The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. The Company and Summary of Significant Accounting Policies
MoSys, Inc. (the Company) was incorporated in California in September 1991 and reincorporated in September 2000 in Delaware. The Company’s strategy and primary business objective is to be an IP-rich fabless semiconductor company focused on the development and sale of integrated circuit (IC) and related firmware products. Its Bandwidth Engine ICs combine the Company’s proprietary high-density embedded memory with its high-speed 10 gigabits per second and higher interface technology.
The accompanying condensed consolidated financial statements of the Company have been prepared without audit.
The condensed consolidated balance sheet as of December 31, 2018 has been derived from the audited consolidated financial statements at that date. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted in accordance with these rules and regulations of the Securities and Exchange Commission (SEC). The information in this report should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in its most recent annual report on Form 10-K filed with the SEC.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to summarize fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or for any other future period.
Basis of Presentation
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. The Company’s fiscal year ends on December 31 of each calendar year.
Reverse Stock Split
On August 27, 2019, the Company filed a certificate of amendment to its amended and restated certificate of incorporation with the Secretary of State of the State of Delaware to effect a 1-for-20 reverse stock split of the Company’s shares of common stock. Such amendment and ratio were previously approved by the Company’s stockholders and board of directors, respectively.
As a result of the reverse stock split, which was effective August 28, 2019, every 20 shares of the Company’s pre-reverse split outstanding common stock were combined and reclassified into one share of common stock. Proportionate voting rights and other rights of common stock holders were not affected by the reverse stock split. No fractional shares were issued in connection with the reverse stock split; stockholders who would otherwise hold a fractional share of the Company’s common stock received cash in an amount equal to the product obtained by multiplying (i) the closing sale price of the common stock on the effective date of the reverse stock split as reported on The Nasdaq Stock Market, by (ii) the number of shares of the common stock held by the stockholder that would otherwise have been exchanged for the fractional share interest. All stock options and restricted stock units outstanding and common stock reserved for issuance under the Company’s equity incentive plans and warrants outstanding immediately prior to the reverse stock split were adjusted by dividing the number of affected shares of common stock by 20 and, as applicable, multiplying the exercise price by 20, as a result of the reverse stock split.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses recognized during the reported period. Actual results could differ from those estimates.
7
Cash Equivalents and Investments
The Company invests its excess cash in money market accounts, certificates of deposit, commercial paper, corporate debt, government-sponsored enterprise bonds and municipal bonds and considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Investments with original maturities greater than three months and remaining maturities less than one year are classified as short-term investments. Investments with remaining maturities greater than one year are classified as long-term investments. Management generally determines the appropriate classification of securities at the time of purchase. All securities are classified as available-for-sale. The Company’s available-for-sale short-term investments are carried at fair value, with the unrealized holding gains and losses reported in accumulated other comprehensive income. Realized gains and losses and declines in the value judged to be other than temporary are included in the other income, net line item in the condensed consolidated statements of operations and comprehensive loss. The cost of securities sold is based on the specific identification method.
Fair Value Measurements
The Company measures the fair value of financial instruments using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:
Level 1— Inputs used to measure fair value are unadjusted quoted prices that are available in active markets for the identical assets or liabilities as of the reporting date.
Level 2— Pricing is provided by third party sources of market information obtained through the Company’s investment advisors, rather than models. The Company does not adjust for, or apply, any additional assumptions or estimates to the pricing information it receives from advisors. The Company’s Level 2 securities may include cash equivalents and available-for-sale securities, which consist primarily of certificates of deposit, corporate debt, and government agency and municipal debt securities from issuers with high-quality credit ratings. The Company’s investment advisors obtain pricing data from independent sources, such as Standard & Poor’s, Bloomberg and Interactive Data Corporation, and rely on comparable pricing of other securities because the Level 2 securities are not actively traded and have fewer observable transactions. The Company considers this the most reliable information available for the valuation of the securities.
Level 3— Unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment are used to measure fair value. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions. The determination of fair value for Level 3 investments and other financial instruments involves the most management judgment and subjectivity.
Allowance for Doubtful Accounts
The Company establishes an allowance for doubtful accounts to ensure that its trade receivables balances are not overstated due to uncollectibility. The Company performs ongoing customer credit evaluations within the context of the industry in which it operates and generally does not require collateral from its customers. A specific allowance of up to 100% of the invoice value is provided for any problematic customer balances. Delinquent account balances are written off after management has determined that the likelihood of collection is remote. The Company grants credit only to customers deemed creditworthy in the judgment of management. There was no allowance for doubtful accounts receivable at either September 30, 2019 or December 31, 2018.
Inventories
The Company values its inventories at the lower of cost, which approximates actual cost on a first-in, first-out basis, or net realizable value. The Company records inventory reserves for estimated obsolescence or unmarketable inventories based upon assumptions about future demand and market conditions. Once a reserve is established, it is maintained until the product to which it relates is sold or otherwise disposed of. If actual market conditions are less favorable than those expected by management, additional adjustment to inventory valuation may be required. Charges for obsolete and slow-moving inventories are recorded based upon an analysis of specific identification of obsolete inventory items and quantification of slow moving inventory items. The Company recorded no material inventory write-downs during the three and nine months ended September 30, 2019 and $0.1 million of inventory write-downs during the three and nine months ended September 30, 2018.
8
Revenue Recognition
The Company generates revenue primarily from sales of IC products and licensing of its IP. Revenues are recognized when control is transferred to customers in amounts that reflect the consideration the Company expects to be entitled to receive in exchange for those goods. Revenue recognition is evaluated through the following five steps: (i) identification of the contract, or contracts, with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when or as a performance obligation is satisfied.
IC products
Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied.
The majority of the Company's contracts have a single performance obligation to transfer products. Accordingly, the Company recognizes revenue when title and risk of loss have been transferred to the customer, generally at the time of shipment of products. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products and is generally based upon a negotiated, formula, list or fixed price. The Company sells its products both directly to customers and through distributors generally under agreements with payment terms typically less than 60 days.
The Company may record an estimated allowance, at the time of shipment, for future returns and other charges against revenue consistent with the terms of sale.
Royalty and other
The Company’s licensing contracts typically provide for royalties based on the licensee’s use of the Company’s memory technology in its currently shipping commercial products. The Company estimates its royalty revenue in the calendar quarter in which the licensee uses the licensed technology. Payments are generally received in the subsequent quarter.
Contract liabilities – deferred revenue
The Company’s contract liabilities consist of advance customer payments and deferred revenue. The Company classifies advance customer payments and deferred revenue as current or non-current based on the timing of when the Company expects to recognize revenue.
During the nine months ended September 30, 2019, the Company recognized revenue of $0.3 million that had been included in deferred revenue at December 31, 2018.
See Note 5 for disaggregation of revenue by geography.
Cost of Net Revenue
Cost of net revenue consists primarily of direct and indirect costs of IC product sales and engineering personnel costs directly related to maintenance and support services specified in licensing agreements. Maintenance and support typically include engineering support to assist in the commencement of production of a licensee’s products.
Goodwill
The Company determines the amount of 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
9
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 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, 2019, and, due to a decrease in the price per share of its common stock, the test results indicated the goodwill carrying value was greater than its implied fair value. Further, the Company concluded a triggering event had occurred due to the sustained decrease in the price per share of its common stock and related reduced market capitalization as of September 30, 2019 and performed an additional test for impairment of its goodwill asset resulting in further indication that the goodwill carrying value was still greater than its implied fair value. As a result of both of these tests, the Company recorded non-cash impairment charges totaling $0.4 million. As a result of these charges, the Company’s goodwill balance was reduced to zero at September 30, 2019.
Warrants
As of September 30, 2019 and December 31, 2018, the Company had the following outstanding warrants to purchase common stock:
|
|
|
Warrant type
|
|
Number of shares
|
|
|
Exercise Price
|
|
|
Expiration date
|
Pre-funded common stock
|
|
|
115,538
|
|
|
$
|
0.02
|
|
|
None
|
Common stock
|
|
|
33,125
|
|
|
$
|
47.00
|
|
|
January 2023
|
Common stock
|
|
|
1,845,540
|
|
|
$
|
6.00
|
|
|
October 2023
|
Per Share Amounts
Basic net income (loss) per share is computed by dividing net income (loss) for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share gives effect to all potentially dilutive common shares outstanding during the period. Potentially dilutive common shares consist of incremental shares of common stock issuable upon the exercise of stock options, vesting of stock awards and shares issuable in conjunction with the outstanding convertible notes.
The following table sets forth the computation of basic and diluted net loss per share for the periods indicated (in thousands, except per share amounts):
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,801
|
)
|
|
$
|
(2,812
|
)
|
|
$
|
(1,894
|
)
|
|
$
|
(2,149
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
2,171
|
|
|
|
412
|
|
|
|
2,161
|
|
|
|
409
|
|
Total shares: basic and diluted
|
|
|
2,171
|
|
|
|
412
|
|
|
|
2,161
|
|
|
|
409
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.83
|
)
|
|
$
|
(6.83
|
)
|
|
$
|
(0.88
|
)
|
|
$
|
(5.25
|
)
|
10
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):
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Options to purchase common stock
|
|
|
81
|
|
|
|
17
|
|
Unvested restricted common stock units
|
|
|
91
|
|
|
|
19
|
|
Convertible debt
|
|
|
245
|
|
|
|
118
|
|
Warrants
|
|
|
1,994
|
|
|
|
33
|
|
Total
|
|
|
2,411
|
|
|
|
187
|
|
Recently Adopted Accounting Standards
In 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases. The standard introduces a new lessee model that requires most leases to be recorded on the balance sheet and eliminates the required use of bright-line tests for determining lease classification. In July 2018, the FASB issued the following standards which clarified ASU No. 2016-02 and have the same effective date as the original standard: ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. ASU No. 2018-11 includes an option to not restate comparative periods in transition and elect to use the effective date of ASU No. 2016-02 as the date of initial application of transition. In March 2019, the FASB issued ASU No. 2019-01, Leases (Topic 842): Codification Improvements, which clarifies ASU No. 2016-02 and is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company adopted ASU No. 2016-02, as amended, on January 1, 2019 using the optional transition method provided by the FASB in ASU No. 2018-11. As the Company did not restate comparative periods, the adoption had no impact on previously reported results. The Company elected to use the practical expedient that allowed it to not reassess: (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases as well as the practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component for all asset classes. The adoption of this standard had a material impact on the Company’s condensed consolidated balance sheet due to the recognition of right of use assets and lease liabilities. Upon adoption, the Company recognized right of use assets and lease liabilities of approximately $0.4 million that reflected the present value of future lease payments. The adoption of this standard did not have a material impact on the Company’s condensed consolidated results of operations or cash flows. See Note 9 for further information.
In 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718), Improvements to Employee Share-based Payment Accounting. ASU No. 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company adopted ASU No. 2016-09 effective January 1, 2019, and has applied the effects of the adoption from that date. ASU No. 2016-09 permits entities to make an accounting policy election related to how forfeitures will impact the recognition of compensation cost for stock-based compensation to: estimate the total number of awards for which the requisite service period will not be rendered (as previously required) or account for forfeitures as they occur. Upon the adoption of ASU No. 2016-09, 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. The amendments in the standard that required use of a modified retrospective transition method did not materially impact the Company. Therefore, the Company did not recognize a cumulative-effect adjustment to accumulated deficit upon adoption.
11
Note 2: Fair Value of Financial Instruments
The estimated fair values of financial instruments outstanding were (in thousands):
|
|
September 30, 2019
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Cash and cash equivalents
|
|
$
|
6,170
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,170
|
|
Short-term investments
|
|
|
649
|
|
|
|
1
|
|
|
|
—
|
|
|
|
650
|
|
|
|
$
|
6,819
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
6,820
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Cash and cash equivalents
|
|
$
|
7,104
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,104
|
|
The following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) (in thousands):
|
|
September 30, 2019
|
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Money market funds
|
|
$
|
4,202
|
|
|
$
|
4,202
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate notes and commercial paper
|
|
$
|
650
|
|
|
$
|
—
|
|
|
$
|
650
|
|
|
$
|
—
|
|
|
|
December 31, 2018
|
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Money market funds
|
|
$
|
632
|
|
|
$
|
632
|
|
|
$
|
—
|
|
|
$
|
—
|
|
There were no transfers in or out of Level 1 and Level 2 securities during the three or nine months ended September 30, 2019.
Note 3. Balance Sheet Detail
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Work-in-process
|
|
$
|
755
|
|
|
$
|
548
|
|
Finished goods
|
|
|
460
|
|
|
|
600
|
|
|
|
$
|
1,215
|
|
|
$
|
1,148
|
|
Note 4. Commitments and Contingencies
Indemnification
In the ordinary course of business, the Company enters into contractual arrangements under which it may agree to indemnify the counterparties from any losses incurred relating to breach of representations and warranties, failure to perform certain covenants, or claims and losses arising from certain events as outlined within the particular contract, which may include, for example, losses arising from litigation or claims relating to past performance. Such indemnification clauses may not be subject to maximum loss clauses. The Company has also entered into indemnification agreements with its officers and directors. No material amounts were reflected in the Company’s condensed consolidated financial statements for the three or nine months ended September 30, 2019 or 2018 related to these indemnifications.
12
The Company has not estimated the maximum potential amount of indemnification liability under these agreements due to the limited history of prior claims and the unique facts and circumstances applicable to each particular agreement. To date, the Company has not made any material payments related to these indemnification agreements.
Legal Matters
The Company is not a party to any legal proceeding that the Company believes is likely to have a material adverse effect on its condensed consolidated financial position or results of operations. From time to time the Company may be subject to legal proceedings and claims in the ordinary course of business. These claims, even if not meritorious, could result in the expenditure of significant financial resources and diversion of management efforts. .
Note 5. Business Segments, Concentration of Credit Risk and Significant Customers
The Company operates in one business segment and uses one measurement of profitability for its business. Net revenue is attributed to the United States and to all foreign countries based on the geographical location of the customer.
The Company recognized revenue from shipment of product and licensing of its technologies to customers by geographical location as follows (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
North America
|
|
$
|
930
|
|
|
$
|
3,652
|
|
|
$
|
6,004
|
|
|
$
|
10,393
|
|
Japan
|
|
|
179
|
|
|
|
364
|
|
|
|
1,431
|
|
|
|
2,206
|
|
Taiwan
|
|
|
97
|
|
|
|
155
|
|
|
|
225
|
|
|
|
311
|
|
Rest of world
|
|
|
—
|
|
|
|
172
|
|
|
|
132
|
|
|
|
239
|
|
Total net revenue
|
|
$
|
1,206
|
|
|
$
|
4,343
|
|
|
$
|
7,792
|
|
|
$
|
13,149
|
|
Customers who accounted for at least 10% of total net revenue were:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Customer A
|
|
33%
|
|
37%
|
|
27%
|
|
34%
|
Customer B
|
|
19%
|
|
29%
|
|
20%
|
|
15%
|
Customer C
|
|
19%
|
|
*%
|
|
*%
|
|
*%
|
Customer D
|
|
15%
|
|
*%
|
|
18%
|
|
17%
|
Customer E
|
|
*%
|
|
*%
|
|
17%
|
|
18%
|
*
|
Represents less than 10%
|
Three customers accounted for 76% of accounts receivable at September 30, 2019. Three customers accounted for 63% of accounts receivable at December 31, 2018.
Note 6. Income Tax Provision
The Company determines deferred tax assets and liabilities based upon the differences between the financial statement and tax bases of the Company’s assets and liabilities using tax rates in effect for the year in which the Company expects the differences to affect taxable income. A valuation allowance is established for any deferred tax assets for which it is more likely than not that all or a portion of the deferred tax assets will not be realized.
The Company files U.S. federal and state and foreign income tax returns in jurisdictions with varying statutes of limitations. All tax returns from 2013 to 2018 may be subject to examination by the Internal Revenue Service, California and other states. Returns filed in foreign jurisdictions may be subject to examination for the years 2009 to 2018. As of September 30, 2019, the Company has not recorded any liability for unrecognized tax benefits related to uncertain tax positions.
13
Note 7. Stock-Based Compensation
The expense relating to stock options is recognized on a straight-line basis over the requisite service period, usually the vesting period, based on the grant-date fair value. The unamortized compensation cost, as of September 30, 2019, was $0.2 million related to stock options and is expected to be recognized as expense over a weighted-average period of approximately 2.2 years. The expense related to restricted stock units (RSUs) is recognized over a three-to-five year vesting period and is based on the fair value of the underlying stock on the dates of grant. The unamortized compensation cost, as of September 30, 2019, was $0.3 million related to RSUs and is expected to be recognized as expense over a weighted-average period of approximately 2.3 years.
For the three and nine months ended September 30, 2019 and 2018, there were no excess tax benefits associated with the exercise of stock options due to the Company’s historical loss positions.
Valuation Assumptions
The fair value of the Company’s stock options granted during the nine months ended September 30, 2019 and 2018 was estimated on the grant dates using the Black-Scholes valuation option-pricing model with the following assumptions:
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Risk-free interest rate
|
|
|
2.5
|
%
|
|
|
2.2
|
%
|
Volatility
|
|
|
128.4
|
%
|
|
|
109.5
|
%
|
Expected life (years)
|
|
3.0 - 5.0
|
|
|
|
4.0
|
|
Dividend yield
|
|
|
—
|
%
|
|
|
—
|
%
|
There were no awards granted during the three months ended September 30, 2019 and 2018. 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.
Prior to January 1, 2019, the stock‑based compensation expense recorded was adjusted based on estimated forfeiture rates. An annualized forfeiture rate has been used as a best estimate of future forfeitures based on the Company’s historical forfeiture experience. Stock‑based compensation expense was then 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 changed its accounting policy and began accounting for forfeitures as they occur. Historically, estimated forfeitures were immaterial to the condensed consolidated financial statements.
14
Common Stock Options and Restricted Stock
A summary of option and RSU activity under the Company’s Amended and Restated 2010 Equity Incentive Plan (the 2010 Plan) is presented below (in thousands, except exercise price):
|
|
|
|
|
|
Options outstanding
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
|
|
|
|
Average
|
|
|
|
Available
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
for Grant
|
|
|
Shares
|
|
|
Prices
|
|
Balance as of January 1, 2019
|
|
|
200
|
|
|
|
17
|
|
|
$
|
83.80
|
|
Additional shares authorized under the Plan
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
RSUs granted
|
|
|
(101
|
)
|
|
|
—
|
|
|
|
—
|
|
RSUs cancelled and returned to the Plan
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
Options granted
|
|
|
(65
|
)
|
|
|
65
|
|
|
$
|
4.00
|
|
Balance as of March 31, 2019
|
|
|
37
|
|
|
|
82
|
|
|
$
|
20.40
|
|
RSUs granted
|
|
|
(6
|
)
|
|
|
—
|
|
|
|
—
|
|
Options cancelled and returned to the Plan
|
|
|
1
|
|
|
|
(1
|
)
|
|
$
|
144.00
|
|
Balance as of June 30, 2019
|
|
|
32
|
|
|
|
81
|
|
|
$
|
20.00
|
|
Plan termination
|
|
|
(32
|
)
|
|
|
—
|
|
|
$
|
—
|
|
Balance as of September 30, 2019
|
|
|
-
|
|
|
|
81
|
|
|
$
|
20.00
|
|
A summary of RSU activity under the Plan is presented below (in thousands, except for fair value):
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Non-vested shares as of January 1, 2019
|
|
|
14
|
|
|
$
|
24.60
|
|
Granted
|
|
|
101
|
|
|
$
|
4.00
|
|
Vested
|
|
|
(8
|
)
|
|
$
|
29.60
|
|
Cancelled
|
|
|
(1
|
)
|
|
$
|
25.20
|
|
Non-vested shares as of March 31, 2019
|
|
|
106
|
|
|
$
|
4.60
|
|
Granted
|
|
|
6
|
|
|
$
|
4.60
|
|
Vested
|
|
|
(5
|
)
|
|
$
|
16.20
|
|
Non-vested shares as of June 30, 2019
|
|
|
107
|
|
|
$
|
4.00
|
|
Vested
|
|
|
(16
|
)
|
|
$
|
4.00
|
|
Non-vested shares as of September 30, 2019
|
|
|
91
|
|
|
$
|
4.00
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of the RSUs outstanding as of September 30, 2019 was $0.2 million.
In August 2019, the Company’s stockholders approved the 2019 Stock Incentive Plan (the 2019 Plan), and, as a result, the 2010 Plan was automatically terminated. No future grants of awards will be made under the 2010 Plan, although it will continue to govern prior awards granted thereunder, until all such awards granted have been exercised, forfeited, canceled, expired or otherwise terminated in accordance with the terms of such grants. The 2019 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 2019 Plan, 182,500 shares have been reserved for issuance.
The 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 2019 Plan must be at least equal to the fair market value of the shares on the date of
15
grant. Generally, options granted under the 2019 Plan will vest over a three to four-year period and have a term of 10 years from the date of grant. In addition, the 2019 Plan provides for automatic acceleration of vesting for options granted to non-employee directors upon a change of control of the Company. As of September 30, 2019, no awards had been granted under the 2019 Plan.
The following table summarizes significant ranges of outstanding and exercisable options as of September 30, 2019 (in thousands, except contractual life and exercise price):
There were no stock options exercised during the nine months ended September 30, 2019 or 2018.
Note 8. Convertible Notes
In March 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 amendments to the Notes and related documents in February and October 2018, the interest rate was reduced to 8%, the maturity date of the Notes was extended to August 15, 2023, and the optional conversion price was reduced from $170.00 of Note principal per share of common stock to $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, the Notes are secured by a security interest in all of the assets of the Company.
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 2018, pursuant to one amendment to the Notes, the redemption price was reduced from 120% to 100% of the principal amount of the Note to be repurchased plus accrued and unpaid interest as of the redemption date.
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 amortized to interest expense over the original repayment period using the effective interest rate method. The interest expense related to the debt discount during the three and nine months ended September 30, 2019 was approximately zero and during the three and nine months ended September 30, 2018 was approximately $6,000 and $30,000, respectively.
Note 9. Leases
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”). Under the effective date method, comparative periods are presented under previous GAAP, Accounting Standards Codification 840, and do not include any retrospective adjustments to reflect the adoption of ASU No. 2016-02. As an accounting policy, the Company has elected not to apply the recognition requirements to short-term leases and not to separate non-lease components from lease components. The Company also has elected the package of transition provisions available for existing contracts, which allowed the Company to carryforward its historical assessments of (i) whether contracts are or contain leases, (ii) lease classification and (iii) initial direct costs. The adoption did not result in a cumulative-effect adjustment to the opening balance of accumulated deficit. As a result of the adoption, the Company recorded an operating lease right-to-use asset of $0.4 million and corresponding short-term and long-term liabilities of $0.2 million and $0.2 million, respectively, as of January 1, 2019. The adoption of ASU No. 2016-02 did not have a material impact on the Company’s condensed consolidated statement of operations and comprehensive income or cash flows as of the adoption date.
Our future minimum payments under our facility operating lease as of September 30, 2019 are listed in the table below (in thousands).
Supplemental cash flow information related to the operating lease was as follows (in thousands):