UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
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For the quarterly period ended September 30, 2007. | ||
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OR | ||
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o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
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For the transition period from to
Commission file number 000-51560
MathStar, Inc.
(Exact name of registrant as specified in its charter)
Delaware |
| 41-1881957 |
(State or other jurisdiction of |
| (I.R.S. Employer |
incorporation or organization) |
| Identification No.) |
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19075 NW Tanasbourne, Suite 200 |
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Hillsboro, Oregon |
| 97124 |
(Address of principal executive offices) |
| (Zip Code) |
(503) 726-5500
(Registrant’s telephone number, including area code)
N/A
(Former name, former address, and former fiscal year, if changed since last report)
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. x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one.)
Large Accelerated Filer o | Accelerated Filer x | Non-Accelerated Filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
Shares outstanding of the Registrant’s common stock:
Class |
| Outstanding at September 30, 2007 |
Common stock, $0.01 par value |
| 45,906,890 |
Financial Information
MathStar, Inc.
(Unaudited)
(in thousands)
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| December 31, |
| September 30, |
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Assets |
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Current assets |
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Cash and cash equivalents |
| $ | 12,891 |
| $ | 14,283 |
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Restricted cash |
| 103 |
| 106 |
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Investment securities— short term |
| - |
| 14,250 |
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Accounts receivable |
| 14 |
| 144 |
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Inventory |
| 610 |
| 702 |
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Prepaid expenses and other current assets |
| 1,231 |
| 796 |
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Total current assets |
| 14,849 |
| 30,281 |
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Property and equipment, net |
| 487 |
| 430 |
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Investment securities — long term |
| - |
| 5,431 |
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Other assets |
| 278 |
| 454 |
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Total assets |
| $ | 15,614 |
| $ | 36,596 |
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Liabilities and Stockholders’ Equity |
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Current liabilities |
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Accounts payable |
| $ | 1,791 |
| $ | 410 |
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Deferred revenue |
| — |
| 162 |
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Accrued expenses |
| 1,206 |
| 1,216 |
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Total liabilities |
| 2,997 |
| 1,788 |
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Commitments and contingencies |
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Stockholders’ equity |
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Preferred stock, $0.01 par value; 10,000 shares authorized; no shares issued and outstanding |
| — |
| — |
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Common stock, $0.01 par value; 90,000 shares authorized; 20,922 and 45,907 shares issued and outstanding at December 31, 2006 and September 30, 2007, respectively |
| 209 |
| 459 |
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Additional paid-in capital |
| 118,545 |
| 154,881 |
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Accumulated deficit |
| (106,137 | ) | (120,532 | ) | ||
Total stockholders’ equity |
| 12,617 |
| 34,808 |
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Total liabilities and stockholders’ equity |
| $ | 15,614 |
| $ | 36,596 |
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The accompanying notes are an integral part of these financial statements.
1
MathStar, Inc.
Condensed Statements of Operations
(Unaudited)
(in thousands except for per share amounts)
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| Three Months Ended |
| Nine Months Ended |
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| 2006 |
| 2007 |
| 2006 |
| 2007 |
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Revenue |
| $ | 28 |
| $ | 63 |
| $ | 46 |
| $ | 275 |
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Cost of goods sold |
| 21 |
| 58 |
| 27 |
| 181 |
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Gross margin |
| 7 |
| 5 |
| 19 |
| 94 |
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Operating expenses: |
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Research and development |
| 4,267 |
| 2,655 |
| 10,293 |
| 8,387 |
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Selling, general and administrative |
| 2,581 |
| 2,164 |
| 7,132 |
| 6,733 |
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| 6,848 |
| 4,819 |
| 17,425 |
| 15,120 |
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Operating loss |
| (6,841 | ) | (4,814 | ) | (17,406 | ) | (15,026 | ) | ||||
Interest income |
| 112 |
| 426 |
| 462 |
| 652 |
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Other income /(loss), net |
| — |
| (5 | ) | — |
| (21 | ) | ||||
Net loss |
| $ | (6,729 | ) | $ | (4,393 | ) | $ | (16,944 | ) | $ | (14,395 | ) |
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Basic and diluted net loss per share |
| $ | (0.39 | ) | $ | (0.10 | ) | $ | (0.99 | ) | $ | (0.47 | ) |
Weighted average basic and diluted shares outstanding |
| 17,259 |
| 45,907 |
| 17,112 |
| 30,405 |
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The accompanying notes are an integral part of these financial statements.
2
MathStar, Inc.
Condensed Statements of Cash Flows
(Unaudited)
(in thousands)
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| Nine Months Ended |
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| September 30, |
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| 2006 |
| 2007 |
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Cash flows from operating activities |
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Net loss |
| $ | (16,944 | ) | $ | (14,395 | ) |
Adjustments to reconcile net loss to net cash used in operating activities |
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Depreciation and amortization |
| 99 |
| 133 |
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Loss on asset disposal |
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| 5 |
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Stock-based compensation |
| 2,288 |
| 83 |
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Foreign currency translation |
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| 11 |
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Change in operating assets and liabilities |
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Accounts receivable |
| 28 |
| (130 | ) | ||
Inventory |
| 22 |
| (92 | ) | ||
Prepaid expenses and other assets |
| 402 |
| 542 |
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Accounts payable |
| (321 | ) | (1,381 | ) | ||
Deferred revenue |
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| 162 |
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Accrued expenses |
| (24 | ) | 4 |
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Net cash used in operating activities |
| (14,450 | ) | (15,058 | ) | ||
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Cash flows from investing activities |
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Purchase of property and equipment |
| (252 | ) | (69 | ) | ||
Purchase of capitalized application software |
| (91 | ) | (292 | ) | ||
Purchase of investment securities |
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| (19,684 | ) | ||
Restricted cash |
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| (3 | ) | ||
Net cash used in investing activities |
| (343 | ) | (20,048 | ) | ||
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Cash flows from financing activities |
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Proceeds from issuance of common stock, net of offering costs |
| 3,800 |
| 36,473 |
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Proceeds from exercise of warrants |
| 513 |
| 21 |
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Proceeds from exercise of stock options |
| 46 |
| 9 |
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Net cash provided by financing activities |
| 4,359 |
| 36,503 |
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Effect of exchange rate changes on cash |
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| (5 | ) | ||
Net (decrease) increase in cash and cash equivalents |
| (10,434 | ) | 1,392 |
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Cash and cash equivalents |
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Beginning of period |
| 20,149 |
| 12,891 |
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End of period |
| $ | 9,715 |
| $ | 14,283 |
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The accompanying notes are an integral part of these financial statements.
3
MathStar, Inc.
(Unaudited)
(in thousands, except per share data)
1. Basis of Presentation and Going Concern
The accompanying interim condensed financial statements of MathStar, Inc. (“MathStar” or the “Company”) have been prepared in conformity with United States (“U.S.”) generally accepted accounting principles (“GAAP”), consistent in all material respects with those applied to the financial statements in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 14, 2007. The year-end condensed balance sheet was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The interim financial information is unaudited, but it reflects all normal adjustments that are, in the opinion of management, necessary to provide a fair statement of results for the interim periods presented. The interim financial results are not necessarily indicative of results to be expected in future interim or annual periods. The interim financial statements should be read in conjunction with the financial statements in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2007.
For the year ended December 31, 2006, MathStar reported as a “development stage company” as prescribed in Statement of Financial Accounting Standards (“SFAS”) No.7, Accounting and Reporting by Development Stage Enterprises. During that time, MathStar’s major emphasis was on planning, research and development, recruitment and development of a management and technical staff, and raising capital. These development stage activities were completed during the first quarter of 2007. MathStar has its management team and organizational structure in place with its primary focus on the sale and commercialization of its current product. MathStar has production products placed within its distribution channel and has sold production chips and development systems to end customers. As such, MathStar no longer considers itself a development stage company.
The accompanying financial statements have been prepared on a basis which assumes that the Company will continue as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has a limited operating history and has incurred losses and negative cash flows from operations since inception, which raise substantial doubt about the Company’s ability to continue as a going concern. Although the Company successfully completed a $40,000 follow-on offering during the quarter ended June 30, 2007, it expects to incur additional losses while the Company continues to develop its sales. Given the lack of operating profitability, the Company will continue to disclose a substantial doubt about its ability to continue as a going concern.
2. New Accounting Pronouncements
The Company adopted the provisions of the Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. This adoption did not have a material effect on the Company’s consolidated financial position or results of operations. As of September 30, 2007, the Company had $38,304 of deferred tax assets; however, valuation allowances have been established to fully offset these deferred tax assets due to the uncertainty about the Company’s ability to generate the future taxable income necessary to realize these deferred tax assets, particularly in light of the Company’s recent history of significant operating losses. The Company records interest and penalties, if any, within operating expenses as a tax expense.
4
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities—including Amendment of FAS No. 115”. SFAS No. 159 gives companies the option of recording certain financial assets and liabilities at fair value. SFAS No. 159 is effective for the Company in the first quarter of 2008. The Company is evaluating the potential impact of the standard.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in U.S. GAAP, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company will be required to adopt SFAS No. 157 in the first quarter of 2008. Management is currently evaluating the requirements of SFAS No. 157 and has not yet determined the impact on the Company’s consolidated financial statements.
3. Stock-Based Compensation
MathStar continues to issue options as a means to incent potential employees to join and retain certain existing employees. The Company accounts for options granted under SFAS No. 123R (revised 2004), “Share-Based Payment,” utilizing the Black-Scholes pricing model. The table below discloses options granted to new and existing employees and the total options outstanding as of September 30, 2007.
Options |
| Shares |
| Weighted-Average Exercise Price |
| Weighted-Average Remaining Contractual Term |
| Aggregate Intrinsic Value |
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| (in thousands) |
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| (in thousands) |
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Outstanding at December 31, 2006 |
| 2,178 |
| $ | 5.46 |
| 5.45 |
| $ | 169 |
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Granted new employees |
| 213 |
| 2.94 |
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Granted replenishment options |
| 985 |
| 1.52 |
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Exercised |
| (10 | ) | 0.87 |
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Forfeited or expired |
| (325 | ) | 5.33 |
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Outstanding at September 30, 2007 |
| 3,041 |
| $ | 4.03 |
| 7.93 |
| $ | 5 |
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Exercisable at September 30, 2007 |
| 1,085 |
| $ | 5.58 |
| $ | 5.62 |
| $ | 5 |
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| Three Months Ended |
| Nine Months Ended |
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2007 Stock Based Compensation Expense |
| September 30, 2007 |
| September 30, 2007 |
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Employee stock based compensation |
| $ | 189 |
| $ | 517 |
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Nonemployee adjustments |
| (55 | ) | (434 | ) | ||
Net stock based compensation |
| $ | 134 |
| $ | 83 |
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For the first nine months of 2007, the Company recorded $517 in non-cash stock based compensation expense related to awards to employees. The remaining compensation expense associated with these awards is $1,913 with a weighted average contractual term of 3.63 years. The Company also grants awards to non-employees, the Company revalues non-employee awards based on the market value of the stock at the end of each quarter, which resulted in year-to-date recapturing of previous year’s expenses of $434.
5
4. Selected Balance Sheet Information
Restricted Cash
The Company has pledged $106 as collateral to secure the balances on Company-issued credit cards. The Company cannot use the restricted cash in the normal course of business until the credit cards are cancelled or the bank releases the funds. The credit cards are issued to certain Company employees for the purpose of Company-related travel and purchases.
Investment Securities
|
| December 31, |
| September 30, |
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| 2006 |
| 2007 |
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Government securities — notes (short term) |
| $ | — |
| $ | 8,702 |
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Government securities — bonds (short term) |
| — |
| 5,548 |
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Government securities — bonds (long term) |
| — |
| 5,431 |
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| $ | — |
| $ | 19,681 |
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The Company has an investment policy that restricts investments to government securities and high quality investments. The Company’s investments generally mature between three and fifteen months. Investments with maturities beyond one year are classified as long-term investments. All of our investments are classified as held-to-maturity and are carried at amortized cost as the Company has the intent and ability to hold these securities to maturity.
Inventory
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| December 31, |
| September 30, |
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| 2006 |
| 2007 |
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Raw materials |
| $ | 49 |
| $ | 60 |
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Sub-assembly |
| — |
| 33 |
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Finished goods |
| 662 |
| 726 |
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| $ | 711 |
| $ | 819 |
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Less: reserve for excess and obsolete inventory |
| (101 | ) | (117 | ) | ||
Total inventory, net |
| $ | 610 |
| $ | 702 |
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The increase in the valuation reserve was charged to cost of sales.
Prepaid and Other Current Assets
|
| December 31, |
| September 30, |
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| 2006 |
| 2007 |
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EDA licenses |
| $ | 695 |
| $ | 330 |
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Interest Receivable |
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| 212 |
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Prepaid insurance |
| 239 |
| 73 |
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Prepaid rent |
| 111 |
| 30 |
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Other |
| 186 |
| 151 |
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Total prepaid and other current assets |
| $ | 1,231 |
| $ | 796 |
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Property and Equipment
|
| December 31, |
| September 30, |
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| 2006 |
| 2007 |
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Computer equipment |
| $ | 1,003 |
| $ | 144 |
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Purchased software |
| 533 |
| 533 |
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Equipment |
| 106 |
| 106 |
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Furniture and fixtures |
| 365 |
| 314 |
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| $ | 2,007 |
| $ | 1,097 |
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Less: Accumulated depreciation |
| (1,520 | ) | (667 | ) | ||
Total property and equipment, net |
| $ | 487 |
| $ | 430 |
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6
Depreciation expense was $39 and $43 for the three months ended September 30, 2006 and 2007, respectively, and $99 and $123 for the nine months ended September 30, 2006 and 2007, respectively. The reduction in gross property and equipment and accumulated depreciation is due to disposal of excess and idle assets from the previous Minneapolis location. The disposal resulted in a noncash charge of $5 to operating results.
Other Assets
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| December 31, |
| September 30, |
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| 2006 |
| 2007 |
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Capitalized application software (net) |
| $ | 134 |
| $ | 417 |
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Other |
| 144 |
| 37 |
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| $ | 278 |
| $ | 454 |
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Amortization expense associated with capitalized software was $0 and $5 for the three months ended September 30, 2006 and 2007, respectively, and $0 and $7 for the nine months ended September 30, 2006 and 2007, respectively.
Accrued Expenses
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| December 31, |
| September 30, |
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| 2006 |
| 2007 |
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Accrued rent |
| $ | 77 |
| $ | 46 |
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Accrued compensation |
| 480 |
| 778 |
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Accrued professional fees |
| 226 |
| 101 |
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Other |
| 423 |
| 291 |
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Total accrued expenses |
| $ | 1,206 |
| $ | 1,216 |
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements, which are being provided under the “safe harbor” protection of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are generally written in the future tense and/or are preceded by words such as “will,” “may,” “should,” “could,” “expect,” “suggest,” “believe,” “anticipate,” “intend,” “plan,” or other similar words. Forward-looking statements include statements regarding the commercial success of our new products; the growth prospects of the semiconductor industry and programmable logic market, including the field programmable object array (“FPOA”) and field programmable gate array (“FPGA”) product sub-segments; and trends in our future sales, including our opportunities for growth by displacing FPGAs, application-specific integrated circuits (“ASICs”) and other semiconductor alternatives.
7
Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. The forward-looking statements contained in this report are based on information that is currently available to us and expectations and assumptions that we deem reasonable at the time the statements were made. We do not undertake any obligation to update any forward-looking statements in this report or in any of our other communications, except as required by law. All such forward-looking statements should be read as of the time the statements were made and with the recognition that these forward-looking statements may not be complete or accurate at a later date.
Many factors may cause actual results to differ materially from those expressed or implied by the forward-looking statements contained in this report. These factors include, but are not limited to, those risks described in our Annual Report on Form 10-K filed on March 14, 2007.
Business Overview
We are a fabless semiconductor company engaged in the development, marketing and selling of our high-performance, programmable platform chips and design tools required to program our chips. We have established a sales network and distribution channel, sold and shipped a limited quantity of our first production field programmable object array, or FPOA, chip, and provided a second release of our design tools to customers. Current activities are focused on the sale of current products and developing enhanced and follow-on products.
Our sales cycle begins when a prospective customer decides to introduce a new product or change or upgrade an existing product. Generally, the prospective customer will survey new and existing technology to determine if there are technological advances that it needs need to integrate into its product lines. At this point, if there appears to be a fit, the prospective customer will engage with us to determine if our FPOA can solve its product needs. Typically, one of our field application engineers (FAEs) will work with the prospective customer’s engineers to create an application assessment that documents the advantages of using an FPOA in the customer’s product. At this point, the prospective customer will make a technology decision. If the decision is to use an FPOA, the customer will buy an FPOA evaluation system and an FPOA design software tools license from us to develop a prototype of its application on our FPOA. Once the customer has developed and tested its FPOA design, the customer will develop prototypes of its new product. The customer will then sell prototypes or limited production versions of its new product to its customers. Assuming the customer achieves market acceptance, it will ramp its design in production and start purchasing production quantities of FPOAs. Our sales cycle can be as short as six months and as long as 18 months, except in the case of the military/aerospace markets, in which the development cycle can be three to five years.
Our production FPOA is currently in inventory and for sale at our warehouse, a worldwide electronics component distributor and an e-commerce distributor. Our revenue for the first half of 2007 was primarily from sales of production chips, evaluation systems, tools, nonrecurring engineering fees (NRE) and application licenses which are the key components of the beginning of the sales cycle. As more of our customers move their products into production, more of our revenues will be from the sale of FPOAs.
Financial Operations Overview
Revenue and Costs
The Company recognizes revenue for products when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, collection is reasonably assured and there are no post-delivery obligations. Costs associated with product revenue consist of the manufacturing costs of the evaluation units and chips, subcontracted expenses associated with NRE revenue and software license fees and recorded in cost of sales. Revenue and costs associated with sales to distributors are deferred until MathStar receives notice from the distributor that the product has been sold to an end user. The amount reflected on MathStar’s balance sheet is the net margin from the deferred revenue and associated costs. Revenue and costs for chips held at distributors are deferred because of the distributors’ ability to return unsold chips for refund or credit.
8
Research and Development
Research and development expenses represent costs incurred for designing and engineering our FPOA chips and developing design tools and applications to enable customers to more easily program our chip. Research and development expenses consist primarily of salaries and related costs of our engineering organization; fees paid to third party consultants associated with chip development; an allocation of facilities; and depreciation expenses. We expense all research and development costs related to the development of our FPOA chips. Development of certain design tools and applications include the development of software. Such research and development expenses are required to be expensed until the technological feasibility of the software is established. We determine technological feasibility to be the point at which a feasibility assessment is complete and a detailed technical design document is established. We expect to incur significant additional research and development costs as we develop more chips using our FPOA technology.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of salaries and related costs of our sales and marketing and administrative staff, commissions paid to direct sales staff and manufacturing representatives, general corporate activities and an allocation of facilities and depreciation expenses. We anticipate that our selling, general and administrative costs will increase as a result of increasing our sales and marketing and administrative staff and commissions to support sales of FPOA chips in worldwide markets and to support our growth and operation as a public company.
Recently Issued Accounting Pronouncements
See Note 2 of Notes to Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Critical Accounting Policies
The Company has updated the disclosure related to critical accounting policies since its Annual Report on Form 10-K for the year ended December 31, 2006 to include capitalized application software.
Capitalization of Application Software
The Company is developing certain applications of known algorithms for use on its FPOA chips. The accounting for development costs of these applications is covered under SFAS No. 86, “Research and Development Costs of Computer Software.” Judgment is required in determining when technological feasibility is established. Because these are established algorithms, we define technological feasibility of an application development project to be the point at which a feasibility assessment is complete and a detailed technical design document is established. All costs incurred prior to establishing technological feasibility are expensed when incurred. Costs after that date are capitalized and then amortized based on the greater of a straight-line basis over the useful life of the applications or the ratio of current sales to the total current and anticipated future sales.
Investment Securities
The Company invests idle funds in government securities, money market funds and high quality securities. The investment criteria is based on the desire to preserve capital, maintain adequate balances to meet obligations, minimize risk of principle loss, and yield maximization within the investment guidelines. Current investments are classified as securities to be held-to-maturity and are reported at the amortized cost.
Results of Operations
Three Months Ended September 30, 2006 and 2007
Revenue and Cost of Goods Sold. For the three months ended September 30, 2007, we generated revenue of $63,000 compared to $28,000 for the same period last year. Revenue for the three months ended September 30,
9
2007 was from the sale of development systems, licensed software and NRE fees. Revenue for the three months ended September 30, 2006 was from the sale of software licenses. Costs of goods sold for the three months ended September 30, 2007 and 2006 were $58,000 and $21,000, respectively. Costs of goods sold in the third quarter of 2007 include evaluation system manufacturing costs, subcontracted services associated with NRE revenue and the cost of third party software licenses. Costs of goods sold for the third quarter of 2006 consist of the cost of third party software licenses. During the three months ending September 30, 2007, the Company completed and invoiced the first phase of a multiple element transaction for $78,000. The amount has not been recognized as revenue during the quarter as certain criteria for revenue recognition were not met. The Company will recognize the full value of the arrangement, totaling $156,000, upon completion of the other elements which is expected to occur in the fourth quarter.
Research and Development. For the three months ended September 30, 2007, research and development expenses decreased $1,612,000 or 38% to $2,655,000 from $4,267,000 for the three months ended September 30, 2006. The decrease was the result of reductions in design tools ($46,000), engineering material ($1,297,000) due to the tapeout of the Arrix chip in the prior year, internal board development ($223,000), building rent ($235,000) and other development costs ($169,000). These decreases were partially offset by increases in employee related expenses ($214,000) and contracted services ($144,000). Research and development spending will continue to fluctuate based on the timing in the chip design cycle and application development projects.
Selling, General and Administrative. For the three months ended September 30, 2007, selling, general and administrative expenses decreased $417,000 or 16% to $2,164,000 from $2,581,000 for the three months ended September 30, 2006. The decrease was the result of lower employee related expenses ($300,000), which was the result of a $320,000 increase in compensation expenses less the elimination of restricted stock charges of $620,000 recorded in the prior periods, reduction in recruiting fees ($66,000), professional fees ($24,000), advertising and communications ($20,000), and other general business expenses ($7,000). Future selling, general and administrative expense increases will be primarily in sales and commission expenses as revenues grow.
Other Income (Expense). For the three months ended September 30, 2007, we had net other income of $421, 000 compared to of $112,000 for the three months ended September 30, 2006. The increase was primarily in interest income of funds invested from the secondary offering.
Nine Months Ended September 30, 2006 and 2007
Revenue and Cost of Goods Sold. For the nine months ended September 30, 2007, we generated revenue of $275,000 compared to $46,000 for the nine months ended September 30, 2006. Revenue for the nine months ended September 30, 2007 was from the sale of production FPOA chips, software license fees and NRE fees. Revenue for the nine months ended September 30, 2006 was from the sale of software license fees and NRE. These product development kits included software that we licensed from a third party for the development of design tools for our FPOA chips. Cost of goods sold for the nine months ended September 30, 2007 and 2006 were $181,000 and $27,000, respectively. Cost of goods sold for the nine months ended September 30, 2007 were from manufacturing costs of the chips and evaluation systems, the cost of the third party software licenses and subcontracted NRE services. Cost of goods sold for the nine months ended September 30, 2006 was for the cost of third party software licenses. During the nine months ending September 30, 2007, the Company completed and invoiced the first phase of a multiple element transaction for $78,000. The amount has not been recognized as revenue during the quarter as certain criteria for revenue recognition were not met. The Company will recognize the full value of the arrangement, totaling $156,000, upon completion of the other elements which is expected to occur in the fourth quarter.
Research and Development. For the nine months ended September 30, 2007, we incurred research and development costs of $8,387,000, a decrease of $1,906,000 or 19% from research and development costs for the nine months ended September 30, 2006 of $10,293,000. The decrease was the result of lower contractor and outside service expense ($99,000), design tool licenses ($281,000), engineering material ($1,268,000) due to the tapeout of the Arrix chip in the prior year, allocated building rent ($330,000), board development costs ($241,000), maintenance contracts ($150,000) and recruiting and other expenses ($91,000). These were offset by higher employee related expenses ($554,000) due to having a more developed research and development staff. Research
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and development expenses will fluctuate depending on the development cycle of future chips and application projects.
Selling, General and Administrative. For the nine months ended September 30, 2007, selling, general and administrative expenses decreased $399,000 or 6% to $6,733,000 from $7,132,000 for the nine months ended September 30, 2006. This decrease was a result of lower employee related expenses ($845,000), which are the net results of an increase in compensation expenses of $986,000 and the elimination of restricted stock charges of $1,831,000 recorded in the prior period. The decrease was offset by increases in travel ($91,000), advertising and promotions ($24,000), commissions ($22,000) product samples and development systems ($76,000), consultants and outside services ($100,000), rent ($52,000), and other infrastructure costs ($81,000). Growth in spending will continue to be directed towards sales and product promoting activities.
Other Income (Expense). For the nine months ended September 30, 2007 and September 30, 2006, we had net other income $631,000 and $462,000, respectively. The other income was primarily from interest earned on invested cash.
Liquidity and Capital Resources
In June 2007, MathStar completed a registered follow-on public offering of 25,000,000 shares of its common stock at a price to the public of $1.60 per share, netting $36,473,000 in cash after commissions and offering costs. We believe that our cash and investment securities on hand and cash resulting from the sale of product and services will be sufficient to fund operations and meet our capital needs and do not anticipate needing to raise additional funds. However, our future capital requirements will depend on many factors, including our sales growth, further market acceptance of our existing and new FPOA chips, the amount and timing of our research and development expenditures, the timing of our introduction of new chips, the expansion of our sales and marketing efforts and working capital needs.
Net Cash Used in Operating Activities
Net cash used in operating activities was $15,058,000 and $14,450,000 for the nine months ended September 30, 2007 and 2006, respectively. Net cash used in operating activities was to fund chip development, fund the promotion of current products and pay general and administrative costs.
Net Cash Used by Investing Activities
Net cash used by investing activities for the nine months ended September 30, 2007 was $20,048,000. Investing activities were for the purchase of equipment, the development of applications for resale and the purchase of investment securities. Investing activities for the nine months ended September 30, 2006 was $343,000. Investing activities were for the purchase of equipment and the development of applications for resale.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was $36,503,000 and $4,359,000 for the nine months ended September 30, 2007 and 2006, respectively. For the nine month period ended September 30, 2007, cash was provided from a registered follow-on public offering ($36,473,000) and warrants ($21,000) and stock options ($9,000). For the nine month period ended September 30, 2006, cash provided by financing activities was from the exercise of warrants ($513,000) and stock options ($46,000) and the sale of registered securities ($3,800,000).
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not
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engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our exposure to market risk is confined to our cash equivalents and investments. We have invested in high-quality financial instruments, primarily money market funds, federal agency notes and asset-backed securities, which we believe are subject to limited credit risks. The Company investments are matched to forecasted cash needs such that investments will not be sold prior to maturity and exposing the Company to losses due to interest rate changes.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
During the fiscal period covered by this report, the Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, completed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”). Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the fiscal period covered by this report, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Other Information
We are currently not a party to any legal proceedings.
The semiconductor industry is characterized by rapid technological change, intense competition and cyclical market patterns which contribute to create factors that may affect our future operating results. The risk factors are described in the section entitled “Risk Factors” beginning on page 4 of our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2007. Other information included in this Quarterly Report on Form 10-Q also should be carefully considered. The risks and uncertainties described in our Annual Report are not the only risks the Company faces. Additional risks and uncertainties not presently known to the Company or that the Company’s management currently deems immaterial also may impair its business operations. If any of the risks described were to occur, our business, financial condition, operating results and cash flows could be materially adversely affected.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None
None.
The exhibits are described on the Exhibit Index to this Quarterly Report on Form 10-Q.
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.
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| MathStar, Inc. | |
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| (Registrant) | |
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Date: November 7, 2007 |
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| By: | /s/ James W. Cruckshank |
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| James W. Cruckshank | |||||||
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| Vice President of Administration and Chief Financial Officer | |||||||
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| (Principal Financial Officer and Principal Accounting Officer) | |||||||
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EXHIBIT INDEX
Exhibit No. |
| Description of Exhibit |
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3.1 |
| Certificate of Incorporation of MathStar, Inc. (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 filed by MathStar, Inc. with the Securities and Exchange Commission (“SEC”) on August 3, 2005 (File No. 333-127164) (the “Registration Statement”)). |
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3.2 |
| By-laws of MathStar, Inc. (incorporated by reference to Exhibit 3.2 to the Registration Statement). |
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4.1 |
| Form of common stock certificate of MathStar, Inc. (incorporated by reference to Exhibit 4.1 to the Registration Statement). |
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10.1 |
| MathStar, Inc. Amended and Restated 2004 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by MathStar, Inc. with the SEC on May 17, 2007). |
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31.1 |
| Certification of Chief Executive Officer pursuant to Rules 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 (filed herewith electronically). |
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31.2 |
| Certification of Chief Financial Officer pursuant to Rules 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 (filed herewith electronically). |
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32.1 |
| Section 1350 Certification of Chief Executive Officer (filed herewith electronically). |
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32.2 |
| Section 1350 Certification of Chief Financial Officer (filed herewith electronically). |
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