $11 million for each of the years ended December 31, 2018 and 2017 and had an accumulated deficit of approximately $236 million as of June 30, 2019. These and prior year losses have resulted in significant negative cash flows for almost a decade and have necessitated that we 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 and one offering of convertible notes.

We may continue to incur operating losses and will need to increase revenues substantially beyond levels that we have 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.

Accounting Changes

On January 1, 2019, we adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), as discussed in Notes 1 and 9 to our condensed consolidated financial statements included in Item 1 of this Report.

On January 1, 2019, we adopted FASB ASU No. 2016-09, Compensation—Stock Compensation (Topic 718), Improvements to Employee Share-based Payment Accounting. (ASU 842), as discussed in Notes 1 and 7 to our condensed consolidated financial statements included in Item 1 of this Report.

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.

Royalty and other. Our licensing contracts typically provide for royalties based on the licensee’s use of our memory technology in their currently shipping commercial products. We estimate royalty revenue in the period in which the licensee uses the licensed technology. Payments are received in the following period.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these condensed consolidated 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, 2018. As of June 30, 2019, there have been no material changes to our significant accounting policies and estimates, except that we adopted ASU Nos. 2016-02 and 2016-09 effective January 1, 2019, as discussed above.

Results of Operations

Net Revenue.


	June 30,						Change
	2019			2018			2018 to 2019
	(dollar amounts in thousands)
Product – three months ended	$	2,810		$	4,051		$	(1,241	)	(31	)%
Percentage of total net revenue		92	%		88	%
Product – six months ended	$	6,196		$	7,755		$	(1,559	)	(20	)%
Percentage of total net revenue		94	%		88	%

Product revenue decreased for the three and six months ended June 30, 2019 compared with the same periods of 2018 primarily due to lower sales of our Bandwidth Engine products. Although we experienced increased sales of our LineSpeed products, they did not offset the decline in Bandwidth Engine shipments. We expect our product revenues to decrease for the remainder 2019, primarily due to the completion of shipments of last-time buy orders for our first-generation Bandwidth Engine combined with the decision by a large networking equipment customer to reduce its inventory level of Bandwidth Engine 2 products, because it had accumulated a buffer inventory over the last few quarters.


	June 30,						Change
	2019			2018			2018 to 2019
	(dollar amounts in thousands)
Royalty and other – three months ended	$	256		$	547		$	(291	)	(53	)%
Percentage of total net revenue		8	%		12	%
Royalty and other – six months ended	$	390		$	1,051		$	(661	)	(63	)%
Percentage of total net revenue		6	%		12	%

Royalty and other includes revenues generated from licensing agreements. The decrease in royalty and other revenue for 2019 was primarily due to a non-recurring license and engineering services for a development project for which revenue was recognized during the three and six months ended June 30, 2018, combined with lower royalty revenues in 2019 resulting from lower shipment volumes by licensees whose products incorporate our licensed IP.

Cost of Net Revenue and Gross Profit.


	June 30,						Change
	2019			2018			2018 to 2019
	(dollar amounts in thousands)
Cost of net revenue – three months ended	$	1,228		$	1,833		$	(605	)	(33	)%
Percentage of total net revenue		40	%		40	%
Cost of net revenue – six months ended	$	2,582		$	3,434		$	(852	)	(25	)%
Percentage of total net revenue		39	%		39	%

	June 30,						Change
	2019			2018			2018 to 2019
	(dollar amounts in thousands)
Gross profit – three months ended	$	1,838		$	2,765		$	(927	)	(34	)%
Percentage of total net revenue		60	%		60	%
Gross profit – six months ended	$	4,004		$	5,372		$	(1,368	)	(25	)%
Percentage of total net revenue		61	%		61	%

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

Cost of net revenue decreased for the three and six months ended June 30, 2019 compared with the same periods of 2018 primarily due to decreased product shipment volumes. We expect the total cost of net revenue to remain consistent as a percentage of total net revenue for the remainder of 2019.

Gross profit decreased for the three and six months ended June 30, 2019, compared with the same period of 2018, primarily from the decrease in gross profit from reduced product shipments, as well as from reduced royalty and other revenues, which have little to no associated costs.

Research and Development.


	June 30,						Change
	2019			2018			2018 to 2019
	(dollar amounts in thousands)
Research and development – three months ended	$	981		$	990		$	(9	)	(1	)%
Percentage of total net revenue		32	%		22	%
Research and development – six months ended	$	2,134		$	2,041		$	93		5	%
Percentage of total net revenue		32	%		23	%

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

The decrease for the three months ended June 30, 2019 was primarily due to a decrease in depreciation expense partially offset by increased development expenses for our Bandwidth Engine 3 and LineSpeed products. The increase for the six months ended June 30, 2019 was primarily due to increased development expenses for our Bandwidth Engine 3 and LineSpeed products, which were partially offset by a decrease in depreciation expense. We expect that total research and development expenses will increase slightly for the remainder of 2019 primarily due to increased personnel costs and investments to develop new derivatives of our existing products.

Selling, General and Administrative


	June 30,						Change
	2019			2018			2018 to 2019
	(dollar amounts in thousands)
SG&A – three months ended	$	932		$	1,250		$	(318	)	(25	)%
Percentage of total net revenue		30	%		27	%
SG&A – six months ended	$	1,904		$	2,239		$	(335	)	(15	)%
Percentage of total net revenue		29	%		25	%

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 and six months ended June 30, 2019 was primarily due to reduced professional fees, sales commissions and personnel costs. We expect total SG&A expenses to increase slightly for the remainder of 2019 primarily due to increased personnel costs.

Interest expense


	June 30,						Change
	2019			2018			2018 to 2019
	(dollar amounts in thousands)
Interest expense – three months ended	$	56		$	206		$	(150	)	(73	)%
Percentage of total net revenue		2	%		4	%
Interest expense – six months ended	$	110		$	427		$	(317	)	(74	)%
Percentage of total net revenue		2	%		5	%

Interest expense consisted of interest expense on our senior secured convertible notes (the Notes). To date, we have paid all accumulated interest for the Notes in-kind through the issuance of identical new senior secured convertible notes. As a result of an amendment to the Notes in October 2018 and repayment of principal, interest expense is significantly lower in 2019. See Note 8 to the condensed consolidated financial statements for additional disclosure.

Liquidity and Capital Resources; Changes in Financial Condition

Cash Flows

As of June 30, 2019, we had cash, cash equivalents and short-term investments of $7.4 million and working capital of $8.8 million.

Net cash provided by operating activities was $0.4 million for the first six months of 2019, which primarily resulted from $0.2 in net changes in assets and liabilities and non-cash charges, stock-based compensation of $0.1 million, depreciation and amortization expenses of $0.1 million and accrued interest of $0.1 million, partially offset by net loss of $0.1 million. The changes in assets and liabilities primarily related to the timing of customer collections and inventory and other vendor payables and prepayments.

Net cash used in operating activities was $0.2 million for the first six months of 2018, which primarily resulted from $1.9 million in net reductions in assets and liabilities partially offset by net income of $0.7 million, non-cash charges, including stock-based compensation expense of $0.3 million, depreciation and amortization expenses of $0.4 million and accrued interest of $0.4 million. The changes in assets and liabilities primarily related to the timing of customer collections and inventory prepayments and net change in liabilities.

Net cash used in investing activities of $1.1 million for the six months ended June 30, 2019 was mainly due to the purchase of short-term investments of $1.6 million, which did not affect our liquidity, partially offset by proceeds from the maturities of short-term investments of $0.5 million. Net cash used in investing activities during the six months ended June 30, 2018 was for the purchase of operating equipment, and was not significant.

There were minimal cash flows used in financing activities during the six months ended June 30, 2019. Net cash used in financing activities for the first six months of 2018 consisted of amounts paid for employee income taxes related to net share settlement of vested RSUs and costs incurred in connection with the sale of common stock and warrants to purchase common stock in an equity offering completed in 2017.

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.

Working Capital

Our primary need for liquidity is to fund working capital requirements of our business, capital expenditures and general corporate purposes. We expect our cash expenditures to exceed receipts in 2019, as our revenues will not be sufficient to offset our working capital requirements. We incurred net losses of approximately $11 million for each of the years ended December 31, 2018 and 2017 and had an accumulated deficit of approximately $236 million as of March 31, 2019. These and prior year losses have resulted in significant negative cash flows for more than 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 and a sale of $8.0 million of 10% Senior Secured Convertible Notes in March 2016, of which we have repaid principal of $7.4 million from the proceeds of a public offering of common stock in October 2018. Interest on the notes totaling approximately $2.1 million has been paid through the issuance of additional notes having the same terms. As of June 30, 2019, the outstanding balance of the Notes approximated $2.7 million with a maturity date of August 15, 2023.

(See Note 8 to the condensed consolidated financial statements included in Item 1 of this Report.)

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:

•

repay the Notes when they are due;

•

develop or enhance our products;

•

expand our product development and sales and marketing organizations;

•

acquire complementary technologies, products or businesses;

•

expand operations;

•

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 or research and development plans.

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 June 30, 2019, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting. During the first six months of 2019, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 1. Legal Proceedings

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

ITEM 1A. Risk Factors

We face many significant risks in our business, some of which are unknown to us and not presently foreseen. These risks could have a material adverse impact on our business, financial condition and results of operations in the future. We have disclosed a number of material risks under Item 1A of our annual report on Form 10-K for the year ended December 31, 2018, which we filed with the SEC on March 12, 2019.

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 June 30, 2019, filed with the SEC on August 13, 2019, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2019 and 2018, (ii) the Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018, (iii) the Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2019 and 2018, (iv) the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018, and (v) Notes to Condensed Consolidated Financial Statements.

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: August 13, 2019		MOSYS, INC.

	By:	/s/ Daniel Lewis
		Daniel Lewis
		President and Chief Executive Officer

	By:	/s/ James W. Sullivan
		James W. Sullivan
		Vice President of Finance and Chief Financial Officer (Principal Financial Officer)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging Growth Company