Virage Logic 10-Q 2009
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2009
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-31089
VIRAGE LOGIC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
VIRAGE LOGIC CORPORATION
47100 BAYSIDE PARKWAY
FREMONT, CALIFORNIA 94538
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF PRINCIPAL EXECUTIVE OFFICE)
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 x 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 (§232.405 of this chapter) 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):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
As of July 31, 2009, there were 23,986,293 shares of the Registrants Common Stock outstanding.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Description of Business
Virage Logic Corporation (Virage Logic or the Company) was incorporated in California in November 1995 and subsequently reincorporated in Delaware in July 2000. The Company provides semiconductor intellectual property (IP) including the following embedded memories including SRAM and non-volatile memory (NVM): logic libraries, IP and development infrastructure for embedded test and repair of on-chip memory instances, software development tools used to build memory compilers, and Double Date Rate (DDR) memory controllers, Physical Interfaces (PHYs) and Delay Locked Loops (DLLs). These various forms of IP are utilized by the Companys customers to design and manufacture System-on-a-Chip (SoC) integrated circuits that power todays consumer, communications and networking, handheld and portable devices, computer and graphics, automotive, and defense applications.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements, and should be read in conjunction with the Companys audited consolidated financial statements for the fiscal year ended September 30, 2008 contained in the Companys 2008 Annual Report on Form 10-K. In the opinion of management, the unaudited interim financial statements reflect all adjustments, consisting only of normal, recurring adjustments necessary for a fair statement of the financial position, results of operations and cash flows for the periods indicated. Operating results for the three and nine months ended June 30, 2009 are not necessarily indicative of the results that may be expected for any subsequent interim period or for the fiscal year ending September 30, 2009.
The accompanying unaudited condensed consolidated financial statements include the accounts of Virage Logic Corporation and its wholly-owned subsidiaries and operations located in the Republic of Armenia (Armenia), Germany, India, Israel, Japan and the United Kingdom. All significant intercompany balances and transactions have been eliminated upon consolidation.
Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. Specifically, the Company has reclassified certain prior year amounts relating to the classification of revenues to show maintenance revenues separately. The effects of these reclassifications have no impact on previously reported total revenues, operating loss or net income (loss).
The financial position and results of operations of the Companys foreign operations are measured using currencies other than the U.S. dollar as their functional currencies. Accordingly, for these operations all assets and liabilities are translated into U.S. dollars at the current exchange rates as of the respective balance sheet dates. Revenue and expense items are translated using the weighted average exchange rates prevailing during the period. Cumulative gains and losses from the translation of these operations financial statements are reported as a separate component of stockholders equity, while foreign currency transactions gains or losses, resulting from re-measuring local currencies to the U.S. dollar are recorded in the consolidated statements of operations in other income (expense), net.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Accounting for Internal-Use Computer Software
In March 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use and identifies the characteristics of internal-use software. SOP 98-1 permits the capitalization of certain costs, including internal payroll costs, incurred in the connection with the development or acquisition of software for internal use. These costs are capitalized beginning when the Company has entered the application development stage and ceases when the software is substantially complete and is ready for its intended use. In accordance with SOP 98-1, the Company purchased and capitalized costs of approximately $129,000 and $0 during the nine months ended June 30, 2009, and 2008, respectively. Software is amortized for financial reporting purposes using the straight-line method over the estimated useful life of three years.
The Companys revenue recognition policy is based on the American Institute of Certified Public Accountants Statement of Position (SOP) 97-2, Software Revenue Recognition as amended by SOP 98-4 and SOP 98-9. Additionally, revenue is recognized on some of the Companys products, according to SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. The Company recognizes intellectual property revenue in accordance with SOP 97-2 because the software is not incidental to the IP as the IP is embedded in the software and the intellectual property is, in essence, a software product.
Revenues from perpetual licenses for the semiconductor IP products are generally recognized when persuasive evidence of an arrangement exists, delivery of the product has occurred, the fee is fixed or determinable, and collectibility is reasonably assured. The Company uses a completed performance model for perpetual licenses that do not include services to provide significant production, modification or customization of software as all of the elements have been delivered. The Company determines delivery has occurred when all the license materials that are specified in the evidence of a signed arrangement including any related documentation and the license keys are delivered electronically through the FTP server or via Electronic mail (e-mail). If any of these criteria are not met, revenue recognition is deferred until such time as all criteria are met. Revenues from term-based licenses that do not require specific customization for the semiconductor IP and software products are recognized ratably over the term of the license, which is generally between twelve to thirty-six months in duration, provided the criteria mentioned above are met. The Company uses a proportional performance model for term-based licenses as these licenses have a right to receive unspecified additional products that are granted over the access term of the license. Consulting services represent an immaterial amount of the Companys revenue thus are recorded as part of license revenue. These consulting services are not related to the functionality of the products licensed. Revenue from consulting services is recognized on the time and materials method or as work is performed.
License of custom memory compilers and logic libraries may involve customization to the functionality of the software; therefore revenues from such licenses are recognized in accordance with SOP 81-1 over the period that services are performed. Revenue derived from library development services are recognized using a percentage-of-completion method, and revenues from technical consulting services are recognized as the services are performed. For all license and service agreements accounted for using the percentage-of-completion method, the Company determines progress-to-completion based on labor hours incurred in comparison to the estimated total service hours required to complete the development or service or on the value of contract milestones completed. The Company believes that it is able to reasonably and reliably estimate the costs to complete projects accounted for using the percentage-of-completion method based on historical experience of similar project requirements. If the Company cannot reasonably and reliably estimate the costs to complete a project, the completed contract method of accounting is used, such that costs are deferred until the project is completed, at which time revenues and related costs are recognized. A provision for estimated losses on any project is made in the period in which the loss becomes probable and can be reasonably estimated. Costs incurred in advance of revenue recognition are recorded as costs in excess of related revenue on uncompleted contracts. If customer acceptance is required for completion of specified milestones, the related revenue is deferred until the acceptance criteria are met. If a portion of the value of a contract is contingent based on meeting a specified criteria, then the contingent value of the contract is deferred until the contingency has been satisfied or removed.
For agreements that include multiple elements, the Company recognizes revenues attributable to delivered or completed elements when such elements are completed or delivered. The amount of such revenues is determined by applying the residual method of accounting by deducting the aggregate fair value of the undelivered or uncompleted elements, which the Company determines by each such elements vendor-specific objective evidence of fair value, from the total revenues recognizable under such agreement. Vendor-specific objective evidence of fair value of each element of an arrangement is based upon the higher of the normal pricing for such licensed product and service when sold separately or the actual price stated in the contract, and for maintenance, it is determined based on 20% of the net selling price of the license for new agreements starting in fiscal 2007 or the higher of the actual price stated in the contract or the stated renewal rate in each contract for all contracts entered into prior to fiscal 2007. Revenues are recognized once the Company delivers the element identified as having vendor-specific objective evidence or once the provision of the services is completed. Maintenance revenues are recognized ratably over the remaining contractual term of the maintenance period from the date of delivery of the licensed materials receiving maintenance, which is generally twelve months.
The Company assesses whether the fee associated with each transaction is fixed or determinable and collection is reasonably assured and evaluates the payment terms. If a portion of the fee is due beyond normal payment terms, the Company recognizes the revenues on the payment due date, as long as collection is reasonably assured. The Company assesses collectibility based on a number of factors, including past transaction history and the overall credit-worthiness of the customer. If collection is not reasonably assured, revenue is deferred and recognized at the time collection becomes reasonably assured, which is generally upon receipt of the payment.
Amounts invoiced to customers in excess of recognized revenues are recorded as deferred revenues. Amounts recognized as revenue in advance of invoicing the customer are recorded as unbilled accounts receivable. The timing and amounts invoiced to customers can
vary significantly depending on specific contract terms and can therefore have a significant impact on deferred revenues and unbilled accounts receivable in any given period. All of the criteria under SOP 97-2 or SOP 81-1, as applicable, have been met, prior to the recognition of any revenue that would create an unbilled accounts receivable balance.
Royalty revenues are generally determined and recognized one quarter in arrears based on SOP 97-2, when a production volume report is received from the customer or foundry, and are calculated based on actual production volumes of wafers containing chips utilizing the Companys semiconductor IP technologies based on a rate per-chip or rate per-wafer depending on the terms of the respective license agreement. Depending on the contractual terms, prepaid royalties are recognized as revenue upon either the receipt of a corresponding royalty report or after all related license deliverables have been made.
Cash and Cash Equivalents, Short-term and Long-term Investments
For purposes of the accompanying consolidated statements of cash flows, the Company considers all highly liquid instruments with an original maturity on the date of purchase of three months or less to be cash equivalents. Cash and cash equivalents as of June 30, 2009 consisted of money market funds. Cash and cash equivalents as of September 30, 2008 consisted of money market funds and commercial paper. The Company determines the appropriate classification of investment securities at the time of purchase. As of June 30, 2009, all investment securities are designated as available-for-sale and are carried at fair value. The Company considers all investments that are available-for-sale that have a maturity date longer than three months and less than twelve months to be short-term investments. The Company considers all investments that have a maturity of more than twelve months to be long-term investments. The Company did not carry any long-term investments as of June 30, 2009. Long-term investments for the fiscal year ended September 30, 2008 included government sponsored enterprise bonds of $21.4 million with maturity dates greater than one year.
The available-for-sale securities are carried at fair value based on quoted market prices, with the unrealized gains (losses) reported as a separate component of stockholders equity. The Company periodically reviews the realizable value of its investments in marketable securities. When assessing marketable securities for other-than-temporary declines in value, the Company considers such factors as the length of time and extent to which fair value has been less than the cost basis, the market outlook in general and the Companys intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. If an other-than-temporary impairment of the investments is deemed to exist, the carrying value of the investment would be written down to its estimated fair value.
Investments, classified as available-for-sale securities, included the following (in thousands):
Investments, classified as available-for-sale securities as of June 30, 2009 and September 30, 2008, are reported as (in thousands):
The contractual maturities of investments are as follows as of June 30, 2009 and September 30, 2008 (in thousands):
The following table shows the gross unrealized losses and market value of the Companys investments with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of June 30, 2009 (in thousands):
Fair Value of Financial Instruments
The Company has determined that the amounts reported for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value because of their short maturities and/or variable interest rates. Available-for-sale investments are reported at their fair market value based on quoted market prices.
In September 2006, the Financial Accounting Standard Board (FASB) issued FASB Statement No. 157 (SFAS 157), Fair Value Measurements. The standard defines fair value, establishes a framework for measuring fair value and expands fair value measurement disclosures. Effective October 1, 2008, the Company adopted the measurement and disclosure requirements related to financial assets and financial liabilities and provided disclosure in Note 9. The adoption of SFAS 157 for financial assets and financial liabilities did not have any impact on the Companys results of operations or the fair values of its financial assets and liabilities.
Software Development Costs
The Company accounts for software development costs in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. Software development costs are capitalized beginning when a products technological feasibility has been established by completion of a working model of the product and amortization begins when a product is available for general release to customers. The Company capitalized $1.4 million and $0 of third party SFAS No. 86 costs, or purchased software, during the nine months ended June 30, 2009 and 2008. The purchased software will start to be amortized when the technology is available for general release to customers. The Company expects the general release date to be around the end of fiscal 2009. There is no amortization expense for software development costs during fiscal 2009.
Goodwill and Intangible Assets
In accordance with SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), goodwill and intangible assets deemed to have indefinite lives are no longer to be amortized, but instead are subject to annual impairment tests. As required by the provisions of SFAS 142, the Company evaluates goodwill for impairment on an annual basis on September 30 each year or more frequently if impairment indicators arise. During the second quarter of fiscal 2009 the Company assessed the carrying value of its goodwill balance. The Company determined that the restructuring plan it undertook in the second quarter represented a triggering event to assess its goodwill. As a result of the significant negative industry and economic trends affecting current operations and expected future growth as well as the general decline of industry valuations impacting the Companys valuation, the Company determined that the full amount of its goodwill was impaired. The Company recorded an impairment loss of $11.8 million in the second quarter ended March 31, 2009.
Acquired Intangible Assets
Other intangible assets, net are as follows (in thousands):
Aggregate amortization expense related to acquired intangible assets totaled approximately $992,000 and $516,000 for the nine months ended June 30, 2009 and 2008, respectively.
Estimated amortization expenses for intangible assets for the remainder of fiscal 2009, the next four fiscal years and all years thereafter are as follows (in thousands):
Stock Options and Stock Settled Appreciation Rights (SSARS)
As outlined in SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R), the Company uses the fair value method to apply the provisions of SFAS 123R. Total SFAS 123R compensation expense recognized for the three months ended June 30, 2009 and 2008 were $0.5 million and $0.7 million, respectively. As of June 30, 2009, total unrecognized estimated compensation expense, net of forfeitures related to stock options and SSARs prior to that date, was $3.6 million and will be amortized over a weighted average period of 2.82 years.
The estimated stock-based compensation expense related to the Companys stock-based awards for the three and nine months period ended June 30, 2009 and 2008 was as follows (in thousands, except per share data):
As of June 30, 2009 and 2008, the Company capitalized approximately $147,000 and $92,000, respectively, of stock-based compensation expense related to its custom contracts which have not been completed.
The Company uses the Black-Scholes option pricing model to value the compensation expense associated with its stock-based awards under SFAS 123R. As required by SFAS 123R, employee stock-based compensation expense is calculated based on estimated forfeiture rates. The Company estimates its future forfeitures based on its historical forfeiture experience and future expectations. SFAS 123R requires forfeitures to be estimated at the time of the grant and revised as necessary in subsequent periods if actual forfeitures differ from those estimates. If factors change and the Company employs different assumptions in the application of SFAS 123R in future periods, the stock-based compensation expense recognized under SFAS 123R may differ significantly from what has been recorded in the current period. During the nine months ended June 30, 2009 the Company recorded a true-up of stock-based compensation expense recognized in prior periods as a result of an increase in our estimated forfeiture rate in accordance with SFAS 123R.
The following weighted average assumptions were used in the estimated grant date fair value calculations for stock options and SSARs:
The expected stock price volatility rates are based on historical volatilities of the Companys common stock. The risk free interest rates are based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the options and SSARs. The average expected life represents the weighted average period of time that options and SSARs granted are expected to be outstanding giving consideration to vesting schedules and its historical exercise patterns. The Black-Scholes weighted average fair values of options and SSARs granted during the three months ended June 30, 2009 and 2008 were $1.68 and $2.35, respectively. The Black-Scholes weighted average fair values of options and SSARs granted during the nine months ended June 30, 2009 and 2008 were $1.43 and $3.34, respectively.
Restricted Stock Units
The Company issues restricted stock unit awards as an additional form of equity compensation to its employees and officers, pursuant to the Companys stockholder-approved 2002 Equity Incentive Plan. Restricted stock units generally vest over a two or four year period and unvested restricted stock units are forfeited and cancelled as of the date that employment terminates. Restricted stock units are settled in shares of the Companys common stock upon vesting. The cost of restricted stock unit awards is determined using the fair value of the Companys common stock on the date of the grant, and compensation expense is recognized over the vesting period.
The following table summarizes the activity of the Companys unvested restricted stock units as of June 30, 2009 and changes during the nine months ended June 30, 2009:
As of June 30, 2009, the total unrecognized compensation cost net of forfeitures related to unvested awards not yet recognized is $3.3 million and is expected to be recognized over a period of 2.13 years.
Equity Incentive Plans
The Company has two active incentive plans: the 2001 Incentive and Non-statutory Stock Option Plan and the 2002 Equity Incentive Plan. The Company continues to have awards outstanding under its expired 1997 Equity Incentive Plan. In November 2006, the Company began issuing SSARs which provide the holder the right to receive an amount settled in stock at the time of the exercise. Under the Companys equity incentive plans, stock options and SSARs generally have a vesting period of four years, are exercisable for a period not to exceed ten years from the date of grant and are generally granted at prices not less than the fair value of the Companys common stock at the time of grant. Information with respect to the Equity Incentive Plans is summarized as follows:
The following table summarizes information about stock options and SSARs outstanding and exercisable at June 30, 2009:
The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Companys closing stock price of $4.50 as of June 30, 2009, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options exercisable as of June 30, 2009 and 2008 was 0.1 million and 0.5 million, respectively.
The total intrinsic value of options exercised during the nine month periods ended June 30, 2009 and 2008 was $0.2 million and $1.0 million, respectively. The total cash received from employees as a result of employee stock option exercises during the nine months ended June 30, 2009 and 2008 was approximately $38,000 and $1.9 million.
NOTE 2 RESTRUCTURING CHARGES
During the second quarter of fiscal 2009, the Company initiated a plan of restructuring in an effort to reduce operating expenses and improve operating margins and cash flows. The restructuring plan was intended to decrease costs through job eliminations. The Company reduced its workforce by 13% primarily in engineering. The restructuring plan resulted in the reduction of 60 employees and closing of its R&D centers in New Jersey and Minnesota. Costs resulting from the restructuring plan included severance payments, severance-related benefits, lease termination charges, and other professional services. Total restructuring expense was $1.5 million of which $1.1 million was paid as of June 30, 2009. No further material charges are expected under the plan.
Total restructuring costs accrued as of June 30, 2009 and September 30, 2008 were $0.4 million and $4,000, respectively, which were recorded in accrued expenses on the consolidated balance sheets. Approximately $0.2 million of the accrued restructuring balance of $0.4 million as of June 30, 2009 will be paid in the fourth quarter of fiscal 2009. The remaining amount, consisting mainly of lease payments for the Companys exited facilities, will continue until the first quarter of fiscal 2011.
The following table summarizes restructuring activity for the nine months ended June 30, 2009 as follows (in thousands):
NOTE 3 NET INCOME (LOSS) PER SHARE
Basic and diluted net income (loss) per share is presented in conformity with SFAS No. 128, Earnings Per Share (SFAS 128). Accordingly, basic and diluted net income (loss) per share have been computed using the weighted average number of shares of common stock outstanding during the period, plus weighted average share equivalents, unless anti-dilutive.
The following table presents the computation of basic and diluted net income (loss) per share applicable to common stockholders (in thousands, except for per share data):
For the computation of diluted net income (loss) per share for the three months ended June 30, 2009 and June 30, 2008, the Company excluded awards totaling approximately 4.3 million shares and 5.5 million shares, respectively, from the calculation of the net income (loss) per share as they are anti-dilutive. Additionally, for the nine months ended June 30, 2009 and June 30, 2008, the Company excluded awards totaling approximately 4.3 million shares and 5.7 million shares, respectively, from the calculation of the net income (loss) per share as they are anti-dilutive.
NOTE 4 COMPREHENSIVE INCOME (LOSS)
SFAS No. 130, Reporting Comprehensive Income (SFAS 130) established standards for the reporting and display of comprehensive income (loss). Comprehensive income (loss) includes unrealized gains (losses) on investments, net of related tax effects and foreign currency translation adjustments. These items have been excluded from net income (loss) and are reflected instead in stockholders equity.
Total comprehensive income (loss) for the three and nine month periods ended June 30, 2009 and 2008, respectively, is as follows:
NOTE 5 SEGMENT INFORMATION
The Company operates in one industry segment, the sale of semiconductor IP including embedded SRAM and NVM, logic libraries, IP and development infrastructure for embedded test and repair of on-chip memory instances, software development tools used to build memory compilers, and DDR memory controllers, PHYs and DLLs.
The Chief Executive Officer has been identified as the Chief Operating Decision Maker (CODM) because he has final authority over resource allocation decisions and performance assessment.
Revenues by geographic region are based on the region in which the customers are located.
Total revenues by geography are as follows:
Total license revenues by process node are as follows:
Total maintenance revenues by process node are as follows:
The Company has only one product line and as such disclosure by product groupings is not applicable.
Long-lived assets are located primarily in the United States, with the exception of a building in Armenia, which is owned by the Company. The building in Armenia and its leasehold improvements are valued at cost less accumulated depreciation and amortization and amounted to approximately $1.9 million and $2.4 million as of June 30, 2009 and 2008, respectively.
NOTE 6 RECENT ACCOUNTING PRONOUNCEMENTS
In June 2009, the FASB issued FASB Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a replacement of FAS No 162 (SFAS 168). SFAS 168 states that that the codification will become the source of authoritative United States generally accepted accounting principles (GAAP). Once the codification is in effect, all of its content will carry the same level of authority. Thus, the GAAP hierarchy will be modified to include only two levels of GAAP, authoritative and nonauthoritative. SFAS 168 will be effective for us in the quarter ended September 30, 2009. The Company does not expect the adoption of SFAS 168 to have an impact on its financial position or results of operations.
In May 2009, the FASB issued FASB Statement No. 165, Subsequent Events (SFAS 165). SFAS 165 provides guidance on managements assessment of subsequent events. SFAS 165 includes existing guidance that was previously included in United States auditing literature. In addition, SFAS 165 clarifies that management is responsible for evaluating events and transactions occurring after the balance sheet date and through the financial statement issuance date that should be disclosed as subsequent events. The evaluation and assessment must be performed for interim and annual reporting periods. SFAS 165 is effective for the Company for the quarter ending June 30, 2009. The adoption of SFAS 165 did not have a material impact of the Companys financial position or results of operations.
Effective April 1, 2009, the Company adopted three FASB Staff Positions (FSPs) that are intended to provide additional application guidance and enhance disclosures about fair value measurements and impairments of securities. FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4) clarifies the objective and method of fair value measurement even when there has been a significant decrease in market activity for the asset being measured. FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2) establishes a new model for measuring other-than-temporary impairments for debt securities, including establishing criteria for when to recognize a write-down through earnings versus other comprehensive income (loss). FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1 and APB 28-1) expands the fair value disclosures required for all financial instruments within the scope of SFAS No. 107, Disclosures about Fair Value of Financial Instruments (SFAS No. 107). These FSPs are effective for interim and annual periods ending after June 15, 2009. The adoption of these FSPs did not have a material impact on the Companys consolidated financial statements.
In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets (FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets (SFAS 142). FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008 and early adoption is prohibited. The Company is currently evaluating what impact this standard will have on its financial position or results of operations.
In December 2007, the FASB issued SFAS No. 141 (revised 2007) (SFAS 141R), Business Combinations and SFAS No. 160 (SFAS 160), Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51. SFAS 141R will change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. SFAS 160 will change the accounting and reporting for minority interests, which will be re-characterized as noncontrolling interests and classified as a component of equity. SFAS 141R and SFAS 160 are effective for
financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is not permitted. The Company is currently evaluating the impact SFAS 141R and SFAS 160 will have on its financial position or results of operations.
NOTE 7 COMMITMENTS AND CONTINGENCIES
Indemnification. The Company enters into standard license agreements in its ordinary course of business. Pursuant to these agreements, the Company agrees to indemnify its customers for losses suffered or incurred by them as a result of any patent, copyright, or other intellectual property infringement claims by any third party with respect to the Companys products. These agreements generally have perpetual terms. The maximum amount of indemnification the Company could be required to make under these agreements is generally limited to the license fees received by the Company. The Company has minimal history of claims, and accordingly, no liabilities have been recorded for indemnification under these agreements as of June 30, 2009.
Warranties. The Company offers its customers a warranty that its software products will substantially conform to their functional specifications. To date, there have been no payments or material costs incurred related to fulfilling these warranty obligations. Accordingly, the Company has no liabilities recorded for these warranties as of June 30, 2009. The Company assesses the need for a warranty reserve on a quarterly basis and there can be no guarantee that a warranty reserve will not become necessary in the future.
NOTE 8 INCOME TAXES
The Company calculates its income taxes based on an annual effective tax rate in compliance with SFAS No. 109, Accounting for Income Taxes (SFAS 109). Under SFAS 109, income tax expense (benefit) is recognized for the amount of taxes payable or refundable for the current year, and for deferred tax assets and liabilities for the tax consequences of events that have been recognized in an entitys financial statements or tax returns.
The Company recorded a tax provision of $7.9 million and $0.1 million for the nine months ended June 30, 2009 and 2008. The Company evaluates its deferred tax assets each reporting period and assesses the likelihood that it will be able to recover its deferred tax assets. If recovery is not more likely than not, the Company increases its income tax provision by recording a valuation allowance against the deferred tax assets that it estimates will not ultimately be recoverable over a reasonable period. Due to the current market conditions and resulting impact on near term financial projections, the Company adjusted its expectations and risks associated with estimates of taxable income in future periods. During the quarter ended March 31, 2009, the Company has determined that the realization of the R&D credits and foreign tax credits to be included in the deferred tax assets is not more likely than not. Based on these facts, the Company has recorded a valuation allowance of $11.0 million against its prior years deferred tax assets and also placed a valuation allowance on current year R&D credits and foreign tax credits in computing its estimated annual tax rate for the fiscal year 2009. As of June 30, 2009, the Company has current and long-term deferred tax assets, net of valuation allowance, totaling $7.0 million which primarily related to temporary timing differences and net operating loss carry-forwards. The Company believes it is more-likely-than not that these deferred tax assets will be realized in the future.
The Indian Tax Authorities completed its assessment of the Companys tax returns for the tax years 2001 and 2006 and issued assessment orders in which the Indian Tax Authorities proposes to assess an aggregate tax deficiency for the two year period of approximately $0.4 million, net of deposits of $260,000 as required by the Indian Tax Authorities. Interest will continue to accrue until the matter is resolved. The Indian Tax Authorities may also make similar claims for years subsequent to 2006 in future assessment. The assessment orders are not final notices of deficiency, and the Company has immediately filed appeals. The Company believes that the assessments are inconsistent with applicable tax laws and that it has meritorious defense to the assessments.
The ultimate outcome of the tax assessment cannot be predicted with certainty, including the amount payable or the timing of any such payments upon resolution of the matter. Should the Indian Tax Authorities assess additional taxes as a result of a current or a future assessment, the Company may be required to record charges to operations that could have an adverse effect on its condensed unaudited consolidated statements of operations.
NOTE 9 FAIR VALUE DISCLOSURE
The Company accounts for investments in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Management determines the appropriate classification of securities at the time of purchase. All securities are classified as available-for-sale. The Companys short-term and long-term investments are carried at fair value, with the unrealized holding gains and losses reported in accumulated other comprehensive income. The Company evaluates declines in market value for potential impairment if the decline results in a value below cost and is determined to be other than temporary. Realized gains and losses and declines in the value judged to be other than temporary are included in other income and expense. The cost of securities sold is based on the specific identification method.
The Company has invested its excess cash in money market accounts, corporate debt, commercial paper, government agency securities and government sponsored enterprise bonds and considers all highly liquid debt instruments purchased with an original maturity of six months or less to be cash equivalents. Investments with original maturities greater than six 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.
On October 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements, or (SFAS 157). The adoption of SFAS 157 did not have a material impact on its consolidated financial statements. SFAS 157 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and consider assumptions that market participants would use when pricing the asset or liability. SFAS 157 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instruments categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. SFAS 157 establishes three levels of inputs that may be used to measure fair value:
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 Inputs used to measure fair value, other than quoted prices included in Level 1, are either directly or indirectly observable as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.
Level 3 Inputs used to measure fair value are unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize managements estimates of market participant assumptions.
Investments primarily include money market funds, U.S. government sponsored enterprise bonds, commercial paper, corporate debt securities, and common stock securities. The Company uses quoted prices in active markets for identical assets or liabilities to determine fair value. This pricing methodology applies to Level 1 investments such as money market funds and corporate common stock securities. If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then the Company uses quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable either directly or indirectly. These investments are included in Level 2 and consist primarily of government sponsored enterprise bonds, U.S. treasury bills, commercial paper debt securities, corporate debt securities.
In accordance with SFAS 157, the following table represents the Companys fair value hierarchy for its financial assets (cash equivalents and short and long-term available-for-sale investments) as of June 30, 2009 (in thousands):
NOTE 10 STOCK REPURCHASE PROGRAM
On May 14, 2009, the Company announced that its Board of Directors authorized the extension of the expiration date of the stock repurchase program to repurchase up to $20 million in shares of the Companys common stock in the open market or negotiated transactions through December 2010. Since the inception of the program in May 2008, the Company has repurchased 890,000 shares for a total of $5.1 million. The Company has not repurchased additional shares since the extension of the program was authorized on May 14, 2009. As of June 30, 2009, the remaining balance available for future stock repurchase was $14.9 million under the Companys stock repurchase program.
NOTE 11 SUBSEQUENT EVENT
The Company adopted SFAS 165 in May 2009. The Company evaluated subsequent events through August 7, 2009 and has determined that there were no subsequent events or transactions which would require recognition or disclosure in the consolidated financial statements.
Statements made in this quarterly report on Form 10-Q, other than statements of historical fact, are forward-looking statements that involve risks and uncertainties. These statements and the assumptions underlying them are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Some of these statements relate to products, customers, business prospects, technologies, trends and effects of acquisitions. In some cases, forward-looking statements can be identified by terminology such as may, will, should, expect, anticipate, intend, plan, believe, estimate, potential, or continue, the negative of these terms or other comparable terminology. Forward-looking statements are subject to a number of known and unknown risks and uncertainties which might cause actual results to differ materially from those expressed or implied by such statements. These risks include our ability to forecast our business, including our revenue, income and order flow outlook, our ability to execute on our strategy of being a provider of highly differentiated semiconductor IP, our ability to continue to develop new products and maintain and develop new relationships with third-party foundries, integrated device manufacturers, and fabless semiconductor companies, our ability to overcome the challenges associated with establishing licensing relationships with semiconductor companies, our ability to obtain royalty revenues from customers in addition to license fees, our ability to receive accurate information necessary for calculation of royalty revenues and to collect royalty revenues from customers, business and economic conditions generally and in the semiconductor industry in particular, pace of adoption of new technologies by our customers and increases or fluctuations in the demand for their products, competition in the market for semiconductor IP, and other risks and uncertainties including those set forth below under Risk Factors. These forward-looking statements speak only as of the date hereof, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein. The following information should be read in conjunction with the Managements Discussion and Analysis of Financial Condition and Results of Operations section of the Companys Form 10-K for the fiscal year ended September 30, 2008 filed with the Securities and Exchange Commission.
Virage Logic provides semiconductor intellectual property (IP) to the global semiconductor industry. These various forms of IP are utilized by our customers to design and manufacture System-on-Chip (SoC) integrated circuits that are the foundation of todays consumer, communications and networking, hand-held and portable devices, computer and graphics, automotive, and defense applications. Our semiconductor IP offering consists of (1) compilers that allow chip designers to configure our memories, or SRAMs, into different sizes and shapes on a single silicon chip, (2) IP and development solutions for embedded test and repair of on-chip memory instances, (3) software development tools used to design memory compilers, (4) NVM instances, (5) logic cell libraries, and (6) interface IP solutions such as DDR memory controllers. We also provide design services related to our IP to the semiconductor industry.
Our customers include fabless semiconductor companies, integrated device manufacturers and foundries. As semiconductor companies face increasing pressures to bring products to market faster and semiconductors have shorter product cycles, we focus on providing our customers a broad product offering as a means to satisfy a larger portion of our customers semiconductor IP needs, while positioning ourselves to offer advanced products as the semiconductor industry migrates to smaller geometries.
The timing of customer purchases of our products is typically related to new design starts by fabless companies and migration to new manufacturing processes by integrated device manufacturers and foundries. Because of the high costs involved in new design starts and migration to new manufacturing processes, our customers decisions regarding these matters are heavily dependent on their long-term business outlook. As a result, our business, and specifically our license revenues, are likely to grow at times of positive outlook for the semiconductor industry and may suffer at times of negative outlook for the semiconductor industry.
In the third quarter of fiscal year 2009, we derived 86% of our license and maintenance revenue from the more advanced processes, 90-nanometer, 65-nanometer, 45/40-nanometer, and 32-nanometer technologies and 14% of license and maintenance revenue from the older process nodes, predominantly 0.13, 0.18, 0.25 and 0.35 micron technologies. The Company expects the 90-nanometer, 65-nanometer and 45/40-nanometer technologies to drive revenue growth in the foreseeable future while license revenues from the older process nodes decline. Our royalty revenue to date has been from production on the older process nodes. However, we expect future growth in royalty revenues to be driven by the advanced processes, 45-nanometer, 65-nanometer and 90-nanometer technologies, in addition to continued production on the 0.13 and 0.18 micron technologies.
We sell our products early in the design process, and there are time delays of 24 to 36 months between the sale of our products and the time we expect to receive royalty revenues. These time delays are due to the length of time required for our customers to implement our semiconductor IP into their designs, and then to manufacture, market and sell a product incorporating our products. As a result, we expect our royalty revenues to increase in periods in which manufacturing volumes of semiconductors are growing. Future growth of our royalty revenue is dependent on our ability to increase the number of designs incorporating our products and on such designs achieving substantial manufacturing volumes.
Stock Repurchase Program
On May 14, 2009, we announced that our Board of Directors authorized the extension of the expiration date of our stock repurchase program to repurchase up to $20 million in shares of our common stock in the open market or negotiated transactions through December 2010. We intend to use available cash to effect any stock repurchases. At June 30, 2009, the Companys balance sheet reflected cash and investments totaling $59.3 million. Since the inception of the program in May 2008, we have repurchased 890,000 shares for a total of $5.1 million. We have not repurchased additional shares since the extension of the program was authorized on May 14, 2009. As of June 30, 2009, the remaining balance available for future stock repurchase was $14.9 million under our stock repurchase program.
Our common stock trades on the Nasdaq Global Market. We may plan to make purchases from time to time in the open market or through privately negotiated transactions. The number, price and timing of the repurchases, which may include, without limitation round lot or block transactions, will be at our sole discretion and may be re-evaluated depending on market conditions, liquidity needs or other factors. Our board of directors may suspend, terminate, modify or cancel the program at any time without notice.
Sources of Revenues
Our revenues are derived principally from licenses of our semiconductor IP products, which include:
We also derive revenues from royalties, custom design services, maintenance services and library development and consulting services related to the license of logic components. Our revenues are reported in two separate categories: license revenues and royalty revenues. License revenues are derived from license fees, maintenance fees, fees for custom design services, library design services and consulting services. Royalty revenues are derived from fees paid by a customer or a third-party foundry based on production volumes of wafers containing chips utilizing our semiconductor IP technologies.
The license of our semiconductor IP typically covers a range of embedded memory, logic, DDR memory controller, PHY and DLL products. Licenses of our semiconductor IP products can be either perpetual or term-based. In addition, maintenance can be purchased for both types of licenses.
We derive our royalty revenues from pure-play foundries that manufacture chips incorporating our Area, Speed and Power (ASAP TM) Memory, ASAP TM Logic, SiWare TM Memory, SiWare TM Logic and STAR Memory products for our fabless customers, and from integrated device manufacturers and fabless customers that utilize our STAR TM Memory System, NOVeA® and AEON® technologies. Royalty payments are in addition to the license fees we collect from our customers, and are calculated based on production volumes of wafers containing chips utilizing our semiconductor IP technologies based on a rate per-chip or rate per-wafer depending on the terms of the respective license agreement. Royalty revenues are generally determined and recognized one quarter in arrears, when a production volume report is received from the customer or foundry.
Currently, license fees represent the majority of our revenues. License revenues for the three months ended June 30, 2009 and 2008 were $9.0 million and $10.5 million, respectively. Maintenance revenues for the three months ended June 30, 2009 and 2008 were $1.7 million. Royalty revenues for the three months ended June 30, 2009 and 2008 were $1.2 million and $2.8 million, respectively. License revenues for the nine months ended June 30, 2009 and 2008 were $23.1 million and $29.3 million, respectively. Maintenance revenues for the nine months ended June 30, 2009 and 2008 were $5.3 million and $5.8 million, respectively. Royalty revenues for the nine months ended June 30, 2009 and 2008 were $5.9 million and $8.7 million, respectively.
We have been dependent on a limited number of customers for a substantial portion of our revenues, although our dependence on certain customers over the long term continues to decrease. Our customers comprising the top 10 customer group have changed from time to time. We have two customers that generated 10% or more of our revenue for the three and nine months ended June 30, 2009. We have one customer that generated 10% or more of our revenue for the three months ended June 30, 2008 and two customers that generated 10% or more of our revenue for the nine months ended June 30, 2008.
Sales to customers located outside of North America accounted for approximately 39% and 48% of total sales for the three months ended June 30, 2009 and 2008, respectively. Sales to customers located outside of North America accounted for approximately 46% and 53% for the nine months ended June 30, 2009 and 2008, respectively. Our global sales force, comprised of direct sales representatives and field application engineers as well as third-party sales representatives, are located in North America, Europe, Israel, Japan and the rest of Asia. All revenues to date have been denominated in U.S. dollars.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with generally accepted accounting principles in the United States requires that we make estimates and judgments, which affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We continually evaluate our estimates, including those related to percentage-of-completion, allowance for doubtful accounts, investments, intangible assets, income taxes, and contingencies such as litigation. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. We believe that there have been no significant changes during the three and nine months ended June 30, 2009 to the items that we disclosed as our critical accounting policies and estimates in Managements Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended September 30, 2008.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2009 AND 2008
The table below sets forth the changes in revenues from the three and nine months ended June 30, 2009 to the three and nine months ended June 30, 2008 (in thousands, except percentage data):
Revenues for the three months ended June 30, 2009 totaled $11.9 million, decreasing 20.9% from $15.1 million for the three months ended June 30, 2008. The decrease resulted from a $1.5 million decrease in license revenues and a decrease of $1.6 million in royalty revenues.
Revenues for the nine months ended June 30, 2009 totaled $34.3 million, decreasing 21.7% from $43.8 million for the nine months ended June 30, 2008. The decrease resulted from a $6.2 million decrease in license revenues, $0.5 million decrease in maintenance revenues, and a decrease of $2.8 million in royalty revenues.
Overall economic conditions during the first three quarters of fiscal 2009, which may continue throughout 2009, have negatively impacted sales. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels, and accelerated erosion of average selling prices.
For the three and nine months ended June 30, 2009 and 2008, total license revenues by process node are as follows:
License revenues for the three months ended June 30, 2009 were $9.0 million, representing a decrease of $1.5 million, or 14.6%, as compared to $10.5 million for the three months ended June 30, 2008. The license revenue decrease for the three months ended June 30, 2009 is mainly attributed to decreases of $1.9 million on the 65-nanometer process, $0.4 million on 0.13 micron process and other technologies, $0.2 million on the 90-nanometer process, partially offset by increases of $0.9 million on the 45-nanometer process and $0.1 million on the 32-nanometer process.
License revenues for the nine months ended June 30, 2009 were $23.0 million, representing a decrease of $6.2 million, or 21.3%, as compared to $29.2 million for the nine months ended June 30, 2008. The license revenue decrease for the nine months ended June 30, 2009 is mainly attributed to decreases of $5.1 million on the 65-nanometer process, $2.1 million on the 90-nanometer process, $1.6 million on 0.13 micron process, and $1.6 million on other technologies, partially offset by increases of $3.4 million on the 45-nanometer process, $0.6 million on the 32-nanometer process, and $0.2 million on 0.18 micron process.
For the three and nine months ended June 30, 2009 and 2008, total maintenance revenues by process node are as follows:
Maintenance revenues for the three months ended June 30, 2009 and 2008 were both $1.7 million. Maintenance revenues for the nine months ended June 30, 2009 were $5.3 million, representing a decrease of $0.5 million, or 9.0%, as compared to $5.8 million for the nine months ended June 30, 2008. Maintenance revenues decreased for the nine months ended June 30, 2009 mainly due to decreases of $0.6 million on the 65-nanometer process and, $0.6 million on 0.13 micron process, and $0.3 million on the 90-nanometer process, partially offset by increases of $0.9 million on the 45-nanometer process and $0.1 million on 32-nanometer process and other technologies.
Royalties decreased by $1.6 million, or 58%, from $2.8 million in the three months ended June 30, 2008 to $1.2 million for the three months ended June 30, 2009. Royalties decreased by $2.8 million, or 31.8%, from $8.7 million in the nine months ended June 30, 2008 to $5.9 million for the nine months ended June 30, 2009.
For the three and nine months ended June 30, 2009 and 2008, total revenues by geography were as follows:
Cost and Expenses
The table below sets forth the changes in cost and expenses for the three and nine months ended June 30, 2009 and for the three and nine months ended June 30, 2008 (in thousands, except percentage data):
Cost of Revenues
Cost of revenues is determined principally based on allocation of costs associated with custom contracts and maintenance contracts, which consist primarily of personnel expense, allocation of facilities costs, and depreciation expense of acquired software and capital equipment. Cost of revenues for the three months ended June 30, 2009 totaled $2.5 million, representing a decrease of $0.1 million, or 3.3%, from $2.6 million for the three months ended June 30, 2008. The decrease for the three months was primarily attributable to a decrease in stock-based compensation due to the reduction of workforce. Cost of revenues for the nine months ended June 30, 2009 totaled $7.5 million, representing a decrease of $0.7 million, or 8.3%, from $8.2 million for the nine months ended June 30, 2008. The decrease for the nine months was primarily attributable to a decrease in expenses due to the reduction in contract related expenses as a result of lower revenue.
Research and Development Expenses
Research and development expenses primarily include personnel expense, software license and maintenance fees and capital equipment depreciation expense. Research and development expenses as a percentage of total revenue for the three months ended June 30, 2009 increased to 54.8% from 53.2% for the same period in fiscal 2008. Research and development expenses for the three months ended June 30, 2009 totaled $6.5 million, a decrease of $1.5 million, or 18.6%, from $8.0 million for the three months ended June 30, 2008. The decrease was primarily due to a decrease of $1.9 million in earn outs associated with acquisition milestones of the Ingot acquisition offset by increases of $0.4 million of additional recurring expenses incurred due to the acquisition of NVM IP business segment of Impinj. For the nine months ended June 30, 2009, research and development expenses increased $2.2 million, or 11%, from $20.0 million in fiscal 2008 to $22.2 million in fiscal 2009. The increase was primarily attributable to $3.9 million of additional recurring expenses incurred due to the acquisition of NVM IP business segment of Impinj and $0.7 million of consulting fees offset by $2.4 million decreases in other personnel expenses.
Sales and Marketing Expenses
Sales and marketing expenses consist mainly of personnel expense, commissions, advertising and promotion-related costs. Sales and marketing expenses for the three months ended June 30, 2009 totaled $2.6 million, representing a decrease of $1.1 million, or 29.6%, over the same period in fiscal 2008. Sales and marketing expenses as a percentage of revenue were 21.6% for the three months ended June 30, 2009, compared to 24.3% for the three months ended June 30, 2008. The decrease in sales and marketing expenses for the three months ended June 30, 2009 was primarily attributable to decreases of $0.6 million of payroll related expense, $0.2 million of marketing and advertising expenses, and $0.2 million of recruiting expenses. For the nine months ended June 30, 2009, total sales and marketing expense decreased by $3.1 million, or 28.1%, from $11.1 million in fiscal 2008 to $8.0 million in fiscal 2009. The decrease was primarily attributed to decreases of $2.6 million of payroll related expense, $0.1 million of stock-based compensation expense, and $0.4 million of other recurring expenses.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel, corporate governance and other costs associated with the management of our business. General and administrative expenses for the three months ended June 30, 2009 totaled $2.1 million, representing a decrease of $0.1 million, or 3.2%, from the three months ended June 30, 2008. General and administrative expenses, as a percentage of total revenue were 17.5% for the three months ended June 30, 2009, compared to 14.3% for the same period in fiscal 2008. The decrease in general and administrative expenses for the three months ended June 30, 2009 was mainly attributable to decreases of $0.3 professional fees and $0.2 million of stock compensation expense offset by $0.2 million of bad debt expense, $0.1 million of higher payroll-related expense and $0.1 million of other recurring expense. For the nine months ended June 30, 2009, total general and administrative expense increased by $0.8 million from $6.0 million in fiscal 2008 to $6.8 million in fiscal 2009. The increase was primarily attributed to increases of $0.4 million of payroll related expense, $0.6 million of bad debt expense, and $0.1 million of consulting expense offset by decreases of $0.3 million of professional fees.
Goodwill impairment for the nine months ended June 30, 2009 was $11.8 million, representing a write-off of all goodwill as a result of a triggering event The Company determined that the restructuring plan it undertook in the second quarter represented a triggering event to assess its goodwill. As a result of the significant negative industry and economic trends affecting current operations and expected future growth as well as the general decline of industry valuations impacting the Companys valuation, the Company determined that goodwill was impaired in the second quarter of fiscal 2009. There was no impairment loss for the same periods ended June 30, 2008.
Restructuring expense for the nine months ended June 30, 2009 was $1.5 million and primarily consisted of severance charges of $1.1 million and lease termination expense of $0.3 million. Restructuring expense for the same period ended June 30, 2008 was $0.3 million.
Interest Income and Other Income (Expense), net
The table below sets forth the changes in interest income and other income (expense), net from the three and nine months ended June 30, 2009 to the three and nine months ended June 30, 2008 (in thousands, except percentage data):
Interest income and other income (expense), net, for the three months ended June 30, 2009 totaled $0.1 million of expense compared to $0.7 million of income for the same period in fiscal 2008. The decrease of $0.8 million is largely due to lower investment balances and lower interest rates earned in our investment portfolio of marketable securities. Interest income and other income (expense), net, for the nine months ended June 30, 2009 totaled $0.7 million of income compared to $2.6 million of income for the same period in fiscal 2008. The decrease of $1.9 million is largely due to lower investment balances and lower interest rates earned in our investment portfolio of marketable securities.
Income Tax Provision
The table below sets forth the changes in income tax provision from the three months ended June 30, 2009 to the three months ended June 30, 2008 (in thousands, except percentage data):
For the three and nine months ended June 30, 2009, we recorded an income tax provision of $29,000 and $7.9 million, respectively. For the three and nine months ended June 30, 2008, we recorded an income tax provision of $131,000 and $149,000. The provision for income taxes for the nine months ended June 30, 2009 is based on our annual effective tax rate in compliance with SFAS 109. The income tax provision for the nine months ended June 30, 2009 included a provision of $11.0 million related to the valuation allowance placed against deferred tax assets. The fiscal 2009 effective tax rate excluding the discrete item relating to the establishment of a valuation allowance is 40%.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2009, our cash and cash equivalents totaled $17.6 million, as compared to $13.2 million as of September 30, 2008. As of June 30, 2009 and September 30, 2008, our short-term and long-term investments totaled in aggregate $41.8 million and $52.6 million, respectively. In aggregate, cash, cash equivalents and short-term and long-term investments in marketable securities as of June 30, 2009 totaled $59.3 million, compared to $65.8 million at September 30, 2008. We do not carry any long-term investments as of June 30, 2009. The primary source of our cash in the nine months ended June 30, 2009 was proceeds from maturity of investments and collections of accounts receivable.
Net cash used in operating activities was $4.4 million for the nine months ended June 30, 2009, representing a decrease of $6.9 million from net cash provided by operating activities of $2.5 million for the nine months ended June 30, 2008. The change in cash flows from operating activities was primarily attributable to a reduction in net income of $31.5 million. The reduction in net income of $31.5 million was offset by increases of $3.0 million in changes in operating assets and liabilities and increases of $21.6 million in non-cash charges primarily due to goodwill impairment of $11.8 million and deferred taxes of $9.8 million.
Net cash provided by investing activities was $8.2 million for the nine months ended June 30, 2009, representing an increase of $8.4 million over net cash used in investing activities of $0.3 million for the nine months ended June 30, 2008. The increase of $8.4 million from the investing activities resulted from decreases in purchases of investments of $45.2 million and business acquisition of $5.2 million offset by a decrease in proceeds from maturity of investments of $40.0 million and an increase in property and equipment purchases of $2.0 million.
Net cash provided by financing activities totaled $0.2 million for the nine months ended June 30, 2009, representing a decrease of $1.7 million from net cash provided by financing activities of $1.9 million for the nine months ended June 30, 2008. The decrease of $1.7 million was attributed to a decrease of $1.9 million in proceeds from issuance of common stock and $0.6 million in the purchase of treasury stock offset by an increase of $0.7 million in proceeds from sale-leaseback transactions and an increase of $0.1 million in excess tax benefits from stock-based compensation.
Our future capital requirements will depend on many factors, including the rate of our sales growth, market acceptance of our existing and new technologies, the amount and timing of R&D expenditures, the timing of the introduction of new technologies, expansion of sales and marketing efforts, acquisitions we may pursue, and levels of working capital, primarily accounts receivable. We believe that our current capital resources will be sufficient to meet our needs for at least the next twelve months, although we may seek to raise additional capital during that period and there can be no assurance that we will not require additional financing beyond this time frame. There can be no assurance that additional equity or debt financing, if required, will be available on satisfactory terms.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following table summarizes our contractual obligations and commercial commitments at June 30, 2009 (dollars in thousands):
Our core business, the sale of semiconductor IP for the design and manufacture of system-on-a-chip integrated circuits, has exposure to financial market risks, including changes in foreign currency exchange rates and interest rates. A significant portion of our customers are located in Asia, Canada and Europe. However, to date, our exposure to foreign currency exchange fluctuations has been minimal because all of our license agreements provide for payment in U.S. dollars.
Our international business is subject to risks typical of an international business, including, but not limited to differing economic conditions, changes in political climate, differing tax environments, other regulations and restrictions and foreign exchange rate volatility. Our foreign subsidiaries incur most of their expenses in the local currency. To date these expenses have not been significant, therefore, we do not anticipate our future results will be materially adversely impacted by changes in factors affecting international operations.
We are exposed to the impact of interest rate changes and changes in the market values of our investments. We maintain an investment portfolio of various issuers, types and maturities. These securities are classified as available-for-sale and, consequently, are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of stockholders equity. Our investments primarily consist of short-term commercial paper, U.S. government sponsored enterprise bonds and U.S. treasury bills. Our short term investments balance of $41.8 million at June 30, 2009 consists of instruments with original maturities of less than one year. The estimated fair value of our investment portfolio as of June 30, 2009, assuming a 100 basis point increase in market interest rates, would decrease by approximately $0.1 million, which would not materially affect our operations. We have the ability to hold our fixed income investments until maturity and therefore we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our securities portfolio. If necessary, we may sell short-term investments prior to maturity to meet our liquidity needs.
Evaluation of Disclosure Controls and Procedures
We evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act of 1934, as of the end of the period covered by this quarterly report. Our Chief Executive Officer and Chief Financial Officer supervised and participated in the evaluation. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer each concluded that, as of the date of the evaluation, our disclosure controls and procedures were effective in providing reasonable assurance that material information relating to us and our consolidated subsidiaries is recorded, processed and made known to management on a timely basis, including during the period when we prepare our periodic SEC reports. The design and operation of any system of controls is based in part upon certain assumptions about the likelihood of future events and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934 that occurred during the quarter ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
We are a party to legal proceedings and claims of various types in the ordinary course of business. We believe based on information currently available to management that the resolution of such claims will not have a material adverse impact on our condensed consolidated financial position or results of operations.
We face many significant risks in our business, some of which are unknown to us and not presently foreseen. These risks could have a material adverse impact on our business, financial condition and results of operations in the future. We have disclosed a number of material risks under Item 1A of our annual report on Form 10-K for the year ended September 30, 2008, which we filed with the Securities and Exchange Commission on December 11, 2008. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results. We have updated these risk factors to reflect changes during the first nine months of fiscal 2009. The following discussion is of material changes to the risk factors disclosed in that report.
General economic conditions and future terrorist attacks may reduce our revenues and harm our business.
The U.S. and International economy and financial market have experienced significant slowdown and volatility due to the instability of the financial markets, falling consumer confidence and rising unemployment rates. As a result of the deteriorating economic environment, our current or potential future customers may experience serious cash flow problems and may modify, delay or cancel plans to purchase our products. If businesses or consumers defer or cancel purchases of new products that contain complex semiconductors, purchases by fabless semiconductor companies, integrated device manufacturers and production levels by semiconductor manufacturers could decline. This could adversely affect our revenues which in turn would have an adverse effect on our results of operations and financial condition. In addition, continued unrest in Israel and the Middle East may negatively impact the investments that our worldwide customers make in these geographic regions.
We may experience additional losses in the future and may have difficulty returning to profitability.
We recorded a net loss of $30.9 million for the nine months ended June 30, 2009 and a net income of $0.6 million for the same period of fiscal 2008. The loss for the nine months of fiscal 2009 mainly due to goodwill impairment of $11.8 million and tax charge of $11.0 million related to valuation allowance placed against deferred tax assets. Though we plan on continuing the growth of our business while implementing cost control measures, we may not be able to successfully generate enough revenues to return to profitability. Any failure to increase our revenues and control costs as we pursue our planned growth would harm our profitability and would likely negatively affect the market price of our stock. In addition, if we incurred losses for a sustained period we may be prevented from being able to fully utilize our deferred tax assets which would result in the need for an additional valuation allowance to be recorded.
Our quarterly operating results may fluctuate significantly and the failure to meet financial expectations for any fiscal quarter may cause our stock price to decline.
Our quarterly operating results are likely to fluctuate in the future from quarter to quarter and on an annual basis due to a variety of factors, many of which are outside of our control. Factors that could cause our revenues and operating results to vary materially from quarter to quarter include the following:
As a result, we believe that quarter-to-quarter comparisons of our results of operations are not necessarily meaningful and may not be reliable as indicators of future performance. These factors make it difficult for us to accurately predict our revenues and operating results and may cause them to be below market analysts expectations in some quarters, which could cause the market price of our stock to decline.
The following table provides the specified information about the repurchase of shares by the Company under the Companys stock repurchase program.
On May 14, 2009, the Company announced that its Board of Directors authorized the extension of the expiration date of the stock repurchase program to repurchase up to $20 million in shares of the Companys common stock in the open market or negotiated transactions through December 2010. See Note 10. Stock Repurchase Program.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.