gsit_Current folio_10Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

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

 

For the quarterly period ended December 31, 2018

 

or

 

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

 

For the transition period from              to             

 

Commission File Number 001-33387

 


 

GSI Technology, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

77-0398779

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification No.)

 

1213 Elko Drive

Sunnyvale, California 94089

(Address of principal executive offices, zip code)

 

(408) 331-8800

(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 such filing requirements for the past 90 days.  Yes  ☒  No  ☐

 

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

 

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

 

 

 

 

Large accelerated filer  ☐

 

Accelerated filer  ☒

Non-accelerated filer  ☐

 

Smaller reporting company  ☐

 

 

Emerging growth company  ☐

 

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

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

 

The number of shares of the registrant’s common stock outstanding as of January 31, 2019: 22,044,083

 

 

 


 

Table of Contents

GSI TECHNOLOGY, INC.

 

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2018

 

 

 

 

 

Page

 

 

PART I — FINANCIAL INFORMATION 

 

 

 

 

Item 1. 

Financial Statements

2

 

Condensed Consolidated Balance Sheets

2

 

Condensed Consolidated Statements of Operations

3

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

4

 

Condensed Consolidated Statements of Cash Flows

5

 

Notes to Condensed Consolidated Financial Statements

6

Item 2. 

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

19

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

25

Item 4. 

Controls and Procedures

25

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

Item 1A. 

Risk Factors

25

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

40

Item 6. 

Exhibits

41

Signatures 

42

 

 

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PART I — FINANCIAL INFORMATION

 

Item 1.Financial Statements

 

GSI TECHNOLOGY, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

March 31,

 

 

 

2018

  

2018

    

 

 

(In thousands, except share
and per share amounts)

 

ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

   

$

40,529

    

$

40,241

 

Short-term investments

 

 

16,557

 

 

18,124

 

Accounts receivable, net

 

 

8,160

 

 

5,279

 

Inventories

 

 

5,949

 

 

5,547

 

Prepaid expenses and other current assets

 

 

2,558

 

 

2,080

 

Total current assets

 

 

73,753

 

 

71,271

 

Property and equipment, net

 

 

9,184

 

 

8,172

 

Long-term investments

 

 

10,183

 

 

7,923

 

Goodwill

 

 

7,978

 

 

7,978

 

Intangible assets, net

 

 

2,781

 

 

2,989

 

Other assets

 

 

198

 

 

1,207

 

Total assets

 

$

104,077

 

$

99,540

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Accounts payable

 

$

2,348

 

$

1,841

 

Accrued expenses and other liabilities

 

 

5,865

 

 

5,563

 

Total current liabilities

 

 

8,213

 

 

7,404

 

Income taxes payable

 

 

631

 

 

619

 

Other accrued expenses

 

 

4,026

 

 

4,702

 

Total liabilities

 

 

12,870

 

 

12,725

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock: $0.001 par value authorized: 5,000,000 shares; issued and outstanding: none

 

 

 —

 

 

 —

 

Common Stock: $0.001 par value authorized: 150,000,000 shares; issued and outstanding: 21,992,084 and 21,407,247 shares, respectively

 

 

22

 

 

21

 

Additional paid-in capital

 

 

31,483

 

 

27,391

 

Accumulated other comprehensive loss

 

 

(108)

 

 

(142)

 

Retained earnings

 

 

59,810

 

 

59,545

 

Total stockholders’ equity

 

 

91,207

 

 

86,815

 

Total liabilities and stockholders’ equity

 

$

104,077

 

$

99,540

 

 

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

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GSI TECHNOLOGY, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended December 31,

 

Nine Months Ended December 31,

 

 

 

2018

 

2017

 

2018

 

2017

    

 

 

(In thousands, except per share amounts)

 

Net revenues

   

$

14,702

    

$

11,118

    

$

38,800

    

$

31,452

 

Cost of revenues

 

 

4,663

 

 

5,443

 

 

14,942

 

 

15,315

 

Gross profit

 

 

10,039

 

 

5,675

 

 

23,858

 

 

16,137

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

5,171

 

 

4,231

 

 

15,773

 

 

12,726

 

Selling, general and administrative

 

 

2,632

 

 

2,481

 

 

7,902

 

 

7,771

 

Total operating expenses

 

 

7,803

 

 

6,712

 

 

23,675

 

 

20,497

 

Income (loss) from operations

 

 

2,236

 

 

(1,037)

 

 

183

 

 

(4,360)

 

Interest income, net

 

 

195

 

 

113

 

 

488

 

 

309

 

Other expense, net

 

 

(99)

 

 

(14)

 

 

(224)

 

 

(9)

 

Income (loss) before income taxes

 

 

2,332

 

 

(938)

 

 

447

 

 

(4,060)

 

Provision for income taxes

 

 

70

 

 

590

 

 

182

 

 

720

 

Net income (loss)

 

$

2,262

 

$

(1,528)

 

$

265

 

$

(4,780)

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.10

 

$

(0.07)

 

$

0.01

 

$

(0.23)

 

Diluted

 

$

0.10

 

$

(0.07)

 

$

0.01

 

$

(0.23)

 

Weighted average shares used in per share calculations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

21,979

 

 

21,165

 

 

21,798

 

 

21,003

 

Diluted

 

 

22,769

 

 

21,165

 

 

23,139

 

 

21,003

 

 

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

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GSI TECHNOLOGY, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended December 31,

 

Nine Months Ended December 31,

 

 

 

2018

 

2017

 

2018

 

2017

    

 

 

(In thousands)

 

Net Income (loss)

   

$

2,262

    

$

(1,528)

    

$

265

    

$

(4,780)

 

Net unrealized gain (loss) on available-for-sale investments

 

 

18

 

 

(48)

 

 

34

 

 

(48)

 

Total comprehensive income (loss)

 

$

2,280

 

$

(1,576)

 

$

299

 

$

(4,828)

 

 

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

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GSI TECHNOLOGY, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended December 31,

 

 

 

2018

 

2017

    

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

   

$

265

    

$

(4,780)

 

Adjustments to reconcile net income (loss) to net cash used in operating activities:

 

 

 

 

 

 

 

Allowance for sales returns, doubtful accounts and other

 

 

40

 

 

(22)

 

Provision for excess and obsolete inventories

 

 

874

 

 

1,166

 

Depreciation and amortization

 

 

1,073

 

 

948

 

Stock-based compensation

 

 

1,686

 

 

1,521

 

Amortization of premium (discount) on investments

 

 

(25)

 

 

69

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,921)

 

 

826

 

Inventory

 

 

(1,276)

 

 

1,250

 

Prepaid expenses and other assets

 

 

(219)

 

 

115

 

Accounts payable

 

 

532

 

 

(119)

 

Accrued expenses and other liabilities

 

 

768

 

 

(1,579)

 

Net cash provided by (used in) operating activities

 

 

797

 

 

(605)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of investments

 

 

(16,057)

 

 

(6,748)

 

Maturities of short-term investments

 

 

15,423

 

 

10,500

 

Decrease in MikaMonu escrow deposit

 

 

750

 

 

1,222

 

Purchases of property and equipment

 

 

(1,948)

 

 

(436)

 

Net cash provided by (used in) investing activities

 

 

(1,832)

 

 

4,538

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Payment of MikaMonu escrow deposit

 

 

(364)

 

 

(850)

 

Payment of contingent consideration

 

 

(720)

 

 

 —

 

Repurchase of common stock

 

 

(102)

 

 

 —

 

Proceeds from issuance of common stock under employee stock plans

 

 

2,509

 

 

2,921

 

Net cash provided by financing activities

 

 

1,323

 

 

2,071

 

Net increase in cash and cash equivalents

 

 

288

 

 

6,004

 

Cash and cash equivalents at beginning of the period

 

 

40,241

 

 

33,736

 

Cash and cash equivalents at end of the period

 

$

40,529

 

$

39,740

 

Non-cash financing activities:

 

 

 

 

 

 

 

Purchases of property and equipment through accounts payable and

accruals

 

$

34

 

$

256

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Net cash paid for income taxes

 

$

11

 

$

42

 

 

 

 

 

 

 

 

 

 

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

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GSI TECHNOLOGY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

NOTE 1—THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation

 

The accompanying unaudited condensed consolidated financial statements of GSI Technology, Inc. and its subsidiaries (“GSI” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission.  Accordingly, the interim financial statements do not include all of the information and footnotes required by GAAP for annual financial statements.  These interim financial statements contain all adjustments (which consist of only normal, recurring adjustments) that are, in the opinion of management, necessary to state fairly the interim financial information included therein.  The Company believes that the disclosures are adequate to make the information not misleading.  However, these financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2018.

 

The consolidated results of operations for the nine months ended December 31, 2018 are not necessarily indicative of the results to be expected for the entire fiscal year.

 

Significant accounting policies

 

Except for the accounting policy for revenue recognition, which was updated as a result of adopting a new accounting standard related to revenue recognition, there have been no material changes to our significant accounting policies that were disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2018.

 

See “Recent accounting pronouncements” below for additional information on the impact of the adoption of the new accounting standard for revenue recognition on the Company’s consolidated financial statements.

 

Recent accounting pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”. The standard amends the disclosure requirements for recurring and nonrecurring fair value measurements by removing, modifying, and adding certain disclosures. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company does not anticipate the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.

 

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, “Disclosure Update and Simplification”, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded.  In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements.  Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement.  The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed.  The Company anticipates its first presentation of changes in shareholders' equity will be included in its Form 10-Q for the quarter ended June 30, 2019.

In January 2017, the FASB issued ASU No. 2017-04, "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". The standard eliminates the second step in the goodwill impairment

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test which requires an entity to determine the implied fair value of the reporting unit’s goodwill.  Instead, an entity should recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. The standard is effective for annual and interim goodwill impairment tests conducted in fiscal years beginning after December 15, 2019, with early adoption permitted.  The Company does not anticipate the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”. ASU 2016-18 requires entities to include in their cash and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. As a result, companies will no longer present transfers between cash and cash equivalents, and restricted cash and restricted cash equivalents in the statement of cash flows. The Company adopted ASU 2016-18 in the quarter ended June 30, 2018.  Implementation of this guidance did not have a material impact on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13,  “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” ASU 2016-13 replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For trade and other receivables, loans, and other financial instruments, the Company will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted beginning April 1, 2019. Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the effective date. The Company is currently evaluating the impact of this standard on its consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. All leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, “Elements of Financial Statements,” and, therefore, recognition of those lease assets and lease liabilities represents a change of previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases.  This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those years.  Early adoption is permitted. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous GAAP. Although the Company is currently evaluating the impact the pronouncement will have on its consolidated financial statements and related disclosures, the Company expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon adoption.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income and simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. The accounting standard update also updates certain presentation and disclosure requirements. The Company adopted ASU 2016-01 in the quarter ended June 30, 2018.  Implementation of this guidance did not have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)" and has subsequently issued several supplemental and/or clarifying ASUs (collectively, "ASC 606"). The new accounting standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The new standard requires a company to recognize revenue as control of goods or services transfers to a customer at an amount that reflects the expected consideration to be received in exchange for those goods or services. It defines a five-step approach for recognizing revenue, which may require a company to use more judgment and make more estimates than under the current standard. The Company adopted ASC 606 on April 1, 2018 using the modified retrospective transition method.

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The Company determines revenue recognition through the following steps: (1) identification of the contract with a customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, we satisfy a performance obligation.

The adoption of ASC 606 was applied to all contracts and did not have a significant impact on the Company’s retained earnings as the timing of Company’s revenue recognition under the new standard coincides with the way the Company previously recognized revenue. There was no impact on the opening retained earnings balance as of April 1, 2018 due to the adoption of ASC 606.

The majority of the Company’s customer contracts, which may be in the form of purchase orders, contracts or purchase agreements, contain performance obligations for delivery of agreed upon products.  Delivery of all performance obligations contained within a contract with a customer typically occurs at the same time (or within the same accounting period).  Transfer of control typically occurs at the time of shipment or at the time the product is pulled from consignment as that is the point at which delivery has occurred, title and the risks and rewards of ownership have passed to the customer, and the Company has a right to payment. Thus, the Company will generally recognize revenue upon shipment of the product.

Because all of the Company’s performance obligations relate to contracts with a duration of less than one year, the Company elected to apply the optional exemption practical expedient provided in ASC 606 and, therefore, is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period.

The Company adjusts the transaction price for variable consideration.  Variable consideration is not typically significant and primarily results from stock rotation rights and quick pay discounts provided to our distributors. As a practical expedient, the Company is recognizing the incremental costs of obtaining a contract, specifically commission expenses that have a period of benefit of less than twelve months, as an expense when incurred.  Additionally, the Company has adopted an accounting policy to recognize shipping costs that occur after control transfers to the customer as a fulfillment activity.

The Company’s contracts with customers do not typically include extended payment terms. Payment terms vary by contract type and type of customer and generally range from 30 to 60 days from shipment. Additionally, the Company has right to payment upon shipment.

The Company records revenue net of sales tax, value added tax, excise tax and other taxes collected concurrent with product sales. The impact of such taxes on products sales is immaterial. The Company has also elected to recognize the cost for freight and shipping when control over the products sold passes to customers and revenue is recognized.

The Company warrants its products to be free of defects generally for a period of three years. The Company estimates its warranty costs based on historical warranty claim experience and includes such costs in cost of revenues. Warranty costs and the accrued warranty liability were not material as of December 31, 2018.

 

The majority of the Company’s revenue is derived from sales of SRAM products which represent approximately 99% of total revenues in the nine months ended December 31, 2018.

The majority of the Company’s revenue is derived from sales to distributors and contract manufacturers which represented approximately 57% and 42% of net revenue, respectively, for the nine months ended December 31, 2018.

Nokia, the Company’s largest customer, purchases products directly from the Company and through contract manufacturers and distributors. Based on information provided to the Company by its contract manufacturers and distributors, purchases by Nokia represented approximately 46% of the Company’s net revenues in the nine months ended December 31, 2018.

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The Company historically deferred recognition of revenue on shipments to its distributors under prior revenue guidance because it lacked fixed and determinable pricing for contracts in which the distributors had rights to price concessions from the Company upon shipment to the distributors’ customers. During fiscal 2018, the Company revised all of its distribution agreements to eliminate the uncertainty in pricing, allowing the Company to recognize revenue at the time of shipment to the distributors. As a result, the implementation of the new revenue guidance did not have a significant impact on the Company’s consolidated financial statements. See “Note 9 - Segment and Geographic Information” for revenue by shipment destination.

 

 

 

NOTE 2—NET INCOME (LOSS) PER COMMON SHARE

 

The Company uses the treasury stock method to calculate the weighted average shares used in computing diluted net income (loss) per share. The following table sets forth the computation of basic and diluted net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended December 31,

 

Nine Months Ended December 31,

 

 

 

2018

 

2017

 

2018

 

2017

    

 

 

(In thousands, except per share amounts)

 

Net income (loss)

   

$

2,262

    

$

(1,528)

    

$

265

    

$

(4,780)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominators:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares—Basic

 

 

21,979

 

 

21,165

 

 

21,798

 

 

21,003

 

Dilutive effect of employee stock options

 

 

784

 

 

 —

 

 

1,335

 

 

 —

 

Dilutive effect of employee stock purchase plan options

 

 

 6

 

 

 —

 

 

 6

 

 

 —

 

Weighted average shares—Dilutive

 

 

22,769

 

 

21,165

 

 

23,139

 

 

21,003

 

Net income (loss) per common share—Basic

 

$

0.10

 

$

(0.07)

 

$

0.01

 

$

(0.23)

 

Net income (loss) per common share—Diluted

 

$

0.10

 

$

(0.07)

 

$

0.01

 

$

(0.23)

 

 

 

The following shares of common stock underlying outstanding stock options, determined on a weighted average basis, were excluded from the computation of diluted net income (loss) per share as they had an anti-dilutive effect:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended December 31,

 

Nine Months Ended December 31,

 

 

 

2018

 

2017

 

2018

 

2017

    

 

 

(In thousands)

 

Shares underlying options and ESPP shares

   

3,961

 

2,969

 

2,470

 

2,785

 

 

 

 

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NOTE 3—BALANCE SHEET DETAIL

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

March 31, 2018

    

 

 

(In thousands)

 

Inventories:

 

 

 

Work-in-progress

   

$

2,470

    

$

2,226

 

Finished goods

 

 

3,479

 

 

3,321

 

 

 

$

5,949

 

$

5,547

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

March 31, 2018

    

 

 

(In thousands)

 

Accounts receivable, net:

 

 

 

 

 

 

 

Accounts receivable

   

$

8,263

    

$

5,342

 

Less: Allowances for sales returns, doubtful accounts and other

 

 

(103)

 

 

(63)

 

 

 

$

8,160

 

$

5,279

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

March 31, 2018

    

 

 

(In thousands)

 

Prepaid expenses and other current assets:

 

 

 

 

 

 

 

Prepaid tooling and masks

 

$

705

 

$

163

 

Escrow deposit

 

 

1,000

 

 

750

 

Other receivables

 

 

407

 

 

370

 

Other prepaid expenses and other current assets

 

 

446

 

 

797

 

 

 

$

2,558

 

$

2,080

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

March 31, 2018

    

 

 

(In thousands)

 

Property and equipment, net:

 

 

 

 

 

 

 

Computer and other equipment

 

$

18,990

 

$

17,845

 

Software

 

 

4,057

 

 

4,072

 

Land

 

 

3,900

 

 

3,900

 

Building and building improvements

 

 

3,691

 

 

2,310

 

Furniture and fixtures

 

 

102

 

 

82

 

Leasehold improvements

 

 

832

 

 

766

 

Construction in progress

 

 

 —

 

 

965

 

 

 

 

31,572

 

 

29,940

 

Less: Accumulated depreciation

 

 

(22,388)

 

 

(21,768)

 

 

 

$

9,184

 

$

8,172

 

 

Depreciation expense was $317,000 and $245,000 for the three months ended December 31, 2018 and 2017, respectively, and $865,000 and $714,000 for the nine months ended December 31, 2018 and 2017, respectively. The construction in progress related primarily to a facility expansion at our Sunnyvale headquarters and was placed in service in fiscal 2019.

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December 31, 2018

 

March 31, 2018

    

 

 

(In thousands)

 

Other assets:

 

 

 

 

 

 

 

Escrow deposit

 

$

 —

 

$

1,000

 

Non-current deferred income taxes

 

 

75

 

 

75

 

Deposits

 

 

123

 

 

132

 

 

 

$

198

 

$

1,207

 

 

The escrow deposit at March 31, 2018 included approximately $1.0 million placed in escrow in connection with the Company’s acquisition of MikaMonu Group Ltd. (“MikaMonu”) on November 23, 2015. During the quarter ended December 31, 2018, $1.0 million was reclassified to current assets.

 

The following tables summarize the components of intangible assets and related accumulated amortization balances at December 31, 2018 and March 31, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018

 

 

    

Gross
Carrying
Amount

    

Accumulated
amortization

    

Net Carrying
Amount

 

Intangible assets:

 

 

 

    

 

 

    

 

 

 

Product designs

 

$

590

 

$

(590)

 

$

 —

 

Patents

 

 

4,220

 

 

(1,439)

 

 

2,781

 

Software

 

 

80

 

 

(80)

 

 

 —

 

Total

 

$

4,890

 

$

(2,109)

 

$

2,781

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2018

 

 

    

Gross
Carrying
Amount

    

Accumulated
Amortization

    

Net Carrying
Amount

 

Intangible assets:

 

 

 

 

 

 

 

 

 

 

Product designs

 

$

590

 

$

(590)

 

$

 —

 

Patents

 

 

4,220

 

 

(1,231)

 

 

2,989

 

Software

 

 

80

 

 

(80)

 

 

 —

 

Total

 

$

4,890

 

$

(1,901)

 

$

2,989

 

 

 

Amortization of intangible assets included in cost of revenues was $58,000 and $78,000 for the three months ended December 31, 2018 and 2017, respectively, and $208,000 and $235,000 for the nine months ended December 31, 2018 and 2017, respectively.

 

As of December 31, 2018, the estimated future amortization expense of intangible assets in the table above is as follows (in thousands):

 

 

 

 

 

 

 

 

 

Fiscal year ending March 31,

 

 

 

 

 

 

2019 (remaining three months)

 

$

59

 

 

 

    

2020

 

 

233

 

 

 

 

2021

 

 

233

 

 

 

 

2022

 

 

233

 

 

 

 

2023

 

 

233

 

 

 

 

Thereafter

 

 

1,790

 

 

 

 

Total

 

$

2,781

 

 

 

 

 

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December 31, 2018

 

March 31, 2018

    

 

 

(In thousands)

 

Accrued expenses and other liabilities:

 

 

 

 

 

 

 

Accrued compensation

 

$

3,530

 

$

2,786

 

Accrued professional fees

 

 

31

 

 

31

 

Accrued commissions

 

 

326

 

 

299

 

Contingent consideration

 

 

470

 

 

1,102

 

Accrued retention payment

 

 

384

 

 

291

 

Miscellaneous accrued expenses

 

 

1,124

 

 

1,054

 

 

 

$

5,865

 

$

5,563

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

March 31, 2018

    

 

 

(In thousands)

 

Other accrued expenses:

 

 

 

 

 

 

 

Contingent consideration

 

$

4,026

 

$

4,411

 

Other long-term accrued liabilities

 

 

 —

 

 

291

 

 

 

$

4,026

 

$

4,702

 

 

 

 

 

 

 

 

NOTE 4—GOODWILL

Goodwill represents the difference between the purchase price and the estimated fair value of the identifiable assets acquired and liabilities assumed in a business combination. The Company tests for goodwill impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset is more likely than not impaired. The Company has one reporting unit. The Company assesses goodwill for impairment on an annual basis on the last day of February in the fourth quarter of its fiscal year.

The Company had a goodwill balance of $8.0 million as of both March 31, 2018 and December 31, 2018. The goodwill resulted from the acquisition of MikaMonu Group Ltd. in fiscal 2016.

 

The Company utilized a two-step quantitative analysis to complete its annual impairment test during the fourth quarter of fiscal 2018 and concluded that there was no impairment, as the fair value of its sole reporting unit exceeded its carrying value. The Company determined that the second step of the impairment test was not necessary. No triggering event took place subsequent to the fiscal 2018 annual assessment that necessitated a quantitative impairment analysis for the Company’s one reporting unit.

 

 

 

 

NOTE 5—INCOME TAXES

 

The current portion of the Company’s unrecognized tax benefits was $0 at both December 31, 2018 and March 31, 2018. The long-term portion at December 31, 2018 and March 31, 2018 was $631,000 and $619,000, respectively, of which the timing of the resolution is uncertain.  As of December 31, 2018, $2.4 million of unrecognized tax benefits had been recorded as a reduction to net deferred tax assets.  As of December 31, 2018, the Company’s net deferred tax assets of $6.7 million were subject to a valuation allowance of $6.6 million. As of March 31, 2018, the Company’s net deferred tax assets of $6.0 million were subject to a valuation allowance of $5.9 million.

 

On December 22, 2017, the “Tax Cuts and Jobs Act” ("H.R. 1") was signed into law, significantly impacting several sections of the Internal Revenue Code. Following the enactment of H.R. 1, the SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the law.  SAB 118 provides a measurement period that should not extend beyond one year from the enactment date of H.R. 1 for companies to complete the accounting under ASC 740.  In accordance with SAB 118, the Company must reflect the income tax effects of those aspects of H.R. 1 for which the accounting under ASC 740 is complete.  To the extent that the Company’s accounting for certain income tax effects of H.R. 1 is incomplete but the Company is able to determine a reasonable estimate, the Company must record a provisional estimate in the financial statements.  If the Company cannot

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determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax law that were in effect immediately before the enactment of H.R 1.

 

H.R. 1 includes significant changes to the U.S. corporate income tax system, including a permanent reduction in the corporate income tax rate from 35% to 21%, limitations on the deductibility of interest expense and executive compensation and the transition of U.S. international taxation from a worldwide tax system to a territorial tax system. We re-measured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. The re-measurement of our deferred tax balance of $1.1 million was offset by application of our valuation allowance. We calculated our best estimate of the impact of H.R. 1 in the fiscal 2018 year-end income tax provision, including the impact of the one-time transition tax, in accordance with our understanding of H.R. 1 and guidance available as of the date of this filing and recorded a tax expense of $367,000 in the year ended March 31, 2018 related to the transition tax associated with deemed repatriation of foreign earnings. Pursuant to Staff Accounting Bulletin No. 118, adjustments to the provisional amounts recorded by the Company that are identified within a subsequent measurement period of up to one year from the enactment date will be included as an adjustment to tax expense from continuing operations in the period the amounts are determined. During the quarter ended December 31, 2018, the Company completed its assessment of the impact of H.R. 1 and recorded an immaterial additional liability that is included in Income Taxes Payable in the Condensed Consolidated Balance Sheet as of December 31, 2018.

 

H.R. 1 subjects a U.S. shareholder to tax on global intangible low-taxed income (GILTI) earned by certain foreign subsidiaries.  The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. The Company has elected to treat GILTI book-tax differences as a period cost. In addition, the Company has elected to use the incremental cash tax savings approach (with and without method) in determining its U.S. valuation allowance.

At December 31, 2018, the Company has estimated the impact of the GILTI income inclusion as part of the Company’s estimate of its fiscal 2019 income taxes.  Due to the Company’s valuation allowance in the United States, it is projected that there will be no net income tax effect related to GILTI in the Company’s fiscal year ending March 31, 2019.

Management believes that within the next twelve months the Company will not have a significant reduction in uncertain tax benefits, including interest and penalties, related to positions taken with respect to credits and loss carryforwards on previously filed tax returns.

 

The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the provision for income taxes in the Condensed Consolidated Statements of Operations.

 

The Company is subject to taxation in the United States and various state and foreign jurisdictions.  Fiscal years 2013 through 2018 remain open to examination by federal tax authorities, and fiscal years 2011 through 2018 remain open to examination by California tax authorities.

 

The Company’s estimated annual effective income tax rate was approximately (22.6%) and (13.7%) as of December 31, 2018 and 2017, respectively. The annual effective tax rates as of December 31, 2018 and 2017 vary from the United States statutory income tax rate primarily due to valuation allowances in the United States, whereby pre-tax losses do not result in the recognition of corresponding income tax benefits and expenses, the foreign tax differential, and the impact of recent tax reform.

 

NOTE 6—FINANCIAL INSTRUMENTS

 

Fair value measurements

 

Authoritative accounting guidance for fair value measurements provides a framework for measuring fair value and related disclosures.  The guidance applies to all financial assets and financial liabilities that are measured

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on a recurring basis.  The guidance requires fair value measurement to be classified and disclosed in one of the following three categories:

 

Level 1: Valuations based on quoted prices in active markets for identical assets and liabilities.  The fair value of available-for-sale securities included in the Level 1 category is based on quoted prices that are readily and regularly available in an active market.  As of December 31, 2018, the Level 1 category included money market funds of $5.5 million, which were included in cash and cash equivalents on the Condensed Consolidated Balance Sheets.

 

Level 2: Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly. The fair value of available-for-sale securities included in the Level 2 category is based on the market values obtained from an independent pricing service that were evaluated using pricing models that vary by asset class and may incorporate available trade, bid and other market information and price quotes from well-established independent pricing vendors and broker-dealers. As of December 31, 2018, the Level 2 category included short-term investments $16.6 million and long-term investments of $10.2 million, which were comprised of certificates of deposit, government and agency securities.

 

Level 3: Valuations based on inputs that are unobservable and involve management judgment and the reporting entity’s own assumptions about market participants and pricing.  As of December 31, 2018, the Company’s Level 3 financial instruments measured at fair value on the Condensed Consolidated Balance Sheets consisted of the contingent consideration liability related to the acquisition of MikaMonu. The fair value of the contingent consideration liability was initially determined as of the acquisition date using unobservable inputs.  These inputs include the estimated amount and timing of future cash flows, the probability of success (achievement of the various contingent events) and a risk-adjusted discount rate of approximately 14.8% used to adjust the probability-weighted cash flows to their present value.  Subsequent to the acquisition date, at each reporting period, the contingent consideration liability is re-measured to fair value with changes recorded in selling, general and administrative expenses in the Consolidated Statements of Operations.

 

The fair value of financial assets measured on a recurring basis is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

 

in Active

 

Significant

 

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

 

 

Identical Assets

 

Observable

 

Unobservable

 

 

 

 

 

 

and Liabilities

 

Inputs

 

Inputs

 

 

    

December 31, 2018

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

5,468

 

$

5,468

 

$

 —

 

$

 —

 

Marketable securities

 

 

26,740

 

 

 —

 

 

26,740

 

 

 —

 

Total

 

$

32,208

 

$

5,468

 

$

26,740

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

4,496

 

$

 —

 

$

 —

 

$

4,496

 

 

 

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Fair Value Measurements at Reporting Date Using

 

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

 

in Active

 

Significant

 

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

 

 

Identical Assets

 

Observable

 

Unobservable

 

 

 

 

 

 

and Liabilities

 

Inputs

 

Inputs

 

 

    

March 31, 2018

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

6,788

 

$

6,788

 

$

 —

 

$

 —

 

Marketable securities

 

 

26,047

 

 

 —

 

 

26,047

 

 

 —

 

Total

 

$

32,835

 

$

6,788

 

$

26,047

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

5,514

 

$

 —

 

$

 —

 

$

5,514

 

 

The following table sets forth the changes in fair value of contingent consideration for the nine months ended December 31, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended December 31,

 

 

    

2018

    

2017

 

 

 

 

 

 

 

 

 

Contingent consideration, beginning of period

 

$

5,514

 

$

6,200

 

Change due to accretion

 

 

111

 

 

120

 

Payment of contingent consideration

 

 

(1,129)

 

 

(371)

 

Contingent consideration, end of period

 

$

4,496

 

$

5,949

 

 

Short-term and long-term investments

 

All of the Company’s short-term and long-term investments are classified as available-for-sale.  Available-for-sale debt securities with maturities greater than twelve months are classified as long-term investments when they are not intended for use in current operations.  Investments in available-for-sale securities are reported at fair value with unrecognized gains (losses), net of tax, as a component of accumulated other comprehensive income (loss) in the Condensed Consolidated Balance Sheets.  The Company had money market funds of $5.5 million and $6.8 million at December 31, 2018 and March 31, 2018, respectively, included in cash and cash equivalents on the Condensed Consolidated Balance Sheets.  The Company monitors its investments for impairment periodically and records appropriate reductions in carrying values when declines are determined to be other-than-temporary.

 

The following table summarizes the Company’s available-for-sale investments: