Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 


 

FORM 10-Q

 

(Mark one)

 

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

 

For the quarterly period ended March 31, 2012

 

OR

 

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

 

For the transition period from                to               

 

Commission file number 000-32929

 


 

MOSYS, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

77-0291941

(State or other jurisdiction

 

(I.R.S. Employer

of Incorporation or organization)

 

Identification Number)

 

3301 Olcott Street

Santa Clara, California, 95054

(Address of principal executive office and zip code)

 

( 408) 418-7500

(Registrant’s telephone number, including area code)

 


 

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

 

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

 

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

 

Large accelerated filer  o

 

Accelerated filer  x

 

 

 

Non-accelerated filer  o

 

Smaller reporting company  o

(Do not check if a smaller reporting company)

 

 

 

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

 

As of May 1, 2012, 38,744,929 shares of the Registrant’s common stock, $0.01 par value, were outstanding.

 

 

 



Table of Contents

 

MOSYS, INC.

 

FORM 10-Q
March 31, 2012

 

TABLE OF CONTENTS

 

PART I —

FINANCIAL INFORMATION

3

 

 

 

Item 1.

Financial Statements (Unaudited):

3

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011

3

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2012 and 2011

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

 

Item 2.

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

15

 

 

 

Item 3.

Qualitative and Quantitative Disclosures About Market Risk

19

 

 

 

Item 4.

Controls and Procedures

20

 

 

 

PART II —

OTHER INFORMATION

20

 

 

 

Item 1.

Legal Proceedings

20

 

 

 

Item 1A.

Risk Factors

20

 

 

 

Item 6.

Exhibits

20

 

 

 

 

Signatures

21

 



Table of Contents

 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

MOSYS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except par value)

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

9,420

 

$

40,025

 

Short-term investments

 

23,368

 

9,413

 

Accounts receivable, net

 

308

 

969

 

Unbilled contracts receivable

 

6

 

74

 

Prepaid expenses and other current assets

 

1,993

 

1,522

 

Total current assets

 

35,095

 

52,003

 

 

 

 

 

 

 

Long-term investments

 

21,908

 

8,537

 

Property and equipment, net

 

1,149

 

1,382

 

Goodwill

 

23,134

 

23,134

 

Intangible assets, net

 

3,717

 

4,400

 

Other assets

 

182

 

181

 

Total assets

 

$

85,185

 

$

89,637

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

757

 

$

336

 

Accrued expenses and other liabilities

 

4,064

 

2,779

 

Deferred revenue

 

875

 

920

 

Total current liabilities

 

5,696

 

4,035

 

 

 

 

 

 

 

Long-term liabilities

 

126

 

109

 

Commitments and contingencies (Note 4)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

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

 

 

 

Common stock, $0.01 par value; 120,000 shares authorized; 38,746 shares and 38,423 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively

 

385

 

384

 

Additional paid-in capital

 

151,604

 

150,507

 

Accumulated other comprehensive income (loss)

 

(12

)

1

 

Accumulated deficit

 

(72,614

)

(65,399

)

Total stockholders’ equity

 

79,363

 

85,493

 

Total liabilities and stockholders’ equity

 

$

85,185

 

$

89,637

 

 

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

 

3



Table of Contents

 

MOSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)
(In thousands, except per share data)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

Net revenue

 

 

 

 

 

Licensing and other

 

$

221

 

$

1,347

 

Royalty

 

1,203

 

2,192

 

Total net revenue

 

1,424

 

3,539

 

 

 

 

 

 

 

Cost of net revenue

 

 

 

 

 

Licensing and other

 

57

 

690

 

Total cost of net revenue

 

57

 

690

 

 

 

 

 

 

 

Gross profit

 

1,367

 

2,849

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

Research and development

 

7,506

 

6,155

 

Selling, general and administrative

 

2,926

 

2,714

 

Gain on sale of assets

 

(1,856

)

 

Total operating expenses

 

8,576

 

8,869

 

 

 

 

 

 

 

Loss from operations

 

(7,209

)

(6,020

)

Other income and expense, net

 

24

 

9

 

Loss before income taxes

 

(7,185

)

(6,011

)

Income tax provision

 

30

 

18

 

 

 

 

 

 

 

Net loss

 

(7,215

)

(6,029

)

 

 

 

 

 

 

Other comprehensive loss, net of tax:

 

 

 

 

 

Net unrealized losses on available-for-sale securities

 

(13

)

(8

)

Comprehensive loss

 

$

(7,228

)

$

(6,037

)

 

 

 

 

 

 

Net loss per share

 

 

 

 

 

Basic and diluted

 

$

(0.19

)

$

(0.16

)

Shares used in computing net loss per share

 

 

 

 

 

Basic and diluted

 

38,566

 

37,264

 

 

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

 

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MOSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(7,215

)

$

(6,029

)

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

 

 

 

 

 

Depreciation and amortization

 

258

 

281

 

Stock-based compensation

 

1,043

 

709

 

Amortization of intangible assets

 

683

 

655

 

Gain on sale of assets

 

(1,856

)

 

Provision for doubtful accounts

 

 

106

 

Other non-cash items

 

 

16

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

661

 

(272

)

Unbilled contracts receivable

 

68

 

18

 

Prepaid expenses and other assets

 

13

 

847

 

Deferred revenue

 

(45

)

385

 

Accounts payable

 

(39

)

(634

)

Accrued expenses and other liabilities

 

201

 

(5

)

Net cash used in operating activities

 

(6,228

)

(3,923

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(25

)

(240

)

Net proceeds from sale of assets

 

2,187

 

 

Proceeds from sales and maturities of marketable securities

 

8,454

 

10,353

 

Purchase of marketable securities

 

(35,793

)

(15,853

)

Net cash used in investing activities

 

(25,177

)

(5,740

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of common stock

 

847

 

1,269

 

Payments on capital lease obligations

 

(47

)

(47

)

Net cash provided by financing activities

 

800

 

1,222

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(30,605

)

(8,441

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

40,025

 

14,340

 

Cash and cash equivalents at end of period

 

$

9,420

 

$

5,899

 

 

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

 

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MOSYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1. The Company and Summary of Significant Accounting Policies

 

The Company

 

MoSys, Inc. (the Company) was incorporated in California in September 1991, and reincorporated in September 2000 in Delaware. The Company has been designing, developing, marketing and licensing high-performance semiconductor memory and high-speed parallel and serial interface intellectual property (IP) used by the semiconductor industry and communications, networking and storage equipment manufacturers. In February 2010, the Company announced the commencement of a new product initiative to develop a family of integrated circuit (IC) products under the “Bandwidth Engine” product name. Bandwidth Engine ICs combine the Company’s high-density embedded memory with its high-speed 10 Gigabits per second interface (I/O) technology and are initially being marketed to networking systems companies and designers of advanced systems on chips designs. The Company’s strategy and primary business objective is to become a fabless semiconductor company focused on development and sale of Bandwidth Engine ICs. The Company’s future success and ability to achieve and maintain profitability will be dependent on its success in developing a market for the Bandwidth Engine ICs. During 2011, the Company began to dedicate more of its engineering resources and the engineering budget to IC efforts and this trend will continue as the Company places more emphasis on IC product sales as opposed to IP sales.

 

The accompanying condensed consolidated financial statements of the Company have been prepared without audit in accordance with the rules and regulations of the Securities and Exchange Commission (SEC).  The condensed consolidated balance sheet at December 31, 2011 has been derived from the audited consolidated financial statements at that date. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted in accordance with these rules and regulations. The information in this report should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in its most recent annual report on Form 10-K filed with the SEC.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to summarize fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 or for any other future period.

 

Basis of Presentation

 

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

 

Use of Estimates

 

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

 

Cash Equivalents and Investments

 

The Company has invested its excess cash in money market accounts, certificates of deposit, commercial paper, corporate debt, government agency and municipal debt securities and considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Investments with original maturities greater than three months and remaining maturities less than one year are classified as short-term investments. Investments with remaining maturities greater than one year are classified as long-term investments. Management generally determines the appropriate classification of securities at the time of purchase. All securities are classified as available-for-sale. The Company’s available-for-sale short-term and long-term investments are carried at fair value, with the unrealized holding gains and losses reported in accumulated other comprehensive income (loss). Realized gains and losses and declines in the value judged to be other than temporary are included in the other income and expense, 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, as follows:

 

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

 

Level 2—Pricing is provided by third party sources of market information obtained through the Company’s investment advisors rather than models. The Company does not adjust for or apply any additional assumptions or estimates to the pricing information it receives from advisors. The Company’s Level 2 securities include cash equivalents and available-for-sale securities, which consisted primarily of certificates of deposit, commercial paper, 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 it holds 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. 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 performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral from its customers. The Company grants credit only to customers deemed creditworthy in the judgment of management. The Company maintains an allowance for doubtful accounts receivable based upon the expected collectibility of all accounts receivable. There was no allowance for doubtful accounts receivable at March 31, 2012 and December 31, 2011.

 

Revenue Recognition

 

General

 

The Company generates revenue from the licensing of its IP and sales of IC products. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery or performance has occurred, the sales price is fixed or determinable, and collectibility is reasonably assured. Evidence of an arrangement generally consists of signed agreements or customer purchase orders.

 

Licensing

 

Licensing revenue consists of fees earned from license agreements, development services and support and maintenance. For stand-alone license agreements or license deliverables in multi-deliverable arrangements that do not require significant development, modification or customization, revenues are recognized when all revenue recognition criteria have been met. Delivery of the licensed technology is typically the final revenue recognition criterion met, at which time revenue is recognized. If any of the criteria are not met, revenue recognition is deferred until such time as all criteria have been met.

 

When sales arrangements contain multiple deliverables (e.g., license and services), the Company reviews each deliverable to determine the separate units of accounting that exist within the agreement. If more than one unit of accounting exists, the consideration payable to the Company under the agreement is allocated to each unit of accounting using the relative fair value method. Revenue is recognized for each unit of accounting when the revenue recognition criteria have been met for that unit of accounting. The Company allocates revenue among the deliverables using the relative selling price method. Revenue allocated to each element is recognized when the basic revenue recognition criteria is met for each element. Under GAAP, the Company is required to apply a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair

 

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value (VSOE), (ii) third-party evidence of selling price (TPE) and (iii) best estimate of the selling price (ESP). In general, the Company is unable to establish VSOE or TPE for license fees and development services.  Therefore revenue is allocated to these elements based on the Company’s ESP, which the Company determines after considering multiple factors such as management approved pricing guidelines, geographic differences, market conditions, competitor pricing strategies, internal costs and gross margin objectives. These factors may vary over time depending upon the unique facts and circumstances related to each deliverable. If the facts and circumstances underlying the factors considered change or should future facts and circumstances lead the Company to consider additional factors, the Company’s ESP for license fee and development services could change.

 

For license agreements involving deliverables that do require significant production, modification or customization, and where the Company has significant experience in meeting the design specifications in the contract and the direct labor hours related to services under the contract can be reasonably estimated, the Company recognizes revenue over the period in which the contract services are performed. For these arrangements, the Company recognizes revenue using the percentage of completion method. Under this method, revenue recognized in any period depends on the Company’s progress toward completion of projects in progress. Significant management judgment and discretion are used to estimate total direct labor hours. These judgmental elements include determining that the Company has the experience to meet the design specifications and estimating the total direct labor hours to perform the contract services, based on experience in developing prior licensees’ designs. The direct labor hours for the development of the licensee’s design are estimated at the beginning of the contract. As the direct labor hours are incurred, they are used as a measure of progress towards completion. . During the contract performance period, the Company reviews estimates of direct labor hours to complete the contracts and will revise its estimates of revenue and gross profit under the contract if it revises the estimations of the direct labor hours to complete. The Company’s policy is to reflect any revision in the contract gross profit estimate in reported income or loss in the period in which the facts giving rise to the revision become known. Under the percentage of completion method, provisions for estimated losses on uncompleted contracts are recorded in the period in which such losses are determined to be likely. If the amount of revenue recognized under the percentage of completion accounting method exceeds the amount of billings to a customer, the excess amount is recorded as an unbilled contracts receivable.

 

The Company provides support and maintenance under many of its license agreements. Under these arrangements, the Company provides unspecified upgrades, design rule changes and technical support. No other upgrades, products or other post-contract support are provided. Support and maintenance revenue is recognized at its fair value established by VSOE, ratably over the period during which the obligation exists, typically 12 months. These arrangements are generally renewable annually by the customer.

 

Under limited circumstances, the Company also recognizes prepaid pre-production royalties as license revenues. These are lump sum payments made when the Company enters into licensing agreements that cover future shipments of a product that is not commercially available from the licensee. The Company characterizes such payments as license revenues because they are paid as part of the initial license fee and not with respect to products being produced by the licensee. These payments are non-cancelable and non-refundable.

 

Royalty

 

The Company’s licensing contracts typically also provide for royalties based on licensees’ use of the Company’s memory technology in their currently shipping commercial products. The Company recognizes royalties in the quarter in which it receives the licensee’s report. Under limited circumstances, the Company may also recognize prepaid post-production royalties as revenue upon execution of the contract, which are paid in a lump sum after the licensee commences production of the royalty-bearing product and applied against future unit shipments regardless of the actual level of shipments by the licensee. The criteria for revenue recognition of prepaid royalties are that a formal agreement with the licensee is executed, no deliverables, development or support services related to prepaid royalties are required, the fees are non-refundable and not contingent upon future product shipments by the licensee, and the fees are payable by the licensee in a time period consistent with the Company’s normal billing terms. If any of these criteria are not met, the Company defers revenue recognition until such time as all criteria have been met.

 

IC products

 

The Company recognizes revenue at the time of shipment to the Company’s customers. Revenue is recognized upon shipment for sales to distributors with limited rights of returns and price protection if the Company concludes it can reasonably estimate the credits for returns and price adjustments issuable. The Company records an estimated allowance, at the time of shipment, for future returns and other charges against revenue consistent with the terms of sale.  IC product revenue was not significant for the three months ended March 31, 2012, and has been included in the licensing and other revenue line item in the condensed consolidated statements of operations and comprehensive loss.

 

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Cost of Net Revenue

 

Cost of licensing and other revenue consists primarily of engineering personnel and overhead allocation costs directly related to development services specified in agreements and costs of IC sales. Development services typically include customization of the Company’s technologies for the licensee’s particular IC design and may include engineering support to assist in the commencement of production of a licensee’s products.

 

 

Goodwill

 

The Company reviews goodwill for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. The Company first assesses qualitative factors to determine whether it is more-likely-than-not that the fair value of the reporting unit is less than the carrying amount as a basis for determining whether it is necessary to perform the two-step impairment test. If the qualitative assessment warrants further analysis, the Company compares the fair value of the reporting unit to its carrying value. The fair value of the reporting unit is determined using the market approach. If the fair value of the reporting unit exceeds the carrying value of net assets of the reporting unit, goodwill is not impaired, and the Company is not required to perform further testing. If the carrying value of the net assets of the reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second step in order to determine the implied fair value of the reporting unit’s goodwill and compare it to the carrying value of the reporting unit’s goodwill. If the carrying value of the reporting unit’s goodwill exceeds its implied fair value, then the Company must record an impairment charge equal to the difference. The Company has determined that it has a single reporting unit for purposes of performing its goodwill impairment test. The Company performed the annual impairment test in September 2011, and the test did not indicate impairment of goodwill, as the fair value exceeded the carrying value of the reporting unit by approximately 61%. As the Company used the market approach to assess impairment, 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. As of March 31, 2012, the Company had not identified any factors to indicate there was an impairment of our goodwill and determined that no additional impairment analysis was required.

 

Intangible Assets

 

Intangible assets acquired in business combinations, referred to as purchased intangible assets, are accounted for based on the fair value of assets purchased and are amortized over the period in which economic benefit is estimated to be received. Identifiable intangible assets relating to business combinations and the patent license were as follows (dollar amounts in thousands):

 

 

 

March 31, 2012

 

 

 

Life
(years)

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Value

 

Developed technology

 

3-5

 

$

9,240

 

$

6,299

 

$

2,941

 

Customer relationships

 

3

 

390

 

366

 

24

 

Contract backlog

 

1

 

750

 

750

 

 

Non-compete agreements

 

1.5

 

140

 

140

 

 

Subtotal purchased intangible assets

 

 

 

10,520

 

7,555

 

2,965

 

Patent license

 

7

 

780

 

28

 

752

 

Total

 

 

 

$

11,300

 

$

7,583

 

$

3,717

 

 

 

 

December 31, 2011

 

 

 

Life
(years)

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Value

 

Developed technology

 

3-5

 

$

9,240

 

$

5,676

 

$

3,564

 

Customer relationships

 

3

 

390

 

334

 

56

 

Contract backlog

 

1

 

750

 

750

 

 

Non-compete agreements

 

1.5

 

140

 

140

 

 

Subtotal purchased intangible assets

 

 

 

10,520

 

6,900

 

3,620

 

Patent license

 

7

 

780

 

 

780

 

Total

 

 

 

$

11,300

 

$

6,900

 

$

4,400

 

 

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The related amortization expense was $0.7 million for each of the three months ended March 31, 2012 and 2011. Amortization expense has been included in research and development expense in the condensed consolidated statements of operations and comprehensive loss.  The estimated aggregate amortization expense to be recognized in future years is approximately $1.1 million for the remainder of 2012, $1.0 million for 2013, $1.0 million for 2014, $0.3 million for 2015 and $0.1 million annually for 2016 through 2018.

 

Per Share Amounts

 

Basic net loss per share is computed by dividing net loss for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share gives effect to all potentially dilutive common shares outstanding during the period. Potentially dilutive common shares consist of incremental shares of common stock issuable upon the exercise of stock options, vesting of stock awards and purchases under the employee stock purchase plan. As of March 31, 2012 and 2011, stock awards to purchase approximately 11,546,000 and 10,110,000 shares, respectively, were excluded from the computation of diluted net loss per share as their inclusion would be anti-dilutive.

 

Note 2: Fair Value of Financial Instruments

 

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

 

 

 

March 31, 2012

 

 

 

Cost

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair
Value

 

Cash and cash equivalents

 

$

9,420

 

$

 

$

 

$

9,420

 

Short-term investments:

 

 

 

 

 

 

 

 

 

U.S. government debt securities

 

$

12,415

 

$

2

 

$

(4

)

$

12,413

 

Corporate notes and commercial paper

 

10,237

 

6

 

(4

)

10,239

 

Certificates of deposit

 

716

 

 

 

716

 

Total short-term investments

 

$

23,368

 

$

8

 

$

(8

)

$

23,368

 

Long-term investments:

 

 

 

 

 

 

 

 

 

U.S. government debt securities

 

$

15,239

 

$

4

 

$

(13

)

$

15,230

 

Corporate notes

 

6,681

 

4

 

(7

)

6,678

 

Total long-term investments

 

$

21,920

 

$

8

 

$

(20

)

$

21,908

 

 

 

 

December 31, 2011

 

 

 

Cost

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair
Value

 

Cash and cash equivalents

 

$

40,025

 

$

 

$

 

$

40,025

 

Short-term investments:

 

 

 

 

 

 

 

 

 

U.S. government debt securities

 

$

4,834

 

$

2

 

$

 

$

4,836

 

Corporate notes

 

4,578

 

1

 

(2

)

4,577

 

Total short-term investments

 

$

9,412

 

$

3

 

$

(2

)

$

9,413

 

Long-term investments:

 

 

 

 

 

 

 

 

 

U.S. government debt securities

 

$

5,721

 

$

1

 

$

(1

)

$

5,721

 

Corporate notes

 

2,816

 

2

 

(2

)

2,816

 

Total long-term investments

 

$

8,537

 

$

3

 

$

(3

)

$

8,537

 

 

As of March 31, 2012 and December 31, 2011, all of the available-for-sale securities with unrealized losses were in a loss position for less than 12 months.  Total fair value of available-for-sale securities with unrealized losses was $29.6 million at March 31, 2012.

 

Cost and fair value of investments based on two maturity groups were as follows (in thousands):

 

 

 

March 31, 2012

 

 

 

Cost

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair
Value

 

Due within 1 year

 

$

23,368

 

$

8

 

$

(8

)

$

23,368

 

Due in 1-2 years

 

21,920

 

8

 

(20

)

21,908

 

Total

 

$

45,288

 

$

16

 

$

(28

)

$

45,276

 

 

 

 

December 31, 2011

 

 

 

Cost

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair
Value

 

Due within 1 year

 

$

9,412

 

$

3

 

$

(2

)

$

9,413

 

Due in 1-2 years

 

8,537

 

3

 

(3

)

8,537

 

Total

 

$

17,949

 

$

6

 

$

(5

)

$

17,950

 

 

10



Table of Contents

 

The following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) as of March 31, 2012 and December 31, 2011 (in thousands):

 

 

 

March 31, 2012

 

 

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

Money market funds

 

$

6,355

 

$

6,355

 

$

 

$

 

Certificates of deposit

 

965

 

 

965

 

 

Corporate notes and commercial paper

 

18,916

 

 

18,916

 

 

U.S. government debt securities

 

27,644

 

 

27,644

 

 

Total assets

 

$

53,880

 

$

6,355

 

$

47,525

 

$

 

 

 

 

December 31, 2011

 

 

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

Money market funds

 

$

2,792

 

$

2,792

 

$

 

$

 

Corporate notes

 

7,393

 

 

7,393

 

 

U.S. government debt securities

 

10,557

 

 

10,557

 

 

Total assets

 

$

20,742

 

$

2,792

 

$

17,950

 

$

 

 

There were no transfers in or out of Level 1 and Level 2 securities during the three months ended March 31, 2012 and 2011.  There were no Level 3 financial assets as of March 31, 2012 and December 31, 2011.

 

Note 3:          Asset Purchase Agreement

 

In March 2012, the Company entered into an asset purchase agreement for an exclusive license of a portion of its intellectual property pertaining to its high-speed serial I/O technology for approximately $4.3 million.  The Company will also provide certain technology transfer support services, and fifteen employees of the Company’s India subsidiary accepted employment with the purchasing company.  The Company received approximately $2.2 million, net of transaction costs, in cash upon execution of the agreement.  The agreement includes approximately $1.9 million (the “Holdback”) to be paid upon providing technology transfer support services and achievement of certain contractually agreed-upon development milestones.  A portion of the Holdback is reserved for any costs related to indemnification claims that may arise during the 12 month period following the agreement date.

 

During the quarter ended March 31, 2012, the Company recognized a $1.9 million gain on this transaction, net of transaction costs, which has been recorded as a reduction of operating expenses in the condensed consolidated statements of operations and comprehensive loss, and approximately $0.3 million in current liabilities for the technology transfer support service obligation.  Gains related to the Holdback will be recorded when the milestones are completed and the indemnity period lapses, which is expected to be within 12 months of the agreement date.

 

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 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, 2012 or 2011 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 payments related to these indemnification agreements.

 

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Table of Contents

 

Legal Matters

 

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

 

In September 2010, a claimant filed suit against the Company seeking a contractual payment by the Company of approximately 200,000 shares of the Company’s common stock, among other claims. In November 2010, the suit went to arbitration, and in December 2010, the Company filed a counter claim against the claimant.  On April 3, 2012, the arbitrator ruled against the Company and awarded the claimant a cash award of approximately $1.4 million.  The disputed shares are to be returned to the Company and retired.  The value of the retired shares, $0.8 million as of the arbitration settlement date, was recorded as a reduction to stockholders’ equity as a stock repurchase.  The remaining amount of $0.6 million was recorded as a selling, general and administrative expense in the Company’s condensed consolidated statements of operations and comprehensive loss. The Company expects to pay the $1.4 million in the second quarter of 2012.

 

Note 5. Business Segments and Significant Customers

 

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

 

The Company recognized revenue from customers in North America, Asia and Europe as follows (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

United States

 

$

581

 

$

1,346

 

Taiwan

 

437

 

789

 

Japan

 

394

 

1,294

 

Europe

 

12

 

106

 

Other Asia

 

 

4

 

Total

 

$

1,424

 

$

3,539

 

 

Customers who accounted for at least 10% of total revenues were as follows:

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

Customer A

 

30

%

22

%

Customer B

 

26

%

12

%

Customer C

 

17

%

20

%

 

Three customers accounted for 88% of net accounts receivable at March 31, 2012. Four customers accounted for 96% of net accounts receivable at December 31, 2011.

 

Note 6. Provision for Income Taxes

 

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.  The Company is not currently under any tax jurisdiction examination.  The 2003 through 2011 tax years generally remain subject to examination by federal, state and foreign tax authorities.  As of March 31, 2012, the Company did not have any unrecognized tax benefits or recognize any interest or penalties related to unrecognized tax benefits.

 

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Table of Contents

 

Note 7. Stock-Based Compensation

 

The Company recorded approximately $1.0 million and $0.7 million of stock-based compensation expense for the three months ended March 31, 2012 and 2011, respectively. The expense relating to stock-based awards is recognized on a straight-line basis over the requisite service period, usually the vesting period, based on the grant-date fair value. The unamortized compensation cost, net of expected forfeitures, as of March 31, 2012 was $5.2 million and is expected to be recognized as expense over a weighted average period of approximately 2.44 years.

 

The Company presents the tax benefits resulting from tax deductions in excess of the compensation cost recognized from the exercise of stock options as financing cash flows in the condensed consolidated statements of cash flows. For the three months ended March 31, 2012 and 2011, there were no such tax benefits associated with the exercise of stock options due to the Company’s loss position.

 

Common Stock Options and Restricted Stock

 

A summary of the option and restricted stock unit activity under the Company’s Amended and Restated 2000 Stock Option and Equity Incentive Plan (Amended 2000 Plan) and 2010 Equity Incentive Plan (2010 Plan), referred to collectively as the “Plans,” is presented below (in thousands, except exercise price):

 

 

 

 

 

Options Outstanding

 

 

 

Available
for Grant

 

Number of
Shares

 

Weighted
Average
Exercise
Prices

 

Balance at December 31, 2011

 

1,977

 

6,528

 

$

4.48

 

Additional shares authorized under the 2010 Plan

 

500

 

 

 

Options granted

 

(4

)

4

 

$

3.93

 

Options cancelled

 

111

 

(111

)

$

4.23

 

Options exercised

 

 

(34

)

$

2.85

 

Options expired

 

(55

)

 

 

Balance at March 31, 2012

 

2,529

 

6,387

 

$

4.50

 

 

A summary of restricted stock awards and restricted stock unit activity for grants outside of the Plans is presented below (in thousands, except fair value):

 

 

 

Number of
Shares

 

Weighted
Average
Grant-Date
Fair Value

 

Non-vested shares at March 31, 2012 and December 31, 2011

 

15

 

$

1.60

 

 

The Company also has awarded options to new employees outside the Plans and may continue to do so outside the 2010 Plan, as a material inducement to the acceptance of employment with the Company, as permitted under the Listing Rules of the Nasdaq Stock Market. These grants must be approved by the compensation committee of the board of directors, a majority of the independent directors or, below a specified share level, by an authorized executive officer.

 

A summary of the inducement grant option activity is presented below (in thousands, except exercise price):

 

 

 

Options Outstanding

 

 

 

Number of
Shares

 

Weighted
Average
Exercise
Prices

 

Balance at December 31, 2011

 

4,815

 

$

3.29

 

Granted

 

350

 

$

3.92

 

Cancelled

 

(103

)

$

1.54

 

Exercised

 

(111

)

$

1.54

 

Balance at March 31, 2012

 

4,951

 

$

3.41

 

 

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Table of Contents

 

The following table summarizes significant ranges of outstanding and exercisable options and inducement grants, excluding restricted stock awards and restricted stock unit activity, as of March 31, 2012 (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

 

Aggregate
Intrinsic
Value

 

Number
Exercisable

 

Weighted
Average
Remaining
Contractual
Life
(in Years)

 

Weighted
Average
Exercise
Price

 

Aggregate
Intrinsic
Value

 

$1.50 - $2.50

 

3,309

 

2.63

 

$

1.70

 

$

7,520

 

2,061

 

2.85

 

$

1.70

 

$

4,686

 

$2.51 - $5.00

 

4,694

 

4.33

 

$

3.96

 

1,029

 

2,204

 

3.67

 

$

4.12

 

282

 

$5.01 - $7.50

 

2,688

 

4.20

 

$

5.87

 

 

1,805

 

3.76

 

$

5.84

 

 

$7.51 - $15.00

 

647

 

0.92

 

$

8.63

 

 

647

 

0.92

 

$

8.63

 

 

 

 

11,338

 

3.61

 

$

4.02

 

$

8,549

 

6,717

 

3.17

 

$

4.27

 

$

4,968

 

 

As of March 31, 2012, the Company had 10.6 million shares subject to outstanding options fully vested and expected to vest, after estimated forfeitures, with a remaining contractual life of 3.51 years, weighted average exercise price of $4.03 and aggregate intrinsic value of $8.1 million.

 

The total fair value of shares subject to outstanding options vested during the three months ended March 31, 2012 and 2011 calculated using the Black-Scholes valuation method was $0.5 million and $0.6 million, respectively. The total intrinsic value of employee stock options exercised during the three months ended March 31, 2012 and 2011 was $0.3 million and $0.7 million, respectively.

 

Options to purchase 6.7 million and 5.7 million shares with weighted average exercised prices of $4.27 and $4.65 per share were exercisable at March 31, 2012 and 2011, respectively.

 

Valuation Assumptions

 

The fair value of the Company’s share-based payment awards for the three months ended March 31, 2012 and 2011 was estimated on the grant date using a Black-Scholes valuation method and an option-pricing model with the following assumptions:

 

 

 

Three Months Ended
March 31,

 

Employee stock options:

 

2012

 

2011

 

Risk-free interest rate

 

0.7% - 0.8%

 

1.5%

 

Volatility

 

66.8%

 

62.9%

 

Expected life (years)

 

4.0

 

4.0

 

Dividend yield

 

0%

 

0%

 

 

The risk-free interest rate was derived from the Daily Treasury Yield Curve Rates as published by the U.S. Department of the Treasury as of the grant date for terms equal to the expected terms of the options. The expected volatility was based on the combination of: 1) four-year historical volatility and 2) implied volatility of the Company’s stock price. The expected term of options granted was derived from historical data based on employee exercises and post-vesting employment termination behavior. A dividend yield of zero is applied because the Company has never paid dividends and has no intention to pay dividends in the near future.

 

The stock-based compensation expense recorded is adjusted based on estimated forfeiture rates. An annualized forfeiture rate has been used as a best estimate of future forfeitures based on the Company’s historical forfeiture experience. The stock-based compensation expense will be adjusted in later periods if the actual forfeiture rate is different from the estimate.

 

Employee Stock Purchase Plan

 

In June 2010, the Company’s stockholders approved the 2010 Employee Stock Purchase Plan (ESPP). A total of 2.0 million shares of common stock have been reserved for issuance under the ESPP. The ESPP, which is intended to qualify under Section 423 of the Internal Revenue Code, is administered by the board of directors or the compensation committee of the board of directors. The ESPP provides that eligible employees may purchase up to $25,000 worth of the Company’s common stock annually over the course of two six-month offering periods. The purchase price to be paid by participants is 85% of the price per share of the Company’s common stock either at the beginning or the end of each six-month offering period, whichever is less. On February 29, 2012, approximately 178,000 shares of common stock were issued at an aggregate purchase price of $579,000 under the ESPP.  As of March 31, 2012, there were approximately 1,500,000 shares authorized and unissued under the ESPP.

 

14



Table of Contents

 

Note 8. Related Party Transactions

 

In February 2012, the Company entered into a strategic development and marketing agreement with Credo Semiconductor (Hong Kong) Ltd. (“Credo”), a privately-funded fabless semiconductor company, to develop, market and sell integrated circuits.  Two of the Company’s executive officers are investors in Credo.  The agreement calls for the Company to pay approximately $1.4 million to Credo and its hardware vendors upon Credo achieving certain development and verification milestones, of which the Company paid $0.2 million in the quarter ended March 31, 2012, which was accounted for as research and development expense. The first $1.2 million of gross profits generated by the sale of these integrated circuits will be retained by the Company.  Thereafter, the gross profits will be shared equally by the two companies.

 

Note 9. Subsequent Events

 

On April 3, 2012, the Company received notification of an arbitration settlement against the Company; see Note 4.

 

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, all information disclosed under Item 3 of this Part I, and other aspects of our business identified in our most recent annual report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2012 and in other reports that we file from time to time with the Securities and Exchange Commission. Any statements about our business, financial results, financial condition and operations contained in this Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” or similar expressions are intended to identify forward-looking statements. Our actual results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors, including the risk factors described below in Risk Factors and elsewhere in this report and under Item 1A of our annual report on Form 10-K for the year ended December 31, 2011. 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 become a fabless semiconductor company focused on the development and sale of Bandwidth Engine integrated circuits (ICs) to networking equipment systems providers and their subsystem and component vendors. Our Bandwidth Engine family of ICs combines our 1T-SRAM high-density embedded memory and high-speed 10 Gigabits per second (Gbps) serial interface (I/O) technology with our intelligent access technology and a highly efficient interface protocol and is initially being marketed to networking systems companies. Bandwidth Engine ICs have been designed to increase system performance by using a serial I/O to increase the accesses per second between the processor and memory components in networking systems.

 

Since the beginning of 2010, we have invested an increasing amount of our financial and engineering resources towards the development of our Bandwidth Engine family of ICs. We shipped initial samples of our first Bandwidth Engine ICs to prospective customers in December 2010, and, in November 2011, we announced two design wins for low volume applications. Our future success and ability to achieve and maintain profitability will be dependent on our success in developing a market for our Bandwidth Engine ICs.

 

Historically, our primary business has been defining, designing, marketing and licensing differentiated embedded memory and high-speed parallel and serial interface intellectual property (IP) for advanced systems on chip (SoCs) designs. However, our competitiveness and the demand for our IP have declined since the beginning of 2011 when we began dedicating more of our engineering and marketing resources to our IC efforts. This trend will continue as we place far more emphasis on IC product sales than on IP transactions.

 

The 1T-SRAM is our high-density, high-performance patented memory solution that represents an alternative to traditional volatile embedded memory. Our I/O IP includes physical layer (PHY) circuitry that allows ICs to communicate with one another in the networking, storage, computer and consumer market segments. Our PHY IP supports serial interface technologies, such as 10 Gbps Base KR, XAUI, PCI Express and SATA, as well as parallel interfaces like DDR3. Our IP customers typically include fabless semiconductor companies, integrated device manufacturers (IDMs) and foundries.

 

As a result of our reduced licensing activities, we expect our licensing and royalty revenue to decrease in future periods. We do not expect to generate significant revenue from our Bandwidth Engine ICs until 2013, and we believe that the growth in our IC revenues will not offset the decline in our IP revenues until at least 2013. Accordingly, we expect our losses from operations to increase in the near future.

 

15



Table of Contents

 

Sources of Revenue

 

Licensing.   Licensing revenue consists of fees earned from license agreements, development services, prepaid pre-production royalties, and support and maintenance. Our licensing revenue consists primarily of fees for providing circuit design, layout and design verification and granting licenses to customers that embed our technology into their products. License fees generally range from $100,000 to several million dollars per contract, depending on the scope and complexity of the development project, and the extent of the licensee’s rights. The vast majority of our contracts allow for milestone billing based on work performed. Fees billed prior to revenue recognition are recorded as deferred revenue.

 

Royalty.   Royalty revenue represents amounts earned under provisions in our memory licensing contracts that require our licensees to report royalties and make payments at a stated rate based on actual units manufactured or sold by licensees for products that include our memory IP. Our license agreements require the licensee to report the manufacture or sale of products that include our technology after the end of the quarter in which the sale or manufacture occurs, and we recognize royalties in the quarter in which we receive the licensee’s report.

 

The timing and level of royalties are difficult to predict. They depend on the licensee’s ability to market, produce and sell products incorporating our technology. Many of the products of our licensees that are currently subject to licenses from us are used in consumer products, such as electronic game consoles, for which demand can be seasonal.

 

IC product.   IC product revenue is recognized at the time of shipment of our ICs to customers. Revenue is recognized upon shipment for sales to distributors with limited rights of returns and price protection if we conclude we can reasonably estimate the credits for returns and price adjustments issuable. An estimated allowance is recorded, at the time of shipment for future returns and other charges against revenue consistent with the terms of sale.

 

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 accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis we make these estimates based on our historical experience and on assumptions that we consider reasonable under the circumstances. Actual results may differ from these estimates, and reported results could differ under different assumptions or conditions. Our significant accounting policies and estimates are disclosed in Note 1 of the “Notes to Consolidated Financial Statements” in our Annual Report on Form 10-K for the year ended December 31, 2011.  As of March 31, 2012, there have been no material changes to our significant accounting policies and estimates.

 

Results of Operations

 

Net Revenue.

 

 

 

Three Months Ended
March 31,

 

Year-Over-Year
Change

 

 

 

2012

 

2011

 

2011 to 2012

 

 

 

(dollar amounts in thousands)

 

Licensing and other

 

$

221

 

$

1,347

 

$

(1,126

)

(84

)%

Percentage of total net revenue

 

16

%

38

%

 

 

 

 

 

Licensing and other revenue decreased for the three months ended March 31, 2012, compared with the same period of 2011, primarily due to the decline in the number and value of new license agreements. We did not execute any new license agreements in the first quarter of 2012, and we do not expect to enter into new license agreements during the remainder of 2012.  Revenue from the sale of our IC products was included in this line item, and was not considered significant for the three months ended March 31, 2012.

 

 

 

Three Months Ended
March 31,

 

Year-Over-Year
Change

 

 

 

2012

 

2011

 

2011 to 2012

 

 

 

(dollar amounts in thousands)

 

Royalty

 

$

1,203

 

$

2,192

 

$

(989

)

(45

)%

Percentage of total net revenue

 

84

%

62

%

 

 

 

 

 

16



Table of Contents

 

Royalty revenue decreased for the three months ended March 31, 2012, compared with the same period of 2011, primarily due to a decrease in shipments by an IDM licensee whose product is used in the Nintendo Wii ®  game console and a decrease in royalties received from a major foundry partner.

 

Cost of Net Revenue and Gross Profit.

 

 

 

Three Months Ended
March 31,

 

Year-Over-Year
Change

 

 

 

2012

 

2011

 

2011 to 2012

 

 

 

(dollar amounts in thousands)

 

Cost of net revenue

 

$

57

 

$

690

 

$

(633

)

(92

)%

Percentage of total net revenue

 

4

%

19

%

 

 

 

 

 

 

 

Three Months Ended
March 31,

 

Year-Over-Year
Change

 

 

 

2012

 

2011

 

2011 to 2012

 

 

 

(dollar amounts in thousands)

 

Gross profit

 

$

1,367

 

$

2,849

 

$

(1,482

)

(52

)%

Percentage of total net revenue

 

96

%

81

%

 

 

 

 

 

Cost of net revenue consists of personnel and related overhead allocation costs for engineers assigned to revenue-generating licensing arrangements and costs related to the sale of IC products.

 

Cost of net revenue decreased for the three months ended March 31, 2012, compared with the same period of 2011 primarily due to the lack of new licensing agreements and limited engineering services required on existing contracts during the first quarter of 2012.  Cost of net revenue included stock-based compensation expense of $8,000 and $61,000 for the three months ended March 31, 2012 and 2011, respectively.

 

Gross profit decreased for the three months ended March 31, 2012, compared with the same period of 2011 primarily due the decrease in our revenue.  Gross margin percentage increased to 96% for the three months ended March 31, 2012 from 81% in the same quarter of the prior year primarily due to the increase in royalty revenue, which has no related costs, as a percentage of total net revenue.

 

Research and Development.

 

 

 

Three Months Ended
March 31,

 

Year-Over-Year
Change

 

 

 

2012

 

2011

 

2011 to 2012

 

 

 

(dollar amounts in thousands)

 

Research and development

 

$

7,506

 

$

6,155

 

$

1,351

 

22

%

Percentage of total net revenue

 

522

%

174

%

 

 

 

 

 

Our research and development expenses include development and design of variations of our 1T-SRAM and I/O technologies for use in different manufacturing processes used by licensees, costs related to the development of our IC products and amortization of technology-based intangible assets. We expense research and development costs as they are incurred.

 

The $1.4 million increase for the three months ended March 31, 2012, compared with the same period a year ago, was primarily due to increases in costs related to the development of our Bandwidth Engine IC and stock-based compensation charges.

 

Research and development expenses included stock-based compensation expense of $0.8 million and $0.3 million for the three months ended March 31, 2012 and 2011, respectively.

 

Selling, General and Administrative.

 

 

 

Three Months Ended
March 31,

 

Year-Over-Year
Change

 

 

 

2012

 

2011

 

2011 to 2012

 

 

 

(dollar amounts in thousands)

 

Selling, general and administrative

 

$

2,926

 

$

2,714

 

$

212

 

8

%

Percentage of total net revenue

 

206

%

77

%

 

 

 

 

 

Selling, general and administrative expenses consist primarily of personnel and related overhead costs for sales, marketing, application engineering, finance, human resources and general management.

 

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Table of Contents

 

The $0.2 million increase for the three months ended March 31, 2012, compared with the same period a year ago, was primarily due to arbitration costs and a $0.6 million judgment, partially offset by lower sales commissions resulting from lower sales bookings.

 

Selling, general and administrative expenses included stock-based compensation expense of $0.3 million for each of the three month periods ended March 31, 2012 and 2011. We expect total selling, general and administrative expenses to decrease in absolute dollars as the arbitration costs incurred in the first quarter are not expected to recur.

 

Other Income and Expense, net.

 

 

 

Three Months Ended
March 31,

 

Year-Over-Year
Change

 

 

 

2012

 

2011

 

2011 to 2012

 

 

 

(dollar amounts in thousands)

 

Other income and expense, net

 

$

24

 

$

9

 

$

15

 

167

%

Percentage of total net revenue

 

2

%

 

 

 

 

 

 

Other income and expense, net primarily consisted of interest income on our investments, which was $40,000 and $44,000 for the three months ended March 31, 2012 and 2011, respectively.  Despite our higher average cash and investments balance, interest income declined due to lower interest rates earned during the quarter ended March 31, 2012.  Interest income was partially offset by expenses, including foreign exchange transaction losses and other non-operating expenses, for the three month ended March 31, 2012 and 2011.

 

Income Tax Provision.

 

 

 

Three Months Ended
March 31,

 

Year-Over-Year
Change

 

 

 

2012

 

2011

 

2011 to 2012

 

 

 

(dollar amounts in thousands)

 

Income tax provision

 

$

30

 

$

18

 

$

12

 

67

%

Percentage of total net revenue

 

2

%

1

%

 

 

 

 

 

Our income tax provisions are primarily attributable to foreign jurisdictions.

 

The provision for the three months ended March 31, 2012 and 2011 was attributable to taxes for our foreign subsidiaries and branches and minimum U.S. state income tax liabilities. We believe that, based on the history of our operating losses and other factors, the weight of available evidence indicates that it is more likely than not that we will not be able to realize the benefit of our net operating losses. Accordingly, a full valuation reserve has been recorded against our net deferred tax assets.

 

Liquidity and Capital Resources; Changes in Financial Condition

 

Cash Flows

 

As of March 31, 2012, we had cash, cash equivalents and long and short-term investments of $54.7 million and had total working capital of $29.4 million. Our principal source of cash and investments in 2011 was the sale of patents for $35 million in December 2011. Our primary capital requirements are to fund working capital, including development of Bandwidth Engine ICs, and any acquisitions that we make that require cash consideration or expenditures.

 

Net cash used in operating activities was $6.2 million for the first three months of 2012, which primarily resulted from the net loss of $7.2 million and $0.8 million generated from changes in operating assets and liabilities, reduced by the $1.9 million gain on the sale of assets and adjusted for non-cash charges consisting of stock-based compensation of $1.0 million and depreciation and amortization of $0.9 million. The changes in assets and liabilities primarily related to the timing of billing our customers, collection of receivables and payments to vendors.

 

Net cash used in operating activities was $3.9 million for the first three months of 2011 and was primarily attributable to our net loss of $6.0 million, partially offset by $0.4 million in changes in assets and liabilities, non-cash charges, including stock-based compensation expense of $0.7 million, depreciation and amortization expense of $0.9 million and a $0.1 million provision for doubtful accounts.  The changes in assets and liabilities primarily related to the timing of billing our customers, collection of receivables and payments to vendors.

 

Net cash used in investing activities was $25.2 million for the first three months of 2012, and included net amounts transferred from cash to marketable securities of $27.3 million that did not impact our liquidity and $2.2 million in proceeds from the sale of assets.

 

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Table of Contents

 

Net cash used in investing activities was $5.7 million for the first three months of 2011, and included amounts transferred to and from cash and marketable securities of $5.5 million that did not impact our liquidity and $0.2 million for purchases of fixed assets.

 

Our financing activities in for the first three months of 2012 and 2011 primarily consisted of proceeds from the exercise of stock options and our employee stock purchase plan.

 

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

 

·                   level and timing of licensing, royalty and IC product revenue;

 

·                   cost, timing and success of technology development efforts, including meeting customer design specifications;

 

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

 

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

 

·                   costs of acquiring other businesses and integrating the acquired operations; and

 

·                   profitability of our business.

 

We expect our cash expenditures to continue to exceed receipts in 2012 as we will generate minimal revenue from IC sales and expect reduced licensing and royalty revenues compared with 2011, and we will continue our research and development efforts for the expansion and fabrication of the Bandwidth Engine IC product line. We believe our existing cash, cash equivalents and investments, along with our existing capital and cash generated from operations, if any, to be sufficient to meet our operating cash requirements through the remainder of 2012 and for the foreseeable future. Should our cash resources prove inadequate, we may seek additional funding through public or private equity or debt financing, and have a shelf registration allowing us to sell up to approximately $30 million of our securities from time to time until November 2013. We also might decide to raise additional capital at such times and upon such terms as management considers favorable and in our interests, including, but not limited to, from the sale of our debt and/or equity securities under our existing shelf registration statement. There can be no assurance that such additional funding will be available to us on favorable terms, if at all. The failure to raise capital when needed could have a material adverse effect on our business and financial condition.

Contractual Obligations

 

The impact that our contractual obligations as of March 31, 2012 are expected to have on our liquidity and cash flow in future periods is as follows (in thousands):

 

 

 

Payment Due by Period

 

 

 

Total

 

Less than 1 year

 

1-3 years

 

3-5 years

 

More than
5 years

 

Operating Leases

 

$

6,237

 

$

848

 

$

1,531

 

$

1,377

 

$

2,481

 

Purchase Commitments

 

3,211

 

3,211

 

 

 

 

Capital Lease

 

104

 

104

 

 

 

 

 

 

$

9,552

 

$

4,163

 

$

1,531

 

$

1,377

 

$

2,481

 

 

As of March 31, 2012, we had purchase commitments primarily related to computer-aided design tools payable through March 2013 and capital lease obligation for testing equipment.

 

ITEM 3. Qualitative and Quantitative Disclosures about Market Risk

 

Our investment portfolio consists of money market accounts, certificates of deposit, corporate debt, commercial paper, government agency and municipal debt securities. The portfolio dollar-weighted average maturity of these investments is within 12 months.  Our primary objective with this investment portfolio is to invest available cash while preserving principal and meeting liquidity needs. No single security should exceed 5% of the portfolio at the time of purchase. In accordance with our investment policy, we place investments with high credit quality issuers and limit the amount of credit exposure to any one issuer. These securities, which approximated $53.9 million as of March 31, 2012 and earned an average annual interest rate of approximately 0.4% during the first three months of 2012, are subject to interest rate and credit risks. We do not have any investments denominated in foreign currencies, and, therefore, are not subject to foreign currency risk on such investments.

 

19



Table of Contents

 

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, 2012, our disclosure controls and procedures were effective.

 

Changes in Internal Control over Financial Reporting.   During the first quarter of 2012, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II—OTHER INFORMATION

 

ITEM 1. Legal Proceedings

 

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

 

ITEM 1A. Risk Factors

 

We face many significant risks in our business, some of which are unknown to us and not presently foreseen.  These risks could have a material adverse impact on our business, financial condition and results of operations in the future.  We have disclosed a number of material risks under Item 1A of our annual report on Form 10-K for the year ended December 31, 2011, which we filed with the Securities and Exchange Commission on March 15, 2012.

 

ITEM 6. Exhibits

 

(a)

Exhibits

 

 

 

 

 

10.20*

Stock Option Agreement between Registrant and Leonard Perham dated as of November 1, 2011

 

10.21*

Stock Option Agreement between Registrant and Thomas Riordan dated as of December 21, 2011

 

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, 2012, filed with the SEC on May 10, 2012, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2012 and 2011, (ii) the Condensed Consolidated Balance Sheets as of March 31, 2012  and December 31, 2011, (iii) the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011, and (iv) Notes to Condensed Consolidated Financial Statements.

 


*Management contract, compensatory plan or arrangement.

 

20



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 9, 2012

 

 

MOSYS, INC.

 

 

 

 

 

 

 

 

 

 

By:

/s/ Leonard Perham

 

 

 

Leonard Perham

 

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

 

 

 

By:

/s/ James W. Sullivan

 

 

 

James W. Sullivan

 

 

 

Vice President of Finance and Chief Financial Officer

 

 

 

(Principal Financial Officer)

 

21


Exhibit 10.20

 

 

STOCK OPTION GRANT PURSUANT TO THE
MOSYS, INC. 2010 EQUITY INCENTIVE PLAN

 

Date of Grant (“Grant Date”):  November 1, 2011

 

Leonard Perham (the “Optionee”):

 

MoSys, Inc., a Delaware corporation (the “Company”), has granted to Optionee, an option (“Option”) to purchase a total of 200,000 fully paid, nonassessable shares (“Shares”) of common stock of the Company, par value $0.01 per share (“Common Stock”), at the price set forth herein, and in all respects subject to the terms, definitions and provisions of the Company’s 2010 Equity Incentive Plan (“Plan”).  The terms and provisions of the Plan are incorporated herein by reference and all capitalized terms used herein and not otherwise defined shall have the meanings ascribed thereto in the Plan, and in the event of any conflict between the terms and provisions herein and those of the Plan, the terms and provisions of the Plan, including, without limitation, the powers of the Committee thereunder, shall prevail and be controlling.

 

THE DETAILS OF YOUR OPTION ARE AS FOLLOWS:

 

1.                                        Nature Of The Option

 

The Option is intended to be a Nonstatutory Option.

 

2.                                        Option Price

 

The exercise price of the Option (“Option Price”) is $3.54 for each Share.

 

3.                                        Vesting And Exercise Of Option

 

a.                                        Subject to the Optionee’s continued employment or other association with the Company, the Option will vest and become exercisable as to 1/24 th  of the Shares on each monthly anniversary of November 1, 2011 (“the Vesting Commencement Date”); provided that in the event of a Corporate Transaction, this Option automatically will vest and become exercisable in full immediately prior to the consummation of the Corporate Transaction.

 

b.                                       “Corporate Transaction” means:

 

MoSys, Inc.   3301 Olcott Street, Santa Clara, CA 95054    Tel: 408.418.7500   Fax: 408.418.7501  www.mosys.com

 

1



 

(i) an acquisition after the Grant Date by an individual, an entity or a group in one or more related transactions (excluding the Company or an employee benefit plan of the Company or a corporation controlled by the Company’s stockholders) of 45 percent or more of the outstanding shares of Common Stock or the Company’s voting securities; or

 

(ii) the consummation of a complete liquidation or dissolution of the Company or a merger, consolidation, reorganization or sale of all or substantially all of the Company’s assets (collectively, a “ Business Combination ”) other than a Business Combination in which (i) the stockholders of the Company receive 50 percent or more of the stock of the corporation resulting from the Business Combination, (ii) at least a majority of the board of directors of such resulting corporation were incumbent directors of the Company immediately prior to the consummation of the Business Combination, and (iii) after which no individual, entity or group (excluding any corporation or other entity resulting from the Business Combination or any employee benefit plan of such corporation or of the Company) who did not own 45 percent or more of the stock of the resulting corporation or other entity immediately before the Business Combination owns 45 percent or more of the stock of such resulting corporation or other entity.

 

c.                                        In the event of the Optionee’s death, disability or other termination of employment, the Option shall be exercisable in the manner and to the extent provided in Section 6.3 of the Plan.

 

d.                                       No fraction of a Share shall be purchasable or deliverable upon exercise, but in the event any adjustment of the number of Shares covered by the Option shall cause such number to include a fraction of a Share, such number of Shares shall be adjusted to the nearest smaller whole number of Shares.

 

e.                                        In order to exercise any portion of this Option which has vested, the Optionee should complete the transaction through their on-line ETRADE.com account.  For exercises transacted through a different brokerage account, Optionee shall notify the Company in writing of the election to exercise the Option and the number of Shares in respect of which the Option is being exercised, by executing and delivering the Notice of Exercise of Stock Option in the form attached hereto as Appendix I .  The certificate or certificates representing Shares as to which this Option has been exercised shall be registered in the name of the Optionee.

 

4.                                        Non-Transferability Of Option

 

This Option may not be transferred other than by will or by the laws of descent and distribution; provided, however, that the Optionee may transfer the Option to a family member if the transfer has first been approved by the Committee, acting in its sole discretion, is without payment and otherwise complies with the terms and conditions set forth in Section 6.4 of the Plan.  The terms of this Option shall be binding upon the executors, administrators, heirs and successors of the Optionee.

 

2



 

5.                                        Method Of Payment

 

Payment of the exercise price shall be by any of the following, or a combination thereof, at the election of the Optionee:

 

a.                                        cash;

 

b.                                       check, cashier’s check, certified check or wire transfer;

 

c.                                        as long as there is a public market for the Common Stock on the date of exercise, by delivery of a sell order to a broker for the shares being purchased and an agreement to pay (or have the broker remit payment for) the purchase price of the shares being purchased on or before the settlement date for the sale of such shares to the broker; or

 

d.                                       as long as there is a public market for the Common Stock on the date of exercise, by surrender of shares of Common Stock, provided that if such shares were acquired upon exercise of an Incentive Option, the Optionee must have first satisfied the holding period requirements under Section 422(a)(1) of the Internal Revenue Code of 1986, as amended (the “Code”).  In this case payment shall be made as follows:

 

i.                                           The Optionee shall deliver to the Secretary of the Company a written notice which shall set forth the portion of the purchase price the Optionee wishes to pay with Common Stock, and the number of shares of such Common Stock the Optionee intends to surrender pursuant to the exercise of this Option, which shall be determined by dividing the aforementioned portion of the purchase price by the closing price per share of the Common Stock of the Company, as reported on the Nasdaq Global Market (or on any other national securities exchange or other established market on which the Common Stock is then listed), on the last business day immediately preceding the date of exercise of the Option, as determined by the Committee;

 

ii.                                        Fractional shares shall be disregarded and the Optionee shall pay in cash an amount equal to such fraction multiplied by the price determined under subparagraph (i) above;

 

iii.                                     The written notice shall be accompanied by a duly endorsed blank stock power with respect to the number of Shares set forth in the notice, and the certificate(s) representing said Shares shall be delivered to the Company at its principal offices within three working days from the date of the notice of exercise;

 

iv.                                    The Optionee hereby authorizes and directs the Secretary of the Company to transfer so many of the Shares represented by such certificate(s) as are necessary to pay the purchase price in accordance with the provisions herein; and

 

v.                                       Notwithstanding any other provision herein, the Optionee shall only be permitted to pay the purchase price with shares of Common Stock owned by him as of the exercise date in the manner and within the time periods allowed under 17 CFR Section 240.16b-3 promulgated under the Securities Exchange Act of 1934, as amended

 

3



 

(“Exchange Act”), as such regulation is presently constituted, as it is amended from time to time, and as it is interpreted now or hereafter by the Securities and Exchange Commission.

 

Furthermore, in all events, the Optionee’s selection of means of payment of the exercise price is subject to the Optionee’s compliance with the Company’s Insider Trading Policy.

 

6.                                        Adjustments Upon Changes in Capitalization and Corporate Transactions

 

The number of Shares covered by this Option, and the per share Option Price of this Option, are subject to adjustment in accordance with the provisions of Section 8 of the Plan in the event of certain changes in the capitalization or organization of the Company.  In the event of a Corporate Transaction, the Committee, in its sole and absolute discretion, may take any one or more of the actions set forth in Section 8.4 of the Plan with respect to the Option.

 

7.                                        Term Of Option

 

This Option may not be exercised more than six years from the date of grant of this Option, as set forth above, and may be exercised during such term only in accordance with the Plan and the terms of this Option.

 

8.                                        No Employment Contract

 

Nothing in this Agreement or in the Plan shall confer upon the Optionee any right to continue in the employ or other service with the Company or any Affiliate or shall interfere with or restrict in any way the rights of the Company (or any Affiliate), which are hereby expressly reserved, to discharge the Optionee at any time for any reason whatsoever, with or without cause, subject to the provisions of applicable law.  This is not an employment contract.

 

9.                                        Income Tax Withholding

 

a.                                        The Optionee authorizes the Company to withhold in accordance with applicable law from any compensation payable to him or her any taxes required to be withheld by Federal, state or local laws as a result of the exercise of this Option in accordance with Section 9.7 of the Plan.  The Optionee further authorizes the Company to satisfy the applicable withholding requirement upon such an exercise, in whole or in part, by having the Company withhold a number of Shares having a Market Value on the date the tax is to be determined equal to the minimum statutory total tax which could be imposed on the transaction and sell those Shares into the public market through a broker transaction with the net proceeds remitted to the Company.  All elections shall be irrevocable, made in writing, signed by the Optionee, and shall be subject to any restrictions or limitations that the Committee deems appropriate. The Optionee agrees to notify the Company immediately in the event of any disqualifying disposition (within the meaning of Section 421(b) of the Code) of the shares acquired upon exercise of an Incentive Option.  Furthermore, in the event of any determination that the Company has failed to withhold a sum sufficient to pay all withholding taxes due in connection with the exercise of this Option, or a disqualifying disposition of the shares acquired upon exercise of an Incentive Option, the Optionee agrees to pay the Company the amount of such deficiency in cash within five days after

 

4



 

receiving a written demand from the Company to do so, whether or not Optionee is an employee of the Company at that time.

 

b.                                       At such time as the Optionee is required to pay to the Company an amount with respect to tax withholding obligations as set forth in Section 9.7, the Optionee may elect prior to the date the amount of such withholding tax is determined to make such payment, or such increased payment as the Optionee elects to make up to the maximum federal, state and local marginal tax rates (including any related FICA obligation) applicable to the Optionee and the particular transaction in accordance with the provisions of Section 9.7 of the Plan.

 

c.                                        Any adverse consequences incurred by an Optionee with respect to the use of shares of Common Stock to pay any part of the Option Price or of any tax in connection with the exercise of the Option, including, without limitation, any adverse tax consequences arising as a result of a disqualifying disposition within the meaning of Section 422 of the Code, shall be the sole responsibility of the Optionee.

 

10.                                  Conditions Upon Issuance of Shares

 

Shares shall not be issued with respect to the Option unless the exercise of the Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange or public trading market upon which the Shares may then be listed, and may be further subject to obtaining an opinion of counsel for the Company with respect to such compliance. As a condition to the exercise of the Option, the Company may require the Optionee to render such representations and warranties as the Company may deem necessary or appropriate for compliance with applicable securities laws, rules and regulations, including but not limited to the representation that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares.  All certificates for shares of Common Stock or other securities delivered under the Plan shall be subject to such stock transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of any stock exchange upon which the Stock is then listed, and any applicable federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions.  If the Company so requests in connection with any underwritten public offering of securities, the Optionee (a) shall not sell, make any short sale of, loan, grant any option for the purchase of, pledge or otherwise encumber, or otherwise dispose of any Shares during a period not to exceed 180 days commencing on the effective date of the registration statement relating to such offering, without the prior written consent of the Company or the managing underwriter of the offering, and (b) shall agree in writing to the foregoing restrictions in one or more written instruments as the Company may request from time to time.

 

11.                                  Notices and Other Communications

 

Any notice, demand, request or other communication hereunder to any party shall be deemed to be sufficient if contained in a written instrument delivered in person or duly sent by first class registered, certified or overnight mail, postage prepaid, or telecopied with a confirmation copy

 

5



 

by regular, certified or overnight mail, addressed or telecopied, as the case may be, (i) if to the Optionee, at his or her residence address last filed with the Company and (ii) if to the Company, at its principal place of business, addressed to the attention of its Chief Financial Officer, or to such other address or telecopier number or electronic mail address, as the case may be, as the addressee may have designated by written notice to the addressor. All such notices, requests, demands and other communications shall be deemed to have been received: (i) in the case of personal delivery, on the date of such delivery; (ii) in the case of mailing, when received by the addressee; (iii) in the case of facsimile transmission, when confirmed by facsimile machine report; and (iv) in the case of electronic mail, when directed to an electronic mail address at which the receiving party has consented to receive notice, provided, that such consent is deemed revoked if the sender is unable to deliver by electronic transmission two consecutive notices and such inability becomes known to the secretary or assistant secretary of the Company or to the transfer agent, or other person responsible for giving notice.

 

 

MoSys, Inc.

 

 

 

/s/ James W. Sullivan

 

 

 

 

 

By: James W. Sullivan

 

Its: Chief Financial Officer

 

Duly authorized on behalf of the Board of Directors

 

The Optionee acknowledges receipt of copies of the Plan and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions of the Plan and this Option grant.  The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions arising under the Plan.

 

 

/s/ Leonard Perham

 

Optionee

 

Date: November 27, 2011

 

6


Exhibit 10.21

 

 

STOCK OPTION GRANT PURSUANT TO THE
MOSYS, INC. 2010 EQUITY INCENTIVE PLAN

 

Date of Grant (“Grant Date”):  December 21, 2011

 

Thomas Riordan (the “Optionee”):

 

MoSys, Inc., a Delaware corporation (the “Company”), has granted to Optionee, an option (“Option”) to purchase a total of 400,000 fully paid, nonassessable shares (“Shares”) of common stock of the Company, par value $0.01 per share (“Common Stock”), at the price set forth herein, and in all respects subject to the terms, definitions and provisions of the Company’s 2010 Equity Incentive Plan (“Plan”).  The terms and provisions of the Plan are incorporated herein by reference and all capitalized terms used herein and not otherwise defined shall have the meanings ascribed thereto in the Plan, and in the event of any conflict between the terms and provisions herein and those of the Plan, the terms and provisions of the Plan, including, without limitation, the powers of the Committee thereunder, shall prevail and be controlling.

 

THE DETAILS OF YOUR OPTION ARE AS FOLLOWS:

 

1.                                        Nature Of The Option

 

The Option is intended to be a Nonstatutory Option.

 

2.                                        Option Price

 

The exercise price of the Option (“Option Price”) is $2.99 for each Share.

 

3.                                        Vesting And Exercise Of Option

 

a.                                        Subject to the Optionee’s continued employment or other association with the Company, the Option will vest and become exercisable as to one-fourth (1/4) of the Shares on the one-year anniversary of December 21, 2011 (“the Vesting Commencement Date”) and as to one thirty-sixth (1/36) of the remaining Shares monthly thereafter (with January 21, 2013 being the first such date) until all of the Shares are vested; provided that if within two years following the occurrence of a Corporate Transaction, Optionee terminates employment with the Company for “Good Reason,” then, one year of the remaining unvested Shares as of the date of such termination shall immediately become vested.

 

b.                                       “Corporate Transaction” means the occurrence of any of the following:

 

MoSys, Inc.   3301 Olcott Street, Santa Clara, CA 95054    Tel: 408.418.7500   Fax: 408.418.7501  www.mosys.com

 

1



 

(i) an acquisition after the Grant Date by an individual, an entity or a group in one or more related transactions (excluding the Company or an employee benefit plan of the Company or a corporation controlled by the Company’s stockholders) of 45 percent or more of the outstanding shares of Common Stock or the Company’s voting securities; or

 

(ii) the consummation of a complete liquidation or dissolution of the Company or a merger, consolidation, reorganization or sale of all or substantially all of the Company’s assets (collectively, a “ Business Combination ”) other than a Business Combination in which (i) the stockholders of the Company receive 50 percent or more of the stock of the corporation resulting from the Business Combination, (ii) at least a majority of the board of directors of such resulting corporation were incumbent directors of the Company immediately prior to the consummation of the Business Combination, and (iii) after which no individual, entity or group (excluding any corporation or other entity resulting from the Business Combination or any employee benefit plan of such corporation or of the Company) who did not own 45 percent or more of the stock of the resulting corporation or other entity immediately before the Business Combination owns 45 percent or more of the stock of such resulting corporation or other entity.

 

c.                                        “Good Reason” means, without the Optionee’s prior written consent or acquiescence:

 

(i)  assignment to the Optionee of duties incompatible with the Optionee’s position, failure to maintain the Optionee in this position and its reporting relationship or a substantial diminution in the nature of the Optionee’s authority or responsibilities;

 

(ii)  reduction in the Optionee’s then current base salary or in the bonus or incentive compensation opportunities or benefits coverage available during the term of this Option, except pursuant to an across-the-board reduction similarly affecting all senior executives of MoSys;

 

(iii) termination of the Optionee’s employment, for any reason other than death, disability, voluntary termination or Misconduct (as defined below);

 

(iv)  relocation of the Optionee’s principal place of business to a location more than 30 miles from the location of such office on the date of this Agreement;

 

(v) MoSys’s failure to pay the Optionee any material amounts otherwise vested and due the Optionee hereunder or under any plan, program or policy of MoSys; or

 

(vi) failure of a successor to MoSys following a Corporate Transaction to expressly assume or affirm MoSys’ obligations under this Option as specified in Section 6.

 

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d.                                       “Misconduct” means the commission of any act of fraud, embezzlement or dishonesty or other violation of MoSys’ Code of Business Conduct and Ethics for Employees, Executive Officers and Directors by the Optionee, any unauthorized use or disclosure by the Optionee of confidential information or trade secrets of MoSys or other breach by the Optionee of a material agreement between the Company and the Optionee, or any other intentional misconduct by the Optionee adversely affecting the business affairs of MoSys in a material manner.

 

e.                                        “MoSys” when used herein shall be deemed to refer to MoSys and any entity or entities that succeed to the assets and properties of MoSys following a Corporate Transaction, or any other corporation or other entity which is a subsidiary or parent of such successor entity or entities for whom the Optionee is employed at any time within two years following the Corporate Transaction.

 

f.                                          In the event of the Optionee’s death, disability or other termination of employment, the Option shall be exercisable in the manner and to the extent provided in Section 6.3 of the Plan.

 

g.                                       No fraction of a Share shall be purchasable or deliverable upon exercise, but in the event any adjustment of the number of Shares covered by the Option shall cause such number to include a fraction of a Share, such number of Shares shall be adjusted to the nearest smaller whole number of Shares.

 

h.                                       In order to exercise any portion of this Option which has vested, the Optionee should complete the transaction through their on-line ETRADE.com account.  For exercises transacted through a different brokerage account, Optionee shall notify the Company in writing of the election to exercise the Option and the number of Shares in respect of which the Option is being exercised, by executing and delivering the Notice of Exercise of Stock Option in the form attached hereto as Appendix I .  The certificate or certificates representing Shares as to which this Option has been exercised shall be registered in the name of the Optionee.

 

4.                                        Non-Transferability Of Option

 

This Option may not be transferred other than by will or by the laws of descent and distribution; provided, however, that the Optionee may transfer the Option to a family member if the transfer has first been approved by the Committee, acting in its sole discretion, is without payment and otherwise complies with the terms and conditions set forth in Section 6.4 of the Plan.  The terms of this Option shall be binding upon the executors, administrators, heirs and successors of the Optionee.

 

5.                                        Method Of Payment

 

Payment of the exercise price shall be by any of the following, or a combination thereof, at the election of the Optionee:

 

a.                                        cash;

 

b.                                       check, cashier’s check, certified check or wire transfer;

 

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c.                                        as long as there is a public market for the Common Stock on the date of exercise, by delivery of a sell order to a broker for the shares being purchased and an agreement to pay (or have the broker remit payment for) the purchase price of the shares being purchased on or before the settlement date for the sale of such shares to the broker; or

 

d.                                       as long as there is a public market for the Common Stock on the date of exercise, by surrender of shares of Common Stock, provided that if such shares were acquired upon exercise of an Incentive Option, the Optionee must have first satisfied the holding period requirements under Section 422(a)(1) of the Internal Revenue Code of 1986, as amended (the “Code”).  In this case payment shall be made as follows:

 

i.                                           The Optionee shall deliver to the Secretary of the Company a written notice which shall set forth the portion of the purchase price the Optionee wishes to pay with Common Stock, and the number of shares of such Common Stock the Optionee intends to surrender pursuant to the exercise of this Option, which shall be determined by dividing the aforementioned portion of the purchase price by the closing price per share of the Common Stock of the Company, as reported on the Nasdaq Global Market (or on any other national securities exchange or other established market on which the Common Stock is then listed), on the last business day immediately preceding the date of exercise of the Option, as determined by the Committee;

 

ii.                                        Fractional shares shall be disregarded and the Optionee shall pay in cash an amount equal to such fraction multiplied by the price determined under subparagraph (i) above;

 

iii.                                     The written notice shall be accompanied by a duly endorsed blank stock power with respect to the number of Shares set forth in the notice, and the certificate(s) representing said Shares shall be delivered to the Company at its principal offices within three working days from the date of the notice of exercise;

 

iv.                                    The Optionee hereby authorizes and directs the Secretary of the Company to transfer so many of the Shares represented by such certificate(s) as are necessary to pay the purchase price in accordance with the provisions herein; and

 

v.                                       Notwithstanding any other provision herein, the Optionee shall only be permitted to pay the purchase price with shares of Common Stock owned by him as of the exercise date in the manner and within the time periods allowed under 17 CFR Section 240.16b-3 promulgated under the Securities Exchange Act of 1934, as amended (“Exchange Act”), as such regulation is presently constituted, as it is amended from time to time, and as it is interpreted now or hereafter by the Securities and Exchange Commission.

 

Furthermore, in all events, the Optionee’s selection of means of payment of the exercise price is subject to the Optionee’s compliance with the Company’s Insider Trading Policy.

 

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6.                                        Adjustments Upon Changes in Capitalization and Corporate Transactions

 

The number of Shares covered by this Option, and the per share Option Price of this Option, are subject to adjustment in accordance with the provisions of Section 8 of the Plan in the event of certain changes in the capitalization or organization of the Company.  In the event of a Corporate Transaction, the Committee, in its sole and absolute discretion, may take any one or more of the actions set forth in Section 8.4 of the Plan with respect to the Option.

 

7.                                        Term Of Option

 

This Option may not be exercised more than six years from the date of grant of this Option, as set forth above, and may be exercised during such term only in accordance with the Plan and the terms of this Option.

 

8.                                        No Employment Contract

 

Nothing in this Agreement or in the Plan shall confer upon the Optionee any right to continue in the employ or other service with the Company or any Affiliate or shall interfere with or restrict in any way the rights of the Company (or any Affiliate), which are hereby expressly reserved, to discharge the Optionee at any time for any reason whatsoever, with or without cause, subject to the provisions of applicable law.  This is not an employment contract.

 

9.                                        Income Tax Withholding

 

a.                                        The Optionee authorizes the Company to withhold in accordance with applicable law from any compensation payable to him or her any taxes required to be withheld by Federal, state or local laws as a result of the exercise of this Option in accordance with Section 9.7 of the Plan.  The Optionee further authorizes the Company to satisfy the applicable withholding requirement upon such an exercise, in whole or in part, by having the Company withhold a number of Shares having a Market Value on the date the tax is to be determined equal to the minimum statutory total tax which could be imposed on the transaction and sell those Shares into the public market through a broker transaction with the net proceeds remitted to the Company.  All elections shall be irrevocable, made in writing, signed by the Optionee, and shall be subject to any restrictions or limitations that the Committee deems appropriate. The Optionee agrees to notify the Company immediately in the event of any disqualifying disposition (within the meaning of Section 421(b) of the Code) of the shares acquired upon exercise of an Incentive Option.  Furthermore, in the event of any determination that the Company has failed to withhold a sum sufficient to pay all withholding taxes due in connection with the exercise of this Option, or a disqualifying disposition of the shares acquired upon exercise of an Incentive Option, the Optionee agrees to pay the Company the amount of such deficiency in cash within five days after receiving a written demand from the Company to do so, whether or not Optionee is an employee of the Company at that time.

 

b.                                       At such time as the Optionee is required to pay to the Company an amount with respect to tax withholding obligations as set forth in Section 9.7, the Optionee may elect prior to the date the amount of such withholding tax is determined to make such payment, or such increased payment as the Optionee elects to make up to the maximum federal, state and local marginal tax rates (including any related FICA obligation) applicable to the Optionee and the particular transaction in accordance with the provisions of Section 9.7 of the Plan.

 

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c.                                        Any adverse consequences incurred by an Optionee with respect to the use of shares of Common Stock to pay any part of the Option Price or of any tax in connection with the exercise of the Option, including, without limitation, any adverse tax consequences arising as a result of a disqualifying disposition within the meaning of Section 422 of the Code, shall be the sole responsibility of the Optionee.

 

10.                                  Conditions Upon Issuance of Shares

 

Shares shall not be issued with respect to the Option unless the exercise of the Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange or public trading market upon which the Shares may then be listed, and may be further subject to obtaining an opinion of counsel for the Company with respect to such compliance. As a condition to the exercise of the Option, the Company may require the Optionee to render such representations and warranties as the Company may deem necessary or appropriate for compliance with applicable securities laws, rules and regulations, including but not limited to the representation that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares.  All certificates for shares of Common Stock or other securities delivered under the Plan shall be subject to such stock transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of any stock exchange upon which the Stock is then listed, and any applicable federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions.  If the Company so requests in connection with any underwritten public offering of securities, the Optionee (a) shall not sell, make any short sale of, loan, grant any option for the purchase of, pledge or otherwise encumber, or otherwise dispose of any Shares during a period not to exceed 180 days commencing on the effective date of the registration statement relating to such offering, without the prior written consent of the Company or the managing underwriter of the offering, and (b) shall agree in writing to the foregoing restrictions in one or more written instruments as the Company may request from time to time.

 

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11.                                  Notices and Other Communications

 

Any notice, demand, request or other communication hereunder to any party shall be deemed to be sufficient if contained in a written instrument delivered in person or duly sent by first class registered, certified or overnight mail, postage prepaid, or telecopied with a confirmation copy by regular, certified or overnight mail, addressed or telecopied, as the case may be, (i) if to the Optionee, at his or her residence address last filed with the Company and (ii) if to the Company, at its principal place of business, addressed to the attention of its Chief Financial Officer, or to such other address or telecopier number or electronic mail address, as the case may be, as the addressee may have designated by written notice to the addressor. All such notices, requests, demands and other communications shall be deemed to have been received: (i) in the case of personal delivery, on the date of such delivery; (ii) in the case of mailing, when received by the addressee; (iii) in the case of facsimile transmission, when confirmed by facsimile machine report; and (iv) in the case of electronic mail, when directed to an electronic mail address at which the receiving party has consented to receive notice, provided, that such consent is deemed revoked if the sender is unable to deliver by electronic transmission two consecutive notices and such inability becomes known to the secretary or assistant secretary of the Company or to the transfer agent, or other person responsible for giving notice.

 

 

MoSys, Inc.

 

 

 

/s/ James Sullivan

 

 

 

 

 

By: James Sullivan

 

Its: Chief Financial Officer

 

Duly authorized on behalf of the Board of Directors

 

The Optionee acknowledges receipt of copies of the Plan and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions of the Plan and this Option grant.  The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions arising under the Plan.

 

 

/s/ Thomas Riordan

 

Optionee

 

Date: January 4, 2012

 

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Exhibit 31.1

 

CERTIFICATION PURSUANT TO

 

RULE 13a-14 THE SECURITIES EXCHANGE ACT OF 1934

 

I, Leonard Perham, certify that:

 

1.              I have reviewed this quarterly report on Form 10-Q of MoSys, Inc. for the period ended March 31, 2012;

 

2.              Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.              Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.              The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)                                 Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)                                 Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)                                  Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)                                 Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.              The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)                                 All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)                                 Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 9, 2012

 

 

 

/s/ Leonard Perham

 

Leonard Perham

 

President and Chief Executive Officer

 

 


Exhibit 31.2

 

CERTIFICATION PURSUANT TO

 

RULE 13a-14 THE SECURITIES EXCHANGE ACT OF 1934

 

I, James W. Sullivan, certify that:

 

1.              I have reviewed this quarterly report on Form 10-Q of MoSys, Inc. for the period ended March 31, 2012;

 

2.              Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.              Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.              The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)                                 Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)                                 Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)                                  Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)                                 Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.              The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)                                 All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)                                 Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 9, 2012

 

 

 

/s/ James W. Sullivan

 

James W. Sullivan

 

Vice President of Finance and Chief Financial Officer

 

 


Exhibit 32.1

 

CERTIFICATION OF CEO AND CFO FURNISHED PURSUANT TO
18 U.S.C. § 1350,
AS ADOPTED PURSUANT TO
§ 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report on Form 10-Q of MoSys, Inc. (the “Company”) for the quarterly period ended March 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of Leonard Perham, Chief Executive Officer of the Company and James W. Sullivan, Vice President of Finance and Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge, that:

 

(1)   The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

(2)   The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

 

 

/s/ Leonard Perham

 

Leonard Perham

 

President and Chief Executive Officer

 

May 9, 2012

 

 

 

/s/ James W. Sullivan

 

James W. Sullivan

 

Vice President of Finance and Chief Financial Officer

 

May 9, 2012

 

This certification accompanies this Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, or otherwise required, be deemed filed by the Company for purposes of § 18 of the Securities Exchange Act of 1934, as amended.