The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. The Company and Summary of Significant Accounting Policies
MoSys, Inc. (the “Company”) was incorporated in California in September 1991 and reincorporated in September 2000 in Delaware. The Company’s strategy and primary business objective is to be an IP-rich fabless semiconductor company focused on the development and sale of integrated circuit (IC) products. Its Bandwidth Engine ICs combine the Company’s proprietary high-density embedded memory with its high-speed 10 gigabits per second and higher interface technology. The Company’s future success and ability to achieve and maintain profitability depends on its success in developing a market for its ICs.
The accompanying condensed consolidated financial statements of the Company have been prepared on a basis that assumes that the Company will continue as a going concern and contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business and have been prepared without audit in accordance with the rules and regulations of the Securities and Exchange Commission (SEC).
The condensed consolidated balance sheet as of December 31, 2017 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 and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 or for any other future period.
Basis of Presentation
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. The Company’s fiscal year ends on December 31 of each calendar year.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses recognized during the reported period. Actual results could differ from those estimates.
Cash Equivalents and Investments
The Company invests its excess cash in money market accounts, certificates of deposit, commercial paper, corporate debt, government-sponsored enterprise bonds and municipal bonds and considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Investments with original maturities greater than three months and remaining maturities less than one year are classified as short-term investments. Investments with remaining maturities greater than one year are classified as long-term investments. Management generally determines the appropriate classification of securities at the time of purchase. All securities are classified as available-for-sale. The Company’s available-for-sale short-term investments are carried at fair value, with the unrealized holding gains and losses reported in accumulated other comprehensive loss. Realized gains and losses and declines in the value judged to be other than temporary are included in the other income, net line item in the condensed consolidated statements of operations and comprehensive loss. The cost of securities sold is based on the specific identification method.
6
Fair Value Measurements
The Company measures the fair value of financial instruments using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:
Level 1— Inputs used to measure fair value are unadjusted quoted prices that are available in active markets for the identical assets or liabilities as of the reporting date.
Level 2— Pricing is provided by third party sources of market information obtained through the Company’s investment advisors, rather than models. The Company does not adjust for, or apply, any additional assumptions or estimates to the pricing information it receives from advisors. The Company’s Level 2 securities may include cash equivalents and available-for-sale securities, which consist primarily of certificates of deposit, corporate debt, and government agency and municipal debt securities from issuers with high-quality credit ratings. The Company’s investment advisors obtain pricing data from independent sources, such as Standard & Poor’s, Bloomberg and Interactive Data Corporation, and rely on comparable pricing of other securities because the Level 2 securities are not actively traded and have fewer observable transactions. The Company considers this the most reliable information available for the valuation of the securities.
Level 3— Unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment are used to measure fair value. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions. The determination of fair value for Level 3 investments and other financial instruments involves the most management judgment and subjectivity.
Allowance for Doubtful Accounts
The Company establishes an allowance for doubtful accounts to ensure that its trade receivables balances are not overstated due to uncollectibility. The Company performs ongoing customer credit evaluations within the context of the industry in which it operates and generally does not require collateral from its customers. A specific allowance of up to 100% of the invoice value is provided for any problematic customer balances. Delinquent account balances are written off after management has determined that the likelihood of collection is remote. The Company grants credit only to customers deemed creditworthy in the judgment of management. There was no allowance for doubtful accounts receivable at either June 30, 2018 or December 31, 2017.
Inventories
The Company values its inventories at the lower of cost, which approximates actual cost on a first-in, first-out basis, or net realizable value. The Company records inventory reserves for estimated obsolescence or unmarketable inventories based upon assumptions about future demand and market conditions. Once a reserve is established, it is maintained until the product to which it relates is sold or otherwise disposed of. If actual market conditions are less favorable than those expected by management, additional adjustment to inventory valuation may be required. Charges for obsolete and slow-moving inventories are recorded based upon an analysis of specific identification of obsolete inventory items and quantification of slow moving inventory items. The Company recorded no inventory write-downs during the three or six months ended June 30, 2018 or 2017.
Critical Accounting Policy – Revenue Recognition
The Company generates revenue primarily from sales of IC products and licensing of its IP. Revenues are recognized when control is transferred to customers in amounts that reflect the consideration the Company expects to be entitled to receive in exchange for those goods. Revenue recognition is evaluated through the following five steps: (i) identification of the contract, or contracts, with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when or as a performance obligation is satisfied.
7
IC products
Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied.
The
majority of the Company's contracts have a single performance obligation to transfer products. Accordingly, the
Company
recognizes revenue when title and risk of loss have been transferred to the customer, generally at the time of shipment of products. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products and is generally based upon a negotiated, formula, list or fixed price. The Company
sells
its
products both directly to customers
and
through distributors
generally under agreements with payment terms typically less than 60 days.
The Company may record an estimated allowance, at the time of shipment, for future returns and other charges against revenue consistent with the terms of sale.
Royalty and other
The Company’s licensing contracts typically provide for royalties based on the licensee’s use of the Company’s memory technology in its currently shipping commercial products. With the adoption of ASC 606 in January 2018, the Company estimates its royalty revenue in the calendar quarter in which the licensee uses the licensed technology. Payments are generally received in the subsequent quarter.
Contract liabilities – deferred revenue
The Company’s contract liabilities consist of advance customer payments and deferred revenue. The Company classifies advance customer payments and deferred revenue as current or non-current based on the timing of when the Company expects to recognize revenue. For the six months ended June 30, 2018, contract liabilities were in a current position and included in deferred revenue.
During the six months ended June 30, 2018, the Company recognized revenue of $2.6 million that had been included in deferred revenue at December 31, 2017.
See Note 5 for disaggregation of revenue by geography.
Cost of Net Revenue
Cost of net revenue consists primarily of direct and indirect costs of IC product sales and engineering personnel costs directly related to maintenance and support services specified in licensing agreements. Maintenance and support typically include engineering support to assist in the commencement of production of a licensee’s products.
Goodwill
In January 2017, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2017-04,
Simplifying the Test for Goodwill Impairment
(ASU No. 2017-04), which eliminated step 2, the computation of the implied fair value of goodwill to determine the amount of impairment, from the goodwill impairment test. Under ASU No. 2017-04, the Company determines the amount of goodwill impairment by comparing the fair value of the reporting unit with its carrying amount. To the extent the carrying value of a reporting unit exceeds its fair value, a goodwill impairment charge is recognized. The Company early-adopted ASU No. 2017-04 effective January 1, 2017, because the ASU significantly simplifies the evaluation of goodwill for impairment.
The Company has determined that it has a single reporting unit for purposes of performing its goodwill impairment test. As the Company uses the market approach to determine the step one fair value, the price of its common stock is an important component of the fair value calculation. If the Company’s stock price continues to experience significant price and volume fluctuations, this will impact the fair value of the reporting unit, which can lead to potential impairment in future periods. The Company reviews goodwill for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. The Company first assesses qualitative factors to determine whether it is more-likely-than-not that the fair value of the reporting unit is less than the carrying amount. 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
8
the reporting unit exceeds the carrying value of net assets of the reporting unit, goodwill is not impaired. If the carrying value o
f the reporting unit’s goodwill exceeds its fair value, then the Company must record an impairment charge equal to the difference. The Company performed its annual test for goodwill impairment as of September 1, 2017, and performed a subsequent test on
Jun
e
3
0
, 2018.
In both tests, the Company’s fair value exceeded its carrying value of net assets and, as such, there was no additional impairment of goodwill
.
Per Share Amounts
Basic net income (loss) per share is computed by dividing net income (loss) for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share gives effect to all potentially dilutive common shares outstanding during the period. Potentially dilutive common shares consist of incremental shares of common stock issuable upon the exercise of stock options, vesting of stock awards and shares issuable in conjunction with the Company’s outstanding senior secured convertible notes.
The following table sets forth the computation of basic and diluted net income (loss) per share for the periods indicated (in thousands, except per share amounts):
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
315
|
|
|
$
|
(3,994
|
)
|
|
$
|
663
|
|
|
$
|
(8,399
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: weighted-average common shares outstanding
|
|
|
8,171
|
|
|
|
6,677
|
|
|
|
8,151
|
|
|
|
6,662
|
|
Total shares: basic
|
|
|
8,171
|
|
|
|
6,677
|
|
|
|
8,151
|
|
|
|
6,662
|
|
Add: weighted-average stock options outstanding
|
|
|
81
|
|
|
|
—
|
|
|
|
72
|
|
|
|
—
|
|
Add: weighted-average unvested restricted stock units
|
|
|
157
|
|
|
|
—
|
|
|
|
155
|
|
|
|
—
|
|
Total shares: diluted
|
|
|
8,409
|
|
|
|
6,677
|
|
|
|
8,378
|
|
|
|
6,662
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.04
|
|
|
$
|
(0.60
|
)
|
|
$
|
0.08
|
|
|
$
|
(1.26
|
)
|
Diluted
|
|
$
|
0.04
|
|
|
$
|
(0.60
|
)
|
|
$
|
0.08
|
|
|
$
|
(1.26
|
)
|
The following table sets forth securities outstanding which were excluded from the computation of diluted net loss per share as their inclusion would be anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Options outstanding to purchase common stock
|
|
|
144
|
|
|
|
336
|
|
|
|
144
|
|
|
|
659
|
|
Employee stock purchase plan
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
35
|
|
Unvested restricted common stock units
|
|
|
—
|
|
|
|
52
|
|
|
|
—
|
|
|
|
11
|
|
Convertible debt
|
|
|
2,271
|
|
|
|
973
|
|
|
|
2,271
|
|
|
|
889
|
|
Total
|
|
|
2,415
|
|
|
|
1,361
|
|
|
|
2,415
|
|
|
|
1,594
|
|
Debt Issuance Costs
Debt issuance costs are capitalized and amortized to interest expense using the effective interest method. Unamortized debt issuance costs are presented in the condensed consolidated balance sheets as a direct deduction from the carrying amount of the related debt liability and accounted for as debt discounts.
9
Note 2: Fair Value of Financial Instruments
The estimated fair values of financial instruments outstanding were (in thousands):
|
|
June 30, 2018
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Cash and cash equivalents
|
|
$
|
3,595
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,595
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Cash and cash equivalents
|
|
$
|
3,868
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,868
|
|
The following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) (in thousands):
|
|
June 30, 2018
|
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Money market funds
|
|
$
|
625
|
|
|
$
|
625
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
December 31, 2017
|
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Money market funds
|
|
$
|
621
|
|
|
$
|
621
|
|
|
$
|
—
|
|
|
$
|
—
|
|
There were no transfers in or out of Level 1 and Level 2 securities during the three or six months ended June 30, 2018 or 2017.
Note 3. Balance Sheet Detail
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Work-in-process
|
|
$
|
1,941
|
|
|
$
|
1,612
|
|
Finished goods
|
|
|
353
|
|
|
|
154
|
|
|
|
$
|
2,294
|
|
|
$
|
1,766
|
|
Identifiable intangible assets were (dollar amounts in thousands):
|
|
June 30, 2018
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Net
|
|
|
|
Life
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
(years)
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
Patent license
|
|
7
|
|
$
|
780
|
|
|
$
|
724
|
|
|
$
|
56
|
|
|
|
December 31, 2017
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Net
|
|
|
|
Life
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
(years)
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
Patent license
|
|
7
|
|
$
|
780
|
|
|
$
|
669
|
|
|
$
|
111
|
|
Amortization expense has been included in research and development expense in the condensed consolidated statements of operations. The remaining estimated aggregate amortization expense is less than $0.1 million and will be recognized in 2018.
10
Note 4. Commitments and Contingencies
Indemnification
In the ordinary course of business, the Company enters into contractual arrangements under which it may agree to indemnify the counterparties from any losses incurred relating to breach of representations and warranties, failure to perform certain covenants, or claims and losses arising from certain events as outlined within the particular contract, which may include, for example, losses arising from litigation or claims relating to past performance. Such indemnification clauses may not be subject to maximum loss clauses. The Company has also entered into indemnification agreements with its officers and directors. No material amounts were reflected in the Company’s condensed consolidated financial statements for the three or six months ended June 30, 2018 or 2017 related to these indemnifications.
The Company has not estimated the maximum potential amount of indemnification liability under these agreements due to the limited history of prior claims and the unique facts and circumstances applicable to each particular agreement. To date, the Company has not made any material payments related to these indemnification agreements.
Legal Matters
In October 2017, Trinity Technologies, Inc. (Trinity), the Company’s former sales representative in the San Francisco Bay Area, filed a lawsuit against the Company in the Superior Court of California alleging non-payment of commissions. In April 2018, the Company and Trinity executed a settlement agreement, and Trinity dismissed the lawsuit. Under the terms of the settlement agreement, the Company agreed to pay Trinity for commissions related to both 2017 and 2018. Commissions for the period prior to April 1, 2018 were accrued as of March 31, 2018. Pursuant to the settlement agreement, the Company recorded commission expenses of approximately $250,000 and paid approximately $450,000 in the quarter ended June 30, 2018.
Note 5.
Business Segments, Concentration of Credit Risk and Significant Customers
The Company operates in one business segment and uses one measurement of profitability for its business. Net revenue is attributed to the United States and to all foreign countries based on the geographical location of the customer.
The Company recognized revenue from shipment of product and licensing of its technologies to customers by geographical location as follows (in thousands):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
North America
|
|
$
|
3,384
|
|
|
$
|
961
|
|
|
$
|
6,741
|
|
|
$
|
1,783
|
|
Japan
|
|
|
1,128
|
|
|
|
200
|
|
|
|
1,842
|
|
|
|
371
|
|
Taiwan
|
|
|
73
|
|
|
|
171
|
|
|
|
156
|
|
|
|
340
|
|
Rest of world
|
|
|
13
|
|
|
|
52
|
|
|
|
67
|
|
|
|
102
|
|
Total net revenue
|
|
$
|
4,598
|
|
|
$
|
1,384
|
|
|
$
|
8,806
|
|
|
$
|
2,596
|
|
Customers who accounted for at least 10% of total net revenue were:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Customer A
|
|
31%
|
|
37%
|
|
39%
|
|
46%
|
Customer B
|
|
24%
|
|
14%
|
|
12%
|
|
14%
|
Customer C
|
|
21%
|
|
*%
|
|
22%
|
|
*%
|
Customer D
|
|
*%
|
|
10%
|
|
*%
|
|
*%
|
Customer E
|
|
*%
|
|
10%
|
|
*%
|
|
12%
|
*
|
Represents less than 10%
|
11
Two
customer
s
accounted for
76
% of accounts receivable, net at
June 30
, 2018. One customer accounted for 63% of accounts receivable, net at December 31, 2017
.
Note 6. Income Tax Provision
The Company determines deferred tax assets and liabilities based upon the differences between the financial statement and tax bases of the Company’s assets and liabilities using tax rates in effect for the year in which the Company expects the differences to affect taxable income. A valuation allowance is established for any deferred tax assets for which it is more likely than not that all or a portion of the deferred tax assets will not be realized.
The Company files U.S. federal and state and foreign income tax returns in jurisdictions with varying statutes of limitations. All tax returns from 2013 to 2017 may be subject to examination by the Internal Revenue Service, California and other states. Returns filed in foreign jurisdictions may be subject to examination for the years 2009 to 2017. As of June 30, 2018, the Company has not recorded any liability for unrecognized tax benefits related to uncertain tax positions.
Note 7. Stock-Based Compensation
The expense relating to stock options is recognized on a straight-line basis over the requisite service period, usually the vesting period, based on the grant-date fair value. The unamortized compensation cost, net of expected forfeitures, as of June 30, 2018 was $0.8 million related to stock options and is expected to be recognized as expense over a weighted-average period of approximately 2.0 years. The expense related to restricted stock units (RSUs) is recognized over a three-to-five year vesting period and is based on the fair value of the underlying stock on the dates of grant. The unamortized compensation cost, net of expected forfeitures, as of June 30, 2018 was $0.3 million related to RSUs and is expected to be recognized as expense over a weighted-average period of approximately 0.6 years.
For the three and six months ended June 30, 2018 and 2017, there were no excess tax benefits associated with the exercise of stock options due to the Company’s historical loss positions.
Valuation Assumptions
No stock options were granted during the three months ended June 30, 2018 or 2017. The fair value of the Company’s stock options granted for the six months ended June 31, 2018 and 2017 was estimated on the grant dates using the Black-Scholes valuation option-pricing model with the following assumptions:
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Risk-free interest rate
|
|
|
2.2
|
%
|
|
|
1.6
|
%
|
Volatility
|
|
|
109.5
|
%
|
|
|
70.2
|
%
|
Expected life (years)
|
|
|
4.0
|
|
|
|
4.0
|
|
Dividend yield
|
|
|
—
|
%
|
|
|
—
|
%
|
The risk-free interest rate was derived from the Daily Treasury Yield Curve Rates, as published by the U.S. Department of the Treasury as of the grant date for terms equal to the expected terms of the options. The expected volatility was based on the historical volatility of the Company’s stock price over the expected term of the options. The expected term of options granted was derived from historical data based on employee exercises and post‑vesting employment termination behavior. A dividend yield of zero is applied because the Company has never paid dividends, and has no intention to pay dividends in the near future.
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. Stock‑based compensation expense will be adjusted in later periods if the actual forfeiture rate is different from the estimate.
12
Common Stock Options and Restricted Stock
A summary of option and RSU activity under the Company’s Amended and Restated 2010 Equity Incentive Plan (the Plan) is presented below (in thousands, except exercise price):
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Awards outstanding
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Weighted
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Shares
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Average
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Available
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Number of
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Exercise
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for Grant
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Shares
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Prices
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Balance at January 1, 2018
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|
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231
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|
|
307
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$
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4.81
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Additional shares authorized under the Plan
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50
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—
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—
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RSUs granted
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(60
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)
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—
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—
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RSUs cancelled and returned to the Plan
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1
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—
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—
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Options granted
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(40
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)
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40
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$
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1.28
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Options cancelled and returned to the Plan
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2
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(2
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)
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$
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23.47
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Balance at March 31, 2018
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184
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345
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$
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4.30
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Options cancelled and returned to the Plan
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1
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(1
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)
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$
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9.40
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Balance at June 30, 2018
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185
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344
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$
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4.27
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A summary of RSU activity under the Plan is presented below (in thousands, except for fair value):
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Weighted
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Average
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Number of
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Grant-Date
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Shares
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Fair Value
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Non-vested shares at January 1, 2018
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376
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$
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1.58
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Granted
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60
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$
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1.16
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Vested
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(133
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)
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$
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2.11
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Cancelled
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(1
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)
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$
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0.94
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Non-vested shares at June 30, 2018
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302
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$
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1.27
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In the six months ended June 30, 2018, the Company paid approximately $38,000 for employee income taxes related to net-share settlement of vested RSUs.
The total intrinsic value of the RSUs outstanding as of June 30, 2018 was $0.5 million.
13
The following table summarizes significant ranges of outstanding and exercisable options as of
June 30
, 2018 (in thousands, except contractual life and exercise price):
There were no stock options exercised during the six months ended June 30, 2018 or 2017. As of June 30, 2018, the intrinsic value of outstanding stock options was approximately $0.2 million.
Note 8. Convertible Notes
On March 14, 2016, the Company entered into a 10% Senior Secured Convertible Note Purchase Agreement (the “Purchase Agreement”) with the purchasers of $8,000,000 principal amount of 10% Senior Secured Convertible Notes due August 15, 2018 (the “Notes”), at par, in a private placement transaction effected pursuant to an exemption from the registration requirements under the Securities Act of 1933, as amended. Pursuant to an amendment to the Notes and related documents effective February 18, 2018, the interest rate was reduced to 8%, the maturity date of the Notes was extended to August 15, 2019, and the optional conversion price was reduced from $8.50 of Note principal per share of common stock to $4.25 of Note principal per share of common stock. The conversion price is subject to adjustment upon certain events, such as stock splits, reverse stock splits, stock dividends and similar kinds of transactions, as set forth in the Purchase Agreement. Pursuant to a security agreement entered into by the Company, the Notes are secured by a security interest in all of the assets of the Company.
The Notes originally had an interest rate of 10%, but from February 15, 2018, the annual rate of interest is 8%. Accrued interest is payable semi-annually in cash or in kind through the issuance of identical new Notes, or with a combination of the two, at the Company’s option. The Notes are noncallable and nonredeemable by the Company. The Notes are redeemable at the election of the holders if the Company experiences a fundamental change (as defined in the Notes), which generally would occur in the event (i) any person acquires beneficial ownership of shares of common stock of the Company entitling such person to exercise at least 40% of the total voting power of all of the shares of capital stock of the Company entitled to vote generally in elections of directors, (ii) an acquisition of the Company by another person through a merger or consolidation, or the sale, transfer or lease of all or substantially all of the Company’s assets, or (iii) the Company’s current directors cease to constitute a majority of the board of directors of the Company within a 12-month period, disregarding for this purpose any director who voluntarily resigns as a director or dies while serving as a director. Pursuant to the amendment to the Notes, the redemption price was reduced from 120% to 100% of the principal amount of the Note to be repurchased plus accrued and unpaid interest as of the redemption date.
No holder of a Note is entitled to convert such Note if effective upon the applicable conversion date (i) the holder would have beneficial ownership of more than 9.9% of the voting capital stock of the Company as determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended, (with exceptions specified in the Purchase Agreement), or (ii) if the shares are being acquired or held with a purpose or effect of changing or influencing control of the Company, or in connection with or as a participant in any transaction having that purpose or effect, as determined in the sole discretion of the board of directors of the Company. There is no required sinking fund for the Notes. The Notes have not been registered for resale, and the holder(s) do not have registration rights.
The Notes define an event of default generally as any failure by the Company to pay an amount owed under the Notes when due (subject to cure periods), a default with respect to other indebtedness of the Company resulting in acceleration of such indebtedness, the commencement of bankruptcy or insolvency proceedings, or the cessation of business. If an event of default occurs under the Notes, the holder(s) of a majority-in-interest of the outstanding principal amount of the Notes may declare the outstanding principal amount thereof to be immediately due and payable and pursue all available remedies, including taking possession of the assets of the Company and selling them to pay the amount of debt then due, plus expenses, in accordance with applicable laws and procedures.
The Company incurred debt issuance costs of approximately $0.1 million, which were recorded as a debt discount and are being amortized to interest expense over the repayment period for the original loan using the effective interest rate method. The interest expense related to the debt discount during the three and six months ended June 30, 2018 was approximately $12,000 and $24,000, respectively, and during the three and six months ended June 30, 2017 was approximately $11,000 and $22,000, respectively.
Semi-annual interest payments have been made in each of August 2016, February 2017, August 2017 and February 2018, for approximately $336,000, $420,000, $434,000 and $463,000, respectively, in-kind with the issue of additional notes (Interest Notes) to the Purchasers. The Interest Notes have terms identical to the Notes. As of June 30, 2018, the Notes and Interest Notes could be converted into a maximum of 2,271,338 shares of common stock at $4.25 per share, excluding the effects of future payments of interest in-kind and a beneficial ownership ceiling of 9.9%.
Note 9. Restructuring Charges
In the second quarter of 2017, the Company effected a reduction in its workforce and associated operating expenses, net loss and cash burn. The Company reduced headcount by approximately 60% with the majority of the reductions occurring at its U.S. headquarters facility. As a result of the restructuring, the Company recorded approximately $1.0 million of charges for severance benefits and future obligations under computer-aided design software licenses. In the third quarter of 2017, the Company closed its Japanese branch and Iowa locations and further reduced headcount resulting in additional expenses of approximately $50,000. In the fourth quarter of 2017, the Company terminated its existing headquarters facility lease and incurred lease termination expenses of approximately $270,000.
Expenses related to the restructure are included in the restructuring charges line in the condensed consolidated statements of operations and the remaining liability is included in accrued expenses and other on the condensed consolidated balance sheets consisting of (in thousands):