10-Q 1 gsit-20160930x10q.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 September 30, 2016

 

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 October 31, 2016: 20,225,043

 

 

 


 

 

GSI TECHNOLOGY, INC.

 

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016

 

 

 

 

 

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

20 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

27 

Item 4. 

Controls and Procedures

27 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

Item 1A. 

Risk Factors

28 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

42 

Item 6. 

Exhibits

43 

Signatures 

44 

Exhibit Index 

45 

 

 

1


 

 

PART I — FINANCIAL INFORMATION

 

Item 1.Financial Statements

 

GSI TECHNOLOGY, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

March 31,

 

 

 

2016

  

2016

    

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

   

$

28,803

    

$

31,963

 

Short-term investments

 

 

19,030

 

 

23,149

 

Accounts receivable, net

 

 

8,807

 

 

7,478

 

Inventories

 

 

8,978

 

 

7,174

 

Prepaid expenses and other current assets

 

 

2,217

 

 

2,198

 

Total current assets

 

 

67,835

 

 

71,962

 

Property and equipment, net

 

 

8,198

 

 

8,653

 

Long-term investments

 

 

12,533

 

 

11,148

 

Goodwill

 

 

7,978

 

 

8,030

 

Intangible assets, net

 

 

3,459

 

 

3,651

 

Other assets

 

 

3,226

 

 

3,086

 

Total assets

 

$

103,229

 

$

106,530

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Accounts payable

 

$

3,205

 

$

2,514

 

Accrued expenses and other liabilities

 

 

6,280

 

 

4,398

 

Deferred revenue

 

 

1,611

 

 

2,330

 

Total current liabilities

 

 

11,096

 

 

9,242

 

Income taxes payable

 

 

254

 

 

116

 

Long-term deferred income taxes

 

 

 —

 

 

811

 

Other accrued expenses

 

 

6,306

 

 

6,492

 

Total liabilities

 

 

17,656

 

 

16,661

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

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

 

 

 -

 

 

 -

 

Common Stock: $0.001 par value authorized: 150,000,000 shares; issued and outstanding: 20,325,043 and 21,716,364 shares, respectively

 

 

20

 

 

22

 

Additional paid-in capital

 

 

19,881

 

 

25,050

 

Accumulated other comprehensive income

 

 

16

 

 

27

 

Retained earnings

 

 

65,656

 

 

64,770

 

Total stockholders’ equity

 

 

85,573

 

 

89,869

 

Total liabilities and stockholders’ equity

 

$

103,229

 

$

106,530

 

 

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 September 30,

 

Six Months Ended September 30,

 

 

 

2016

 

2015

 

2016

 

2015

    

 

 

(In thousands, except per share amounts)

 

Net revenues

   

$

13,358

    

$

13,577

    

$

26,304

    

$

27,602

 

Cost of revenues

 

 

6,015

 

 

6,660

 

 

12,239

 

 

13,390

 

Gross profit

 

 

7,343

 

 

6,917

 

 

14,065

 

 

14,212

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

4,282

 

 

2,940

 

 

7,781

 

 

5,938

 

Selling, general and administrative

 

 

2,681

 

 

4,274

 

 

5,515

 

 

9,579

 

Total operating expenses

 

 

6,963

 

 

7,214

 

 

13,296

 

 

15,517

 

Income (loss) from operations

 

 

380

 

 

(297)

 

 

769

 

 

(1,305)

 

Interest income, net

 

 

69

 

 

71

 

 

146

 

 

151

 

Other income (expense), net

 

 

23

 

 

(92)

 

 

88

 

 

(56)

 

Income (loss) before income taxes

 

 

472

 

 

(318)

 

 

1,003

 

 

(1,210)

 

Provision (benefit) for income taxes

 

 

(154)

 

 

29

 

 

117

 

 

54

 

Net income (loss)

 

$

626

 

$

(347)

 

$

886

 

$

(1,264)

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.03

 

$

(0.02)

 

$

0.04

 

$

(0.06)

 

Diluted

 

$

0.03

 

$

(0.02)

 

$

0.04

 

$

(0.06)

 

Weighted average shares used in per share calculations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

20,529

 

 

22,676

 

 

20,912

 

 

22,809

 

Diluted

 

 

21,104

 

 

22,676

 

 

21,349

 

 

22,809

 

 

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

3


 

 

GSI TECHNOLOGY, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Six Months Ended September 30,

 

 

 

2016

 

2015

 

2016

 

2015

    

 

 

(In thousands)

 

Net income (loss)

   

$

626

    

$

(347)

    

$

886

    

$

(1,264)

 

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

 

 

(18)

 

 

(12)

 

 

(11)

 

 

(17)

 

Total comprehensive income (loss)

 

$

608

 

$

(359)

 

$

875

 

$

(1,281)

 

 

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

4


 

 

GSI TECHNOLOGY, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended September 30,

 

 

 

2016

 

2015

    

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

   

$

886

    

$

(1,264)

 

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

 

 

 

 

 

 

 

Allowance for sales returns, doubtful accounts and other

 

 

3

 

 

(3)

 

Provision for excess and obsolete inventories

 

 

333

 

 

659

 

Depreciation and amortization

 

 

821

 

 

651

 

Stock-based compensation

 

 

930

 

 

973

 

Amortization of premium on investments

 

 

33

 

 

145

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,332)

 

 

2,109

 

Inventory

 

 

(2,137)

 

 

(883)

 

Prepaid expenses and other assets

 

 

(107)

 

 

(152)

 

Accounts payable

 

 

685

 

 

784

 

Accrued expenses and other liabilities

 

 

1,023

 

 

(2,194)

 

Deferred revenue

 

 

(719)

 

 

(960)

 

Net cash provided by (used) in operating activities

 

 

419

 

 

(135)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of investments

 

 

(9,410)

 

 

(9,026)

 

Sales and maturities of short-term investments

 

 

12,100

 

 

14,335

 

Purchases of property and equipment

 

 

(168)

 

 

(31)

 

Net cash provided by investing activities

 

 

2,522

 

 

5,278

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Repurchase of common stock

 

 

(6,618)

 

 

(3,074)

 

Proceeds from issuance of common stock under employee stock plans

 

 

517

 

 

576

 

Net cash used in financing activities

 

 

(6,101)

 

 

(2,498)

 

Net increase (decrease) in cash and cash equivalents

 

 

(3,160)

 

 

2,645

 

Cash and cash equivalents at beginning of the period

 

 

31,963

 

 

36,776

 

Cash and cash equivalents at end of the period

 

$

28,803

 

$

39,421

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Net cash paid (received) for income taxes

 

$

1,339

 

$

(97)

 

 

 

 

 

 

 

 

 

 

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, 2016.

 

The consolidated results of operations for the six months ended September 30, 2016 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, 2016.

 

Recent accounting pronouncements

In October 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” ASU 2016-16 requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs and eliminates the exception for an intra-entity transfer of an asset other than inventory. ASU 2016-16 is effective for annual and interim periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods, and is required to be adopted using a modified retrospective approach, with early adoption permitted. The Company is evaluating the impact of the adoption of this ASU on its consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This accounting standard update will be effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, and early adoption is permitted. The Company is currently evaluating the methods and impact of adopting the new accounting standard on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. All leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, “Elements of Financial Statements,” and, therefore, recognition of those lease assets and lease liabilities represents a change of previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases.  This ASU is effective for annual and interim periods beginning after December 15, 2018.  Early adoption is permitted. The recognition,

6


 

measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous GAAP.  The Company is currently evaluating the impact the pronouncement will have on its consolidated financial statements and related disclosures.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Assets.” ASU 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income and simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. The accounting standard update also updates certain presentation and disclosure requirements. This accounting standard update will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.

In September 2015, the FASB issued a new accounting standard that eliminates the requirement to restate prior period financial statements for measurement period adjustments following a business combination. The new guidance requires that the cumulative impact of a measurement period adjustment including the impact on prior periods be recognized in the reporting period in which the adjustment is identified along with additional disclosures. The new guidance was effective for the Company beginning in the first quarter of fiscal 2017.  Implementation of this new guidance did not have a material impact on the Company’s consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11, "Simplifying the Measurement of Inventory.” This standard update intends to simplify the subsequent measurement of inventory, excluding inventory accounted for under the last-in, first-out or the retail inventory methods. The update replaces the current lower of cost or market test with a lower of cost and net realizable value test. Under the current guidance, market could be replacement cost, net realizable value or net realizable value less an approximately normal profit margin. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The update is effective for reporting periods beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact of this accounting standard on its consolidated financial statements.

In August 2014, the 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. In March, April and May 2016, the FASB issued additional updates to the new revenue standard relating to reporting revenue on a gross versus net basis, identifying performance obligations and licensing arrangements, and narrow-scope improvements and practical expedients, respectively. The Company is in the process of assessing the impact this additional guidance is expected to have upon adoption, including determining the adoption method.

7


 

 

NOTE 2—NET INCOME (LOSS) PER COMMON SHARE

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Six Months Ended September 30,

 

 

 

2016

 

2015

 

2016

 

2015

    

 

 

(In thousands, except per share amounts)

 

Net income (loss)

   

$

626

    

$

(347)

    

$

886

    

$

(1,264)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominators:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares—Basic

 

 

20,529

 

 

22,676

 

 

20,912

 

 

22,809

 

Dilutive effect of employee stock options

 

 

550

 

 

 —

 

 

412

 

 

 —

 

Dilutive effect of employee stock purchase plan options

 

 

25

 

 

 —

 

 

25

 

 

 —

 

Weighted average shares—Dilutive

 

 

21,104

 

 

22,676

 

 

21,349

 

 

22,809

 

Net income (loss) per common share—Basic

 

$

0.03

 

$

(0.02)

 

$

0.04

 

$

(0.06)

 

Net income (loss) per common share—Diluted

 

$

0.03

 

$

(0.02)

 

$

0.04

 

$

(0.06)

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Six Months Ended September 30,

 

 

 

2016

 

2015

 

2016

 

2015

    

 

 

(In thousands)

 

Shares underlying options

   

5,401

 

5,317

 

5,734

 

5,067

 

 

 

 

8


 

NOTE 3—BALANCE SHEET DETAIL

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

March 31, 2016

    

 

 

(In thousands)

 

Inventories:

 

 

 

Work-in-progress

   

$

2,760

    

$

1,697

 

Finished goods

 

 

5,941

 

 

5,011

 

Inventory at distributors

 

 

277

 

 

466

 

 

 

$

8,978

 

$

7,174

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

March 31, 2016

    

 

 

(In thousands)

 

Accounts receivable, net:

 

 

 

 

 

 

 

Accounts receivable

   

$

8,910

    

$

7,578

 

Less: Allowances for sales returns, doubtful accounts and other

 

 

(103)

 

 

(100)

 

 

 

$

8,807

 

$

7,478

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

March 31, 2016

    

 

 

(In thousands)

 

Prepaid expenses and other current assets:

 

 

 

 

 

 

 

Prepaid tooling and masks

 

$

580

 

$

1,224

 

Prepaid income taxes

 

 

43

 

 

 —

 

Escrow deposit

 

 

484

 

 

 —

 

Other receivables

 

 

273

 

 

230

 

Other prepaid expenses and other current assets

 

 

837

 

 

744

 

 

 

$

2,217

 

$

2,198

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

March 31, 2016

    

 

 

(In thousands)

 

Property and equipment, net:

 

 

 

 

 

 

 

Computer and other equipment

 

$

18,549

 

$

18,394

 

Software

 

 

4,793

 

 

4,793

 

Land

 

 

3,900

 

 

3,900

 

Building and building improvements

 

 

2,256

 

 

2,256

 

Furniture and fixtures

 

 

110

 

 

114

 

Leasehold improvements

 

 

706

 

 

687

 

 

 

 

30,314

 

 

30,144

 

Less: Accumulated depreciation

 

 

(22,116)

 

 

(21,491)

 

 

 

$

8,198

 

$

8,653

 

 

Depreciation expense was $305,000 and $277,000, respectively, for the three months ended September 30, 2016 and 2015 and $629,000 and $569,000, respectively, for the six months ended September 30, 2016 and 2015.

9


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

March 31, 2016

    

 

 

(In thousands)

 

Other assets:

 

 

 

 

 

 

 

Escrow deposit

 

$

2,500

 

$

2,984

 

Non-current deferred income taxes

 

 

24

 

 

 —

 

Prepaid income taxes

 

 

574

 

 

 —

 

Deposits

 

 

128

 

 

102

 

 

 

$

3,226

 

$

3,086

 

 

The escrow deposits at September 30, 2016 and March 31, 2016 include approximately $2.5 million and $3.0 million respectively, placed in escrow in connection with the Company’s acquisition of MikaMonu Group Ltd. on November 23, 2015.  See Note 10 Acquisition for more information.

 

The following tables summarize the components of intangible assets and related accumulated amortization balances at September 30, 2016 and March 31, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2016

 

 

    

Gross
Carrying
Amount

    

Accumulated
amortization

    

Net Carrying
Amount

 

Intangible assets:

 

 

 

    

 

 

    

 

 

 

Product designs

 

$

590

 

$

(590)

 

$

 —

 

Patents

 

 

4,220

 

 

(761)

 

 

3,459

 

Software

 

 

80

 

 

(80)

 

 

 —

 

Total

 

$

4,890

 

$

(1,431)

 

$

3,459

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2016

 

 

    

Gross
Carrying
Amount

    

Accumulated
Amortization

    

Net Carrying
Amount

 

Intangible assets:

 

 

 

 

 

 

 

 

 

 

Product designs

 

$

590

 

$

(555)

 

$

35

 

Patents

 

 

4,220

 

 

(604)

 

 

3,616

 

Software

 

 

80

 

 

(80)

 

 

 —

 

Total

 

$

4,890

 

$

(1,239)

 

$

3,651

 

 

 

Amortization of intangible assets included in cost of revenues was $92,000 and $41,000, respectively, for the three months ended September 30, 2016 and 2015 and $192,000 and $82,000, respectively, for the six months ended September 30, 2016 and 2015.

 

As of September 30, 2016, the estimated future amortization expense of intangible assets in the table above is as follows (in thousands):

 

 

 

 

 

 

 

 

 

Six Months Ended September 30,

 

 

 

 

 

 

2017

 

$

313

 

 

 

    

2018

 

 

307

 

 

 

 

2019

 

 

233

 

 

 

 

2020

 

 

233

 

 

 

 

2021

 

 

233

 

 

 

 

Thereafter

 

 

2,140

 

 

 

 

Total

 

$

3,459

 

 

 

 

 

10


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

March 31, 2016

    

 

 

(In thousands)

 

Accrued expenses and other liabilities:

 

 

 

 

 

 

 

Accrued compensation

 

$

2,921

 

$

3,082

 

Escrow indemnity accrual

 

 

484

 

 

 —

 

Accrued professional fees

 

 

207

 

 

83

 

Accrued commissions

 

 

280

 

 

284

 

Accrued income taxes

 

 

126

 

 

15

 

Customer credit balance

 

 

1,073

 

 

 —

 

Other accrued expenses

 

 

1,189

 

 

934

 

 

 

$

6,280

 

$

4,398

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

March 31, 2016

    

 

 

(In thousands)

 

Other accrued expenses:

 

 

 

 

 

 

 

Contingent consideration

 

$

5,936

 

$

5,856

 

Escrow indemnity accrual

 

 

 —

 

 

484

 

Other long-term accrued liabilities

 

 

370

 

 

152

 

 

 

$

6,306

 

$

6,492

 

 

 

 

 

 

 

 

NOTE 4—GOODWILL

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

As of March 31, 2016 and September 30, 2016, the Company had a goodwill balance of $8.0 million and $8.0 million, respectively. The goodwill resulted from the acquisition of MikaMonu Group Ltd. (“MikaMonu”) in fiscal 2016. The reduction in goodwill at September 30, 2016 was due to additional tax liabilities identified as of the acquisition date in the amount of $52,000.    

 

The Company utilized a two-step quantitative analysis to complete its annual impairment test during the fourth quarter of fiscal 2016 and concluded that there was no impairment, as the fair value of its sole reporting unit exceeded its carrying value. The Company determined that the second step of the impairment test was not necessary. No triggering event took place subsequent to the fiscal 2016 annual assessment that necessitated a quantitative impairment analysis for the Company’s one reporting unit. However, there continues to be a risk that a sustained decline in the Company’s stock price could constitute a triggering event that would require assessment for potential goodwill impairment in fiscal 2017.

 

 

 

 

NOTE 5—INCOME TAXES

 

The current portion of the Company’s unrecognized tax benefits was $0 at both September 30, 2016 and March 31, 2016. The long-term portion at September 30, 2016 and March 31, 2016 was $254,000 and $116,000, respectively, of which the timing of the resolution is uncertain.  As of September 30, 2016, $2,078,000 of unrecognized tax benefits had been recorded as a reduction to net deferred tax assets.  As of September 30, 2016 and March 31, 2016, the Company’s net deferred tax assets of $8.0 million and $6.4 million, respectively, were subject to a full valuation allowance.

 

The Company recorded a net deferred tax liability of $821,000 associated with the estimated fair value adjustments of the intangible assets acquired in its acquisition of MikaMonu in the quarter ended December 31,

11


 

2015. During the six months ended September 30, 2016, the Company reversed the deferred tax liability and recorded a prepaid asset of $636,000 associated with the transfer of the acquired intangible assets out of Israel.

 

During the three months ended June 30, 2016, the Company recorded a tax benefit of $71,000 that is included in the tax provision for the quarter then ended, to the reduction of uncertain tax benefits as a result of the lapse of applicable statutes of limitations.

 

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 $438,000, 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 2013 through 2016 remain open to examination by federal tax authorities, and fiscal years 2012 through 2016 remain open to examination by California tax authorities.

 

The Company’s estimated annual effective income tax rate was approximately 23.5% and 3.5% as of September 30, 2016 and 2015, respectively. The annual effective tax rates as of September 30, 2016 and 2015 vary from the United States statutory income tax rate primarily due to valuation allowances in the United States, whereby pre-tax losses do not result in the recognition of corresponding income tax benefits and expenses, and the foreign tax differential.

 

NOTE 6—FINANCIAL INSTRUMENTS

 

Fair value measurements

 

Authoritative accounting guidance for fair value measurements provides a framework for measuring fair value and related disclosures.  The guidance applies to all financial assets and financial liabilities that are measured 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 September 30, 2016, the Level 1 category included money market funds of $2.3 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 September 30, 2016, the Level 2 category included short-term investments of $19.0 million and long-term investments of $12.5 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 September 30, 2016, the Company had no Level 3 financial assets and a Level 3 financial liability consisting of the contingent consideration liability for the acquisition of MikaMonu. See Note 10-Acquisition for more information.

 

12


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

 

in Active

 

Significant

 

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

 

 

Identical Assets

 

Observable

 

Unobservable

 

 

 

 

 

 

and Liabilities

 

Inputs

 

Inputs

 

 

    

September 30, 2016

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

2,313

 

$

2,313

 

$

 —

 

$

 —

 

Marketable securities

 

 

31,563

 

 

 —

 

 

31,563

 

 

 —

 

Total

 

$

33,876

 

$

2,313

 

$

31,563

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

 

in Active

 

Significant

 

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

 

 

Identical Assets

 

Observable

 

Unobservable

 

 

 

 

 

 

and Liabilities

 

Inputs

 

Inputs

 

 

    

March 31, 2016

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

6,611

 

$

6,611

 

$

 —

 

$

 —

 

Marketable securities

 

 

34,297

 

 

 —

 

 

34,297

 

 

 —

 

Total

 

$

40,908

 

$

6,611

 

$

34,297

 

$

 —

 

 

 

Short-term and long-term investments

 

All of the Company’s short-term and long-term investments are classified as available-for-sale.  Available-for-sale debt securities with maturities greater than twelve months are classified as long-term investments when they are not intended for use in current operations.  Investments in available-for-sale securities are reported at fair value with unrecognized gains (losses), net of tax, as a component of accumulated other comprehensive income (loss) in the Condensed Consolidated Balance Sheets.  The Company had money market funds of $2.3 million and $6.6 million at September 30, 2016 and March 31, 2016, respectively, included in cash and cash equivalents on the Condensed Consolidated Balance Sheets.  The Company monitors its investments for impairment periodically and records appropriate reductions in carrying values when declines are determined to be other-than-temporary.

 

13


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

 

 

 

 

Unrealized

 

Unrealized

 

Fair

 

 

    

Cost

    

Gains

    

Losses

    

Value

 

 

 

(In thousands)

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate notes

 

$

2,757

 

$

 —

 

$

(2)

 

$

2,755

 

Certificates of deposit

 

 

13,250

 

 

22

 

 

(1)

 

 

13,271

 

Foreign government obligations

 

 

1,002

 

 

 —

 

 

(1)

 

 

1,001

 

Agency bonds

 

 

2,000

 

 

3

 

 

 —

 

 

2,003

 

Total short-term investments

 

$

19,009

 

$

25

 

$

(4)

 

$

19,030

 

Long-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate notes

 

$

558

 

$

 —

 

$

(1)

 

$

557

 

Certificates of deposit

 

 

6,500

 

 

20

 

 

(1)

 

 

6,519

 

Foreign government obligations

 

 

3,448

 

 

 —

 

 

(7)

 

 

3,441

 

Agency bonds

 

 

2,018

 

 

 —

 

 

(2)

 

 

2,016

 

Total long-term investments

 

$

12,524

 

$

20

 

$

(11)

 

$

12,533

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

 

 

 

 

Unrealized

 

Unrealized

 

Fair

 

 

    

Cost

    

Gains

    

Losses

    

Value

 

 

 

(In thousands)

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal obligations

 

$

1,011

 

$

 —

 

$

 —

 

$

1,011

 

Corporate notes

 

 

5,680

 

 

 —

 

 

(3)

 

 

5,677

 

Agency bonds

 

 

2,001

 

 

1

 

 

 —

 

 

2,002

 

Foreign government obligations

 

 

2,695

 

 

3

 

 

 —

 

 

2,698

 

Certificates of deposit

 

 

11,750

 

 

12

 

 

 —

 

 

11,762

 

Total short-term investments

 

$

23,137