Quarterly Report (10-q)

Date : 05/15/2019 @ 7:33PM
Source : Edgar (US Regulatory)
Stock : MoSys Inc (MOSY)
Quote : 1.81  0.0 (0.00%) @ 4:30PM

Quarterly Report (10-q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark one)

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

For the quarterly period ended March 31, 2019

OR

 

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

For the transition period from                 to                

Commission file number 000-32929

 

 

MOSYS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   77-0291941
(State or other jurisdiction
of Incorporation or organization)
  (I.R.S. Employer
Identification Number)

2309 Bering Drive

San Jose, California, 95131

(Address of principal executive office and zip code)

(408) 418-7500

(Registrant’s telephone number, including area code)

 

 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    YES  ☒    NO  ☐

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
Emerging Growth Company       

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

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

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

 

Title of each class

 

Trading symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.001 per share   MOSY   Nasdaq Capital Market

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 43,139,146 as of April 30, 2019.

 

 

 


Table of Contents

MOSYS, INC.

FORM 10-Q

March  31, 2019

TABLE OF CONTENTS

 

PART I—FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements (Unaudited):

     3  
 

Condensed Consolidated Balance Sheets as of March  31, 2019 and December 31, 2018

     3  
 

Condensed Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2019 and 2018

     4  
 

Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2019 and 2018

     5  
 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018

     6  
 

Notes to Condensed Consolidated Financial Statements

     7  

Item 2.

 

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

     18  

Item 4.

 

Controls and Procedures

     22  

PART II—OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     22  

Item 1A.

 

Risk Factors

     23  

Item 6.

 

Exhibits

     24  
 

Signatures

     25  


Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

MOSYS,  INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except par value)

 

     March 31,
2019
    December 31,
2018
 

ASSETS

    

Current assets

    

Cash and cash equivalents

   $ 4,765     $ 7,104  

Short-term investments

     1,564       —    

Accounts receivable

     2,171       1,622  

Inventories

     902       1,148  

Prepaid expenses and other

     1,171       923  
  

 

 

   

 

 

 

Total current assets

     10,573       10,797  

Property and equipment, net

     255       279  

Goodwill

     420       420  

Right-of-use lease asset

     297       —    

Other

     260       260  
  

 

 

   

 

 

 

Total assets

   $ 11,805     $ 11,756  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities

    

Accounts payable

   $ 215     $ 236  

Deferred revenue

     269       273  

Short-term lease liability

     197       —    

Accrued expenses and other

     1,098       1,402  
  

 

 

   

 

 

 

Total current liabilities

     1,779       1,911  

Long-term lease liability

     115       17  

Convertible notes payable

     2,749       2,671  
  

 

 

   

 

 

 

Total liabilities

     4,643       4,599  
  

 

 

   

 

 

 

Commitments and contingencies (Note 4)

    

Stockholders’ equity

    

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

     —         —    

Common stock, $0.001 par value; 120,000 shares authorized; 43,139 shares and 42,967 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively

     43       43  

Additional paid-in capital

     242,976       242,981  

Accumulated deficit

     (235,857     (235,867
  

 

 

   

 

 

 

Total stockholders’ equity

     7,162       7,157  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 11,805     $ 11,756  
  

 

 

   

 

 

 

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

 

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Table of Contents

MOSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except per share data)

 

     Three Months Ended
March 31,
 
     2019     2018  

Net revenue

    

Product

   $ 3,386     $ 3,704  

Royalty and other

     134       504  
  

 

 

   

 

 

 

Total net revenue

     3,520       4,208  

Cost of net revenue

     1,354       1,601  
  

 

 

   

 

 

 

Gross profit

     2,166       2,607  

Operating expenses

    

Research and development

     1,153       1,051  

Selling, general and administrative

     972       989  
  

 

 

   

 

 

 

Total operating expenses

     2,125       2,040  
  

 

 

   

 

 

 

Income from operations

     41       567  

Interest expense

     (54     (221

Other income, net

     23       3  
  

 

 

   

 

 

 

Income before income taxes

     10       349  

Income tax provision

     —         1  
  

 

 

   

 

 

 

Net and comprehensive income

   $ 10     $ 348  
  

 

 

   

 

 

 

Net income per share

    

Basic

   $ 0.00     $ 0.04  
  

 

 

   

 

 

 

Diluted

   $ 0.00     $ 0.04  
  

 

 

   

 

 

 

Shares used in computing net income per share

    

Basic

     43,068       8,130  

Diluted

     45,412       8,347  

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

 

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Table of Contents

MOSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

 

                   Additional              
     Common Stock      Paid-In     Accumulated        
     Shares      Amount      Capital     Deficit     Total  

Balance at December 31, 2018

     42,967      $ 43      $ 242,981     $ (235,867   $ 7,157  

Issuance of common stock for release of awards

     172        —          (1     —         (1

Stock-based compensation

     —          —          (4     —         (4

Net income

     —          —          —         10       10  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2019

     43,139      $ 43      $ 242,976     $ (235,857   $ 7,162  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
                   Additional              
     Common Stock      Paid-In     Accumulated        
     Shares      Amount      Capital     Deficit     Total  

Balance at December 31, 2017

     8,068      $ 8      $ 232,026     $ (224,688   $ 7,346  

Cumulative effect of accounting change

     —          —          —         230       230  

Issuance costs for the sale of common stock

     —          —          (12     —         (12

Issuance of common stock for release of awards

     103        —          (38     —         (38

Stock-based compensation

     —          —          93       —         93  

Net income

     —          —          —         348       348  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2018

     8,171      $ 8      $ 232,069     $ (224,110   $ 7,967  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

MOSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

     Three Months Ended
March 31,
 
     2019     2018  

Cash flows from operating activities:

    

Net income

   $ 10     $ 348  

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

    

Depreciation and amortization

     72       169  

Stock-based compensation

     (4     94  

Amortization of intangible assets

     —         27  

Amortization of debt issuance costs

     —         12  

Accrued interest

     54       209  

Other

     (2     —    

Changes in assets and liabilities

    

Accounts receivable

     (549     406  

Inventories

     246       (134

Prepaid expenses and other assets

     (248     93  

Accounts payable

     (21     63  

Deferred revenue and other liabilities

     (284     (1,604
  

 

 

   

 

 

 

Net cash used in operating activities

     (726     (317

Cash flows from investing activities:

    

Purchases of property and equipment

     (48     —    

Purchases of marketable securities

     (1,564     —    
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,612     —    

Cash flows from financing activities:

    

Issuance costs for sale of common stock

     —         (12

Taxes paid to net share settle equity awards

     (1     (38
  

 

 

   

 

 

 

Net cash used in financing activities

     (1     (50

Net decrease in cash and cash equivalents

     (2,339     (367

Cash and cash equivalents at beginning of period

     7,104       3,868  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 4,765     $ 3,501  
  

 

 

   

 

 

 

Supplemental disclosure:

    

Issuance of convertible notes in settlement of accrued interest

   $ 78     $ 463  

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

 

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Table of Contents

MOSYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. The Company and Summary of Significant Accounting Policies

MoSys, Inc. (the “Company”) was incorporated in California in September 1991 and reincorporated in September 2000 in Delaware. The Company’s strategy and primary business objective is to be an IP-rich fabless semiconductor company focused on the development and sale of integrated circuit (IC) and related firmware products. Its Bandwidth Engine ICs combine the Company’s proprietary high-density embedded memory with its high-speed 10 gigabits per second and higher interface technology.

The accompanying condensed consolidated financial statements of the Company have been prepared without audit.

The condensed consolidated balance sheet as of December 31, 2018 has been derived from the audited consolidated financial statements at that date. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). The information in this report should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in its most recent annual report on Form 10-K filed with the SEC.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to summarize fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or for any other future period.

Basis of Presentation

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. The Company’s fiscal year ends on December 31 of each calendar year.

Use of Estimates

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

Cash Equivalents and Investments

The Company invests its excess cash in money market accounts, certificates of deposit, commercial paper, corporate debt, government-sponsored enterprise bonds and municipal bonds and considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Investments with original maturities greater than three months and remaining maturities less than one year are classified as short-term investments. Investments with remaining maturities greater than one year are classified as long-term investments. Management generally determines the appropriate classification of securities at the time of purchase. All securities are classified as available-for-sale. The Company’s available-for-sale short-term investments are carried at fair value, with the unrealized holding gains and losses reported in accumulated other comprehensive loss. Realized gains and losses and declines in the value judged to be other than temporary are included in the other income, net line item in the condensed consolidated statements of operations and comprehensive loss. The cost of securities sold is based on the specific identification method.

 

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Fair Value Measurements

The Company measures the fair value of financial instruments using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:

Level 1— Inputs used to measure fair value are unadjusted quoted prices that are available in active markets for the identical assets or liabilities as of the reporting date.

Level 2— Pricing is provided by third party sources of market information obtained through the Company’s investment advisors, rather than models. The Company does not adjust for, or apply, any additional assumptions or estimates to the pricing information it receives from advisors. The Company’s Level 2 securities may include cash equivalents and available-for-sale securities, which consist primarily of certificates of deposit, corporate debt, and government agency and municipal debt securities from issuers with high-quality credit ratings. The Company’s investment advisors obtain pricing data from independent sources, such as Standard & Poor’s, Bloomberg and Interactive Data Corporation, and rely on comparable pricing of other securities because the Level 2 securities are not actively traded and have fewer observable transactions. The Company considers this the most reliable information available for the valuation of the securities.

Level 3— Unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment are used to measure fair value. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions. The determination of fair value for Level 3 investments and other financial instruments involves the most management judgment and subjectivity.

Allowance for Doubtful Accounts

The Company establishes an allowance for doubtful accounts to ensure that its trade receivables balances are not overstated due to uncollectibility. The Company performs ongoing customer credit evaluations within the context of the industry in which it operates and generally does not require collateral from its customers. A specific allowance of up to 100% of the invoice value is provided for any problematic customer balances. Delinquent account balances are written off after management has determined that the likelihood of collection is remote. The Company grants credit only to customers deemed creditworthy in the judgment of management. There was no allowance for doubtful accounts receivable at either March 31, 2019 or December 31, 2018.

Inventories

The Company values its inventories at the lower of cost, which approximates actual cost on a first-in, first-out basis, or net realizable value. The Company records inventory reserves for estimated obsolescence or unmarketable inventories based upon assumptions about future demand and market conditions. Once a reserve is established, it is maintained until the product to which it relates is sold or otherwise disposed of. If actual market conditions are less favorable than those expected by management, additional adjustment to inventory valuation may be required. Charges for obsolete and slow-moving inventories are recorded based upon an analysis of specific identification of obsolete inventory items and quantification of slow moving inventory items. The Company recorded no inventory write-downs during the three month periods ended March 31, 2019 and 2018.

Revenue Recognition

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

IC products

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

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

 

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Table of Contents

The Company may record an estimated allowance, at the time of shipment, for future returns and other charges against revenue consistent with the terms of sale.

Royalty and other

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

Contract liabilities – deferred revenue

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

During the three months ended March 31, 2019, the Company recognized revenue of $0.2 million that had been included in deferred revenue at December 31, 2018.

See Note 5 for disaggregation of revenue by geography.

Cost of Net Revenue

Cost of net revenue consists primarily of direct and indirect costs of IC product sales and engineering personnel costs directly related to maintenance and support services specified in licensing agreements. Maintenance and support typically include engineering support to assist in the commencement of production of a licensee’s products.

Goodwill

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

The Company has determined that it has a single reporting unit for purposes of performing its goodwill impairment test. As the Company uses the market approach to determine the step one fair value, the price of its common stock is an important component of the fair value calculation. If the Company’s stock price continues to experience significant price and volume fluctuations, this will impact the fair value of the reporting unit, which can lead to potential impairment in future periods. The Company reviews goodwill for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. The Company first assesses qualitative factors to determine whether it is more-likely-than-not that the fair value of the reporting unit is less than the carrying amount as a basis for determining whether it is necessary to perform an impairment test. If the qualitative assessment warrants further analysis, the Company compares the fair value of the reporting unit to its carrying value. The fair value of the reporting unit is determined using the market approach. If the fair value of the reporting unit exceeds the carrying value of net assets of the reporting unit, goodwill is not impaired. If the carrying value of the reporting unit’s goodwill exceeds its fair value, then the Company must record an impairment charge equal to the difference.

 

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Warrants

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

 

Warrant type

   Number of shares      Exercise Price      Expiration date

Pre-funded common stock

     2,310,776      $ 0.001      None

Common stock

     662,500      $ 2.35      January 2023

Common stock

     36,910,809      $ 0.30      October 2023

Per Share Amounts

Basic net income per share is computed by dividing net income for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share gives effect to all potentially dilutive common shares outstanding during the period. Potentially dilutive common shares consist of incremental shares of common stock issuable upon the exercise of stock options, vesting of stock awards and shares issuable in conjunction with our convertible debt.

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

 

     Three months ended  
     March 31,  
     2019      2018  

Numerator:

     

Net Income

   $  10      $  348  
  

 

 

    

 

 

 

Denominator:

     

Add: weighted-average common shares outstanding

     43,068        8,130  
  

 

 

    

 

 

 

Total shares: basic

     43,068        8,130  

Add: weighted-average stock options outstanding

     —          63  

Add: weighted-average unvested restricted stock units

     46        154  

Add: weighted-average shares issuable on conversion of warrants

     2,298        —    
  

 

 

    

 

 

 

Total shares: diluted

     45,412        8,347  

Net income per share:

     

Basic

   $ 0.00      $  0.04  
  

 

 

    

 

 

 

Diluted

   $ 0.00      $  0.04  
  

 

 

    

 

 

 

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

 

     March 31,  
     2019      2018  

Options outstanding to purchase common stock

     1,633        186  

Convertible debt

     4,809        2,272  

Outstanding warrants

     37,573        —    
  

 

 

    

 

 

 

Total

     44,015        2,458  
  

 

 

    

 

 

 

 

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Debt Issuance Costs

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

Recently Adopted Accounting Standards

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

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

 

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Note 2: Fair Value of Financial Instruments

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

 

     March 31, 2019  
     Cost      Unrealized
Gains
     Unrealized
Losses
     Fair
Value
 

Cash and cash equivalents

   $ 4,765      $ —        $ —        $ 4,765  

Short-term investments

     1,564        —          —          1,564  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,329      $ —        $ —        $ 6,329  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2018  
     Cost      Unrealized
Gains
     Unrealized
Losses
     Fair
Value
 

Cash and cash equivalents

   $ 7,104      $ —        $ —        $ 7,104  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

                                                   
     March 31, 2019  
     Fair Value      Level 1      Level 2      Level 3  

Money market funds

   $ 3,233      $ 3,233      $ —        $ —    

Corporate notes and commercial paper

   $ 1,564      $ —        $ 1,564      $ —    
     December 31, 2018  
     Fair Value      Level 1      Level 2      Level 3  

Money market funds

   $ 632      $ 632      $ —        $ —    

There were no transfers in or out of Level 1 and Level 2 securities during the three months ended March 31, 2019 or 2018.

Note 3. Balance Sheet Detail

 

     March 31,
2019
     December 31,
2018
 
     (in thousands)  

Inventories:

     

Work-in-process

   $ 474      $ 548  

Finished goods

     428        600  
  

 

 

    

 

 

 
   $ 902      $ 1,148  
  

 

 

    

 

 

 

Amortization expense for an identifiable intangible asset, which was fully amortized during 2018, has been included in research and development expense in the condensed consolidated statement of operations and comprehensive income.

 

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Note 4. Commitments and Contingencies

Indemnification

In the ordinary course of business, the Company enters into contractual arrangements under which it may agree to indemnify the counterparties from any losses incurred relating to breach of representations and warranties, failure to perform certain covenants, or claims and losses arising from certain events as outlined within the particular contract, which may include, for example, losses arising from litigation or claims relating to past performance. Such indemnification clauses may not be subject to maximum loss clauses. The Company has also entered into indemnification agreements with its officers and directors. No material amounts were reflected in the Company’s condensed consolidated financial statements for the three months ended March 31, 2019 or 2018 related to these indemnifications.

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

Legal Matters

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

Note 5. Business Segments, Concentration of Credit Risk and Significant Customers

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

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

 

     Three Months Ended
March 31,
 
     2019      2018  

North America

   $ 2,487      $ 3,357  

Japan

     906        714  

Taiwan

     74        83  

Rest of world

     53        54  
  

 

 

    

 

 

 

Total net revenue

   $ 3,520      $ 4,208  
  

 

 

    

 

 

 

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

 

     Three Months Ended
March 31,
 
     2019     2018  

Customer A

     26     17

Customer B

     23     34

Customer C

     15     24

Customer D

     14     *

Customer E

     13     10

 

*

Represents less than 10%

Three customers accounted for 94% of accounts receivable at March 31, 2019. Three customers accounted for 63% of accounts receivable at December 31, 2018.

 

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Note 6. Income Tax Provision

The Company determines deferred tax assets and liabilities based upon the differences between the financial statement and tax bases of the Company’s assets and liabilities using tax rates in effect for the year in which the Company expects the differences to affect taxable income. A valuation allowance is established for any deferred tax assets for which it is more likely than not that all or a portion of the deferred tax assets will not be realized.

The Company files U.S. federal and state and foreign income tax returns in jurisdictions with varying statutes of limitations. All tax returns from 2013 to 2017 may be subject to examination by the Internal Revenue Service, California and other states. Returns filed in foreign jurisdictions may be subject to examination for the years 2009 to 2017. As of March 31, 2019, the Company has not recorded any liability for unrecognized tax benefits related to uncertain tax positions.

Note 7. Stock-Based Compensation

The expense relating to stock options is recognized on a straight-line basis over the requisite service period, usually the vesting period, based on the grant-date fair value. The unamortized compensation cost, as of March 31, 2019, was $0.5 million related to stock options and is expected to be recognized as expense over a weighted-average period of approximately 3.0 years. The expense related to restricted stock units (RSUs) is recognized over a three-to-four year vesting period and is based on the fair value of the underlying stock on the dates of grant. The unamortized compensation cost, as of March 31, 2019, was $0.4 million related to RSUs and is expected to be recognized as expense over a weighted-average period of approximately 0.3 years.

For the three months ended March 31, 2019 and 2018, there were no excess tax benefits associated with the exercise of stock options due to the Company’s historical loss positions.

Valuation Assumptions

The fair value of the Company’s stock options granted during the three months ended March 31, 2019 and 2018 was estimated on the grant dates using the Black-Scholes valuation option-pricing model with the following assumptions:

 

     Three Months Ended
March 31,
 
     2019     2018  

Risk-free interest rate

     2.5     2.2

Volatility

     128.4     109.5

Expected life (years)

     3 - 5       4.0  

Dividend yield

     —       —  

The risk-free interest rate was derived from the Daily Treasury Yield Curve Rates, as published by the U.S. Department of the Treasury as of the grant date for terms equal to the expected terms of the options. The expected volatility was based on the historical volatility of the Company’s stock price over the expected term of the options. The expected term of options granted was derived from historical data based on employee exercises and post-vesting employment termination behavior. A dividend yield of zero is applied because the Company has never paid dividends, and has no intention to pay dividends in the near future.

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

 

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Common Stock Options and Restricted Stock

A summary of option and RSU activity under the Company’s Amended and Restated 2010 Equity Incentive Plan (the Plan) is presented below (in thousands, except exercise price):

 

            Options outstanding  
     Shares
Available
for Grant
     Number of
Shares
     Weighted
Average
Exercise
Prices
 

Balance at January 1, 2019

     4,007        337      $ 4.19  

Additional shares authorized under the Plan

     50        —          —    

RSUs granted

     (2,028      —          —    

RSUs cancelled and returned to the Plan

     11        —          —    

Options granted

     (1,297      1,297      $ 0.20  

Options cancelled and returned to the Plan

     1        (1    $ 7.20  
  

 

 

    

 

 

    

Balance at March 31, 2019

     744        1,633      $ 1.02  
  

 

 

    

 

 

    

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

 

     Number of
Shares
     Weighted
Average
Grant-Date
Fair Value
 

Non-vested shares at December 31, 2018

     272      $ 1.23  

Granted

     2,028      $ 0.20  

Vested

     (167    $ 1.48  

Cancelled

     (11    $ 1.26  
  

 

 

    

Non-vested shares at March 31, 2019

     2,122      $ 0.23  
  

 

 

    

The total intrinsic value of the RSUs outstanding as of March 31, 2019 was $0.4 million.

The following table summarizes significant ranges of outstanding and exercisable options as of March 31, 2019 (in thousands, except contractual life and exercise price):

 

     Options Outstanding      Options Exercisable  

Range of Exercise Price

   Number
Outstanding
     Weighted
Average
Remaining
Contractual
Life

(in Years)
     Weighted
Average
Exercise
Price
     Number
Exercisable
     Weighted
Average
Exercise
Price
     Aggregate
Intrinsic
value
 

$0.18 - $0.74  

     1,297        2.80      $ 0.20        30      $ 0.20      $ —    

$0.75 - $1.27  

     160        4.55      $ 0.75        53      $ 0.75      $ —    

$1.28 - $7.19  

     51        5.15      $ 2.09        23      $ 2.93      $ —    

$7.20 - $20.49  

     106        7.04      $ 7.20        92      $ 7.20      $ —    

$20.50 - $46.20  

     19        5.94      $ 21.53        19      $ 21.53      $ —    
  

 

 

          

 

 

       

 

 

 

$0.18 - $46.20  

     1,633        5.52      $ 1.02        217      $ 5.46      $ —    
  

 

 

          

 

 

       

 

 

 

There were no stock options exercised during the three months ended March 31, 2019 or 2018.

 

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Note 8. Convertible Notes

In March 2016, the Company entered into a 10% Senior Secured Convertible Note Purchase Agreement (the “Purchase Agreement”) with the purchasers of $8,000,000 principal amount of 10% Senior Secured Convertible Notes due August 15, 2018 (the “Notes”), at par, in a private placement transaction effected pursuant to an exemption from the registration requirements under the Securities Act of 1933, as amended. Pursuant to amendments to the Notes and related documents in February and October 2018, the interest rate was reduced to 8%, the maturity date of the Notes was extended to August 15, 2023, and the optional conversion price was reduced from $8.50 of Note principal per share of common stock to $0.5717 of Note principal per share of common stock. The conversion price is subject to adjustment upon certain events, such as stock splits, reverse stock splits, stock dividends and similar kinds of transactions, as set forth in the Purchase Agreement. Pursuant to a security agreement entered into by the Company, the Notes are secured by a security interest in all of the assets of the Company.

Accrued interest is payable semi-annually in cash or in kind through the issuance of identical new Notes, or with a combination of the two, at the Company’s option. The Notes are noncallable and nonredeemable by the Company. The Notes are redeemable at the election of the holders if the Company experiences a fundamental change (as defined in the Notes), which generally would occur in the event (i) any person acquires beneficial ownership of shares of common stock of the Company entitling such person to exercise at least 40% of the total voting power of all of the shares of capital stock of the Company entitled to vote generally in elections of directors, (ii) an acquisition of the Company by another person through a merger or consolidation, or the sale, transfer or lease of all or substantially all of the Company’s assets, or (iii) the Company’s current directors cease to constitute a majority of the board of directors of the Company within a 12-month period, disregarding for this purpose any director who voluntarily resigns as a director or dies while serving as a director. Effective February 2018, pursuant to one amendment to the Notes, the redemption price was reduced from 120% to 100% of the principal amount of the Note to be repurchased plus accrued and unpaid interest as of the redemption date.

No Note holder shall be entitled to convert such holder’s Notes if effective upon the applicable conversion date (i) the holder would have beneficial ownership of more than 19.9% of the voting capital stock of the Company as determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended, (with exceptions specified in the Purchase Agreement), or (ii) if the shares are being acquired or held with a purpose or effect of changing or influencing control of the Company, or in connection with or as a participant in any transaction having that purpose or effect, as determined in the sole discretion of the board of directors of the Company. There is no required sinking fund for the Notes. The Notes have not been registered for resale, and the holder(s) do not have registration rights.

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

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

The Company incurred debt issuance costs of approximately $0.1 million, which were recorded as a debt discount and are being amortized to interest expense over the repayment period for the original loan using the effective interest rate method. The interest expense related to the debt discount during the three months ended March 31, 2019 and 2018 was approximately zero and $12,000, respectively.

 

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In accordance with the October 2018 amendment to the Notes, the Company used $7.4 million of the proceeds from a public offering of securities effected in October 2018 to repay a portion of the Notes. As of March 31, 2019, the outstanding convertible notes payable of $2.7 million were due in August 2023. In February 2019, a semi-annual interest payment of approximately $78,000 was paid in-kind with the issuance of an additional note (the Interest Note) to the Purchasers. The Interest Note has terms identical to the Notes. As of March 31, 2019, the Notes and Interest Note could be converted into a maximum of 4,808,626 shares of common stock at $0.5717 per share, excluding the effects of future payments of interest in-kind and a beneficial ownership ceiling of 9.9%.

Note 9. Leases

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

The Company identified only one lease to be accounted for under ASU No. 2016-02, and this was the lease for its corporate facility, which expires in October 2020. The right-to-use asset and corresponding liability for the facility lease have been measured at the present value of the future minimum lease payments. The discount rate used to measure the lease asset and liability represents the interest rate on the Notes (8%). Lease expense is recognized on a straight line basis over the lease term, and operating lease expense was $0.1 million for the quarter ended March 31, 2019.

Our future minimum payments under our facility operating lease as of March 31, 2019 are listed in the table below (in thousands).

 

Year

   Operating Lease  

2019

   $ 164  

2020

     187  
  

 

 

 

Total future lease payments

     351  

Less: imputed interest

     (39
  

 

 

 

Present value of lease liabilities

   $ 312  
  

 

 

 

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

 

     Three months ended
March 31, 2019
 

Cash paid for amounts included in the measurement of lease liabilities:

  

Operating cash flows for lease

   $ 54  

 

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying condensed consolidated financial statements and notes included in this report. This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which include, without limitation, statements about the market for our technology, our strategy, competition, expected financial performance and capital raising efforts, all information disclosed under Item 3 of this Part I, and other aspects of our business identified in our most recent annual report on Form 10-K filed with the Securities and Exchange Commission on March 12, 2019 and in other reports that we file from time to time with the Securities and Exchange Commission. Any statements about our business, financial results, financial condition and operations contained in this Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” or similar expressions are intended to identify forward-looking statements. Our actual results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors, including the risk factors described under Item 1A of our annual report on Form 10-K for the year ended December 31, 2018. We undertake no obligation to update publicly any forward-looking statements for any reason, except as required by law, even as new information becomes available or events occur in the future.

Company Overview

Our strategy and primary business objective is to be a profitable IP-rich fabless semiconductor company offering ICs that deliver unparalleled memory bandwidth and access rate performance for high-performance data processing in cloud networking, communications, security appliances, video, test and monitoring, and data center systems. Our solutions deliver time-to-market, performance, power, area and economic benefits for system original equipment manufacturers, or OEMs. Our principal product line and source of substantially all of our revenue is the Bandwidth Engine ®  product family. Bandwidth Engine ICs combine our proprietary 1T-SRAM ®  high-density embedded memory, integrated macro functions and high-speed serial interface, or SerDes I/O, with our intelligent access technology and a highly efficient interface protocol. Our second-generation Bandwidth Engine, or Bandwidth Engine 2, products are expected to be our primary revenue source through at least 2020, and we expect these products to continue to generate significant revenue thereafter. We expect our third generation Bandwidth Engine, or Bandwidth Engine 3, products and Programmable Hyperspeed Engine products to commence production and begin generating meaningful revenue in late 2019. Despite our limited new product development efforts, we believe our current product portfolio positions us for future growth and profitability. We will continue to seek third-party funding for new product development efforts.

We incurred net losses of approximately $11 million for each of the years ended December 31, 2018 and 2017 and had an accumulated deficit of approximately $236 million as of March 31, 2019. These and prior year losses have resulted in significant negative cash flows for almost a decade and have necessitated that we raise substantial amounts of additional capital during this period. To date, we have primarily financed our operations through multiple offerings of common stock to investors and affiliates, as well as asset sale transactions and one offering of convertible notes.

We may continue to incur operating losses and will need to increase revenues substantially beyond levels that we have attained in the past in order to generate sustainable operating profit and sufficient cash flows to continue doing business without raising additional capital from time to time.

Accounting Changes

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

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

 

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Sources of Revenue

Product. Product revenue is generally recognized at the time of shipment to our customers. An estimated allowance may be recorded, at the time of shipment, for future returns and other charges against revenue consistent with the terms of sale.

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

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis we make these estimates based on our historical experience and on assumptions that we consider reasonable under the circumstances. Actual results may differ from these estimates, and reported results could differ under different assumptions or conditions. Our significant accounting policies and estimates are disclosed in Note 1 of the “Notes to Consolidated Financial Statements” in our Annual Report on Form 10-K for the year ended December 31, 2018. As of March 31, 2019, there have been no material changes to our significant accounting policies and estimates, except that we adopted ASU Nos. 2016-02 and 2016-09 effective January 1, 2019, as discussed above.

Results of Operations

Net Revenue.

 

                                       
     March 31,     Change  
     2019     2018     2018 to 2019  
     (dollar amounts in thousands)  

Product -three months ended

   $ 3,386     $ 3,704     $ (318      (9 %) 

Percentage of total net revenue

     96     88     

Product revenue decreased for the three months ended March 31, 2019 compared with the same period of 2018 primarily due to lower sales of our Bandwidth Engine 2 products, which was partially offset by increases in sales of our Bandwidth Engine 1 product and our LineSpeed products.

 

                                       
     March 31,     Change  
     2019     2018     2018 to 2019  
     (dollar amounts in thousands)  

Royalty and other -three months ended

   $ 134     $ 504     $ (370      (73 %) 

Percentage of total net revenue

     4     12     

Royalty and other includes revenues generated from licensing agreements. The decrease in royalty and other revenue for 2019 was primarily due to non-recurring license and engineering services for a development project for which revenue was recognized during the quarter ended March 31, 2018, combined with lower royalty revenues in 2019 resulting from lower shipment volumes by licensees whose products incorporate our licensed IP.

 

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Cost of Net Revenue and Gross Profit.

 

                                       
     March 31,     Change  
     2019     2018     2018 to 2019  
     (dollar amounts in thousands)  

Cost of net revenue -three months ended

   $ 1,354     $ 1,601     $ (247      (15 %) 

Percentage of total net revenue

     38     38     

 

                                       
     March 31,     Change  
     2019     2018     2018 to 2019  
     (dollar amounts in thousands)  

Gross profit -three months ended

   $ 2,166     $ 2,607     $ (441      (17 %) 

Percentage of total net revenue

     62     62     

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

Cost of net revenue decreased for the three months ended March 31, 2019 compared with the same periods of 2018 primarily due to decreased IC product shipment volumes.

Gross profit decreased for the three months ended March 31, 2019, compared with the same period of 2018, primarily from the decrease in gross profit from reduced product shipments, as well as from reduced royalty and other revenues, which have little to no associated costs.

Research and Development.

 

                                                   
     March 31,     Change  
     2019     2018     2018 to 2019  
     (dollar amounts in thousands)  

Research and development -three months ended

   $ 1,153     $ 1,051     $ 102        10

Percentage of total net revenue

     33     25     

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

The increase for the three months ended March 31, 2019 was primarily due to increased development expenses for our Bandwidth Engine 3 and LineSpeed products, which were partially offset by a decrease in depreciation expense.

Selling, General and Administrative

 

                                                   
     March 31,     Change  
     2019     2018     2018 to 2019  
     (dollar amounts in thousands)  

SG&A -three months ended

   $ 972     $ 989     $ (17      (2 )% 

Percentage of total net revenue

     28     24     

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

 

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The decrease for the three months ended March 31, 2019 was primarily due to reduced professional fees and personnel costs.

Liquidity and Capital Resources; Changes in Financial Condition

Cash Flows

As of March 31, 2019, we had cash, cash equivalents and short-term investments of $6.3 million and working capital of $8.8 million.

Net cash used in operating activities was $0.7 million for the first three months of 2019, which primarily resulted from $0.9 in net changes in assets and liabilities, partially offset by the effects of depreciation and amortization expenses of $0.1 million and accrued interest of $0.1 million. The changes in assets and liabilities primarily related to the timing of customer collections and inventory and other vendor payables and prepayments.

Net cash used in operating activities was $0.3 million for the first three months of 2018, which primarily resulted from $1.2 million in net reductions in assets and liabilities partially offset by net income of $0.3 million, non-cash charges, including stock-based compensation expense of $0.1 million, depreciation and amortization expenses of $0.2 million and accrued interest of $0.2 million. The changes in assets and liabilities primarily related to the timing of customer collections and inventory prepayments and net change in liabilities.

Net cash used in investing activities of $1.6 million for the three months ended March 31, 2019 was mainly due to the purchase of marketable securities, which did not affect our liquidity. There were no cash flows from investing activities during the three months ended March 31, 2018.

There were minimal cash flows used in financing activities during the three months ended March 31, 2019. Net cash used in financing activities for the first three months of 2018 consisted of amounts paid for employee income taxes related to net share settlement of vested RSUs and costs incurred in connection with the sale of common stock and warrants to purchase common stock in an equity offering completed in July 2017.

Our future liquidity and capital requirements are expected to vary from quarter-to-quarter, depending on numerous factors, including:

 

   

level of revenue;

 

   

cost, timing and success of technology development efforts;

 

   

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

 

   

fabrication costs, including mask costs, of our ICs, currently under development;

 

   

variations in manufacturing yields, materials costs and other manufacturing risks;

 

   

costs of acquiring other businesses and integrating the acquired operations;

 

   

profitability of our business; and

 

   

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

Working Capital

Our primary need for liquidity is to fund working capital requirements of our business, capital expenditures and general corporate purposes. We expect our cash expenditures to exceed receipts in 2019, as our revenues will not be sufficient to offset our working capital requirements. We incurred net losses of approximately $11 million for each of the years ended December 31, 2018 and 2017 and had an accumulated deficit of approximately $236 million as of March 31, 2019. These and prior year losses have resulted in significant negative cash flows for more than a decade and have required us to raise substantial amounts of additional capital during this period. To date, we have primarily financed our

 

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operations through multiple offerings of common stock to investors and affiliates, as well as asset sale transactions and a sale of $8.0 million of 10% Senior Secured Convertible Notes in March 2016, of which we have repaid principal of $7.4 million from the proceeds of a public offering of common stock in October 2018. Interest on the notes totaling approximately $2.2 million has been paid through the issuance of additional notes having the same terms. As of March 31, 2019, the outstanding balance of the Notes approximated $2.7 million and has a maturity date of August 15, 2023.

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

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

 

   

repay the Notes when they are due;

 

   

develop or enhance our products;

 

   

expand our product development and sales and marketing organizations;

 

   

acquire complementary technologies, products or businesses;

 

   

expand operations;

 

   

hire, train and retain employees; or

 

   

respond to competitive pressures or unanticipated working capital requirements.

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

ITEM 4. Controls and Procedures

Disclosure Controls and Procedures. Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on this evaluation, our management concluded that, as of March 31, 2019, our disclosure controls and procedures were effective.

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

PART II—OTHER INFORMATION

ITEM 1. Legal Proceedings

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

 

22


Table of Contents

ITEM 1A. Risk Factors

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

 

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Table of Contents

ITEM 6. Exhibits

 

(a) Exhibits

     31.1    Rule  13a-14 certification
     31.2    Rule  13a-14 certification
     32.1    Section  1350 certification
   101    The following financial information from MoSys, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 2019, filed with the SEC on May 15, 2019, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2019 and 2018, (ii) the Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018, (iii) the Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2019 and 2018, (iv) the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018, and (v) Notes to Condensed Consolidated Financial Statements.

 

24


Table of Contents

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Dated: May 15, 2019    

MOSYS, INC.

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

 

25

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