MEMSIC Inc - FORM 10-Q - August 11, 2011

Attached files

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EX-4.4 - EXHIBIT 4.4 - MEMSIC Inc	ex4-4.htm
EX-31.2 - EXHIBIT 31.2 - MEMSIC Inc	ex_31-2.htm
EX-32.2 - EXHIBIT 32.2 - MEMSIC Inc	ex_32-2.htm
EX-32.1 - EXHIBIT 32.1 - MEMSIC Inc	ex_32-1.htm
EXCEL - IDEA: XBRL DOCUMENT - MEMSIC Inc	Financial_Report.xls
EX-31.1 - EXHIBIT 31.1 - MEMSIC Inc	ex_31-1.htm

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 June 30, 2011

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

For the transition period from to

Commission File No. 001-33813

MEMSIC, Inc.

(Exact name of registrant as specified in its charter)

Delaware		04-3457049
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

One Tech Drive, Suite 325 Andover, Massachusetts		01810
(Address of principal executive offices)		(Zip Code)

(978) 738-0900

(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 x No o

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 x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or 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.

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x

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

The number of shares of common stock, par value $0.00001 per share, of the registrant outstanding as of August 8, 2011 was 23,968,813.

MEMSIC, Inc.

FORM 10-Q, June 30, 2011

TABLE OF CONTENTS

		PAGE NO.

PART I.	FINANCIAL INFORMATION
ITEM 1.	Financial Statements
	Unaudited Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010	1
	Unaudited Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010	2
	Unaudited Consolidated Statement of Stockholders’ Equity	3
	Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010	4
	Notes to Unaudited Consolidated Financial Statements	5
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
ITEM 4.	Controls and Procedures	30
PART II.	OTHER INFORMATION
ITEM 1.	Legal Proceedings	31
ITEM 1A.	Risk Factors	31
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
ITEM 6.	Exhibits	31
Signatures

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

MEMSIC, Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
	June 30,			December 31,
	2011			2010

ASSETS
Current assets:
Cash and cash equivalents	$	50,475,499		$	55,694,205
Restricted cash		2,394,110			2,928,933
Short-term investments		1,353,672			-
Accounts receivable, net of allowance for doubtful accounts of $6,441 as of June 30, 2011 and December 31, 2010		6,423,290			3,664,444
Inventories		9,689,542			8,923,127
Other assets		2,919,670			2,537,445
Total current assets		73,255,783			73,748,154

Property and equipment, net		27,809,748			22,015,502
Long-term investments		4,820,000			5,020,000
Goodwill		4,997,441			4,919,513
Intangible assets, net		11,480,353			11,894,328
Other assets		28,789			67,599
Total assets	$	122,392,114		$	117,665,096

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	6,174,793		$	4,563,420
Accrued expenses		2,059,372			2,969,839
Advance research funding		2,394,110			2,928,933
Current portion of long-term debt		500,000			-
Total current liabilities		11,128,275			10,462,192

Note payable to bank		17,430,000			17,930,000
Building liability		5,625,000			-
Deferred rent		139,330			90,036
Total other liabilities		23,194,330			18,020,036

Stockholders’ equity:

Common stock, $0.00001 par value; authorized, 45,000,000 shares; 23,968,813 and 23,810,613 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively		240			238

Additional paid-in capital		100,450,269			99,615,378
Accumulated other comprehensive income		3,577,226			3,029,372
Accumulated deficit		(16,260,047	)		(13,823,565	)
MEMSIC, Inc. stockholders' equity		87,767,688			88,821,423

Non-controlling interest related to joint venture in Japan		301,821			361,445
Total stockholders' equity		88,069,509			89,182,868
Total liabilities and stockholders’ equity	$	122,392,114		$	117,665,096

See notes to consolidated financial statements (unaudited)

MEMSIC, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010

Net sales	$	15,372,634		$	9,095,626		$	28,327,554		$	16,367,619
Cost of goods sold		10,374,465			5,407,199			18,387,664			9,833,698
Gross profit		4,998,169			3,688,427			9,939,890			6,533,921

Operating expenses:
Research and development		2,112,136			2,035,088			4,409,973			4,008,745
Sales and marketing		1,529,907			1,108,852			2,994,653			2,180,330
General and administrative		2,519,970			2,328,037			4,774,230			4,313,086
Amortization expense		402,231			401,522			808,166			740,282
Total operating expenses		6,564,244			5,873,499			12,987,022			11,242,443

Operating loss		(1,566,075	)		(2,185,072	)		(3,047,132	)		(4,708,522	)

Other income:
Interest and dividend income		98,366			104,112			181,855			220,777
Foreign exchange gain		328,799			50,056			519,475			54,077
Other, net		13,844			37,702			82,420			51,210
Total other income		441,009			191,870			783,750			326,064

Loss before income taxes		(1,125,066	)		(1,993,202	)		(2,263,382	)		(4,382,458	)
Provision for (benefit from) income taxes		(3,084	)		941			114,310			(115,494	)
Net loss		(1,121,982	)		(1,994,143	)		(2,377,692	)		(4,266,964	)

Less: net income (loss) attributable to non-controlling interest		(13,681	)		(20,052	)		58,790			27,089
Net loss attributable to MEMSIC, Inc.	$	(1,108,301	)	$	(1,974,091	)	$	(2,436,482	)	$	(4,294,053	)

Net loss per common share to MEMSIC, Inc.:
Basic	$	(0.05	)	$	(0.08	)	$	(0.10	)	$	(0.18	)
Diluted	$	(0.05	)	$	(0.08	)	$	(0.10	)	$	(0.18	)

Weighted average shares outstanding used in calculating net loss per common share:
Basic		23,823,321			23,804,863			23,818,467			23,800,936
Diluted		23,823,321			23,804,863			23,818,467			23,800,936

See notes to consolidated financial statements (unaudited)

MEMSIC, Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited)
							Accumulated
					Additional		Other						MEMSIC, Inc.			Non-
	Common Stock				Paid-In		Comprehensive			Accumulated			Stockholders’			controlling			Total
	Shares		Par Value		Capital		Income			Deficit			Equity			Interest			Equity

Balance at December 31, 2010		23,810,613	$	238	$	99,615,378	$	3,029,372		$	(13,823,565	)	$	88,821,423		$	361,445		$	89,182,868

Net loss								-			(2,436,482	)		(2,436,482	)		58,790			(2,377,692	)
Foreign currency translation adjustment								548,665			-			548,665			(3,025	)		545,640
Unrealized loss on short-term investment								(811	)		-			(811	)		-			(811	)
Comprehensive loss								547,854			(2,436,482	)		(1,888,628	)		55,765			(1,832,863	)

Exercise of options to purchase common stock		158,200		2		40,661								40,663						40,663
Stock compensation expense						794,230								794,230						794,230
Dividend paid to non-controlling interest														-			(115,389	)		(115,389	)

Balance at June 30, 2011		23,968,813	$	240	$	100,450,269	$	3,577,226		$	(16,260,047	)	$	87,767,688		$	301,821		$	88,069,509

See notes to consolidated financial statements (unaudited)

MEMSIC, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Six Months Ended June 30,
	2011			2010

Cash flows from operating activities:
Net loss	$	(2,377,692	)	$	(4,266,964	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation		1,347,781			1,079,769
Amortization		807,221			740,282
Stock compensation expense		794,230			673,706
Deferred rent		49,294			(6,049	)
Deferred income taxes		33,806			(33,808	)
Changes in operating assets and liabilities, net of the effects of business acquisition:
Restricted cash		586,642			451,670
Accounts receivable		(2,749,001	)		(1,027,083	)
Inventories		(580,922	)		(618,969	)
Other assets		(446,651	)		(1,226,592	)
Advance research funding		(586,642	)		(451,670	)
Accounts payable and accrued expenses		607,563			3,467,504
Net cash used in operating activities		(2,514,371	)		(1,218,204	)

Cash flows from investing activities:
Purchase of short-term investments		(1,354,353	)		-
Proceeds from sale of long-term investments		200,000			180,000
Purchase of property and equipment		(1,095,474	)		(6,761,583	)
Acquisition payment net of acquired cash of $352,247		-			(17,647,753	)
Net cash used in investing activities		(2,249,827	)		(24,229,336	)

Cash flows from financing activities:
Cash dividend paid to non-controlling interest		(115,389	)		(56,838	)
Proceeds from exercise of options to purchase common stock		40,662			13,135
Proceeds from note payable to bank		-			17,930,000
Net cash provided by financing activities		(74,727	)		17,886,297

Effect of exchange rate changes on cash and cash equivalents		(379,781	)		2,682

Net decrease in cash and cash equivalents		(5,218,706	)		(7,558,561	)
Cash and cash equivalents —beginning of period		55,694,205			66,970,736
Cash and cash equivalents —end of period	$	50,475,499		$	59,412,175

Supplemental disclosures of cash flows information:
Building liability	$	5,625,000		$	-

See notes to consolidated financial statements (unaudited)

MEMSIC, Inc.

Notes to Unaudited Consolidated Financial Statements

1. NATURE OF THE BUSINESS AND OPERATIONS

MEMSIC, Inc. (the Company) was incorporated on March 3, 1999 as a Delaware corporation. The Company is a leading provider of semiconductor sensor systems solutions based on micro electromechanical systems (MEMS) technology and advanced integrated circuit design. The Company has integrated a MEMS technology-based inertial sensor, commonly known as an accelerometer, with mixed signal processing circuitry onto a single chip using a standard complementary metal-oxide-semiconductor (CMOS) process. This proprietary technology has allowed for sensor solutions at lower cost, higher performance and improved functionality. Utilizing a standard CMOS process allows easy integration of additional functions and the creation of new sensors to expand into magnetic, touch and flow sensors, as well as other MEMS application areas beyond accelerometers. Any application that requires the control or measurement of motion is a potential application for accelerometers. The Company’s sensor and solution products have a wide range of applications for consumer electronics, mobile phones, automotive (airbags, rollover detection, electronic stability control and navigation systems), as well as business, industrial and medical applications.

MEMSIC, Inc. maintains its corporate headquarters in Massachusetts. All manufacturing operations are provided by its wholly-owned subsidiary, MEMSIC Semiconductor (Wuxi) Company Limited (MEMSIC Semiconductor) and its indirect wholly owned subsidiary, MEMSIC Transducer Systems Company Limited, (MTS), which are located in the People’s Republic of China (PRC).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES

Principles of Consolidation

The accompanying unaudited consolidated financial statements include the accounts of the Company, MEMSIC Semiconductor, MTS and its majority owned and controlled joint venture, Crossbow Japan Limited (Crossbow Japan). The Company presents all of Crossbow Japan’s assets, liabilities, revenue and expenses, as well as the non-controlling interest in Crossbow Japan (representing the 49% equity interest in the entity not owned by the Company) in its consolidated financial statements. All significant intercompany balances and transactions have been eliminated in consolidation.

Unaudited Interim Financial Information

The accompanying interim consolidated financial statements are unaudited. These financial statements and notes should be read in conjunction with the audited consolidated financial statements and related notes, together with management’s discussion and analysis of financial condition and results of operations, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, which is on file with the Securities and Exchange Commission (SEC).

The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted pursuant to such SEC rules and regulations. In the opinion of management, the unaudited interim consolidated financial statements and notes have been prepared on the same basis as the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, and include all adjustments (consisting of normal, recurring adjustments) necessary for the fair presentation of the Company’s financial position at June 30, 2011, results of operations for the three and six months ended June 30, 2011 and 2010 and cash flows for the six months ended June 30, 2011 and 2010. The interim periods are not necessarily indicative of results to be expected for any other interim periods or for the full year.

Reclassification

Certain amounts in the accompanying 2010 financial statements related to amortization expense and foreign exchange gain have been reclassified to permit comparison with the accompanying interim 2011 financial statements.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect at the date of the financial statements the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Actual results could differ from these estimates.

Cash Equivalents

The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents.

Advance Research Funding

Advance research funding represents research funding granted by the Chinese government for specific research and development projects the Company is taking on. The amount received is initially recorded as a liability and subsequently recognized as a credit to research and development expenses in the statements of operations or property and equipment in the balance sheets as the Company performs the projects and has complied with the conditions or performance obligations attached to the related government grants.

Advance research funding activities for the six months ended June 30, 2011 are as follows:

Balance at January 1, 2011	$	2,928,933
Funds received		108,300
Research and development activities		(104,775	)
Property and equipment expenditures		(538,348	)
Balance at June 30, 2011	$	2,394,110

Foreign Currency

The Company’s manufacturing operations and certain other operations are conducted by MEMSIC Semiconductor and MTS. The functional currency of MEMSIC Semiconductor and MTS is the Renminbi. Financial transactions between the Company, MEMSIC Semiconductor and MTS are conducted in United States (U.S.) dollars. At June 30, 2011 and December 31, 2010, the underlying currency for approximately 54.0% and 51.1% of consolidated assets, respectively, was the Renminbi. The functional currency of Crossbow Japan is the Japanese Yen. Financial transactions between the Company and Crossbow Japan are conducted in U.S. dollars. At June 30, 2011 and December 31, 2010, the underlying currency for approximately 1.0% and 1.1% of consolidated assets, respectively, was the Japanese Yen. The Company has not utilized hedging strategies with respect to its foreign exchange exposure.

The financial statements of MEMSIC Semiconductor, MTS and Crossbow Japan are translated into U.S. dollars in accordance with U.S. GAAP. The functional currencies of MEMSIC Semiconductor, MTS and Crossbow Japan are translated into U.S. dollars utilizing the following method: assets and liabilities are translated at the exchange rate in effect at the end of the period, and revenues and expenses are translated at the weighted average exchange rate during the period. Cumulative translation gains and losses are included as a separate component of stockholders’ equity and reported as a part of other comprehensive income. Transaction gains and losses are included in the consolidated statements of operations as incurred.

Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments, which include cash equivalents, accounts receivable, accounts payable, notes payable and accrued expenses, approximate their fair values due to the short-term nature of the instruments.

Net Loss per Common Share

Basic net loss per share is calculated by dividing net loss by the weighted-average common shares outstanding during the period. Diluted net loss per share is calculated by dividing net loss by the weighted-average common shares and potentially dilutive securities outstanding during the period using the treasury stock method.

Income Taxes

Deferred tax assets and liabilities relate to temporary differences between the financial reporting basis and the tax basis of assets and liabilities, the carryforward tax losses and available tax credits. Such assets and liabilities are measured using tax rates and laws expected to be in effect at the time of their reversal or utilization. Valuation allowances are established, when necessary, to reduce the net deferred tax asset to an amount more likely than not to be realized. For interim reporting periods, the Company uses the estimated annual effective tax rate except with respect to discrete items, whose impact is recognized in the interim period in which the discrete item occurred.

Inventories

Inventories are stated at the lower of cost (weighted average FIFO) or market. The Company evaluates its inventory for potential excess and obsolete inventories based on forecasted demands and records a provision for such amounts as necessary. At June 30, 2011 and December 31, 2010, the Company’s total inventory reserve balances were $591,000 and $482,000, respectively.

Revenue Recognition

The Company recognizes revenue from the sale of its products to its customers when all of the following conditions have been met: (i) evidence exists of an arrangement with the customer, typically consisting of a purchase order or contract; (ii) the Company’s products have been shipped and risk of loss has passed to the customer; (iii) the Company has completed all of the necessary terms of the purchase order or contract; (iv) the amount of revenue to which the Company is entitled is fixed or determinable; and (v) the Company believes it is probable that it will be able to collect the amount due from the customer based upon an evaluation of the customer’s creditworthiness. To the extent that one or more of these conditions has not been satisfied, the Company defers recognition of revenue. An allowance for estimated future product returns and sales price allowances is established at the date of revenue recognition. An allowance for uncollectible receivables is established by a charge to operations when, in the opinion of the Company, it is probable that the amount due to the Company will not be collected.

The Company sells its products to distributors as well as to end customers. Sales to distributors are made pursuant to distributor agreements, which allow for the return of goods under certain circumstances upon authorization of the company. Accordingly, the Company follows the following criteria for recognition of sales to distributors: (i) the selling price to the distributor is fixed or determinable at the date of shipment; (ii) the distributor’s obligation to pay the selling price is not contingent on resale of the product; (iii) the Company’s product has been shipped and risk of loss has passed to the distributor; (iv) it is probable that the amount due from the distributor will be collected; (v) the Company does not have significant future obligations to directly assist in the distributor’s resale of the product; and (vi) the amount of future returns can be reasonably estimated. Once these criteria are met, the Company recognizes revenue upon shipment to the distributor and estimates returns based on historical sales returns.

Stock-Based Compensation

The Company accounts for share-based payments to employees based on requirements that all share-based payments to employees, including grants of employee stock options, shall be recognized in the financial statements based on their fair values. The cost of equity-based service awards is based on the grant-date fair value of the award and is recognized over the period during which the employee is required to provide service in exchange for the award (vesting period). Stock-based compensation arrangements with non-employees are accounted for utilizing the fair value method or, if a more reliable measurement, the value of the services or consideration received. The resulting compensation expense is recognized for financial reporting purposes over the term of performance or vesting.

Recent Accounting Pronouncements

In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements. ASU No. 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly expands required disclosures related to a vendor’s multiple-deliverable revenue arrangements. ASU No. 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption is permitted. A company may elect, but will not be required, to adopt the amendments in ASU No. 2009-13 retrospectively for all prior periods. The adoption of ASU 2009-13 did not have a material impact on the Company’s financial position or statement of operations.

3. LONG-TERM INVESTMENTS

Long-term investments held by the Company at June 30, 2011 and December 31, 2010 consisted primarily of auction rate securities, or ARS, and are considered available for sale. These securities reset the interest or dividend rates by auctions held at intervals of 7, 28, 35 or 49 days, and at such dates the Company has the option to sell such securities. The auction rate securities held by the Company have contractual maturities of greater than 10 years.

These investments are carried at fair value, with the unrealized gains and losses, if any, net of tax, reported in other comprehensive income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities are included in interest and dividend income. Quarterly, management reviews the valuation of investments and considers whether any decline in value is deemed to be other than a temporary decline.

At June 30, 2011, the Company held two ARS investments: Illinois Educational Facilities Authority Select Auction Variable Rate Securities having a value at par of $3.0 million with a maturity date in 2028 and Montana Health Facility Authority Select Auction Variable Rate Securities having a value at par of $2.2 million with a maturity date in 2017. The Company has classified these investments as long-term assets due to liquidity issues that have been experienced in global credit and capital markets as well as failed auctions since the first quarter of 2008. A failed auction means that the amount of securities submitted for sale at auction exceeded the amount of purchase orders. If an auction fails, the issuer becomes obligated to pay interest at penalty rates, and all of the auction rate securities the Company holds continue to pay interest in accordance with their stated terms. However, the failed auctions create uncertainty as to the liquidity of these securities.

Based on the Company’s expected operating cash flows, and other sources of cash, the Company does not expect the potential lack of liquidity in these investments to affect its ability to execute its current business plan in the near term.

Fair Value Measurement

The Company accounts for assets and liabilities recognized or disclosed in the financial statements at fair value on a recurring basis in accordance with the provisions of ASC Topic 820.

ASC Topic 820 provides that fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based on the highest and best use of the asset or liability. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. ASC Topic 820 requires the Company to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:

Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets

Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs

Level 3: Unobservable inputs for which there is little or no market data and which require the Company to develop its own assumptions about how market participants would price the assets or liabilities

The valuation techniques that may be used to measure fair value are as follows:

Market approach - Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities

Income approach - Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option-pricing models and excess earnings method

Cost approach - Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost)

The Company’s assets measured at fair value on a recurring basis during the period include (in thousands):

	Carrying amount as of								Valuation
	June 30, 2011		Level 1		Level 2		Level 3		Technique

Auction rate securities	$	4,820	$	-	$	-	$	4,820	(B)

The reconciliation of the Company’s assets measured at fair value on a recurring basis using unobservable inputs (Level 3) is as follows (in thousands):

	Auction Rate Securities

Balance at January 1, 2011	$	5,020
Redemptions		(200	)
Transfers to Level 3		-
Gains and losses:
Reported in earnings		-
Reported in other comprehensive loss		-
Balance at June 30, 2011	$	4,820

The Company historically accounted for the ARS held in its portfolio as available-for-sale investments. The carrying value of these ARS approximated fair value due to the frequent resetting of the interest rate. While the Company continues to earn interest at the specified contractual rate on those investments involved in failed auctions, due to the illiquidity of these securities under current market conditions, the Company has considered whether par value continues to be a reasonable basis for estimating the fair value of these ARS at June 30, 2011 and December 31, 2010. The Company estimated the fair value of these securities at June 30, 2011 and December 31, 2010 using broker valuations and internally-developed models of the expected future cash flows related to the securities as well as referencing a third party specialist’s valuation. One of the more significant assumptions made in the Company’s internally-developed models was the term of expected cash flows of the underlying auction rate securities and the discount related to the illiquidity of the investments. The Company developed several scenarios for the liquidation of the auction rate securities over periods that ranged from 3 to 7 years. In estimating the fair value of these investments, the Company considered the financial condition and near-term prospects of the issuers, the magnitude of the losses compared to the investments' cost, the length of time the investments have been in an unrealized loss position, the low probability that the Company will be unable to collect all amounts due according to the contractual terms of the security, whether the security has been downgraded by a rating agency, and the Company’s ability and intent to hold these investments until the anticipated recovery in market value occurs. Based on its estimated operating cash flows and other sources of cash, the Company intends to hold these auction rate securities for the foreseeable future, if necessary.

The Company’s valuation analysis in the second quarter of 2011 resulted in no change to the unrealized impairment loss on record at December 31, 2010. As of June 30, 2011, the unrealized impairment loss is $400,000. The Company continues to monitor the market for auction rate securities and to assess its impact on the fair value of the Company’s investments. If current market conditions deteriorate further, the Company may be required to record additional temporary unrealized losses in other comprehensive loss or, if the decline in fair value is judged to be other-than-temporary, the cost basis of the individual security may be written down to fair value as a new cost basis and the amount of the write-down would be reflected as a charge to earnings.

4. INVENTORIES

Inventories consist of the following:

	June 30,		December 31,
	2011		2010
Raw materials	$	4,473,900	$	3,583,679
Work in process		3,225,898		3,276,095
Finished units		1,989,744		2,063,353
Total	$	9,689,542	$	8,923,127

5. GOODWILL AND INTANGIBLE ASSETS

Goodwill

Goodwill represents the excess cost of the Crossbow asset acquisition over the net fair value allocated to the assets acquired and liabilities assumed and to the acquired intangible asset that does not qualify for separate recognition according to ASC 805. The Company reported goodwill of $4,997,441 at June 30, 2011 which includes foreign exchange impact $77,928 for the six months ended June 30, 2011.

The Company performed an annual impairment test for goodwill during the fourth quarter of 2010 and concluded that no impairment existed as of December 31, 2010. It is the Company’s opinion that there has been no change in circumstances that would indicate a potential impairment as of June 30, 2011. The Company will continue to perform an annual impairment test for goodwill during the fourth quarter of each fiscal year, and more frequently if an event or circumstances indicate that an impairment loss has been incurred. Conditions that would trigger an impairment assessment include, but are not limited to, a significant adverse change in legal factors or business climate that could affect the value of an asset.

Intangible Assets

Intangible assets relate to issued and applied-for patents on the Company’s core technology and gas meter processing know-how purchased in May 2008, as well as trademarks, customer relationships and developed technology acquired from Crossbow Technology, Inc. on January 15, 2010.

As of June 30, 2011, intangible assets consisted of the following:

	Gross carrying amount		Accumulated amortization			Net carrying amount		Expected life (Years)

Patents	$	1,160,575	$	(246,445	)	$	914,130		15
Know-how		569,760		(339,042	)		230,718		5
Trademarks		396,730		(289,282	)		107,448		2
Customer relationships		4,715,056		(746,253	)		3,968,803		8-10
Developed technology		7,346,953		(1,087,699	)		6,259,254		8-10
	$	14,189,074	$	(2,708,721	)	$	11,480,353

Amortization expense expected over the next five years is approximately $1.4 million per year. Amortization expense amounted to $808,000 and $740,000, respectively for the six months ended June 30, 2011 and 2010.

The Company has considered the cash flows associated with the valuation of the definite-lived intangible assets and concluded that the straight line method best approximates the economic pattern of usefulness of those assets.

6. NOTE PAYABLE TO BANK

On June 30, 2010, MTS, a wholly owned subsidiary of MEMSIC Semiconductor, entered into a five-year project loan agreement with Agricultural Bank of China. The total loan available is $20 million, of which $15 million was used by the Company for the purchase of substantially all the assets acquired from Crossbow Technology, Inc., $3 million for working capital purposes and $2 million for the purchase of equipment to be used in the manufacture of the Company’s system solution products.

The loan is collateralized by the buildings and land owned by MEMSIC Semiconductor as well as the land and intellectual property owned by MTS. The interest rate of the loan is a variable rate, adjusted semi-annually based on the LIBOR rate plus 4.00%. MTS has obtained agreement from the local government in Wuxi, China to fully subsidize the interest expense on a quarterly basis. There are no financial covenants required for this loan. As of June 30, 2011, MTS has withdrawn an amount of $17.9 million and has $2.1 million available for borrowing. Interest expense paid and subsidized by the Wuxi government for the three and six months ended June 30, 2011 was $0.2 million and $0.4 million respectively. Based on the terms of the agreement, there are no circumstances in which amounts previously subsidized by the Wuxi government are repayable by the Company. In the remote event the Wuxi government is unable to fulfill its obligation, the Company would recognize the interest expense in its income statement. The repayment schedule of the principal amount is as follows:

Date	Payment Amount
June 29, 2012	$	500,000
June 29, 2013	$	1,000,000
June 29, 2014	$	2,500,000
June 29, 2015	$	13,930,000
	$	17,930,000

7. BUILDING LIABILITY

At June 30, 2011, the Company recorded a building liability in the amount of $5.6 million related to the construction of the new MTS facility in Wuxi, China, which is based upon an estimate of total construction costs incurred to date. The construction site is located on the same property as our June 2010 land purchase. Construction of the facility started in August of 2010 and is expected to be completed in August 2011. The construction is financed by the local Chinese government. Per agreement with the local Chinese government, at the completion of the building, the Company can either lease the building for five years or purchase the building at cost from the government.

8. STOCK BASED COMPENSATION

Description of Plan

On March 29, 2000, the Company’s stockholders and board of directors approved the 2000 Omnibus Stock Plan (the “2000 Plan”), as amended, under which 2,969,000 shares of the Company’s common stock were reserved for issuance to directors, officers, employees, and consultants. With the adoption of the 2007 Plan discussed below, the Company no longer grants awards under the 2000 Plan.

On August 22, 2007, the Company’s board of directors approved the 2007 Stock Incentive Plan (the “2007 Plan”), under which up to 3,000,000 shares of the Company’s common stock may become available for issuance. At the adoption date, 1,526,425 shares were reserved for issuance. The reserved amount will increase by 300,000 shares at each of the five anniversaries of the adoption date, for a maximum of 3,000,000 shares issuable under the 2007 Plan.

Options granted under the 2000 Plan and the 2007 Plan may be incentive stock options or nonqualified stock options. Both the 2000 Plan and the 2007 Plan provide that the exercise price of incentive stock options must be at least equal to the market value of the Company’s common stock at the date such option is granted. For incentive stock option grants to an employee who owns more than 10% of the outstanding shares of common stock of the Company, the exercise price on the incentive stock option must be 110% of market value at the time of grant. Granted options expire in ten years or less from the date of grant and vest based on the terms of the awards, generally ratably over four years.

Prior to December 19, 2007, there was no public market for the Company’s common stock. Accordingly, the board of directors determined the market value of the common stock at the date of grant by considering a number of relevant factors, including the Company’s operating and financial performance and corporate milestones achieved, the prices at which shares of convertible preferred stock in arm’s-length transactions were sold, the composition of and changes to the management team, the superior rights and preferences of securities senior to the common stock at the time of each grant and the likelihood of achieving a liquidity event for the shares of common stock underlying stock options.

On December 9, 2009, the Company’s board of directors approved the 2009 Nonqualified Inducement Stock Option Plan (the “2009 Plan”) with an effective date on January 15, 2010, the closing date of the acquisition of Crossbow assets. Under the 2009 Plan, up to 1,250,000 shares of the Company’s common stock may become available for issuance. On December 23, 2010, the Company’s board of directors approved an Amended and Restated 2009 Nonqualified Inducement Stock Option Plan (the “Amended and Restated Plan”) and an increase in shares of the Company’s common stock available for issuance under the Amended and Restated Plan from 1,250,000 to 2,500,000. Except as otherwise determined by the Compensation Committee of the Company’s board of directors, the form of option to be employed under the Amended and Restated Plan shall be substantially identical to the form of nonqualified option customarily used under the Company’s 2007 Stock Incentive Plan.

On June 29, 2011 at its Annual Meeting of Stockholders, the Company’s stockholders approved the Amendment and Restatement of the Company’s 2007 Plan. The Amended and Restated 2007 Plan

permits the granting of restricted stock units (“RSU”), performance-based stock awards and stock appreciation rights;

eliminates the ability to reprice options;

extends the expiration date of the plan to June 29, 2021;

provides that awards may qualify as “performance-based compensation” under Section 162(m) of the Internal Revenue Code of 1986, as amended; and

incorporates certain other administrative provisions.

The approval of the amendment and restatement of the 2007 Plan does not change the number of shares available for awards under the 2007 Plan.

Valuation of Stock Options

The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value of an option award. The weighted-average fair value per share of the options granted during the three and six months ended June 30, 2011 was $1.97, while the weighted-average fair values per share of the options granted during the three and six months ended June 30, 2010 were $2.07 and $2.12, respectively, utilizing the following assumptions:

	Three months ended				Six months ended
	June 30,				June 30,
	2011		2010		2011		2010
Volatility		64%		67%		64%		67% - 70$
Expected dividend yield		0%		0%		0%		0%
Expected life	5.6 years		6.0 years		5.6 - 5.8 years		5.0 - 6.0 years
Risk free interest rate		2.20%		2.65%		2.20% - 2.34%		2.42% - 2.65%
Forfeitures		37%		36%		36% - 37%		36%- 37%

The Company is responsible for estimating volatility and has considered a number of factors, including analysis of volatility data for a peer group of companies. The Company determined the volatility for options granted in the six months ended June 30, 2011 based on the historical volatility of the Company’s common stock, which the Company believes results in the best estimate of the grant-date fair value of employee stock options because it reflects the market’s current expectations of future volatility. Prior to January 1, 2010, due to limited historical information on the volatility of the Company’s common stock, the Company determined the volatility for options based on an analysis of reported data for a peer group of companies that issued options with substantially similar terms. The expected volatility of options granted was determined using an average of the historical volatility measures of this peer group of companies for a period equal to the expected life of the option.

The Company has not paid and does not anticipate paying cash dividends on its shares of common stock; therefore, the expected dividend yield is assumed to be zero.

The Company uses historical employee exercise and option expiration data to estimate the expected life assumption for the Black-Scholes grant-date valuation. The Company believes that this historical data is currently the best estimate of the expected term of a new option, and generally its employees exhibit similar exercise behavior.

The risk-free interest rate is based on a zero coupon United States treasury instrument whose term is consistent with the expected life of the stock options. The Company applies an estimated forfeiture rate, based on its historical forfeiture experience, in determining the expense recorded in the Company’s consolidated statement of operations.

For the three months ended June 30, 2011 and 2010, the Company recorded stock-based compensation expense of $392,814 and $290,217, respectively. For the six months ended June 30, 2011 and 2010, the Company recorded stock-based compensation expense of $749,230 and $673,706, respectively. Stock-based compensation expense related to stock options for the three and six months ended June 30, 2011 and 2010 was allocated as follows:

	Three months ended				Six months ended
	June 30,				June 30,
	2011		2010		2011		2010

Research and development	$	63,385	$	26,230	$	184,579	$	65,087
Sales and marketing		21,914		40,284		87,929		85,057
General and administrative		307,515		223,703		521,722		523,562
Total	$	392,814	$	290,217	$	794,230	$	673,706

The Company has historically accounted for stock options granted to consultants using the fair value method for the calculation of compensation cost. For the three and six months ended June 30, 2011, the Company recorded compensation expense for stock option grants to consultants in the amount of $6,700 and $17,000, respectively. The Company has no compensation expense for stock option grants to consultants in the first six months of 2010.

The Company accounted for restricted stock awards (“RSA”) and RSUs using the fair value at the date of the grant for the calculation of compensation cost. For the three and six months ended June 30, 2011, the Company recorded compensation expense for RSAs and RSUs in the amount of $64,000.

At June 30, 2011, total unrecognized stock-based compensation expense for stock options, RSAs and RSUs granted to the Company’s employees and directors was estimated to approximate $4.0 million. The total unrecognized stock-based compensation expense related to the non-qualified common stock option grants to consultants expected to be charged to operations was estimated to approximate $4,000 at June 30, 2011.

The stock option activity under the 2000, 2007 and 2009 Plans for the six months ended June 30, 2011 is as follows:

				Weighted		Remaining
	Options			Average		Contractual		Aggregrate
	Outstanding			Exercise Price		Term in Years		Intrinsic Value

Options outstanding at December 31, 2010		2,588,080		$	4.76		7.4	$	1,863,883

Granted		645,000			1.61
Exercised		(18,200	)		2.23
Cancelled		(223,750	)		3.28

Options outstanding at June 30, 2011		2,991,130		$	4.21		7.5	$	2,978,073

Options exercisable at June 30, 2011		1,201,105		$	4.36		6.0	$	1,355,303

Options available for grant at June 30, 2011		2,727,900

The intrinsic values (aggregate market value of the underlying common stock minus aggregate exercise price) of stock options exercised during the three and six months ended June 30, 2011 were $16,600 and $21,600, respectively. The total fair value of options which became exercisable during the three and six months ended June 30, 2011 were approximately $158,000 and $397,000, respectively. The total fair value of options which became exercisable during the three and six months ended June 30, 2010 were approximately $62,000 and $177,000, respectively.

9. COMPREHENSIVE LOSS

Comprehensive loss is defined to include all changes in stockholders’ equity during the period other than those changes that result from investments by and distributions to stockholders. For the three and six months ended June 30, 2011 and 2010, the Company’s comprehensive loss is the sum of net loss, unrealized loss on investment and the foreign currency translation adjustment, as follows:

	Three months ended June 30,						Six months ended June 30,
	2011			2010			2011			2010

Net loss attributable to MEMSIC, Inc.	$	(1,108,301	)	$	(1,974,091	)	$	(2,436,482	)	$	(4,294,053	)
Other comprehensive income (loss):
Unrealized loss on investments		(811	)		-			(811	)		-
Foreign currency translation adjustment		361,962			180,659			548,665			185,245

Comprehensive loss attributable to MEMSIC, Inc.		(747,150	)		(1,793,432	)		(1,888,628	)		(4,108,808	)
Net income (loss) attributable to noncontrolling interest		(13,681	)		(20,052	)		58,790			27,089
Foreign currency translation adjustment		-			-			(3,025	)		-
Comprehensive loss attributable to noncontrolling interest		(13,681	)		(20,052	)		55,765			27,089
Total comprehensive loss	$	(760,831	)	$	(1,813,484	)	$	(1,832,863	)	$	(4,081,719	)

10. COMMON STOCK

The Company reserved 5,719,030 and 4,208,954 shares at June 30, 2011 and 2010, respectively for issuance upon exercise of options to purchase common stock.

11. NET LOSS PER COMMON SHARE

The calculation of the numerator and denominator for basic and diluted net loss per common share is as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Numerator:
Net loss attributable to MEMSIC, Inc.	$	(1,108,301	)	$	(1,974,091	)	$	(2,436,482	)	$	(4,294,053	)

Denominator:
Basic weighted average shares		23,823,321			23,804,863			23,818,467			23,800,936
Dilutive effect of common stock equivalents		-			-			-			-
Diluted weighted average shares		23,823,321			23,804,863			23,818,467			23,800,936

Net loss per common share	$	(0.05	)	$	(0.08	)	$	(0.10	)	$	(0.18	)

During the six months ended June 30, 2011 and 2010, the Company had 1.0 million and 1.6 million, respectively, dilutive potential common shares in the form of stock options which were not included in the computation of net loss per diluted share because these stock options would be anti-dilutive.

12. SEGMENT INFORMATION

The Company conducts its operations and manages its business in two reporting segments. The Company develops, designs, manufactures and markets (i) semiconductor sensor products (“sensor products”) based on MEMS technology and advanced integrated circuit design, and (ii) sensor system solution products (“system solution products”) which incorporates sensors with on-board computing, wireless communications and systems and application software solutions. In making operating decisions, the Company’s chief executive officer, who is the chief operating decision maker, considers the gross profit results of the sensor product unit and the system solution product unit separately, but utilizes enterprise wide operating expense and earning results.

Revenues and gross profit by reportable segment

	Three months ended June 30,				Six months ended June 30,
	2011		2010		2011		2010
Revenue
Sensor products	$	12,742,245	$	6,296,037	$	22,978,347	$	11,254,103
System solution products		2,630,389		2,799,589		5,349,207		5,113,516
Total	$	15,372,634	$	9,095,626	$	28,327,554	$	16,367,619

Gross Profit
Sensor products	$	3,695,571	$	2,355,361	$	7,037,849	$	4,152,505
System solution products		1,302,598		1,333,066		2,902,041		2,381,416
Total	$	4,998,169	$	3,688,427	$	9,939,890	$	6,533,921

Revenues by product application

The categorization of revenue by product application is determined using a variety of data points including the technical characteristics of the product, the end customer product and application into which the Company’s product will be incorporated.

	Three months ended June 30,				Six months ended June 30,
	2010		2009		2011		2010
Mobile phone	$	7,493,107	$	842,619	$	12,152,859	$	2,098,580
Consumer		1,255,118		1,763,350		2,632,320		2,669,394
Automotive		3,459,332		3,200,110		7,300,479		5,637,673
Industrial/other		3,165,077		3,289,547		6,241,896		5,961,972
Total	$	15,372,634	$	9,095,626	$	28,327,554	$	16,367,619

Revenues by geographical region

Revenue by geographic region, based upon customer location, for the three and six months ended June 30, 2011 and 2010 was as follows:

	Three months ended June 30,				Six months ended June 30,
	2011		2010		2011		2010
Asia (excluding Japan)	$	8,677,298	$	2,512,086	$	14,917,216	$	5,040,180
Europe		708,644		1,014,929		1,683,888		1,739,964
Japan		1,306,243		1,379,374		3,226,937		2,534,582
North America		4,596,375		4,013,074		8,335,571		6,810,125
Other		84,074		176,163		163,942		242,768
Total	$	15,372,634	$	9,095,626	$	28,327,554	$	16,367,619

Total Assets by geographical region

Total assets by geographical region are as follows:

	June 30,		December 31,
	2011		2010

United States	$	55,080,263	$	56,250,073
China		66,095,547		60,172,360
Japan		1,216,304		1,242,663
Total	$	122,392,114	$	117,665,096

Total long-lived assets by geographical region are as follows:

	June 30,		December 31,
	2011		2010

United States	$	973,622	$	1,034,156
China		26,834,987		20,980,268
Japan		1,139		1,078
Total	$	27,809,748	$	22,015,502

13. CONTINGENCIES

The Company may be subject to claims that arise out of the ordinary course of business in legal disputes. In management’s opinion, these matters will not have a material adverse effect on the financial position of the Company.

14. SUBSEQUENT EVENTS

The Company evaluated subsequent events occurring after June 30, 2011 through the date of filing these financial statements, and concluded that there was no event of which management was aware that occurred after the balance sheet date that would require any adjustment to the accompanying consolidated financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This information should be read in conjunction with the unaudited consolidated financial statements and related notes included in Item 1 of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

This quarterly report on Form 10-Q contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include any expectation of earnings, revenues,or other financial items; any statements of the plans, strategies and objectives of management for future operations; factors that may affect our operating results; statements concerning new products or services; statements related to future capital expenditures; statements related to future economic conditions or performance; statements as to industry trends and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. These statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “will,” “plan,” “target,” “continue,” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere in this Form 10-Q and in our other filings with the SEC. Furthermore, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

We provide advanced semiconductor sensor and system solutions based on integrated MEMS technology and mixed signal circuit design. We operate and manage our business in two reporting segments. We develop, design, manufacture and market:

·	semiconductor sensor products, which we refer to as sensor products, based on MEMS technology and advanced integrated circuit design; and

·	sensor system solution products, which we refer to as system solution products, which incorporate sensors with on-board computing, wireless communications and systems and application software solutions.

In making operating decisions, our chief executive officer, who is the chief operating decision maker, considers the gross profit results of the sensor product segment and the system solution product segment separately, but utilizes enterprise wide operating expense and earning results.

Our sensor products combine proprietary thermal-based MEMS technology and advanced analog mixed signal processing circuitry design into a single chip using a standard CMOS process. This approach allows us to provide sensor solutions at a lower cost, with higher performance and greater functionality than our competitors. In addition, our technology platform allows us to easily integrate additional functions or create new sensors to expand into magnetic, touch and flow sensors and related applications. Our sensor products have a wide range of applications such as mobile phones, automotive safety systems and video projectors.

Our system solution products, initially acquired from Crossbow Technology, Inc. in January 2010, consist of wireless sensors that connect the physical environment with enterprise management and information systems to provide advanced monitoring, automation and control solutions for a range of industries, as well as inertial systems that provide end-users and systems integrators with MEMS-based solutions for measurement of static and dynamic motion in a wide variety of challenging environments, including avionics, remotely operated vehicles, agricultural and construction vehicles, automotive test and wind power turbines.

We manufacture our sensor products utilizing a “semi-fabless” model by outsourcing the production of CMOS wafers and completing the post-CMOS MEMS process in-house. By outsourcing the standard CMOS manufacturing process, we are able to more efficiently manage our capital expenditures and cost of goods sold. The system solution products were initially manufactured for us by Crossbow under a manufacturing agreement that we entered into in connection with the acquisition. We are in the process of migrating the manufacture of these products to China, with the objective of outsourcing most of the assembly process to third-party contract assembly vendors and performing final testing and programming functions in-house at our facility in Wuxi.

We sell our products either to distributors, which then resell to original equipment manufacturers, (“OEMs”) and original design manufacturers, (“ODMs”), or to OEM and ODM customers directly. Historically, a small number of our customers have accounted for a substantial portion of our revenue, and sales to our largest distributor customers and OEM and ODM customers have varied significantly. This significant variation is in part due to the fact that our sales are made on the basis of purchase orders rather than long-term contracts. Although our distributors generally provide us with non-binding rolling forecasts, our distributors generally have up to 30 days prior to delivery to cancel or reschedule shipments pursuant to our distribution agreements. This arrangement has added to the fluctuation and unpredictability of our sales. Because our products are a component of our customers’ products, our sales performance is significantly affected by the sales performance of our customers’ products. It is difficult for us to accurately forecast our product demand because in the case where we sell our products to distributors, we may not know the identity of the distributor’s OEM and ODM customers and information regarding their demand.

OEM and ODM customers’ products are complex and require significant time to define, design and ramp to volume production. Our sales cycle begins with our marketing and sales staff and application engineers engaging with our OEM and ODM customers’ system designers and management, which is typically a multi-month, or even multi-year, process. If this process is successful, an OEM and ODM customer will decide to incorporate our solution in its product, which we refer to as a design-win. Because the sales cycles for our products are long, we incur expenses to develop and sell our products, regardless of whether we achieve the design-win and well in advance of generating revenue, if any, from those expenditures. Although we do not have long-term purchase commitments from any of our distributor customers or OEM and ODM customers, once one of our products is incorporated into an OEM’s or ODM’s design, it is likely to remain a part of the design for the life cycle of its product. We believe this to be the case because a redesign would generally be time consuming and expensive.

Description of Certain Line Items

Net Sales

Net sales represent gross revenue net of an allowance for the estimated amount of product returns and sales rebates from our customers. Sales to distributors are made pursuant to distributor agreements, which allow for the return of goods under certain circumstances upon authorization of the Company. We recognize revenue in accordance with ASC Topic 605-15, Revenue Recognition. We sell our products to distributors as well as end customers.

Historically, our revenue has been derived primarily from shipments of our accelerometer products. As a result of our Crossbow acquisition in January 2010, our revenue has expanded to include net sales from system solution products, which accounted for 18.9% of our net sales in the first six months of 2011. The primary factors that affect our revenue are the sales volumes and average selling prices of our products. Growth in our net sales has generally been attributable to the increase in the unit volumes of our products, as the average selling prices of our products generally decline due to the following factors, among others:

●

The semiconductor market is highly competitive, and as a result, the average selling prices of particular products generally experience rapid declines over the course of their respective product and technology life cycles. This trend has been particularly evident in the market for mobile phone applications. We seek to mitigate the impact of this trend on our business by continuing to rapidly design, develop and sell new generations of products with additional functionalities to replace older generation products;

●

We may also reduce our product prices as we are able to increase our production yields by continuously improving the manufacturing efficiency or to reduce our manufacturing costs by re-engineering our product and reducing the overall material cost;

●

Changes in our product mix may affect the average selling prices of our products. For example, our products for consumer and mobile phone markets generally have lower average selling prices than products for the automotive and industrial markets. The average selling prices of products may also be affected by our strategy to increase market adoption of our products in certain markets; and

●

We occasionally grant discounts or modified payment terms to our large customers or OEM and ODM customers for high volume purchases.

Net Sales by Reportable Segment

Our sales consist of two reportable segments: sensor products that are used as components in our customers’ products and system solution products that incorporate sensors with on-board computing, wireless communications and systems and application software solutions and offer a complete system solution to our customers. The following table sets forth our net sales by reportable segment for the periods indicated by amount and as a percentage of our net sales (dollar amounts in thousands).

	Three months ended June 30,										Six months ended June 30,
	2011					2010					2011					2010
	Amount		% of Sales			Amount		% of Sales			Amount		% of Sales			Amount		% of Sales

Sensor products	$	12,742		82.9	%	$	6,296		69.2	%	$	22,978		81.1	%	$	11,254		68.8	%
System solution products		2,630		17.1			2,800		30.8			5,349		18.9			5,114		31.2
Total	$	15,372		100.0	%	$	9,096		100.0	%	$	28,327		100.0	%	$	16,368		100.0	%

Sales from sensor products increased primarily due to a significant increase in our magnetic sensor sales in the mobile phone applications and steady year over year increases in sales in the automotive applications.

Net Sales by Application

In the first six months of 2011, net sales from mobile phone applications were the largest component of our total sales, representing 42.9% of total net sales. The increase was primarily due to increased magnetic sensor sales to a major mobile phone manufacturer. We expect that net sales from mobile phone applications will continue to be a major component of our total sales for the remainder of 2011 as we are increasing design-in activities with our magnetic sensor product into smart phone applications.

Net sales from automotive applications were the second largest component of our total sales, representing 25.8% of total net sales. We expect our sales from automotive applications will remain strong with our new application and the recovery of the automotive market. To increase net sales from the automotive market, we will continue to seek to increase sales from new automotive applications and to expand our customer base. However, revenue increases, if any, from the automotive market will require significant time, as the development lead time in this market is generally longer than other markets in which we participate.

Net sales from industrial and other applications increased in absolute terms in the first six months of 2011 compared to the corresponding period of 2010 mainly due to the fact that the 2011 results represented a full two quarters of operations whereas the corresponding results for the six months ended June 30, 2010 only covered results from the date of the Crossbow acquisition, or January 15, 2010, forward.

Net sales from consumer applications stayed flat in absolute terms in the first six months of 2011 compared to the corresponding period of 2010. Net sales from consumer applications have fluctuated historically as a result of the generally short life cycle of consumer electronics and changes in our customer base. As our product offering and customer base for consumer applications continue to diversify, we expect net sales from consumer applications to fluctuate less.

The following table sets forth our net sales by application for the periods indicated by amount and as a percentage of our net sales (dollar amounts in thousands).

	Three months ended June 30,										Six months ended June 30,
	2011					2010					2011					2010
	Amount		% of Sales			Amount		% of Sales			Amount		% of Sales			Amount		% of Sales
Mobile phone	$	7,493		48.7	%	$	843		9.3	%	$	12,153		42.9	%	$	2,099		12.8	%
Consumer		1,255		8.2			1,763		19.4			2,632		9.3			2,669		16.3
Automotive		3,459		22.5			3,200		35.2			7,300		25.8			5,638		34.5
Industrial/other		3,165		20.6			3,290		36.1			6,242		22.0			5,962		36.4
Total	$	15,372		100.0	%	$	9,096		100.0	%	$	28,327		100.0	%	$	16,368		100.0	%

Net Sales by Customer Base

Our customers primarily consist of distributors, OEMs and ODMs. Historically, a small number of our customers have accounted for a substantial portion of our net sales. We have customers representing 10% or more of our net sales, which combined accounted for approximately 50.7% of our net sales in the second quarter of 2011 compared with 29.2% in the corresponding period of 2010. The increase in 2011 over the prior year period is primarily due to the increase in sales of magnetic sensor product to a major cell phone manufacturer.

We have experienced and will continue to experience fluctuations in demand from a significant number of customers, including many of our largest customers. It is difficult for us to accurately forecast our product demand, particularly in the case of sales to our distributors, as we may not know the identity of the distributor’s OEM and ODM customers and lack information regarding their demand, and recent adverse macro-economic changes have increased the difficulty of accurately forecasting product demand and revenue. Occasionally, design changes in the products of our OEM and ODM customers have resulted in the loss of sales.

Net Sales by Geography

Our products are shipped to OEM and ODM customers worldwide. However, we focus on different application markets among geographical regions. In Asia (excluding Japan), our revenue is primarily derived from products for mobile phone applications. We are also seeking to expand the consumer and industrial applications markets in that region. In Japan, our revenue has primarily been derived from products for consumer applications, particularly projectors. We are also seeking to penetrate the automotive market in Japan. In North America, our revenue has primarily been derived from products for automotive applications. In Europe, our revenue has fluctuated. The Crossbow acquisition has broadened our sales in the industrial and other markets in North America, Japan and Europe.

The following table sets forth our net sales by geographical region for the periods indicated by amount and as a percentage of our net sales (dollar amounts in thousands).

	Three months ended June 30,										Six months ended June 30,
	2011					2010					2011					2010
	Amount		% of Sales			Amount		% of Sales			Amount		% of Sales			Amount		% of Sales
Asia (excluding Japan)	$	8,677		56.4	%	$	2,512		27.6	%	$	14,917		52.7	%	$	5,040		30.8	%
Europe		709		4.6			1,015		11.2			1,684		5.9			1,740		10.6
Japan		1,306		8.5			1,379		15.2			3,227		11.4			2,535		15.5
North America		4,596		29.9			4,013		44.1			8,335		29.4			6,810		41.6
Other		84		0.6			177		1.9			164		0.6			243		1.5
Total	$	15,372		100.0	%	$	9,096		100.0	%	$	28,327		100.0	%	$	16,368		100.0	%

The increase in net sales to Asia is mainly attributable to increased magnetic sensor sales to a major mobile phone manufacturer.

Cost of Goods Sold

We are a semi-fabless company. For our sensor products, we outsource wafer production to third-party foundries and complete the post-CMOS MEMS and most of the packaging, assembly and testing functions in-house. We also purchase our ceramic packaging materials from third-party suppliers. Cost of goods sold consists of: (i) cost of wafer, ceramic and other materials purchased from third parties; (ii) manufacturing overhead, primarily consisting of salaries and wages of our quality control employees and manufacturing-related management employees, depreciation, and equipment and parts; (iii) direct labor, primarily consisting of salaries and wages of our manufacturing operators; and (iv) outsourced processing fees paid to our third-party packaging service providers.

Our relationships with third-party foundry and packaging service providers do not provide for guaranteed levels of production capacity at pre-determined prices. As a result, our outsourcing costs relating to wafer production, and to a lesser extent, packaging services, are susceptible to sudden changes based on conditions in the global semiconductor market and our service providers’ available capacity.

During the first six months of 2011, our wireless system solution products and part of the inertial system solution products were manufactured by our indirect subsidiary MTS in Wuxi. We are still in the process of transitioning the manufacturing of the rest of the non-FAA inertial system products from Crossbow Technology to MTS and expect to complete the transition by the end of this year. Meanwhile, we’ve extended the manufacturing agreement with Crossbow Technology for another 12-month support of manufacturing the non-FAA certified products and 24-month support of manufacturing the FAA certified products.

Gross Profit and Gross Margin

Recently our gross profit and gross margin from our sensor product have tended to decrease due to a variety of factors, including average selling prices of our products, our product application mix, prices of wafers, excess and obsolete inventory, pricing by competitors, changes in production yields, and percentage of sales conducted through distributors. Our products for mobile phone and consumer applications have historically had lower margins than our products for automotive and industrial applications. We expect average gross margin will continue to decrease as the net sales to mobile phone application increase as a percentage of total sales. Notwithstanding the relatively lower margin in the mobile phone applications market, we will seek to increase our market share in that market by introducing improved low cost sensor products because of the significant potential for further revenue growth in the mobile phone applications market.

The gross margin from systems solution products in the first six months of 2011 are beginning to reflect the reduced cost associated with our transfer of manufacturing to our Wuxi, China operations. We expect the gross margins for our system solution products will continue to increase as we complete the transition to in-house manufacturing in China.

Research and Development Expenses

Research and development expenses are recognized as they are incurred and primarily consist of salaries and wages of research and development employees; research costs, primarily consisting of mask costs and prototype wafers, consulting fees paid for outside design services; travel and other expenses; and stock-based compensation attributable to our research and development employees.

Historically, research and development expenses have increased both in absolute terms and as a percentage of total net sales. We expect our research and development expenses in absolute terms to continue to increase for the remainder of 2011 as we seek to diversify into non-accelerometer products. However, research and development expenses as a percentage of total net sales are expected to decline as our total net sales continue to increase.

Sales and Marketing Expenses

Sales and marketing expenses primarily consist of wages, salaries and commissions for our sales and marketing personnel; consulting expenses, primarily consisting of sales consulting services and software application consulting services; travel expenses; independent sales representatives’ commissions; office rental; market promotion and other expenses and stock-based compensation. We expect sales and marketing expense to continue to increase for the remainder of 2011 as we continue to invest in sales and marketing resources to develop new market applications, expand our sales marketing network and engage in additional marketing and promotional activities.

General and Administrative Expenses

General and administrative expenses primarily consist of salaries and wages for administrative personnel; costs for professional services, including legal, tax and accounting services; depreciation and amortization expenses for non-manufacturing equipment; travel and entertainment expenses; office supply and other office-related expenses; office rental expenses; other expenses, such as utilities, insurance and provision for accounts receivable; and stock-based compensation.

Other Income (Expense)

Other income (expense) primarily consists of interest income earned on our investments of cash and cash equivalents, and interest expense incurred on our borrowings and net foreign currency exchange gains and losses.

Provision for Income Taxes

We conduct sensor sales through our headquarters in Andover, Massachusetts. Our Wuxi subsidiary is primarily engaged in manufacturing and engineering activities and does not conduct direct sales of our sensor products to customers. For internal accounting and PRC tax purposes, we account for the transfers of goods from our Wuxi subsidiary to our U.S. headquarters as sales, and calculate the transfer price of such sales based on a markup of manufacturing and operating costs. We believe the prices of these sales were consistent with the prevailing market prices.

U.S. Tax

In the United States, we are subject to the federal income tax and the Massachusetts state income tax, which are approximately at the rates of 34.0% and 8.75%, respectively. At December 31, 2010, the Company had gross U.S. net operating loss carryforwards of $6.3 million, which expire in various amounts beginning in 2028. Included within this amount is approximately $260,000 of excess tax deductions associated with non-qualified stock options that have been exercised. When these excess tax benefits actually result in a reduction to currently payable income taxes, the tax benefit will be recorded as an increase to additional paid-in capital. The Company’s operating losses may be subject to limitations under provisions of the Internal Revenue Code.

PRC Enterprise Income Tax

PRC enterprise income tax is calculated based on taxable income determined under PRC accounting principles. In accordance with the “Enterprise Income Tax Law”, which approved by the National People’s Congress on March 16, 2007 and took effect on January 1, 2008, Foreign Investment Enterprises, or FIEs and domestic companies are subject to a uniform tax rate of 25%.

Prior to January 1, 2008, the Foreign Enterprise Income Tax Law and the related implementing rules provide certain favorable tax treatments to FIEs which qualify as high-technology companies and are registered and operate in designated high-technology zones in the PRC. Our Wuxi subsidiary is a high-technology FIE registered and operating in a designated high-technology zone. Accordingly, under the Foreign Enterprise Income Tax Law, its implementing rules and several local regulations, our Wuxi subsidiary is entitled to a preferential enterprise income tax rate of 15%. In addition, our Wuxi subsidiary is entitled to a five-year tax holiday, pursuant to which it is exempted from paying the enterprise income tax for 2007, the year in which it first had positive accumulated earnings, and 2008. After the two-year exemption period, our Wuxi subsidiary is entitled to a 50% reduction from the then applicable income tax rate for each year from 2009 through 2011. After the expiration of this five-year tax holiday period, a preferential enterprise income tax rate of 15% may apply for so long as our Wuxi subsidiary continues to be recognized as a “high-technology company especially supported by the PRC government.”

To qualify as a “high-technology company especially supported by the PRC government” for PRC enterprise income tax purposes, a business entity generally must meet certain financial and non-financial criteria, including, but not limited to:

•

products or services of the business falling under the scope of “high-technology especially supported by the PRC government”;

•

a minimum level of revenue generated from high-technology related sales or services as a percentage of total revenue;

•

a minimum number of employees engaged in research and development as a percentage of total number of employees; and

•

a minimum level of research and development expenses as a percentage of total revenue.

If the PRC central government or applicable local governments determine that our Wuxi subsidiary is not or no longer qualifies as a “high-technology company especially supported by the PRC government,” our effective enterprise income tax rate would increase as a result.

In addition, as an FIE, our Wuxi subsidiary MEMSIC Semiconductor enjoys certain tax deductions for purchasing equipment made in China. Under the relevant regulation, if an FIE purchases Chinese-made equipment, and the price does not exceed the total investment amount of the FIE, for projects that fall within certain specified categories, 40% of the purchase price amount may be credited against the surplus between the amount of enterprise income tax payable in the current year and the amount paid in the previous year. If the credited amount is greater than the surplus, the excess amount can be carried forward for up to five years, subject to certain exceptions.

If MEMSIC Semiconductor ceases to qualify for its current preferential enterprise income tax rates, we will consider options that may be available at the time that would enable it to qualify for other preferential tax treatment. To the extent we are unable to offset the expiration of, or the inability to obtain, preferential tax treatment with new tax exemptions, tax incentives or other tax benefits, our effective tax rate will increase. The amount of income tax payable by our Wuxi subsidiary in the future will depend on various factors, including, among other things, the results of operations and taxable income of our Wuxi subsidiary (which is in turn partially dependent on our internal transfer pricing policies) and the applicable statutory tax rate.

The new “Enterprise Income Tax Law” provides a five-year transition period starting from its effective date for those enterprises which were established before the promulgation date of the new tax law and which were entitled to a preferential lower tax rate under the then effective tax laws or regulations. In accordance with regulations issued by the State Council, the tax rate of such enterprises may gradually transition to the uniform tax rate within the transition period. For those enterprises which are enjoying tax holidays, such tax holidays may continue until their expiration in accordance with the regulations issued by the State Council. While the new tax law equalizes the tax rates for FIEs and domestic companies, preferential tax treatment would continue to be given to companies in certain encouraged sectors and to entities classified as “high-technology companies especially supported by the PRC government,” whether FIEs or domestic companies.

MEMSIC Semiconductor has been qualified as a “high-technology company especially supported by the PRC government.” Therefore, a preferential enterprise income tax rate of 15% under the new tax law may apply to our Wuxi subsidiary. However, according to the relevant transition preferential tax policies issued by the State Council, the preferential enterprise income tax rate under the new tax law and the transition-period preferential tax policy can not apply simultaneously. Our Wuxi subsidiary may either choose to enjoy the exemption from enterprise income tax for 2007 and 2008 and a 50% reduction on the uniform enterprise income tax rate of 25% from 2009 to 2011, or, choose the preferential enterprise income tax rate of 15% for qualified high-technology companies under the new tax law. We believe the adoption of the transition-period preferential tax policy will be more beneficial to our Wuxi subsidiary. Therefore, from 2009 to 2011, the effective income tax rate for our Wuxi subsidiary is 12.5%.

As a result of the new tax law, following the year 2011, upon expiration of our 50% reduction from the then applicable income tax rate, our effective tax rate may increase, unless we are otherwise eligible for preferential treatment.

Our indirect Wuxi subsidiary MTS is registered as a China domestic company and has not been qualified as a high-technology company, therefore is currently subject to the uniform tax rate of 25%.

At December 31, 2010, the net operating loss carryforward from our Wuxi subsidiaries was $2.0 million, which will expire in 2015.

See “Risk Factors—Risks Related to Doing Business in China—The discontinuation of any of the preferential tax treatments currently available to us in China could materially and adversely affect our business, financial condition and results of operations” included in our Annual Report on Form 10-K for the period ended December 31, 2010.

Crossbow Japan Taxes

Our majority owned joint venture in Japan is subject to Japan taxes including enterprise income tax, value-added tax, and certain other miscellaneous taxes. The effective income tax rate for Crossbow Japan is 40%.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements and related notes requires us to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, net sales and expenses, and related disclosure of contingent assets and liabilities. We have based our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We consider all accounting policy to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. For a discussion of the critical accounting policies that we consider to be the most sensitive and that require the most significant estimates and assumptions used in the preparation of our consolidated financial statements, see our Annual Report on Form 10-K for the year ended December 31, 2010, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations--Critical Accounting Policies.” There has been no change in our critical accounting policies and estimates from those described in our Annual Report on Form 10-K for the year ended December 31, 2010.

Results of Operations

The following tables set forth a summary of our unaudited statements of operations data by reportable segments for the periods described by amount and as a percentage of our total net sales. This information should be read together with our unaudited consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. The operating results in any period are not necessarily indicative of the results that may be expected for any future period:

Quarter Ended June 30, 2011 Compared to Quarter Ended June 30, 2010

	For the Three Months Ended June 30,												For the Six Months Ended June 30,
	2011						2010						2011						2010
	Amount			% of net sales			Amount			% of net sales			Amount			% of net sales			Amount			% of net sales
	(dollar amounts in thousands)												(dollar amounts in thousands)
Net sales	$	15,372			100.0	%	$	9,096			100.0	%	$	28,327			100.0	%	$	16,368			100.0	%
Cost of goods sold		10,374			67.5			5,407			59.4			18,387			64.9			9,834			60.1
Gross profit		4,998			32.5			3,689			40.6			9,940			35.1			6,534			39.9


Operating expenses:
Research and development		2,112			13.7			2,035			22.4			4,410			15.6			4,009			24.5
Sales and marketing		1,530			10.0			1,109			12.2			2,995			10.6			2,180			13.3
General and administrative		2,520			16.4			2,328			25.6			4,774			16.8			4,313			26.4
Amortization		402			2.6			402			4.4			808			2.8			740			4.5
Total operating expenses		6,564			42.7			5,874			64.6			12,987			45.8			11,242			68.7

Operating loss		(1,566	)		(10.2	)		(2,185	)		(24.0	)		(3,047	)		(10.7	)		(4,708	)		(28.8	)

Other income:
Interest and dividend income		98			0.6			104			1.1			182			0.6			221			1.4
Foreign exchange gain		329			2.2			50			0.6			519			1.8			54			0.3
Other, net		14			0.1			38			0.4			82			0.3			51			0.3
Total other income		441			2.9			192			2.1			783			2.7			326			2.0

Earnings (loss) before income taxes		(1,125	)		(7.3	)		(1,993	)		(21.9	)		(2,264	)		(8.0	)		(4,382	)		(26.8	)
Provision for (benefit from) income taxes		(3	)		(0.0	)		1			0.0			114			0.4			(115	)		(0.7	)
Net loss		(1,122	)		(7.3	)		(1,994	)		(21.9	)	$	(2,378	)		(8.4	)	$	(4,267	)		(26.1	)

Less: net income (loss) attributable to noncontrolling interest		(14	)		(0.1	)		(20	)		(0.2	)		59			0.4			27			0.3
Net loss attributable to MEMSIC, Inc.	$	(1,108	)		(7.2	) %	$	(1,974	)		(21.7	) %	$	(2,437	)		(8.8	) %	$	(4,294	)		(26.4	) %

Net sales. Our net sales increased by 69.0% to $15.4 million for the three months ended June 30, 2011 from $9.1 million in the corresponding period of 2010. This increase was primarily attributable to a $6.4 million increase in net sales of our sensor products as a result of a significant increase in our magnetic sensor sales in the mobile phone applications and steady year over year increases in sales in the automotive applications.

Cost of goods sold. Our cost of goods sold increased by 91.9% to $10.4 million for the three months ended June 30, 2011 from $5.4 million for the corresponding period of 2010. This increase was primarily due to the increase in the volume of units sold in our sensor products.

Gross profit and gross margin. Our gross profit increased by 35.5% to $5.0 million for the three months ended June 30, 2011 from $3.7 million in the corresponding period of 2010. Our gross margin percentage decreased by approximately 8.2 percentage points to 32.5% for the three months ended June 30, 2011 from 40.6% in the corresponding period of 2010.

Our gross profits and gross margins by reportable segment are shown in the following table (dollars in thousands):

	Three months ended June 30,
	2011					2010
	Gross Profit		Margin %			Gross Profit		Margin %
Sensor products	$	3,696		29.0	%	$	2,356		37.4	%
System solution products		1,302		49.5			1,333		47.6
Total	$	4,998		32.5	%	$	3,689		40.6	%

Gross profit from our sensor products increased from $2.4 million for the three months ended June 30, 2010 to $3.7 million for the corresponding period of 2011, which was primarily due to increased sales volume from our magnetic sensor product. Gross margin of our sensor products decreased from 37.4% for the three months ended June 30, 2010 to 29.0% for the corresponding period of 2011 as a result of changes in our sales mix. Net sales of lower-margin mobile phone applications increased from 9.3% of net sales for the second quarter of 2010 to 48.7% of net sales for the second quarter of 2011, which negatively affected the average gross margin.

Gross profit of our system solution products remained unchanged at $1.3 million for the three months ended June 30, 2011 from the corresponding period of 2010. Gross margin of our system solution products increased from 47.6% for the three months ended June 30, 2010 to 49.5% for the three months ended June 30, 2011 as a result of both an increase in sales of higher margin products and lower overall costs as a result of our transfer of manufacturing activities to our Wuxi manufacturing facility. We expect our gross margin percentage to remain strong as we finalize the transfer of manufacturing of system solution products to in-house operations in China.

Research and development. Our research and development expenses increased by 3.8% to $2.1 million for the three months ended June 30, 2011 from $2.0 million in the corresponding period of 2010. This increase was primarily due to the design, tape-out, testing and material costs related to developing new products in our sensor product business and consulting and testing expenses related to upgrading and reengineering of our systems solutions products. Research and development expenses, as a percentage of total net sales, decreased to 13.7% for the three months ended June 30, 2011 from 22.4% for the corresponding period of 2010. We expect our research and development expenses, as a percentage of total net sales, will remain below the 2010 level as our revenue grows.

Sales and marketing. Our sales and marketing expenses increased by 38.0% to $1.5 million for the three months ended June 30, 2011 from $1.1 million for the corresponding period of 2010. The increase was primarily due to additional sales resources, more travel expenses and sales representatives’ commission expenses as our sensor product sales increased. Sales and marketing expenses, as a percentage of total net sales, decreased to 10.0% for the three months ended June 30, 2011 from 12.2% for the corresponding period of 2010.

General and administrative. Our general and administrative expenses increased by 8.2% to $2.5 million for the three months ended June 30, 2011 from $2.3 million in the corresponding period of 2010. This increase was primarily due to the hiring of our President of North American and European Operations and increased office and administrative expenses of our California office. General and administrative expenses, as a percentage of total net sales, decreased to 16.4% for the three months ended June 30, 2011 from 25.6% for the corresponding period in 2010.

Amortization expense. Amortization expense remained unchanged at $0.4 million for the three months ended June 30, 2011 and 2010.

Other income. Our other income was $441,000 for the three months ended June 30, 2011 compared to $192,000 in the corresponding period of 2010. The increase was primarily attributable to foreign exchange gain partially offset by a decrease in interest income due to lower interest rates.

Provision for income taxes. Our income tax benefit was $3,000 for the three months ended June 30, 2011 compared to an income tax provision of $941 in the corresponding period of 2010. Our income tax benefit for the second quarter of 2011 reflected a tax benefit of $7,000 related to a change in the deferred tax assets in China and an income tax benefit of $19,000 related to a net loss in Crossbow Japan, offset by a provision of $23,000 related to certain deferred tax liabilities.

Our income tax provision for the second quarter of 2010 reflected principally a provision of $27,000 related to certain deferred tax liability in the U.S., offset by a tax benefit of $25,000 related to a net loss in Crossbow Japan.

Beginning in 2009, our Wuxi subsidiary started its three-year tax holiday period at one-half the unified tax rate of 25%, which will terminate at the end of 2011.

Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

Net sales. Our net sales increased by 73.1% to $28.3 million for the six months ended June 30, 2011 from $16.4 million in the corresponding period of 2010. This increase was primarily attributable to a $11.7 million increase in net sales of our sensor products as a result of a significant increase in our magnetic sensor sales in the mobile phone applications and steady year over year increases in sales in the automotive applications. Additionally, net sales in our systems solutions products reported an increase of $0.2 million, which is primarily due to the fact that the 2011 results represented a full two quarters of operations whereas the corresponding reported results for the six months ended June 30, 2010 only covered results from the date of the Crossbow acquisition, or January 15, 2010, forward.

Cost of goods sold. Our cost of goods sold increased by 87.0% to $18.4 million for the six months ended June 30, 2011 from $9.8 million for the corresponding period in 2010. This increase was primarily due to the increase in the volume of units sold in both our sensor products.

Gross profit and gross margin. Our gross profit increased by 52.1% to $9.9 million for the six months ended June 30, 2011 from $6.5 million in the corresponding period of 2010. Our gross margin percentage decreased by approximately 4.8 percentage points to 35.1% for the six months ended June 30, 2011 from 39.9% in the corresponding period of 2010.

Our gross profits and gross margins by reportable segment for the six months ended June 30, 2011 and 2010 are shown in the following table (dollars in thousands):

	Six months ended June 30,
	2011					2010
	Gross Profit		Margin %			Gross Profit		Margin %

Sensor products	$	7,038		30.6	%	$	4,153		36.9	%
System solution products		2,902		54.3			2,381		46.6
Total	$	9,940		35.1	%	$	6,534		39.9	%

Gross profit from our sensor products increased from $4.2 million for the six months ended June 30, 2010 to $7.0 million for the corresponding period in 2011, which was primarily due to increased sales volume of our sensor products. Gross margin of our sensor products decreased from 36.9% for the six months ended June 30, 2010 to 30.6% for the corresponding period of 2011 as a result of changes in our sales mix. Net sales of lower-margin mobile phone applications increased from 12.8% of net sales for the first six months of 2010 to 42.9% of net sales for the first six months of 2011, which negatively affected the average gross margin.

Gross profit of our system solution products increased to $2.9 million for the first six months of 2011 from $2.4 million for the first six months of 2010 as a result of improved margins. Gross margin of our system solution products increased from 46.6% for the first six months of 2010 to 54.3% for the first six months of 2011 as a result of an increase in sales of higher margin products and lower overall costs as a result of our transfer of manufacturing activities to our Wuxi manufacturing facility. We expect our gross margin percentage to remain strong as we finalize the transfer of manufacturing of system solution products to in-house operations in China.

Research and development. Our research and development expenses increased by 10.0% to $4.4 million for the six months ended June 30, 2011 from $4.0 million in the corresponding period of 2010. This increase was primarily due to the design, tape-out, testing and material costs related to developing new products in our sensor products business and consulting and testing expenses related to upgrading and reengineering of our systems solutions products. Research and development expenses, as a percentage of total net sales, decreased to 15.6% for the six months ended June 30, 2011 from 24.5% for the corresponding period of 2010.

Sales and marketing. Our sales and marketing expenses increased by 37.4% to $3.0 million for the first six months of 2011 from $2.2 million for the corresponding period of 2010. The increase was primarily due to additional sales resources, more travel expenses and sales representatives’ commission expenses as our sales increased. Sales and marketing expenses, as a percentage of total net sales, decreased to 10.6% for the first six months of 2011 from 13.3% for the corresponding period of 2010.

General and administrative. Our general and administrative expenses increased by 10.7% to $4.8 million for the first two quarters of 2011 from $4.3 million in the corresponding period of 2010. This increase was primarily due to the hiring of our President of North American and European Operations and increased office and administrative expenses of our California office. General and administrative expenses, as a percentage of total net sales, decreased to 16.8% for the six months ended June 30, 2011 from 26.4% for the corresponding period in 2010.

Amortization expense. Amortization expense increased 9.2% to $0.8 million for the first six months of 2011 compared to $0.7 million for the corresponding period in 2010. The increase is primarily attributable to a full two quarters of expense in 2011 compared to the five and a half months reporting period in 2010 which began on the date of our acquisition of Crossbow Technology, or January 15, 2010.

Other income. Our other income was $0.8 million for the six months ended June 30, 2011 compared to $0.3 million in the corresponding period of 2010. The increase was primarily attributable to foreign exchange gain partially offset by a decrease in interest income due to lower interest rates.

Provision for income taxes. Our income tax provision was $114,000 for the six months ended June 30, 2011 compared to an income tax benefit of $115,000 in the corresponding period of 2010. Our income tax provision for the first six month of 2011 reflected a tax provision of $80,000 related to income in Crossbow Japan and a provision of $45,000 related to certain deferred tax liabilities, offset by a tax benefit of $11,000 related to a change in the deferred tax assets in China.

Our income tax benefit for the first half of 2010 reflected principally income tax benefit of $112,000 related to the recognition of a research and development tax credit earned in China and the benefit of $92,000 related to losses incurred by our Wuxi subsidiary at the effective rate of 12.5%. These amounts were partially offset by the recognition of a provision of $50,000 related to certain deferred tax liability in the U.S. and a provision of $39,000 related to a net income in the joint venture in Japan.

Beginning in 2009, our Wuxi subsidiary started its three-year tax holiday period at one-half the unified tax rate of 25%, which will terminate at the end of 2011.

Liquidity and Capital Resources

As of June 30, 2011, our principal sources of liquidity consisted of cash and cash equivalents of $50.5 million. Our principal uses of cash historically have consisted of payments to our suppliers for the costs related to the outsourcing of wafer fabrication and outsourced processing fees paid to and materials purchased from third parties, as well as payments for our manufacturing overhead, equipment purchases and manufacturing space expansion. Other significant cash outlays primarily consist of salaries, wages and commissions for our non-manufacturing related employees.

As of June 30, 2011, our investments included $4.8 million (net of $400,000 temporary impairment loss previously taken) of auction rate securities. Auction rate securities are generally long-term fixed income instruments that provide liquidity through a Dutch auction process that resets the applicable interest rate at pre-determined calendar intervals, typically every 7, 28, 35 or 49 days. Due to liquidity issues that have recently been experienced in global credit and capital markets, certain of the auction rate securities we hold have failed at auction, meaning that the amount of securities submitted for sale at auction exceeded the amount of purchase orders. If an auction fails, the issuer becomes obligated to pay interest at penalty rates, and all of the auction rate securities we hold continue to pay interest in accordance with their stated terms. However, the failed auctions create uncertainty as to the liquidity in the near term of these securities. As a result, we have classified the $4.8 million of auction rate securities we held at June 30, 2011 as long-term investments.

Based on our expected operating cash flows and our other sources of cash, we do not expect the potential lack of liquidity in our auction rate securities classified as long-term investments to affect our ability to execute our current business plan in the foreseeable future. However, the principal represented by these investments will not be accessible to us until one of the following occurs: a successful auction occurs, the issuer redeems the issue, a buyer is found outside of the auction process or the underlying securities have matured. There can be no assurance that we would be able in the near term to liquidate these securities on favorable terms, or at all, and if we should require access to these funds sooner than we currently expect, our inability to sell these auction rate securities could adversely affect our liquidity and our financial flexibility.

Our June 30, 2011 Consolidated Balance Sheet includes a building liability in the amount of $5.6 million related to the construction of the new MTS facility in Wuxi, China. The construction is financed by the local Chinese government and upon completion of the building, the Company can either lease the building for five years or purchase the building at cost from the government.

We believe that our current cash and cash flow from operations will be sufficient to meet our anticipated cash needs, including working capital requirements and capital expenditures for at least the next twelve months. Our future cash requirements will depend on many factors, including our operating income, the timing of our new product introductions, the costs to maintaining adequate manufacturing capacity, the continuing market acceptance of our products, payment terms for major contracts and customers, or other changing business conditions and future developments, including any investments or acquisitions we may decide to pursue. If our existing cash is insufficient to meet our requirements, we may seek to sell additional equity securities, debt securities or borrow from banks. We cannot assure you that financing will be available in the amounts we need or on terms acceptable to us, if at all. The sale of additional equity securities, including convertible debt securities, would be dilutive to our stockholders. The incurrence of indebtedness would divert cash for working capital requirements and capital expenditures to service debt and could result in operating and financial covenants that restrict our operations and our ability to pay dividends to our stockholders. If we are unable to obtain additional equity or debt financing, our business, operations and prospects may suffer.

Operating Activities

Net cash used in operating activities for the six months ended June 30, 2011 was $2.5 million, which was derived from a net loss of $2.4 million, adjusted to reflect a net increase related to non-cash items, and a net decrease relating to changes in balances of operating assets and liabilities. The adjustment related to non-cash items, an increase of $3.0 million, was mainly attributable to depreciation and amortization expense of $2.2 million, stock-based compensation of $0.8 million, an increase in deferred rent of $49,000 and an increase in deferred tax assets of $34,000. The adjustment related to changes in the balances of operating assets and liabilities, a net decrease in cash of $3.2 million, was primarily the result of increases of $2.7 million in accounts receivables due to increased sales, $0.6 million increase in inventories and $0.4 million increase in other assets, partially offset by a $0.6 million increase in accounts payable and accrued expenses.

Net cash used in operating activities for the six months ended June 30, 2010 was $1.2 million, which was derived from a net loss of $4.3 million, adjusted to reflect a net increase relating to non-cash items and a net increase relating to changes in balances of operating assets and liabilities. The adjustments relating to non-cash items, a net increase of $2.5 million, were primarily due to depreciation and amortization expense of $1.8 million and stock-based compensation expense of $0.7 million, offset by an increase in deferred tax asset of $34,000. The adjustments related to changes in balances of operating assets and liabilities, a net increase in cash of $0.6 million, were primarily attributable to a $0.6 million increase in inventories, primarily due to the preparation for shipments of our magnetic sensor product to a major electronic manufacturer, a $1.0 million increase in accounts receivable, a $1.2 million increase in other assets, primarily due to an increase in certain prepaid expenses including insurance, VAT receivables and supplier deposits, offset by a $3.5 million increase in accounts payable and accrued expenses.

Investing Activities

Net cash used in investing activities for the six months ended June 30, 2011 was $2.2 million, primarily consisting of $1.1 million used for the purchase of property and equipment mainly attributable to expansion of manufacturing operations in China and $1.3 million used to purchase short term investments offset by proceeds of $0.2 million from a partial redemption of one of our auction rate securities.

Net cash used in investing activities for the six months ended June 30, 2010 was $24.2 million, primarily consisting of the payment of $17.6 million, net of acquired cash of $0.4 million, for the Crossbow acquisition and the purchase of property and equipment for expanding our manufacturing capacity for $6.8 million, offset by proceeds from sale of investments of $0.2 million.

Financing Activities

Net cash used in financing activities for the six months ended June 30, 2011 was $75,000, consisting cash dividend of $115,000 paid to the minority owner of Crossbow Japan, offset by proceeds of $41,000 from exercise of options to purchase common stock.

Net cash provided by financing activities for the six months ended June 30, 2010 was $17.9 million, primarily reflecting proceeds from the project loan from the Agricultural Bank of China of $17.9 million and proceeds of $13,000 from exercise of options to purchase common stock, offset by a cash dividend of $57,000 paid to the minority owner of the joint venture in Japan.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet financing arrangements, other than property and equipment operating leases, nor do we have any transactions, arrangements or other relationships with any special purpose entities established by us, at our direction or for our benefit.

Item 4. Controls and Procedures

A. Evaluation of Disclosure Controls and Procedures

Based on the evaluation of our disclosure controls and procedures (as defined in the Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) required by Exchange Act Rules 13a15(b) or 15d-15(b), our chief executive officer and our principal financial and accounting officer have concluded that as of June 30, 2011, the end of the period covered by this report, our disclosure controls and procedures were effective.

B. Changes in Internal Controls

There were no changes in our internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f), that occurred during the quarter ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

There has been no material change in the risk factors disclosed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The net proceeds to us of our initial public offering in 2007, including the net proceeds from exercise of underwriters’ over-allotment option were approximately $60.2 million. Through June 30, 2011, we have applied approximately $8.1 million of the net proceeds to fund capital expenditures for the expansion of our manufacturing facility in Wuxi, $7.0 million to the construction of two new buildings adjacent to that facility and $4.0 million to the purchase of a piece of land to build the MTS manufacturing facility and manufacturing equipment, and $18.0 million to the Crossbow acquisition. We invested the balance of $23.1 million of the net proceeds from our initial public offering in money market funds and auction rate securities, pending other uses.

Item 6. Exhibits


Exhibit No.	Description	Filed with This Form 10-Q	Incorporated by Reference
Exhibit No.	Description	Filed with This Form 10-Q	Form	Filing Date	Exhibit No.
3.1	Second Amended and Restated Certificate of Incorporation of MEMSIC, Inc.		8-K	December 19, 2007	3.1

3.2	Amended and Restated By-Laws of MEMSIC, Inc.		S-1/A	November 30, 2007	3.4

4.1	Form of Common Stock Certificate.		S-1/A	December 7, 2007	4.2

4.2	Fifth Amended and Restated Investor Rights Agreement.		S-1	September 28, 2007	4.3
4.4	Amended and Restated 2007 Stock Incentive Plan	X
31.1	Chief Executive Officer Certification required by Rule 13a-14(a)	X
31.2	Principal Accounting Officer Certification required by Rule 13a-14(a)	X
32.1†	Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350	X
32.2†	Principal Financial and Accounting Officer Certification pursuant to 18 U.S.C. Section 1350	X
101.***	The following materials from MEMSIC, Inc.’s Quarterly Report on Form 10-Q for the six months ended June 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) the Unaudited Consolidated Balance Sheets; (ii) the Unaudited Consolidated Statement of Stockholders’ Equity; (iii) the Unaudited Consolidated Statements of Income; (iv) the Unaudited Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text.	X

† These certifications are deemed filed by the SEC and are not incorporated by reference in any filing we make under the Securities Act of 1933 or the Securities Exchange Act of 1934, irrespective of any general incorporation language.

Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2011 (Unaudited) and December 31, 2010; (ii) Unaudited Statement of Stockholders’ Equity, (iii) Unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010, (iv) Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010 and (v) Notes to Unaudited Consolidated Financial Statements.

In accordance with Rule 406T of Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act, is deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise is not subject to liability under these sections.

SIGNATURES

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.

	MEMSIC, Inc.

Dated: August 11, 2011	By:	/S/ YANG ZHAO
		Yang Zhao
		Chief Executive Officer and President
		Principal Executive Officer

Dated: August 11, 2011	By:	/S/ PATRICIA NIU
		Patricia Niu
		Principal Financial and Accounting Officer

Attached files

MEMSIC Inc Reports

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