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| | our
a lack of working capital; adoption of the GCI interface, without which our Accelerator Engine products cannot function; 16
difficulties and delays in our product development, manufacturing, testing and marketing activities; | ·
| | adoption of the GCI protocol, without which our Bandwidth Engine products cannot function;
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timeliness of new product introductions; | ·
| | difficulties and delays in our product development, manufacturing, testing and marketing activities;
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the anticipated costs and technological risks of developing and bringing ICs to market; | ·
| | timeliness of new product introductions;
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the willingness of our manufacturing partners to assist successfully with fabrication; | ·
| | the anticipated costs and technological risks of developing and bringing ICs to market;
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our ability to qualify our products for mass production and achieve wafer yield levels and the final test results necessary to be price competitive; | ·
| | the willingness of our manufacturing partners to assist successfully with fabrication;
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the availability of quantities of ICs supplied by our manufacturing partners at a competitive cost; | ·
| | our ability to qualify our products for mass production and achieve wafer yield levels and the final test results necessary to be price competitive;
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our ability to generate the desired gross margin percentages and return on our product development investment; | ·
| | the availability of quantities of ICs supplied by our manufacturing partners at a competitive cost;
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competition from established IC suppliers; | ·
| | our ability to generate the desired gross margin percentages and return on our product development investment;
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the adequacy of our IP protection for our proprietary IC designs and technologies; | ·
| | competition from established IC suppliers;
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customer concerns over our financial condition and viability to be a long-term profitable supplier; and the vigor and growth of markets served by our current and prospective customers. | ·
| | the adequacy of our intellectual property protection for our proprietary IC designs and technologies;
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| | customer concerns over our financial condition and viability to be a long-term profitable supplier;
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| | the vigor and growth of markets served by our current and prospective customers; and
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| | our lack of recent experience as a fabless semiconductor company making and selling proprietary ICs.
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If we experience significant delays in bringing our IC products to market, or if customer adoption of our products is delayed or if our customers’ products that include our IC products are not successful, this could have a material adverse effect on our anticipated revenues in upcoming years due to the potential loss of design wins and future revenues. We may continue to experience significant delays in the future. Our main objective is the development and sale of our productstechnologies to cloud networking, communicationssecurity, test and data center systemsvideo system providers and their subsystem and component vendors and, if demand for these products does not grow, we may not achieve revenue growth and our strategic objectives. We market and sell our ICs and IP to cloud networking, communications, and data center and other equipment providers and their subsystem and component vendors. We believe our future business and financial success depends on market acceptance and increasing sales of these products. In order to meet our growth and strategic objectives, networking infrastructure OEMs must incorporate our products into their systems and the demand for their systems must grow as well. We cannot provide assurance that sales of our products to these OEMs will increase substantially in the future or that the demand for our customers’ systems will increase. Our future revenues from these products may not increase in accordance with our growth and strategic objectives if, instead, our OEM customers modify their product designs, select products sold by our competitors or develop their own proprietary ICs.technologies. Moreover, demand for their products that incorporate our ICstechnologies may not grow or result in significant sales of such products due to factors affecting the customers and their business such as industry downturns, declines in capital spending in the enterprise and carrier markets andor unfavorable macroeconomic conditions. Thus, the future success of our business depends in large part on factors outside our control, and sales of our products may not meet our revenue growth and strategic objectives. 17
Our failure to continue to develop new products and enhance our products on a timely basis could diminish our ability to attract and retain customers. The existing and potential markets for our products are characterized by ever-increasing performance requirements, evolving industry standards, rapid technological change and product obsolescence. These characteristics lead to frequent new product introductions and enhancements,periodic changes in customer requirements, shorter product life cycles and changes in industry demands.demands and mandate new product introductions and enhancements to maintain customer engagements and design wins. In order to attain and maintain a significant position in the market, we will need to continue to enhance and evolve our products and the underlying proprietary technologies in anticipation of these market trends.trends although we do not have a large engineering staff. Our future performance depends on a number of factors, including our ability to: | ·
| | identify target markets and relevant emerging technological trends;
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identify target markets and relevant emerging technological trends; | ·
| | develop and maintain competitive technology by improving performance and adding innovative features that differentiate our products from alternative technologies;
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develop and maintain competitive technology by improving performance and adding innovative features that differentiate our products from alternative technologies; | ·
| | enable the incorporation of our products into the customers’ products on a timely basis and at competitive prices;
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enable the incorporation of our products into customers’ products on a timely basis and at competitive prices; | ·
| | develop our products to be manufactured at smaller process geometries; and
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develop and establish a market for our VAE products; and | ·
| | respond effectively to new technological developments or new product introductions by others.
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respond effectively to new technological developments or new product introductions by others. Our failure to enhance our existing products and develop future products that achieve broad market acceptance couldwill harm our competitive position and impede our future growth. Our ICs have a lengthy sales cycle, which makes it difficult to predict success in this market and the timing of future revenue. Our ICs have a lengthy sales cycle, ranging from six to 24 months from the date of our initial proposal to a prospective customer until the date on which the customer confirms that it has designed our product into its system. As lengthy, or anAn even lengthier period could ensue before we would know the volume of products that such customer will, or is likely to, order. A number of factors can contribute to the length of the sales cycle including technical evaluations of our products by the customers, the design process required to integrate our products into the customers’ products and the timing of the customers’ new product announcements. In anticipation of product orders, we may incur substantial costs before the sales cycle is complete and before we receive any customer payments. As a result, in the event that a sale is not completed or is cancelled or delayed, we may have incurred substantial expenses, making it more difficult for us to become profitable or otherwise negatively impacting our financial results. Furthermore, because of this lengthy sales cycle, the recording of revenues from our selling efforts may be substantially delayed, our ability to forecast our future revenue may be more limited and our revenue may fluctuate significantly from quarter to quarter. We cannot provide any assurances that our efforts to build a strong and profitable business based on the sale of ICs will succeed. If these efforts are not successful, in light of the substantial resources that we have invested, our future operating results and cash flows could be materially and adversely affected. The semiconductor industry is cyclical in nature and subject to periodic downturns, which can negatively affect our revenue. The semiconductor industry is cyclical and has experienced pronounced downturns for sustained periods of up to several years. To respond to any downturn, many semiconductor manufacturers and their customers will slow their research and development activities, cancel or delay new product developments, reduce their workforces and inventories and take a cautious approach to acquiring new equipment and technologies. As a result, our business has been in the past and could be adversely affected in the future by an industry downturn which could negatively impact our future revenue and profitability. Also, the cyclical nature of the semiconductor industry may cause our operating results to fluctuate significantly from year-to-year, which may tend to increase the volatility of the price of our common stock.year-to-year. 18
We expect our licensing and1T-SRAM royalty revenues to decrease compared with our historical results, and there is no guarantee revenues from our IC products will replace these lost revenues in the near future. In 2011, we began to place greater emphasis on our IC business and re-deploy engineering, marketing and sales resources from IP to IC activities. We are no longer actively pursuing new license arrangements for our 1T-SRAM technologies, and, as a result, our license and1T-SRAM royalty revenues in 2017 declined when compared with prior years. In addition,may decline the production volumes of the current royalty-bearing products shipped by our licensees are expected to decrease; therefore welicensees. We expect our royalty revenue to decrease in 20182021 and future periods. Historically, royalties have generated a 100% gross margin, and any decrease in royalties adversely affects our gross margin, operating results and cash flows.
Our revenue has been highly concentrated among a small number of licensees and customers, and our results of operations could be harmed if we lose a key revenue source and fail to replace it. Our overall revenue has been highly concentrated, with a few customers accounting for a significant percentage of our total revenue. For the year ended December 31, 2017,2020, our three largest customers represented 46%, 17% and 11%approximately 66% of total revenue, respectively.revenue. For the year ended December 31, 2016,2019, our three largest customers represented 47%, 21% and 13%approximately 61% of total revenue, respectively. For the year ended December 31, 2015, our three largest customers represented 34%, 31% and 12% of total revenue, respectively.revenue. We expect that a relatively small number of customers will continue to account for a substantial portion of our revenue for the foreseeable future. As a result of this revenue concentration, our results of operations could be adversely affected by the decision of a single key licensee or customer to cease using our technology or products or by a decline in the number of products that incorporate our technology that are sold by a single licensee or customer or by a small group of licensees or customers. Our revenue concentration may also pose credit risks which could negatively affect our cash flow and financial condition. We might also face credit risks associated with the concentration of our revenue among a small number of licensees and customers. As ofAt December 31, 2017, one customer2020, four customers represented 63%79% of total trade receivables. Our failure to collect receivables from any customer that represents a large percentage of receivables on a timely basis, or at all, could adversely affect our cash flow or results of operations and might cause our stock price to fall.operations. Our products must meet exact specifications and defects and failures may occur, which may cause customers to return or stop buying our products. Our customers generally establish demanding specifications for quality, performance and reliability that our products must meet. However, our products are highly complex and may contain defects and failures when they are first introduced or as new versions are released. If defects and failures occur in our products during the design phase or after, we could experience lost revenues, increased costs, including warranty and customer support expenses and penalties for non-performance stipulated in customer purchase agreements, delays in or cancellations or rescheduling of orders or shipments, product returns or discounts, diversion of management resources or damage to our reputation and brand equity, and in some cases consequential damages, any of which would harm our operating results. In addition, delays in our ability to fill product orders as a result of quality control issues may negatively impact our relationship with our customers. We cannot assure you that we will have sufficient resources to satisfy any asserted claims. Furthermore, any such defects, failures or delays may be particularly damaging to us as we attempt to establish our reputation as a reliable provider of IC and IP products. 19
Because we sell our IC products on a purchase order basis and rely on estimated forecasts of our customers’ needs, inaccurate forecasts could adversely affect our business. We expect to sell our IC products pursuant to individual purchase orders rather than long-term purchase commitments. Therefore, we will rely on estimated demand forecasts, based upon input from our customers, to determine how much product to manufacture. Because our sales will beare based primarily on purchase orders, our customers may cancel, delay or otherwise modify their purchase commitments with little or no notice to us. For these reasons, we will generally have limited visibility regarding our customers’ product needs. In addition, the product design cycle for networking OEMs is lengthy and it may be difficult for us to accurately anticipate when they will commence commercial shipments of products that include our ICs. Furthermore, if we experience substantial warranty claims, our customers may cancel existing orders or cease to place future orders. Any cancellation, delay or other modification in our customers’ orders could significantly reduce our revenue, cause our operating results to fluctuate from period to period and make it more difficult for us to predict our revenue. In the event of a cancellation or reduction of an order, we may not have enough time to reduce operating expenses to mitigate the effect of the lost revenue on our business. If we overestimate customer demand for our products, we may purchase products from our manufacturers that we cannot sell. Conversely, if we underestimate customer demand or if sufficient manufacturing and testing capacity were are unavailable, we would forego revenue opportunities and could lose market share in the markets served by our products and could incur penalty payments under our customer purchase agreements. In addition, our inability to meet customer requirements for our products could lead to delays in product shipments, force customers to identify alternative sources and otherwise adversely affect our ongoing relationships with our customers.
We depend on contract manufacturers for a significant portion of our revenue from the sale of our IC products. Many of our current and prospective OEM customers use third party contract manufacturers to manufacture their systems and these contract manufacturers purchase our products directly from us on behalf of the OEMs. Although we expect to work with our OEM customers in the design and development phases of their systems, these OEMs often give contract manufacturers some authority in product purchasing decisions. If we cannot compete effectively for the business of these contract manufacturers, or if any of the contract manufacturers that work with our OEM customers experience financial or other difficulties in their businesses, our revenue and our business could be adversely affected. For example, if a contract manufacturer becomes subject to bankruptcy proceedings, we may not be able to obtain our products held by the contract manufacturer or recover payments owed to us by the contract manufacturer for products already delivered to the contract manufacturer. If we are unable to persuade contract manufacturers to purchase our products, or if the contract manufacturers are unable to deliver systems with our products to OEMs on a timely basis, our business would be adversely affected. We rely on an independent foundriesfoundry and contractors for the manufacture, assembly, testing and packaging of our integrated circuits, and the failure of any of these third parties to deliver products or otherwise perform as requested could damage our relationships with our customers and harm our sales and financial results. As a fabless semiconductor company, we rely on third parties for substantially all of our manufacturing operations. We depend on these parties to supply us with material in a timely manner that meets our standards for yield, cost and quality. We do not have long-term supply contracts with any of our suppliers or manufacturing service providers, and therefore they are not obligated to manufacture products for us for any specific period, in any specific quantity or at any specified price except as may be provided in a particular purchase order. Any problems with our manufacturing supply chain, including disruptions due to the COVID-19 global pandemic,could adversely impact our ability to ship our products to our customers on time and in the quantity required which in turn could damage our customer relationships and impede market acceptance of our IC solutions. 20
Our third partythird-party wafer foundries,foundry and testing and assembly vendors are located in regions at high risk for earthquakes and other natural disasters.disasters and adverse consequences related to the outbreak of contagious diseases such as COVID-19. Any disruption to the operations of these foundries and vendors resulting from earthquakes or other natural disasters could cause significant delays in the development, production, shipment and sales of our IC products. TSMC, which manufactures our products, is located in Asia, as are other foundries we may use in the future. EAG, which handlesOur vendors that provide substrates and wafer sorting and handle the testing of our products isare headquartered in either Asia or the San Francisco Bay Area of California. Our primary manufacturing operations are located in San Jose, California. The risk of an earthquake in the Pacific Rim region is significant due to the proximity of major earthquake fault lines. The occurrence of earthquakes or other natural disasters could result in the disruption of the wafer foundry or assembly and test capacity of the third parties that supply these services to us and may impede our research and development efforts as well as our ability to market and sell our products. We may not be able to obtain alternate capacity on favorable terms, if at all. The COVID-19 global pandemic, along with outbreaks of new contagious diseases or the resurgence of existing diseases that significantly affect the Asia-Pacific region could disrupt the operations of our key suppliers and manufacturing partners. Any claim that our products or technology infringe third party intellectual propertyIP rights could increase our costs of operation and distract management and could result in expensive settlement costs or the discontinuance of our technology licensing or product offerings. In addition, we may incur substantial litigation expense which would adversely affect our profitability. The semiconductor industry is characterized by vigorous protection and pursuit of intellectual propertyIP rights or positions which has resulted in often protracted and expensive litigation. We are not aware of any third party intellectual propertyIP that our products or technology would infringe. However, like many companies of our size with limited resources, we have not searched for all potentially applicable intellectual propertyIP in the public databases. It is possible that a third party now has, or may in the future obtain, patents or other intellectual property rights that our products or technology may now, or in the future, infringe. Our licensees and IC customers, or we, might, from time to time, receive notice of claims that we have infringed patents or other intellectual propertyIP rights of others. Litigation against us can result in significant expense and divert the efforts of our technical and management personnel whether or not the litigation has merit or results in a determination adverse to us. The discovery of defects in our technology and products could expose us to liability for damages. The discovery of a defect in our technologies and products could lead our customers to seek damages from us. Many of our agreements with customers include provisions waiving implied warranties regarding our technology and products and limiting our liability to our customers. We cannot be certain, however, that the waivers or limitations of liability contained in our agreements with customers will be enforceable. Royalty amounts owed to us might be difficult to verify, and we might find it difficult, expensive and time-consuming to enforce our license agreements. The standard terms of our 1T-SRAM license agreements require our licensees to document the manufacture and sale of products that incorporate our technology and generally report this data to us after the end of each quarter. We have the right to audit these royalty reports periodically, although we have not conducted any such audits recently. These audits can be expensive, time-consuming and potentially detrimental to our business relationships. A failure to fully enforce the royalty provisions of our license agreements could cause our revenue to decrease and impede our ability to achieve and maintain profitability. We might not be able to protect and enforce our intellectual propertyIP rights which could impair our ability to compete and reduce the value of our technology. Our technology is complex and is intended for use in complex SoCsICs and networking systems. Our licensees’ products utilize our embedded memory and/or interface technology and a large number of companies manufacture and market these products. Because of these factors, policing the unauthorized use of our intellectual propertyIP is difficult and expensive. We cannot be certain that we will be able to detect unauthorized use of our technology or prevent other parties from designing and marketing unauthorized products based on our technology. In the event we identify any 21
past or present infringement of our patents, copyrights or trademarks, or any violation of our trade secrets, confidentiality procedures or licensing agreements, we cannot assure you that the steps taken by us to protect our proprietary information will be adequate to prevent misappropriation of our technology. Our inability to adequately protect our intellectual propertyIP would reduce significantly the barriers of entry for directly competing technologies and could reduce the value of our technology. Furthermore, we might initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Litigation by us could result in significant expense and divert the efforts of our technical and management personnel whether or not such litigation results in a determination favorable to us. Our existing patents might not provide us with sufficient protection of our intellectual property,IP, and our patent applications might not result in the issuance of patents, either of which could reduce the value of our core technology and harm our business. We rely on a combination of patents, trademarks, copyrights, trade secret laws and confidentiality procedures to protect our intellectual propertyIP rights. We cannot be sure that any patents will be issued from any of our pending applications or that any claims allowed from pending applications will be of sufficient scope or strength, or issued in all countries where our products can be sold, to provide meaningful protection or any commercial advantage to us. In December 2011, we sold 43 United States and 30 related foreign patents, which reduced the size of our patent portfolio and diminishes our ability to assert counterclaims in the defense of actions against us that may arise. Also, competitors might be able to design around our patents. Failure of our patents or patent applications to provide meaningful protection might allow others to utilize our technology without any compensation to us. The discovery of defects in our technology and products could expose us to liability for damages.
The discovery of a defect in our technologies and products could lead our customers to seek damages from us. Many of our agreements with customers include provisions waiving implied warranties regarding our technology and products and limiting our liability to our customers. We cannot be certain, however, that the waivers or limitations of liability contained in our agreements with customers will be enforceable.
If we fail to retain key personnel, our business and growth could be negatively affected. Our business has been dependent to a significant degree upon the services of a small number of executive officers and technical employees. The loss of key personnel could negatively impact our technology development efforts, our ability to deliver products under our existing agreements, maintain strategic relationships with our partners and obtain new customers. We generally have not entered into employment or non-competition agreements with any of our employees and do not maintain key-man life insurance on the lives of any of our key personnel. 22
We may incur additional debt in the future, subject to certain limitations contained in our senior secured convertible notes.future. The degree to which we are leveraged and the restrictions governing our indebtedness could have important consequences including, but not limited to: | ·
| | limiting our ability to service all of our debt obligations;
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limiting our ability to service all of our debt obligations; | ·
| | impacting our ability to incur additional indebtedness or obtain additional financing in the future for working capital, capital expenditures, acquisitions or general corporate or other purposes;
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impacting our ability to incur additional indebtedness or obtain additional financing in the future for working capital, capital expenditures, acquisitions or general corporate or other purposes; | ·
| | increasing our vulnerability to general economic downturns and adverse industry conditions;
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increasing our vulnerability to general economic downturns and adverse industry conditions; | ·
| | limiting our flexibility in planning for, or reacting to, changes in our business and our industry; and
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limiting our flexibility in planning for, or reacting to, changes in our business and our industry; and | ·
| | limiting our ability to engage in certain transactions or capitalize on acquisition or other business opportunities.
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limiting our ability to engage in certain transactions or capitalize on acquisition or other business opportunities. If we are in violation of the terms of the Notesany indebtedness in the future and do not receive a waiver, the notedebt holders could choose to accelerate payment on all outstanding loan balances. If we needed to obtain replacement financing, we may not be able to quickly obtain equivalent or suitable replacement financing. If we are unable to secure alternative sources of funding, such acceleration would have a material adverse impact on our financial condition. Our failureability to successfully addressutilize our net operating loss carryforwards may be limited as a result of an “ownership change,” as defined in Section 382 of the potential difficulties associatedInternal Revenue Code of 1986, as amended. As of December 31, 2020, we had over $200 million of net operating loss, or NOL, carryforwards for U.S. federal tax purposes. Under U.S. federal income tax law, we generally can use our NOL carryforwards (and certain related tax credits) to offset ordinary taxable income, thereby reducing our U.S. federal income tax liability, for up to 20 years from the year in which the losses were generated, after which time they will expire. Our California NOL carryforwards (and certain related tax credits) generally may be used to offset future state taxable income for 20 years from the year in which the losses are generated, depending on the state, after which time they will expire. The rate at which we can utilize our NOL carryforwards is limited (which could result in NOL carryforwards expiring prior to their use) each time we experience an “ownership change,” as determined under Section 382 of the Internal Revenue Code. A Section 382 ownership change generally occurs if a shareholder or a group of shareholders who are deemed to own at least 5% of our common stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. If an ownership change occurs, Section 382 generally would impose an annual limit on the amount of post-ownership change taxable income that may be offset with pre-ownership change NOL carryforwards equal to the product of the total value of our international operationsoutstanding equity immediately prior to the ownership change (reduced by certain items specified in Section 382) and the U.S. federal long-term tax-exempt interest rate in effect at the time of the ownership change. A number of special and complex rules apply in calculating this Section 382 limitation. While the complexity of Section 382 makes it difficult to determine whether and when an ownership change has occurred, and a formal study has not been performed, we believe that a Section 382 ownership change occurred as a result of a financing effected in October 2018. The Company believes this Section 382 limitation will result in substantially all of our federal and state NOLs federal tax credit carryforwards incurred prior to October 2018 expiring before they can be utilized. An additional ownership change may occur upon the consummation of this offering. In addition, our ability to use our NOL carryforwards will be limited to the extent we fail to generate enough taxable income in the future before they expire. Existing and future Section 382 limitations and our inability to generate enough taxable income in the future could increase our costs of operation and negatively impact our revenue. We are subject to many difficulties posed by doing business internationally, including:
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| | foreign currency exchange fluctuations;
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| | unanticipated changesresult in local regulation;
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| | potentially adverse tax consequences, such as withholding taxes and transfer pricing issues;
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| | political and economic instability; and
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| | reduced or limited protection of our intellectual property.
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Because we anticipate that integrated circuit sales to companies that operate primarily outside the United States may account for a substantial portion of our revenueNOL carryforwards expiring before they are used. We have recorded a full valuation allowance for our deferred tax assets.
23
Acquisitions or other business combinations that we pursue in the future, whether or not consummated, could result in other operating and financial difficulties. In the future we may seek to acquire additional product lines, technologies or businesses in an effort to increase our growth, enhance our ability to compete, complement our product offerings, enter new and adjacent markets, obtain access to additional technical resources, enhance our IP rights or pursue other competitive opportunities. If we seek acquisitions or other business combinations, we may not be able to identify suitable candidates at prices we consider appropriate. We cannot readily predict the timing or size of our future acquisitions or combinations, or the success of any such transactions. To the extent that we consummate acquisitions, combinations or investments, we may face financial risks as a result, including increased costs associated with merged or acquired operations, increased indebtedness, economic dilution to gross and operating profit and earnings per share, or unanticipated costs and liabilities. Acquisitions may involve additional risks, including: the acquired product lines, technologies or businesses may not improve our financial and strategic position as planned; we may determine we have overpaid for the product lines, technologies or businesses, or that the economic conditions underlying our acquisition have changed; we may have difficulty integrating the operations and personnel of the acquired company; we may have difficulty retaining the employees with the technical skills needed to enhance and provide services with respect to the acquired product lines or technologies; the acquisition may be viewed negatively by customers, employees, suppliers, financial markets or investors; we may have difficulty incorporating the acquired product lines or technologies with our existing technologies; we may encounter a competitive response, including price competition or IP litigation; we may become a party to product liability or IP infringement claims as a result of our sale of the acquired company’s products; we may incur one-time charges, such as for acquired in-process research and development costs, and restructuring charges; we may acquire goodwill and other intangible assets that are subject to impairment tests, which could result in future periods,impairment charges; our ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the occurrencecomplexity of managing geographically or culturally diverse enterprises; and our due diligence process may fail to identify significant existing issues with the target business. From time to time, we may enter into negotiations for acquisitions or investments that are not ultimately consummated. These negotiations could result in significant diversion of management time, as well as substantial out-of-pocket costs, any of these circumstanceswhich could significantly increasehave a material adverse effect on our costs of operation, delay the timing of our revenuebusiness, operating results and harm our profitability.financial condition. Provisions of our certificate of incorporation and bylaws or Delaware law might delay or prevent a change of controlchange-of-control transaction and depress the market price of our stock. Various provisions of our certificate of incorporation and bylaws might have the effect of making it more difficult for a third party to acquire, or discouraging a third party from attempting to acquire, control of our company. These provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock. Certain of these provisions eliminate cumulative voting in the election of directors, limit the right of stockholders to call special meetings and establish specific procedures for director nominations by stockholders and the submission of other proposals for consideration at stockholder meetings. 24
We are also subject to provisions of Delaware law whichthat could delay or make more difficult a merger, tender offer or proxy contest involving our company. In particular, Section 203 of the Delaware General Corporation Law prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years unless specific conditions are met. Any of these provisions could have the effect of delaying, deferring or preventing a change in control, including without limitation, discouraging a proxy contest or making more difficult the acquisition of a substantial block of our common stock. Under our certificate of incorporation, our board of directors may issue up to 20,000,000 shares of preferred stock, potentially without stockholder approval on such terms as the board might determine. The rights of the holders of common stock will be subject to, and might be adversely affected by, the rights of the holders of any preferred stock that might be issued in the future. Our stockholder rights plan could prevent stockholders from receiving a premium over the market price for their shares from a potential acquirer.
We adopted a stockholder rights plan that generally entitles our stockholders to rights to acquire additional shares of our common stock when a third party acquires 15% of our common stock or commences or announces its intent to commence a tender offer for at least 15% of our common stock. The plan also includes an exception to permit the acquisition of shares representing more than 15% of our common stock by a brokerage firm that manages independent customer accounts and generally does not have any discretionary voting power with respect to such shares. This plan could delay, deter or prevent an investor from acquiring us in a transaction that could otherwise result in stockholders receiving a premium over the market price for their shares of common stock. Our intention is to maintain and enforce the terms of this plan, which could delay, deter or prevent an investor from acquiring us in a transaction that could otherwise result in stockholders receiving a premium over the market price for their shares of common stock.
Potential volatility of the price of our common stock could negatively affect your investment. We cannot assure you that there will continue to be an active trading market for our common stock. Historically, the stock market, as well as our common stock, has experienced significant price and volume fluctuations. Market prices of securities of technology companies have been highly volatile and frequently reach levels that bear no relationship to the operating performance of such companies. These market prices generally are not sustainable and are subject to wide variations. If our common stock trades to unsustainably high levels, it is likely that the market price of our common stock will thereafter experience a material decline. In the past, our board of directors approved stock repurchase programs, and any future program could impact the price of our common stock and increase volatility. In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We could be the target of similar litigation in the future. Securities litigation could cause us to incur substantial costs, divert management’s attention and resources, harm our reputation in the industry and the securities markets and negatively impact our operating results. Our stock price could drop, and there could be significantly less trading activity in our stock, if securities or industry analysts downgrade our stock or do not publish research or reports about our business.
Our stock price and the trading market for our stock are likely to be affected significantly by the research and reports concerning our company and our business which are published by industry and securities analysts. We do not have any influence or control over these analysts, their reports or their recommendations. Our stock price and the trading market for our stock could be negatively affected if any analyst downgrades our stock, publishes a report which is critical of our business, or discontinues coverage of us.
We are a “smaller reporting company” and, as a result of the reduced disclosure and governance requirements applicable to smaller reporting companies, our common stock may be less attractive to investors. We are a “smaller reporting company,” meaning that we are not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent company that is not a “smaller reporting company,” have a public float of less than $75 million and have annual revenues of less than $50 million during the most recently completed fiscal year. As a “smaller reporting company,” we are subject to lesser disclosure obligations in our SEC filings compared to other issuers. Specifically, “smaller reporting companies” are able to provide simplified executive compensation disclosures in their filings, are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered public accounting firms provide an attestation report on the effectiveness of internal control over financial reporting and have certain other decreased disclosure obligations in their SEC filings, including, among other things, only being required to provide two years of audited financial statements in annual reports. Decreased disclosures in our SEC filings due to our status as a “smaller reporting company” may make it harder for investors to analyze our operating results and financial prospects. If we fail to maintain compliance with the continued listing requirements of the Nasdaq CapitalStock Market, our common stock may be delisted and the price of our common stock and our ability to access the capital markets could be negatively impacted. Our common stock currently trades on The NASDAQ Stockthe Nasdaq Capital Market, (Nasdaq)or Nasdaq, under the symbol “MOSY.” This market has continued listing standards that we must comply with in order to maintain the listing of our common stock. The continued listing standards include, among others, a minimum bid price requirement of $1.00 per share and any of: (i) a minimum stockholders’ equity of $2.5 million; (ii) a market value of listed securities of at least $35.0 million; or (iii) net income from continuing operations of $500,000 in the most recently completed fiscal year or in the two of the last three fiscal years. Our results of operations and fluctuating stock price directly impact our ability to satisfy these continued listing standards. In the event we are unable to maintain these continued listing standards, our common stock may be subject to delisting from the Nasdaq Capital Market.Nasdaq. We have received deficiency letters from the Nasdaq from time to time, and while we have always regained compliance, we may receive them again in the future. Ultimately such deficiencies, if not remedied, could cause Nasdaq to delist our common stock. 25
If we arewere to be delisted, we would expect our common stock to be traded in the over-the-counter market which could adversely affect the liquidity of our common stock. Additionally, we could face significant material adverse consequences, including: | ·
| | a limited availability of market quotations for our common stock;
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| | a reduced amount of analyst coverage;
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| | a decreased ability to issue additional securities or obtain additional financing in the future;
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| | reduced liquidity for our stockholders;
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| | potential loss of confidence by customers, collaboration partners and employees; and
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| | loss of institutional investor interest.
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21a limited availability of market quotations for our common stock;
a reduced amount of analyst coverage; Table of Contentsa decreased ability to issue additional securities or obtain additional financing in the future;
reduced liquidity for our stockholders; potential loss of confidence by customers, collaboration partners and employees; and loss of institutional investor interest. Item 1B. Unresolved Staff Comments None. Item 2. Properties Our principal administrative, sales, marketing, support and research and development functions are located in a leased facility in San Jose, California. We currently occupy approximately 10,000 square feet of space in the San Jose facility, and the lease for which extends through November 2020.until July 2022. We believe that our existing facilities arefacility is adequate to meet our current needs. Item 3. Legal Proceedings The information set forth under the “Legal Matters” subheading in Note 9 (Commitments and Contingencies) of the Notes to Consolidated Financial Statements in Part II, Item 15, of this Annual Report on Form 10-K is incorporated herein by reference. Item 4. Mine Safety Disclosures Not applicable. 26
Part II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information for Common Stock Our common stock is currently listed on the Nasdaq Capital Market of the NASDAQ Stock Market under the symbol MOSY. The following table sets forth the range of high and low sales prices of our common stock for each period indicated. The table has been modified to reflect the impact of a 1-for-10 reverse stock split effected in February, 2017. See Note 1 of the consolidated financial statements in Item 15 for further discussion of the reverse stock split.“MOSY”. | | | | | | | | Quarter ended | | High | | Low | | December 31, 2017 | | $ | 1.45 | | $ | 0.64 | | September 30, 2017 | | $ | 1.81 | | $ | 0.89 | | June 30, 2017 | | $ | 2.70 | | $ | 0.64 | | March 31, 2017 | | $ | 4.32 | | $ | 2.00 | | December 31, 2016 | | $ | 7.80 | | $ | 2.30 | | September 30, 2016 | | $ | 8.03 | | $ | 4.10 | | June 30, 2016 | | $ | 6.50 | | $ | 3.23 | | March 31, 2016 | | $ | 11.70 | | $ | 5.70 | | December 31, 2015 | | $ | 16.20 | | $ | 10.80 | | September 30, 2015 | | $ | 20.30 | | $ | 13.80 | | June 30, 2015 | | $ | 23.70 | | $ | 18.30 | | March 31, 2015 | | $ | 23.70 | | $ | 16.80 | |
Holders of Record As of December 31, 2017,2020, there were sixfour holders of record of our common stock. The actual number of stockholders is significantly greater than this number of record stockholders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees. This number of stockholders of record also does not include stockholders whose shares may be held in trust by other entities. Dividend Policy
We have not declared or paid any cash dividends on our common stock and presently intend to retain future earnings, if any, to fund the development and growth of our business and, therefore, do not anticipate paying any cash dividends in the foreseeable future.
Securities Authorized for Issuance under Equity Compensation Plan For information regarding securities authorized for issuance under equity compensation plans, please refer to Item 12.—12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Item 6. Selected Financial Data Not applicable. 27
Item 7. Management’s Discussion and Analysis ofof 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 consolidated financial statements and notes included in this report.Report. Overview Our strategy and primary business objective is to becomebe a profitable, IP-rich fabless semiconductor company focused on the developmentoffering ICs and sale of integrated circuits, or ICs,related software and IP that deliver unparalleled memory bandwidth and access rate performance for the high-speedhigh-performance data processing in cloud networking, communications, storagesecurity appliances, video, test and monitoring, and data center markets.systems. Our solutions deliver time-to-market, performance, power, area and economic benefits for system original equipment manufacturers, or OEMs. Our primary product line is marketed under the Accelerator Engine name and comprises our Bandwidth Engine ICs combineand Programmable HyperSpeed Engine IC products, which integrate our proprietary, 1T-SRAM® high- density embedded memory, integrated macro functions and high-speed serial interface, or SerDes interface, with our intelligent access technology and a highly efficient interface protocol. Historically, our primary business was the design, development, marketing, sale and support of differentiated intellectual property, or IP, including high-density embedded memory and high-speed parallela highly-efficient serial interface protocol resulting in a monolithic memory IC solution optimized for memory bandwidth and SerDes interface used in advanced systems-on-chips, or SoCs.transaction access performance. In April 2017, we implemented restructuring initiatives to effect a reduction in our workforce and associated operating expenses, net loss and cash burn. Under these initiatives, we significantly reduced our headcount, closed our international sales offices and relocated and downsized our corporate headquarters. We are now focusing our resources primarily on producing and selling our existing products, and have substantially curtailed new product development. Our second-generation Bandwidth Engine, or Bandwidth Engine 2, products are expected to be our primary revenue source through at least 2019, andfor the foreseeable future. As we expect theseare not developing new IC products, tofrom a product development perspective, we continue to generateleverage our current technologies and core competencies to expand our product offerings without incurring significant revenue thereafter. We expectadditional R&D expenses. In 2020, we began offering for license the first of our third generation BandwidthVirtual Accelerator Engine, or BandwidthVAE, products which consist of software, firmware and related IP. This new product line will include multiple function accelerator platform products, which target specific application functions and will use a common software interface to allow performance scalability over multiple hardware environments. These function accelerator platform products are hardware agnostic and operate with or without one of our Accelerator Engine 3, productsICs. This software-defined, hardware-accelerated platform architecture utilizes an internally developed graphical memory engine architecture to provide flexible data classification and PSE products to commence production in 2018,analysis capability. We believe the technology will generate new opportunities that require less up-front architectural changes by system designers and begin generating meaningful revenue in 2019.provide a scalable performance roadmap of options using our Accelerator Engine ICs. Despite our limited new IC product development efforts, we believe our current hardware and software/firmware product portfolio positions us for future growth and profitability. We will continue to seek third-party funding for new product development efforts.
Our future successSubsequent to December 31, 2020, we received gross proceeds of approximately $9.3 million from financing activities. In February 2021, we completed a registered direct offering and ability sold 1,487,601 shares of common stock at a price of $5.00 per share to achieveinstitutional investors. Net proceeds of the offering, after placement agent and maintain profitability are dependent onother fees and expenses payable by us, were approximately $6,800,000. During January and February 2021, we received a total of $2,477,657 of proceeds from the marketing and salesexercise of 1,032,357 warrants to purchase shares of common stock at a price of $2.40 per share. We used approximately $3 million of these proceeds to pay in full the outstanding balance of our IC products into networking, communications and other markets requiring high-bandwidth memory access.senior secured convertible notes.
We incurred net losses of approximately $11$3.8 million and $32$2.6 million for the years ended December 31, 20172020 and 2016,2019, respectively, and had an accumulated deficit of approximately $225$242.7 million as of December 31, 2017. 2020. These and prior year losses have resulted in significant negative cash flows for almost a decade and have necessitated that we raise substantial amounts of additional capital during this period. To date, we have primarily financed our operations through multiple offerings of common stock to investors and affiliates, as well as asset sale transactions and one offering of convertible notes. In February 2021, we completed a registered direct offering of our common stock for net proceeds of approximately $6.8 million. We may continue to incur operating losses and will need to increase revenues substantially beyond levels that we have attained in the past in order to generate sustainable operating profit and sufficient cash flows to continue doing business without raising additional capital from time to time. As 28
COVID-19 The global outbreak of the coronavirus disease 2019 (COVID-19) was declared a resultpandemic by the World Health Organization and a national emergency by the U.S. government in March 2020. This has negatively affected the U.S. and global economy, disrupted global supply chains, significantly restricted travel and transportation, resulted in mandated closures and orders to “shelter-in-place” and created significant disruption of the financial markets. The full extent of the COVID-19 impact on our operational and financial performance will depend on future developments, including the duration and spread of the pandemic and related actions taken by the U.S. and foreign government agencies to prevent disease spread, all of which are uncertain, out of our expected operating lossescontrol, and cash burn for the foreseeable future, recurring losses from operations, ifcannot be predicted. In March 2020, Santa Clara County in California, where we are unablebased, issued a ”shelter-in-place” order (the Order) that was initially effective through April 7, 2020 and has now been extended. We have been complying with the Order and have minimized business activities at our San Jose headquarters facility (our only facility). We have implemented a teleworking policy for our employees and contractors to raise sufficient capital through additional debt or equity arrangements, there will be uncertainty regardingreduce on-site activity at our facility. The Order impacted our ability to maintain liquidity sufficientproduce and ship our IC products in the second half of March, as certain of our vendors in the San Francisco Bay Area closed in accordance with the Order. In April, we resumed shipments of our IC products, as we and our vendors are supporting shipment of components for critical infrastructure, as defined by the federal government; however, our employees are generally restricted from visiting our customer and vendor sites in compliance with the Order, and, in some cases, we have limited ability to operateconduct certain product testing and development activities. We remain diligent in continuing to identify and manage risks to our business effectively. There cangiven the changing uncertainties related to COVID-19. The ultimate impact of the COVID-19 pandemic on our business and results of operations is uncertain and difficult to predict, and we are closely monitoring impacts, especially to customer programs and our supply chain. We expect that the impacts of the COVID-19 pandemic will have a negative impact on our revenues for 2021, although we are not in a position to quantify such impacts. In addition, we have and continue to experience longer lead times for certain components used to manufacture our IC products. While we believe that our operations personnel are currently in a position to meet expected customer demand levels in the coming quarters, we recognize that unpredictable events could create difficulties in the months ahead. We may not be no assurance that suchable to address these difficulties in a timely manner, which could negatively impact our business, results of operations, financial condition and cash flows. The continued spread of COVID-19 has also led to disruption and volatility in the global capital markets. During 2020, we were able to raise additional capital whetherand received a loan under the Paycheck Protection Program (see discussion below under Liquidity and in Notes 6 and 10 to the consolidated financial statements included in Item 15 of this report), however, our ability to raise additional capital to support operations in the form of debt or equity financing, willfuture may be sufficient orimpacted, and we may be unable to access the capital markets and additional capital may only be available and, if available, that such capital will be offeredto us on terms that could be significantly detrimental to our existing stockholders and conditions acceptable to us.our business. Critical Accounting Policies and Use of Estimates Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. Note 1 to the consolidated financial statements included in Item 15 of this reportReport describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. We have identified the accounting policies below as some of the more critical to our business and the understanding of our results of operations. These policies may involve estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Although we believe our judgments and estimates are appropriate, actual future results may differ from our estimates, and if different assumptions or conditions were to prevail, the results could be materially different from our reported results. 29
Revenue Recognition GeneralWe recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 606, Revenue from Contracts with Customers and all its related amendments (“ASC 606”).
This standard update outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. We generate revenue primarily from the sales of IC products and licensing of our IP. Weintellectual property. Revenues are recognized when control is transferred to customers in amounts that reflect the consideration we expect to be entitled to receive in exchange for those goods. Revenue recognition is evaluated through the following five steps: (i) identification of the contract, or contracts, with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when or as a performance obligation is satisfied. IC products Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied. The majority of our contracts have a single performance obligation to transfer products. Accordingly, we recognize revenue when persuasive evidencetitle and risk of an arrangement exists, deliveryloss have been transferred to the customer, generally at the time of shipment of products. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products and is generally based upon a negotiated, formula, list 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. IC Products
Products are soldprice. We sell our products both directly to customers as well asand through distributors. Revenue from sales directly to customers isdistributors generally recognized at the time of shipment. under agreements with payment terms typically 60 days or less.
We may record an estimated allowance, at the time of shipment, for future returns and other charges against revenue consistent with the terms of sale. IC product Royalty and other Our licensing contracts typically provide for royalties based on the licensee’s use of our memory technology in its currently shipping commercial products. We estimate our royalty revenue and costs relating to sales made through distributors with rights of return or stock rotation are generally deferred until the distributors sell the product to end customers due to our inability to estimate future returns and credits to be issued. Distributors are generally able to return up to 10% of their purchases of slow, non-moving or obsolete inventory for credit every six months. At the time of shipment to distributors, an accounts receivable for the selling price is recorded, as there is a legally enforceable right to receive payment, and inventory is relieved, as legal title to the inventory is transferred upon shipment. Revenues are recognized upon receiving notification from the distributors that products have been sold to end customers. Distributors provide information regarding products and quantity, end customer shipments and remaining inventory on hand. The associated deferred margin is included in the accrued expenses and other line item in the consolidated balance sheets. Royalty
Royalty revenue represents amounts earned under provisions in our memory licensing agreements 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 thecalendar quarter in which the sale or manufacture occurs. We recognize royaltieslicensee uses the licensed technology. Payments are received in the quarter in which we receive the licensee’s report. The timing and level of royalties are difficult to predict, and depend on the licensee’s ability to market, produce and sell products incorporating our technology.
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, revenue is 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. Support and maintenance revenue is recognized ratably over the period during which the obligation exists, typically 12 months.subsequent quarter.
Fair Value Measurements of Financial Instruments We measure 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 from investment advisors rather than models. We do not adjust for or apply any additional assumptions or estimates to the pricing information we receive from advisors. Our Level 2 securities include cash equivalents and available-for-sale securities, which consisted primarily of corporate debt, and government agency and municipal debt securities from issuers with high quality credit ratings. Our 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 we hold are not actively traded and have fewer observable transactions. We consider this the most reliable information available for the valuation of the securities. 30
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. Valuation of long-lived Assets We evaluate our long-lived assets for impairment at least annually, or more frequently when a triggering event is deemed to have occurred. This assessment is subjective in nature and requires significant management judgment to forecast future operating results, projected cash flows and current period market capitalization levels. If our estimates and assumptions change in the future, it could result in a material write-down of long-lived assets. We amortize our finite-lived intangible assets, such as developed technology and patent license, on a straight-line basis over their estimated useful lives of three to seven years. We recognize an impairment charge as the difference between the net book value of such assets and the fair value of the assets on the measurement date. Goodwill
In January 2017, we adopted Accounting Standards Update (ASU) No. 2017-04, Simplifying the Test for Goodwill Impairment (ASU No. 2017-04), which eliminates step 2, the computation of the implied fair value of goodwill to determine the amount of impairment, from the goodwill impairment test. Under the amendments in this update, we determine 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. We have determined that we have a single reporting unit for purposes of performing our goodwill impairment test. As we use the market approach to determine the step one fair value, the price of our common stock is an important component of the fair value calculation. If our 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. We review 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. We first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of the reporting unit is less than the carrying amount as a basis for determining whether it is necessary to perform an impairment test. We performed our annual test for goodwill impairment as of September 1, 2017, and performed a subsequent test on December 31, 2017. 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.
Deferred tax valuation allowance When we prepare our consolidated financial statements, we estimate our income tax liability for each of the various jurisdictions where we conduct business. This requires us to estimate our actual current tax exposure and to assess temporary differences that result from differing treatment of certain items for tax and accounting purposes. These differences result in deferred tax assets, which we show on our consolidated balance sheet under the category of other assets. The net deferred tax assets are reduced by a valuation allowance if, based upon weighted available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. We must make significant judgments to determine our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance to be recorded against our net deferred tax asset. We believe that utilization of our net operating loss and tax credit carryforwards, which comprise the majority of our deferred tax assets, may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. See Note 4 to the consolidated financial statements in Item 15 of this report for an additional description of these limitations. Stock-based compensation We recognize stock-based compensation for equity awards on a straight-line basis over the requisite service period, usually the vesting period, based on the grant-date fair value. We estimate the value of employee stock options on the date of grant using the Black-Scholes model. The determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price, as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The expected term of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior. The expected volatility is based on the historical volatility of our stock price. 31
Results of Operations Net Revenue | | | | | | | | | | | | | | | | | | | | | | | | Year ended December 31, | | Year-Over-Year Change | | | Years Ended December 31, | | | Year-Over-Year Change | | | | 2017 | | 2016 | | 2015 | | 2016 to 2017 | | 2015 to 2016 | | | 2020 | | | 2019 | | | 2019 to 2020 | | | | (dollar amounts in thousands) | | | (dollar amounts in thousands) | | Product | | $ | 7,833 | | $ | 4,604 | | $ | 2,400 | | $ | 3,229 | | 70 | % | $ | 2,204 | | 92 | % | | $ | 5,933 | | | $ | 9,377 | | | $ | (3,444 | ) | | | (37 | )% | Percentage of total net revenue | | | 89 | % | | 76 | % | | 55 | % | | | | | | | | | | | | | 87 | % | | | 93 | % | | | | | | | | |
Product revenue increaseddecreased in 2017 and 20162020 compared with 2019 due to increased volumereduced shipments of our Bandwidth engine products. Specifically, we completed final shipments forof our ICs, mainly Bandwidth Engine products, as additional1 product in the first half of 2019 and experienced reduced shipments to certain of our Bandwidth Engine 2 IC and LineSpeed customers during 2020. The reduction in shipments was primarily due to customer design wins commenced production.transitions and inventory reductions. We expect our productIC revenues to increase in 2018, as we expect our lead customers’ production ramps to continue and additional customer design wins to commence production.2021. | | | | | | | | | | | | | | | | | | | | | | | | Year ended December 31, | | Year-Over-Year Change | | | Years Ended December 31, | | | Year-Over-Year Change | | | | 2017 | | 2016 | | 2015 | | 2016 to 2017 | | 2015 to 2016 | | | 2020 | | | 2019 | | | 2019 to 2020 | | | | (dollar amounts in thousands) | | | (dollar amounts in thousands) | | Royalty and other | | $ | 1,009 | | $ | 1,420 | | $ | 1,990 | | | (411) | | (29) | % | $ | (570) | | (29) | % | | $ | 862 | | | $ | 709 | | | $ | 153 | | | | 22 | % | Percentage of total net revenue | | | 11 | % | | 24 | % | | 45 | % | | | | | | | | | | | | | 13 | % | | | 7 | % | | | | | | | | |
Royalty and other revenue is primarily comprised ofcomprises revenue generated from licensing agreements. The decreases wereincrease from 2019 to 2020 was primarily due to a decreasenew licensing revenue of $0.1 million in shipment volumes by licensees whose products incorporate2020 attributable to our licensed IP. We expect royalty and other revenue to decline in 2018, as we expect a decline in shipments of units incorporatingVAE technology, combined with increased royalties from our technology by licensees, as their products approach their end of life.1T-SRAM licensees. Cost of Net Revenue and Gross Profit | | | | | | | | | | | | | | | | | | | | | | | | Year ended December 31, | | Year-Over-Year Change | | | Years Ended December 31, | | | Year-Over-Year Change | | | | 2017 | | 2016 | | 2015 | | 2016 to 2017 | | 2015 to 2016 | | | 2020 | | | 2019 | | | 2019 to 2020 | | | | (dollar amounts in thousands) | | | (dollar amounts in thousands) | | Cost of net revenue | | $ | 4,694 | | $ | 3,075 | | $ | 2,474 | | $ | 1,619 | | 53 | % | $ | 601 | | 24 | % | | $ | 2,329 | | | $ | 3,931 | | | $ | (1,602 | ) | | | (41 | )% | Percentage of total net revenue | | | 53 | % | | 51 | % | | 56 | % | | | | | | | | | | | | | 34 | % | | | 39 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | Year ended December 31, | | Year-Over-Year Change | | | Years Ended December 31, | | | Year-Over-Year Change | | | | 2017 | | 2016 | | 2015 | | 2016 to 2017 | | 2015 to 2016 | | | 2020 | | | 2019 | | | 2019 to 2020 | | | | (dollar amounts in thousands) | | | (dollar amounts in thousands) | | Gross profit | | $ | 4,148 | | $ | 2,949 | | $ | 1,916 | | $ | 1,199 | | 41 | % | $ | 1,033 | | 54 | % | | $ | 4,466 | | | $ | 6,155 | | | $ | (1,689 | ) | | | (27 | )% | Percentage of total net revenue | | | 47 | % | | 49 | % | | 44 | % | | | | | | | | | | | | | 66 | % | | | 61 | % | | | | | | | | |
In each of 2017, 20162020 and 2015,2019 cost of net revenue primarily consisted of direct and indirect costs related to the sale of IC products. Cost of net revenue increaseddecreased in 2017 and 2016,2020 from 2019 due to decreased product shipments. Gross profit decreased from 2020 to 2019 primarily due to the increasedecrease in material and production costs related to our increased IC product shipments, as well as inventory write-downs recorded in 2017. We expect the total cost of net revenue to increase in the future, because we anticipatewhich was partially offset by an increase in sales of our IC products. Gross profit increased from 2016 to 2017 and from 2015 to 2016, primarily due to the increase in IC shipments, partially offset by the decrease in our royalty and other revenue, which generally has no associated costs. The decrease in gross profit percentage was due to the increase in product sales and decrease in royalties.
Research and Development | | | | | | | | | | | | | | | | | | | | | | | | Year ended December 31, | | Year-Over-Year Change | | | Years Ended December 31, | | | Year-Over-Year Change | | | | 2017 | | 2016 | | 2015 | | 2016 to 2017 | | 2015 to 2016 | | | 2020 | | | 2019 | | | 2019 to 2020 | | | | (dollar amounts in thousands) | | | (dollar amounts in thousands) | | Research and development | | $ | 8,158 | | $ | 18,086 | | $ | 27,108 | | $ | (9,928) | | (55) | % | $ | (9,022) | | (33) | % | | $ | 3,989 | | | $ | 4,182 | | | $ | (193 | ) | | | (5 | )% | Percentage of total net revenue | | | 92 | % | | 300 | % | | 617 | % | | | | | | | | | | | | | 59 | % | | | 41 | % | | | | | | | | |
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Our research and development expenses include costs related to the development of our IC products and amortization of intangible assets.VAE products. We expense research and development costs as they are incurred. The decreaseResearch and development expenses decreased slightly in 20172020 compared with the prior year was2019 primarily due to our restructuring activities that resulted in a significant decrease in headcount,decreased personnel costs and decreased prototyping, testing and related salaries and expenses, non-recurring mask toolingmaterial costs, partially offset by increases in consulting costs for development of our IC products incurred in 2016, a decrease in computer-aided software license fees, and a decrease in stock-based compensation charges.
The decrease in 2016 compared with the prior year was primarily due to a decrease in salaries and related expenses, non-recurring mask tooling costs for our Bandwidth Engine 3 product incurred in 2015, a decrease in computer-aided software license fees, and a decrease in stock-based compensation charges.new VAE products.
Research and development expenses included stock-based compensation expenses of $0.4$0.1 million $1.6 million and $2.7 million for each of the years ended December 31, 2017, 20162020 and 2015, respectively.2019. We expect that total research and development expenses will decrease due to reduced headcount, including the full-year effects of a reduction-in-force initiatedremain flat in the second quarter of 2017, reduced facility costs due to our relocation in the fourth quarter of 2017 and reductions in computer-aided software license fees.2021. Selling, General and Administrative (SG&A) | | | | | | | | | | | | | | | | | | | | | | | | Year ended December 31, | | Year-Over-Year Change | | | Years Ended December 31, | | | Year-Over-Year Change | | | | 2017 | | 2016 | | 2015 | | 2016 to 2017 | | 2015 to 2016 | | | 2020 | | | 2019 | | | 2019 to 2020 | | | | (dollar amounts in thousands) | | | (dollar amounts in thousands) | | SG&A | | $ | 4,702 | | $ | 5,693 | | $ | 6,299 | | $ | (991) | | (17) | % | $ | (606) | | (10) | % | | $ | 4,028 | | | $ | 4,016 | | | $ | 12 | | | | 0 | % | Percentage of total net revenue | | | 53 | % | | 95 | % | | 143 | % | | | | | | | | | | | | | 59 | % | | | 40 | % | | | | | | | | |
Selling, general and administrative expenses consist primarily of personnel and related overhead costs for sales, marketing, finance, human resources and general management. Selling, general and administrative expenses decreasedincreased slightly for 2017,2020, compared with the prior year, primarily as a result of our restructuring activities, which resulted in a decrease in headcount and related salaries and expenses and stock-based compensation charges. Selling, general and administrative expenses decreased for 2016, compared with the prior year, primarily as a result of a decrease in stock-based compensation charges and salaries and related expenses.increased consulting fees.
Selling, general and administrative expenses included stock-based compensation expense of $0.3$0.2 million $0.6 million and $0.9 million for each of the years ended December 31, 2017, 20162020 and 2015, respectively.2019. We expect total selling, general and administrative expenses to decrease slightlyremain flat in absolute dollars in 2018, partially due to reduced headcount, including the full-year effects2021. Impairment of a reduction-in-force initiated in the second quarter of 2017.Goodwill Restructuring Charges
| | | | | | | | | | | | | | | | | | | | | | Years Ended December 31, | | | Year-Over-Year Change | | | | | Year ended December 31, | | Year-Over-Year Change | | | 2020 | | | 2019 | | | 2019 to 2020 | | | | | 2017 | | 2016 | | 2015 | | 2016 to 2017 | | 2015 to 2016 | | | (dollar amounts in thousands) | | | | | (dollar amounts in thousands) | | | Restructuring charges | | | $ | 1,321 | | $ | 676 | | $ | — | | $ | 645 | | 95 | % | $ | 676 | | 100 | % | | Impairment of goodwill | | | $ | - | | | $ | 420 | | | $ | (420 | ) | | | (100 | )% | Percentage of total net revenue | | | | 15 | % | | 11 | % | | — | % | | | | | | | | | | | | | 0 | % | | | 4 | % | | | | | | | | |
In the first quarter of 2016,2019, we recorded restructuring charges attributable to a reduction-in-forcegoodwill impairment charges. See Note 1 of the consolidated financial statements in Item 15 of this report for additional disclosure. Interest expense | | Years Ended December 31, | | | Year-Over-Year Change | | | | 2020 | | | 2019 | | | 2019 to 2020 | | | | (dollar amounts in thousands) | | Interest expense | | $ | 243 | | | $ | 220 | | | $ | 23 | | | | 10 | % | Percentage of total net revenue | | | 4 | % | | | 2 | % | | | | | | | | |
Interest expense is incurred on our senior secured convertible notes (the Notes). Through December 31, 2020, we have paid all accumulated interest for the United States andNotes in-kind through the closureissuance of our operations at our Indian subsidiary. In 2017, we recorded restructuring charges attributable to another reduction in our workforce and associated operating expenses and relocation costs, as well as for contractual obligations under computer-aided software design licenses.identical new senior-secured convertible notes. See Note 10 inand 11 to the consolidated financial statements in Item 15 of this Report for additional disclosure. 33 Interest expense
| | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | Year-Over-Year Change | | | | | 2017 | | 2016 | | 2015 | | 2016 to 2017 | | 2015 to 2016 | | | | | (dollar amounts in thousands) | | Interest expense | | | $ | 927 | | $ | 687 | | $ | — | | $ | 240 | | 35 | % | $ | 687 | | — | % | Percentage of total net revenue | | | | 10 | % | | 11 | % | | — | % | | | | | | | | | | |
Interest expense consisted of interest expense on our senior secured convertible notes. We have paid all accumulated interest for the period from issuance of the convertible notes in March 2016 in-kind through the issuance of an identical new senior-secured convertible notes. See Note 11 in the consolidated financial statements in Item 15 of this Report for additional disclosure.
Liquidity and Capital Resources As ofAt December 31, 2017,2020, we had cash and cash equivalents totaling $3.9$5.9 million compared with a combined balance of cash, cash equivalents and short-term investments of $9.8$6.4 million as of December 31, 2016.2019. In February 2021, we completed a registered direct offering of our common stock for net proceeds of approximately $6.8 million. Subsequent to December 31, 2020, we received a total of $2,476,817 of proceeds from the exercise of 1,032,007 warrants to purchase shares of common stock at a price of $2.40 per share. We believe that cash generated from our liquidity sources will be sufficient to meet our working capital and capital expenditure needs for the foreseeable future.
In 2017,2020, we used $7.6$2.6 million in cash from operating activities, which primarily resulted from the net loss of $10.7$3.8 million, adjusted for non-cash charges and gains, which included stock-based compensation expenses of $0.7$0.3 million, depreciation and amortization expenses of $0.9$0.1 million, accrued interest of $0.9$0.2 million, and changes to operating assets and liabilities of approximately $0.6 million. The changes in assets and liabilities primarily related to the timing of the collection of receivables from customers, payments to vendors and decreases in inventory balances. In 2019, we used $0.7 million in cash from operating activities, which primarily resulted from the net loss of $2.6 million, adjusted for non-cash charges and gains, which included goodwill impairment of $0.4 million, stock-based compensation expenses of $0.3 million, depreciation and amortization expenses of $0.2 million, accrued interest of $0.2 million, and changes to operating assets and liabilities of approximately $0.8 million. The changes in assets and liabilities primarily related to the timing of the collection of receivables from customers and payments to vendors, including purchases of and increasesdecreases in inventory. In 2016, we used $17.92020, net cash provided from investing activities of $0.2 million in operating activities, which primarily resultedrepresented the $0.3 million proceeds from the net lossmaturities of $32.0short-term investments partially offset by $0.1 million adjusted for non-cash charges and gains, which included impairment of goodwill of $9.9 million, stock-based compensation expenses of $2.2 million, depreciation and amortization expenses of $1.1 million, accrued interest of $0.7 million, and changes to operating assets and liabilities of $0.3 million. The changes in assets and liabilities primarily related to the timing of the collection of receivables from customers, including customer prepayments, and payments to vendors, including purchases of and increases in inventory. In 2015, we used $27.5 million in operating activities, which primarily resulted from the net loss of $31.5 million, adjusted for non-cash charges and gains, which included stock-based compensation expenses of $3.7 million and depreciation and amortization expenses of $0.9 million, and changes to operating assets and liabilities of $0.6 million. The changes in assets and liabilities primarily related to the timing of the collection of receivables from customers and payments to vendors, including purchases of and increase in inventory.
Our investing activities in 2017, 2016 and 2015 consisted of $0.3 million, $0.6 million and $1.2 million, respectively, expended for purchases of fixed assets. The majority of the remainingnet cash used in investing activities for eachin 2019 was due to the purchase of those years consistedshort-term investments of investing our cash in marketable securities,$1.6 million, which did not affect our liquidity.
Our financing activities in 2017 primarily consisted of $2.0 million in netliquidity, partially offset by proceeds from the salematurities of common stock and warrants to purchase common stockshort-term investments of $1.3 million. The remaining investing activities in an equity offering completed in July 2017. Our2019 consisted of $0.1 million expended for purchases of fixed assets.
In 2020, net cash provided by financing activities in 2016 primarilywas $2.2 million and consisted of $7.9 million in net proceeds received from the issuance of the Notes and $0.4 million in proceeds purchases of common stock under our employee stock purchase plan. Our financing activities in 2015 primarily consisted of $21.4$1.6 million in net proceeds received from the sale of common stock throughin a publicregistered direct offering of securities in April 2020 and $1.8$0.6 million of proceeds received in proceedsMay 2020 from an unsecured loan under the exercise of stock options and purchases of common stock under our employee stock purchase plan. Paycheck Protection Program. There were minimal cash flows used in financing activities during the year ended December 31, 2019. Our future liquidity and capital requirements are expected to vary from quarter to quarter, depending on numerous factors, including: | ·
| | cost, timing and success of technology development efforts;
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| ·
| | inventory levels, timing of product shipments and length of billing and collection cycles;
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| ·
| | fabrication costs, including mask costs, of our ICs, currently under development;
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| ·
| | variations in manufacturing yields, materials costs and other manufacturing risks;
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cost, timing and success of technology development efforts; fabrication costs, including mask costs, of our ICs, currently under development; | ·
| | costs of acquiring other businesses and integrating the acquired operations;
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| ·
| | profitability of our business; and
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variations in manufacturing yields, materials costs and other manufacturing risks; costs of acquiring other businesses and integrating the acquired operations; | ·
| | whether interest payments on the Notes are paid in cash or, at our election, in kind through the issuance of new Notes with identical terms for the accrued interest.
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profitability of our business; and whether interest payments on the Notes are paid in cash or, at our election, in kind through the issuance of new Notes with identical terms for the accrued interest. 34
Working Capital Our primary need for liquidity is to fund working capital requirements of our businesses, capital expenditures and for general corporate purposes, including debt repayment in 2019. purposes. We expect our cash expenditures to continue to exceed receipts in 2018,2021, as we do not expect our revenues will not be sufficient to offset our working capital requirements. We incurred net losses of approximately $11$3.8 million and $32$2.6 million for the years ended December 31, 20172020 and 2016,2019, respectively, and had an accumulated deficit of approximately $225$242.7 million as of December 31, 2017. 2020. These and prior year losses have resulted in significant negative cash flows for almostmore than a decade and have required us to raise substantial amounts of additional capital during this period. To date, we have primarily financed our operations through multiple offerings of common stock to investors and affiliates, as well as asset sale transactions. In March 2016, we entered into a 10% Senior Secured Convertible Note Purchase Agreement with the purchasers of $8.0 million principal amount of 10% Senior Secured Convertible Notes due August 15, 2018 (the Notes), at par, in a private placement transaction. The Notes bore interest at the annual rate of 10%. Accrued interest was 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. Through February 15, 2018,As of December 31, 2020, the Company had made the interest payments in-kind through the issuance of additional notes totaling approximately $1.7 million. As a result of the Company’s financial position, the Company’s management implemented a restructuring plan to better align the Company’s resources with its financial outlook including reductions in the Company’s workforce and associated operating expense, concluding the development of new products, and relocating its corporate offices. (See Note 10 to the consolidated financial statements included in Item 15 of this Report.)
Additionally, pursuant to an amendment to the Notes and related loan documents effective February 18, 2018, the interest rate has been reduced to 8%, the maturity dateoutstanding balance of the Notes has been extendedapproximated $3.1 million. The Notes were paid in full in March 2021 using the proceeds from exercises of warrants to August 15, 2019, the optional conversion price has been reduced from $8.50 of Note principal per sharepurchase common stock and a registered direct offering of common stock to $4.25 of Note principal per share of common stock, and the redemption purchase price in the event of certain transactions, such as an acquisition, has been reduced from 120% to 100% of the total amount of debt to be redeemed. The Notes restrict our ability to incur any indebtedness for borrowed money, unless such indebtedness by its terms is expressly subordinated to the Notes in right of payment and to the security interest of the Note holder(s) in respect to the priority and enforcement of any security interest in our property securing such new debt; provided that the Note holder(s) security interest and cash payment rights under the Notes shall be subordinate to a maximum of $5 million of indebtedness for a secured accounts receivable line of credit facility under certain conditions. (See Note 11 to the consolidated financial statements included in Item 15 of this Report.)
Our historical operating results and the initial requirement to repay the Notes in August 2018 indicated substantial doubt existed related to our ability to continue as a going concern. As a result of the measures discussed above, we have better aligned our resources with its financial outlook, and, with the amendment of the terms of the Notes, we have until August 2019 to repay the Notes. Accordingly, we expect to satisfy our estimated liquidity needs for at least 12 months from the issuance of these financial statements and have mitigated our going concern risk. However, we cannot predict, with certainty, our ability to achieve and maintain profitability and the generation of positive cash flows, and the outcome of our future actions to generate liquidity, including the availability of additional financing.February 2021.
We expect to raise additional capital, but there can be no assurance that such 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. We may not be able to obtain additional financing as needed on acceptable terms, or at all, which may require us to reduce our operating costs and other expenditures, including reductions of personnel, salaries and capital expenditures. Alternatively, or in addition to such potential measures, we may elect to implement additional cost reduction actions as we may determine are necessary and in our best interests. Any such actions undertaken might limit our opportunities to realize plans for revenue growth and we might not be able to reduce our costs in amounts sufficient to achieve break-even or profitable operations. If we were to raise additional capital through sales of our equity securities, our stockholders would suffer dilution of their equity ownership. If we engage in debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness, prohibit us from paying dividends, repurchasing our stock or making investments, and force us to maintain specified liquidity or other ratios, any of which could harm our business, operating results and financial condition. If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things: | ·
| | develop or enhance our products;
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develop or enhance our products; | ·
| | expand our product development and sales and marketing organizations;
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expand our product development and sales and marketing organizations; | ·
| | acquire complementary technologies, products or businesses;
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acquire complementary technologies, products or businesses; | ·
| | expand operations, in the United States or internationally;
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| ·
| | hire, train and retain employees; or
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hire, train and retain employees; or | ·
| | respond to competitive pressures or unanticipated working capital requirements.
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respond to competitive pressures or unanticipated working capital requirements. Our failure to do any of these things could seriously harm our ability to execute our business strategy and may force us to curtail our existing operations or research and development plans or existing operations.plans. Off-Balance Sheet Arrangements We do not maintain any off-balance sheet arrangements or obligations that are reasonably likely to have a material current or future effect on our financial condition, results of operations, liquidity or capital resources. Indemnifications In the ordinary course of business, we enter into contractual arrangements under which we may agree to indemnify the counter-party from losses relating to a breach of representations and warranties, a failure to perform certain covenants, or claims and losses arising from certain external events as outlined within the 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. We have also entered into indemnification agreements with our officers and directors. No material amounts related to these indemnifications are reflected in our consolidated financial statements for the years ended December 31, 2017, 20162020 or 2015.2019. 35
Recent Accounting Pronouncements See Note 1 to the consolidated financial statements in Item 15 of this reportReport for a full description of recent accounting pronouncements, including the respective expected dates of adoption and effects on results of operations and financial condition.pronouncements. Item 8. Financial Statements and Supplementary Data Reference is made to the consolidated financial statements listed under the heading (a) (1) Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm of Item 15, which consolidated financial statements are incorporated by reference in response to this Item 8. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officerchief executive officer and Chief Financial Officer,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 December 31, 2017,2020, our disclosure controls and procedures were effective. Management’s Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls. Under the supervision and with the participation of our management, including our Chief Executive Officerchief executive officer and Chief Financial Officer,chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2017.2020. Changes in Internal Control over Financial Reporting There were no changes in our internal controlcontrols over financial reporting during the fourth fiscal quarter of 20172020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information None. 36
Part III Item 10. Directors, Executive Officers and Corporate Governance The names of our directors and certain information about each of them are set forth below. | | | | | Name | | Age | | Position(s) with the Company | Leonard PerhamDaniel Lewis
| | 7472
| | President, Chief Executive Officer President and Director | Stephen L. Domenik(1)Scott Lewis(1)
| | 65 | | Director | Robert Y. Newell(1)(2) | | 6672
| | Director | Daniel Lewis(1)J. O'Neil(1)(2) | | 68
| | Director
| Daniel O’Neil(1)
| | 4750
| | Director |
| (1) | | Member of Audit Committee |
| (2) | | Member of Compensation Committee |
The principal occupations and positions for at least the past five years of our directors are described below. There are no family relationships among any of our directors or executive officers. Len Perham. Mr. Perham was appointed to be our chief executive officer and president and a member of our board of directors in November 2007. Mr. Perham was one of the original investors in MoSys, and initially served on our board of directors from 1991 to 1997. In 2000, Mr. Perham retired from Integrated Device Technology, Inc., where he served as chief executive officer from 1991 to 2000 and as president and a board member from 1986. From March 2000 to February 2012, Mr. Perham served as a member of the board of directors of NetLogic Microsystems, Inc., a fabless semiconductor company, including as chairman for a portion of that time. Mr. Perham also has been a private investor holding officer and director positions with various private companies. Mr. Perham holds a B.S. in electrical engineering from Northeastern University. We believe that Mr. Perham’s qualifications to serve as a director include his tenure as our chief executive officer and as a member of the board of directors, during which time he has gained a unique and extensive understanding of our company, our business and our long-term strategy, as well as his experience in the semiconductor industry generally.
Daniel Lewis.Mr. Lewis was appointed to our board of directors in September 2017, and has served as our president and chief executive officer since August 2018. He has served as the managing member and an owner of GMS Manufacturing Solution LLC, which provides engineering services to manufacturing companies, since 2013. From 2001 to 2013, heMr. Lewis served as chief executive officer of View Box Group, LLC, which provides management consulting services to small businesses. Prior to 2001, Mr. Lewis previouslyhe served as vice president of worldwide sales at both Xicor, Inc. and Integrated Device Technology, Inc. Mr. Lewis has also held various sales and technical positions with Accelerant Networks, Inc. Intel Corporation, Zilog, Inc. and Digital Equipment Corporation. Mr. Lewis holds a B.S. in Electrical Engineering from the University of Michigan. We believe that Mr. Lewis’s qualifications to serve on the board of directors include his extensive business experience, having held senior management positions at several companies in the semiconductor, computer and networking industries. He brings strategic and operational insight to the board of directors. Scott Lewis. Mr. Lewis was appointed to our board of directors in October 2018. He brings more than 40 years of design, sales, and product and corporate marketing experience with technology and semiconductor companies. He is not related to our chief executive officer. Since February 2018, Mr. Lewis has been serving as executive marketing strategist at United Silicon Carbide, Inc., a leader in the silicon carbide power device market. Previously, he held multiple corporate and product-line marketing leadership positions at Maxim Integrated Products, Inc., Global Foundries, Ltd., Cadence Design Systems, Inc., Intersil Corp., Xilinx, Inc. and Integrated Device Technology, Inc. Mr. Lewis holds a B.S. in Electrical Engineering Technology from DeVry Institute of Technology. We believe that Mr. Lewis’s qualifications to serve on the board of directors include his extensive business experience with over 40 years of design, sales, product and corporate marketing experience in high-technology industries, primarily in management positions at several companies in the semiconductor industry. He also can provide the board with valuable insight into sales and customer management relevant to our business. Robert Y. Newell. Mr. Newell was appointed to our board of directors in October 2018. He is currently a consultant and advisor to emerging technology and healthcare companies, having held financial management positions with technology and healthcare companies in Silicon Valley for over 25 years. From 2003 to 2018, Mr. Newell was CFO of Dextera Surgical Inc., a developer of advanced stapling devices and automated medical systems. In December 2017, after entering into an agreement to sell substantially all of its assets, Dextera Surgical, Inc. filed a voluntary petition for reorganization under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware. Mr. Newell served on the board of directors of ARI Network Services, Inc., a leading supplier of SaaS and data-as-a-service solutions, from 2012 to 2017. Previously, Mr. Newell served as CFO of Omnicell, Inc., a hospital supply and medication management company, and held executive positions with the Beta Group, LLC and Cardiometrics, Inc. Prior to his business career, he was a pilot in the United States Air Force. Mr. Newell holds a BA in mathematics from the College of William & Mary and an MBA from Harvard Business School. We believe that Mr. Newell’s qualifications to serve on the board of directors include his substantial financial and public-company experience, as he has served as chief financial officer at multiple medical device and other technology companies. He also has previous experience serving as a director on public-company boards of directors. 37
Daniel O’Neil. Mr. O’Neil was appointed to our board of directors in September 2017 and has served as a partner at Acme Strategy, LLC, a provider of strategic consulting and advisory services, which he founded, since 2010. From 2008 to 2010, he served as an investment banker at Signal Hill Capital Group LLC. Prior to 2008, Mr. O’Neil held business development and investment banking positions at Energy Services Group, Deutsche Bank AG and BT Alex. Brown. Mr. O’Neil holds an AB from Harvard College and an MBA from the Stanford University Graduate School of Business. We believe that Mr. O’Neil’s qualifications to serve on the board of directors include his extensive business experience and expertise in corporate finance and strategy, including experience gained both as an investment banker and corporate executive focused on the semiconductor and electronics industries. In the past, Mr,Mr. O’Neil has provided financial advisory services to us. He also brings to our board extensive knowledge of the semiconductor industry, along with deep experience in transactional processes, mergers and acquisitions, and deal financing for a wide range of transactions. Stephen L. Domenik. Mr. Domenik was appointed to our board of directors in June 2012. Since 1995, Mr. Domenik has been a general partner with Sevin Rosen Funds, a venture capital firm. In February 2018, He was appointed to the board of directors of Radisys Corporation, a provider of telecom software and services. He served as a
director of YuMe, Inc., digital video brand advertising provider from July 2017 until it was acquired in in February 2018. Mr. Domenik served as interim Chief Executive Officer of Pixelworks, Inc., a semiconductor company, from February to April 2016 and as a member of its board of directors from August 2010 to November 2016. Mr. Domenik served on the board of directors of Meru Networks, Inc. from January 2014, and, as its chairman from January 2015, until it was acquired in July 2015. Since December 2013, Mr. Domenik has served on the board of directors of Emcore Corporation. He also served on the boards of directors of PLX Technology, Inc. NetLogic Microsystems, Inc. prior to the acquisitions of those companies. Mr. Domenik holds a B.S. in Physics and a M.S.E.E. from the University of California at Berkeley. We believe that Mr. Domenik's qualifications to serve on the board of directors include his extensive business experience, having held senior management positions at several companies in the semiconductor and software industries and having served on the boards of directors of multiple public semiconductor companies. In addition, he has considerable relevant experience in corporate investments and the strategic development of high-technology companies.
The names of our executive officers and certain information about them are set forth either above or below, as the case may be: | | | | | | Name | | Age | | Position(s) with the Company | | Leonard PerhamDaniel Lewis
| | 7472
| | President, and Chief Executive Officer | and Director | James W. Sullivan | | 4952
| | Vice President of Finance and Chief Financial Officer | | John Monson
| | 55
| | Vice President of Marketing and Sales
| |
James W. Sullivan. Mr. Sullivan became our Vice President of Finance and Chief Financial Officer in January 2008. From July 2006 until January 2008, Mr. Sullivan served as Vice President of Finance and Chief Financial Officer at Apptera, Inc., a venture-backed company providing software for mobile advertising, search and commerce. From July 2002 until June 2006, Mr. Sullivan was the Chief Financial Officer at 8x8, Inc., a provider of voice-over-internet-protocol communication services. Mr. Sullivan’s prior experience includes various positions at 8x8, Inc. and PricewaterhouseCoopers LLP. He received a Bachelor of Science degree in Accounting from New York University and is a certified public accountant. John Monson. Mr. Monson became our Vice President of Marketing in February 2012. In early 2014, he assumed, on a permanent basis, additional responsibilities for our sales and business development activities and became our Vice President of Marketing and Sales. Prior to joining the Company, Mr. Monson was Vice President of Marketing for Mellanox Technologies, a supplier of interconnect solutions and services, from 2009 to 2012. From 2007 to 2008, Mr. Monson was Vice President of the EDC/PhyOptik business line at Inphi Corporation. He joined Inphi Corporation through a business unit acquisition of Scintera Networks, where he was Vice President of Sales and Marketing from 2005 to 2007. Previously, he held various management positions at PMC-Sierra, Inc., Lucent Technologies and AT&T Microelectronics. Mr. Monson received a Bachelor of Science degree in Electrical Engineering from the University of Minnesota.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive officers and persons who own more than 10% of a registered class of our equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of ours. Directors, executive officers and greater than 10% holders are required by SEC regulation to furnish us with copies of all Section 16(a) reports they file. Based solely on our review of Forms 3 and 4 received during 2017 (and any written representations to us by such persons), we believe that all directors, executive officers and 10% stockholders complied with all applicable Section 16(a) filing requirements during 2017 except that:
| ·
| | Messrs. Sullivan and Monson each failed to timely file a Form 4 to report a restricted stock unit award granted in September 2017;
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| ·
| | Messrs. Lewis and O’Neil each failed to timely file a Form 3 to register as a reporting person in September 2017; and
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| ·
| | Messrs. Lewis and O’Neil each failed to timely file a Form 4 to report a stock option granted in October 2017.
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Code of Ethics We have adopted a code of ethics that applies to all of our employees. The code of ethics is designed to deter wrongdoing and to promote, among other things, honest and ethical conduct, full, fair, accurate, timely, and understandable disclosures in reports and documents submitted to the SEC and other public communications, compliance with applicable governmental laws, rules and regulations, the prompt internal reporting of violations of the code to an appropriate person or persons identified in the code and accountability for adherence to such code. The code of ethics is available on our website, www.mosys.com. We will provide to any person without charge, upon request, a copy of our code of ethics. Such a request can be made by contacting us via telephone at 408.418.7500 or via mail addressed to MoSys, Inc., 2309 Bering Drive, San Jose, CA 95131, Attention: Corporate Secretary.www.mosys.com. If we make any substantive amendments to the code of ethics or grant any waiver, including any implicit waiver, from a provision of the code to our Chief Executive Officer or Chief Financial Officer, or persons performing similar functions, where such amendment or waiver is required to be disclosed under applicable SEC rules, we intend to disclose the nature of such amendment or waiver on our website. Audit Committee Our board of directors established the Audit Committee for the purpose of overseeing the accounting and financial reporting processes and audits of our financial statements. The Audit Committee also is charged with reviewing reports regarding violations of our code of ethics and complaints with respect thereto, and internal control violations under our whistleblower policy are directed to the members of the Audit Committee. The responsibilities of our Audit Committee are described in the Audit Committee Charter adopted by our board of directors, a current copy of which can be found on the investors section of our website, www.mosys.com. Messrs.Scott Lewis, Daniel J. O’Neil, and DomenikRobert Y. Newell are the current members of the Audit Committee. Our board of directors has determined that theyAll are independent, as determined in accordance with Rule 5605(a)(2) of the Nasdaq listing rules and Rule 10A-310A‑3 of the Securities Exchange Act of 1934, as amended (the Exchange Act).Act. Mr. O’Neil serves as the chairman and has been designated by the board of directors as the "audit“audit committee financial expert,"” as defined by Item 407(d)(5) of Regulation S-KS‑K under the Securities Act of 1933, as amended, and the Exchange Act. That status does not impose on him duties, liabilities or obligations that are greater than the duties, liabilities or obligations otherwise imposed on him as a member of the Audit Committee and the board of directors, however. The Audit Committee has delegated authority to Mr. O’Neil for review and approvalpre-approval of non-audit services proposed to be provided by our independent registered public accounting firm.
38
Compensation Committee Robert Y. Newell and Daniel J. O’Neil are the current members of the Compensation Committee, and Mr. Newell serves as the chairman. The Compensation Committee is responsible for reviewing, recommending and approving our compensation policies and benefits, including the compensation of all of our executive officers and directors. Our Compensation Committee also has the principal responsibility for the administration of our equity incentive and stock purchase plans. The responsibilities of our Compensation Committee are described in the Compensation Committee Charter adopted by our board of directors, a current copy of which can be found on the investors section of our website, www.mosys.com. Nominations Process We do not have a nominating committee, as we are a small company and currently only have four directors. Instead of having such a committee, our board of directors historically has appointed all of the independent directors on our board to search for and evaluate qualified individuals to become nominees for director and board committee members. The independent directors recommend candidates for nomination for election or reelection at each annual meeting of stockholders and, as necessary, to fill vacancies and newly created directorships, and evaluate candidates for appointment to and removal from committees. The independent directors operate in this capacity under authority granted by resolution of the board of directors, rather than by charter. When new candidates for our board of directors are sought, the independent directors evaluate each candidate for nomination as a director within the context of the needs and the composition of the board of directors as a whole. The independent directors conduct any appropriate and necessary inquiries into the backgrounds and qualifications of candidates. When evaluating director nominees, our board of directors generally seeks to identify individuals with diverse, yet complementary business backgrounds. Although we have no formal policy regarding diversity, our directors consider both the personal characteristics and experience of director nominees, including each nominee’s independence, diversity, age, skills, expertise, time availability and industry background in the context of the needs of the board of directors and the Company. The board of directors believes that director nominees should exhibit proven leadership capabilities and experience at a high level of responsibility within their chosen fields, and must have the experience and ability to analyze the complex business issues facing us, and specifically, the issues inherent in the semiconductor industry. In addition to business expertise, the board of directors requires that director nominees have the highest personal and professional ethics, integrity and values and, above all, are committed to representing the long-term interests of our stockholders and other stakeholders. To date, we have not paid any fee to a third party to assist in the process of identifying or evaluating director candidates. Our independent directors will consider candidates for nomination as director who are recommended by a stockholder and will not evaluate any candidate for nomination for director differently because the candidate was recommended by a stockholder. To date, we have not received or rejected any suggestions for a director candidate recommended by any stockholder or group of stockholders owning more than 5% of our common stock. The recommendation must include the information specified in our bylaws for stockholder nominees to be considered at an annual meeting, including the following: | • | The stockholder’s name and address and the beneficial owner, if any, on whose behalf the nomination is proposed; |
The stockholder’s reason for making the nomination at the annual meeting, and the signed consent of the nominee to serve if elected; The number of shares owned by, and any material interest of, the record owner and the beneficial owner, if any, on whose behalf the record owner is proposing the nominee; A description of any arrangements or understandings between the stockholder, the nominee and any other person regarding the nomination; and Information regarding the nominee that would be required to be included in our proxy statement by the rules of the SEC, including the nominee’s age, business experience for the past five years and any other directorships held by the nominee. The information listed above is not a complete list of the information required by our bylaws. The secretary will forward any timely recommendations containing the required information to our independent directors for consideration. 39
Item 11. Executive Compensation The information presented below has been modified to reflect the impact of a 1-for-10 reverse stock split effected in February 2017. See Note 1 of the consolidated financial statements in Item 15 of this Report for further discussion of the reverse stock split.
Compensation Committee Robert Y. Newell and Daniel J. O’Neil are the current members of the Compensation Committee, with Mr. Newell serving as the chairman. The Compensation Committee is responsible for reviewing, recommending and approving our compensation policies and benefits, including the compensation of all of our executive officers and directors. Our Compensation Committee also has the principal responsibility for the administration of our equity incentive and stock purchase plans.plans and the approval of equity awards to the named executive officers. The responsibilities of our Compensation Committee are described in the Compensation Committee Charter adopted by our board of directors, a current copy of which can be found on the investors section of our website, www.mosys.com.www.mosys.com. Overview of Compensation Program The Compensation Committee of the board of directors has responsibility for establishing, implementing and monitoring adherence to our compensation philosophy. The board of directors has delegated to the Compensation Committee the responsibility for determining our compensation policies and procedures for senior management, including the named executive officers, periodically reviewing these policies and procedures, and making recommendations concerning executive compensation to be considered by the full board of directors, when such approval is required under any of our plans or policies or by applicable laws. The Compensation Committee also has the principal responsibility for the administration of our stock plans, including the approval of equity awards to the named executive officers.
The compensation received by our named executive officers in fiscal year 20172020 is set forth in the Summary Compensation Table, below. For 2017,2020, the named executive officers included Leonard Perham,Daniel Lewis, President and Chief Executive Officer, and James Sullivan, Vice President of Finance and Chief Financial Officer, and John Monson, Vice President of Marketing and Sales.Officer. Compensation Philosophy In general, our executive compensation policies are designed to recruit, retain and motivate qualified executives by providing them with a competitive total compensation package based in large part on the executive’s contribution to our financial and operational success, the executive’s personal performance and increases in stockholder value, as measured by the price of our common stock. We believe that the total compensation paid to our executives should be fair, reasonable and competitive. We seek to have a balanced approach to executive compensation with each primary element of compensation (base salary, variable compensation and equity incentives) designed to play a specific role. Overall, we design our compensation programs to allow for the recruitment, retention and motivation of the key executives and high-levelhigh‑level talent required in order for us to: | ·
| | supply high-value and high-quality integrated circuit solutions to our customer base;
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supply high‑value and high‑quality integrated circuit solutions to our customer base; | ·
| | achieve or exceed our annual financial plan and be profitable;
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achieve or exceed our annual financial plan and be profitable; | ·
| | make continuous progression towards achieving our long-term strategic objectives to be a high-growth company with growing profitability; and
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make continuous progression towards achieving our long‑term strategic objectives to be a high‑growth company with growing profitability; and | ·
| | increase our share price to provide greater value to our stockholders.
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increase our share price to provide greater value to our stockholders. Role of Executive Officers in Compensation Decisions The chief executive officer (CEO) makes recommendations based on guidelines for equity and non-equitynon‑equity compensation for executives that have beento be approved by the Compensation Committee. The Compensation Committee reviews these guidelines annually. The CEO annually reviews the performance of our executives (other than himself) and presents his recommendations for proposed salary adjustments, bonuses and equity awards to the Compensation Committee once a year. In its discretion, the Compensation Committee may accept, modify or reject the CEO’s recommendations. The Compensation Committee evaluates the compensation of the CEO on its own without the participation or involvement of the CEO. Only the Compensation Committee and the board of directors are authorized to approve the compensation for any named executive officer. Compensation of new executives is based on hiring negotiations between the individuals and our CEO and/or Compensation Committee. 40
Elements of Compensation Consistent with our compensation philosophy and objectives, we offer executive compensation packages consisting of the following three components: | ·
| | annual incentive compensation; and
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annual incentive compensation; and In each fiscal year, the Compensation Committee determines the amount and relative weighting of each component for all executives, including the named executive officers. Base salaries are paid in fixed amounts and thus do not encourage risk taking. Our widespread use of long-termlong‑term compensation consisting of stock options and restricted stock units (RSUs) focuses recipients on the achievement of our longer-termlonger‑term goals and conserves cash for other operating expenses. For example, the RSUs granted to our executives in 2017 vest in increments over one and one-half years and will fully vest in 2019 and the stock options and RSUs granted to our non-executive employees vest in increments over three years, while stock options granted to four yearsour executives in 2019 vest over 36 months from the date of grant. The Compensation Committee does not believe that these awards encourage unnecessary or excessive risk taking because the ultimate value of the awards is tied to our stock price, and the use of multi-yearmulti‑year vesting schedules helps to align our employees’ interests even more closely with those of our long-termlong‑term investors. Base Salary Because our compensation philosophy stresses performance-based awards, base salary is intended to be a smaller portion of total executive compensation relative to long-term equity. The Compensation Committee takes into account the executive’s scope of responsibility and significance to the execution of our long-term strategy, past accomplishments, experience and personal performance and compares each executive’s base salary with those of the other members of senior management. The Compensation Committee may give different weighting to each of these factors for each executive, as it deems appropriate. The Compensation Committee did not retain a compensation consultant or determine a compensation peer group for 2017.2020. In September 2017, upon2020, there were no changes to the recommendation of Mr. Perham, the Compensation Committee awarded Mr. Sullivan a 5.1% increase in annual base salary, retroactivesalaries paid to July 1, 2017, thereby increasing his salary to $246,990. Mr. Sullivan had not received a salary increase since 2015. The Compensation Committee determined that the increase was warranted based on the executive’s performance and increases in the cost of living.our named executive officers. Annual Incentive Compensation In September 2017, the Compensation Committee implemented a bonus plan for Messrs. Sullivan and Monson providing for bonuses of 15% and 5%, respectively, of their base salary. The Compensation Committee determined that these bonuses were warranted based on the executives’ performance and increases in the cost of living, as the executives did not receiveauthorize any salary increasesincentive compensation for the named executive officers in 2016. These bonuses will be paid during 2017 and 2018.
In addition, during 2017, Mr. Monson was eligible for payments totaling $60,000 under a sales incentive plan because of his responsibility for managing our sales efforts. Under this incentive plan, Mr. Monson was paid additional compensation of approximately $60,000 for his service in 2017.2020.
Equity Awards Although we do not have a mandated policy regarding the ownership of shares of common stock by officers and directors, we believe that granting equity awards to executives and other key employees on an ongoing basis gives them a strong incentive to maximize stockholder value and aligns their interests with those of our other stockholders on a long-term basis. Our Amended and Restated 2010 Equity2019 Stock Incentive Plan (the Equity Plan)“2019 Plan”), which was approved by our stockholders and became effective in August 2019, enables us to grant equity awards, as well as other types of stock-based compensation, to our executive officers and other employees. The Compensation Committee reviews and approves all equity awards granted under the Equity2019 Plan to the named executive officers. We grant equity awards to achieve retention and motivation: | ·
| | upon the hiring of key executives and other personnel;
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upon the hiring of key executives and other personnel; | ·
| | annually, when we review progress against corporate and personal goals; and
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annually, when we review progress against corporate and personal goals; and | ·
| | when we believe that competitive forces or economic conditions threaten to cause our key executives to lose their motivation and/or where retention of these key executives is in jeopardy.
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when we believe that competitive forces or economic conditions threaten to cause our key executives to lose their motivation and/or where retention of these key executives is in jeopardy. With the Compensation Committee’s approval, we grant options to purchase shares of common stock when we initially hire executives and other employees, as a long-term performance incentive. The Compensation Committee has determined the size of the initial option grants to newly hired executives with reference to option grants held by existing executives, the percentage that such grant represents of our total shares outstanding and hiring negotiations with the individual. In addition, the Compensation Committee would consider other relevant information regarding the size and type of compensation package considered necessary to enable us to recruit, retain and motivate the executive. 41
Typically, when we hire an executive, the options vest with respect to one-fourth of the total number of shares subject to the grant on the first anniversary of the grant date and with respect to 1/48th of the shares monthly thereafter. The options granted to executives in connection with annual performance reviews typically vest monthly over a four-yearthree-to-four year period, at the rate of 1/48th of the shares monthly, and RSUs granted typically vest annually over a period of from three-to-fiveone-to-three years, as the Compensation Committee may decide. As matters of policy and practice we grant stock options with an exercise price equal to fair market value, although the Equity2019 Plan allows us to use a different exercise price. In determining fair market value, we use the closing price of the common stock on the Nasdaq Capital Market, or Nasdaq CM, on the grant date.
Historically, no employee has been eligible for an annual performance grant until the employee has been employed for at least six months. Annual performance reviews are generally conducted in the first quarterhalf of each fiscal year. Our CEO conducts the performance review of all other executives, and makes his recommendations to the Compensation Committee. The Compensation Committee also reviews the CEO’s annual performance and determines whether he should receive additional equity awards. Aside from equity award grants in connection with annual performance reviews, we do not have a policy of granting additional awards to executives during the year. The board of directors and Compensation Committee have not adopted a policy with respect to setting the dates of award grants relative to the timing of the release of material non-public information. Our policy with respect to prohibiting insider trading restricts sales of shares during specified black-out periods, including at all times that our insiders are considered to possess material non-public information. In determining the size of equity awards in connection with the annual performance reviews of our executives, the Compensation Committee takes into account the executive’s current position with and responsibilities to us, and current and past equity awards to the executive. In September 2017, in connection with Mr. Perham’s review of the executives’ annual performance, upon the recommendation of Mr. Perham, the Compensation Committee approved awards of restricted stock units for 35,000 shares of common stock to each of Messrs. Sullivan and Monson. Those grants were consistent with our practice of awarding annual refresh equity awards to our executives after considering each executive’s outstanding awards and the percentage that total equity awards held by each executive represent as a percentage of our total shares outstanding, in light of our annual performance. In October 2017, Mr. Perham voluntarily agreed to surrender all of his outstanding equity awards, all of which were stock options, to make additional shares available for the awards to Messrs. Lewis and O'Neil, as the 2010 Plan did not have adequate shares available.
While only the board of directors or the Compensation Committee may approve options or other equity-based compensation to our executives, the board of directors has authorized the CEO to approve option grants to employees at the senior director level and below for the purchase of not more than 100,000 shares by any employee during any calendar year. All such grants must be consistent with equity incentive guidelines approved by the Compensation Committee. The exercise price for such grants must be equal to the closing price of a share of the common stock on the Nasdaq CM on the date of grant.
Going forward, we intend to continue to evaluate and consider equity grants to our executives on an annual basis. We expect to consider potential equity awards for executives at the same time as we annually review our employees’ performance and determine whether to award grants for all employees. Accounting and Tax Considerations Our Compensation Committee has reviewed the impact of tax and accounting treatment on the various components of our executive compensation program. Section 162(m) of the Internal Revenue Code, as amended (the “Code”), generally disallows a tax deduction to publicly-held companies for compensation paid to “covered” executive officers, to the extent that compensation paid to such an officer exceeds $1 million during the taxable year. The Tax Cuts and Jobs Act repealed the performance-based exception to the deduction limit for remuneration that is deductible in tax years commencing after December 31, 2017. However, certain remuneration is specifically exempt from the deduction limit under a transition rule to the extent that it is "performance-based," as defined in Section 162(m) of the Code, and subject to a "written binding contract" in effect as of November 2, 2017 that is not later modified in any material respect. We endeavor to award compensation that will be deductible for income tax purposes, though other factors will also be considered. None of the compensation paid to our covered executive officers for the year ended December 31, 2020 that would be taken into account for purposes of Section 162(m) exceeded the $1 million limitation for 2020. Because of ambiguities and uncertainties as to the application and interpretation of Section 162(m) of the Code and the regulations issued thereunder, including the uncertain scope of the transition relief under the Tax Cuts and Jobs Act, no assurance can be given that compensation intended to satisfy the requirements for exemption from Section 162(m) of the Code in fact will satisfy such requirements. Our Compensation Committee may authorize compensation payments that do not comply with the exemptions to Section 162(m) when we believe that such payments are appropriate to attract and retain executive talent. 42
Say-on-Pay In 2017,2020, we gave our stockholders an opportunity to provide feedback on our executive compensation through an advisory vote at our annual stockholder meeting. Stockholders were asked to approve, on an advisory basis, the compensation paid to our named executive officers. A majority of stockholders indicated approval of the compensation of the named executive officers, with approximately 92%90% of the shares that voted on such matter voting in favor of the proposal. Additionally, in 2017, stockholders were asked to approve, on an advisory basis, in favor of having a stockholder vote to approve the compensation of the Company'sour named executive officers every three years. A majority of stockholders indicated approval of having a stockholder vote to approve the compensation of the Company'sour named executive officers every three years, with approximately 62%60% of the shares that voted on such matter voting in favor of the proposal. Based on these results and consistent with the previous recommendation and determination of its board of directors, the Companywe will hold non-binding advisory votes on executive compensation every three years until the next vote on the frequency of the stockholder advisory vote on executive compensation. In light of the results of the advisory vote, the Compensation Committee has continued to apply principles that were substantially similar to those applied historically in determining compensation policies and decisions and did not make any significant changes to executive compensation decisions and policies with respect to 20172020 executive compensation. The Compensation Committee will consider the results of the current advisory vote in its compensation policies and decisions. SUMMARY COMPENSATION TABLE The following table sets forth compensation information for fiscal years 20172020 and 20162019 for each of our named executive officers. Name and principal position | | Year | | Salary ($) | | Stock Option Awards ($)(1)(2) | | Restricted Stock Awards ($)(1) | | Non-Equity Incentive Plan Compensation ($) | | Total ($) | | Leonard Perham | | 2017 | | 150,000 | | — | | — | | — | | 150,000 | | Chief Executive Officer & President | | 2016 | | 150,000 | | — | | — | | — | | 150,000 | | James Sullivan | | 2017 | | 240,990 | | — | | 32,200 | | 37,050 | (3) | 310,240 | | Chief Financial Officer & | | 2016 | | 234,990 | | 63,114 | | 53,000 | | 55,876 | (3) | 406,980 | | Vice President of Finance | | | | | | | | | | | | | | John Monson | | 2017 | | 225,750 | | — | | 32,200 | | 45,600 | (4) | | | Vice President of Marketing & Sales | | | | | | | | | | 11,288 | (3) | 314,838 | | | | 2016 | | 225,750 | | 71,701 | | 31,800 | | 48,000 | (4) | | | | | | | | | | | | | 5,644 | (3) | 382,895 | |
Name and principal position | | Year | | Salary ($) | | | Stock Option Awards ($)(1) | | | Restricted Stock Awards ($)(1) | | | Non-Equity Incentive Plan Compensation ($) | | Total ($) | | Daniel Lewis | | 2020 | | | 250,000 | | | — | | | — | | | — | | | 250,000 | | Chief Executive Officer & President | | 2019 | | | 250,000 | | | | 153,000 | | | | 88,200 | | | — | | | 491,200 | | James Sullivan | | 2020 | | | 250,000 | | | — | | | — | | | — | | | 250,000 | | Chief Financial Officer & Vice President of Finance | | 2019 | | | 244,793 | | | | 52,960 | | | | 32,340 | | | — | | | 330,093 | |
| (1) | | Award amounts reflect the aggregate grant date fair value with respect to awards granted during the years indicated, as determined pursuant to FASB ASC Topic 718. The assumptions used to calculate the aggregate grant date fair value of option and stock awards are set forth in the notes to the consolidated financial statements included in item 15 of this Report. These amounts do not reflect actual compensation earned or to be earned by our named executive officers. |
| (2)
| | In August 2016, each of the named executive officers, except Mr. Perham, tendered their eligible options and received new options at a rate of 1 replacement option share for each 1.75 option shares tendered. No other stock option awards were granted to the named executive officers in 2016.
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| (3)
| | Earned as bonuses in 2016 and 2017, as indicated.
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| (4)
| | Mr. Monson earned the amounts listed for him in the non-equity incentive plan compensation column for performance pursuant to a sales incentive plan.
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43 GRANTS OF PLAN-BASED AWARDS The following table provides information onWe did not grant plan-based awards granted in 20172020 to each of theour named executive officers.
| | | | | | | | | | | | Name | Grant Date | | All Other Stock Awards: Number of Shares of Stock or Units (#)(1) | All Other Option Awards: Number of Securities Underlying Options (#) | | Exercise or Base Price of Option Awards ($/Share) | | Grant Date Fair Value of Stock and Option Awards ($)(4) | | James Sullivan | 9/26/17 | | 35,000 | — | | | — | | $ | 32,200 | | John Monson | 9/26/17 | | 35,000 | — | | | — | | $ | 32,200 | |
| (1)
| | Represents restricted stock units granted pursuant to the Equity Plan.
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| (2)
| | Award amounts shown reflect the aggregate grant date fair value for financial statement reporting purposes, as determined pursuant to FASB ASC Topic 718, which utilizes certain assumptions as outlined in the notes to the consolidated financial statements included in Item 15 of this Report.
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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END The following table sets forth information regarding the outstanding equity awards held by our named executive officers as of December 31, 2017.2020. | | | Option Awards | | Stock Awards | Name | | | Number of Securities Underlying Unexercised Options (#) Exercisable | | | Number of Securities Underlying Unexercised Options (#) Unexercisable | | | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | | Option Exercise Price($) | | | Option Expiration Date(1) | | Number of Units That Have Not Vested (#) | | | Market Value of Units That Have Not Vested ($) | | | Daniel Lewis | | | | 4,000 | | (2) | — | | | — | | | 15.00 | | | 10/19/2023 | | — | | | — | | | | | | | | | | | | | | | | | | | | | 1,000 | | (3) | — | | | — | | | 25.60 | | | 1/4/2024 | | — | | | — | | | | | Option Awards | | Stock Awards | | | | 9,167 | | (4) | | 5,833 | | | — | | | 3.92 | | | 2/6/2029 | | — | | | — | | | Name | | Number of Securities Underlying Unexercised Options (#) Exercisable | | Number of Securities Underlying Unexercised Options (#) Unexercisable | | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | | Option Exercise Price($) | | Option Expiration Date(1) | | Number of Units That Have Not Vested (#) | | Market Value of Units That Have Not Vested ($) | | | | | | | 21,666 | | (5) | | 38,334 | | | — | | | 1.57 | | | 11/20/2029 | | — | | | — | | | | | | — | | | — | | | — | | — | | | — | | | 11,250 | | (6) | | 27,450 | | (7) | James Sullivan | | — | | — | | — | | — | | — | | 600 | (2) | 666 | (3) | | | 300 | | (8) | — | | | — | | | 410.00 | | | 3/30/2025 | | — | | | — | | | | | 4,375 | (4) | 1,625 | | — | | 20.50 | | 3/30/25 | | — | | — | | | | 787 | | (9) | | - | | | — | | | 144.00 | | | 8/23/2026 | | — | | | — | | | | | — | | — | | — | | — | | — | | 6,666 | (5) | 7,399 | (3) | | | 3,361 | | (4) | | 2,139 | | | — | | | 3.92 | | | 2/6/2029 | | — | | | — | | | | | 7,015 | (6) | 8,770 | | — | | 7.20 | | 8/23/26 | | — | | — | | | | 7,221 | | (5) | | 12,779 | | | — | | | 1.57 | | | 11/20/2029 | | — | | | — | | | | | — | | — | | — | | — | | — | | 35,000 | (7) | 38,850 | (3) | | — | | | — | | | — | | — | | | — | | | 4,125 | | (6) | | 10,065 | | (7) | John Monson | | — | | — | | — | | — | | — | | 400 | (2) | 444 | (3) | | | | 4,375 | (4) | 1,625 | | — | | 20.50 | | 3/30/25 | | — | | — | | | | | — | | — | | — | | — | | — | | 4,000 | (5) | 4,440 | (3) | | | | 5,711 | (6) | 7,140 | | — | | 7.20 | | 8/23/26 | | — | | — | | | | | — | | — | | — | | — | | — | | 35,000 | (7) | 38,850 | (3) | |
| (1) | | The standard option term is generally six to ten years, but all of the options expire automatically unless exercised within 90 days after the cessation of service as an employee, director or consultant. |
| (2) | | The stock option was granted on October 19, 2017 for service as a non-employee director, and the shares subject to each restricted stock unit awardthis option vest annually over a four-year period commencing on February 18, 2014three years beginning September 26, 2017 subject to continued employment (or service as a director or consultant). |
| (3) | The stock option was granted on January 4, 2018 for service as a non-employee director, and the shares subject to this option vest annually over three years beginning September 26, 2017 subject to continued service as an employee, director or consultant. |
(4) | The stock option was granted on February 6, 2019, and the shares subject to this option vest monthly over three years subject to continued service as an employee, director or consultant. |
(5) | The stock option was granted on November 20, 2019, and the shares subject to this option vested monthly over three years subject to continued service as an employee, director or consultant. |
(6) | The shares subject to each restricted stock unit grant vest on each semi-annual anniversary over a three-year period commencing on February 6, 2019 subject to continued employment (or service as a director or consultant). |
(7) | The amount is calculated using the Company’s closing price on the Nasdaq of $1.11$2.44 per share of common stock on December 29, 2017, which was the last trading day of the Nasdaq CM during 2017.31, 2020. |
(8) | (4)
| | The stock option was granted on March 30, 2015, and the shares subject to this option vestvested monthly over 48 months subject to continued employment (or service as a director or consultant). |
| (5)
| | The shares subject to each restricted stock unit grant vest annually over a three-year period commencing on March 1, 2017 subject to continued employment (or service as a director or consultant).
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| (6)
| (9) | In August 2016, officers tendered their eligible options and received new options at a rate of 1 replacement option share for each 1.75 option shares tendered. The stock option was granted on August 23, 2016, and the shares subject to this option vestvested monthly over 48 months subject to continued employment (or service as a director or consultant). |
| (7)
| | The shares subject to each restricted stock unit grant vest in three equal installments on January 31, 2018, July 31, 2018 and January 31, 2019 subject to continued employment (or service as a director or consultant).
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OPTION EXERCISES AND STOCK VESTED The following table sets forth the number of shares acquired and aggregate dollar amount realized pursuant to the exercise of options and vesting of stock awards by our named executive officers during 2017.2020. | | | | | | | | | | | | | Option Awards | | Stock Awards | | | Option Awards | | Stock Awards | | Name | | Number of Shares Acquired on Exercise(#) | | Value Realized on Exercise($) | | Number of Shares Acquired on Vesting(#) | | Value Realized on Vesting($)(1) | | | Number of Shares Acquired on Exercise(#) | | Value Realized on Exercise($) | | Number of Shares Acquired on Vesting(#) | | | Value Realized on Vesting($)(1) | | Daniel Lewis | | | — | | — | | | 7,500 | | | | 15,263 | | James Sullivan | | — | | — | | 3,934 | | 10,368 | | | — | | — | | | 1,723 | | | | 3,485 | | John Monson | | — | | — | | 2,400 | | 6,360 | | |
| (1) | | The aggregate dollar value realized upon vesting represents the closing price of a share of common stock on the Nasdaq CM at the date of vesting, multiplied by the total number of shares vested. |
Employment and Change-in-controlChange-in-Control Arrangements and Agreements In April 2016, our Compensation Committee adopted ourOur Executive Change-in-Control and Severance Policy (the “Policy”). The provides benefits provided by the Policythat are intended to encourage the continued dedication of our executive officers and to mitigate potential disincentives to the consideration of a transaction that would result in a change in control, particularly where the services of our named executive officers may not be required by a potential acquirer. The Policy provides for benefits for our named executive officers in the event of a “Change-in-Control,” which is generally defined as:
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| | an acquisition of 45% or more of our common stock or voting securities by any “person” as defined under the Exchange Act; or
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| ·
| | consummation of a complete liquidation or dissolution of the Company or a merger, consolidation, reorganization or sale of all or substantially all of our assets (collectively, a “Business Combination”) other than a Business Combination in which (A) our stockholders receive 50% or more of the stock of the corporation resulting from the Business Combination and (B) at least a majority of the board of directors of such resulting corporation were our incumbent directors immediately prior to the consummation of the Business Combination, and (C) 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 ours) who did not own 45% or more of the stock of the resulting corporation or other entity immediately before the Business Combination owns 45% or more of the stock of such resulting corporation or other entity.
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| ·
| | Under the Policy, the following compensation and benefits are to be provided to our chief executive officer upon the occurrence of a Change-in-Control, and in the case of our other named executive officers, upon a Change-in-Control combined with a termination of the named executive officer’s employment without cause, or due to disability or resignation for good reason (as defined in the Policy) in connection with the Change-in-Control or within 24 months after it:
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| ·
| | any base salary earned but not yet paid through the date of termination;
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| ·
| | any annual or discretionary bonus earned but not yet paid to him for any calendar year prior to the year in which his termination occurs;
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| ·
| | any compensation under any deferred compensation plan of ours or deferred compensation agreement with us then in effect;
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| ·
| | any other compensation or benefits, including without limitation any benefits under long-term incentive
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compensation plans, any benefits under equity grants and awards and employee benefits under plans that have vested through the date of termination or to which he may then be entitled in accordance with the applicable terms of each grant, award or plan;
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consummation of a complete liquidation or dissolution of the Company or a merger, consolidation, reorganization or sale of all or substantially all of our assets (collectively, a “Business Combination”) other than a Business Combination in which (A) our stockholders receive 50% or more of the stock of the corporation resulting from the Business Combination and (B) at least a majority of the board of directors of such resulting corporation were our incumbent directors immediately prior to the consummation of the Business Combination, and (C) 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 ours) who did not own 45% or more of the stock of the resulting corporation or other entity immediately before the Business Combination owns 45% or more of the stock of such resulting corporation or other entity. Under the Policy, the following compensation and benefits are to be provided to our chief executive officer upon the occurrence of a Change-in-Control, and in the case of our other named executive officers, upon a Change-in-Control combined with a termination of the named executive officer’s employment without cause, or due to disability or resignation for good reason (as defined in the Policy) in connection with the Change-in-Control or within 24 months after it: any base salary earned but not yet paid through the date of termination; | ·
| | reimbursement of any business expenses incurred by him through the date of termination but not yet paid;
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any annual or discretionary bonus earned but not yet paid to him for any calendar year prior to the year in which his termination occurs; | ·
| | reimbursement of the cost of continuation of medical benefits for a period of 12 months; and
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any compensation under any deferred compensation plan of ours or deferred compensation agreement with us then in effect; | ·
| | acceleration of vesting of then-outstanding stock options and RSUs which are subject solely to time-based vesting.
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a single lump sum payment equal to the sum of (a) one year of his or her then-current base salary plus (b) the average of his or her annual bonus payments in the preceding three years or such shorter time as he or she has been employed by us (with prorated weighting assigned to any bonus earned for a partial year of employment), which payment will be made within 60 days following the Change-in-Control (in the case of the chief executive officer), or 60 days following the date of employment termination (in the case of all other named executive officers). 45
vesting in 100% of all outstanding equity awards as of the date of the Change-in-Control for the chief executive officer, or as of the date of termination of employment for all other named executive officers; reimbursement of any business expenses incurred by him through the date of termination but not yet paid; reimbursement of the cost of continuation of medical benefits for a period of 12 months; and outstanding equity awards that are structured as stock options, stock appreciation rights or similar awards shall be amended effective as of the date of termination to provide that such awards will remain outstanding and exercisable until the earlier of (a) 12 months following the date of the Change-in-Control for the chief executive officer, or the termination of employment for the other named executive officers, and (b) the expiration of the award’s initial term. Under the Policy, “cause” means the executive’s: | ·
| | willful failure to attend to the executive’s duties that is not cured by the executive within 30 days of receiving written notice from the CEO (or, in the case of the CEO, from the board of directors) specifying such failure;
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willful failure to attend to the executive’s duties that is not cured by the executive within 30 days of receiving written notice from the CEO (or, in the case of the CEO, from the board of directors) specifying such failure; | ·
| | material breach of the executive’s then-current employment agreement (if any) that is not cured by the executive within 30 days of receiving written notice from the CEO (or, in the case of the CEO, from the board of directors) specifying such breach;
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material breach of the executive’s then-current employment agreement (if any) that is not cured by the executive within 30 days of receiving written notice from the CEO (or, in the case of the CEO, from the board of directors) specifying such breach; | ·
| | conviction of (or plea of guilty or nolo contendere to) any felony or any misdemeanor involving theft or embezzlement; or
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conviction of (or plea of guilty or nolo contendere to) any felony or any misdemeanor involving theft or embezzlement; or | ·
| | misconduct resulting in material harm to our business or reputation, including fraud, embezzlement, misappropriation of funds or a material violation of the executive’s Employment, Confidential Information, Invention Assignment and Arbitration Agreement; and
|
misconduct resulting in material harm to our business or reputation, including fraud, embezzlement, misappropriation of funds or a material violation of the executive’s Employment, Confidential Information, Invention Assignment and Arbitration Agreement; and Under the Policy, “good reason” means the occurrence of any of the following conditions without the executive’s consent, but only if such condition is reported by the executive within 90 days of the executive’s knowledge of such condition and remains uncured 30 days after written notice from the executive to the board of directors of said condition: | ·
| | a material reduction in the executive’s then-current base salary or annual target bonus (expressed as a percentage of Executive’s then-current base salary), except for a reduction proportionate to reductions concurrently imposed on all other members of the Company’s executive management; a material reduction in the executive’s then-current employee benefits package, taken as a whole, except for a reduction proportionate to reductions concurrently imposed on all other members of executive management; a material reduction in the executive’s responsibilities with respect to our overall operations, such that continuity of responsibilities with respect to business operations existing prior to a corporate transaction will serve as a material reduction in responsibilities if such business operations represent only a subsidiary or business unit of the larger enterprise after the corporate transaction; a material reduction in the responsibilities of the executive’s direct reports, including a requirement for the chief executive officer to report to another officer as opposed to our board of directors or a requirement for any other executive to report to any officer other than our chief executive officer; a material breach by us of any material provision of the executive’s then-current employment agreement (if any); a requirement that the executive relocate to a location more than 35 miles from the executive’s then-current office location, unless such office relocation results in the distance between the new office and Executive’s home being closer or equal to the distance between the prior office and the executive’s home; a failure of a successor or transferee to assume our obligations under this Policy; or 46
a failure to nominate the executive for election as a Board director, if, at the proper time for nomination, the executive is a member of the board of directors. The information below describes the severance benefits payable to our named executive officers under the Policy as if the Policy had been in effect and a Change‑in‑Control occurred on December 31, 2020, and the employment of each of our named executive officers was terminated without cause immediately following the Change‑in‑Control: Name | | Base Salary($)(1) | | | Incentive Plans($)(2) | | | Continuation of Benefits($)(3) | | | Stock Option Vesting($)(4) | | | Stock Award Vesting($)(5) | | | Total($) | | Daniel Lewis | | | 250,000 | | | — | | | | 23,676 | | | | 33,351 | | | | 27,450 | | | | 334,477 | | James Sullivan | | | 250,000 | | | | 18,725 | | | | 23,676 | | | | 11,118 | | | | 10,065 | | | | 313,584 | |
(1) | Represents cash severance payments based on the executive’s salary at December 31, 2020, in an amount equal to one year of his base salary. |
(2) | ·
| | a material reductionRepresents the average of executive’s annual performance incentive payments in the executive’s then-current employee benefits package, taken as a whole, except for a reduction proportionate to reductions concurrently imposed on all other members of executive management;preceding three years.
|
(3) | ·
| | a material reduction inRepresents the aggregate amount of all premiums payable for the continuation of the executive’s responsibilities with respect to our overall operations,health benefits for one year, based on the amounts of such that continuity of responsibilities with respect to business operations existing prior to a corporate transaction will serve as a material reduction in responsibilities if such business operations represent only a subsidiary or business unit of the larger enterprise after the corporate transaction;premiums at December 31, 2020.
|
(4) | ·
| | a material reduction inThe value is calculated as the responsibilitiesintrinsic value per share, multiplied by the number of shares that would become fully vested upon the Change‑in‑Control. The intrinsic value per share would be calculated as the excess of the executive’s direct reports, including a requirementclosing price of the common stock on the Nasdaq of $2.44 on December 31, 2020 over the exercise price of the option. If the value is less than zero, it is deemed to be zero for the chief executive officer to report to another officer as opposed to our boardpurposes of directors or a requirement for any other executive to report to any officer other than our chief executive officer;these calculations.
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(5) | ·
| | a material breachThe value is calculated as the intrinsic value per share, multiplied by usthe number of any material provisionshares that would become fully vested upon the Change‑in‑Control. The intrinsic value per share is considered as the closing price of our common stock on the executive’s then-current employment agreement (if any);Nasdaq of $2.44 on December 31, 2020.
|
If a Change‑in‑Control occurred on December 31, 2020, under the Policy, the following numbers of option and award shares would have vested immediately as a result of acceleration on December 31, 2020: Name | ·
| Number of Accelerated Option and Award Shares | a requirement that the executive relocate to a location more than 35 miles from the executive’s then-current office location, unless such office relocation results in the distance between the new office and Executive’s home being closer or equal to the distance between the prior office and the executive’s home;
| Daniel Lewis | | | 55,417 | | James Sullivan | | | 19,043 | |
47
| ·
| | a failure of a successor or transferee to assume our obligations under this Policy; or
|
| ·
| | a failure to nominate the executive for election as a Board director, if, at the proper time for nomination, the executive is a member of the board of directors
|
Employment Agreements In addition to the agreements containing the Change-in-ControlChange‑in‑Control provisions summarized above, we have entered into our standard form of employment, confidential information, invention assignment and arbitration agreement with each of the named executive officers. We also have entered into agreements to indemnify our current and former directors and certain executive officers, in addition to the indemnification provided for in our certificate of incorporation and bylaws. These agreements, among other things, provide for indemnification of our directors and certain executive officers for many expenses, including attorneys’ fees, judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of the Company, arising out of such person’s services as a director or executive officer of the Company, any subsidiary of the Company or any other company or enterprise to which the person provided services at our request. Director Compensation The following table summarizes the compensation we paid to our non-employee directors in 2017:2020: | | | | | | | | | | Name | | Fee Compensation ($) | | Option Awards ($)(1)(2) | | All Other Compensation | | Total ($) | | Daniel Lewis | | 7,911 | | 7,080 | | — | | 14,991 | | Daniel O’Neil | | 8,661 | | 7,080 | | 50,000 | (3) | 65,741 | | Stephen L. Domenik | | 8,286 | | — | | — | | 8,286 | |
Name | | Fee Compensation ($) | | | Restricted Stock Awards ($)(1) | | | Option Awards ($)(1)(2) | | | All Other Compensation | | | Total ($) | | Scott Lewis | | | 30,000 | | | | 1,870 | | | | — | | | | — | | | | 31,870 | | Robert Y. Newell | | | 31,500 | | | | 1,870 | | | | — | | | | — | | | | 33,370 | | Daniel O'Neil | | | 33,000 | | | | 1,870 | | | | — | | | | — | | | | 34,870 | |
| (1) | | Option awardAward amounts reflect the aggregate grant date fair value with respect to stock optionsawards granted toduring the non-employee directors,years indicated, as determined pursuant to FASB ASC Topic 718. 718. The assumptions used to calculate the aggregate grant date fair value of option and stock awards are set forth in the notes to the consolidated financial statements included in Itemitem 15 of this Report. These amounts do not reflect actual compensation earned or to be earned by our non-employee directors. Optionnamed executive officers. Restricted stock award amounts consist of: optionsawards granted to Messrs. Lewis, Newell and O’Neil on October 19, 2017July 29, 2020 to purchase 80,0001,000 shares each.
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| (2) | | As of December 31, 2017,2020, our non-employee directors each held outstanding options to purchase the following number5,000 of shares of our common stock: Daniel Lewis, 80,000; Daniel O’Neil, 80,000. |
| (3)
| | Represents fees paid by us to Mr. O’Neil for consulting services provided prior to September 2017, when he joined our board of directors.stock.
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Director Fee Compensation The challenges our business has faced have made it very challenging for us to attract new non-employee directors. Nasdaq and SEC regulations require that a majority of the directors on our board of directors and on the Audit Committee and Compensation Committeeits committees be independent, non-employee directors, as defined by each entity. To maintain our listing on the Nasdaq CM, during 2017, we were required to fill the vacancies on our board of directors and add two independent, non-employee directors. Given the challenges our business has and continues to face, it was extremely difficult for us to recruit qualified candidates. Historically, we have relied solely on stock options to incentivize and compensate our non-employee directors. In September 2017, our board of directors authorizedWe pay the following annual cash retainer fees, payable in quarterly installments, forto our non-employee directors to further compensate them for their service on our board of directors and, as applicable, for service as chairperson of a committee of our board of directors:
| ·
| | $30,000 for service on the board of directors; |
| ·
| | $3,000 for service as chairperson of the Audit Committee; and
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| ·
| | $1,500 for service as chairperson of the Compensation Committee.
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We believe implementing the retainer fees was necessary to allow us to attract qualified director candidates and was more representative of how other small, public companies compensate their directors. In addition, to these retainer fees, we believe it is essential to offer meaningful equity awards as an incentive for service by our non-employee directors.
43on the board of directors;
$3,000 for service as chairperson of the Audit Committee; and Director Equity Compensation Our Amended and Restated 2010 Equity IncentiveIn August 2019, the Company’s stockholders approved the 2019 Plan.
The 2019 Plan (the “Equity Plan”) permits the board of directors to establish by resolution the number of shares, up to a maximum of 40,0002,000 each year for each non-employee director, to be covered by annual option grants or other awards for each year of service on our board. The awards are to be granted at the first regular meeting of the board of directors following the date of each annual meeting of stockholders and vest in full on the first anniversary of the grant date, subject to continuous service during the period. The Equity2019 Plan alsofurther provides that each non-employee director shallmay be granted an award to acquire up to 120,0006,000 shares upon his or her initial appointment or election to our board of directors, vestingboard. The shares covered by these awards vest over a four-yearthree year period at the rate of one fourththird of the total number of shares each year, subject to the non-employee director’s continuous service on the board, with the exercise price of the award equal to 100% of the fair market value of a share of common stock on the date that he becomes a director. We did not elect any new directors in 2016.board. The Equity Plan also provides that each non-employee director shall be granted an award to purchase up to 20,000 shares for his or her role as chairperson of the Compensation and Audit Committees. The Equity2019 Plan also permits a disinterested majority of the board of directors, in its discretion, to authorize additional shares to be awarded or granted under stock options to committee chairs and other non-employee directors for extraordinary service on the board. The board of directors did not exercise this discretion in 2017. 48
The exercise price per share under each option grant is equal to the fair market value of a share of our common stock on the date of grant on the principal trading market for our common stock at the time of grant, which currently is the Nasdaq CM.Capital Market, or the Nasdaq. In the event of a merger, sale of substantially all of our assets or similar transaction, vesting of all director options would accelerate as to 100% of the unvested shares subject to the award. All In recent years, our basic annual service award to a non-employee director has been a restricted stock unit award for 1,000 shares of common stock. In 2020, the board of directors once again determined that this was an appropriate award size. In July 2020, we awarded restricted stock units for 1,000 shares to each of our non-employee directors. These awards to directors have a termvest and become non-forfeitable on July 29, 2021, or, if earlier, on the date of not longer than six years. In October 2017, Mr. Domenik voluntarily agreed to surrender allthe 2021 annual meeting of his outstanding equity awards, all of which were stock options, to make additional shares available for the awards to Messrs. Lewis and O'Neil, as the 2010 Plan did not have adequate shares available.stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The following table sets forth certain information as of December 31, 2017March 1, 2021 concerning the ownership of our common stock by: | ·
| | each stockholder known by us to be the beneficial owner of more than 5% of the outstanding shares of our common stock (currently our only class of voting securities);
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each stockholder known by us to be the beneficial owner of more than 5% of the outstanding shares of our common stock (currently our only class of voting securities); | ·
| | each of the named executive officers; and
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each of the named executive officers; and | ·
| | all directors and executive officers as a group.
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all directors and executive officers as a group. Beneficial ownership is determined in accordance with Rule 13d-3 of the Exchange Act, and includes all shares over which the beneficial owner exercises voting or investment power. Shares that are issuable upon the exercise of options, warrants and other rights to acquire common stock that are presently exercisable or exercisable within 60 days of December 31, 2017March 1, 2020 are reflected in a separate column in the table below. These shares are taken into account in the calculation of the total number of shares beneficially owned by a particular holder and the total number of shares outstanding for the purpose of calculating percentage ownership of the particular holder. We have relied on information supplied by our officers, directors and certain stockholders and on information contained in filings with the SEC. Except as otherwise indicated, and subject to community property laws where applicable, we believe, based on information provided by these persons, that the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. The percentage of beneficial ownership is based on 8,067,6356,133,719 shares of common stock outstanding as of December 31, 2017.March 12, 2021. Unless otherwise stated, the business address of each of our directors and named executive officers listed in the table is 2309 Bering Drive, San Jose, California 95131. | | | | | | | | | | Amount and Nature of Beneficial Ownership | | | | Name and Address of Beneficial Owner | | Number of Shares Beneficially Owned (Excluding Outstanding Options)(1) | | Number of Shares Issuable on Exercise of Outstanding Options or Convertible Securities(2) | | Percent of Class | | Ingalls & Snyder LLC | | 638,188 | (3) | 638,188 | (4) | 10.7 | | 1325 Avenue of the Americas | | | | | | | | New York, NY 10019 | | | | | | | | | | | | | | | | AIGH Investment Partners, L.P. | | 750,000 | (5) | — | | 9.3 | | 6006 Berkeley Avenue | | | | | | | | Baltimore, MD 21209 | | | | | | | | | | | | | | | | Directors and Officers: | | | | | | | | Leonard Perham | | 176,853 | | — | | 2.2 | | James Sullivan | | 3,738 | | 12,644 | | * | | John Monson | | 1,991 | | 11,176 | | * | | All current directors and executive officers as a group (7 persons) | | 182,583 | | 23,820 | | 2.6 | |
| | Amount and Nature of Beneficial Ownership | | | | | | Name and principal position | | Number of Shares Beneficially Owned (Excluding Outstanding Options)(1) | | | | Number of Shares Issuable on Exercise of Outstanding Options or Convertible Securities(2) | | | | | | Percent of Class | | Empery Asset Management, LP | | | 495,867 | | | | | 7,375 | | | (3 | ) | | | 8.20 | % | 1 Rockefeller Plaza, Suite 1205 New York, NY 10020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Directors and Officers: | | | | | | | | | | | | | | | | | Daniel Lewis | | | 18,500 | | | | | 42,499 | | | | | | * | | Scott Lewis | | | 2,000 | | | | | 3,333 | | | | | | * | | Robert Y. Newell | | | 15,000 | | | | | 3,333 | | | | | | * | | Daniel J. O'Neil | | | 3,000 | | | | | 5,000 | | | | | | * | | James Sullivan | | | 5,071 | | | | | 13,949 | | | | | | * | | All current directors and executive officers as a group (5 persons) | | | 43,571 | | | | | 68,114 | | | | | | | 1.80 | % |
* Represents holdings of less than one percent.
49
* | Represents holdings of less than one percent. |
(1) | | Excludes shares subject to outstanding options, warrants, convertible securities or other rights to acquire common stock that are exercisable within 60 days of December 31, 2017.March 1, 2021. |
| (2) | | Represents the number of shares subject to outstanding options, warrants, convertible securities or other rights to acquire common stock that are exercisable within 60 days of December 31, 2017. |
| (3)
| | In a Form 13G/A filed with the SEC on February 9, 2018, Ingalls & Snyder LLC (“Ingalls”) reported that it had shared dispositive power over all shares, but no voting authority with respect to any such shares. These shares include securities owned by clients of Ingalls, a registered broker dealer and a registered investment advisor, in accounts managed under investment advisory contracts.March 1, 2021.
|
| (4)
| (3) | Empery Asset Management, LP (“Empery”) filed a Form 13G/A with the SEC on February 23, 2021 behalf of (i) Empery, (ii) Ryan Lane and (iii) Martin Hoe (together with Empery, the “Empery Persons”). Martin Hoe and Ryan Lane, in their capacity as investment managers of Empery, may also be deemed to have investment discretion and voting power over the shares held by Empery. Mr. Hoe and Mr. Lane each disclaim any beneficial ownership of these shares. The beneficial ownership of Ingallsthe Empery Persons includes shares of our common stock issuable upon conversionexercise of $5,743,693 par amount of our 10% senior secured convertible notes, which are held by Ingalls & Snyder Value Partners, an investment partnership managed under an investment advisory contract with Ingalls, and for which Ingalls & Snyder Value Partners would have voting and dispositive power if such shares were converted.warrants issued in July 2017. The individual at Ingalls with dispositive power or voting power with respectEmpery Persons cannot exercise the warrants to the shares included inextent the table is Thomas O. Boucher, Managing Director. By their terms, the notes are not convertible at any time that, as a result of such conversion, the note holderEmpery Persons would beneficially own, after any such exercise, more than 9.9%4.99% of ourthe outstanding shares of our common stock. |
| (5)
| | In a Form 13G/A filed with the SEC on February 15, 2018, AIGH Investment Partners, L.P. ("AIGH LP") reported that it had sole dispositive power and sole voting authority over all such shares. Represents shares of common stock held by AIGH LP, AIGH Investment Partners, L.L.C. ("AIGH LLC") and Mr. Orin Hirschman, who is the managing member of AIGH LP’s general partner and president of AIGH LLC.
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Securities Authorized for Issuance under Equity Compensation Plans The following table provides information as of December 31, 20172020 regarding equity compensation plans approved by our security holders. As of December 31, 2017,2020, we had no awards outstanding under equity compensation plans that have not been approved by our security holders. | | | | | | | | | | Plan Category | | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (excluding Securities reflected in Column (a))(1) | | | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | | | | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | | | | Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (excluding Securities reflected in Column (a))(1) | | | | (a) | | (b) | | (c) | | | (a) | | | | (b) | | | | (c) | | Equity compensation plans approved by security holders | | 683,934 | | $ | 4.81 | | 378,209 | | | | 224,074 | | | | $ | 10.82 | | | | | 81,000 | |
| (1) | | Consists of shares of common stock available for future issuance under the Equity Plan and shares of common stock available for future issuance under the Amended and Restated 2010 Employee Stock Purchase2019 Plan. The Equity Plan provides for an annual increase of 50,000 shares on January 1 of each year. |
Item 13. Certain Relationships and Related Transactions with and Director Independence Related PersonsParty Transactions As previously reported on a Form 8-K filedNone.
Director Independence Our board of directors has determined that each of the current directors, with the SEC on March 14, 2016, we entered into a 10% Senior Secured Convertible Note Purchase Agreement (the Purchase Agreement) with Ingalls with respect to $8,000,000 principal amountexception of 10% Senior Secured Convertible Notes due August 15, 2018 (the Notes), at par, in a private placement transaction effected pursuant to an exemption fromDaniel Lewis, is “independent,” as defined by the registration requirements under the Securities Act of 1933, as amended. The conversion pricelisting rules of the Notes originally was $9.00 per shareNASDAQ Stock Market, or Nasdaq, and is subject to adjustment upon certain events, 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 allrules and regulations of the assets of the Company. The Notes bear interest at the annual rate of 10%. 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 electionsSEC. Our board of directors (ii) an acquisitionhas standing Audit and Compensation Committees, each of which is comprised solely of independent directors in accordance with 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 ofNasdaq listing rules. No director qualifies as independent unless the board of directors affirmatively determines that he has no direct or indirect relationship with us that would impair his independence. We independently review the relationship of the Company within a 12-month period, disregarding for this purposeto any director who voluntarily resigns asentity employing a director or dies whileon whose board of directors he is serving as a director. The redemption price is 120% of the principal amount of the Note to be repurchased plus accrued and unpaid interest as of the redemption date.currently.
Effective February 18, 2018, we entered into an amendment to the Notes and related documents with Ingalls and the holder of Notes representing a majority of the total amount of outstanding principal, which reduced the interest rate to 8%, extended the maturity date of the Notes to August 15, 2019, reduced the optional conversion price from $8.50 of Note principal per share of common stock to $4.25 of Note principal per share of common stock, and reduced the redemption price if the Company experiences a fundamental change to 100% of the principal amount of the Note to be repurchased plus accrued and unpaid interest as of the redemption date.50
In February 2017, we made an additional payment of interest on the Notes (including interest due on other notes issued for the previously due August 2016 interest payment) in-kind with the issuance of an additional note to Ingalls of approximately $420,000, in August 2017, we made an additional payment of interest for the period from February 2017 to August 15, 2017 in-kind with the issuance of an additional note to Ingalls of approximately $434,000, and in February 2018, we made an additional payment of interest for the period from August 2017 to February 15, 2018 in kind with the issuance of an additional note to Ingalls of approximately $463,000. All of the additional notes have terms identical to the Notes, as amended.
A related party to one of the Company's executive officers performed construction work at our new corporate headquarters in the fourth quarter of 2017. The construction work was completed at a cost of approximately $195,000, which was paid in the fourth quarter of 2017.
Item 14. Principal AccountantAccountant Fees and Services Weinberg & Co., P.A. (“Weinberg”) was our independent registered public accounting firm for the year ended December 31, 2020. Pursuant to the Audit Committee's determination, on May 12, 2020, BPM LLP ("BPM"), the independent registered public accounting firm previously engaged to audit our financial statements, was dismissed. The engagement of Weinberg as our independent registered public accounting firm was approved by our Audit Committee on May 12, 2020. The following table shows the fees billed (in thousands of dollars) to us by Weinberg and BPM, LLP, or BPM, our independent registered public accounting firm, for the auditfinancial statement audits and other services provided for fiscal 20172020 and 2016.2019. | | | | | | | | | | | 2017 | | 2016 | | | 2020 | | | 2019 | | Audit Fees(1) | | $ | 227 | | $ | 255 | | | $ | 195 | | | $ | 239 | | Audit-Related Fees(2) | | 10 | | 2 | | | | 14 | | | | 9 | | Total(3) | | $ | 237 | | $ | 257 | | | $ | 209 | | | $ | 248 | |
| (1) | | Audit fees consisted of fees for professional services rendered for the audit of our annual consolidated financial statements, review of our quarterly financial statements and services normally provided in connection with statutory and regulatory filings. |
| (2) | | Audit-related fees consisted of fees related to the issuance of SEC registration statements. |
| (3) | | Weinberg and BPM did not provide any non-audit or other services other than those reported under “Audit Fees” and “Audit-Related Fees.” |
The Audit Committee meets with our independent registered public accounting firm at least four times a year. At such times, the Audit Committee reviews both audit and non-auditnon‑audit services performed by the independent registered public accounting firm, as well as the fees charged for such services. The Audit Committee is responsible for pre-approvingpre‑approving all auditing services and non-auditingnon‑auditing services (other than non-auditnon‑audit services falling within the de minimis exception set forth in Section 10A(i)(1)(B) of the Exchange Act and non-auditnon‑audit services that independent auditors are prohibited from providing to us) in accordance with the following guidelines: (1) pre-approvalpre‑approval policies and procedures must be detailed as to the particular services provided; (2) the Audit Committee must be informed about each service; and (3) the Audit Committee may delegate pre-approvalpre‑approval authority to one or more of its members, who shall report to the full committee, but shall not delegate its pre-approvalpre‑approval authority to management. Among other things, the Audit Committee examines the effect that performance of non-auditnon‑audit services may have upon the independence of the auditors. 51
Part IV Item 15. Exhibits (a)(1) Consolidated Financial Statements: (a)The following documents are filed as part of this report:Report:
(1)Consolidated Financial Statements and ReportReports of Independent Registered Public Accounting Firm,Firms, all of which are set forth in the Index to Consolidated Financial Statements on pages 5358 through 7781 of this report.Report.
(2) Financial Statement Schedules: Financial statement schedules are omitted because they are not required, not applicable or because the required information is shown in the consolidated financial statements or notes thereto. (3) Exhibits: Required exhibits are incorporated by reference or are filed with this Report. | | | 3.1(1) | | Restated Certificate of Incorporation of the Registrant | 3.1.1(1A) | | Certificate of Amendment to Restated Certificate of Incorporation of the Registrant | 3.1.2(1B) | | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of MoSys, Inc., filed with the Secretary of State of the State of Delaware on August 27, 2019 | 3.2(2) | | Amended and Restated Bylaws of the Registrant | 4.1(3) | | Specimen Common Stock Certificate | 4.4(4)4.2(4)
| | Form of Common Stock Purchase Warrant | 4.3(5) | | Form of Securities Purchase Agreement | 4.4.1(6) | | Rights Agreement, dated November 10, 2010, by and between Registrant and Wells Fargo Bank, N.A., as Rights Agent | 4.4.1(4)4.4.2(7)
| | Form of Right Certificate | 4.4.2(4)4.4.3(8)
| | Summary of Rights to Purchase Preferred Shares | 4.4.3(5)4.4.4(9)
| | Amendment No. 1 to Rights Agreement, dated July 22, 2011, by and between Registrant and Wells Fargo Bank, N.A., as Rights Agent | 4.4.4(6)4.4.5(10)
| | Amendment No. 2 to Rights Agreement, dated May 18, 2012, by and between Registrant and Wells Fargo Bank, N.A., as Rights Agent | 10.1(3)4.5(11)
| | Form of Indemnity Agreement between Registrant and each of its directors and executive officersCommon Stock Purchase Warrant | 10.2(7)*4.7
| | 2000 Stock Option and Equity Incentive Plan and formDescription of Option Agreement thereunderSecurities
| 10.2.1(8)*4.8.1(12)
| | MoSys, Inc. 2010 Amended and Restated 2000 Stock Option and Equity Incentive Plan | 10.3(9)*4.8.2(13)
| | MoSys, Inc. 2019 Stock Incentive Plan | 4.9.1(14) | | Form of Agreement for Stock Option AgreementGrant pursuant to the MoSys, Inc. Amended and Restated 2000 Stock Option and2010 Equity Incentive Plan | 10.4(10)*4.9.2(15)
| | Form of New Employee InducementNotice of Grant of Stock Option Award and Agreement pursuant to the MoSys, Inc. 2019 Stock Incentive Plan | 10.5(11)*4.10.1(16)
| | Employment offer letter agreementForm of Notice of Grant of Restricted Stock Unit Award and Mutual Agreement to Arbitrate between Registrantunder the MoSys, Inc. Amended and Leonard Perham dated as of November 8, 2007Restated 2010 Equity Incentive Plan
| 10.6(12)4.10.2(17)
| | Form of Notice of Grant of Restricted Stock Unit Award and Agreement under the MoSys, Inc. 2019 Stock Incentive Plan | | | |
52
| | | 10.3(18)* | | Employment offer letter agreement between Registrant and James Sullivan dated December 21, 2007 | 10.7(13)10.4(19)*
| | Change-in-control Agreement between Registrant and James Sullivan dated January 18, 2008 | 10.8(14)10.5(20)*
| Amended and Restated 2010 Equity Incentive Plan
| 10.9(15)*
| Form of Option Agreement for Stock Option Grant pursuant to 2010 Equity Incentive Plan | 10.10(16)10.7(21)*
| 2010 Employee Stock Purchase Plan
| 10.11(17)*
| Form of Notice of Restricted Stock Unit Award and Agreement under the MoSys, Inc. 2010 Amended and Restated Equity Incentive Plan | 10.12(18)10.8(22)*
| Lease Agreement between Registrant and M West Propco XII, LLC. dated July 19, 2010
| 10.13(19)*
| Form of New Employee Inducement Grant Stock Option Agreement (revised February 2012) | 10.14(20)*10.9(23)
| Stock Option Agreement between Registrant and Leonard Perham dated as of November 1, 2011
| 10.15(21)
| Form of Indemnification Agreement used from June 5, 2012 to present | 10.16(22)*10.10(24)
| | Form of Notice of Grant of Restricted Stock Unit Award andSublease Agreement under the Amended and Restated 2010 Equity Incentive Planwith Cyren, Inc. dated October 3, 2017
| 10.17(23)*10.11(25)
| Employment Offer Letter Agreement between Registrant and John Monson dated February 21, 2012
| 10.18(24)
| 10% Senior Secured Convertible Note Purchase Agreement dated March 14, 2016 | 10.19(25)10.12(26)
| | Security Agreement dated March 14, 2016 | 10.20(26)10.13(27)
| | 10% Senior Secured Convertible Note due August 15, 2018 |
10.14(28) | 10.21(27)
| Amendment to 10% Senior Secured Convertible Note Purchase Agreement and every 10% Senior Secured Convertible Note due August 15, 2018 Issued Thereunder | 10.22(28)10.15(29)*
| Offer to Exchange Certain Outstanding Stock Options for a Number of Replacement Stock Options
| 10.23(28)*
| Executive Change-in-Control and Severance Policy | 10.16(30)* | | Employment offer letter agreement between Registrant and Daniel Lewis dated August 8, 2018 | 10.17(31) | | Securities Purchase Agreement | 10.18(32) | | Amendment No. 2 to 10% Senior Secured Convertible Note Purchase Agreement and every 10% Senior Secured Convertible Note due August 15, 2018 Issued Thereunder | 10.19(33) | | Securities Purchase Agreement | 10.20(34) | | Paycheck Protection Program Promissory Note and Agreement dated May 3, 2020 | 10.21 | | Sublease Addendum #2 to the Lease between Cyren Ltd. and MoSys, Inc., dated September 30, 2020, by and between MoSys, Inc., and Cyren Ltd. | 21.1 | | List of Subsidiaries | 23.1 | | Consent of Independent Registered Public Accounting Firm—Weinberg & Co., P.A. | 23.2 | | Consent of Independent Registered Public Accounting Firm—BPM LLP | 24.1 | | Power of Attorney (see signature page) | 31.1 | | Rule 13a-14 certification | 31.2 | | Rule 13a-14 certification | 32 | | Section 1350 certification | 101.INS | | XBRL Instance Document | 101.SCH | | XBRL Taxonomy Extension Schema Document | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | 101.LAB | | XBRL Taxonomy Extension Labels Linkbase Document | 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
| (1) | | Incorporated by reference to Exhibit 3.6 to Form 8-K filed by the Company on November 12, 2010 (Commission File No. 000-32929). |
(1A) Incorporated by reference to Exhibit 3.1 to Form 8-K filed by the Company on February 14, 2017 (Commission File No. 000-32929).
(1A) | Incorporated by reference to Exhibit 3.1 to Form 8-K filed by the Company on February 14, 2017 (Commission File No. 000-32929). |
(1B) | Incorporated by reference to Exhibit 3.1 to Form 8-K filed by the Company on August 27, 2019 (Commission File No. 000-32929). |
(2) | | Incorporated by reference to Exhibit 3.4 to Form 8-K filed by the Company on October 29, 2008 (Commission File No. 000-32929). |
| (3) | | Incorporated by reference to the same-numbered exhibitExhibit 4.1 to the Company’s Registration Statement on Form S-1, as amended, originally filed August 4, 2000, declared effective June 27, 2001 (Commission file No. 333-43122). |
| (4) | | Incorporated by reference to Exhibit 4.1 to Form 8-K filed by the same-numbered exhibitCompany on June 30, 2017 (Commission File No. 000-32929) |
(5) | Incorporated by reference to Exhibit 10.1 to Form 8-K filed by the Company on June 30, 2017 (Commission File No. 000-32929) |
53
(6) | Incorporated by reference to Exhibit 4.4 to Form 8-K filed by the Company on November 12, 2010 (Commission File No. 000-32929). |
(7) | (5)Incorporated by reference to Exhibit 4.4.1 to Form 8-K filed by the Company on November 12, 2010 (Commission File No. 000-32929).
|
(8) | Incorporated by reference to Exhibit 4.4.2 to Form 8-K filed by the Company on November 12, 2010 (Commission File No. 000-32929) |
(9) | Incorporated by reference to Exhibit 4.2.3 to the Current Report on Form 8-K, filed on July 27, 2011 (Commission File No. 000-32929). |
(10) | (6)
| | Incorporated by reference to Exhibit 4.2.4 to Current Report on Form 8-K filed by the Company on May 24, 2012 (Commission File No. 000-32929). |
(11) | (7)
| | Incorporated by reference to Exhibit 10.54.6 to Form 8-K filed by the Company on October 3, 2018 (Commission File No. 000-32929). |
(12) | Incorporated by reference to Exhibit 4.8 to the Company’s Registration Statement on Form S-1, as amended, originallyS-8, filed August 4, 2000, declared effective June 17, 2001February 15, 2019 (Commission File No. 333-43122)333-229728). |
(13) | (8)
| | Incorporated by reference to Appendix BA to the Company’s proxy statement on Schedule 14A filed bywith the CompanySecurities and Exchange Commission on October 7, 2004July 3, 2019 (Commission File No. 000-32929). |
(14) | (9)
| | Incorporated by reference to Exhibit 10.154.10 to the Company’s Registration Statement on Form 10-QS-8, filed by the Company on August 9, 2005July 28, 2010 (Commission File No. 000-32929)333-168358). |
(15) | (10)Incorporated by reference to Exhibit 4.10 to the Company’s Registration Statement on Form S-8, filed November 13, 2019 (Commission File No. 333-234675).
|
(16) | | Incorporated by reference to Exhibit 10.2510.23 to the Company’s Form 10-K10-Q filed by the Company on March 17, 2008August 8, 2013 (Commission File No. 000-32929). |
(17) | (11)
| | Incorporated by reference to Exhibit 10.244.13 to the Company’s Registration Statement on Form 10-K S-8, filed by the Company on March 17, 2008November 13, 2019 (Commission File No. 000-32929)333-234675). |
(18) | (12)
| | Incorporated by reference to Exhibit 10.26 to Form 10-K filed by the Company on March 17, 2008 (Commission File No. 000-32929). |
(19) | (13)
| | Incorporated by reference to Exhibit 10.27 to Form 10-K filed by the Company on March 17, 2008 (Commission File No. 000-32929)000-32929). |
(20) | (14)
| | Incorporated by reference to Exhibit 4.8 to From S-8 filed by the Company on January 29, 2018 (Commission File No. 333-222739).
|
| (15)
| | Incorporated by reference to Exhibit 4.10 to Form S-8 filed by the Company on July 28, 2010 (Commission File No. 333-168358). |
(21) | (16)
| | Incorporated by reference to Appendix B to the proxy statement on Schedule 14A filed by the Company on May 26, 2010 (Commission File No. 000-32929).
|
| (17)
| | Incorporated by reference to Exhibit 4.8 to Form S-8 filed by the Company on June 5, 2009 (Commission File No. 333-159753). |
(22) | (18)
| | Incorporated by reference to Exhibit 10.35 to Form 8-K filed by the Company on July 22, 2010 (Commission File No. 000-32929).
|
| (19)
| | Incorporated by reference to Exhibit 10.19 to Form 10-K filed by the Company on March 15, 2012 (Commission File No. 000-32929). |
(23) | (20)
| | Incorporated by reference to Exhibit 10.20 to Form 10-Q filed by the Company on May 9, 2012 (Commission File No. 000-32929).
|
| (21)
| | Incorporated by reference to Exhibit 10.22 to Form 10-Q filed by the Company on August 9, 2012 (Commission File No. 000-32929). |
(24) | (22)
| | Incorporated by reference to Exhibit 10.2499.2 to Form 10-K10-Q filed by the Company on MarchNovember 14, 20142017 (Commission File No. 000-32929). |
(25) | (23)
| | Incorporated by reference to Exhibit 10.25 to Form 10-K filed by the Company on March 14, 2014 (Commission File No. 000-32929).
|
| (24)
| | Incorporated by reference to Exhibit 10.1 to Form 8-K filed by the Company on March 15, 2016 (Commission File No. 000-32929). |
(26) | (25)
| | Incorporated by reference to Exhibit 10.2 to Form 8-K filed by the Company on March 15, 2016 (Commission File No. 000-32929). |
(27) | (26)
| | Incorporated by reference to Exhibit 10.3 to Form 8-K filed by the Company on March 15, 2016 (Commission File No. 000-32929). |
(28) | (27)
| | Incorporated by reference to Exhibit 10.4 to Form 8-K filed by the Company on February 27, 2018 (Commission File No. 000-32929) |
54
(29) | (28)
| | Incorporated by reference to Exhibit 99 to Schedule TO filed by the Company on July 26, 2016 (Commission File No. 005-78033), as amended |
(30) | Incorporated by reference to Exhibit 10.28 to Form S-1/A filed by the Company on September 17, 2018 (Commission File No. 333-225193), as amended |
(31) | Incorporated by reference to Exhibit 10.26 to Form 8-K filed by the Company on October 3, 2018 (Commission File No. 000-32929). |
(32) | Incorporated by reference to Exhibit 10.30 to Form 8-K filed by the Company on October 3, 2018 (Commission File No. 000-32929). |
(33) | Incorporated by reference to Exhibit 10.1 to Form 8-K filed by the Company on April 17, 2020 (Commission File No. 000-32929). |
(34) | Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on May 13, 2020 (Commission File No. 000-32929). |
* Management contract, compensatory plan or arrangement.
* | Management contract, compensatory plan or arrangement. |
Item 16. Form 10-K Summary Not applicable. 55 SIGNATURESSIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this reportReport to be signed on its behalf by the undersigned, thereunto duly authorized, on the 12th18th day of March 2018.2021. | | | | | | MOSYS, INC. | | | | | | | | | By: | /s/ Leonard PerhamDaniel Lewis | | | | Leonard PerhamDaniel Lewis
| | | | President and Chief Executive Officer |
POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Leonard PerhamDaniel Lewis and James W. Sullivan as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in- fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. | | | | | Signature | | Title | | Date | /s/ Leonard PerhamDANIEL LEWIS | | President, Chief Executive Officer, and Director | | March 12, 201818, 2021 | Leonard PerhamDaniel Lewis
| | (Principal Executive Officer) | | | | | | | | | | | | /s/ James W. Sullivan | | Vice President of Finance and Chief Financial | | | James W. Sullivan | | Officer (Principal Financial Officer and Principal | | March 12, 201818, 2021 | | | Accounting Officer) | | | | | | | | | | | | | /s/ Stephen L. DomenikSCOTT LEWIS | | Director | | March 12, 201818, 2021 | Stephen L. DomenikScott Lewis
| | | | | | | | | | | | | /s/ Daniel O’NeIlROBERT Y. NEWELL | | Director | | March 12, 201818, 2021 | Daniel O’NeilRobert Y. Newell
| | | | | | | | | | | | | /s/ Daniel LewisO’NeIl | | Director | | March 12, 201818, 2021 | Daniel LewisO’Neil | | | | | | | |
56
MOSYS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 57 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors of MoSys, Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of MoSys, Inc. and its subsidiaries (the “Company”) as of December 31, 2017 and 2016,2020, the related consolidated statements of operations, and comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the periodyear ended December 31, 2017,2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016,2020, and the results of its operations and its cash flows for each of the three years in the periodyear ended December 31, 2017,2020, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Adjustment of warrant exercise price As discussed in Note 6 to the consolidated financial statements, in April 2020, the Company completed a registered direct offering of securities and sold 1,218,000 shares of common stock at a price of $1.56 per share to institutional investors. As a result of the offering, the exercise price of the 1,845,540 outstanding common stock purchase warrants that were issued in October 2018 was reduced from $6.00 per share to $2.40 per share. The Company accounted for the warrant exercise price adjustment in accordance with ASC Topic 260 and determined that the change in the exercise price resulted in a deemed dividend of $392,000 that increased the net loss attributable to common stockholders for the year ended December 31, 2020. 58
We identified the accounting for the adjustment of the warrant exercise price as a critical audit matter because of the significance of the account balance and due to the complexity of the transaction and the significant judgements used by management in determining the fair value of the adjustment to the warrant price. Auditing the accounting for the adjustment of the exercise price of the warrants involved increased extent of effort and a high degree of auditor judgment. The primary audit procedures we performed to address this critical audit matter included the following, among others: We inspected the warrant agreements and relevant documentation. We evaluated the Company’s conclusions regarding the application of relevant accounting guidance to the accounting for the adjustment of the warrant price, including conclusions reached with respect to treatment as a deemed dividend. We tested the accuracy and completeness of data used by the Company to calculate the fair value of warrant price adjustment, including expected life, expected volatility, the risk free interest rate, and the dividend rate, and tested the mathematical accuracy of calculations. We developed independent estimates for the fair value of the deemed dividend based on the assumptions and data used by the Company. We have served as the Company’s auditor since 2020. /s/ Weinberg & Company Los Angeles, California March 18, 2021 59
Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors of MoSys, Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheet of MoSys, Inc. and its subsidiaries (the “Company”) as of December 31, 2019, the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America. Change in Accounting Principle As discussed in Note 9 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of the new lease standard. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits,audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our auditsaudit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our auditsaudit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ BPM LLP We have served as the Company’s auditor since 2007.from 2007 to 2020. San Jose, California March 12, 2018 17, 2020 60
MOSYS, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except par value data) | | | | | | | | | | | December 31, | | | December 31, | | | | 2017 | | 2016 | | | 2020 | | | 2019 | | ASSETS | | | | | | | | | | | | | | | | Current assets | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 3,868 | | $ | 8,766 | | | $ | 5,889 | | | $ | 6,053 | | Short-term investments | | | — | | | 1,002 | | | | — | | | | 300 | | Accounts receivable, net | | | 1,681 | | | 559 | | | | 701 | | | | 1,175 | | Inventories | | | 1,766 | | | 1,451 | | | | 599 | | | | 968 | | Prepaid expenses and other | | | 1,347 | | | 473 | | | | 668 | | | | 472 | | Total current assets | | | 8,662 | | | 12,251 | | | | 7,857 | | | | 8,968 | | | | | | | | | | | Property and equipment, net | | | 827 | | | 1,274 | | | | 121 | | | | 197 | | Goodwill | | | 13,276 | | | 13,276 | | | Intangible assets, net | | | 111 | | | 223 | | | Right-of-use lease asset | | | | 303 | | | | 156 | | Other | | | 263 | | | 121 | | | | 17 | | | | 78 | | Total assets | | $ | 23,139 | | $ | 27,145 | | | $ | 8,298 | | | $ | 9,399 | | | | | | | | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | Current liabilities | | | | | | | | | | | | | | | | Accounts payable | | $ | 170 | | $ | 561 | | | $ | 76 | | | $ | 218 | | Deferred revenue | | | 3,938 | | | 271 | | | | 15 | | | | 166 | | Short-term lease liability | | | | 201 | | | | 166 | | PPP note payable, current | | | | 244 | | | | — | | Accrued expenses and other | | | 2,507 | | | 2,502 | | | | 1,300 | | | | 1,155 | | Total current liabilities | | | 6,615 | | | 3,334 | | | | 1,836 | | | | 1,705 | | | | | | | | | | | Long-term liabilities | | | 18 | | | 233 | | | Long-term lease liability | | | | 103 | | | | — | | PPP note payable | | | | 335 | | | | — | | Convertible notes payable | | | 9,160 | | | 8,250 | | | | 3,092 | | | | 2,858 | | Total liabilities | | | 15,793 | | | 11,817 | | | | 5,366 | | | | 4,563 | | | | | | | | | | | Commitments and contingencies (Note 9) | | | | | | | | | | | | | | | | | | | | | | | | | Stockholders’ equity | | | | | | | | | | | | | | | | Preferred stock, $0.01 par value; 20,000 shares authorized; none issued and outstanding | | | — | | | — | | | | — | | | | — | | Common stock, $0.001 par value; 120,000 shares authorized; 8,068 shares and 6,630 shares issued and outstanding at December 31, 2017 and December 31, 2016, respectively | | | 8 | | | 7 | | | Common stock, $0.001 par value; 120,000 shares authorized; 3,554 shares and 2,179 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively | | | | 3 | | | | 2 | | Additional paid-in capital | | | 232,026 | | | 229,341 | | | | 245,548 | | | | 243,281 | | Accumulated deficit | | | (224,688) | | | (214,020) | | | | (242,619 | ) | | | (238,447 | ) | Total stockholders’ equity | | | 7,346 | | | 15,328 | | | | 2,932 | | | | 4,836 | | Total liabilities and stockholders’ equity | | $ | 23,139 | | $ | 27,145 | | | $ | 8,298 | | | $ | 9,399 | |
Note:
. The common stock share andaccompanying notes are an integral part of these consolidated financial statements. 61
MOSYS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts asdata) | | Year Ended | | | | December 31, | | | | 2020 | | | 2019 | | Net revenue | | | | | | | | | Product | | $ | 5,933 | | | $ | 9,377 | | Royalty and other | | | 862 | | | | 709 | | Total net revenue | | | 6,795 | | | | 10,086 | | Cost of net revenue | | | 2,329 | | | | 3,931 | | Gross profit | | | 4,466 | | | | 6,155 | | Operating expenses | | | | | | | | | Research and development | | | 3,989 | | | | 4,182 | | Selling, general and administrative | | | 4,028 | | | | 4,016 | | Impairment of goodwill | | | — | | | | 420 | | Total operating expenses | | | 8,017 | | | | 8,618 | | Loss from operations | | | (3,551 | ) | | | (2,463 | ) | Interest expense | | | (243 | ) | | | (220 | ) | Other income, net | | | 14 | | | | 103 | | Net loss | | | (3,780 | ) | | | (2,580 | ) | Deemed dividend for warrant exercise price adjustment | | | (392 | ) | | | — | | Net loss attributable to common stockholders | | $ | (4,172 | ) | | $ | (2,580 | ) | | | | | | | | | | Net loss per share attributable to common stockholders | | | | | | | | | Basic and diluted | | $ | (1.32 | ) | | $ | (1.19 | ) | Shares used in computing net loss per share | | | | | | | | | Basic and diluted | | | 3,167 | | | | 2,165 | | | | | | | | | | |
The accompanying notes are an integral part of December 31, 2016 have been adjusted to reflect the impact of a 1-for-10 reverse stock split effected in February 2017, as discussed in Note 1.these consolidated financial statements. 62
MOSYS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Additional | | | | | | | | | | | | Common Stock | | | Paid-In | | | Accumulated | | | | | | | | Shares | | | Amount | | | Capital | | | Deficit | | | Total | | Balance as of January 1, 2019 | | | 2,148 | | | $ | 2 | | | $ | 243,022 | | | $ | (235,867 | ) | | $ | 7,157 | | Issuance of common stock under stock plans, net | | | 31 | | | | — | | | | (4 | ) | | | — | | | | (4 | ) | Stock-based compensation | | | — | | | | — | | | | 263 | | | | — | | | | 263 | | Net loss | | | — | | | | — | | | | — | | | | (2,580 | ) | | | (2,580 | ) | Balance as of December 31, 2019 | | | 2,179 | | | | 2 | | | | 243,281 | | | | (238,447 | ) | | | 4,836 | | Issuance of common stock under stock plans, net | | | 41 | | | | — | | | | (2 | ) | | | — | | | | (2 | ) | Exercise of pre-funded warrants | | | 116 | | | | — | | | | 2 | | | | — | | | | 2 | | Sale of common stock, net of financing | | | 1,218 | | | | 1 | | | | 1,618 | | | | — | | | | 1,619 | | Deemed dividend for warrant exercise price adjustment | | | — | | | | — | | | | 392 | | | | (392 | ) | | | — | | Stock-based compensation | | | — | | | | — | | | | 257 | | | | — | | | | 257 | | Net loss | | | — | | | | — | | | | — | | | | (3,780 | ) | | | (3,780 | ) | Balance as of December 31, 2020 | | | 3,554 | | | $ | 3 | | | $ | 245,548 | | | $ | (242,619 | ) | | $ | 2,932 | |
The accompanying notes are an integral part of these consolidated financial statements. 63
MOSYS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSSCASH FLOWS (In thousands, except per share data)thousands) | | | | | | | | | | | | | Year Ended December 31, | | | | | | | | | | | | | | | 2017 | | 2016 | | 2015 | | Net revenue | | | | | | | | | | | Product | | $ | 7,833 | | $ | 4,604 | | $ | 2,400 | | Royalty and other | | | 1,009 | | | 1,420 | | | 1,990 | | Total net revenue | | | 8,842 | | | 6,024 | | | 4,390 | | | | | | | | | | | | | Cost of net revenue | | | 4,694 | | | 3,075 | | | 2,474 | | Gross profit | | | 4,148 | | | 2,949 | | | 1,916 | | Operating expenses | | | | | | | | | | | Research and development | | | 8,158 | | | 18,086 | | | 27,108 | | Selling, general and administrative | | | 4,702 | | | 5,693 | | | 6,299 | | Impairment of goodwill | | | — | | | 9,858 | | | — | | Restructuring charges | | | 1,321 | | | 676 | | | — | | Total operating expenses | | | 14,181 | | | 34,313 | | | 33,407 | | | | | | | | | | | | | Loss from operations | | | (10,033) | | | (31,364) | | | (31,491) | | Interest expense | | | 927 | | | 687 | | | — | | Other income, net | | | 59 | | | 48 | | | 94 | | Loss before income taxes | | | (10,901) | | | (32,003) | | | (31,397) | | Income tax provision (benefit) | | | (233) | | | 45 | | | 86 | | Net loss | | $ | (10,668) | | $ | (32,048) | | $ | (31,483) | | Other comprehensive income (loss), net of tax: | | | | | | | | | | | Net unrealized gains (losses) on available-for-sale securities | | | — | | | 16 | | | (6) | | Comprehensive loss | | $ | (10,668) | | $ | (32,032) | | $ | (31,489) | | Net loss per share | | | | | | | | | | | Basic and diluted | | $ | (1.45) | | $ | (4.86) | | $ | (5.04) | | Shares used in computing net loss per share | | | | | | | | | | | Basic and diluted | | | 7,338 | | | 6,601 | | | 6,249 | |
| | Year Ended | | | | December 31, | | | | 2020 | | | 2019 | | Cash flows from operating activities: | | | | | | | | | Net loss | | $ | (3,780 | ) | | $ | (2,580 | ) | Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | | | | | Provision for doubtful accounts | | | 41 | | | | — | | Depreciation and amortization | | | 143 | | | | 185 | | Stock-based compensation | | | 257 | | | | 263 | | Impairment of goodwill | | | — | | | | 420 | | Accrued interest | | | 243 | | | | 220 | | Loss on disposal of assets | | | 4 | | | | — | | Amortization of lease right-of-use asset | | | 212 | | | | 212 | | Change in operating lease liability | | | (220 | ) | | | (219 | ) | Other | | | (1 | ) | | | (6 | ) | Changes in assets and liabilities | | | | | | | | | Accounts receivable | | | 433 | | | | 447 | | Inventories | | | 369 | | | | 180 | | Prepaid expenses and other assets | | | (135 | ) | | | 416 | | Accounts payable | | | (142 | ) | | | (18 | ) | Deferred revenue and other liabilities | | | (15 | ) | | | (171 | ) | Net cash used in operating activities | | | (2,591 | ) | | | (651 | ) | Cash flows from investing activities: | | | | | | | | | Purchases of property and equipment | | | (71 | ) | | | (103 | ) | Proceeds from maturities of marketable securities and investments | | | 300 | | | | 1,275 | | Purchases of marketable securities and investments | | | — | | | | (1,568 | ) | Net cash provided by (used in) investing activities | | | 229 | | | | (396 | ) | Cash flows from financing activities: | | | | | | | | | Proceeds from PPP note | | | 579 | | | | — | | Proceeds from sale of common stock and warrants, net of issuance costs | | | 1,619 | | | | — | | Net proceeds from exercise of pre-funded warrants | | | 2 | | | | — | | Taxes paid to net share settle equity awards | | | (2 | ) | | | (4 | ) | Net cash provided by (used in) financing activities | | | 2,198 | | | | (4 | ) | Net decrease in cash and cash equivalents | | | (164 | ) | | | (1,051 | ) | Cash and cash equivalents at beginning of year | | | 6,053 | | | | 7,104 | | Cash and cash equivalents at end of year | | $ | 5,889 | | | $ | 6,053 | | Supplemental disclosure: | | | | | | | | | Cash paid for income taxes | | $ | 2 | | | $ | 2 | | Noncash investing and financing activities: | | | | | | | | | Issuance of convertible notes in settlement of accrued interest | | $ | 234 | | | $ | 187 | | Fair value of warrant exercise price adjustment considered as deemed dividend | | $ | 392 | | | $ | — | |
Note: Share and per share amounts have been adjusted to reflect the impact of a 1-for-10 reverse stock split effected in February 2017, as discussed in Note 1.
The accompanying notes are an integral part of these consolidated financial statements. 64
MOSYS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | Additional | | Other | | | | | | | | | | Common Stock | | Paid-In | | Comprehensive | | Accumulated | | | | | | | Shares | | Amount | | Capital | | Income (Loss) | | Deficit | | Total | | Balance at January 1, 2015 | | 4,979 | | | 5 | | | 200,034 | | | (10) | | | (150,489) | | | 49,540 | | Issuance of common stock for exercise of options, employee stock purchase plan and release of awards | | 133 | | | — | | | 1,772 | | | — | | | — | | | 1,772 | | Issuance of common stock, net of issuance costs of $1,632 | | 1,437 | | | 2 | | | 21,366 | | | — | | | — | | | 21,368 | | Stock-based compensation | | — | | | — | | | 3,650 | | | — | | | — | | | 3,650 | | Change in unrealized loss on available-for-sale investments | | — | | | — | | | — | | | (6) | | | — | | | (6) | | Net loss | | | | | | | | | | | | | | (31,483) | | | (31,483) | | Balance at December 31, 2015 | | 6,549 | | | 7 | | | 226,822 | | | (16) | | | (181,972) | | | 44,841 | | Issuance of common stock for exercise of options, employee stock purchase plan and release of awards | | 81 | | | — | | | 364 | | | — | | | — | | | 364 | | Stock-based compensation | | — | | | — | | | 2,155 | | | — | | | — | | | 2,155 | | Change in unrealized loss on available-for-sale investments | | — | | | — | | | — | | | 16 | | | — | | | 16 | | Net loss | | — | | | — | | | — | | | — | | | (32,048) | | | (32,048) | | Balance at December 31, 2016 | | 6,630 | | | 7 | | | 229,341 | | | — | | | (214,020) | | | 15,328 | | Issuance of common stock for exercise of options, employee stock purchase plan and release of awards | | 113 | | | — | | | (20) | | | — | | | — | | | (20) | | Issuance of common stock, net of issuance costs of $265 | | 1,325 | | | 1 | | | 1,986 | | | — | | | — | | | 1,987 | | Stock-based compensation | | — | | | — | | | 719 | | | — | | | — | | | 719 | | Net loss | | — | | | — | | | — | | | — | | | (10,668) | | | (10,668) | | Balance at December 31, 2017 | | 8,068 | | $ | 8 | | $ | 232,026 | | $ | — | | $ | (224,688) | | $ | 7,346 | |
Note: Share and per share amounts have been adjusted to reflect the impact of a 1-for-10 reverse stock split effected in February 2017, as discussed in Note 1.
The accompanying notes are an integral part of these consolidated financial statements.
MOSYS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | | | | | | | | | | Year Ended December 31, | | | | | | | | | | | | | | | 2017 | | 2016 | | 2015 | | Cash flows from operating activities: | | | | | | | | | | | Net loss | | $ | (10,668) | | $ | (32,048) | | $ | (31,483) | | Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | | Depreciation and amortization | | | 747 | | | 998 | | | 607 | | Stock-based compensation | | | 719 | | | 2,155 | | | 3,650 | | Amortization of intangible assets | | | 112 | | | 111 | | | 321 | | Impairment of goodwill | | | — | | | 9,858 | | | — | | Amortization of debt issuance costs | | | 45 | | | 37 | | | — | | Accrued interest | | | 898 | | | 650 | | | — | | (Gain) loss on disposal of assets | | | (12) | | | 4 | | | — | | Changes in assets and liabilities: | | | | | | | | | | | Accounts receivable | | | (1,122) | | | 170 | | | (552) | | Inventories | | | (315) | | | 146 | | | (716) | | Prepaid expenses and other assets | | | (1,016) | | | 459 | | | 104 | | Accounts payable | | | (402) | | | (419) | | | 261 | | Deferred revenue and other liabilities | | | 3,435 | | | (64) | | | 334 | | Net cash used in operating activities | | | (7,579) | | | (17,943) | | | (27,474) | | Cash flows from investing activities: | | | | | | | | | | | Purchases of property and equipment | | | (300) | | | (646) | | | (1,202) | | Net proceeds from sale of assets | | | 12 | | | — | | | — | | Proceeds from sales and maturities of marketable securities | | | 2,604 | | | 50,486 | | | 44,953 | | Purchases of marketable securities | | | (1,602) | | | (36,874) | | | (36,873) | | Net cash provided by investing activities | | | 714 | | | 12,966 | | | 6,878 | | Cash flows from financing activities: | | | | | | | | | | | Proceeds from sale of common stock, net of issuance costs | | | 1,967 | | | 364 | | | 23,140 | | Proceeds from the issuance of notes payable, net of issuance costs | | | — | | | 7,877 | | | — | | Payments on capital lease obligations | | | — | | | (138) | | | (14) | | Net cash provided by financing activities | | | 1,967 | | | 8,103 | | | 23,126 | | | | | | | | | | | | | Net increase (decrease) in cash and cash equivalents | | | (4,898) | | | 3,126 | | | 2,530 | | | | | | | | | | | | | Cash and cash equivalents at beginning of period | | | 8,766 | | | 5,640 | | | 3,110 | | Cash and cash equivalents at end of period | | $ | 3,868 | | $ | 8,766 | | $ | 5,640 | | Supplemental disclosure: | | | | | | | | | | | Issuance of convertible notes in settlement of accrued interest | | $ | 854 | | $ | 336 | | $ | — | | Cash paid for income taxes | | $ | 2 | | $ | 21 | | $ | 56 | |
The accompanying notes are an integral part of these consolidated financial statements.
MOSYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: The Company and Summary of Significant Accounting Policies The Company MoSys, Inc. (the “Company”)Company) was incorporated in California in September 1991 and reincorporated in September 2000 in Delaware. The Company provides both integrated circuits (ICs) and intellectual property (IP) solutions that enable fast, intelligent data access and decision making for a wide range of markets. The Company’s strategyprimary product line is marketed under the Accelerator Engine name and primary business objective is to be an IP-rich fabless semiconductor company focused onincludes the development and sale of integrated circuit (“IC”) products. Its Bandwidth Engine ICs combineIC products, which integrate the Company’s proprietary, 1T-SRAM high-density embedded memory with its high-speed 10 gigabits per second and highera highly-efficient serial interface technology. The Company’s future successprotocol resulting in a monolithic memory IC solution optimized for memory bandwidth and ability to achieve and maintain profitability depends on its success in developing a market for its ICs. Liquidity
The Company incurred net losses of approximately $11 million and $32 million for the years ended December 31, 2017 and 2016, respectively, and had an accumulated deficit of approximately $225 million as of December 31, 2017.transaction access performance. These and prior year losses have resulted in significant negative cash flows for almost a decade and have requiredIn 2020, the Company to raise substantial amountsbegan offering for license the first of additional capital during this period. To date, the Company has primarily financed its operations through multiple offeringsVirtual Accelerator Engine products which consist of common stock to investors and affiliates, as well as asset sale transactions. In March 2016, the Company entered into a 10% Senior Secured Convertible Note Purchase Agreement with the purchasers of $8.0 million principal amount of 10% Senior Secured Convertible Notes due August 15, 2018 (the “Notes”), at par, in a private placement transaction. The Notes bore interest at the annual rate of 10%. Accrued interest was 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. Through February 15, 2018, the Company had made the interest payments in-kind through the issuance of additional notes totaling approximately $1.7 million.
As a result of the Company’s financial position, the Company’s management implemented a restructuring plan to better align the Company’s resources with its financial outlook including reductions in the Company’s workforce and associated operating expense, concluding the development of new products, and relocating its corporate offices. (See Note 10, Restructuring)
Additionally, pursuant to an amendment to the Notessoftware, firmware and related loan documents effective February 18, 2018, the interest rate has been reducedIP. This new product line will include multiple function accelerator platform products, which target specific application functions and will use a common software interface to 8%, the maturity date of the Notes has been extended to August 15, 2019, the optional conversion price has been reduced from $8.50 of Note principal per share of common stock to $4.25 of Note principal per share of common stock, and the redemption purchase price in the event of certain transactions, such as an acquisition, has been reduced from 120% to 100% of the total amount of debt to be redeemed. The Notes restrict the ability of the Company to incur any indebtedness for borrowed money, unless such indebtedness by its terms is expressly subordinated to the Notes in right of payment and to the security interest of the Note holder(s) in respect to the priority and enforcement of any security interest in property of the Company securing such new debt; provided that the Note holder(s) security interest and cash payment rights under the Notes shall be subordinate to a maximum of $5 million of indebtedness for a secured accounts receivable line of credit facility under certain conditions. (See Note 11, allow performance scalability over multiple hardware environments.Convertible Notes)
Our historical operating results and the initial requirement to repay the Notes in August 2018 raised substantial doubt about the Company's ability to continue as a going concern. As a result of the measures discussed above, the Company has better aligned its resources with its financial outlook, and, with the amendment of the terms of the Notes, the Company has until August 2019 to repay the Notes. Accordingly, the Company expects to satisfy its estimated liquidity needs for at least 12 months from the issuance of these financial statements and has mitigated its going concern risk. However, the Company cannot predict, with certainty, its ability to achieve and maintain profitability and the generation of positive cash flows, and the outcome of its future actions to generate liquidity, including the availability of additional financing.
Basis of Presentation The 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. Reverse Stock Split
On February 16, 2017, the Company effected a one-for-10 reverse stock split of its common stock. As a resultCOVID-19
The global outbreak of the reverse stock split, every ten sharescoronavirus disease 2019 (COVID-19) was declared a pandemic by the World Health Organization and a national emergency by the U.S. government in March 2020. This has negatively affected the U.S. and global economy, disrupted global supply chains, significantly restricted travel and transportation, resulted in mandated closures and orders to “shelter-in-place” and created significant disruption of the financial markets. The full extent of the COVID-19 impact on the Company’s operational and financial performance will depend on future developments, including the duration and spread of the pandemic and related actions taken by the U.S. and foreign government agencies to prevent disease spread, all of which are uncertain, out of the Company’s pre-reverse split outstanding common stockcontrol, and cannot be predicted. In March 2020, Santa Clara County in California, where the Company is based, issued a ”shelter-in-place” order (the Order) that was combinedinitially effective through April 7, 2020 and reclassified into one sharehas now been extended. The Company has been complying with the Order and have minimized business activities at the San Jose headquarters facility (the only facility). The Company has implemented a teleworking policy for employees and contractors to reduce on-site activity at the facility. The Order impacted the Company’s ability to produce and ship IC products in the second half of common stock. Proportionate voting rights and other rightsMarch 2020, as certain vendors in the San Francisco Bay Area closed in accordance with the Order. In April 2020, the Company resumed shipments of common stock holders were not affectedIC products, as they are supporting shipment of components for critical infrastructure, as defined by the reverse stock split. No fractional shares were issuedfederal government; however, employees are generally restricted from visiting customer and vendor sites in connectioncompliance with the reverse stock split; stockholders who would otherwise hold a fractional share of common stock received cashOrder, and, in an amount equalsome cases, have limited ability to conduct certain product testing and development activities. 65
The Company remains diligent in continuing to identify and manage risks to our business given the product obtained by multiplying (i) the closing sale pricechanging uncertainties related to COVID-19. The ultimate impact of the Company’s common stockCovid-19 pandemic on the effective datebusiness and results of operations is uncertain and difficult to predict, and the Company is closely monitoring impacts, especially to customer programs and our supply chain. The Company expects that the impacts of the reverse stock split, by (ii)COVID-19 pandemic will have a negative impact on its revenues for 2021, although the numberCompany is not in a position to quantify such impacts. In addition, the Company has and continues to experience longer lead times for certain components used to manufacture its IC products. While the Company believes that operations personnel are currently in a position to meet expected customer demand levels in the coming quarters, they recognize that unpredictable events could create difficulties in the months ahead. The Company may not be able to address these difficulties in a timely manner, which could negatively impact its business, results of shares of the Company’s common stock held by the stockholder that would otherwise have been exchanged for the fractional share interest. All stock optionsoperations, financial condition and restricted stock units outstanding and common stock reserved for issuance under the Company’s equity incentive plans immediately prior to the reverse stock split were adjusted by dividing the number of affected shares of common stock by 10 and, as applicable, multiplying the exercise price by 10, as a result of the reverse stock split. The common stock par value was adjusted to $0.001 in conjunction with the reverse stock split. All of the share numbers, share prices, and exercise prices have been adjusted, on a retroactive basis to reflect this 1-for-10 reverse stock split.cash flows. 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 the reported amounts of revenues and expenses recognized during the reported period. Material estimates may include assumptions made in determining reserves for uncollectible receivables, inventory write-downs, impairment of long-term assets, valuation allowance on deferred tax assets, accruals for potential liabilities and assumptions made in valuing equity instruments. Actual results could differ from those estimates. Foreign Currency
The functional currency of the Company’s foreign entities is the U.S. dollar. The financial statements of these entities are translated into U.S. dollars and the resulting gains or losses are included in other income, net in the consolidated statements of operations and comprehensive loss. Such gains and losses were not material for any period presented.
Cash Equivalents and Investments The Company has invested its excess cash in money market accounts, certificates of deposit, 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 and long-term investments are carried at fair value, with the unrealized holding gains and losses reported in accumulated other comprehensive loss.income (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 consolidated statements of operations and comprehensive loss.operations. The cost of securities sold is based on the specific identification method. 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 include cash equivalents and available-for-sale securities, which consisted 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. The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable, accounts payable, notes payable and other payables, approximate their fair values because of the short maturity of these instruments. The carrying values of lease obligations and long-term financing 66
obligations approximate their fair values because interest rates on these obligations are based on prevailing market interest rates. 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 noThe allowance for doubtful accounts receivable atwas $41,000 and zero as of December 31, 20172020 and 2016.2019, respectively. InventoryInventories
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 movingslow-moving inventory items. The Company recorded inventory write-downs duringof $0.1 million for each of the yearyears ended December 31, 2017 of $0.3 million, no inventory write-downs during the year ended December 31, 20162020 and inventory write-downs of $0.3 million during the year ended December 31, 2015.2019. Property and Equipment Property and equipment are originally recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally three to five years. Depreciation is recorded in cost of sales and operating expenses in the consolidated statements of operations and comprehensive loss. Leasehold improvements and assets acquired through capital leases are amortized over the shorter of their estimated useful life or the lease term, and amortization is recorded in operating expenses in the consolidated statements of operations and comprehensive loss.operations. Valuation of Long-lived Assets The Company evaluates the recoverability of long-lived assets with finite lives whenever events or changes in circumstances occur that indicate that the carrying value of the asset or asset group may not be recoverable. Finite-lived intangible assets are being amortized on a straight-line basis over their estimated useful lives of three to seven years. An impairment charge is recognized as the difference between the net book value of such assets and the fair value of such assets at the date of measurement. The measurement of impairment requires management to estimate future cash flows and the fair value of long-lived assets. 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.
Goodwill In January 2017, the Company early adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2017-04, Simplifying the Test for Goodwill Impairment (“ASU No. 2017-04”), which eliminates step 2, the computation of the implied fair value of goodwill to determine the amount of impairment, from the goodwill impairment test. Under the amendments in this update, theThe Company determines the amount of a potential goodwill impairment by comparing the fair value of the reporting unit with its carrying amount. To the extent the carrying value of a reporting unit exceeds its fair value, a goodwill impairment charge is recognized.
The Company has determined that it has a single reporting unit for purposes of performing its goodwill impairment test. As the Company uses the market approach to determine the step one fair value, the price of its common stock is an important component of the fair value calculation. If the Company’s stock price continues to experience significant price and volume fluctuations, this will impact the fair value of the reporting unit, which can lead to potential impairment in future periods. The Company reviews goodwill for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. The Company first assesses qualitative factors to determine whether it is more-likely-than-not that the fair value of the reporting unit is less than the carrying amount as a basis for determining whether it is necessary to perform an impairment test. If the qualitative assessment warrants further analysis, the Company compares the fair value of the reporting unit to its carrying value. The fair value of the reporting unit is determined using the market approach. If the fair value of the reporting unit exceeds the carrying value of net assets of the reporting unit, goodwill is not 67
impaired. If the carrying value of the reporting unit’s goodwill exceeds its fair value, then the Company must record an impairment charge equal to the difference. The Company performed its annual test for goodwill impairment as of September 1, 2017,2019, and, performeddue to a subsequentdecrease in the price per share of its common stock, the test on December 31, 2017. In both tests,results indicated the Company’s fair value exceeded itsgoodwill carrying value of net assets and, as such, there was no additional impairment of goodwill. During the fourth quarter of 2016,greater than its implied fair value. Further, the Company concluded a triggering event had occurred due to athe sustained decrease in the price per share of its common stock and related reduced market capitalization. The Companycapitalization as of September 30, 2019 and performed the first stepan additional test for impairment of the impairment test to identify potentialits goodwill impairment, and the test results indicatedasset resulting in further indication that the goodwill carrying value was still greater than its fair value. The Company then performed a step-two analysis to compare the carrying amount of goodwill to the implied fair value of the goodwill, and the Company determined the estimated fair values of the assets and liabilities of its single reporting unit. The fair values of the assets and liabilities identified in the impairment test were determined using the combination of the income approach and the market approach. The implied fair value of goodwill was measured as the excess of the fair value of the Company’s single reporting unit over the fair value of its assets and liabilities.value. As a result of the step-two test,both of these tests, the Company recorded a non-cash impairment chargecharges totaling $0.4 million. As a result of $9.9 million duringthese charges, the fourth quarter of 2016.Company’s goodwill balance was reduced to zero at September 30, 2019.
Revenue Recognition General
The Company recognizes revenue in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, and its amendments (ASC 606). As described below, the analysis of contracts under ASC 606 supports the recognition of revenue at a point in time, resulting in revenue recognition timing that is materially consistent with the Company’s historical practice of recognizing product revenue when title and risk of loss pass to the customer. The Company generates revenue primarily from the sales of IC products and licensing of its IP.intellectual property. Revenues are recognized when control is transferred to customers in amounts that reflect the consideration the Company expects to be entitled to receive in exchange for those goods. Revenue recognition is evaluated through the following five steps: (i) identification of the contract, or contracts, with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when or as a performance obligation is satisfied. IC products Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied. The majority of the Company's contracts have a single performance obligation to transfer products. Accordingly, the Company recognizes revenue when persuasive evidencetitle and risk of an arrangement exists, deliveryloss 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 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. IC products
price. The Company sells its products both directly to customers as well asand through distributors. Revenue from sales directly to customers isdistributors generally recognized at the time of shipment. under agreements with payment terms typically 60 days or less. 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. IC product revenue Royalty and costs relating to sales made through distributors with rights of return or stock rotation are generally deferred until the distributors sell the product to end customers due to the Company’s inability to estimate future returns and credits to be issued. Distributors are generally able to return up to 10% of their purchases for slow, non-moving or obsolete inventory for credit every six months. At the time of shipment to distributors, an accounts receivable for the selling price is recorded, as there is a legally enforceable right to receive payment, and inventory is relieved, as legal title to the inventory is transferred upon shipment. Revenues are recognized upon receiving notification from the distributors that products have been sold to end customers. Distributors provide information regarding products and quantity, end customer shipments and remaining inventory on hand. The associated deferred margin is included in the accrued expenses and other line item in the consolidated balance sheets.
Royalty
The Company’s licensing contracts typically also provide for royalties based on the licensees’licensee’s use of the Company’s memory technology in theirits currently shipping commercial products. The Company recognizes royaltiesestimates its royalty revenue in the calendar quarter in which it receives the licensees’ reports. 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 oflicensee uses the licensed technology is typicallytechnology. Payments are received in the finalsubsequent quarter.
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Contract liabilities – deferred revenue recognition criterion met, at which time revenue is recognized. If any The Company’s contract liabilities consist of the criteria are not met, revenue recognition isadvance customer payments and deferred until such time as all criteria have been met. Support and maintenance revenue is recognized ratably over the period during which the obligation exists, typically 12 months.revenue. The Company recognized no licensingclassifies advance customer payments and deferred revenue duringas current or non-current based on the yearstiming of when the Company expects to recognize revenue. As of December 31, 2020, contract liabilities were in a current position and included in deferred revenue. During the year ended December 31, 2017, 20162020, the Company recognized revenue of $0.2 million that had been included in deferred revenue as of December 31, 2019. During the year ended December 31, 2019, the Company recognized revenue of $0.3 million that had been included in deferred revenue as of December 31, 2018. See Note 8 for disaggregation of revenue by geography. The Company does not have significant financing components, as payments from customers are typically due within 60 days of invoicing, and 2015.the Company has elected the practical expedient to net value financing components that are less than one year. Shipping and handling costs are generally incurred by the customer, and, therefore, are not recorded as revenue. 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 includesinclude engineering support to assist in the commencement of production of a licensee’s products. Advertising Costs Advertising costs are expensed as incurred. Advertising costs were not significant infor the years ended December 31, 2017, 20162020 and 2015.2019. Research and Development Engineering costs are recorded as research and development expense in the period incurred. Stock-Based Compensation The Company recognizes stock-basedperiodically issues stock options and restricted stock awards to employees and non-employees. The Company accounts for such grants based on ASC 718, whereby the value of the award is measured on the date of grant and recognized as compensation for awardsexpense on a straight-line basis over the requisite service period, usually the vesting period, based on the grant-date fair value. period. The Company records stock-based compensation expense for stock options granted to non-employees, excluding non-employee directors, based upon the estimated then-current fair value of the equity instrumentCompany’s stock options is estimated using the Black-Scholes pricing model. Assumptions usedBlack-Scholes-Merton Option Pricing (Black Scholes) model, which uses certain assumptions related to valuerisk-free interest rates, expected volatility, expected life of the equity instruments are consistent with equity instruments issued to employees. The Company chargesoptions, and future dividends. Compensation expense is recorded based upon the value ofderived from the equity instrument to earnings overBlack-Scholes model. The assumptions used in the term of the service agreement and the unvested shares underlying the option are subject to periodic revaluation over the remaining vesting period.Black-Scholes model could materially affect compensation expense recorded in future periods. 69
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.plan, conversion of convertible debt and exercise of warrants. 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): | | | | | | | | December 31, | | | | December 31, | | 2020 | | | 2019 | | | | 2017 | | 2016 | | 2015 | | | | | | | | | | Options outstanding to purchase common stock | | 307 | | 522 | | 839 | | Employee stock purchase plan | | — | | 44 | | 44 | | Options to purchase common stock | | | | 159 | | | | 161 | | Unvested restricted common stock units | | 376 | | 148 | | 24 | | | 65 | | | | 103 | | Convertible debt | | 1,081 | | 926 | | — | | | 271 | | | | 254 | | Outstanding warrants | | 663 | | — | | — | | Warrants | | | | 1,879 | | | | 1,994 | | Total | | 2,427 | | 1,640 | | 907 | | | 2,374 | | | | 2,512 | |
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 20132014 through 20172018 tax years generally remain subject to examination by U.S. federal and state tax authorities, and the 20092010 through 20172019 tax years generally remain subject to examination by foreign tax authorities. As ofAt December 31, 2017,2020, the Company did not have any material unrecognized tax benefits nor expect its unrecognized tax benefits to change significantly over the next 12 months. The Company recognizes interest related to unrecognized tax benefits in itsas income tax expense and penalties related to unrecognized tax benefits as other income and expenses.expense. During the years ended December 31, 2017, 20162020 and 2015,2019, the Company did not recognize any interest or penalties related to unrecognized tax benefits.
Comprehensive Loss Comprehensive loss includes unrealized gains and losses on available-for-sale securities. Realized gains and losses on available-for-sale securities are reclassifiedrepresents the changes in equity of an enterprise, other than those resulting from accumulated otherstockholder transactions. Accordingly, comprehensive loss and includedmay include certain changes in other income,equity that are excluded from net in the consolidated statements of operations and comprehensive loss. All amounts recorded were not significant inFor the years ended December 31, 2017, 20162020 and 2015. Recent Accounting Pronouncements
In May 2014,2019, the FASB issued ASU No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers, which requires an entity to recognizeCompany’s comprehensive loss was the amount of revenue to which it expects to be entitled for the transfer of promised goods and services to customers. In March, April and May 2016, the FASB issued additional updates to the new revenue standard relating to reporting revenue on a gross versussame as its net basis, identifying performance obligations and licensing arrangements, and narrow-scope improvements and practical expedients, respectively. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. generally accepted accounting principles (“GAAP”) when it becomes effective. The accounting standard is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017. Early adoption is permitted for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. ASU 2014-09 provides for one of two methods of transition: retrospective application to each prior period presented; or recognition of the cumulative effect of retrospective application of the new standard in the period of initial application.
The Company has continued to monitor FASB activity related to the new standard and has assessed certain interpretative issues and the associated implementation of the new standard. The Company has drafted its accounting policy for the new standard based on a detailed review of its business and contracts. While the Company continues to assess all potential impacts of the new standard, it does not currently expect that the adoption of the new revenue
standard will have a material impact on its revenues, results of operations or financial position. However, as a result of the adoption of this standard, the Company expects to make material additional footnote disclosures related to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company will adopt the new revenue standard effective January 1, 2018. The Company currently intends to adopt the new standard using the modified retrospective method.
In February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”), Leases. ASU 2016-02 requires lessees to recognize a right-of-use asset and a lease liability equal to the present value of the lease payments for virtually all leases not classified as short term. Consistent with current U.S. GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily depend on its classification as a finance or operating lease. The ASU also will require disclosures to provide additional qualitative and quantitative information about the amounts recorded in the financial statements. ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018, with early adoption permitted. The new standard requires a modified retrospective transition for application at the beginning of the earliest comparative period presented. The Company is currently evaluating the impact that ASU 2016-02 will have on its consolidated financial statements and related disclosures.loss.
In March 2016, the FASB issued ASU No. 2016-09 (“ASU 2016-09”), Improvements to Employee Share-Based Payment Accounting. This guidance simplifies the accounting for the taxes related to stock-based compensation, requiring excess tax benefits and deficiencies to be recognized as a component of income tax expense rather than equity. ASU 2016-09 also requires excess tax benefits and deficiencies to be presented as operating activities on the statement of cash flows and allows an entity to make an accounting policy election to either estimate expected forfeitures or to account for them as they occur. The adoption requires recognition through retained earnings of any pre-adoption date net operating loss carryforwards (“NOLs”) from non-qualified stock options and other employee stock-based payments. As a result, the Company determined the impact of the adoption to be a $10.5 million increase to deferred tax assets related to stock-based compensation incurred as of December 31, 2017 with a corresponding increase to the Company's valuation allowance for financial statement purposes. 70
Note 2: Consolidated Balance Sheets and Statements of Operations and Comprehensive Loss Components | | | | | | | | | | December 31, | | | | 2017 | | 2016 | | | | (in thousands) | | Inventories: | | | | | | | | Work-in-process | | $ | 1,612 | | $ | 1,270 | | Finished goods | | | 154 | | | 181 | | | | $ | 1,766 | | $ | 1,451 | | | | | | | | | | Prepaid expenses and other: | | | | | | | | Prepaid IC material and production costs | | $ | 1,107 | | $ | 3 | | Prepaid insurance | | | 115 | | | 116 | | Prepaid software | | | 38 | | | 250 | | Interest receivable | | | — | | | 17 | | Other | | | 87 | | | 87 | | | | $ | 1,347 | | $ | 473 | | Property and equipment, net: | | | | | | | | Equipment, furniture and fixtures and leasehold improvements | | $ | 4,478 | | $ | 5,906 | | Acquired software | | | 296 | | | 304 | | | | | 4,774 | | | 6,210 | | Less: Accumulated depreciation and amortization | | | (3,947) | | | (4,936) | | | | $ | 827 | | $ | 1,274 | |
Intangible assets, net:
Identifiable intangible assets were (dollar amounts in thousands):
| | | | | | | | | | | | | | | December 31, 2017 | | | | | | Gross | | | | | Net | | | | Life | | Carrying | | Accumulated | | Carrying | | | | (years) | | Amount | | Amortization | | Amount | | Patent license | | 7 | | | $ 780 | | | $ 669 | | | $ 111 | |
Sheet Detail | | | | | | | | | | | | | | | December 31, 2016 | | | | | | Gross | | | | | Net | | | | Life | | Carrying | | Accumulated | | Carrying | | | | (years) | | Amount | | Amortization | | Amount | | Patent license | | 7 | | | $ 780 | | | $ 557 | | | $ 223 | |
| | December 31, | | | | 2020 | | | 2019 | | | | (in thousands) | | Inventories: | | | | | | | | | Work-in-process | | $ | 414 | | | $ | 746 | | Finished goods | | | 185 | | | | 222 | | | | $ | 599 | | | $ | 968 | | | | | | | | | | | Prepaid expenses and other: | | | | | | | | | Prepaid inventory and production costs | | $ | 422 | | | $ | 174 | | Prepaid insurance | | | 144 | | | | 122 | | Prepaid software | | | 18 | | | | 24 | | Refundable tax | | | — | | | | 61 | | Other | | | 84 | | | | 91 | | | | $ | 668 | | | $ | 472 | | | | | | | | | | | Property and equipment, net: | | | | | | | | | Equipment, furniture and fixtures and leasehold improvements | | $ | 4,265 | | | $ | 4,239 | | Acquired software | | | 129 | | | | 123 | | | | | 4,394 | | | | 4,362 | | Less: Accumulated depreciation and amortization | | | (4,273 | ) | | | (4,165 | ) | | | $ | 121 | | | $ | 197 | |
Amortization expense has been included in research and development expense in the consolidated statements of operations and comprehensive loss. The remaining estimated aggregate amortization expense to be recognized is approximately $0.1 million for the year ending December 31, 2018.
Accrued expenses and other: | | | | | | | | | | | December 31, | | | December 31, | | | | 2017 | | 2016 | | | 2020 | | | 2019 | | | | (in thousands) | | | (in thousands) | | Accrued wages and employee benefits | | $ | 616 | | $ | 1,051 | | | $ | 313 | | | $ | 296 | | Accrued restructuring liabilities | | | 478 | | | 5 | | | Professional fees, legal and consulting | | | | 690 | | | | 229 | | IC development and wafer purchases | | | | — | | | | 104 | | Warranty accrual | | | | 41 | | | | 63 | | Interest payable | | | 346 | | | 314 | | | | 93 | | | | 84 | | IC development and wafer purchase costs | | | 335 | | | 598 | | | Professional fees, legal and consulting | | | 182 | | | 282 | | | Corporate taxes | | | 153 | | | 52 | | | | 18 | | | | 20 | | Employee stock purchase plan withholdings | | | — | | | 200 | | | Other | | | 397 | | | — | | | | 145 | | | | 359 | | | | $ | 2,507 | | $ | 2,502 | | | $ | 1,300 | | | $ | 1,155 | |
As of December 31, 2017 and 2016, the amounts in long-term liabilities comprised deferred rent.
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Note 3: Fair Value of Financial Instruments The estimated fair values of financial instruments outstanding were (in thousands): | | | | | | | | | | | | | | | | December 31, 2017 | | | | | | Unrealized | | Unrealized | | Fair | | | | Cost | | Gains | | Losses | | Value | | Cash and cash equivalents | | $ | 3,868 | | $ | — | | $ | — | | $ | 3,868 | |
| | December 31, 2020 | | | | | | | | Unrealized | | | Unrealized | | | Fair | | | | Cost | | | Gains | | | Losses | | | Value | | Cash and cash equivalents | | $ | 5,889 | | | $ | — | | | $ | — | | | $ | 5,889 | |
| | | | | | | | | | | | | | | | December 31, 2016 | | | | | | Unrealized | | Unrealized | | Fair | | | | Cost | | Gains | | Losses | | Value | | Cash and cash equivalents | | $ | 8,766 | | $ | — | | $ | — | | $ | 8,766 | | Short-term investments: | | | | | | | | | | | | | | U.S. government-sponsored enterprise bonds | | $ | 762 | | $ | — | | $ | — | | $ | 762 | | Corporate notes | | | 240 | | | — | | | — | | | 240 | | Total short-term investments | | $ | 1,002 | | $ | — | | $ | — | | $ | 1,002 | |
| | December 31, 2019 | | | | | | | | Unrealized | | | Unrealized | | | Fair | | | | Cost | | | Gains | | | Losses | | | Value | | Cash and cash equivalents | | $ | 6,053 | | | $ | — | | | $ | — | | | $ | 6,053 | | Short-term investments | | | 300 | | | | — | | | | — | | | | 300 | | | | $ | 6,353 | | | $ | — | | | $ | — | | | $ | 6,353 | |
The unrealized losses from available-for-sale securities as of December 31, 20172020 and 20162019 were not material. The following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) as of December 31, 20172020 and 20162019 (in thousands): | | | | | | | | | | | | | | | | December 31, 2017 | | | | Fair Value | | Level 1 | | Level 2 | | Level 3 | | Money market funds | | $ | 621 | | $ | 621 | | $ | — | | $ | — | |
| | December 31, 2020 | | | | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | | Money market funds | | $ | 3,893 | | | $ | 3,893 | | | $ | — | | | $ | — | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | | | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | | Money market funds | | $ | 4,574 | | | $ | 4,574 | | | $ | — | | | $ | — | | Corporate notes and commercial paper | | $ | 300 | | | $ | — | | | $ | 300 | | | $ | — | |
| | | | | | | | | | | | | | | | December 31, 2016 | | | | Fair Value | | Level 1 | | Level 2 | | Level 3 | | Money market funds | | $ | 84 | | $ | 84 | | $ | — | | $ | — | | U.S. government-sponsored enterprise bonds | | | 3,767 | | | — | | | 3,767 | | | — | | Municipal bonds | | | 4,027 | | | — | | | 4,027 | | | — | | Corporate notes | | | 480 | | | — | | | 480 | | | — | | Total assets | | $ | 8,358 | | $ | 84 | | $ | 8,274 | | $ | — | |
During the year ended December 31, 2020, $0.3 million of corporate notes and commercial paper matured and were transferred to Level 1. There were no transfers in or out of Level 1 and Level 2 securities during the yearsyear ended December 31, 2017 and 2016.2019. Note 4: Income Taxes The income tax provision (benefit) consisted of the following (in thousands): | | | | | | | | | | | | | | Year Ended | | | Year Ended | | | | December 31, | | | December 31, | | | | 2017 | | 2016 | | 2015 | | | 2020 | | | 2019 | | Current portion: | | | | | | | | | | | | | | | | | | | State | | $ | 3 | | $ | 3 | | $ | 3 | | | Foreign | | | 7 | | | 42 | | | 83 | | | | | | 10 | | | 45 | | | 86 | | | Federal | | | $ | — | | | $ | (182 | ) | Deferred portion: | | | | | | | | | | | | | | | | | | | Federal | | | (243) | | | — | | | — | | | | — | | | | 182 | | | | $ | (233) | | $ | 45 | | $ | 86 | | | $ | — | | | $ | — | |
On December 22, 2017, the Tax Cuts and Jobs Act (“the Act”) was signed into law making significant changes to the Internal Revenue Code of 1986, as amended. Changes include, but are not limited to, reducing the U.S. federal corporate tax rate from 35.0% to 21.0% as of January 1, 2018 and repealing the alternative minimum tax (“AMT”) for tax years beginning in 2018.
Income tax effects resulting from changes in tax laws are accounted for by the Company in accordance with the authoritative guidance, which requires that these tax effects be recognized in the period in which the law is enacted and the effects are recorded as a component of provision for income taxes from continuing operations.
As a result of the Act, the Company revalued its federal deferred tax assets and liabilities to the new rate of 21%. The Company’s effective tax rate for the year ended December 31, 2017 was not impacted from this revaluation due to its valuation allowance. Additionally, the Company paid $0.2 million in federal AMT tax for 2011, which, under the Act, is now refundable through 2022 subject to limitations by year, and is therefore recorded as a deferred tax asset as of December 31, 2017.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. 72 Significant components of the Company’s deferred tax assets and liabilities were (in thousands): | | | | | | | | | Year Ended | | | | December 31, | | | December 31, | | | | 2017 | | 2016 | | | 2020 | | | 2019 | | Deferred tax assets: | | | | | | | | | | | | | | | | Federal and state loss carryforwards | | $ | 49,533 | | $ | 68,829 | | | $ | 3,031 | | | $ | 1,697 | | Reserves, accruals and other | | | 391 | | | 519 | | | | 239 | | | | 156 | | Depreciation and amortization | | | 1,100 | | | 1,718 | | | | 1,284 | | | | 1,629 | | Deferred stock-based compensation | | | 2,483 | | | 4,287 | | | | 2,698 | | | | 2,613 | | Research and development credit carryforwards | | | 15,487 | | | 13,867 | | | | 6,613 | | | | 6,707 | | Foreign tax and other credits | | | 513 | | | 536 | | | | - | | | | 61 | | Total deferred tax assets | | | 69,507 | | | 89,756 | | | | 13,865 | | | | 12,863 | | Deferred tax liabilities: | | | | | | | | | Acquired intangible assets and other | | | 408 | | | 328 | | | Less: Valuation allowance | | | (68,857) | | | (89,428) | | | | (13,865 | ) | | | (12,802 | ) | Net deferred tax assets | | $ | 242 | | $ | — | | | $ | — | | | $ | 61 | |
The $1.1 million increase in the valuation allowance during 2020 was primarily the result of an increase to the net operating loss carryforwards for the current year. The valuation allowance decreasedincreased by $20.6$0.9 million forduring the year ended December 31, 2017 and increased by $9.8 million for the year ended December 31, 2016.2019. As of December 31, 2017, the Company had NOLs of approximately $196.1 million for federal income tax purposes and approximately $119.6 million for state income tax purposes. These losses are available to reduce future taxable income and expire at various times from 2025 through 2037.
The Company also had federal research and development tax credit carryforwards of approximately $9.1 million, which will begin expiring in 2018, and California research and development credits of approximately $8.1 million, which do not have an expiration date. The Company had remaining foreign tax credits available for federal income tax purposes of approximately $0.3 million, which will begin expiring in 2018.
Utilization of the Company’s NOLsnet operating losses (NOLs) and tax credit carryforwards may beis subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code (“IRC”);IRC and similar state provisions. Section 382 of the IRC (“Section 382”)(Section 382) imposes limitations on a corporation’s ability to utilize its NOLs,NOL and tax credit carryforwards, if it experiences an “ownership change.” In general terms, an ownership change may result from transactions increasing the ownership percentage of certain stockholders in the stock of the corporation by more than 50% over a three-year period. In the event of an ownership change, utilization of the NOLs would be subject to an annual limitation under Section 382 determined by multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term tax-exempt rate. The CompanyWhile a formal study has not completedbeen performed, the Company believes that a Section 382 studyownership change occurred as a result of a financing effected in recent years; however, should a study be completed, certain NOLs may be subject to such limitations. Any future annualOctober 2018. The Company believes this Section 382 limitation maywill result in approximately 97% of the expirationfederal and state NOLs expiring before they can be utilized, and approximately 96% of NOLsthe federal tax credit carryforwards expiring before utilization.they can be utilized. The Company is in the process of dissolving its only foreign subsidiary. As of December 31, 2017,2020, the Company has no unremitted earningshad NOLs of approximately $205.2 million for federal income tax purposes and approximately $127.0 million for state income tax purposes. Only approximately $11.3 million of the federal NOLs and $9.5 million of the state NOLs are expected to be available before expiration due to the Section 382 limitation. These NOLs are available to reduce future taxable income and will expire at various times from its foreign subsidiary.2025 through 2037, except federal NOLs from 2018 to 2020 which will never expire. The Company also had federal research and development tax credit carryforwards of approximately $8.7 million, which will begin expiring in 2020, and California research and development credits of approximately $8.4 million, which do not have an expiration date.
73 A reconciliation of income taxes provided at the federal statutory rate (35%(21%) to the actual income tax provision is as follows (in thousands): | | | | | | | | | | | | Year Ended | | | | Year Ended December 31, | | | December 31, | | | | 2017 | | 2016 | | 2015 | | | 2020 | | | 2019 | | Income tax benefit computed at U.S. statutory rate | | $ | (3,815) | | $ | (11,229) | | $ | (10,989) | | | $ | (794 | ) | | $ | (542 | ) | State income tax (net of federal benefit) | | | 3 | | | 3 | | | 3 | | | Foreign income tax at rate different from U.S. statutory rate | | | 3 | | | (7) | | | (15) | | | Research and development credits | | | (480) | | | (981) | | | (1,580) | | | | (66 | ) | | | (170 | ) | Stock-based compensation | | | (40) | | | 75 | | | 123 | | | Amortization of intangible assets | | | (100) | | | (100) | | | (100) | | | | (60 | ) | | | (60 | ) | Goodwill impairment | | | — | | | 1,856 | | | — | | | | — | | | | 17 | | Federal tax rate reduction | | | (26,617) | | | — | | | — | | | Valuation allowance changes affecting tax provision | | | 30,811 | | | 10,022 | | | 12,588 | | | | 919 | | | | 752 | | Other | | | 2 | | | 406 | | | 56 | | | | 1 | | | | 3 | | Income tax (benefit) provision | | $ | (233) | | $ | 45 | | $ | 86 | | | Income tax provision | | | $ | — | | | $ | — | |
The domestic and foreign components of losslosses before income tax provision for the years ended December 31, 2020 and 2019 were (in thousands):solely attributable to US operations. | | | | | | | | | | | | | Year Ended December 31, | | | | 2017 | | 2016 | | 2015 | | U.S. | | $ | (11,063) | | $ | (31,115) | | $ | (31,580) | | Non-U.S. | | | 162 | | | (888) | | | 183 | | | | $ | (10,901) | | $ | (32,003) | | $ | (31,397) | |
Note 5: Stock-Based Compensation Equity Compensation Plans Common Stock OptionEquity Plans In 2000,2010, the Company adopted the 2000 Stock2010 Equity Incentive Plan whichand later amended it in 2014, 2017 and 2018 (the Amended 2010 Plan). The Amended 2010 Plan was amended in 2004 (“Amended 2000 Plan”), and terminated in 2010.August 2019 and remains in effect as to outstanding equity awards granted prior to the date of expiration. As of December 31, 2017,2019, no options were available for future issuancenew awards may be made under the Amended 20002010 Plan, as the remaining options outstanding under the Amended 2000 Plan expired in June 2016.and equity awards for approximately 172,000 shares were outstanding. In June 2010,August 2019, the Company’s stockholders approved the 2010 Equity2019 Stock Incentive Plan which was amended(the 2019 Plan), and restated in 2014 and amended again in 2017 (“it replaced the Amended 2010 Plan”).Plan. The Amended 20102019 Plan authorizes the board of directors or the compensation committee of the board of directors to grant a broad range of awards including stock options, stock appreciation rights, restricted stock, performance-based awards, and restricted stock units. Under the Amended 20102019 Plan, 400,000182,500 shares were initiallyhave been reserved for issuance. In June 2014, the Company’s stockholders approved an amendment increasing the number of shares reserved for issuance by 150,000 shares. In December 2017, the Company’s stockholders approved an amendment increasing the number of shares reserved for issuance by an additional 200,000 shares. In addition, the terms of the Amended 2010The 2019 Plan provide for an automatic annual increase in the share reserve of 50,000 on January 1 of each year. The Amended 2010 Plan has a 10-year term and provides for annual option grants or other awards to the Company’s non-employee directors to acquire up to 40,0002,000 shares and for a one-time grant of an option or other award to a non-employee director to acquire up to 120,0006,000 shares upon his or her initial appointment or election to the board of directors. The term of options granted under Under the Amended 20102019 Plan, may not exceed ten years. Thethe term of all incentive stock options granted to a person who, at the time of grant, owns stock representing more than 10% of the voting power of all classes of the Company’s stock may not exceed five years. The exercise price of stock options granted under the Amended 20102019 Plan must be at least equal to the fair market value of the shares on the date of grant. Generally, options grantedawards under the Amended 20102019 Plan will vest over a three to four-year period, and options will have a six or ten-year term.term of 10 years from the date of grant. In addition, the Amended 20102019 Plan provides for automatic acceleration of vesting for options granted to non-employee directors upon a change of control of the Company. The Amended 20002010 Plan and Amended 2010the 2019 Plan are referred to collectively as the “Plans.” The Company may also award shares to new employees outside the Plans, as material inducements to the acceptance of employment with the Company, as permitted under the Listing Rules of the Nasdaq Stock Market. These grantsawards 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. As ofAt December 31, 20172020 and 2016,2019, no such grantsawards were outstanding. Employee Stock Purchase Plan
In June 2010, the Company’s stockholders approved the 2010 Employee Stock Purchase Plan (“ESPP”). A total of 200,000 shares of common stock were initially reserved for issuance under the ESPP in 2010. On September 1, 2010, the Company commenced the first offering period under the ESPP. In May 2015, the Company’s stockholders approved an amendment increasing the number of shares reserved for issuance by 200,000 shares. The ESPP, which is intended to qualify under Section 423 of the IRC, 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, 2016, approximately 37,300 shares of common stock were issued at an aggregate purchase price of $197,000 under the ESPP. On August 31, 2016, approximately 31,900 shares of common stock were issued at an aggregate purchase price of $167,000 under the ESPP. In February 2017, the Company’s board of directors canceled the current purchase period under the ESPP, decided not to authorize a new purchase period and directed the Company to refund payroll contributions made under the ESPP during the purchase period that began September 1, 2016. As of December 31, 2017, there were approximately 150,000 shares authorized and unissued under the ESPP.
Stock-Based Compensation Expense The unamortized compensation cost, net of expected forfeitures, as ofat December 31, 20172020, was $1.0$0.2 million related to stock options and is expected to be recognized as expense over a weighted average period of approximately 2.41.4 years. The unamortized 74
compensation cost, net of expected forfeitures, as ofat December 31, 20172020, was $0.6$0.3 million related to restricted stock units and is expected to be recognized as expense over a weighted average period of approximately 1.10.8 years. For the yearyears ended December 31, 2017,2020 and 2019, the fair value of options and awards vested was approximately $0.6 million. The Company is required to present 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 consolidated statements of cash flows. For the years ended December 31, 2017, 2016$0.2 million and 2015, there were no such tax benefits associated with the exercise of stock options. $0.3 million, respectively.
Valuation Assumptions and Expense Information for Stock-based Compensation The fair value of the Company’s share-based payment awards for the years ended December 31, 2017, 20162020, and 20152019 was estimated on the grant dates using the Black-Scholes valuation option-pricing model with the following assumptions: | | | | | | | | | | | | | | | | | | Year Ended December 31, | | Year Ended | | | | | | | | | December 31, | | | 2017 | | 2016 | | 2015 | | 2020 | | 2019 | Risk-free interest rate | | 1.6% - 1.8% | | 1% - 2.1% | | 0.6% -1.7% | | 1.6% - 2.5% | | 1.6% - 2.5% | Volatility | | 70.2% - 101.5% | | 61.4% - 65.0% | | 55.7% - 59.3% | | 128% - 138.5% | | 128% - 138.5% | Expected life (years) | | 4.0 | | 3.0 - 5.0 | | 3.0 - 5.0 | | 3.0 - 5.0 | | 3.0 - 5.0 | Dividend yield | | 0% | | 0% | | 0% | | 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 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. ThePrior to January 1, 2019, the stock-based compensation expense recorded iswas adjusted based on estimated forfeiture rates. An annualized forfeiture rate has beenwas used as a best estimate of future forfeitures based on the Company’s historical forfeiture experience. The stock-based compensation expense will bewas adjusted in later periods if the actual forfeiture rate is different from the estimate. Upon the adoption of ASU No. 2016-09 on January 1, 2019, the Company elected to change its accounting policy to account for forfeitures as they occur. Historically, estimated forfeitures were immaterial to the consolidated financial statements.
Common Stock Options and Restricted Stock A summary of stock option and restricted stock unit (“RSU”)(RSU) award activity under the Plans is presented below (in thousands, except exercise price): | | | | | | | | | | | | | Awards outstanding | | | | | | | | Weighted | | | | Shares | | | | Average | | | | Available | | Number of | | Exercise | | | | for Grant | | Shares | | Prices | | Balance at January 1, 2015 | | 176 | | 599 | | $ | 38.70 | | Additional shares authorized under the Plan | | 50 | | — | | | — | | RSUs cancelled and returned to the Plan | | 2 | | — | | | — | | Options granted | | (154) | | 154 | | $ | 20.20 | | Options cancelled and returned to the Plan | | 70 | | (70) | | $ | 35.20 | | Options exercised | | — | | (8) | | $ | (16.40) | | Options expired | | (38) | | — | | $ | 32.00 | | Balance at December 31, 2015 | | 106 | | 675 | | $ | 35.10 | | Additional shares authorized under the Amended 2010 Plan | | 50 | | — | | | — | | RSUs granted | | (144) | | — | | | — | | RSUs cancelled and returned to Plan | | 7 | | — | | | — | | Options granted | | (384) | | 384 | | $ | 6.96 | | Options cancelled and returned to Plan | | 479 | | (479) | | $ | 35.64 | | Options cancelled and expired | | — | | (58) | | $ | 44.80 | | Balance at December 31, 2016 | | 114 | | 522 | | $ | 13.88 | | Additional shares authorized under the Amended 2010 Plan | | 250 | | — | | | — | | RSUs granted | | (407) | | — | | | — | | RSUs cancelled and returned to Plan | | 59 | | — | | | — | | Options granted | | (160) | | 160 | | $ | 0.76 | | Options cancelled and returned to Plan | | 375 | | (375) | | $ | 15.69 | | Balance at December 31, 2017 | | 231 | | 307 | | $ | 4.81 | |
On July 26, 2016, the Company initiated a one-time option exchange program pursuant to which employees (excluding the chief executive officer and non-employees, including members of the Company’s board of directors) who held certain options to purchase shares of the Company’s common stock (such options, eligible options) were given the opportunity to exchange such eligible options for a lesser number of replacement options with a lower exercise price. Upon the expiration of the option exchange program on August 23, 2016, the Company accepted for cancellation exchanged options to purchase an aggregate of 456,995 shares of common stock and issued replacement options covering 334,027 shares of common stock from the Amended 2010 Plan. The exchanged eligible options included options to purchase 113,531 shares of the Company’s common stock, which were originally inducement grants. The replacement options have an exercise price of $7.20 per share and vest monthly over three years. This one-time option exchange was treated as a modification for accounting purposes and resulted in incremental expense of approximately $926,000, which was calculated using the Black-Scholes option pricing model. The incremental expense and the unamortized expense remaining on the exchanged options are being amortized over the three-year vesting period of the replacement options.
| | | | | | Options outstanding | | | | | | | | | | | | Weighted | | | | Shares | | | | | | | Average | | | | Available | | | Number of | | | Exercise | | | | for Grant | | | Shares | | | Prices | | Balance as of January 1, 2019 | | | 200 | | | | 17 | | | $ | 96.24 | | Additional shares authorized under the Plan | | | 183 | | | | — | | | | — | | RSUs granted | | | (120 | ) | | | — | | | | — | | RSUs cancelled and returned to the Plan | | | 1 | | | | — | | | | — | | Options granted | | | (145 | ) | | | 145 | | | $ | 2.64 | | Options cancelled and returned to the Plan | | | 1 | | | | (1 | ) | | $ | 144.00 | | Plan termination | | | (32 | ) | | | — | | | $ | — | | Balance as of December 31, 2019 | | | 88 | | | | 161 | | | $ | 10.85 | | RSUs granted | | | (9 | ) | | | — | | | | — | | RSUs cancelled and returned to the Plan | | | 2 | | | | — | | | | — | | Options cancelled | | | — | | | | (2 | ) | | $ | 4.00 | | Balance as of December 31, 2020 | | | 81 | | | | 159 | | | $ | 10.82 | |
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A summary of restricted stock unitRSU activity under the Plans is presented below (in thousands, except fair value): | | | | | | | | | | | | Weighted | | | | | | Weighted | | | | | | | Average | | | | | | Average | | | Number of | | | Grant-Date | | | | Number of | | Grant-Date | | | Shares | | | Fair Value | | | | Shares | | Fair Value | | | Non-vested shares at January 1, 2015 | | 39 | | $ | 46.11 | | | Non-vested shares as of January 1, 2019 | | | | 14 | | | $ | 24.31 | | Granted | | — | | $ | — | | | | 120 | | | $ | 3.79 | | Vested | | (13) | | $ | 45.97 | | | | (30 | ) | | $ | 12.89 | | Cancelled | | (2) | | $ | 46.20 | | | | (1 | ) | | $ | 25.13 | | Non-vested shares at December 31, 2015 | | 24 | | $ | 47.17 | | | Non-vested shares as of December 31, 2019 | | | | 103 | | | $ | 3.75 | | Granted | | 144 | | $ | 5.30 | | | | 9 | | | $ | 1.74 | | Vested | | (12) | | $ | 46.06 | | | | (43 | ) | | $ | 3.72 | | Cancelled | | (8) | | $ | 15.67 | | | | (4 | ) | | $ | 4.00 | | Non-vested shares at December 31, 2016 | | 148 | | $ | 8.13 | | | Granted | | 407 | | $ | 0.93 | | | Vested | | (120) | | $ | 5.76 | | | Cancelled | | (59) | | $ | 5.04 | | | Non-vested shares at December 31, 2017 | | 376 | | $ | 1.58 | | | Non-vested shares as of December 31, 2020 | | | | 65 | | | $ | 3.48 | |
The total intrinsic value of outstanding RSUs was $0.2 million for each of the restricted stock units outstanding as ofyears ended December 31, 2017 was$0.4 million.2020 and 2019. The following table summarizes significant ranges of outstanding and exercisable options as ofat December 31, 20172020 (in thousands, except contractual life and exercise price): | | | | | | | | | | | | | | | | | | | Options Outstanding | | Options Exercisable | | | | | | | | | Weighted | | | | | | | | | | | | | | | | | Average | | | | | | | | | | | | | | | | | Remaining | | Weighted | | | | Weighted | | | | | | | | | Contractual | | Average | | | | Average | | Aggregate | | | | Number | | Life | | Exercise | | Number | | Exercise | | Intrinsic | | Range of Exercise Price | | Outstanding | | (in Years) | | Price | | Exercisable | | Price | | value | | $0.75 - $2.35 | | 160 | | 5.80 | | $ | 0.75 | | — | | $ | — | | $ | 58 | | $2.36 - $7.19 | | 11 | | 8.66 | | $ | 4.92 | | 6 | | $ | 5.18 | | $ | — | | $7.20 - $20.49 | | 114 | | 8.64 | | $ | 7.20 | | 51 | | $ | 7.20 | | $ | — | | $20.50 - $43.59 | | 20 | | 6.83 | | $ | 20.89 | | 15 | | $ | 21.02 | | $ | — | | $44.60 - $46.19 | | 1 | | 2.76 | | $ | 44.60 | | 1 | | $ | 44.60 | | $ | — | | $46.20 - $46.20 | | 1 | | 6.13 | | $ | 46.20 | | — | | $ | 46.20 | | $ | — | | $0.75 - $46.20 | | 307 | | 7.02 | | $ | 4.81 | | 73 | | $ | 10.55 | | $ | 58 | | Vested and expected to vest | | 281 | | 7.09 | | $ | 5.07 | | | | | | | $ | 50 | | Exercisable | | 73 | | 8.15 | | $ | 10.55 | | | | | | | $ | — | |
| | Options Outstanding | | | Options Exercisable | | | | | | | | Weighted | | | | | | | | | | | | | | | | | | | | | | | | Average | | | | | | | | | | | | | | | | | | | | | | | | Remaining | | | Weighted | | | | | | | Weighted | | | | | | | | | | | | Contractual | | | Average | | | | | | | Average | | | Aggregate | | | | Number | | | Life | | | Exercise | | | Number | | | Exercise | | | Intrinsic | | Range of Exercise Price | | Outstanding | | | (in Years) | | | Price | | | Exercisable | | | Price | | | value | | $1.57 - $14.99 | | | 143 | | | | 8.26 | | | $ | 2.62 | | | | 68 | | | $ | 2.94 | | | $ | 25 | | $15.00 - $25.59 | | | 8 | | | | 2.74 | | | $ | 15.00 | | | | 8 | | | $ | 15.00 | | | $ | — | | $25.60 - $143.99 | | | 2 | | | | 3.35 | | | $ | 41.81 | | | | 2 | | | $ | 41.81 | | | $ | — | | $144.00 - $409.99 | | | 5 | | | | 5.65 | | | $ | 144.00 | | | | 5 | | | $ | 144.00 | | | $ | — | | $410.00 - $924.00 | | | 1 | | | | 4.19 | | | $ | 430.64 | | | | 1 | | | $ | 430.64 | | | $ | — | | $1.57 - $924.00 | | | 159 | | | | 7.80 | | | $ | 10.82 | | | | 84 | | | $ | 18.39 | | | $ | 25 | |
There were no stock options exercised during the years ended December 31, 2017 and 2016.2020 or 2019. The aggregate intrinsic value of employee stockoutstanding options exercised during the year endedat December 31, 20152019 was $0.3$0.1 million. Note 6: Stockholders’ Equity In March 2015,April 2020, the Company completed a publicregistered direct offering and issued approximately 1,437,000 shares of its common stock for approximately $21.4 million in net proceeds. Two of the Company’s executive officers between them purchased a total of 40,625 shares at the public offering price. In July 2017, the Companysecurities and sold to certain institutional investors an aggregate of 1,325,0001,218,000 shares of common stock at a purchase price of $1.70$1.56 per share for aggregateto institutional investors. Net proceeds toof the offering, after placement agent and other fees and expenses paid by the Company, of $1,987,000, net of transaction expenses.
Inwere approximately $1.6 million. As a concurrent private placement, the Company also sold to eachresult of the purchasers a warrant to purchase one half of a shareoffering, the exercise price of the common stock for each share purchased for cash in the offering, pursuant to a1,845,540 outstanding common stock purchase warrants that were issued in October 2018 was reduced from $6.00 per share to $2.40 per share. The Company accounted for the warrant byexercise price adjustment in accordance with ASC Topic 260 and betweendetermined that the change in the exercise price resulted in a deemed dividend of $392,000 that increased the net loss attributable to common stockholders for the year ended December 31, 2020. The fair value of the warrants was computed on the date of the modification using the Black-Scholes model. The Company assumed a risk-free interest rate of 1.6%, no dividends, expected volatility of 128%, and an expected warrant life of approximately 3.5 years.
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Warrants At December 31, 2020, the Company and each Purchaser (each, a “Warrant,” and collectively,had the following warrants outstanding (share amounts in thousands):
Warrant Type | | Number of Shares | | | Exercise Price | | | Expiration | Common stock | | | 33 | | | $ | 47.00 | | | January 2023 | Common stock | | | 1,846 | | | $ | 2.40 | | | October 2023 |
“Warrants”) representing in the aggregate rights to purchase 662,500 shares of common stock at the exercise price. The Warrants became exercisable on January 6, 2018 at an exercise price of $2.35 per share and will expire on January 6, 2023.
The Warrants will be exercisable on a “cashless” basis if at any time after the six-month anniversary there is not an effective registration statement for the resale of the warrant shares in place, or there is not a current resale prospectus then available.
Stockholder Rights Plan
On November 10, 2010, the Company executed a rights agreement in connection with the declaration by the Company’s board of directors of a dividend of one preferred stock purchase right (a Right) to be paid on November 10, 2010 (the Record Date) for each share of the Company’s common stock issued and outstanding at the close of business on the Record Date. Each Right entitles the registered holder to purchase one one-thousandth of a share of Series AA Preferred Stock, $0.01 par value per share (a Preferred Share), of the Company at a price of $4.80 per one one-thousandth of a Preferred Share, subject to adjustment. The rights will not be exercisable until a third party acquires 15.0% of the Company’s common stock or commences or announces its intent to commence a tender offer for at least 15.0% of the common stock.
Note 7: Retirement Savings Plan Effective January 1997, the Company adopted the MoSys 401(k) Plan (the Savings Plan), which qualifies as a thrift plan under Section 401(k) of the Internal Revenue Code. Full-time and part-time employees who are at least 21 years of age are eligible to participate in the Savings Plan at the time of hire. Participants may contribute up to 15% of their earnings to the Savings Plan. No matching contributions were made by the Company induring the years ended December 31, 2017, 20162020 and 2015.2019. Note 8: Business Segments,Segment, Concentration of Credit Risk 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. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, cash equivalents, short-term and long-term investments and accounts receivable. Cash, cash equivalents and short-term and long-term investments are deposited with high credit-quality institutions. The Company recognized revenue from licensing of its technologies and shipment of ICs to customers in North America, Asia and Rest of world as followsthe following geographical locations (in thousands): | | | | | | | | | | | | | Year Ended December 31, | | | | | | | | | | | | | | | 2017 | | 2016 | | 2015 | | North America | | $ | 6,531 | | $ | 3,816 | | $ | 2,222 | | Japan | | | 1,520 | | | 1,303 | | | 667 | | Taiwan | | | 613 | | | 804 | | | 1,396 | | Rest of world | | | 178 | | | 101 | | | 105 | | Total net revenue | | $ | 8,842 | | $ | 6,024 | | $ | 4,390 | |
| | Year Ended | | | | December 31, | | | | 2020 | | | 2019 | | North America | | $ | 5,454 | | | $ | 7,585 | | Japan | | | 675 | | | | 1,734 | | Taiwan | | | 459 | | | | 345 | | Rest of world | | | 207 | | | | 422 | | Total net revenue | | $ | 6,795 | | | $ | 10,086 | |
Customers who accounted for at least 10% of total net revenues were: | | | | | | | | | | | | Years Ended December 31, | | | | | | | | | | | | | | 2017 | | 2016 | | 2015 | | Customer A | | | 46 | % | * | | * | | Customer B | | | 17 | % | 21 | % | 12 | % | Customer C | | | 11 | % | 47 | % | 34 | | Customer D | | | * | % | 13 | % | 31 | % |
| | Year Ended | | | | December 31, | | | | 2020 | | | 2019 | | Customer A | | | 37 | % | | | 30 | % | Customer B | | | 22 | % | | | 14 | % | Customer C | | | 10 | % | | | 17 | % | Customer D | | | 10 | % | | * | | Customer E | | * | | | | 13 | % | | | | | | | | | |
* Represents percentage less than 10%.
* | Represents percentage less than 10%. |
One customerThree customers accounted for 63%86% of net accounts receivable as ofat December 31, 2017. One customer2020. Four customers accounted for 72%85% of net accounts receivable as ofat December 31, 2016.2019.
NetAll net long-lived assets (property and equipment), classified by major geographic areas, was (in thousands): were held in the United States.
| | | | | | | | | | December 31, | | | | 2017 | | 2016 | | | | (in thousands) | | U.S. | | $ | 827 | | $ | 1,274 | |
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Note 9: Commitments and Contingencies Leases and Purchase Commitments Effective January 1, 2019, the Company adopted ASU No. 2016-02, as amended, using the alternative transition method, which allowed the Company to initially apply the new lease standard at the adoption date (the “effective date method”). The Company leases its facilityidentified only one lease to be accounted for under a non-cancelableASU No. 2016-02, and this was the operating lease that expires in 2020. On October 3, 2017, the Company entered into a sublease agreement under which the Company subleased a new headquartersfor its corporate facility located in San Jose, California, which was entered into in October 2017 and initially expired in October 2020. The right-to-use asset and corresponding liability for the facility lease were measured at the present value of the future minimum lease payments. The discount rate used to measure the lease asset and liability represents the interest rate on the Notes (8%). Lease expense is recognized on a straight line basis over the lease term. The Company had an option to extend the lease for an additional 20.5 month period, but, as the renewal was not reasonably certain, it had not included this renewal option in its accounting for the lease.
On September 30, 2020, the Company and the lessor extended the lease for an additional 20.5 month term of 36 months commencing November 1, 2017.2020. The monthly rentCompany does not have an option to extend the lease term beyond the current extension. The extension was accounted for as a lease modification. The Company assessed the lease classification of the facility lease at the modification date and common-area costsdetermined that the facility lease should be accounted for as an operating lease. The right-of-use asset and corresponding operating lease liability have been remeasured based on the present value of remaining lease payments over the remaining extended lease term. The fair value of the right of use asset and corresponding lease obligation was determined to be $352,000 at the date of modification using a discount rate of 8%. Non-lease components are not included in the right-of-use asset and liability and are reflected as expense in the periods incurred. Future minimum payments under the new facility lease at December 31, 2020 are approximately $22,000, and compare with monthly rent and common-area costs forlisted in the previous facility of approximately $89,000.table below (in thousands). | | Operating | | Year ended December 31, | | lease | | 2021 | | $ | 206 | | 2022 | | | 112 | | Total future lease payments | | | 318 | | Less: imputed interest | | | (14 | ) | Present value of lease liabilities | | $ | 304 | |
On October 3, 2017, the Company entered into a lease termination agreement with M West Propco XII LLC (“MWest”) under which the Company and MWest agreed to terminate the Company’s lease for previous its headquarters facility effective October 31, 2017. In connection with the lease termination, the Company incurred fees of approximately $250,000, which have been recorded as restructuring charges in the statements of operations and comprehensive loss in these consolidated financial statements.
| | | | Year ended December 31, | | | | | | 2020 | | | 2019 | | Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | | Operating cash flows for lease | | | $ | 220 | | | $ | 219 | | Non-cash activity: | | | | | | | Recognition of additional right-of-use asset and liability upon lease modification | $ | 352 | | | $ | - | |
Rent expense was approximately $470,000, $783,000 and $798,000$212,000 for each of the years ended December 31, 2017, 20162020 and 2015, respectively. The leases provide for monthly payments and are being charged to operations ratably over the lease terms.2019. In addition to the minimum lease payments, the Company is responsible for property taxes, insurance and certain other operating costs. 78 Future minimum lease payments under non-cancelable operating leases and purchase commitments are (in thousands):
| | | | | | | | Operating | | | Year ended December 31, | | leases | | | 2018 | | $ | 213 | | | 2019 | | | 219 | | | 2020 | | | 187 | | | Total minimum payments | | $ | 619 | | |
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 consolidated financial statements for the years ended December 31, 2017, 2016 or 20152020 and 2019 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. Legal MattersProduct warranties
In October 2017, Trinity Technologies, Inc., our former sales representativeThe 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 net revenues. Warranty costs were not material for the San Francisco bay area, filed a lawsuit against us in the Superior Court of California alleging non-payment of commissions. The lawsuit is still in its early stages,years ended December 31, 2020 and the Company intends to vigorously defend itself.2019.
Note 10: RestructuringNotes Payable Convertible Notes In the first quarter of 2016, the Company effected a reduction in its workforce and associated operating expenses, net loss and cash burn and realigned resources, as the Company had substantially concluded development of new products, including its third generation Bandwidth Engine IC product family, and brought these products to market in 2016. The Company reduced United States headcount by 12 positions and ceased operations at its subsidiary in Hyderabad, India, which had 18 employees. As a result of these reductions, the Company incurred total charges of approximately $800,000, including approximately $660,000 of charges for severance benefits and other one-time termination costs. The remaining charges represent lease obligations, asset impairments and other expenses related to the Company’s Indian subsidiary. Substantially all of these charges were realized and resulted in cash expenditures of approximately $820,000 in the first quarter of 2016. 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 in 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 consolidated statements of operations and comprehensive loss and the remaining liability is included in accrued expenses and other on the consolidated balance sheets consisting of (in thousands):
| | | | | | | | | | | | | | | | | | | | | Contractual obligations | | | | | | | Workforce | | Facility | | and other | | | | | | | reduction | | related | | termination costs | | Total | | Balance as of January 1, 2017 | | $ | — | | $ | — | | $ | 5 | | $ | 5 | | Restructuring charge | | | 458 | | | 269 | | | 594 | | | 1,321 | | Cash payments | | | (458) | | | (180) | | | (210) | | | (848) | | Balance as of December 31, 2017 | | $ | — | | $ | 89 | | $ | 389 | | $ | 478 | |
Note 11: 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 amendmentamendments to the Notes and related documents effectivein February 18,and October 2018, the interest rate has beenwas reduced to 8%, the maturity date of the Notes has beenwas extended to August 15, 2019,2023, and the optional conversion price has beenwas reduced from $8.50$170.00 of Note
principal per share of common stock to $4.25$11.434 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. Effective February 18, 2018, pursuant to theone amendment to the Notes, the redemption price has beenwas reduced from 120% to 100% of the principal amount of the Note to be repurchased plus accrued and unpaid interest as of the redemption date.
No Note holder shall be entitled to convert such holder’s Notes if effective upon the applicable conversion date (i) the holder would have beneficial ownership of more than 9.9%19.9% of the voting capital stock of the Company as determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended, (with exceptions specified in the Purchase Agreement), or (ii) if the shares are being acquired or held with a purpose or effect of changing or influencing control of the Company, or in connection with or as a participant in any transaction having that purpose or effect, as determined in the sole discretion of the board of directors of the Company. There is 79
no required sinking fund for the Notes. The Notes have not been registered for resale, and the holder(s) do not have registration rights. The Notes restrict the ability of the Company to incur any indebtedness for borrowed money, unless such indebtedness by its terms is expressly subordinated to the Notes in right of payment and to the security interest of the Note holder(s) in respect to the priority and enforcement of any security interest in property of the Company securing such new debt; provided that the Note holder(s) security interest and cash payment rights under the Notes shall be subordinate to a maximum of $5,000,000 of indebtedness for a secured accounts receivable line of credit facility provided to the Company by a bank or institutional lender; and, provided further, that in no event may the amount of indebtedness to which the security interest of the Note holder(s) is subordinated exceed the outstanding balance of accounts receivable less than 90 days old for which the Company has not recorded an allowance for doubtful accounts pledged under such credit facility. The Notes define an event of default generally as any failure by the Company to pay an amount owed under the Notes when due (subject to cure periods), a default with respect to other indebtedness of the Company resulting in acceleration of such indebtedness, the commencement of bankruptcy or insolvency proceedings, or the cessation of business. If an event of default occurs under the Notes, the holder(s) of a majority-in-interest of the outstanding principal amount of the Notes may declare the outstanding principal amount thereof to be immediately due and payable and pursue all available remedies, including taking possession of the assets of the Company and selling them to pay the amount of debt then due, plus expenses, in accordance with applicable laws and procedures. The Company incurred debt issuance costs of approximately $0.1 million, which were recorded as a debt discount and are beingwere amortized to interest expense over the repayment period for the original loan term using the effective interest rate method. The interest expense related toAs of December 31, 2018, the debt discount duringwas fully amortized. In accordance with the year ended December 31, 2017 and 2016 was approximately $45,000 and $37,000, respectively, andOctober 2018 amendment to the remaining unamortized debt discount was approximately $30,000. Notes, the Company used $7.4 million of the proceeds from its public offering of securities effected in October 2018 to repay a portion of the Notes. Semi-annual interest payments have been made in each of February 2019, August 2016,2019, February 2017,2020 and August 2017,2020, for approximately, $336,000, $420,000,$78,000, $109,000, $112,000 and $434,000,$122,000, respectively, in-kind with the issue of additional notes (Interest Notes) to the Purchasers. The Interest Notes have terms identical to the Notes. As ofAt December 31, 2017,2020, the Notes and Interest Notes could be converted into a maximum of 1,081,166271,121 shares of common stock at $8.50$11.434 per share, excluding the effects of future payments of interest in-kind. Future repayments on outstanding convertible notes payable are as follows:
| | | | | Year ending December 31, | | | | | 2018 | | $ | — | | 2019 | | $ | 9,189 | | | | | | | | | $ | 9,189 | |
PPP Note On May 7, 2020, the Company entered into a Promissory Note 12: Related Party Transactionswith Wells Fargo Bank, N.A. (the Lender) in an aggregate principal amount of $579,330 (the PPP Note), pursuant to the Paycheck Protection Program (the PPP) under the CARES Act. A related party to one
The term of the Company's executive officers performed construction workPPP Note is two years. Interest will accrue on the outstanding principal balance of the PPP Note at a fixed rate of 1.0%, which shall be deferred for the Company’s new corporate headquartersfirst ten months of the term of the PPP Note. Monthly payments will be due and payable beginning in October 2021 and continue each month thereafter until maturity of the PPP Note. The Company may prepay principal of the PPP Note at any time in any amount without penalty. The Agreement contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties or provisions of the PPP Note. The occurrence of an event of default may result in the fourth quarterrepayment of 2017. all amounts outstanding, collection of all amounts owing from the Company, and/or filing suit and obtaining judgment against the Company. The construction work was completed at a costCompany may apply to the Lender for forgiveness of approximately $195,000, which was paidthe PPP Note, under the terms of the PPP. No assurance is provided that the Company will obtain forgiveness of the PPP Note in whole or in part, but the fourth quarter of 2017.Company believes it has used the proceeds in accordance with the PPP. If the PPP Note is not forgiven, principal payments will start in 2021. 80
Note 13:11: Subsequent Events Conversion
Warrants Subsequent to December 31, 2020, the Company received a total of Interest Payable$2,478,461 of proceeds from the exercise of 1,032,692 warrants to Notepurchase shares of common stock at a price of $2.40 per share. Financing In February 2018,2021, the Company made payment in-kindcompleted a registered direct offering and sold 1,487,601 shares of interest oncommon stock at a price of $5.00 per share to institutional investors. Net proceeds of the offering, after placement agent and other fees and expenses payable by the Company, were approximately $6,800,000. Notes Under an agreement with the holder of the Notes, who was also a holder of warrants, in January and February 2021, the Interest Notes forCompany used $1,473,098 of the periodproceeds from August 16, 2017the Note holder’s warrant exercises to February 15, 2018 withrepay a portion of the issue of an additional note to the Purchasers (Interest Note 4). Interest Note 4 has a principal amount of approximately $463,000 and has terms identical to the Notes andNotes. In March 2021, the InterestCompany repaid in full the remaining principal amount of the Notes.
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