10-Q 1 gsit-20150630x10q.htm 10-Q gsit_Current folio_10Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2015

 

or

 

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

 

For the transition period from              to             

 

Commission File Number 001-33387

 


 

GSI Technology, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

77-0398779

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification No.)

 

1213 Elko Drive

Sunnyvale, California 94089

(Address of principal executive offices, zip code)

 

(408) 331-8800

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

 

 

 

Large accelerated filer  

 

Accelerated filer  

 

 

 

Non-accelerated filer  

 

Smaller reporting company  

 

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

 

The number of shares of the registrant’s common stock outstanding as of July 31, 2015:  22,632,701

 

 

 


 

 

GSI TECHNOLOGY, INC.

 

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2015

 

 

 

 

 

Page

 

 

PART I — FINANCIAL INFORMATION 

 

 

 

 

Item 1. 

Financial Statements

 

Condensed Consolidated Balance Sheets

 

Condensed Consolidated Statements of Operations

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

 

Condensed Consolidated Statements of Cash Flows

 

Notes to Condensed Consolidated Financial Statements

Item 2. 

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

17 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

22 

Item 4. 

Controls and Procedures

22 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

Item 1. 

Legal Proceedings

23 

Item 1A. 

Risk Factors

24 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

38 

Item 6. 

Exhibits

39 

Signatures 

40 

Exhibit Index 

41 

 

 

1


 

 

PART I — FINANCIAL INFORMATION

 

Item 1.Financial Statements

 

GSI TECHNOLOGY, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

March 31,

 

 

2015

  

2015

 

 

 

 

 

 

 

 

 

(In thousands, except share

 

 

and per share amounts)

ASSETS

 

 

 

 

 

 

Cash and cash equivalents

   

$

39,176

    

$

36,776

Short-term investments

 

 

19,299

 

 

22,201

Accounts receivable, net

 

 

9,423

 

 

8,257

Inventories

 

 

8,674

 

 

8,412

Prepaid expenses and other current assets

 

 

3,181

 

 

2,297

Total current assets

 

 

79,753

 

 

77,943

Property and equipment, net

 

 

8,421

 

 

8,708

Long-term investments

 

 

17,545

 

 

21,740

Other assets

 

 

481

 

 

498

Total assets

 

$

106,200

 

$

108,889

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Accounts payable

 

$

4,495

 

$

2,961

Accrued expenses and other liabilities

 

 

4,082

 

 

5,937

Deferred revenue

 

 

3,022

 

 

2,815

Total current liabilities

 

 

11,599

 

 

11,713

Income taxes payable

 

 

790

 

 

780

Total liabilities

 

 

12,389

 

 

12,493

Commitments and contingencies (Note 6)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

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

 

 

 

 

Common Stock: $0.001 par value authorized: 150,000,000 shares; issued and outstanding: 22,746,842 and 23,128,372 shares, respectively

 

 

23

 

 

23

Additional paid-in capital

 

 

27,744

 

 

29,407

Accumulated other comprehensive income

 

 

21

 

 

26

Retained earnings

 

 

66,023

 

 

66,940

Total stockholders’ equity

 

 

93,811

 

 

96,396

Total liabilities and stockholders’ equity

 

$

106,200

 

$

108,889

 

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

2


 

 

GSI TECHNOLOGY, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

2015

 

2014

 

 

 

 

 

 

 

 

 

(In thousands, except per share amounts)

 

 

 

 

 

 

 

Net revenues

   

$

14,025

    

$

12,945

Cost of revenues

 

 

6,730

 

 

7,006

Gross profit

 

 

7,295

 

 

5,939

Operating expenses:

 

 

 

 

 

 

Research and development

 

 

2,998

 

 

3,073

Selling, general and administrative

 

 

5,305

 

 

4,335

Total operating expenses

 

 

8,303

 

 

7,408

Loss from operations

 

 

(1,008)

 

 

(1,469)

Interest income, net

 

 

79

 

 

96

Other income (expense), net

 

 

37

 

 

(25)

Loss before income taxes

 

 

(892)

 

 

(1,398)

Provision for income taxes

 

 

25

 

 

48

Net loss

 

$

(917)

 

$

(1,446)

Net loss per share:

 

 

 

 

 

 

Basic

 

$

(0.04)

 

$

(0.05)

Diluted

 

$

(0.04)

 

$

(0.05)

Weighted average shares used in per share calculations:

 

 

 

 

 

 

Basic

 

 

22,943

 

 

27,495

Diluted

 

 

22,943

 

 

27,495

 

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

3


 

 

GSI TECHNOLOGY, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

2015

 

2014

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

Net loss

   

$

(917)

    

$

(1,446)

Net unrealized gain (loss) on available-for-sale investments, net of tax

 

 

(5)

 

 

5

Total comprehensive loss

 

$

(922)

 

$

(1,441)

 

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

4


 

 

GSI TECHNOLOGY, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

2015

 

2014

 

 

 

 

 

 

 

 

 

(In thousands)

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

   

$

(917)

    

$

(1,446)

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

 

 

 

 

 

 

Allowance for sales returns, doubtful accounts and other

 

 

3

 

 

(11)

Provision for excess and obsolete inventories

 

 

388

 

 

356

Depreciation and amortization

 

 

333

 

 

510

Stock-based compensation

 

 

474

 

 

573

Amortization of bond premium on investments

 

 

93

 

 

187

Changes in assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(1,169)

 

 

(709)

Inventory

 

 

(650)

 

 

(534)

Prepaid expenses and other assets

 

 

(908)

 

 

249

Accounts payable

 

 

1,534

 

 

(1,243)

Accrued expenses and other liabilities

 

 

(1,845)

 

 

(966)

Deferred revenue

 

 

207

 

 

1,135

Net cash used in operating activities

 

 

(2,457)

 

 

(1,899)

Cash flows from investing activities:

 

 

 

 

 

 

Purchase of investments

 

 

 —

 

 

(250)

Sales and maturities of short-term investments

 

 

7,000

 

 

4,596

Purchases of property and equipment

 

 

(6)

 

 

(24)

Net cash provided by investing activities

 

 

6,994

 

 

4,322

Cash flows from financing activities:

 

 

 

 

 

 

Repurchase of common stock

 

 

(2,453)

 

 

(913)

Proceeds from issuance of common stock under employee stock plans

 

 

316

 

 

316

Net cash used in financing activities

 

 

(2,137)

 

 

(597)

Net increase in cash and cash equivalents

 

 

2,400

 

 

1,826

Cash and cash equivalents at beginning of the period

 

 

36,776

 

 

41,520

Cash and cash equivalents at end of the period

 

$

39,176

 

$

43,346

Supplemental cash flow information:

 

 

 

 

 

 

Net cash paid (received) for income taxes

 

$

(132)

 

$

31

 

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

5


 

 

GSI TECHNOLOGY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

NOTE 1—THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation

 

The accompanying unaudited condensed consolidated financial statements of GSI Technology, Inc. and its subsidiaries (“GSI” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission.  Accordingly, the interim financial statements do not include all of the information and footnotes required by GAAP for annual financial statements.  These interim financial statements contain all adjustments (which consist of only normal, recurring adjustments) that are, in the opinion of management, necessary to state fairly the interim financial information included therein.  The Company believes that the disclosures are adequate to make the information not misleading.  However, these financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2015.

 

The consolidated results of operations for the three months ended June 30, 2015 are not necessarily indicative of the results to be expected for the entire fiscal year.

 

Significant accounting policies

 

The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2015.

 

Litigation and settlement costs

 

From time to time, the Company is involved in legal actions.  See Note 6 for information regarding litigation that was resolved during the three months ended June 30, 2015.  There are many uncertainties associated with any litigation, and the Company may not prevail.  If information becomes available that causes us to determine that a loss in any of our pending litigation, or the settlement of such litigation, is probable, and we can reasonably estimate the loss associated with such events, we will record the loss in accordance with GAAP. However, the actual liability in any such litigation may be materially different from our estimates, which could require us to record additional expenses. 

 

6


 

Recent accounting pronouncements

In August 2014, the Financial Accounting Standards Board (“FASB”) issued new guidance related to the Company’s responsibility to evaluate whether there is substantial doubt about its ability to continue ongoing business operations and to provide relevant footnote disclosures. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." The new accounting standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The 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 No. 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 is currently evaluating the impact of this accounting standard on its consolidated financial statements.

 

 

NOTE 2—NET LOSS PER COMMON SHARE

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

2015

 

2014

 

 

 

 

 

 

 

 

 

(In thousands, except per share amounts)

Net loss

   

$

(917)

    

$

(1,446)

 

 

 

 

 

 

 

Denominators:

 

 

 

 

 

 

Weighted average shares—Basic

 

 

22,943

 

 

27,495

Dilutive effect of employee stock options

 

 

 —

 

 

 —

Weighted average shares—Dilutive

 

 

22,943

 

 

27,495

Net loss per common share—Basic

 

$

(0.04)

 

$

(0.05)

Net loss per common share—Diluted

 

$

(0.04)

 

$

(0.05)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

2015

 

2014

 

 

 

 

 

 

 

(In thousands)

Shares underlying options

   

4,782

    

3,260

 

 

7


 

NOTE 3—BALANCE SHEET DETAIL

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

March 31, 2015

 

 

 

 

 

 

 

 

 

(In thousands)

Inventories:

 

 

 

 

 

 

Work-in-progress

   

$

2,273

    

$

2,422

Finished goods

 

 

5,732

 

 

5,362

Inventory at distributors

 

 

669

 

 

628

 

 

$

8,674

 

$

8,412

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

March 31, 2015

 

 

(In thousands)

Accounts receivable, net:

 

 

 

 

 

 

Accounts receivable

   

$

9,529

    

$

8,360

Less: Allowances for sales returns, doubtful accounts and other

 

 

(106)

 

 

(103)

 

 

$

9,423

 

$

8,257

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

March 31, 2015

 

 

(In thousands)

Prepaid expenses and other current assets:

 

 

 

 

 

 

Prepaid tooling and masks

 

$

2,205

 

$

1,208

Prepaid income taxes

 

 

 —

 

 

139

Other receivables

 

 

360

 

 

350

Other prepaid expenses

 

 

616

 

 

600

 

 

$

3,181

 

$

2,297

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

March 31, 2015

 

 

(In thousands)

Property and equipment, net:

 

 

 

 

 

 

Computer and other equipment

 

$

17,269

 

$

17,264

Software

 

 

4,792

 

 

4,792

Land

 

 

3,900

 

 

3,900

Building and building improvements

 

 

2,256

 

 

2,256

Furniture and fixtures

 

 

110

 

 

110

Leasehold improvements

 

 

791

 

 

791

 

 

 

29,118

 

 

29,113

Less: Accumulated depreciation and amortization

 

 

(20,697)

 

 

(20,405)

 

 

$

8,421

 

$

8,708

 

Depreciation and amortization expense was $292,000 and $465,000, respectively, for the three months ended June 30, 2015 and 2014.

8


 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

March 31, 2015

 

 

(In thousands)

Other assets:

 

 

 

 

 

 

Non-current deferred income taxes

 

$

51

 

$

27

Intangibles, net

 

 

352

 

 

393

Deposits

 

 

78

 

 

78

 

 

$

481

 

$

498

 

The following table summarizes the components of intangible assets and related accumulated amortization balances at June 30, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Carrying Amount

 

Accumulated Amortization

 

Net Carrying Amount

Intangible assets:

 

 

 

 

 

 

 

 

 

Product designs

 

$

590

 

$

492

 

$

98

Patents

 

 

720

 

 

466

 

 

254

Software

 

 

80

 

 

80

 

 

 —

Total

 

$

1,390

 

$

1,038

 

$

352

 

Amortization of intangible assets included in cost of revenues was $41,000 and $45,000, respectively, for the three months ended June 30, 2015 and 2014.

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

March 31, 2015

 

 

(In thousands)

Accrued expenses and other liabilities:

 

 

 

 

 

 

Accrued compensation

 

$

2,144

 

$

3,386

Accrued professional fees

 

 

780

 

 

1,380

Accrued commissions

 

 

312

 

 

268

Other accrued expenses

 

 

846

 

 

903

 

 

$

4,082

 

$

5,937

 

 

 

 

 

NOTE 4—INCOME TAXES

 

The current portion of the Company’s unrecognized tax benefits was $0 at both June 30, 2015 and March 31, 2015. The long-term portion at June 30, 2015 and March 31, 2015 was $790,000 and $780,000, respectively, of which the timing of the resolution is uncertain.   As of June 30, 2015,  $1,318,000 of unrecognized tax benefits had been recorded as a reduction to net deferred tax assets.  As of June 30, 2015 and March 31, 2015,  the Company’s net deferred tax assets of $6.4 million and $6.0 million, respectively, were subject to a full valuation allowance.  

 

Management believes that it is reasonably possible that within the next twelve months the Company could have a reduction in uncertain tax benefits of up to $729,000, including interest and penalties, related to positions taken with respect to credits and loss carryforwards on previously filed tax returns.

 

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

 

The Company is subject to taxation in the United States and various state and foreign jurisdictions.  Fiscal years 2012 through 2015 remain open to examination by federal tax authorities, and fiscal years 2011 through 2015 remain open to examination by California tax authorities.

9


 

 

The Company’s estimated annual effective income tax rate was approximately 2.6% and 5.0% as of June 30, 2015 and 2014, respectively. The annual effective tax rate as of June 30, 2015 and 2014 varies from the United States statutory income tax rate primarily due to valuation allowances in the United States whereby pre-tax losses do not result in the recognition of corresponding income tax benefits and expenses and the foreign tax differential.

 

NOTE 5—FINANCIAL INSTRUMENTS

 

Fair value measurements

 

Authoritative accounting guidance for fair value measurements provides a framework for measuring fair value and related disclosures.  The guidance applies to all financial assets and financial liabilities that are measured on a recurring basis.  The guidance requires fair value measurement to be classified and disclosed in one of the following three categories:

 

Level 1: Valuations based on quoted prices in active markets for identical assets and liabilities.  The fair value of available-for-sale securities included in the Level 1 category is based on quoted prices that are readily and regularly available in an active market.  As of June 30, 2015, the Level 1 category included money market funds of $6.5 million, which were included in cash and cash equivalents on the Condensed Consolidated Balance Sheets.

 

Level 2: Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly. The fair value of available-for-sale securities included in the Level 2 category is based on the market values obtained from an independent pricing service that were evaluated using pricing models that vary by asset class and may incorporate available trade, bid and other market information and price quotes from well established independent pricing vendors and broker-dealers. As of June 30, 2015, the Level 2 category included short-term investments of $19.3 million and long-term investments of $17.5 million, which were comprised of certificates of deposit, corporate debt securities and government and agency securities.

 

Level 3: Valuations based on inputs that are unobservable and involve management judgment and the reporting entity’s own assumptions about market participants and pricing.  As of June 30, 2015, the Company had no Level 3 financial assets measured at fair value on the Condensed Consolidated Balance Sheets.

 

As of June 30, 2015, there were no liabilities measured at fair value on a recurring basis.

10


 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

 

Quoted Prices in Active Markets for Identical Assets and Liabilities

 

Significant Other Observable Inputs

 

Significant Unobservable Inputs

 

 

June 30, 2015

 

(Level 1)

 

(Level 2)

 

(Level 3)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

6,474

 

$

6,474

 

$

 —

 

$

 —

Marketable securities

 

 

36,844

 

 

 —

 

 

36,844

 

 

 —

Total

 

$

43,318

 

$

6,474

 

$

36,844

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

 

Quoted Prices in Active Markets for Identical Assets and Liabilities

 

Significant Other Observable Inputs

 

Significant Unobservable Inputs

 

 

March 31, 2015

 

(Level 1)

 

(Level 2)

 

(Level 3)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

4,409

 

$

4,409

 

$

 —

 

$

 —

Marketable securities

 

 

43,941

 

 

 —

 

 

43,941

 

 

 —

Total

 

$

48,350

 

$

4,409

 

$

43,941

 

$

 —

 

Short-term and long-term investments

 

All of the Company’s short-term and long-term investments are classified as available-for-sale.  Available-for-sale debt securities with maturities greater than twelve months are classified as long-term investments when they are not intended for use in current operations.  Investments in available-for-sale securities are reported at fair value with unrecognized gains (losses), net of tax, as a component of accumulated other comprehensive income in the Condensed Consolidated Balance Sheets.  The Company had money market funds of $6.5 million and $4.4 million at June 30, 2015 and March 31, 2015, respectively, included in cash and cash equivalents on the Condensed Consolidated Balance Sheet.  The Company monitors its investments for impairment periodically and records appropriate reductions in carrying values when declines are determined to be other-than-temporary.

 

 

11


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

 

 

 

Unrealized

 

Unrealized

 

Fair

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

(In thousands)

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal obligations

 

$

2,751

 

$

 —

 

$

(1)

 

$

2,750

Corporate notes

 

 

8,784

 

 

4

 

 

(2)

 

 

8,786

Certificates of deposit

 

 

6,750

 

 

9

 

 

 —

 

 

6,759

Agency bonds

 

 

1,004

 

 

 —

 

 

 —

 

 

1,004

Total short-term investments

 

$

19,289

 

$

13

 

$

(3)

 

$

19,299

Long-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal obligations

 

$

1,043

 

$

3

 

$

 —

 

$

1,046

Corporate notes

 

 

2,790

 

 

 —

 

 

(7)

 

 

2,783

Certificates of deposit

 

 

8,000

 

 

22

 

 

(1)

 

 

8,021

Agency bonds

 

 

3,003

 

 

5

 

 

 —

 

 

3,008

International government obligations

 

 

2,687

 

 

 —

 

 

 —

 

 

2,687

Total long-term investments

 

$

17,523

 

$

30

 

$

(8)

 

$

17,545

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

 

 

 

Unrealized

 

Unrealized

 

Fair

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

(In thousands)

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal obligations

 

$

6,810

 

$

 —

 

$

 —

 

$

6,810

Corporate notes

 

 

7,366

 

 

10

 

 

 —

 

 

7,376

Agency bonds

 

 

1,006

 

 

 —

 

 

 —

 

 

1,006

Certificates of deposit

 

 

7,000

 

 

9

 

 

 —

 

 

7,009

Total short-term investments

 

$

22,182

 

$

19

 

$

 —

 

$

22,201

Long-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal obligations

 

$

1,053

 

$

4

 

$

 —

 

$

1,057

Corporate notes

 

 

4,232

 

 

 —

 

 

(10)

 

 

4,222

Certificates of deposit

 

 

9,750

 

 

24

 

 

(1)

 

 

9,773

Agency bonds

 

 

4,003

 

 

4

 

 

(2)

 

 

4,005

Other

 

 

2,684

 

 

 —

 

 

(1)

 

 

2,683

Total long-term investments

 

$

21,722

 

$

32

 

$

(14)

 

$

21,740

 

The Company’s investment portfolio consists of both corporate and governmental securities that have a maximum maturity of three years. All unrealized gains are due to changes in interest rates and bond yields.  Subject to normal credit risks, the Company has the ability to realize the full value of all these investments upon maturity.

 

The deferred tax liability related to unrecognized gains and losses on short-term and long-term investments was $11,000 at June 30, 2015 and $11,000 at March 31, 2015.

 

12


 

As of June 30, 2015, contractual maturities of the Company’s available-for-sale investments were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair

 

 

 

 

 

 

 

 

Cost

 

Value

 

 

 

 

 

 

 

 

(In thousands)

Maturing within one year

 

 

 

 

 

 

 

$

19,289

 

$

19,299

Maturing in one to three years

 

 

 

 

 

 

 

 

17,523

 

 

17,545

Maturing in more than three years

 

 

 

 

 

 

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

$

36,812

 

$

36,844

 

The Company classifies its short-term investments as “available-for-sale” as they are intended to be available for use in current operations.

 

NOTE 6—COMMITMENTS AND CONTINGENCIES

 

Indemnification obligations

 

The Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the Company, under which the Company agrees to hold the other party harmless against losses arising from a breach of representations and covenants related to such matters as title to assets sold and certain intellectual property rights. In each of these circumstances, the Company’s indemnification obligations are conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the other party’s claims. Further, the Company’s obligations under these agreements may be limited in terms of time and/or amount, and in some instances, the Company may have recourse against third parties for certain payments made by it under these agreements.

 

It is not possible to predict the maximum potential amount of future payments that may be required under these or similar agreements due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these agreements have not had a material effect on its business, financial condition, cash flows or results of operations.

 

Product warranties

 

The Company warrants its products to be free of defects generally for a period of three years. The Company estimates its warranty costs based on historical warranty claim experience and includes such costs in cost of revenues. Warranty costs were not significant for the three months ended June 30, 2015 or 2014.

 

Legal proceedings

 

In March 2011, Cypress Semiconductor Corporation, a semiconductor manufacturer, filed a lawsuit against the Company in the United States District Court for the District of Minnesota alleging that the Company’s products, including its SigmaDDR and SigmaQuad families of Very Fast SRAMs, infringe five patents held by Cypress.  The complaint sought unspecified damages for past infringement and a permanent injunction against future infringement.

 

On June 10, 2011, Cypress filed a complaint against the Company with the United States International Trade Commission (the “ITC”).  The ITC complaint, as subsequently amended, alleged infringement by the Company of three of the five patents involved in the District Court case and one additional patent and also alleged infringement by three of the Company’s distributors and 11 of its customers who allegedly incorporate the Company’s SRAMs in their products.  The ITC complaint sought a limited exclusion order excluding the allegedly infringing SRAMs, and products containing them, from entry into the United States and permanent orders directing the Company and the other respondents to cease and desist from selling or distributing such products in the United States.  On July 21, 2011, the ITC formally instituted an investigation in response to Cypress’s complaint.   On June 7, 2013, the ITC announced that the full Commission had affirmed the determination of Chief Administrative

13


 

Judge Charles E. Bullock that GSI’s SRAM devices, and products containing them, do not infringe the Cypress patents and that Cypress had failed to establish existence of a domestic industry that practices the patents.  Moreover, the Commission reversed a portion of Judge Bullock’s determination with respect to the validity of the patents, finding the asserted claims of one of the patents to have been anticipated by prior art and, therefore, invalid.  The Commission ordered the investigation terminated, and Cypress did not appeal the ruling.

 

The Minnesota District Court case had been stayed pending the conclusion of the ITC proceeding. Following the termination of the ITC investigation, the stay was lifted.  On May 1, 2013, Cypress filed an additional lawsuit in the United States District Court for the Northern District of California alleging infringement by our products of five additional Cypress patents.  Like the Minnesota case, the complaint in the California lawsuit sought unspecified damages for past infringement and a permanent injunction against future infringement.  The Company filed answers in both cases denying liability and asserting affirmative defenses.  On August 7, 2013, the parties stipulated that the claims in the Minnesota case with respect to three of the asserted patents would be dismissed without prejudice and that the claims with respect to the remaining two patents would be transferred to, and consolidated with, the California case.  On August 20, 2013, the Court in the California case ordered the cases consolidated.

 

The Company did not record any loss contingency during fiscal 2013, fiscal 2014 or fiscal 2015 in connection with these legal proceedings as the Company was unable to predict their outcome and could not estimate the likelihood or potential dollar amount of any adverse results.

 

On May 6, 2015, the Company and Cypress entered into a settlement agreement to resolve the patent infringement litigation and a separate lawsuit pending in the United States District Court for the Northern District of California in which the Company alleged that Cypress had violated federal and state antitrust laws.  Under the settlement agreement: 

·

Each of the parties agreed to dismiss its lawsuit with prejudice in consideration of the dismissal with prejudice of the lawsuit brought by the other party; and

 

·

Each party agreed to release all claims against the other with respect to issues raised in the two lawsuits. 

The parties agreed that the settlement agreement was entered into to resolve disputed claims, and that each party denies any liability to the other party.

 

NOTE 7—STOCK-BASED COMPENSATION

 

As of June 30, 2015,  7,329,636 shares of common stock were available for grant under the Company’s 2007 Equity Incentive Plan.

 

The following table summarizes the Company’s stock option activities for the three months ended June 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

Number of Shares

 

Average

 

Weighted

 

 

 

 

 

Shares

 

Underlying

 

Remaining

 

Average

 

 

 

 

 

Available for

 

Options

 

Contractual

 

Exercise

 

Intrinsic

 

 

Grant

 

Outstanding

 

Life (Years)

 

Price

 

Value

Balance at March 31, 2015

 

6,213,943

 

6,774,151

 

 

 

$

5.16

 

 

 

Options reserved

 

1,156,419

 

 —

 

 

 

 

 —

 

 

 

Granted

 

(50,590)

 

50,590

 

 

 

 

5.34

 

 

 

Exercised

 

 —

 

(15,945)

 

 

 

 

3.28

 

$

25,940

Forfeited

 

9,864

 

(9,864)

 

 

 

 

4.78

 

 

 

Balance at June 30, 2015

 

7,329,636

 

6,798,932

 

 

 

$

5.16

 

 

 

Options vested and exercisable

 

 

 

4,730,077

 

4.06

 

$

5.02

 

$

3,272,981

Options vested and expected to vest

 

 

 

6,758,383

 

5.28

 

$

5.16

 

$

3,643,374

 

14


 

The weighted average fair value per underlying share of options granted during the three months ended June 30, 2015 and 2014 was $1.89 and $2.34, respectively.

 

Options outstanding by exercise price at June 30, 2015 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of

 

Options Outstanding

 

Options Exercisable

 

 

 

 

 

Shares

 

Weighted

 

Weighted Average

 

 

 

Weighted

 

 

 

 

 

Underlying

 

Average

 

Remaining

 

Number

 

Average

 

 

 

 

 

Options

 

Exercise

 

Contractual

 

Vested and

 

Exercise

Exercise Price

 

Outstanding

 

Price

 

Life (Years)

 

Exercisable

 

Price

$

2.43

-

3.43

 

895,584

 

$

3.18

 

3.60

 

895,584

 

$

3.18

$

3.75

-

4.00

 

812,779

 

$

3.96

 

3.71

 

812,779

 

$

3.96

$

4.17

-

4.68

 

700,615

 

$

4.31

 

5.19

 

385,551

 

$

4.30

$

4.81

-

5.23

 

1,076,786

 

$

5.05

 

8.03

 

266,888

 

$

4.91

$

5.34

 

 

 

50,590

 

$

5.34

 

9.86

 

 —

 

$

 —

$

5.50

 

 

 

783,433

 

$

5.50

 

1.38

 

783,433

 

$

5.50

$

5.59

-

5.76

 

695,410

 

$

5.70

 

6.38

 

288,753

 

$

5.70

$

6.00

-

6.54

 

798,182

 

$

6.32

 

5.91

 

714,596

 

$

6.31

$

6.61

-

7.00

 

871,933

 

$

6.83

 

7.04

 

468,873

 

$

6.87

$

9.20

 

 

 

113,620

 

$

9.20

 

5.58

 

113,620

 

$

9.20

 

 

 

 

 

6,798,932

 

$

5.16

 

5.30

 

4,730,077

 

$

5.02

 

The following table summarizes stock-based compensation expense by line item in the Condensed Consolidated Statements of Operations, all relating to employee stock plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

 

2015

 

2014

 

 

 

(In thousands)

Cost of revenues

 

$

69

 

$

99

 

Research and development

 

 

217

 

 

242

 

Selling, general and administrative

 

 

188

 

 

232

 

Total

 

$

474

 

$

573

 

 

As stock-based compensation expense recognized in the Condensed Consolidated Statement of Operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures in accordance with authoritative guidance.  The Company estimates forfeitures at the time of grant and revises the original estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

No tax benefit related to stock-based compensation was recognized in the three months ended June 30, 2015 or June 30, 2014 due to a full valuation allowance. There were no windfall tax benefits realized from exercised stock options in either period.    Compensation cost capitalized within inventory at June 30, 2015 was immaterial. As of June 30, 2015, the Company’s total unrecognized compensation cost was $2.9 million, which will be recognized over a weighted average period of 1.86 years.  The Company calculated the fair value of stock-based awards in the periods presented using the Black-Scholes option pricing model and the following weighted average assumptions:

15


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

2015

 

2014

 

 

(In thousands)

Stock Option Plans:

 

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

 

 

1.52

%

 

 

 

1.66

%

Expected life (in years)

 

 

 

5.00

 

 

 

 

5.00

 

Volatility

 

 

 

38.0

%

 

 

 

44.5

%

Dividend yield

 

 

 

 —

%

 

 

 

 —

%

Employee Stock Purchase Plan:

 

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

 

 

0.09

%

 

 

 

0.052

%

Expected life (in years)

 

 

 

0.50

 

 

 

 

0.50

 

Volatility

 

 

 

26.3

%

 

 

 

30.8

%

Dividend yield

 

 

 

 —

%

 

 

 

 —

%

 

 

 

 

NOTE 8—SEGMENT AND GEOGRAPHIC INFORMATION

 

Based on its operating management and financial reporting structure, the Company has determined that it has one reportable business segment: the design, development and sale of integrated circuits.

 

The following is a summary of net revenues by geographic area based on the location to which product is shipped:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

2015

 

2014

 

 

(In thousands)

United States

   

$

5,948

   

$

3,618

China

 

 

3,798

 

 

3,530

Malaysia

 

 

 —

 

 

1,603

Netherlands

 

 

1,698

 

 

1,016

Singapore

 

 

1,398

 

 

1,666

Rest of the world

 

 

1,183

 

 

1,512

 

 

$

14,025

 

$

12,945

 

All sales are denominated in United States dollars.

 

 

 

 

16


 

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

 

This Quarterly Report on Form 10-Q, and in particular the following Management’s Discussion and Analysis of Financial Condition and Results of Operations, includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act”).  These forward-looking statements involve risks and uncertainties.  Forward-looking statements are identified by words such as “anticipates,” “believes,” “expects,” “intends,” “may,” “will,” and other similar expressions.  In addition, any statements which refer to expectations, projections, or other characterizations of future events, or circumstances, are forward-looking statements.  Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, including those set forth in this report under “Risk Factors,” those described elsewhere in this report, and those described in our other reports filed with the Securities and Exchange Commission (“SEC”).  We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report, and we undertake no obligation to update these forward-looking statements after the filing of this report. You are urged to review carefully and consider our various disclosures in this report and in our other reports publicly disclosed or filed with the SEC that attempt to advise you of the risks and factors that may affect our business.

 

Overview

 

We are a fabless semiconductor company that designs, develops and markets static random access memories, or SRAMs, that operate at speeds of less than 10 nanoseconds, which we refer to as Very Fast SRAMs, and low latency dynamic random access memories, or LLDRAMs, primarily for the networking and telecommunications markets. We are subject to the highly cyclical nature of the semiconductor industry, which has experienced significant fluctuations, often in connection with fluctuations in demand for the products in which semiconductor devices are used. Our revenues have been substantially impacted by significant fluctuations in sales to Cisco Systems, historically our largest customer, and more recently to Alcatel-Lucent. We expect that future direct and indirect sales to these two customers will continue to fluctuate significantly on a quarterly basis. The worldwide financial crisis and the resulting economic impact on the end markets we serve have adversely impacted our financial results since the second half of fiscal 2009, and we expect that the unsettled global economic environment will continue to affect our operating results in future periods. However, with no debt, substantial liquidity and a history of positive cash flows from operations, we believe we are in a better financial position than many other companies of our size.

 

Revenues.    Our revenues are derived primarily from sales of our Very Fast SRAM products. Sales to networking and telecommunications OEMs accounted for 64% to 79% of our net revenues during our last three fiscal years. We also sell our products to OEMs that manufacture products for defense applications such as radar and guidance systems, for professional audio applications such as sound mixing systems, for test and measurement applications such as high-speed testers, for automotive applications such as smart cruise control and voice recognition systems, and for medical applications such as ultrasound and CAT scan equipment.

 

As is typical in the semiconductor industry, the selling prices of our products generally decline over the life of the product. Our ability to increase net revenues, therefore, is dependent upon our ability to increase unit sales volumes of existing products and to introduce and sell new products with higher average selling prices in quantities sufficient to compensate for the anticipated declines in selling prices of our more mature products.  Although we expect the average selling prices of individual products to decline over time, we believe that, over the next several quarters, our overall average selling prices will increase due to a continuing shift in product mix to a higher percentage of higher price, higher density products. Our ability to increase unit sales volumes is dependent primarily upon increases in customer demand but, particularly in periods of increasing demand, can also be affected by our ability to increase production through the availability of increased wafer fabrication capacity from Taiwan Semiconductor Manufacturing Company, or TSMC, and Powerchip, our wafer suppliers, and our ability to increase the number of good integrated circuit die produced from each wafer through die size reductions and yield enhancement activities.

We may experience fluctuations in quarterly net revenues for a number of reasons. Historically, orders on hand at the beginning of each quarter are insufficient to meet our revenue objectives for that quarter and are generally cancelable up to 30 days prior to scheduled delivery. Accordingly, we depend on obtaining and shipping

17


 

orders in the same quarter to achieve our revenue objectives. In addition, the timing of product releases, purchase orders and product availability could result in significant product shipments at the end of a quarter. Failure to ship these products by the end of the quarter may adversely affect our operating results. Furthermore, our customers may delay scheduled delivery dates and/or cancel orders within specified timeframes without significant penalty.

We sell our products through our direct sales force, international and domestic sales representatives and distributors. Revenues from product sales, except for sales to distributors, are generally recognized upon shipment, net of sales returns and allowances. Sales to consignment warehouses, who purchase products from us for use by contract manufacturers, are recorded upon delivery to the contract manufacturer. Sales to distributors are recorded as deferred revenues for financial reporting purposes and recognized as revenues when the products are resold by the distributors to the OEM. Sales to distributors are made under agreements allowing for returns or credits under certain circumstances. We therefore defer recognition of revenue on sales to distributors until products are resold by the distributor.

 

Alcatel-Lucent was our largest customer in fiscal 2015 and 2014.  Alcatel-Lucent purchases products directly from us and through contract manufacturers and distributors.  Purchases by Alcatel-Lucent represented approximately 32%, 25%, 19% and 12% of our net revenues in the three months ended June 30, 2015 and in fiscal 2015,  2014 and 2013, respectively. Cisco Systems, historically our largest OEM customer, purchases our products primarily through its consignment warehouse,  Wintec Industries Inc, and also purchases some products through its contract manufacturers and directly from us. Historically, purchases by Cisco Systems have fluctuated from period to period. Based on information provided to us by Cisco Systems' consignment warehouses and contract manufacturers, purchases by Cisco Systems represented approximately 9%, 13%, 19% and 29% of our net revenues in the three months ended June 30, 2015 and in fiscal 2015,  2014 and 2013, respectively.  Our revenues have been substantially impacted by significant fluctuations in sales to Alcatel-Lucent and Cisco Systems, and we expect that future direct and indirect sales to these two customers will continue to fluctuate substantially on a quarterly basis and that such fluctuations may significantly affect our operating results in future periods.  To our knowledge, none of our other OEM customers accounted for more than 10% of our net revenues in fiscal 2015,  2014 or 2013.

 

Cost of Revenues.    Our cost of revenues consists primarily of wafer fabrication costs, wafer sort, assembly, test and burn-in expenses, the amortized cost of production ma