NOTE 1—THE COMPANY AN
D SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
GSI Technology, Inc. (the “Company”) was incorporated in California in March 1995 and reincorporated in Delaware on June 9, 2004. The Company is a provider of high performance semiconductor memory solutions to networking, industrial, medical, aerospace and military customers. The Company’s products are incorporated primarily in high-performance networking and telecommunications equipment, such as routers, switches, wide area network infrastructure equipment, wireless base stations and network access equipment. In addition, the Company serves the ongoing needs of the military, industrial, test equipment and medical markets for high-performance SRAMs. The Company’s in-place associative computing product, currently under development, is targeted for markets including big data, computer vision and cyber security.
Accounting principles
The consolidated financial statements and accompanying notes were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Basis of consolidation
The consolidated financial statements include the accounts of the Company’s four wholly-owned subsidiaries, GSI Technology Holdings, Inc., GSI Technology (BVI), Inc., GSI Technology Israel Ltd. and GSI Technology Taiwan, Inc. All inter-company transactions and balances have been eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates are inherent in the preparation of the consolidated financial statements and include revenue recognition, obsolete and excess inventory, the valuation allowance on deferred tax assets, stock-based compensation, contingent consideration and the valuation of goodwill. Actual results could differ from those estimates.
Risk and uncertainties
The Company buys all of its SRAM and LLDRAM wafers, integral components of its products, from single suppliers and is also dependent on independent suppliers to assemble and test its products. During the years ended
March 31, 2017
,
2016
and
2015
, all of the wafers used in the Company’s SRAM and LLDRAM products were supplied by Taiwan Semiconductor Manufacturing Company Limited, or TSMC, and Powerchip Technology Corporation, or Powerchip, respectively. If these suppliers fail to satisfy the Company’s requirements on a timely basis at competitive prices, the Company could suffer manufacturing delays, a possible loss of revenues, or higher cost of revenues, any of which could adversely affect operating results.
A majority of the Company’s net revenues come from sales to customers in the networking and telecommunications equipment industry. A decline in demand in this industry could have a material adverse effect on the Company’s operating results and financial condition.
Because much of the manufacturing and testing of the Company’s products is conducted in Taiwan, its business performance may be affected by changes in Taiwan’s political, social and economic environment. For example, any political instability resulting from the relationship among the United States, Taiwan and the People’s Republic of China could damage the Company’s business. Moreover, the role of the Taiwanese government in the Taiwanese economy is significant. Taiwanese policies toward economic liberalization, and laws and policies affecting technology companies, foreign investment, currency exchange rates, taxes and other matters could change, resulting in greater restrictions on the Company’s and its suppliers' ability to do business and operate facilities in Taiwan. If any of these risks were to occur, the Company’s business could be harmed.
Some of the Company’s suppliers and the Company’s two principal operations are located near fault lines. In the event of a major earthquake or other natural disaster near the facilities of any of these suppliers or the Company, the Company’s business could be harmed.
From time to time, the Company is involved in legal actions. See Note 7 for information regarding litigation that was resolved during the year ended March 31, 2016. There are many uncertainties associated with any litigation, and the Company may not prevail. If information becomes available that causes us to determine that a loss in any of our pending litigation, or the settlement of such litigation, is probable, and we can reasonably estimate the loss associated with such events, we will record the loss in accordance with GAAP. However, the actual liability in any such litigation may be materially different from our estimates, which could require us to record additional costs
.
Revenue recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectability of the resulting receivable is reasonably assured. Under these criteria, revenue from the sale of products is generally recognized upon shipment according to the Company’s shipping terms, net of accruals for estimated sales returns and allowances based on historical experience. Sales to distributors are made under agreements allowing for returns or credits. Distributors have stock rotation, price protection and ship from stock pricing adjustment rights and the Company therefore defers recognition of revenue on sales to distributors until products are resold by the distributor. In light of possible changes to sales prices resulting from price protection and price adjustment rights granted, sales prices to the distributor are not fixed or determinable until the final sale to the end user. For sales to consignment warehouses, who purchase products from the Company for use by contract manufacturers, revenues are recognized upon delivery to the contract manufacturer.
Cash and cash equivalents
Cash and cash equivalents include cash in demand accounts and highly liquid investments purchased with an original or remaining maturity of three months or less at the date of purchase, stated at cost, which approximates their fair value.
Short-term and long-term investments
All of the Company’s short-term and long-term investments are classified as available-for-sale. Available-for-sale debt securities with maturities greater than twelve months are classified as long-term investments when they are not intended for use in current operations. Investments in available-for-sale securities are reported at fair value with unrecognized gains (losses), net of tax, as a component of “Accumulated other comprehensive income (loss)” on the Consolidated Balance Sheets. The Company monitors its investments for impairment periodically and records appropriate reductions in carrying values when the declines in fair value are determined to be other-than-temporary.
Concentration of credit risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash, cash equivalents, short-term and long-term investments and accounts receivable. The Company places its cash primarily in checking, certificate of deposit, and money market accounts with reputable financial institutions, and by policy, limits the amount of credit exposure with any one financial institution or commercial issuer. The Company’s accounts receivable are derived primarily from revenue earned from customers located in the U.S. and Asia. The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers. The Company maintains an allowance for doubtful accounts receivable based upon the expected collectability of accounts receivable. There were no write offs of accounts receivable in the years ended March 31, 2017, 2016 or 2015.
At March 31, 2017, four customers accounted for 36%, 26%, 13%, and 10% of accounts receivable, and for the year then ended, four customers accounted for 26%, 20%, 20% and 10% of net revenues. At March 31, 2016, four customers accounted for 26%, 25%, 13%, and 11% of accounts receivable, and for the year then ended, four customers accounted for 28%, 16%, 14% and 13% of net revenues. For the year ended March 31, 2015, three customers accounted for 35%, 13% and 12% of net revenues.
Inventories
Inventories are stated at the lower of cost or market value, cost being determined on a weighted average basis. Inventory write-down allowances are established when conditions indicate that the selling price could be less than cost due to physical deterioration, obsolescence, changes in price levels, or other causes. These allowances, once recorded, result in a new cost basis for the related inventory. These allowances are also considered for excess inventory generally based on inventory levels in excess of 12 months of forecasted demand, as estimated by management, for each specific product. The allowance is not reversed until the inventory is sold or disposed of.
The Company recorded write-downs of excess and obsolete inventories of $588,000, $1.2 million and $1.1 million, respectively, in fiscal
2017
,
2016
and
2015
.
Property and equipment, net
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as presented below:
|
|
|
Software
|
|
3 to 5 years
|
Computer and other equipment
|
|
5 to 10 years
|
Building and building improvements
|
|
10 to 25 years
|
Furniture and fixtures
|
|
7 years
|
Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful lives of the assets or the remaining lease term of the respective assets. Gains or losses on disposals of property and equipment are recorded within income from operations. Costs of repairs and maintenance are included as part of operating expenses unless they are incurred in relation to major improvements to existing property and equipment, at which time they are capitalized.
Impairment of long-lived assets
Long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. If the sum of the expected future cash flows
(undiscounted and before interest) from the use of the assets is less than the net book value of the asset an impairment could exist and the amount of the impairment loss, if any, will generally be measured as the difference between the net book value of the assets and their estimated fair values. There were no impairment losses recognized during the years ended
March 31, 2017
,
2016
or
2015
.
Goodwill and intangible assets
Goodwill is not amortized but is tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable.
The Company assesses goodwill for impairment on an annual basis on the last day of February in the fourth quarter of its fiscal year and if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis. The Company has one reporting unit. In accordance with ASU 2011-08,
Testing Goodwill for Impairment
, qualitative factors can be assessed to determine whether it is necessary to perform the current two-step test for goodwill impairment. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required.
Intangible assets with finite useful lives are amortized over their estimated useful lives, generally on a straight-line basis over five to fifteen years. The Company reviews identifiable amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Determination of recoverability is based on the lowest level of identifiable estimated undiscounted cash flows resulting from use of the asset and its eventual disposition. Measurement of any impairment loss is based on the excess of the carrying value of the asset over its fair value.
Research and development
Research and development expenses are related to new product designs, including, salaries, stock-based compensation, contractor fees, and allocation of corporate costs and are charged to the statement of operations as incurred.
Income taxes
The Company accounts for income taxes under the liability method, whereby deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when it is more likely than not that the deferred tax asset will not be realized. Because the Company recorded a cumulative three-year loss on a U.S. tax basis for the year ended March 31, 2017 and 2016, the Company has recorded a tax provision reflecting a full valuation allowance of its $8.9 million and $6.4 million of net deferred tax assets at March 31, 2017 and 2016, respectively.
Authoritative guidance prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return (including a decision whether to file or not to file a return in a particular jurisdiction). Under the guidance, the financial statements will reflect expected future tax consequences of such positions presuming the taxing authorities' full knowledge of the position and all relevant facts, but without considering time values. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or
litigation process, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement
.
Shipping and handling costs
The Company records costs related to shipping and handling in cost of revenues.
Advertising expense
Advertising costs are charged to expense in the period incurred. Advertising expense was not material for the years ended
March 31, 2017
,
2016
, and
2015
, respectively.
Foreign currency transactions
The U.S. dollar is the functional currency for all of the Company’s foreign operations. Foreign currency transaction gains and losses, resulting from transactions denominated in currencies other than U.S. dollars are included in the Consolidated Statements of Operations. These gains and losses were not material for the years ended
March 31, 2017
,
2016
or
2015
.
Segments
The Company operates as one segment for the design, development and sale of integrated circuits.
Accounting for stock-based compensation
Stock-based compensation expense recognized in the Consolidated Statement of Operations is based on options ultimately expected to vest, reduced by the amount of estimated forfeitures. The Company chose the straight-line method of allocating compensation cost over the requisite service period of the related award according to authoritative guidance. The Company calculates the expected term based on the historical average period of time that options were outstanding as adjusted for expected changes in future exercise patterns, which, for options granted in fiscal 2017, 2016 and 2015 resulted in an expected term of approximately five years.
Starting in fiscal 2013, the Company uses its historical volatility to
estimate expected volatility
.
The risk-free interest rate is based on the U.S. Treasury yields in effect at the time of grant for periods corresponding to the expected life of the options. The dividend yield is 0%, based on the fact that the Company has never paid dividends and has no present intention to pay dividends. Changes to these assumptions may have a significant impact on the results of operations.
Authoritative guidance requires cash flows, if any, resulting from the tax benefits from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows in the Consolidated Statements of Cash Flows.
Comprehensive loss
Comprehensive income (loss) is defined to include all changes in stockholders’ equity during a period except those resulting from investments by owners and distributions to owners. For the years ended
March 31, 2017
,
2016
and
2015
, comprehensive loss was $204,000, $2,169,000 and $4,985,000, respectively.
Business combinations
The Company allocates the fair value of the purchase consideration of its acquisitions to the tangible assets, liabilities, and intangible assets acquired, based on their estimated fair values. Goodwill represents the excess of
acquisition cost over the fair value of tangible and identified intangible net assets of businesses acquired. Transaction costs and costs to restructure the acquired company are expensed as incurred. The operating results of the acquired company are reflected in the Company’s consolidated financial statements after the closing date of the business combination. See Note 11 for additional information related to the acquisition of MikaMonu Group Ltd. in fiscal 2016.
Recent accounting pronouncements
In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-04, "
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment".
The standard eliminates the second step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity should recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. The standard is effective for annual and interim goodwill impairment tests conducted in fiscal years beginning after December 15, 2019, with early adoption permitted. The Company does not anticipate the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.
In November 2016, the FASB issued ASU No. 2016-18, “
Statement of Cash Flows (Topic 230): Restricted Cash”
. ASU 2016-18 requires entities to include in their cash and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. As a result, companies will no longer present transfers between cash and cash equivalents, and restricted cash and restricted cash equivalents in the statement of cash flows. The guidance is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact this new guidance will have on its consolidated statement of cash flows.
In October 2016, the FASB
issued ASU 2016-16, “
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
.” ASU 2016-16 requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs and eliminates the exception for an intra-entity transfer of an asset other than inventory. ASU 2016-16 is effective for annual and interim periods
beginning after December 15, 2017, including interim reporting periods within those annual reporting periods,
and is required to be adopted using a modified retrospective approach, with early adoption permitted. The Company is evaluating the impact of the adoption of this ASU on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, “
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”.
ASU 2016-15 adds or clarifies guidance on the classification of certain cash receipts and cash payments in the statement of cash flows. The amendments in the update provide guidance on eight specific cash flow issues, and are effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The amendments to the guidance should be applied using a retrospective transition method for each period presented and, if it is impracticable to apply all of the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company is currently evaluating the impact this new guidance will have on its consolidated statement of cash flows.
In June 2016, the FASB issued
ASU 2016-13
,
“Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,”
ASU 2016-13 replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For trade and other receivables, loans, and other financial instruments, the Company will be required to use a forward-looking expected
loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. ASU 2016-13 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, with early adoption permitted beginning April 1, 2019. Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the effective date. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
In March 2016,
the FASB
issued
ASU 2016-09,
“Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.”
ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions
, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This accounting standard update will be effective
for annual periods beginning after December 15, 2016, and interim periods within those annual periods,
and early adoption is permitted. The Company is currently evaluating the methods and impact of adopting the new accounting standard on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
“Leases (Topic 842)
.” The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. All leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, “
Elements of Financial Statements
,” and, therefore, recognition of those lease assets and lease liabilities represents a change of previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. This ASU is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous GAAP. Although the Company is currently evaluating the impact the pronouncement will have on its consolidated financial statements and related disclosures, the Company expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon adoption.
In January 2016, the FASB issued ASU 2016-01, “
Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.”
ASU 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income and simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. The accounting standard update also updates certain presentation and disclosure requirements. This accounting standard update will be effective
for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years,
and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11, “
Simplifying the Measurement of Inventory.”
This standard update intends to simplify the subsequent measurement of inventory, excluding inventory accounted for under the last-in, first-out or the retail inventory methods. The update replaces the current lower of cost or market test with a lower of cost and net realizable value test. Under the current guidance, market could be replacement cost, net realizable value or net realizable value less an approximately normal profit margin. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The update is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact of this accounting standard on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, “
Revenue from Contracts with Customers
.” The new accounting standard outlines a single comprehensive model for entities to use in accounting for revenue arising from
contracts with customers and supersedes most current revenue recognition guidance. 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 No. 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.
The Company is currently evaluating the full impact of this new guidance on its consolidated financial statements, including selection of the transition method. However, assuming all other revenue recognition criteria have been met, it is likely that the new guidance would require the Company to recognize revenue and cost relating to distributor sales upon product delivery, subject to estimated allowance for distributor price adjustments and rights of return
.
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. The Company is in the process of assessing the impact this additional guidance is expected to have upon adoption.
NOTE 2—NET LOSS PER COMMON SHARE
The Company uses the treasury stock method to calculate the weighted average shares used in computing diluted net loss per share.
The following table sets forth the computation of basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
(In thousands, except per share amounts)
|
|
Net loss
|
|
$
|
(115)
|
|
$
|
(2,170)
|
|
$
|
(4,978)
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominators:
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares—Basic
|
|
|
20,652
|
|
|
22,593
|
|
|
25,029
|
|
Dilutive effect of employee stock options
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Dilutive effect of employee stock purchase plan options
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted average shares—Dilutive
|
|
|
20,652
|
|
|
22,593
|
|
|
25,029
|
|
Net loss per common share—Basic
|
|
$
|
(0.01)
|
|
$
|
(0.10)
|
|
$
|
(0.20)
|
|
Net loss per common share—Diluted
|
|
$
|
(0.01)
|
|
$
|
(0.10)
|
|
$
|
(0.20)
|
|
The following shares of common stock (determined on a weighted average basis) were excluded from the computation of diluted net loss per common share as they had an anti-dilutive effect:
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
(In thousands)
|
|
Shares underlying options and ESPP shares
|
|
5,483
|
|
5,407
|
|
3,851
|
|
NOTE 3—BALANCE SHEET DETAIL
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
(In thousands)
|
|
Inventories:
|
|
|
|
|
|
|
|
Work-in-progress
|
|
$
|
2,112
|
|
$
|
1,697
|
|
Finished goods
|
|
|
6,803
|
|
|
5,011
|
|
Inventory at distributors
|
|
|
296
|
|
|
466
|
|
|
|
$
|
9,211
|
|
$
|
7,174
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
(In thousands)
|
|
Accounts receivable, net:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
6,453
|
|
$
|
7,578
|
|
Less: Allowances for sales returns, doubtful accounts and other
|
|
|
(104)
|
|
|
(100)
|
|
|
|
$
|
6,349
|
|
$
|
7,478
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
(In thousands)
|
|
Prepaid expenses and other current assets:
|
|
|
|
|
|
|
|
Prepaid tooling and masks
|
|
$
|
836
|
|
$
|
1,224
|
|
Prepaid income taxes
|
|
|
43
|
|
|
—
|
|
Escrow deposit
|
|
|
1,234
|
|
|
—
|
|
Other receivables
|
|
|
216
|
|
|
230
|
|
Other prepaid expenses and other current assets
|
|
|
448
|
|
|
744
|
|
|
|
$
|
2,777
|
|
$
|
2,198
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
(In thousands)
|
|
Property and equipment, net:
|
|
|
|
|
|
|
|
Computer and other equipment
|
|
$
|
18,585
|
|
$
|
18,394
|
|
Software
|
|
|
4,793
|
|
|
4,793
|
|
Land
|
|
|
3,900
|
|
|
3,900
|
|
Building and building improvements
|
|
|
2,256
|
|
|
2,256
|
|
Furniture and fixtures
|
|
|
111
|
|
|
114
|
|
Leasehold improvements
|
|
|
715
|
|
|
687
|
|
|
|
|
30,360
|
|
|
30,144
|
|
Less: Accumulated depreciation
|
|
|
(22,671)
|
|
|
(21,491)
|
|
|
|
$
|
7,689
|
|
$
|
8,653
|
|
Depreciation expense was $1,183,000, $1,217,000 and $1,462,000 for the years ended
March 31, 2017
,
2016
and
2015
, respectively.
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
(In thousands)
|
|
Other assets:
|
|
|
|
|
|
|
|
Escrow deposit
|
|
$
|
1,750
|
|
$
|
2,984
|
|
Non-current deferred income taxes
|
|
|
22
|
|
|
—
|
|
Prepaid income taxes
|
|
|
552
|
|
|
—
|
|
Deposits
|
|
|
132
|
|
|
102
|
|
|
|
$
|
2,456
|
|
$
|
3,086
|
|
The following table summarizes the components of intangible assets and related accumulated amortization balances at
March 31, 2017 and 2016, respectively
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
amortization
|
|
Net Carrying
Amount
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Product designs
|
|
$
|
590
|
|
$
|
(590)
|
|
$
|
—
|
|
Patents
|
|
|
4,220
|
|
|
(918)
|
|
|
3,302
|
|
Software
|
|
|
80
|
|
|
(80)
|
|
|
—
|
|
Total
|
|
$
|
4,890
|
|
$
|
(1,588)
|
|
$
|
3,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2016
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Product designs
|
|
$
|
590
|
|
$
|
(555)
|
|
$
|
35
|
|
Patents
|
|
|
4,220
|
|
|
(604)
|
|
|
3,616
|
|
Software
|
|
|
80
|
|
|
(80)
|
|
|
—
|
|
Total
|
|
$
|
4,890
|
|
$
|
(1,239)
|
|
$
|
3,651
|
|
Amortization of intangible assets of $349,000, $242,000 and $171,000 was included in cost of revenues for the years ended
March 31, 2017, 2016 and 2015, respectively
.
As of
March 31, 2017
, the estimated future amortization expense of intangible assets in the table above is as follows (in thousands):
|
|
|
|
|
Twelve month period ending March 31,
|
|
|
|
|
2018
|
|
$
|
313
|
|
2019
|
|
|
267
|
|
2020
|
|
|
234
|
|
2021
|
|
|
233
|
|
2022
|
|
|
233
|
|
Thereafter
|
|
|
2,022
|
|
Total
|
|
$
|
3,302
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
(In thousands)
|
|
Accrued expenses and other liabilities:
|
|
|
|
|
|
|
|
Accrued compensation
|
|
$
|
3,990
|
|
$
|
3,082
|
|
Escrow indemnity accrual
|
|
|
484
|
|
|
—
|
|
Accrued professional fees
|
|
|
66
|
|
|
83
|
|
Accrued commissions
|
|
|
238
|
|
|
284
|
|
Contingent consideration
|
|
|
1,117
|
|
|
—
|
|
Accrued retention payment
|
|
|
251
|
|
|
—
|
|
Miscellaneous accrued expenses
|
|
|
905
|
|
|
949
|
|
|
|
$
|
7,051
|
|
$
|
4,398
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
(In thousands)
|
|
Other accrued expenses:
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
5,083
|
|
$
|
5,856
|
|
Escrow indemnity accrual
|
|
|
—
|
|
|
484
|
|
Other long-term accrued liabilities
|
|
|
335
|
|
|
152
|
|
|
|
$
|
5,418
|
|
$
|
6,492
|
|
NOTE 4—GOODWILL
Goodwill represents the difference between the purchase price and the estimated fair value of the identifiable assets acquired and liabilities assumed in a business combination. The Company tests for goodwill impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset is more likely than not impaired. The Company has one reporting unit.
The Company assesses goodwill for impairment on an annual basis on the last day of February in the fourth quarter of its fiscal year.
The Company had a goodwill balance of $8.0 million as of both March 31, 2017 and 2016. The goodwill resulted from the acquisition of MikaMonu Group Ltd. (“MikaMonu”) in fiscal 2016. The slight reduction in goodwill at March 31, 2017 was due to additional pre-acquisition tax liabilities identified in the amount of $52,000.
The Company utilized a two-step quantitative analysis to complete its annual impairment test during the fourth quarter of fiscal 2017 and concluded that there was no impairment, as the fair value of its sole reporting unit exceeded its carrying value.
The Company determined that the second step of the impairment test was not necessary. The Company believes that the fair value established during the fiscal 2017 annual goodwill impairment testing was reasonable, and no triggering event has taken place subsequent to the fiscal 2017 annual assessment.
NOTE 5—INCOME TAXES
Loss before income taxes and the provision (benefit) for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
(In thousands)
|
|
Loss before income taxes:
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
(4,938)
|
|
$
|
(3,426)
|
|
$
|
(6,910)
|
|
Foreign
|
|
|
4,889
|
|
|
615
|
|
|
1,257
|
|
|
|
$
|
(49)
|
|
$
|
(2,811)
|
|
$
|
(5,653)
|
|
Current income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
(14)
|
|
$
|
(354)
|
|
$
|
(619)
|
|
Foreign
|
|
|
736
|
|
|
15
|
|
|
(2)
|
|
State
|
|
|
4
|
|
|
(289)
|
|
|
(54)
|
|
|
|
|
726
|
|
|
(628)
|
|
|
(675)
|
|
Deferred income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
|
14
|
|
|
(3)
|
|
|
—
|
|
Foreign
|
|
|
(674)
|
|
|
(10)
|
|
|
—
|
|
|
|
|
(660)
|
|
|
(13)
|
|
|
—
|
|
Provision (benefit) for income taxes
|
|
$
|
66
|
|
$
|
(641)
|
|
$
|
(675)
|
|
The provision (benefit) for income tax differs from the amount of income tax determined by applying the applicable U.S. statutory income tax rate to pre-tax loss as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
(In thousands)
|
|
U.S. Federal taxes at statutory rate
|
|
$
|
(17)
|
|
$
|
(956)
|
|
$
|
(1,922)
|
|
State taxes, net of federal benefit
|
|
|
3
|
|
|
(204)
|
|
|
(39)
|
|
Stock-based compensation
|
|
|
630
|
|
|
470
|
|
|
447
|
|
Tax credits
|
|
|
(398)
|
|
|
(539)
|
|
|
(472)
|
|
Foreign tax rate differential
|
|
|
(1,525)
|
|
|
(368)
|
|
|
(916)
|
|
Tax exempt interest
|
|
|
(5)
|
|
|
(9)
|
|
|
(20)
|
|
Non-deductible expenses and other
|
|
|
24
|
|
|
6
|
|
|
(35)
|
|
|
|
|
(1,288)
|
|
|
(1,600)
|
|
|
(2,957)
|
|
Valuation allowance
|
|
|
1,354
|
|
|
959
|
|
|
2,282
|
|
|
|
$
|
66
|
|
$
|
(641)
|
|
$
|
(675)
|
|
Deferred tax assets and deferred tax liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
(In thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
330
|
|
$
|
231
|
|
Tax credits
|
|
|
3,387
|
|
|
2,706
|
|
Net operating losses
|
|
|
2,264
|
|
|
1,356
|
|
Stock-based compensation
|
|
|
1,386
|
|
|
1,550
|
|
Property and equipment
|
|
|
425
|
|
|
297
|
|
Other reserves and accruals
|
|
|
1,167
|
|
|
1,175
|
|
Total deferred tax assets
|
|
$
|
8,959
|
|
$
|
7,315
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Intangible assets
|
|
$
|
(13)
|
|
$
|
(856)
|
|
Unrecognized gains
|
|
|
—
|
|
|
(14)
|
|
Total deferred tax liabilities
|
|
$
|
(13)
|
|
$
|
(870)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
8,946
|
|
$
|
6,445
|
|
Valuation allowance
|
|
|
(8,939)
|
|
|
(7,256)
|
|
Net deferred tax asset (liability)
|
|
$
|
7
|
|
$
|
(811)
|
|
U.S. income taxes and withholding taxes have not been provided on a cumulative total of $45.0 million of undistributed earnings for certain non-U.S. subsidiaries. The Company currently intends to indefinitely reinvest these earnings in operations outside the United States. No provision has been made for taxes that might be payable upon remittance of such earnings, nor is it practicable to determine the amount of such potential liability.
The long-term portion of the Company’s unrecognized tax benefits at
March 31, 2017
and
2016
was $244,000 and $116,000, respectively, of which the timing of the resolution is uncertain.
As of
March 31, 2017 and 2016,
$2,481,000 and $1,943,000, respectively, of unrecognized tax benefits had been recorded as a reduction to net deferred tax assets. As of
March 31, 2017, the Company’s
net deferred tax assets of $8.9 million are subject to a valuation allowance. It is possible, however, that some months or years may elapse before an uncertain position for which the Company has established a reserve is resolved. A reconciliation of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
(In thousands)
|
|
Unrecognized tax benefits, beginning of period
|
|
$
|
2,055
|
|
$
|
1,982
|
|
$
|
2,386
|
|
Additions based on tax positions related to current year
|
|
|
730
|
|
|
453
|
|
|
292
|
|
Additions based on tax positions related to prior years
|
|
|
—
|
|
|
183
|
|
|
—
|
|
Settlements during the current year
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Lapses during the current year applicable to statutes of limitations
|
|
|
(71)
|
|
|
(563)
|
|
|
(696)
|
|
Unrecognized tax benefits, end of period
|
|
$
|
2,714
|
|
$
|
2,055
|
|
$
|
1,982
|
|
The unrecognized tax benefit balance as of
March 31, 2017
of
$233,000
would affect the Company’s effective tax rate if recognized.
Management believes that within the next twelve months the Company will have no reduction in uncertain tax benefits, including interest and penalties, as a result of the lapse of statute of limitations.
The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the provision (benefit) for income taxes in the Consolidated Statements of Operations.
The Company is subject to taxation in the United States and various state and foreign jurisdictions. As of March 31, 2017, the Company maintained a valuation allowance of $8.9 million for deferred tax assets that are not expected to be utilized in future years. Fiscal years 2013 through 2017 remain open to examination by the federal tax authorities and fiscal years 2011 through 2017 remain open to examination by the state of California.
NOTE 6—FINANCIAL INSTRUMENTS
Fair value measurements
Authoritative accounting guidance for fair value measurements provides a framework for measuring fair value and related disclosure. The guidance applies to all financial assets and financial liabilities that are measured on a recurring basis. The guidance requires fair value measurement to be classified and disclosed in one of the following three categories:
Level 1: Valuations based on quoted prices in active markets for identical assets and liabilities. The fair value of available-for-sale securities included in the Level 1 category is based on quoted prices that are readily and regularly available in an active market.
As of
March 31, 2017
, the Level 1 category included money market funds of $6.3 million, which were included in cash and cash equivalents on the Consolidated Balance Sheets.
Level 2: Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly. The fair value of available-for-sale securities included in the Level 2 category is based on the market values obtained from an independent pricing service that were evaluated using pricing models that vary by asset class and may incorporate available trade, bid and other market information and price quotes from well-established independent pricing vendors and broker-dealers. As of
March 31, 2017
, the Level 2 category included short-term investments of $16.2 million and long term-investments of $12.9 million, which were primarily comprised of certificates of deposit, corporate debt securities and government and agency securities.
Level 3: Valuations based on inputs that are unobservable and involve management judgment and the reporting entity’s own assumptions about market participants and pricing. As of
March 31, 2017
, the Company’s Level 3 financial instruments measured at fair value on the Consolidated Balance Sheets consisted of the contingent consideration liability related to the MikaMonu acquisition. Refer to Note 11, “Acquisition” for more information.
The fair value of financial assets measured on a recurring basis is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
Significant
|
|
|
|
|
|
|
|
|
Markets for
|
|
Other
|
|
Significant
|
|
|
|
|
|
|
Identical Assets
|
|
Observable
|
|
Unobservable
|
|
|
|
|
|
|
and Liabilities
|
|
Inputs
|
|
Inputs
|
|
|
|
March 31, 2017
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
6,293
|
|
$
|
6,293
|
|
$
|
—
|
|
$
|
—
|
|
Marketable securities
|
|
|
29,097
|
|
|
—
|
|
|
29,097
|
|
|
—
|
|
Total
|
|
$
|
35,390
|
|
$
|
6,293
|
|
$
|
29,097
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
Significant
|
|
|
|
|
|
|
|
|
Markets for
|
|
Other
|
|
Significant
|
|
|
|
|
|
|
Identical Assets
|
|
Observable
|
|
Unobservable
|
|
|
|
|
|
|
and Liabilities
|
|
Inputs
|
|
Inputs
|
|
|
|
March 31, 2016
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
6,611
|
|
$
|
6,611
|
|
$
|
—
|
|
$
|
—
|
|
Marketable securities
|
|
|
34,297
|
|
|
—
|
|
|
34,297
|
|
|
—
|
|
Total
|
|
$
|
40,908
|
|
$
|
6,611
|
|
$
|
34,297
|
|
$
|
—
|
|
Short-term and long-term investments
All of the Company’s short-term and long-term investments are classified as available-for-sale. Available-for-sale debt securities with maturities greater than twelve months are classified as long-term investments when they are not intended for use in current operations. Investments in available-for-sale securities are reported at fair value with unrecognized gains (losses), net of tax, as a component of accumulated other comprehensive income (loss) on the Consolidated Balance Sheets. The Company had money market funds of $6.3 million and $6.6 million at
March 31, 2017
and
March 31, 2016
, respectively, included in cash and cash equivalents on the Consolidated Balance Sheets. The Company monitors its investments for impairment periodically and records appropriate reductions in carrying values when the declines are determined to be other-than-temporary.
The following table summarizes the Company’s available-for-sale investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
|
(In thousands)
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate notes
|
|
$
|
557
|
|
$
|
—
|
|
$
|
(2)
|
|
$
|
555
|
|
Certificates of deposit
|
|
|
10,000
|
|
|
9
|
|
|
(3)
|
|
|
10,006
|
|
Foreign government obligations
|
|
|
1,001
|
|
|
—
|
|
|
(1)
|
|
|
1,000
|
|
State and municipal obligations
|
|
|
1,632
|
|
|
1
|
|
|
—
|
|
|
1,633
|
|
Agency bonds
|
|
|
3,012
|
|
|
—
|
|
|
(7)
|
|
|
3,005
|
|
Total short-term investments
|
|
$
|
16,202
|
|
$
|
10
|
|
$
|
(13)
|
|
$
|
16,199
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
7,500
|
|
$
|
3
|
|
$
|
(39)
|
|
$
|
7,464
|
|
Foreign government obligations
|
|
|
5,442
|
|
|
—
|
|
|
(8)
|
|
|
5,434
|
|
Total long-term investments
|
|
$
|
12,942
|
|
$
|
3
|
|
$
|
(47)
|
|
$
|
12,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
|
(In thousands)
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal obligations
|
|
$
|
1,011
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,011
|
|
Corporate notes
|
|
|
5,680
|
|
|
—
|
|
|
(4)
|
|
|
5,676
|
|
Agency bonds
|
|
|
2,001
|
|
|
1
|
|
|
—
|
|
|
2,002
|
|
Foreign government obligations
|
|
|
2,695
|
|
|
3
|
|
|
—
|
|
|
2,698
|
|
Certificates of deposit
|
|
|
11,750
|
|
|
12
|
|
|
—
|
|
|
11,762
|
|
Total short-term investments
|
|
$
|
23,137
|
|
$
|
16
|
|
$
|
(4)
|
|
$
|
23,149
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate notes
|
|
$
|
558
|
|
$
|
1
|
|
$
|
—
|
|
$
|
559
|
|
Certificates of deposit
|
|
|
8,500
|
|
|
24
|
|
|
(1)
|
|
|
8,523
|
|
Agency bonds
|
|
|
1,000
|
|
|
4
|
|
|
—
|
|
|
1,004
|
|
Foreign government obligations
|
|
|
1,060
|
|
|
1
|
|
|
—
|
|
|
1,061
|
|
Total long-term investments
|
|
$
|
11,118
|
|
$
|
30
|
|
$
|
(1)
|
|
$
|
11,147
|
|
The Company’s investment portfolio consists of both corporate and governmental securities that have a maximum maturity of three years. All unrealized gains and losses are due to changes in interest rates and bond yields. Subject to normal credit risks, the Company has the ability to realize the full value of all these investments upon maturity.
At
March 31, 2017
, the deferred tax asset related to unrecognized gains and losses on short-term and long-term investments was $17,000. At
March 31, 2016
, the deferred tax liability related to unrecognized gains and losses on short-term and long-term investments was $14,000.
As of
March 31, 2017
, contractual maturities of the Company’s available-for-sale investments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
Cost
|
|
Value
|
|
|
|
(In thousands)
|
|
Maturing within one year
|
|
$
|
16,202
|
|
$
|
16,199
|
|
Maturing in one to three years
|
|
|
12,942
|
|
|
12,898
|
|
|
|
$
|
29,144
|
|
$
|
29,097
|
|
NOTE 7—COMMITMENTS AND CONTINGENCIES
Operating leases
The Company leases office space and equipment under noncancelable operating leases with various expiration dates through April 2022. Rent expense for the years ended
March 31, 2017
,
2016
and
2015
was $504,000, $348,000 and $354,000, respectively.
The terms of the facility leases provide for rental payments on a graduated scale. The Company recognizes rent expense on a straight-line basis over the lease period, and has accrued for rent expense incurred but not paid.
Future minimum lease payments under noncancelable operating leases with remaining lease terms in excess of one year at
March 31, 2017
are as follows:
|
|
|
|
|
|
|
Operating
|
|
Fiscal Year Ending March 31,
|
|
Leases
|
|
|
|
(In thousands)
|
|
2018
|
|
$
|
279
|
|
2019
|
|
|
195
|
|
2020
|
|
|
108
|
|
2021
|
|
|
80
|
|
2022
|
|
|
54
|
|
Thereafter
|
|
|
35
|
|
Total
|
|
$
|
751
|
|
Royalty obligations
The Company has license agreements that require it to pay royalties on the sale of products using the licensed technology. Royalty expense for the years ended
March 31, 2017
,
2016
and
2015
was $35,000,
$44,000 and $53,000, respectively, and was included within cost of revenues.
Indemnification obligations
The Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the Company, under which the Company customarily agrees to hold the other party harmless against losses arising from a breach of representations and covenants related to such matters as title to assets sold and certain intellectual property rights. In each of these circumstances, payment by the Company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the other party’s claims. Further, the Company’s obligations under these agreements may be limited in terms of time and/or amount, and in some instances, the Company may have recourse against third parties for certain payments made by it under these agreements.
It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these agreements have not had a material effect on its business, financial condition, cash flows or results of operations. The Company believes that if it were to incur a loss in any of these matters, such loss should not have a material effect on its business, financial condition, cash flows or results of operations.
Product warranties
The Company warrants its products to be free of defects generally for a period of three years. The Company estimates its warranty costs based on historical warranty claim experience and includes such costs in cost of revenues. Warranty costs and the accrued warranty liability were not material as of March 31, 2017 and 2016 and for the years ended
March 31, 2017
,
2016
or
2015
.
Legal proceedings
In March 2011, Cypress Semiconductor Corporation, a semiconductor manufacturer, filed a lawsuit against the Company in the United States District Court for the District of Minnesota alleging that certain of the Company’s SRAM products infringe patents held by Cypress. The complaint sought unspecified damages for past infringement and a permanent injunction against future infringement.
On June 10, 2011, Cypress filed a complaint against the Company with the United States International Trade Commission (the “ITC”). The ITC complaint, as subsequently amended, alleged infringement by the Company of certain patents involved in the District Court case and one additional patent and also alleged infringement by certain of the Company’s distributors and customers who allegedly incorporate the Company’s SRAMs in their products. The ITC complaint sought a limited exclusion order excluding the allegedly infringing SRAMs, and products containing them, from entry into the United States and permanent orders directing the Company and the other respondents to cease and desist from selling or distributing such products in the United States. On July 21, 2011, the ITC formally instituted an investigation in response to Cypress’s complaint. On June 7, 2013, the full Commission affirmed a determination that GSI’s SRAM devices, and products containing them, do not infringe the Cypress patents and that Cypress had failed to establish existence of a domestic industry that practices the patents. Moreover, the Commission reversed a portion of an earlier determination with respect to the validity of the patents, finding the asserted claims of one of the patents to have been anticipated by prior art and, therefore, invalid. The Commission ordered the investigation terminated, and Cypress did not appeal the ruling.
The Minnesota District Court case had been stayed pending the conclusion of the ITC proceeding. Following the termination of the ITC investigation, the stay was lifted. On May 1, 2013, Cypress filed an additional lawsuit in the United States District Court for the Northern District of California alleging infringement by the Company’s products of five additional Cypress patents. Like the Minnesota case, the complaint in the California lawsuit sought unspecified damages for past infringement and a permanent injunction against future infringement. The Company filed answers in both cases denying liability and asserting affirmative defenses. The parties then stipulated that the claims in the Minnesota case with respect to some of the asserted patents would be dismissed without prejudice and that the claims with respect to the remaining patents would be transferred to the Northern District of California and consolidated with the pending California case. On August 20, 2013, the Court in the California case ordered the cases consolidated.
The Company did not record any loss contingency during fiscal 2015 or fiscal 2016 in connection with these legal proceedings as the Company was unable to predict their outcome and could not estimate the likelihood or potential dollar amount of any adverse results.
On May 6, 2015, the Company and Cypress entered into a settlement agreement to resolve the patent infringement litigation and a separate lawsuit pending in the United States District Court for the Northern District of California in which the Company alleged that Cypress had violated federal and state antitrust laws. Under the settlement agreement:
Each of the parties agreed to dismiss its lawsuit with prejudice in consideration of the dismissal with prejudice of the lawsuit brought by the other party; and
Each party agreed to release all claims against the other with respect to issues raised in the two lawsuits.
The parties agreed that the settlement agreement was entered into to resolve disputed claims, and that each party denies any liability to the other party.
NOTE 8—COMMON STOCK
The Company’s Certificate of Incorporation, as amended, authorizes the Company to issue 150,000,000 shares of $0.001 par value common stock.
On August 6, 2014, the Company completed a modified “Dutch auction” self-tender offer to repurchase for cash shares of its common stock.
The Company accepted for purchase and retirement an aggregate of 3,846,153 shares of its common stock at a final purchase price of $6.50 per share, for an aggregate cost of approximately $25 million, excluding fees and expenses related to the tender offer.
The Company’s board of directors has authorized the repurchase, at management’s discretion, of shares of its common stock. Under the repurchase program, the Company may repurchase shares from time to time on the open market or in private transactions. The specific timing and amount of the repurchases will be dependent on market conditions, securities law limitations and other factors. The repurchase program may be suspended or terminated at any time without prior notice. Through March 31, 2017, including the shares purchased in the modified “Dutch Auction” self-tender offer, the Company has repurchased and retired a total of 11,983,942 shares at an average cost of $5.06 per share for a total cost of $60.6 million. At March 31, 2017, management was authorized to repurchase additional shares with a value of up to $4.4 million under the repurchase program.
NOTE 9—STOCK- BASED COMPENSATION
The 2007 Equity Incentive Plan
In January 2007, the Company’s board of directors approved the 2007 Equity Incentive Plan, (the “2007 Plan”), which was subsequently approved by the Company’s stockholders in March 2007. A total of 3,000,000 shares of common stock were authorized and reserved for issuance under the 2007 Plan. This reserve automatically increased on April 1 of each year through 2017 by an amount equal to the smaller of (a) five percent of the number of shares of common stock issued and outstanding on the immediately preceding March 31, or (b) a lesser amount determined by the board of directors. As described below, the 2007 Plan was terminated in August 2016 and no further awards may be granted pursuant to the 2007 Plan. In the event of a stock split or other change in the Company’s capital structure, appropriate adjustments will be made in the number of outstanding awards to prevent dilution or enlargement of participants’ rights.
Awards could be granted under the 2007 Plan to the Company’s employees, including officers, directors, or consultants or those of any present or future parent or subsidiary corporation or other affiliated entity. Options granted to non-officer employees generally vest at the rate of 25% on the first anniversary and subsequent anniversaries of the date of grant, while grants to officers vest in full four years after the anniversary date of the officer’s employment that is closest to the date of grant.
In the event of a change in control as described in the 2007 Plan, the acquiring or successor entity may assume or continue all or any awards outstanding under the 2007 Plan or substitute substantially equivalent awards. Any awards which are not assumed or continued in connection with a change in control or exercised or settled prior to the change in control will terminate effective as of the time of the change in control. The administrator may provide for the acceleration of vesting of any or all outstanding awards upon such terms and to such extent as it determines, except that the vesting of all nonemployee director awards will automatically be accelerated in full. The 2007 Plan also authorizes the administrator, in its discretion and without the consent of any participant, to cancel each or any outstanding award denominated in shares upon a change in control in exchange for a payment to the participant with respect to each vested share subject to the cancelled award of an amount equal to the excess of the
consideration to be paid per share of common stock in the change in control transaction over the exercise price per share, if any, under the award.
The 2016 Equity Incentive Plan
In June 2016, the Company’s board of directors approved the 2016 Equity Incentive Plan, (the “2016 Plan”), which was subsequently approved by the Company’s stockholders in August 2016. In connection with the stockholders’ approval of the 2016 Plan, 6,000,000 shares available for future award under the 2007 Plan were transferred to the 2016 Plan, 705,699 shares available for grant under the 2007 plan were canceled and the 2007 Plan was terminated. The Company granted options under the 2007 Plan until August 2016, although it continues to govern the terms of options that remain outstanding under the 2007 Plan.
Appropriate and proportionate adjustments will be made to the number of shares authorized and other numerical limits in the 2016 Plan and to outstanding awards in the event of any change in the Company’s common stock through merger, consolidation, reorganization, reincorporation, recapitalization, reclassification, stock dividend, stock split, reverse stock split, split-up, split-off, spin-off, combination of shares, exchange of shares or similar change in the Company’s capital structure, or if the Company makes a distribution to its stockholders in a form other than common stock (excluding regular, periodic cash dividends) that has a material effect on the fair market value of the Company’s common stock. In such circumstances, the administrator also has the discretion under the 2016 Plan to adjust other terms of outstanding awards as it deems appropriate.
If any award granted under the 2016 Plan expires or otherwise terminates for any reason without having been exercised or settled in full, or if shares subject to forfeiture or repurchase are forfeited or repurchased by the Company for not more than the participant's purchase price, any such shares reacquired or subject to a terminated award will again become available for issuance under the 2016 Plan. Shares will not be treated as having been issued under the 2016 Plan and will therefore not reduce the number of shares available for issuance to the
extent an award is settled in cash or to the extent that shares are withheld or reacquired by the Company in satisfaction of a tax withholding obligation. Upon the exercise of a stock appreciation right, tender of shares in payment of an option's exercise price or net-exercise of an option, the number of shares available under the 2016 Plan will be reduced by number of shares actually issued in settlement of the award.
To enable compensation provided in connection with certain types of awards intended to qualify as “performance-based” within the meaning of Section 162(m) of the Internal Revenue Code, the 2016 Plan establishes limits on the maximum aggregate number of shares or dollar value for which awards may be granted to an employee in any fiscal year, as follows:
No more than 300,000 shares subject to stock options and stock appreciation rights.
No more than 100,000 shares subject to restricted stock and restricted stock unit awards.
For each full fiscal year of the Company contained in the performance period of performance shares or performance unit awards, no more than 50,000 shares subject to performance share awards or more than $500,000 subject to performance unit awards.
For each full fiscal year of the Company contained in the performance period of cash-based or other stock-based awards, no more than $500,000 subject to cash-based awards or more than 50,000 shares subject to other stock-based awards.
Awards may be granted under the 2016 Plan to the Company’s employees, including officers, directors and consultants or those of any present or future parent or subsidiary corporation or other affiliated entity of the
Company. To date, options granted to non-officer employees generally vest 25% on the first anniversary and subsequent anniversaries of the date of grant, while grants to officers vest in full four years after the anniversary date of the officer’s employment that is closest to the date of grant.
While the Company may grant incentive stock options only to employees, the Company may grant nonstatutory stock options, stock appreciation rights, restricted stock and stock units, performance shares and units, other stock-based awards and cash-based awards to any eligible participant. Non-employee director awards may be granted only to members of the Company’s board of directors who, at the time of grant, are not employees.
Only members of the board of directors who are not employees at the time of grant are eligible to participate in the nonemployee director awards component of the 2016 Plan. The board or the compensation committee shall set the amount and type of nonemployee director awards to be awarded on a periodic, non-discriminatory basis. Nonemployee director awards may be granted in the form of NSOs, stock appreciation rights, restricted stock awards and restricted stock unit awards. Subject to adjustment for changes in the Company's capital structure, no nonemployee director may be awarded, in any fiscal year, one or more nonemployee director awards for more than a number of shares determined by dividing $150,000 by the fair market value of a share of the Company’s stock determined on the last trading day immediately preceding the date on which the applicable nonemployee award is granted.
The 2016 Plan provides that, without the approval of a majority of the votes cast in person or by proxy at a meeting of the Company’s stockholders, the administrator may not provide for any of the following with respect to underwater options or stock appreciation rights: (1) either the cancellation of such outstanding options or stock appreciation rights in exchange for the grant of new options or stock appreciation rights at a lower exercise price or the amendment of outstanding options or stock appreciation rights to reduce the exercise price, (2) the issuance of new full value awards in exchange for the cancellation of such outstanding options or stock appreciation rights, or (3) the cancellation of such outstanding options or stock appreciation rights in exchange for payments in cash.
In the event of a change in control as described in the 2016 Plan, the surviving, continuing, successor or purchasing entity or its parent may, without the consent of any participant, either assume or continue outstanding awards or substitute substantially equivalent awards for its stock. If so determined by the Committee, stock-based awards will be deemed assumed if, for each share subject to the award prior to the change in control, its holder is given the right to receive the same amount of consideration that a stockholder would receive as a result of the change in control. Any awards which are not assumed or continued in connection with a change in control or exercised or settled prior to the change in control will terminate effective as of the time of the Change in Control. The administrator may provide for the acceleration of vesting or settlement of any or all outstanding awards upon such terms and to such extent as it determines, except that the vesting of all nonemployee director awards will automatically be accelerated in full. The 2016 Plan also authorizes the administrator, in its discretion and without the consent of any participant, to cancel each or any outstanding award denominated in shares of stock upon a change in control in exchange for a payment to the participant with respect each vested share (and each unvested share if so determined by the administrator) subject to the cancelled award of an amount equal to the excess of the consideration to be paid per share of common stock in the change in control transaction over the exercise or purchase price per share, if any, under the award.
The 2007 Employee Stock Purchase Plan
In January 2007, the board of directors approved the 2007 Employee Stock Purchase Plan (the “2007 Purchase Plan”) which was subsequently approved by the Company’s stockholders in March 2007. A total of 500,000 shares of the Company’s common stock was authorized and reserved for sale under the 2007 Purchase Plan. In addition, the 2007 Purchase Plan provides for an automatic annual increase in the number of shares available for issuance
under the plan on April 1 of each year beginning in 2008 and continuing through and including April 1, 2017 equal to the lesser of (1) one percent of the number of issued and outstanding shares of common stock on the immediately preceding March 31, (2) 250,000 shares or (3) a number of shares as the board of directors may determine. Appropriate adjustments will be made in the number of authorized shares and in outstanding purchase rights to prevent dilution or enlargement of participants' rights in the event of a stock split or other change in our capital structure. Shares subject to purchase rights which expire or are canceled will again become available for issuance under the 2007 Purchase Plan.
The Company’s employees and employees of any parent or subsidiary corporation designated by the administrator will be eligible to participate in the 2007 Purchase Plan if they are customarily employed by us for more than 20 hours per week and more than five months in any calendar year. However, an employee may not be granted a right to purchase stock under the 2007 Purchase Plan if: (1) the employee immediately after such grant would own stock possessing 5% or more of the total combined voting power or value of all classes of our capital stock or of any parent or subsidiary corporation, or (2) the employee’s rights to purchase stock under all of our employee stock purchase plans would accrue at a rate that exceeds $25,000 in value for each calendar year of participation in such plans.
The 2007 Purchase Plan is designed to be implemented through a series of sequential offering periods, generally six (6) months in duration beginning on the first trading day on or after May 1 and November 1 of each year. The administrator is authorized to establish additional or alternative sequential or overlapping offering periods and offering periods having a different duration or different starting or ending dates, provided that no offering period may have a duration exceeding 27 months.
Amounts accumulated for each participant under the 2007 Purchase Plan are used to purchase shares of the Company’s common stock at the end of each offering period at a price generally equal to 85% of the lower of the fair market value of our common stock at the beginning of an offering period or at the end of the offering period. Prior to commencement of an offering period, the administrator is authorized to reduce, but not increase, this purchase price discount for that offering period, or, under circumstances described in the 2007 Purchase Plan, during that offering period. The maximum number of shares a participant may purchase in any six-month offering period is the lesser of (i) that number of shares determined by multiplying (x) 1,000 shares by (y) the number of months (rounded to the nearest whole month) in the offering period and rounding to the nearest whole share or (ii) that number of whole shares determined by dividing (x) the product of $2,083.33 and the number of months (rounded to the nearest whole month) in the offering period and rounding to the nearest whole dollar by (y) the fair market value of a share of our common stock at the beginning of the offering period. Prior to the beginning of any offering period, the administrator may alter the maximum number of shares that may be purchased by any participant during the offering period or specify a maximum aggregate number of shares that may be purchased by all participants in the offering period. If insufficient shares remain available under the plan to permit all participants to purchase the number of shares to which they would otherwise be entitled, the administrator will make a pro rata allocation of the available shares. Any amounts withheld from participants' compensation in excess of the amounts used to purchase shares will be refunded, without interest.
In the event of a change in control, an acquiring or successor corporation may assume our rights and obligations under the 2007 Purchase Plan. If the acquiring or successor corporation does not assume such rights and obligations, then the purchase date of the offering periods then in progress will be accelerated to a date prior to the change in control.
The following table summarizes stock option activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Average
|
|
Weighted
|
|
|
|
|
|
|
Shares
|
|
Underlying
|
|
Remaining
|
|
Average
|
|
|
|
|
|
|
Available for
|
|
Options
|
|
Contractual
|
|
Exercise
|
|
Intrinsic
|
|
|
|
Grant
|
|
Outstanding
|
|
Life (Years)
|
|
Price
|
|
Value
|
|
Balance at March 31, 2014
|
|
5,585,500
|
|
6,143,980
|
|
|
|
$
|
5.13
|
|
|
|
|
Options reserved
|
|
1,377,699
|
|
—
|
|
|
|
|
—
|
|
|
|
|
Granted
|
|
(791,903)
|
|
791,903
|
|
|
|
$
|
5.20
|
|
|
|
|
Exercised
|
|
—
|
|
(119,085)
|
|
|
|
$
|
3.88
|
|
$
|
262,253
|
|
Forfeited
|
|
42,647
|
|
(42,647)
|
|
|
|
$
|
5.49
|
|
|
|
|
Balance at March 31, 2015
|
|
6,213,943
|
|
6,774,151
|
|
|
|
$
|
5.16
|
|
|
|
|
Options reserved
|
|
1,156,419
|
|
—
|
|
|
|
|
—
|
|
|
|
|
Granted
|
|
(969,913)
|
|
969,913
|
|
|
|
$
|
4.42
|
|
|
|
|
Exercised
|
|
—
|
|
(76,745)
|
|
|
|
$
|
4.19
|
|
$
|
46,977
|
|
Forfeited
|
|
31,614
|
|
(41,614)
|
|
|
|
$
|
4.82
|
|
|
|
|
Balance at March 31, 2016
|
|
6,432,063
|
|
7,625,705
|
|
|
|
$
|
5.08
|
|
|
|
|
Options reserved
|
|
1,085,818
|
|
—
|
|
|
|
|
—
|
|
|
|
|
Terminated plan
|
|
(705,699)
|
|
—
|
|
|
|
|
—
|
|
|
|
|
Granted
|
|
(1,362,798)
|
|
1,362,798
|
|
|
|
$
|
5.14
|
|
|
|
|
Exercised
|
|
—
|
|
(391,039)
|
|
|
|
$
|
3.96
|
|
$
|
855,160
|
|
Forfeited
|
|
14,801
|
|
(974,634)
|
|
|
|
$
|
5.53
|
|
|
|
|
Balance at March 31, 2017
|
|
5,464,185
|
|
7,622,830
|
|
|
|
$
|
5.09
|
|
|
|
|
Options vested and exercisable
|
|
|
|
4,731,902
|
|
4.00
|
|
$
|
5.04
|
|
$
|
17,365,055
|
|
Options vested and expected to vest
|
|
|
|
7,569,918
|
|
5.71
|
|
$
|
5.09
|
|
$
|
27,412,888
|
|
The options outstanding and by exercise price at
March 31, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
|
|
Shares
|
|
Weighted
|
|
Weighted Average
|
|
|
|
Weighted
|
|
|
|
|
|
|
Underlying
|
|
Average
|
|
Remaining
|
|
Number
|
|
Average
|
|
|
|
|
|
|
Options
|
|
Exercise
|
|
Contractual
|
|
Vested and
|
|
Exercise
|
|
Exercise Price
|
|
Outstanding
|
|
Price
|
|
Life (Years)
|
|
Exercisable
|
|
Price
|
|
$
|
2.43
|
-
|
3.40
|
|
789,595
|
|
$
|
3.22
|
|
4.39
|
|
558,137
|
|
$
|
3.14
|
|
$
|
3.43
|
-
|
4.00
|
|
1,157,919
|
|
$
|
3.80
|
|
3.04
|
|
1,042,275
|
|
$
|
3.83
|
|
$
|
4.17
|
-
|
4.81
|
|
840,645
|
|
$
|
4.42
|
|
4.92
|
|
750,395
|
|
$
|
4.41
|
|
$
|
4.90
|
-
|
4.99
|
|
1,424,681
|
|
$
|
4.97
|
|
8.13
|
|
293,928
|
|
$
|
4.91
|
|
$
|
5.13
|
-
|
5.28
|
|
798,098
|
|
$
|
5.23
|
|
8.06
|
|
90,030
|
|
$
|
5.19
|
|
$
|
5.34
|
-
|
6.00
|
|
768,984
|
|
$
|
5.75
|
|
5.27
|
|
728,336
|
|
$
|
5.76
|
|
$
|
6.16
|
-
|
6.54
|
|
887,513
|
|
$
|
6.35
|
|
6.30
|
|
584,903
|
|
$
|
6.43
|
|
$
|
6.61
|
-
|
6.86
|
|
635,822
|
|
$
|
6.78
|
|
5.92
|
|
364,325
|
|
$
|
6.74
|
|
$
|
7.00
|
|
|
|
206,193
|
|
$
|
7.00
|
|
3.34
|
|
206,193
|
|
$
|
7.00
|
|
$
|
9.20
|
|
|
|
113,380
|
|
$
|
9.20
|
|
3.84
|
|
113,380
|
|
$
|
9.20
|
|
|
|
|
|
|
7,622,830
|
|
$
|
5.09
|
|
5.73
|
|
4,731,902
|
|
$
|
5.04
|
|
Stock-based compensation
The Company recognized $1,877,000, $1,850,000 and $2,077,000 of stock-based compensation expense for the years ended
March 31, 2017
,
2016
and
2015
, respectively, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
(In thousands)
|
|
Cost of revenues
|
|
$
|
282
|
|
$
|
320
|
|
$
|
401
|
|
Research and development
|
|
|
980
|
|
|
858
|
|
|
941
|
|
Selling, general and administrative
|
|
|
615
|
|
|
672
|
|
|
735
|
|
Total
|
|
$
|
1,877
|
|
$
|
1,850
|
|
$
|
2,077
|
|
Stock-based compensation expense in the years ended
March 31, 2017
,
2016
and
2015
included $150,000, $136,000 and $153,000, respectively, related to the Company’s Employee Stock Purchase Plan.
No tax benefit was recognized in either fiscal 2017 or fiscal 2016 due to a full valuation allowance.
There were no windfall tax benefits realized from exercised stock options recognized in fiscal 2017 or fiscal 2016. Compensation cost capitalized within inventory at
March 31, 2017 and 2016
was not material.
As of
March 31, 2017
, the Company’s total unrecognized compensation cost was $3.4 million, which will be recognized over the weighted average period of 2.26 years.
The Company calculated the fair value of stock based awards in the periods presented using the Black-Scholes option pricing model and the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
(In thousands)
|
|
Stock Option Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
1.12
|
-
|
1.95
|
%
|
1.41
|
-
|
1.57
|
%
|
1.47
|
-
|
1.70
|
%
|
Expected life (in years)
|
|
5.00
|
|
|
|
|
|
5.00
|
|
|
|
5.00
|
|
Volatility
|
|
33.3
|
-
|
35.4
|
%
|
36.3
|
-
|
38.0
|
%
|
40.4
|
-
|
44.8
|
%
|
Dividend yield
|
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
Employee Stock Purchase Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
0.38
|
-
|
0.45
|
%
|
0.09
|
-
|
0.15
|
%
|
|
|
0.05
|
%
|
Expected life (in years)
|
|
0.50
|
|
|
|
|
|
0.50
|
|
|
|
0.50
|
|
Volatility
|
|
30.8
|
-
|
39.6
|
%
|
26.3
|
-
|
27.9
|
%
|
30.8
|
-
|
38.0
|
%
|
Dividend yield
|
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
The weighted average fair value of options granted during the years ended
March 31, 2017
,
2016
and
2015
was $1.66, $1.52 and $2.08, respectively.
NOTE 10—SEGMENT AND GEOGRAPHIC INFORMATION
Based on its operating management and financial reporting structure, the Company has determined that it has one reportable business segment: the design, development and sale of integrated circuits.
The following is a summary of net revenues by geographic area based on the location to which product is shipped:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
(In thousands)
|
|
United States
|
|
$
|
19,708
|
|
$
|
20,951
|
|
$
|
18,099
|
|
China
|
|
|
9,364
|
|
|
12,123
|
|
|
15,695
|
|
Singapore
|
|
|
9,475
|
|
|
7,345
|
|
|
6,552
|
|
Rest of the world
|
|
|
9,633
|
|
|
12,317
|
|
|
13,152
|
|
|
|
$
|
48,180
|
|
$
|
52,736
|
|
$
|
53,498
|
|
|
|
|
|
|
|
|
|
|
|
|
All sales are denominated in United States dollars.
The locations and net book value of long-lived assets are as follows:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
(In thousands)
|
|
United States
|
|
$
|
5,648
|
|
$
|
6,085
|
|
Taiwan
|
|
|
1,952
|
|
|
2,521
|
|
Israel
|
|
|
89
|
|
|
47
|
|
|
|
$
|
7,689
|
|
$
|
8,653
|
|
NOTE 11—ACQUISITION
On November 23, 2015, the Company acquired all of the outstanding capital stock of privately held
MikaMonu Group Ltd. (“MikaMonu”), a development-stage, Israel-based company that specializes in in-place associative computing for markets including big data, computer vision and cyber security. MikaMonu, located in Tel Aviv, held 12 United States patents and a number of pending patent applications.
The acquisition was accounted for as a purchase under authoritative guidance for business combinations. The purchase price of the acquisition was allocated to the intangible assets acquired, with the excess of the purchase price over the fair value of assets acquired recorded as goodwill. The Company will perform a goodwill impairment test in February of each fiscal year.
The results of operations of MikaMonu and the estimated fair value of the assets acquired were included in the Company’s consolidated financial statements beginning November 23, 2015.
Consideration
Under the terms of the acquisition agreement, the Company paid the former MikaMonu shareholders initial cash consideration of approximately $4.4 million at the closing on November 23, 2015. In addition, $484,000 was deposited in escrow to provide a fund for potential future indemnification claims by the Company. This amount is included in prepaid expenses and other current assets on the Consolidated Balance Sheet at March 31, 2017.
The Company is also required to pay the former MikaMonu shareholders future contingent consideration consisting of retention payments and “earnout” payments, as described below.
The Company will make cash retention payments of up to an additional $2.5 million to the three former MikaMonu shareholders in installments over a four-year period, conditioned on the continued employment of Dr. Avidan Akerib, MikaMonu’s co-founder and chief technologist. The retention amount of $2.5 million has been deposited in escrow. Of this amount, $750,000 is included in prepaid expenses and other current assets and the remaining $1,750,000 is included in other assets on the Consolidated Balance Sheet at March 31, 2017.
The Company will also make “earnout” payments to the former MikaMonu shareholders in cash or shares of the Company’s common stock, at the Company’s discretion, during a period of up to ten years following the closing if certain product development milestones and revenue targets for products based on the MikaMonu technology are achieved. Earnout amounts of $750,000 will be payable if certain product development milestones are achieved by December 31, 2017. Additional earnout amounts of $2,750,000 and $4,000,000 will be payable if certain revenue milestones are achieved by January 1, 2021 and January 1, 2022, respectively; and additional payments, up to a maximum of $30 million, equal to 5% of net revenues from the sale of qualifying products in excess of certain thresholds, will be made quarterly through December 31, 2025.
The portion of the retention payment contingently payable to Dr. Akerib (approximately $1.2 million) will be recorded as compensation expense over the period that his services are provided to the Company. The portion of the retention payment contingently payable to the other former MikaMonu shareholders (approximately $1.3 million) plus the maximum amount of the potential earnout payments totals approximately $38.8 million. The Company determined that the fair value of this contingent consideration liability was $5.8 million at the acquisition date. This contingent consideration liability is included in other accrued expenses on the Condensed Consolidated Balance Sheet at March 31, 2016 in the amount of $5.9 million. The total contingent consideration liability as of March 31, 2017 was $6.2 million, $5.1 million of which is included in other accrued expenses on the Consolidated Balance Sheet and $1.1 million is included in accrued expenses and other liabilities.
The fair value of the contingent consideration liability was initially determined as of the acquisition date using unobservable inputs. These inputs include the estimated amount and timing of future cash flows, the probability of success (achievement of the various contingent events) and a risk-adjusted discount rate of approximately 14.8% used to adjust the probability-weighted cash flows to their present value. Subsequent to the acquisition date, at each reporting period, the contingent consideration liability is re-measured to fair value with changes recorded in selling, general and administrative expenses in the Consolidated Statements of Operations. The change in fair value for the year ended March 31, 2017 was $344,000.
Acquisition-related costs
Acquisition-related costs of approximately $426,000 are included in selling, general and administrative expenses in the Consolidated Statements of Operations for year ended March 31, 2016.
Purchase price allocation
The allocation of the purchase price to acquired identifiable intangible assets and goodwill was based on their estimated fair values at the date of acquisition. The fair value allocated to patents was $3.5 million and the fair value allocated to goodwill was $8.0 million.
The fair value allocated to tangible and identifiable intangible assets and goodwill of MikaMonu acquired on November 23, 2015 was computed as follows (in thousands):
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1
|
|
Other receivables
|
|
|
54
|
|
Property and equipment, net
|
|
|
10
|
|
Intangible assets
|
|
|
3,500
|
|
Goodwill
|
|
|
8,030
|
|
Total assets acquired
|
|
|
11,595
|
|
Accrued expenses
|
|
|
(10)
|
|
Net deferred tax liability
|
|
|
(821)
|
|
Total liabilities assumed
|
|
|
(831)
|
|
Fair value of net assets acquired
|
|
$
|
10,764
|
|
The deferred tax liability associated with the estimated fair value adjustments of the intangible assets acquired is recorded at an estimated weighted average statutory tax rate in the jurisdictions where the fair value adjustments may occur.
Identifiable intangible assets
The following table sets forth the components of the identifiable intangible assets acquired in the MikaMonu acquisition, which are being amortized over their estimated useful lives on a straight-line basis:
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Useful Life
|
|
|
|
(in thousands)
|
|
(in years)
|
|
Patents
|
|
$
|
3,500
|
|
15
|
|
Acquired identifiable intangible assets
|
|
$
|
3,500
|
|
|
|
The fair value of patents was determined using relief from royalty approach, which discounted expected future cash flows to present value. The cash flows were discounted at a rate of approximately 14.0%.
Prior to the closing of the acquisition, there were no material relationships between the Company and MikaMonu.
The following table summarizes total net revenues and net loss of the combined entity had the acquisition of MikaMonu occurred on April 1, 2014 (in thousands, except loss per share data):
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2016
|
|
2015
|
|
Pro forma net revenues
|
|
$
|
52,736
|
|
$
|
54,134
|
|
Pro forma net loss
|
|
$
|
(2,575)
|
|
$
|
(5,810)
|
|
Pro forma net loss per share, basic and diluted
|
|
$
|
(0.11)
|
|
$
|
(0.23)
|
|
The combined results in the table above have been prepared for comparative purposes only and include acquisition related adjustments for, among other items, the amortization of identifiable intangible assets. Since the acquisition date, the results of MikaMonu have been included in the Company’s consolidated financial statements. The combined results do not purport to be indicative of the results of operations which would have resulted had the acquisition been effected at the beginning of the applicable periods noted above, or the future results of operations of the combined entity.
NOTE 12—EMPLOYEE BENEFIT PLANS
The Company provides a defined contribution retirement plan (the “Retirement Plan”), which qualifies under Section 401(k) of the Internal Revenue Code of 1986. The Retirement Plan covers essentially all United States employees. Eligible employees may make contributions to the Retirement Plan up to 15% of their annual compensation, but no greater than the annual IRS limitation for any plan year. The Retirement Plan does not provide for Company contributions.
The Company provides a defined contribution retirement plan (the “Taiwan Pension Plan”) that covers essentially all of its employees located in Taiwan. The Company makes contributions to the Taiwan Pension Plan equal to 6% of eligible compensation and employees can make voluntary contributions of up to 6% of eligible compensation. All contributions are fully vested.
The Company provides a defined contribution retirement plan (the “Pension Plan”) that covers essentially all of its employees located in Israel. Eligible employees may make contributions to the Pension Plan up to 5% of eligible compensation, and the Company contributes up to 15.83% of eligible compensation. All contributions are fully vested.
Pursuant to Israeli labor laws, the Company’s Israeli subsidiary is required to pay severance pay to dismissed employees and employees leaving their employment in certain circumstances. Severance pay is computed based on length of service and generally according to the latest monthly salary and one month’s salary for each year worked.
NOTE 13 —QUARTERLY FINANCIAL DATA (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
March 31,
|
|
|
|
2016
|
|
2016
|
|
2016
|
|
2017
|
|
|
|
(In thousands, except per share amounts)
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
12,946
|
|
$
|
13,358
|
|
$
|
11,484
|
|
$
|
10,392
|
|
Gross profit
|
|
$
|
6,722
|
|
$
|
7,343
|
|
$
|
6,495
|
|
$
|
5,856
|
|
Net income (loss)
|
|
$
|
260
|
|
$
|
626
|
|
$
|
348
|
|
$
|
(1,349)
|
|
Net Income (loss) per common share—Basic
|
|
$
|
0.01
|
|
$
|
0.03
|
|
$
|
0.02
|
|
$
|
(0.07)
|
|
Net Income (loss) per common share—Diluted
|
|
$
|
0.01
|
|
$
|
0.03
|
|
$
|
0.02
|
|
$
|
(0.07)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
March 31,
|
|
|
|
2015
|
|
2015
|
|
2015
|
|
2016
|
|
|
|
(In thousands, except per share amounts)
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
14,025
|
|
$
|
13,577
|
|
$
|
12,921
|
|
$
|
12,213
|
|
Gross profit
|
|
$
|
7,295
|
|
$
|
6,917
|
|
$
|
6,386
|
|
$
|
6,139
|
|
Net loss
|
|
$
|
(917)
|
|
$
|
(347)
|
|
$
|
(819)
|
|
$
|
(87)
|
|
Net loss per common share—Basic
|
|
$
|
(0.04)
|
|
$
|
(0.02)
|
|
$
|
(0.04)
|
|
$
|
—
|
|
Net loss per common share—Diluted
|
|
$
|
(0.04)
|
|
$
|
(0.02)
|
|
$
|
(0.04)
|
|
$
|
—
|
|
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A.
Control
s and Procedures
Management’s Evaluation of Disclosure Controls and Procedures
Based on their evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of
March 31, 2017
, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report for the purpose of ensuring that the information required to be disclosed by us in the reports we file or submit under the Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that the information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in order to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within GSI Technology, have been detected.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and can only provide reasonable assurance with respect to financial statement preparation. 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.
We assessed the effectiveness of our internal control over financial reporting as of
March 31, 2017
. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in
Internal Control—Integrated Framework (2013)
. Based on our assessment using those criteria, our management (including our Chief Executive Officer and Chief Financial Officer) concluded that our internal control over financial reporting was effective as of
March 31, 2017
.
The effectiveness of the Company’s internal control over financial reporting as of March 31, 2017 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears on page 50 of this
Annual Report on Form 10-K.
Item 9B.
Other Information
Not applicable.