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 |
For the quarterly period ended September 30, 2008.
OR
o |
| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission files 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.) |
|
|
|
19075 NW Tanasbourne, Suite 200, Hillsboro, |
| 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, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o |
| Accelerated filer x |
|
|
|
Non-accelerated filer o |
| Smaller reporting company o |
(Do not check if a smaller reporting company) |
|
|
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, 2008 |
Common stock, $0.01 par value |
| 9,181,497 |
Financial Information
MathStar, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except per share data)
|
| December 31, |
| September 30, |
| ||
|
|
|
|
|
| ||
Assets |
|
|
|
|
| ||
Current assets |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 4,339 |
| $ | 6,824 |
|
Restricted cash |
| 107 |
| — |
| ||
Investments in marketable securities – short term |
| 22,200 |
| 7,942 |
| ||
Accounts receivable |
| 271 |
| 130 |
| ||
Inventory |
| 623 |
| — |
| ||
Prepaid expenses and other current assets |
| 1,326 |
| 221 |
| ||
Total current assets |
| 28,866 |
| 15,117 |
| ||
Property and equipment, net |
| 557 |
| 76 |
| ||
Investments in marketable securities – long term |
| 2,599 |
| 799 |
| ||
Other assets |
| 435 |
| 25 |
| ||
Total assets |
| $ | 32,457 |
| $ | 16,017 |
|
|
|
|
|
|
| ||
Liabilities and Stockholders’ Equity |
|
|
|
|
| ||
Current liabilities |
|
|
|
|
| ||
Accounts payable |
| $ | 930 |
| $ | 26 |
|
Deferred revenue |
| 162 |
| — |
| ||
Accrued expenses |
| 1,416 |
| 536 |
| ||
Total current liabilities |
| 2,508 |
| 562 |
| ||
Other long term liabilities |
| 453 |
| 302 |
| ||
Total liabilities |
| 2,961 |
| 864 |
| ||
|
|
|
|
|
| ||
Stockholders’ equity |
|
|
|
|
| ||
Preferred stock, $0.01 par value; 10,000 shares authorized; no shares issued and outstanding |
| — |
| — |
| ||
Common stock, $0.01 par value; 18,000 shares authorized; 9,181 shares issued and outstanding at December 31, 2007 and September 30, 2008 |
| 459 |
| 92 |
| ||
Additional paid-in capital |
| 155,539 |
| 155,909 |
| ||
Accumulated deficit |
| (126,502 | ) | (140,819 | ) | ||
Accumulated other comprehensive loss |
| — |
| (29 | ) | ||
Total stockholders’ equity |
| 29,496 |
| 15,153 |
| ||
|
|
|
|
|
| ||
Total liabilities and stockholders’ equity |
| $ | 32,457 |
| $ | 16,017 |
|
The accompanying notes are an integral part of these financial statements.
1
MathStar, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| 2007 |
| 2008 |
| 2007 |
| 2008 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Revenue |
| $ | 63 |
| $ | 80 |
| $ | 275 |
| $ | 360 |
|
Cost of sales |
| 58 |
| — |
| 181 |
| 1,195 |
| ||||
Gross profit (loss) |
| 5 |
| 80 |
| 94 |
| (835 | ) | ||||
Operating expenses: |
|
|
|
|
|
|
|
|
| ||||
Research and development |
| 2,655 |
| 165 |
| 8,387 |
| 7,259 |
| ||||
Selling, general and administrative |
| 2,164 |
| 666 |
| 6,733 |
| 4,228 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Restructuring and impairment charges |
| — |
| 17 |
| — |
| 2,618 |
| ||||
|
| 4,819 |
| 848 |
| 15,120 |
| 14,105 |
| ||||
Operating loss |
| (4,814 | ) | (768 | ) | (15,026 | ) | (14,940 | ) | ||||
Interest income |
| 426 |
| 132 |
| 652 |
| 622 |
| ||||
Other income, net |
| (5 | ) | (25 | ) | (21 | ) | 1 |
| ||||
Net loss |
| $ | (4,393 | ) | $ | (661 | ) | $ | (14,395 | ) | $ | (14,317 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Basic and diluted loss per share from continuing operations |
| $ | (0.48 | ) | $ | (0.07 | ) | $ | (2.37 | ) | $ | (1.56 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Weighted average basic and diluted shares outstanding |
| 9,181 |
| 9,181 |
| 6,081 |
| 9,181 |
| ||||
The accompanying notes are an integral part of these financial statements.
2
MathStar, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
|
| Nine Months Ended |
| ||||
|
| 2007 |
| 2008 |
| ||
|
|
|
|
|
| ||
Cash flows from operating activities |
|
|
|
|
| ||
Net loss |
| $ | (14,395 | ) | $ | (14,317 | ) |
Adjustments to reconcile net loss to net cash used in operating activities |
|
|
|
|
| ||
Depreciation and amortization |
| 133 |
| 155 |
| ||
Loss on asset disposal |
| 5 |
| 58 |
| ||
Asset impairment charges |
|
|
| 1,006 |
| ||
Amortization of discount on held-to-maturity securities |
|
|
| 63 |
| ||
Loss on sale of available-for-sale securities |
|
|
| 7 |
| ||
Non-cash changes in inventory |
|
|
| 734 |
| ||
Stock-based compensation |
| 83 |
| 3 |
| ||
Restructuring charges |
|
|
| 563 |
| ||
Gain on sale of marketable securities |
|
|
| (42 | ) | ||
Foreign currency remeasurement |
| 11 |
| (17 | ) | ||
Change in operating assets and liabilities |
|
|
|
|
| ||
Accounts receivable |
| (130 | ) | 141 |
| ||
Inventory |
| (92 | ) | (111 | ) | ||
Prepaid expenses and other assets |
| 542 |
| 803 |
| ||
Accounts payable |
| (1,381 | ) | (904 | ) | ||
Deferred revenue |
| 162 |
| (162 | ) | ||
Accrued expenses |
| 4 |
| (1,570 | ) | ||
Net cash used in operating activities |
| (15,058 | ) | (13,590 | ) | ||
|
|
|
|
|
| ||
Cash flows from investing activities |
|
|
|
|
| ||
Purchase of property and equipment |
| (69 | ) | (50 | ) | ||
Proceeds from sale of equipment |
|
|
| 23 |
| ||
Purchase of capitalized application software |
| (292 | ) |
|
| ||
Proceeds from sale of held-to-maturity securities |
|
|
| 17,158 |
| ||
Proceeds from sale of available-for-sale securities |
|
|
| 4,460 |
| ||
Purchase of held-to-maturity securities |
| (19,684 | ) | (2,931 | ) | ||
Purchase of available-for-sale securities |
|
|
| (2,685 | ) | ||
Restricted cash |
| (3 | ) | 107 |
| ||
Net cash used in investing activities |
| (20,048 | ) | 16,082 |
| ||
|
|
|
|
|
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Cash flows from financing activities |
|
|
|
|
| ||
Proceeds from issuance of common stock, net of offering costs |
| 36,473 |
|
|
| ||
Proceeds from exercise of warrants, net of costs |
| 21 |
| — |
| ||
Proceeds from exercise of stock options |
| 9 |
| — |
| ||
Net cash provided by financing activities |
| 36,503 |
| — |
| ||
Effect of exchange rate changes on cash |
| (5 | ) | (7 | ) | ||
Net decrease in cash and cash equivalents |
| 1,392 |
| 2,485 |
| ||
Cash and cash equivalents |
|
|
|
|
| ||
Beginning of period |
| 12,891 |
| 4,339 |
| ||
End of period |
| $ | 14,283 |
| $ | 6,824 |
|
The accompanying notes are an integral part of these financial statements.
3
MathStar, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
1. Basis of Presentation
The accompanying interim condensed consolidated financial statements of MathStar, Inc. (“MathStar” or the “Company”) have been prepared in conformity with United States generally accepted accounting principles (U.S. GAAP), consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 14, 2008. The year-end condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosure 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, 2008.
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. During the three months ended March 31, 2008, sales did not materialize as expected, and development of the next generation of FPOA fell even further behind schedule. As a result, on May 20, 2008, the Board of Directors voted to suspend research and development activities and ongoing operations while analyzing strategic alternatives to protect the value to the stockholders. The Board of Directors continues to explore these strategic alternatives, which could include merger, acquisition, increasing operations in another structure or liquidation. MathStar has engaged a third party investment banking firm to explore the sale of intellectual property and patents.
The Company’s stockholders approved a one-for-five reverse stock split, effective May 23, 2008. The accompanying financial statements and related notes give retrospective effect to this split on recorded share amounts and earnings per share information.
On October 15, 2008, the Company received a letter from The NASDAQ Stock Market (“Nasdaq”) which stated that based on Nasdaq staff’s review of MathStar, and pursuant to Marketplace Rule 4300, Nasdaq staff believes that MathStar is a “public shell” and as such no longer meets Nasdaq’s listing requirements. Accordingly, Nasdaq indicated in the letter that trading of MathStar’s common stock on The Nasdaq Global Market would be suspended at the opening of business on October 23, 2008. MathStar elected not to appeal the decision and has been delisted from The NASDAQ Global Market.
2. Restructuring and Impairment Charges
During the three months ended June 30, 2008, the Company announced a curtailment of operations as it evaluated strategic alternatives to preserve shareholder value. This decision resulted in restructuring and impairment charges of $3,500 for the nine months ended September 30, 2008. Management determined that it was highly likely that certain operational assets would not be used and no alternatives existed. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” issued by the Financial Accounting Standards Board (“FASB”), these assets were deemed to be impaired and either held-for-sale or abandoned and written down to their fair market value. A plan to locate potential buyers was put in place for their disposal, and no further depreciation expense will be charged to the Company’s operating activity. In addition, the Company evaluated assets that were not abandoned or held-for-sale and determined that the estimated useful lives of these assets should be shortened. Accordingly, higher depreciation expense has been incurred since May 20, 2008. As well, in accordance with SFAS No. 146 issued by the FASB, “Accounting for Costs Associated with Exit or Disposal Activities”, certain one-time charges relating to severance to terminated employees, and fees associated with early contract terminations no longer used and giving economic benefit to the Company, were recorded. As the liabilities for these charges are settled, payment will be made against the liability, and there will not be any further impact on the Company’s operating results.
4
During the quarter ended September 30, 2008, the Company ceased all operations in Minnesota and is no longer utilizing the facility covered under a non-cancellable lease arrangement. MathStar recognized a restructuring charge of $17 for the potential liability of this lease.
Management believes that no further charges will be incurred for this activity, except for potential termination of non-cancelable lease liabilities for the Hillsboro, Oregon facility, which will depend on the strategic direction chosen by the Company. The amount of the potential lease termination liability will not be known until the strategic direction is identified. Below is the detail of restructuring and impairment charges.
|
| Nine Months |
| |
Inventory abandoned |
| $ | 349 |
|
Increase in excess and obsolete reserve |
| 533 |
| |
Charged to cost of sales |
| 882 |
| |
|
|
|
| |
Severance |
| 1,506 |
| |
Fair market adjustment of assets held-for-sale |
| 328 |
| |
Contract termination |
| 57 |
| |
Assets abandoned |
| 727 |
| |
Charged to operating expenses as restructuring and impairment charges |
| 2,618 |
| |
|
|
|
| |
Total charges for restructuring and impairment |
| $ | 3,500 |
|
Severance expense of $1,506 impacted approximately 75 employees, which accounted for a majority of the Company’s workforce. The following is a rollforward of the restructuring liability for the nine months ended September 30, 2008.
|
| Restructuring |
| |
Liability as of March 31, 2008 |
| $ | — |
|
Additions |
| 1,506 |
| |
Payments |
| 943 |
| |
Liability as of June 30, 2008 |
| $ | 563 |
|
Additions |
| 17 |
| |
Payments |
| 568 |
| |
Liability as of September 30, 2008 |
| $ | 12 |
|
Management believes that no further charges will be incurred for this activity, except for the potential termination of the non-cancellable lease for the Hillsboro facility. The lease for the facility extends through August 31, 2011 and the annual lease payments amount to $326,000. The amount of the potential termination liability will not be known until we discontinue utilizing the facility.
5
3. New Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles 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.
Relative to SFAS No. 157, the FASB issued FASB Staff Positions (FSP) 157-1, 157-2 and 157-3. FSP 157-1 amends SFAS No. 157 to exclude SFAS No. 13, “Accounting for Leases,” and its related interpretive accounting pronouncements that address leasing transactions. FSP SFAS No. 157-2 delays the effective date of the application of SFAS No. 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and liabilities except for those that are recognized or disclosed at fair value in the financial statements on a recurring basis. FSP 157-3 clarifies the application of SFAS No. 157 in a market that is not active.
The adoption of this accounting pronouncement did not have a material effect on the Company’s consolidated financial statements for financial assets and liabilities and any other assets and liabilities carried at fair value, although we expanded the disclosure requirements to comply with SFAS No. 157. The Company is currently in the process of evaluating the impact of adopting this pronouncement for other non-financial assets or liabilities.
SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). SFAS No. 157 classifies the inputs used to measure fair value into the following hierarchy:
Level 1 |
| Unadjusted quoted prices in active markets for identical assets or liabilities |
|
|
|
Level 2 |
| Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability |
|
|
|
Level 3 |
| Unobservable inputs for the asset or liability |
We endeavor to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
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 was effective for the Company commencing January 1, 2008. The Company’s adoption of SFAS No. 159 did not have an impact on its financial statements, as the Company did not elect to record eligible items at fair value.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations,” and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”. These standards aim to improve, simplify and converge internationally the accounting for business combinations and the reporting of noncontrolling interests in consolidated financial statements. The provisions of SFAS No. 141(R) and SFAS No. 160 apply to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 31, 2008. The Company does not expect the provisions of SFAS No. 141(R) and SFAS No. 160 will have an effect on its consolidated financial position and results of operations.
6
4. Stock-Based Compensation
MathStar has issued 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 option activity during the nine months ended September 30, 2008 and the total options outstanding as of September 30, 2008, as adjusted for the one-for-five reverse stock split effective on May 23, 2008.
|
|
|
|
|
| Weighted- |
|
|
| |||
|
|
|
|
|
| Average |
| Aggregate |
| |||
|
|
|
| Weighted- |
| Remaining |
| Intrinsic |
| |||
|
| Shares |
| Average |
| Contractual |
| Value |
| |||
|
| (in |
| Exercise |
| Term |
| (in |
| |||
Options |
| thousands) |
| Price |
| (in years) |
| thousands) |
| |||
Outstanding at December 31, 2007 |
| 670 |
| $ | 18.15 |
| 8.01 |
| $ |
|
| |
Granted |
| 26 |
| 2.58 |
|
|
|
|
| |||
Exercised |
| — |
| — |
|
|
|
|
| |||
Forfeited or expired |
| (596 | ) | 16.74 |
| 7.97 |
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
Outstanding at September 30, 2008 |
| 100 |
| $ | 22.37 |
| 5.77 |
| $ |
|
| |
|
|
|
|
|
|
|
|
|
| |||
Exercisable at September 30, 2008 |
| 72 |
| $ | 25.26 |
| 4.81 |
| $ | 0 |
| |
For the first nine months of 2008, the Company recorded a net non-cash expense of $3 resulting from expenses incurred for two remaining employees and the members of the Board of Directors less recaptured expenses on forfeited unvested options of terminated employees. In the first nine months of 2007, the Company had $83 in non-cash stock-based compensation expense.
5. Selected Balance Sheet Information
Restricted Cash
The Company had pledged cash as collateral to secure the balances on Company issued credit cards. The Company could not use the restricted cash in the normal course of business until the credit cards were cancelled or the bank released the funds. During the three months ended September 30, 2008, all Company issued credit cards were cancelled, and the bank released the restricted funds.
7
Investment Securities
|
| December 31, |
| September 30, |
| ||
Short-term |
|
|
|
|
| ||
Available-for-sale |
| $ |
|
| $ |
|
|
Municipal securities |
| 2,605 |
|
|
| ||
Auction preferred securities |
|
|
|
|
| ||
Held-to-maturity |
|
|
|
|
| ||
Government securities |
| 19,595 |
| 5,403 |
| ||
Corporate bonds and notes |
|
|
| 2,539 |
| ||
Total short-term investments |
| 22,200 |
| 7,942 |
| ||
|
|
|
|
|
| ||
Long-term |
|
|
|
|
| ||
Available-for-sale |
|
|
|
|
| ||
Municipal securities |
|
|
|
|
| ||
Auction preferred securities |
|
|
| 799 |
| ||
Held-to-maturity |
|
|
|
|
| ||
Government securities |
|
|
|
|
| ||
Corporate bonds and notes |
| 2,599 |
|
|
| ||
Total long-term investments |
| 2,599 |
| 799 |
| ||
|
|
|
|
|
| ||
Total investments |
| $ | 24,799 |
| $ | 8,741 |
|
Investments classified as held-to-maturity have timed maturities to meet forecasted cash needs, which range from October 2008 to February 2009 and are reported at amortized cost, as the Company has the ability and intent to hold these securities to maturity. Amortized cost approximates fair value for held-to-maturity investments. Investments with maturities beyond one year are classified as long-term investment securities.
|
|
|
| Fair Value Measurement at Reporting Date |
| ||||||
|
|
|
| Quoted Prices |
| Significant |
| Significant |
| ||
Description |
| 9/30/08 |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| ||
|
|
|
|
|
|
|
|
|
| ||
Available-for-sale securities |
| $ | 799 |
| — |
| — |
| $ | 799 |
|
Total |
| $ | 799 |
| — |
| — |
| $ | 799 |
|
We have auction preferred securities (APS), which are preferred equity instruments in a closed-end mutual fund that provide liquidity through an auction process conducted by an independent auction agent that resets the applicable dividend rate at pre-determined calendar intervals, generally every 28 days. These instruments are senior equity securities that have a liquidation preference of $25,000 per share plus the amount of accumulated but unpaid dividends. Upon the liquidation, dissolution or winding up of the fund, APS holders are entitled to receive their liquidation preference before any distribution or payment is made to holders of the fund’s common shares. Dividends declared and payable on the APS have a priority over dividends on the fund’s common shares. Outstanding APS may be redeemed at the option of the fund upon giving notice to APS holders.
The Company generally invests in these securities as part of its overall cash management program. During the first quarter of 2008, the Company’s APS failed to auction due to sell orders exceeding buy orders. The funds associated with failed auctions will not be accessible until a successful auction occurs, the fund redeems outstanding APS or an active secondary market is created and a buyer is identified outside of the auction process.
At September 30, 2008, there was insufficient observable APS market information available to determine the fair value of the Company’s investments in APS. Therefore, the Company estimated Level 3 fair values for these securities by incorporating assumptions that market participants would use in their estimates of fair value. Despite the failed auctions, the Company’s APS continue to be highly rated by the rating agencies. Of the original $2,680 in APS purchased, $1,850 was redeemed on May 27, 2008 at face value. Based upon these factors, the Company adjusted the September 30, 2008 carrying value of these securities downward to fair value by the amount of $29. The entire adjustment amount, which resulted from the limited liquidity of those investments, was considered temporary and was recorded in other comprehensive income. The APS underlying this temporary adjustment amount were classified as non-current as of September 30, 2008 due to the unknown redemption date by the issuer or liquidation by the seller of the security. These funds are not required to meet the Company’s current operating activities or to satisfy its outstanding liabilities.
8
As further required by SFAS No. 157, provided below is a reconciliation of the beginning and ending balances for each type of security valued using a Level 3 valuation at September 30, 2008.
|
| Fair Value Measurement Using Significant |
| |
|
| Auction |
| |
Beginning balance as of December 31, 2007 |
| $ | 0 |
|
Total gains or losses realized/unrealized included in earnings/included in comprehensive loss |
| (29 | ) | |
Purchases, issuance and settlements |
| 828 |
| |
Ending balance as of September 30, 2008 |
| $ | 799 |
|
Inventory
|
| December 31, |
| September 30, |
| ||
Raw materials and sub assemblies |
| $ | 113 |
| $ | 0 |
|
Finished goods |
| 717 |
| 543 |
| ||
|
| $ | 830 |
| $ | 543 |
|
Less: reserve for excess and obsolete inventory |
| (207 | ) | (543 | ) | ||
Total inventory, net |
| $ | 623 |
| $ | 0 |
|
Prepaid and Other Current Assets
|
| December 31, |
| September 30, |
| ||
Design licenses (short term) |
| $ | 729 |
| $ | — |
|
Interest receivable |
| 307 |
| 129 |
| ||
Prepaid insurance |
| 189 |
| 26 |
| ||
Prepaid rent |
| 33 |
| 27 |
| ||
Other |
| 68 |
| 39 |
| ||
Total prepaid and other current assets |
| $ | 1,326 |
| $ | 221 |
|
Property and Equipment
|
| December 31, |
| September 30, |
| ||
Computer equipment |
| $ | 144 |
| $ | 50 |
|
Purchased software |
| 533 |
| 91 |
| ||
Equipment |
| 207 |
| — |
| ||
Furniture and fixtures |
| 387 |
| 198 |
| ||
|
| $ | 1,271 |
| $ | 339 |
|
Less: Accumulated depreciation |
| (714 | ) | (263 | ) | ||
Total property and equipment, net |
| $ | 557 |
| $ | 76 |
|
9
Depreciation expense was $43 and $44 for the three months ended September 30, 2007 and 2008, respectively, and $123 and $146 for the nine months ended September 30, 2007 and 2008, respectively.
Under SFAS No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets”, assets that are no longer used in operations and held for sale should be written down to the expected fair market value and depreciation ceased as of the determination date. The depreciation of assets remaining in service was accelerated and the assets will be fully depreciated in October 2008.
Other Assets
|
| December 31, |
| September 30, |
| ||
Deposits |
| $ | 36 |
| $ | 25 |
|
Design licenses (long-term) |
| 347 |
| — |
| ||
Capitalized intellectual property, net of accumulated amortization of $12 and $0 as of December 31, 2007 and September 30, 2008, respectively |
| 52 |
| — |
| ||
Total other assets |
| $ | 435 |
| $ | 25 |
|
Amortization expense associated with capitalized application software was $5 and $0 for the three months ended September 30, 2007 and 2008, respectively, and $7 and $9 for the nine months ended September 30, 2007 and 2008, respectively.
Accrued Expenses
|
| December 31, |
| September 30, |
| ||
|
|
|
|
|
| ||
Accrued rent |
| $ | 48 |
| $ | 48 |
|
Accrued compensation |
| 702 |
| — |
| ||
Accrued professional fees |
| 161 |
| 135 |
| ||
Accrued license contracts |
| 389 |
| 334 |
| ||
Accrued restructuring charges |
| — |
| 12 |
| ||
Other |
| 116 |
| 7 |
| ||
Total accrued expenses |
| $ | 1,416 |
| $ | 536 |
|
Comprehensive Income
|
| Nine Months Ended September 30, |
| ||||
|
| 2007 |
| 2008 |
| ||
Net loss |
| $ | (14,395 | ) | $ | (14,317 | ) |
Unrealized loss on marketable securities |
| — |
| (29 | ) | ||
Comprehensive loss |
| $ | (14,395 | ) | $ | (14,346 | ) |
10
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 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, 2008, as updated in our Quarterly Report on Form 10-Q filed on August 11, 2008 and in this Quarterly Report.
Business Overview
During 2008, sales of our field programmable object array, or FPOA, did not materialize as expected, and development of the next generation of FPOA fell even further behind schedule. As a result, on May 20, 2008, the Board of Directors voted to suspend research and development activities and ongoing operations while analyzing strategic alternatives to protect the remaining value and increase the liquidity to the stockholders. The Board of Directors continues to explore these strategic alternatives, which could include merger, acquisition, increasing operations in another structure or liquidation.
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
There were no changes in critical accounting policies in the three months ended September 30, 2008.
Results of Operations
Three Months Ended September 30, 2007 and 2008
Revenue. For the three months ended September 30, 2008, we generated revenue of $80,000 compared to $63,000 for the same period last year. Revenue for the three months ended September 30, 2008 was from the sale of FPOA chips left in our inventory. Revenue for the three months ended September 30, 2007 was from the sale of development systems and licenses of $32,000, and licensed software and non-recurring engineering (NRE) fees of $31,000. Although we have suspended operations and established reserves for all unsold production chips in inventory, we are still working with active customers and process orders as requested.
Cost of Sales. Cost of sales for the three months ended September 30, 2008 and 2007 were $0 and $58,000, respectively. As the value of inventory was previously written down, no cost of sales were associated with sales in the third quarter of 2008. The cost of sales for the three months ended September 30, 2007 consisted of production costs of development systems and license fees of $31,000, external costs of engineering services and application intellectual property (IP) of $14,000, and other costs of $13,000.
Research and Development. During the three months ended September 30, 2008, research and development expenses were essentially terminated which resulted in a $2,490,000 or 94% decrease in research and development expenses to $165,000 for the three months ended September 30, 2008 from $2,655,000 for the three months ended September 30, 2007.
11
The research and development expenses incurred during the three months ended September 30, 2008 included $99,000 in employee related expenses, $56,000 for outside services and consulting, and $10,000 in other costs for the completion of the design documentation phases of current chip development. The research and development expenses for the three months ended September 30, 2007 included $1,509,000 in employee related expenses, $771,000 in outside services and consulting, $209,000 in design tool expenses, $37,000 in engineering tools, $26,000 in travel and $103,000 in infrastructure and other charges used in the development phase of the FPOA chip design development.
Selling, General and Administrative. For the three months ended September 30, 2008, selling, general and administrative expenses decreased $1,498,000 or 69% to $666,000, compared to $2,164,000 for the three months ended September 30, 2007. The decrease was primarily the result of reduced employee related expenses of $1,211,000, travel expenses of $128,000, outside service and professional services of $118,000, and infrastructure and other charges of $41,000. Our selling, general and administrative infrastructure is reduced to key individuals necessary to sustain the corporate structure and activities and plan our strategic direction.
Restructuring and Impairment Charges: For the three months ended September 30, 2008, we recorded restructuring and impairment charges of $17,000. These charges consisted of future rent payments for the Minnesota facility covered under a non-cancellable lease agreement which is no longer being utilized. These payments will be made upon a settlement for the early termination of the lease or as payments are due over the remaining lease term.
|
| Restructuring |
| |
Liability as of June 30, 2008 |
| $ | 563,000 |
|
Additions |
| 17,000 |
| |
Payments |
| 568,000 |
| |
Liability as of September 30, 2008 |
| $ | 12,000 |
|
Other Income (Expense). For the three months ended September 30, 2008, other income decreased by $314,000 or 75% to $107,000 compared to $421,000 for the three months ended September 30, 2007. The decrease was the result of $294,000 less interest income earned on lower investment balances and a combined loss on foreign currency translation and loss on asset sale of $20,000.
Nine Months Ended September 30, 2007 and 2008
Revenue. For the nine months ended September 30, 2008, we generated revenue of $360,000 compared to $275,000 for the same period last year. Revenue for the nine months ended September 30, 2008 was from the sale of production FPOA chips of $356,000 and development products of $4,000. Revenue for the nine months ended September 30, 2007 was from the sale of production FPOA chips of $16,000, evaluation systems and licenses of $140,000 and software license fees and NRE fees of $119,000. Although we have curtailed operations and established reserves for all unsold production chips in inventory, we are still working with active customers and process orders as requested.
Cost of Sales. Cost of sales for the nine months ended September 30, 2008 and 2007 were $1,195,000 and $181,000, respectively. Cost of sales for the nine months ended September 30, 2008 include product costs of $36,000, a non-cash charge of $734,000 for excess and obsolete inventory, scrap costs associated with tool licenses and raw material write-offs of $370,000, and other costs of $55,000. Costs of sales for the nine months ended September 30, 2007 were from manufacturing costs of the chips of $1,000, evaluation systems and license fees of $87,000, the cost of the third party software licenses and subcontracted NRE services of $39,000, and other costs of $54,000.
12
Research and Development. For the nine months ended September 30, 2008, research and development expenses decreased $1,128,000 or 13% to $7,259,000 from $8,387,000 for the nine months ended September 30, 2007. The decrease is the result of lower employee related expenses of $1,382,000, consulting and contractor expense of $639,000, development tool expense of $41,000, travel of $53,000, building and equipment rent of $317,000 and other charges of $203,000. The decrease was partially offset by increases in application IP expense of $515,000 and NRE charges paid to outside firms for development of the next chip design of $992,000. Research and development activities now have been completed, and all associated costs have been eliminated.
Selling, General and Administrative. For the nine months ended September 30, 2008, selling, general and administrative expenses decreased $2,505,000 or 37% to $4,228,000, compared to $6,733,000 for the nine months ended September 30, 2007. The decrease was primarily the result of reduced employee related expenses of $1,716,000, advertising costs of $51,000, the costs of consulting and outside services of $185,000, travel expenses of $203,000, insurance costs of $37,000, and infrastructure and other charges of $313,000. Our selling, general and administrative infrastructure is reduced to two key individuals and support contractors necessary to sustain the Company’s corporate structure and plan its strategic direction.
Restructuring and Impairment Charges: For the nine months ended September 30, 2008, we recorded restructuring and impairment charges of $2,618,000. See further discussion of these restructuring and impairment charges above in Note 2.
Other Income (Expense). For the nine months ended September 30, 2008, other income decreased by $8,000 or 1% to $623,000 compared to $631,000 for the nine months ended September 30, 2007. The decrease was the result of $30,000 less in interest income on lower investment balances and a $22,000 improvement on foreign currency translation.
Liquidity and Capital Resources
In response to the Board of Director’s decision to suspend operations and evaluate our strategic alternatives, staff was reduced to two key individuals and support contractors needed to sustain the Company’s corporate structure and activities and plan its strategic direction. We have sufficient cash and investments to satisfy all outstanding obligations and to initiate actions based on the strategic direction when determined by the Board of Directors.
In January 2008, we purchased $2.6 million of investments comprised of auction preferred securities (APS). All of our APS are AAA rated by one of the major credit rating agencies. Since mid-February 2008, we have experience failed auctions for our entire APS portfolio, resulting in our inability to sell these securities. A failed auction results in a lack of liquidity in the securities but does not signify a default by the issuer. Upon an auction failure, the interest rates on the APS do not reset at a market rate but instead reset based on a formula contained in the APS, which generally is higher than the current market rate. The issuer of the APS redeemed $1.85 million of the securities on May 27, 2008 and is actively putting a plan in place to redeem the remainder. Our APS were purchased through UBS Financial Services. On August 8, 2008, UBS announced that it reached a settlement with the New York Attorney General, the Massachusetts Securities Division, the Securities and Exchange Commission and other regulatory agencies to restore liquidity to holders of APS. We do not currently need these funds to satisfy outstanding obligations or meet short-term operating requirements.
We classified our APS as available-for-sale, which resulted in the $29,000 adjustment to the carrying value of our APS to mark them to fair value, which was recorded in other comprehensive loss. If uncertainties in the credit and capital markets continue, if the credit worthiness of the issuer deteriorates, if UBS does not comply with the settlement provisions or if we no longer have the ability to hold these investments, we may be required to recognize impairment charges or additional unrealized losses on our APS holdings or a loss on their disposition.
13
Net Cash Used in Operating Activities
Net cash used in operating activities was $13,590,000 and $15,058,000 for the nine months ended September 30, 2008 and 2007, respectively. Net cash used for operating activities for the nine months ended September 30, 2008 was to pay for the completion of the design of our next generation of FPOA chip, pay our selling, general and administrative costs, pay severance payments to employees whose employment was terminated, fund contract termination expenses and maintain the corporate shell until completion of the strategic transaction. Net cash used for the nine months ended September 30, 2007 was to fund chip development, fund the promotion of current products and pay general and administrative costs.
Net Cash Provided (Used) by Investing Activities
Net cash provided by investing activities for the nine months ended September 30, 2008 was $16,082,000. Cash used in investing activities for the nine months ended September 30, 2007 was $20,048,000. Net cash provided by investing activities for the nine months ended September 30, 2008 was from the proceeds from the sale of investments of $16,002,000, $23,000 from the sale of equipment, $50,000 used to purchase capital equipment and $107,000 in the decrease of restricted cash. Net cash used in the nine months ended September 30, 2007 was for the purchase of held-to-maturity securities of $19,684,000, $292,000 for the purchase of capitalized intellectual property, $69,000 for the purchase of equipment, and $3,000 for the increase of restricted cash.
Net Cash Provided by Financing Activities
There were no financing activities for the nine months ended September 30, 2008. Net cash provided by financing activities was $36,503,000 for the nine months ended September 30, 2007. For the nine months ended September 30, 2007, the cash provided by financing activities was from proceeds from the exercise of options and warrants of $30,000 and $36,473,000 from the issuance of common stock, net of offering costs.
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 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. Our investments were matched to forecasted cash needs such that investments will not be sold prior to maturity and expose us to losses due to interest rate changes. Included in our investments are APS. The APS auctions have historically provided a liquid market for these securities, as investors could readily sell their investments at auction. With the liquidity issues experienced in global credit and capital markets, the APS held by us have experienced failed auctions, beginning on February 19, 2008, as the amount of securities submitted for sale has exceeded the amount of purchase orders, making the liquidity of the securities questionable. Despite the failed auctions, our APS continue to be highly rated by the rating agencies. We believe we will have full redemption of all APS at par. If all APS are not redeemed, it could have a negative effect on the liquidity of our funds available for strategic alternatives.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
During the fiscal period covered by this report, our 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 our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (“Exchange Act”). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer has concluded that, as of the end of the fiscal period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit 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 our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
14
Changes in Internal Control Over Financial Reporting
Because of the change in MathStar’s business strategy and the termination of substantially all of its employees, its internal control over financial reporting for the quarter ended September 30, 2008 has been materially affected. MathStar’s two contract employees and its Chief Accounting Officer enable it to maintain appropriate internal control over financial reporting. In addition, MathStar’s Chief Executive Officer and Chief Financial Officer reviews and approves all of its financial statements. MathStar believes there are controls in place to ensure safeguarding of Company assets and transactions are approved, processed and recorded properly. Management has concluded that MathStar’s two contract employees, its Chief Accounting Officer, and its Chief Executive Officer and Chief Financial Officer are able to maintain effective internal control over financial reporting within established guidelines of the Securities and Exchange Commission (SEC).
Part II
We are currently not a party to any legal proceedings.
There are many factors that may affect our future operating results and financial condition. Some of these 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 SEC on March 14, 2008 (“2007 Form 10-K”), as updated in the section entitled “Risk Factors” on page 13 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 filed with the SEC on August 11, 2008 (“2008 second Quarter Form 10-Q”) and in this Quarterly Report on Form 10-Q. Other information included in this Quarterly Report on Form 10-Q also should be carefully considered. The risks and uncertainties described in our 2007 Form 10-K, our 2008 Second Quarter Form 10-Q and this Quarterly Report are not the only risks we face. Additional risks and uncertainties not presently known to us or that our management currently deems immaterial also may impair our business operations and financial condition. If any of the risks described were to occur, our business, financial condition, operating results and cash flows could be materially adversely affected.
The following updates the section entitled “Risk Factors” included in our 2007 Form 10-K, as updated in our 2008 Second Quarter Form 10-Q:
As of September 30, 2008, we had $828,000 invested in auction preferred securities (APS). Since mid-February 2008, the auctions for these APS have been failing, which adversely affects their liquidity. If we must record impairment charges on the recorded value of these APS, recognize additional unrealized losses, or recognize a loss on the disposition of our APS, our financial condition would be adversely affected.
In January 2008, we purchased $2.68 million of investments comprised of APS. All of our APS are AAA rated by one of the major credit rating agencies. Since mid-February 2008, we have experienced failed auctions for our entire APS portfolio, resulting in our inability to sell these securities. A failed auction results in a lack of liquidity in the securities but does not signify a default by the issuer. Upon an auction failure, the interest rates on the APS do not reset at a market rate but instead reset based on a formula contained in the APS, which generally is higher than the current market rate. The issuer of the APS redeemed $1.85 million of the securities on May 27, 2008 at face value and is actively putting a plan in place to redeem the remainder. Our APS were purchased through UBS Financial Services. On August 8, 2008, UBS announced that it reached a settlement with the New York Attorney General, the Massachusetts Securities Division, the SEC and other regulatory agencies to restore liquidity to holders of APS. We do not need these funds to satisfy outstanding obligations or meet short-term operating requirements.
15
We classified our APS as available-for-sale, which resulted in a $29,000 adjustment to the carrying value of our APS to mark them to fair value, which was recorded in other comprehensive loss. If uncertainties in the credit and capital markets continue, if the credit worthiness of the issuer deteriorates, UBS does not restore liquidity, or if we no longer have the ability to hold these investments, we may be required to recognize impairment charges or additional unrealized losses on our APS or a loss on their disposition.
We are currently considering various strategic alternatives and may not be able to complete the one we decide to pursue, whose failure could result in increased expenses and/or a delay in finally completing the selected strategy, or pursuing and completing another alternative.
On May 20, 2008, the Board of Directors voted to curtail research and development activities and ongoing operations while analyzing alternatives to protect the value to the stockholders. Alternatives could include merger, acquisition, increasing operations in another structure or liquidation. We may select a strategic alternative that we may not be able to complete for various reasons, including a decision of our principal stockholders not to approve such alternative, our inability to obtain regulatory approval, actions, including but not limited to, the inability of other companies to secure adequate financing or possible litigation involving the selected alternative or other matters. The inability to complete a selected alternative may adversely affect us or limit other strategic alternatives still available to us, including adversely affecting our financial results, or deterring other companies from entering into a merger or acquisition with us.
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
On October 15, 2008, the Company received a letter from The NASDAQ Stock Market (“Nasdaq”) which stated that based on Nasdaq staff’s review of MathStar, and pursuant to Marketplace Rule 4300, Nasdaq staff believes that MathStar is a “public shell” and as such no longer meets Nasdaq’s listing requirements. Accordingly, Nasdaq indicated in the letter that trading of MathStar’s common stock on The Nasdaq Global Market would be suspended at the opening of business on October 23, 2008 unless MathStar requested an appeal of the determination on or before October 21, 2008, which request would stay the suspension of MathStar’s common stock. MathStar does not intend to request an appeal of Nasdaq’s decision to delist its securities under Marketplace Rule 4300. On November 4, 2008, the Company received notice from Nasdaq that Nasdaq intends to file a Form 25 with the Securities and Exchange Commission, which filing will remove the Company’s common stock from listing and registration on The Nasdaq Global Market. The delisting will become effective ten days after the filing of the Form 25. As a result of delisting, MathStar’s common stock will no longer be eligible for quotation on Nasdaq, thereby reducing the liquidity of its common stock; however, MathStar’s common stock may be eligible for quotation on the Pink Sheets by broker-dealers or for quotation on the OTC Bulletin Board. At this time, MathStar’s common stock is quoted on the Pink Sheets. While MathStar’s common stock is currently eligible for quotation on the Pink Sheets by broker-dealers, MathStar cannot provide assurances that any broker will continue to make a market in MathStar’s common stock.
The exhibits are described on the Exhibit Index to this Quarterly Report on Form 10-Q.
16
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.
| MathStar, Inc. | |
| (Registrant) | |
|
| |
|
| |
Date: November 7, 2008 | By: | /s/ Douglas M. Pihl |
|
| Douglas M. Pihl |
|
| Chief Executive Officer and Chief |
17
EXHIBIT INDEX
Exhibit No. |
| Description of Exhibit |
|
|
|
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”)). |
|
|
|
3.2 |
| By-laws of MathStar, Inc. (incorporated by reference to Exhibit 3.2 to the Registration Statement). |
|
|
|
4.1 |
| Form of common stock certificate of MathStar, Inc. (incorporated by reference to Exhibit 4.1 to the Registration Statement). |
|
|
|
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). |
|
|
|
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). |
|
|
|
32.1 |
| Section 1350 Certification of Chief Executive Officer (filed herewith electronically). |
|
|
|
32.2 |
| Section 1350 Certification of Chief Financial Officer (filed herewith electronically). |
18