Edgar Filing: GSI TECHNOLOGY INC

gsit_Current folio_10Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2015

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-33387

GSI Technology, Inc.

(Exact name of registrant as specified in its charter)


Delaware		77-0398779
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

1213 Elko Drive

Sunnyvale, California 94089

(Address of principal executive offices, zip code)

(408) 331-8800

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer ☐		Accelerated filer ☒

Non-accelerated filer ☐		Smaller reporting company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the registrant’s common stock outstanding as of January 31, 2016: 22,344,102

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GSI TECHNOLOGY, INC.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2015


		Page

PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements	2
	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of Operations	3
	Condensed Consolidated Statements of Comprehensive Income (Loss)	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	28

	PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 6.	Exhibits	44
Signatures		45
Exhibit Index		46

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PART I — FINANCIAL INFORMATION

Item 1.Financial Statements

GSI TECHNOLOGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



	December 31,		March 31,
	2015		2015

	(In thousands, except share
	and per share amounts)
ASSETS
Cash and cash equivalents	$	30,725	$	36,776
Short-term investments		19,381		22,201
Accounts receivable, net		8,654		8,257
Inventories		7,443		8,412
Prepaid expenses and other current assets		2,714		2,297
Total current assets		68,917		77,943
Property and equipment, net		8,921		8,708
Long-term investments		15,489		21,740
Goodwill		8,030		—
Other assets		6,838		498
Total assets	$	108,195	$	108,889
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	2,229	$	2,961
Accrued expenses and other liabilities		4,369		5,937
Deferred revenue		1,942		2,815
Total current liabilities		8,540		11,713
Income taxes payable		101		780
Long-term deferred income taxes		875		—
Other accrued expenses		6,329		—
Total liabilities		15,845		12,493
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock: $0.001 par value authorized: 5,000,000 shares; issued and outstanding: none		—		—
Common Stock: $0.001 par value authorized: 150,000,000 shares; issued and outstanding: 22,510,419 and 23,128,372 shares, respectively		23		23
Additional paid-in capital		27,529		29,407
Accumulated other comprehensive income (loss)		(59)		26
Retained earnings		64,857		66,940
Total stockholders’ equity		92,350		96,396
Total liabilities and stockholders’ equity	$	108,195	$	108,889

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

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GSI TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	Three Months Ended December 31,				Nine Months Ended December 31,
	2015		2014		2015		2014

	(In thousands, except per share amounts)

Net revenues	$	12,921	$	14,227	$	40,523	$	40,435
Cost of revenues		6,535		7,577		19,925		21,785
Gross profit		6,386		6,650		20,598		18,650
Operating expenses:
Research and development		2,782		2,850		8,720		8,869
Selling, general and administrative		5,164		4,454		14,743		12,945
Total operating expenses		7,946		7,304		23,463		21,814
Loss from operations		(1,560)		(654)		(2,865)		(3,164)
Interest income, net		78		76		229		249
Other income (expense), net		11		25		(45)		35
Loss before income taxes		(1,471)		(553)		(2,681)		(2,880)
Benefit for income taxes		(652)		(701)		(598)		(632)
Net income (loss)	$	(819)	$	148	$	(2,083)	$	(2,248)
Net income (loss) per share:
Basic	$	(0.04)	$	0.01	$	(0.09)	$	(0.09)
Diluted	$	(0.04)	$	0.01	$	(0.09)	$	(0.09)
Weighted average shares used in per share calculations:
Basic		22,612		23,738		22,743		25,591
Diluted		22,612		24,325		22,743		25,591

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

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GSI TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)



	Three Months Ended December 31,				Nine Months Ended December 31,
	2015		2014		2015		2014

	(In thousands)

Net income (loss)	$	(819)	$	148	$	(2,083)	$	(2,248)
Net unrealized loss on available-for-sale investments, net of tax		(68)		(46)		(85)		(81)
Total comprehensive income (loss)	$	(887)	$	102	$	(2,168)	$	(2,329)

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

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GSI TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Nine Months Ended December 31,
	2015		2014

	(In thousands)
Cash flows from operating activities:
Net loss	$	(2,083)	$	(2,248)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Allowance for sales returns, doubtful accounts and other		(3)		(11)
Provision for excess and obsolete inventories		914		912
Depreciation and amortization		1,037		1,294
Stock-based compensation		1,387		1,533
Amortization of premium on investments		177		478
Changes in assets and liabilities, net of impact of acquisition:
Accounts receivable		(394)		2,727
Inventory		55		(1,786)
Prepaid expenses and other assets		(364)		1,782
Accounts payable		(726)		(1,950)
Accrued expenses and other liabilities		(2,278)		(524)
Deferred revenue		(873)		(262)
Net cash provided by (used in) operating activities		(3,151)		1,945
Cash flows from investing activities:
Purchase of investments		(12,526)		(10,712)
Sales and maturities of short-term investments		21,335		34,754
Acquisition		(7,343)		—
Purchases of property and equipment		(1,101)		(453)
Net cash provided by investing activities		365		23,589
Cash flows from financing activities:
Repurchase of common stock		(4,083)		(27,120)
Proceeds from issuance of common stock under employee stock plans		818		919
Net cash used in financing activities		(3,265)		(26,201)
Net decrease in cash and cash equivalents		(6,051)		(667)
Cash and cash equivalents at beginning of the period		36,776		41,520
Cash and cash equivalents at end of the period	$	30,725	$	40,853
Supplemental cash flow information:
Net cash paid (received) for income taxes	$	78	$	(1,597)

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

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GSI TECHNOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1—THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The accompanying unaudited condensed consolidated financial statements of GSI Technology, Inc. and its subsidiaries (“GSI” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, the interim financial statements do not include all of the information and footnotes required by GAAP for annual financial statements. These interim financial statements contain all adjustments (which consist of only normal, recurring adjustments) that are, in the opinion of management, necessary to state fairly the interim financial information included therein. The Company believes that the disclosures are adequate to make the information not misleading. However, these financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2015.

The consolidated results of operations for the three months and nine months ended December 31, 2015 are not necessarily indicative of the results to be expected for the entire fiscal year.

Significant accounting policies

The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2015.

Litigation and settlement costs

From time to time, the Company is involved in legal actions. See Note 6 for information regarding litigation that was resolved during the nine months ended December 31, 2015.

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Recent accounting pronouncements

In November 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which eliminates the current requirement to present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet. Instead, entities will be required to classify all deferred tax assets and liabilities as noncurrent. The update is effective for annual reporting periods beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact of this accounting standard on its consolidated financial statements.

In September 2015, the FASB issued a new accounting standard that eliminates the requirement to restate prior period financial statements for measurement period adjustments following a business combination. The new guidance requires that the cumulative impact of a measurement period adjustment including the impact on prior periods be recognized in the reporting period in which the adjustment is identified along with additional disclosures. The new guidance will be effective for the Company beginning in the first quarter of fiscal 2017. The new guidance is required to be adopted prospectively with early adoption permitted for financial statements that have not yet been made available for issuance. The new guidance is not expected to have a material impact on the Company’s consolidated financial statements.

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

In August 2014, the FASB issued new guidance related to the Company’s responsibility to evaluate whether there is substantial doubt about its ability to continue ongoing business operations and to provide relevant footnote disclosures. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." The new accounting standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The accounting standard is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017. Early adoption is permitted for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. ASU No. 2014-09 provides for one of two methods of transition: retrospective application to each prior period presented; or, recognition of the cumulative effect of retrospective application of the new standard in the period of initial application. The Company is currently evaluating the impact of this accounting standard on its consolidated financial statements.

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NOTE 2—NET INCOME (LOSS) PER COMMON SHARE

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



	Three Months Ended December 31,				Nine Months Ended December 31,
	2015		2014		2015		2014

	(In thousands, except per share amounts)

Net income (loss)	$	(819)	$	148	$	(2,083)	$	(2,248)

Denominators:
Weighted average shares—Basic		22,612		23,738		22,743		25,591
Dilutive effect of employee stock options		—		587		—		—
Weighted average shares—Dilutive		22,612		24,325		22,743		25,591
Net income (loss) per common share—Basic	$	(0.04)	$	0.01	$	(0.09)		(0.09)
Net income (loss) per common share—Diluted	$	(0.04)	$	0.01	$	(0.09)		(0.09)

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



	Three Months Ended December 31,		Nine Months Ended December 31,
	2015	2014	2015	2014

	(In thousands)
Shares underlying options	5,887	4,245	5,282	3,786

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NOTE 3—BALANCE SHEET DETAIL



	December 31, 2015		March 31, 2015

	(In thousands)
Inventories:
Work-in-progress	$	1,669	$	2,422
Finished goods		5,379		5,362
Inventory at distributors		395		628
	$	7,443	$	8,412


	December 31, 2015		March 31, 2015
	(In thousands)
Accounts receivable, net:
Accounts receivable	$	8,754	$	8,360
Less: Allowances for sales returns, doubtful accounts and other		(100)		(103)
	$	8,654	$	8,257


	December 31, 2015		March 31, 2015
	(In thousands)
Prepaid expenses and other current assets:
Prepaid tooling and masks	$	1,767	$	1,208
Prepaid income taxes		—		139
Other receivables		306		350
Other prepaid expenses and other current assets		641		600
	$	2,714	$	2,297


	December 31, 2015		March 31, 2015
	(In thousands)
Property and equipment, net:
Computer and other equipment	$	18,351	$	17,264
Software		4,793		4,792
Land		3,900		3,900
Building and building improvements		2,256		2,256
Furniture and fixtures		114		110
Leasehold improvements		820		791
		30,234		29,113
Less: Accumulated depreciation and amortization		(21,313)		(20,405)
	$	8,921	$	8,708

Depreciation and amortization expense was $322,000 and $322,000, respectively, for the three months ended December 31, 2015 and 2014 and $892,000 and $1,164,000, respectively, for the nine months ended December 31, 2015 and 2014.

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	December 31, 2015		March 31, 2015
	(In thousands)
Other assets:
Non-current deferred income taxes	$	31	$	27
Intangibles, net		3,748		393
Deposits		3,059		78
	$	6,838	$	498

Deposits at December 31, 2015 include approximately $3.0 million placed in escrow in connection with the Company’s acquisition of MikaMonu on November 23, 2015. See Note 9— Acquisition for more information.

The following table summarizes the components of intangible assets and related accumulated amortization balances at December 31, 2015 (in thousands):


	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Intangible assets:
Product designs	$	590	$	534	$	56
Patents		4,220		528		3,692
Software		80		80		—
Total	$	4,890	$	1,142	$	3,748

Amortization of intangible assets included in cost of revenues was $63,000 and $41,000, respectively, for the three months ended December 31, 2015 and 2014 and $145,000 and $130,000, respectively, for the nine months ended December 31, 2015 and 2014.

As of December 31, 2015, the estimated future amortization expense of intangible assets in the table above is as follows (in thousands):


Twelve Month Period Ending December 31,
2016	$	370
2017		313
2018		287
2019		233
2020		233
Thereafter		2,312
Total	$	3,748


	December 31, 2015		March 31, 2015
	(In thousands)
Accrued expenses and other liabilities:
Accrued compensation	$	2,683	$	3,386
Accrued professional fees		480		1,380
Accrued commissions		267		268
Other accrued expenses		939		903
	$	4,369	$	5,937

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	December 31, 2015		March 31, 2015
	(In thousands)
Other accrued expenses:
Contingent consideration	$	5,800	$	—
Escrow indemnity accrual		484		—
Other long-term accrued liabilities		45		—
	$	6,329	$	—

NOTE 4—INCOME TAXES

The current portion of the Company’s unrecognized tax benefits was $0 at both December 31, 2015 and March 31, 2015. The long-term portion at December 31, 2015 and March 31, 2015 was $101,000 and $780,000, respectively, of which the timing of the resolution is uncertain. As of December 31, 2015, $1,731,000 of unrecognized tax benefits had been recorded as a reduction to net deferred tax assets. As of December 31, 2015 and March 31, 2015, the Company’s net deferred tax assets of $7.2 million and $6.0 million, respectively, were subject to a full valuation allowance.

The Company recorded a net deferred tax liability of $821,000 associated with the estimated fair value adjustments of the intangible assets acquired in its acquisition of MikaMonu in the quarter ended December 31, 2015.

During the three months ended December 31, 2015, the Company recorded a tax benefit of $698,000 due to the reduction of uncertain tax benefits as a result of the lapse of applicable statutes of limitations.

Management believes that it is reasonably possible that within the next twelve months the Company could have a reduction in uncertain tax benefits of up to $438,000, including interest and penalties, related to positions taken with respect to credits and loss carryforwards on previously filed tax returns.

The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the provision for income taxes in the Condensed Consolidated Statements of Operations.

The Company is subject to taxation in the United States and various state and foreign jurisdictions. Fiscal years 2013 through 2015 remain open to examination by federal tax authorities, and fiscal years 2012 through 2015 remain open to examination by California tax authorities.

The Company’s estimated annual effective income tax rate was approximately 9.6% and 5.1% as of December 31, 2015 and 2014, respectively. The annual effective tax rate as of December 31, 2015 and 2014 varies from the United States statutory income tax rate primarily due to valuation allowances in the United States whereby pre-tax losses do not result in the recognition of corresponding income tax benefits and expenses and the foreign tax differential.

NOTE 5—FINANCIAL INSTRUMENTS

Fair value measurements

Authoritative accounting guidance for fair value measurements provides a framework for measuring fair value and related disclosures. The guidance applies to all financial assets and financial liabilities that are measured on a recurring basis. The guidance requires fair value measurement to be classified and disclosed in one of the following three categories:

Level 1: Valuations based on quoted prices in active markets for identical assets and liabilities. The fair value of available-for-sale securities included in the Level 1 category is based on quoted prices that are readily and regularly available in an active market. As of December 31, 2015, the Level 1 category included money market

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funds of $6.2 million, which were included in cash and cash equivalents on the Condensed Consolidated Balance Sheets.

Level 2: Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly. The fair value of available-for-sale securities included in the Level 2 category is based on the market values obtained from an independent pricing service that were evaluated using pricing models that vary by asset class and may incorporate available trade, bid and other market information and price quotes from well established independent pricing vendors and broker-dealers. As of December 31, 2015, the Level 2 category included short-term investments of $19.4 million and long-term investments of $ 15.5 million, which were comprised of certificates of deposit, corporate debt securities and government and agency securities.

Level 3: Valuations based on inputs that are unobservable and involve management judgment and the reporting entity’s own assumptions about market participants and pricing. As of December 31, 2015, the Company had no Level 3 financial assets and a Level 3 financial liability consisting of the contingent consideration liability for the acquisition of MikMonu. See Note 9—Acquisition for more information.

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


			Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets and Liabilities		Significant Other Observable Inputs		Significant Unobservable Inputs
	December 31, 2015		(Level 1)		(Level 2)		(Level 3)
Assets:
Money market funds	$	6,219	$	6,219	$	—	$	—
Marketable securities		34,870		—		34,870		—
Total	$	41,089	$	6,219	$	34,870	$	—


			Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets and Liabilities		Significant Other Observable Inputs		Significant Unobservable Inputs
	March 31, 2015		(Level 1)		(Level 2)		(Level 3)
Assets:
Money market funds	$	4,409	$	4,409	$	—	$	—
Marketable securities		43,941		—		43,941		—
Total	$	48,350	$	4,409	$	43,941	$	—

Short-term and long-term investments

All of the Company’s short-term and long-term investments are classified as available-for-sale. Available-for-sale debt securities with maturities greater than twelve months are classified as long-term investments when they are not intended for use in current operations. Investments in available-for-sale securities are reported at fair value with unrecognized gains (losses), net of tax, as a component of accumulated other comprehensive income (loss) in the Condensed Consolidated Balance Sheets. The Company had money market funds of $6.2 million and $4.4 million at December 31, 2015 and March 31, 2015, respectively, included in cash and cash equivalents on the Condensed Consolidated Balance Sheets. The Company monitors its investments for impairment periodically and records appropriate reductions in carrying values when declines are determined to be other-than-temporary.

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



	December 31, 2015
			Gross		Gross
			Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
	(In thousands)
Short-term investments:
State and municipal obligations	$	1,021	$	2	$	—	$	1,023
Corporate notes		3,425		—		(6)		3,419
Certificates of deposit		9,250		3		(5)		9,248
Foreign government obligations		2,692		—		(2)		2,690
Agency bonds		3,003		—		(2)		3,001
Total short-term investments	$	19,391	$	5	$	(15)	$	19,381
Long-term investments:
Corporate notes	$	2,276	$	—	$	(10)	$	2,266
Certificates of deposit		12,250		2		(29)		12,223
Agency bonds		1,000		—		—		1,000
Total long-term investments	$	15,526	$	2	$	(39)	$	15,489



	March 31, 2015
			Gross		Gross
			Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
	(In thousands)
Short-term investments:
State and municipal obligations	$	6,810	$	—	$	—	$	6,810
Corporate notes		7,366		10		—		7,376
Agency bonds		1,006		—		—		1,006
Certificates of deposit		7,000		9		—		7,009
Total short-term investments	$	22,182	$	19	$	—	$	22,201
Long-term investments:
State and municipal obligations	$	1,053	$	4	$	—	$	1,057
Corporate notes		4,232		—		(10)		4,222
Certificates of deposit		9,750		24		(1)		9,773
Agency bonds		4,003		4		(2)		4,005
Foreign government obligations		2,684		—		(1)		2,683
Total long-term investments	$	21,722	$	32	$	(14)	$	21,740

The Company’s investment portfolio consists of both corporate and governmental securities that have a maximum maturity of three years. All unrealized gains are due to changes in interest rates and bond yields. Subject to normal credit risks, the Company has the ability to realize the full value of all these investments upon maturity.

The deferred tax asset related to unrecognized gains and losses on short-term and long-term investments was $17,000 at December 31, 2015. The deferred tax liability related to unrecognized gains and losses on short-term and long-term investments $11,000 at March 31, 2015.

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As of December 31, 2015, contractual maturities of the Company’s available-for-sale investments were as follows:



			Fair
	Cost		Value
	(In thousands)
Maturing within one year	$	19,391	$	19,381
Maturing in one to three years		15,526		15,489
Maturing in more than three years		—		—
	$	34,917	$	34,870

The Company classifies its short-term investments as “available-for-sale” as they are intended to be available for use in current operations.

NOTE 6—COMMITMENTS AND CONTINGENCIES

Indemnification obligations

The Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the Company, under which the Company agrees to hold the other party harmless against losses arising from a breach of representations and covenants related to such matters as title to assets sold and certain intellectual property rights. In each of these circumstances, the Company’s indemnification obligations are conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the other party’s claims. Further, the Company’s obligations under these agreements may be limited in terms of time and/or amount, and in some instances, the Company may have recourse against third parties for certain payments made by it under these agreements.

It is not possible to predict the maximum potential amount of future payments that may be required under these or similar agreements due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these agreements have not had a material effect on its business, financial condition, cash flows or results of operations.

Product warranties

The Company warrants its products to be free of defects generally for a period of three years. The Company estimates its warranty costs based on historical warranty claim experience and includes such costs in cost of revenues. Warranty costs were not material for the three months or nine months ended December 31, 2015 or 2014.

Legal proceedings

In March 2011, Cypress Semiconductor Corporation, a semiconductor manufacturer, filed a lawsuit against the Company in the United States District Court for the District of Minnesota alleging that the Company’s products, including its SigmaDDR and SigmaQuad families of Very Fast SRAMs, infringe five patents held by Cypress. The complaint sought unspecified damages for past infringement and a permanent injunction against future infringement.

On June 10, 2011, Cypress filed a complaint against the Company with the United States International Trade Commission (the “ITC”). The ITC complaint, as subsequently amended, alleged infringement by the Company of three of the five patents involved in the District Court case and one additional patent and also alleged infringement by three of the Company’s distributors and 11 of its customers who allegedly incorporate the Company’s SRAMs in their products. The ITC complaint sought a limited exclusion order excluding the allegedly infringing SRAMs, and products containing them, from entry into the United States and permanent orders directing the Company and the other respondents to cease and desist from selling or distributing such products in the United States. On July 21, 2011, the ITC formally instituted an investigation in response to Cypress’s complaint. On June 7, 2013, the ITC announced that the full Commission had affirmed the determination of Chief Administrative

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Judge Charles E. Bullock that GSI’s SRAM devices, and products containing them, do not infringe the Cypress patents and that Cypress had failed to establish existence of a domestic industry that practices the patents. Moreover, the Commission reversed a portion of Judge Bullock’s determination with respect to the validity of the patents, finding the asserted claims of one of the patents to have been anticipated by prior art and, therefore, invalid. The Commission ordered the investigation terminated, and Cypress did not appeal the ruling.

The Minnesota District Court case had been stayed pending the conclusion of the ITC proceeding. Following the termination of the ITC investigation, the stay was lifted. On May 1, 2013, Cypress filed an additional lawsuit in the United States District Court for the Northern District of California alleging infringement by our products of five additional Cypress patents. Like the Minnesota case, the complaint in the California lawsuit sought unspecified damages for past infringement and a permanent injunction against future infringement. The Company filed answers in both cases denying liability and asserting affirmative defenses. On August 7, 2013, the parties stipulated that the claims in the Minnesota case with respect to three of the asserted patents would be dismissed without prejudice and that the claims with respect to the remaining two patents would be transferred to, and consolidated with, the California case. On August 20, 2013, the Court in the California case ordered the cases consolidated.

The Company did not record any loss contingency during fiscal 2013, fiscal 2014 or fiscal 2015 in connection with these legal proceedings as the Company was unable to predict their outcome and could not estimate the likelihood or potential dollar amount of any adverse results.

On May 6, 2015, the Company and Cypress entered into a settlement agreement to resolve the patent infringement litigation and a separate lawsuit pending in the United States District Court for the Northern District of California in which the Company alleged that Cypress had violated federal and state antitrust laws. Under the settlement agreement:

Each of the parties agreed to dismiss its lawsuit with prejudice in consideration of the dismissal with prejudice of the lawsuit brought by the other party; and

Each party agreed to release all claims against the other with respect to issues raised in the two lawsuits.

The parties agreed that the settlement agreement was entered into to resolve disputed claims, and that each party denies any liability to the other party.

NOTE 7—STOCK-BASED COMPENSATION

As of December 31, 2015, 6,719,123 shares of common stock were available for grant under the Company’s 2007 Equity Incentive Plan.

The following table summarizes the Company’s stock option activities for the nine months ended December 31, 2015:



			Weighted
		Number of Shares	Average	Weighted
	Shares	Underlying	Remaining	Average
	Available for	Options	Contractual	Exercise		Intrinsic
	Grant	Outstanding	Life (Years)	Price		Value
Balance at March 31, 2015	6,213,943	6,774,151		$	5.16
Options reserved	1,156,419	—			—
Granted	(661,103)	661,103			4.90
Exercised	—	(76,745)			4.19	$	46,977
Forfeited/expired	9,864	(19,864)			4.64
Balance at December 31, 2015	6,719,123	7,338,645		$	5.15
Options vested and exercisable		4,976,550	3.82	$	5.05	$	484,583
Options vested and expected to vest		7,290,669	5.22	$	5.14	$	484,583

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The weighted average fair value per underlying share of options granted during the three months ended December 31, 2015 and 2014 was $1.48 and $1.79, respectively and for the nine months ended December 31, 2015 and 2014 was $1.70 and $2.10, respectively.

Options outstanding by exercise price at December 31, 2015 were as follows:

Number of

Options Outstanding