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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
       (Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
FOR THE QUARTERLY PERIOD ENDED September 30, 2012
 
OR
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
For the transition period from              to             .
 
Commission file number 000-24487
 
 
MIPS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
 
 
DELAWARE
77-0322161
(State or other jurisdiction of
Incorporation or organization)
(I.R.S. Employer
Identification Number)
 
955 EAST ARQUES AVENUE, SUNNYVALE, CA 94085-4521
(Address of principal executive offices)
 
Registrant’s telephone number, including area code: (408) 530-5000
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
                    Large accelerated filer  ¨      Accelerated filer  x     Non-accelerated filer  ¨ (Do not check if smaller reporting company)                   Smaller reporting company   ¨ 
                   
Indicate by check mark whether the registrant is a Shell Company (as defined in Rule12b-2 of the Exchange Act).    Yes  ¨    No   x
 
As of October 31, 2012, the number of outstanding shares of the registrant’s common stock, $0.001 par value, was 54,019,716.
 


 

 
 
 
 


 
 
MIPS TECHNOLOGIES, INC.
 
 
(In thousands)
 
   
September 30, 2012
   
June 30, 2012
 
   
(unaudited)
       
ASSETS
           
Current assets:
           
    Cash and cash equivalents
 
$
95,941
   
$
76,242
 
    Short-term investments
   
34,392
     
34,642
 
    Accounts receivable, net
   
2,591
     
27,044
 
    Prepaid expenses and other current assets
   
2,186
     
1,793
 
       Total current assets
   
135,110
     
139,721
 
Equipment, furniture and property, net
   
3,323
     
2,892
 
Intangible assets, net
   
1,751
     
1,927
 
Goodwill
   
565
     
565
 
Other assets
   
9,791
     
10,035
 
       Total Assets
 
$
150,540
   
$
155,140
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
    Accounts payable
 
$
2,480
   
$
2,578
 
    Accrued liabilities
   
9,751
     
11,852
 
    Deferred revenue
   
812
     
1,259
 
       Total current liabilities
   
13,043
     
15,689
 
Long-term liabilities: 
               
    Other long-term liabilities
   
9,621
     
9,815
 
       Total long-term liabilities
   
9,621
     
9,815
 
Stockholders’ equity:
               
Common stock, $0.001 par value:  250,000,000 shares authorized at
September 30, 2012 and June 30, 2012; and 53,858,162 and 53,575,298 shares outstanding at September 30, 2012 and June 30, 2012, respectively, net of 174,655 and 121,297 reacquired shares at September 30, 2012 and June 30, 2012, respectively
   
54
     
53
 
    Preferred stock, $0.001 par value; 50,000,000 shares authorized; none issued and outstanding
   
     
 
    Additional paid-in-capital
   
318,705
     
316,210
 
    Accumulated other comprehensive income
   
627
     
557
 
    Accumulated deficit
   
(191,510
)
   
(187,184
)
       Total stockholders’ equity
   
127,876
     
129,636
 
       Total Liabilities and Stockholders’ Equity
 
$
150,540
   
$
155,140
 
 
 
See accompanying notes.
 
 

 
 
 
1

 
MIPS TECHNOLOGIES, INC.
 
 
(In thousands, except per share data)


   
Three Months Ended
 
   
September 30,
 
   
2012
   
2011
 
Revenue:
           
    Royalties
 
$
10,473
   
$
12,979
 
    License and contract revenue
   
3,470
     
4,238
 
       Total revenue
   
13,943
     
17,217
 
Operating Expenses:
               
    Cost of sales
   
362
     
261
 
    Research and development
   
8,298
     
7,906
 
    Sales and marketing
   
4,425
     
4,831
 
    General and administrative
   
5,566
     
3,264
 
       Total operating expenses
   
18,651
     
16,262
 
Operating income (loss)
   
(4,708
)    
955
 
Other income, net
   
8
     
53
 
Income (loss) before income taxes
   
(4,700
)    
1,008
 
Provision for (benefit from) income taxes
   
(374
)    
485
 
Net income (loss)
 
$
(4,326
)  
$
523
 
Net income (loss) per share, basic
 
$
(0.08
)  
$
0.01
 
Net income (loss) per share, diluted
 
$
(0.08
)  
$
0.01
 
Common shares outstanding, basic
   
53,699
     
52,660
 
Common shares outstanding, diluted
   
53,699
     
53,690
 
   
 
 
See accompanying notes.

 

 
 
 
2

 
MIPS TECHNOLOGIES, INC.


(In thousands)
 
 
   
Three Months Ended
 
   
September 30,
 
   
2012
   
2011
 
 
           
Net income (loss)
 
$
(4,326
)  
$
523
 
Other comprehensive income (loss), net of tax:
   
 
         
    Foreign currency translation adjustments, net of $0 tax in 2013 and 2012
   
53
     
(30
)
    Unrealized gains (losses) on available-for-sale securities, net of $0 tax in 2013 and 2012
      17         (22 )
Other comprehenstive income (loss)
   
70
     
(52
)
Comprehensive income (loss)
   
(4,256
)    
471
 


See accompanying notes.

 

 
 
 
3


 MIPS TECHNOLOGIES, INC.
 
 
(In thousands)

   
Three Months Ended
September 30,
 
   
2012
   
2011
 
Operating activities:
           
    Net income (loss)
 
$
(4,326
)
 
$
523
 
    Adjustments to reconcile net income (loss) to cash provided by (used in) operations:
               
       Depreciation
   
351
     
219
 
       Stock-based compensation
   
1,864
     
1,541 
 
    Excess tax benefits from stock-based compensation
   
(168
)    
 
       Amortization of intangible assets
   
189
     
126
 
       Amortization of investment premium, net
   
123
     
142
 
       Other non-cash charges
   
28
     
128
 
       Changes in operating assets and liabilities:
               
          Accounts receivable
   
24,454
     
(1,776
)
          Prepaid expenses
   
(249
)    
(241
)
          Other assets
   
671
     
874
 
          Accounts payable
   
(182
)    
(580
)
          Accrued liabilities
   
(2,180
)    
(3,200
)
          Deferred revenue
   
(480
)    
(236
)
          Long-term liabilities
   
(498
)    
(112
)
    Net cash provided by (used in) operating activities
   
19,597
     
(2,592
)
Investing activities:
               
    Purchases of marketable securities
   
(16,857
)    
(15,546
)
    Proceeds from maturities of marketable securities
   
17,000
     
6,700
 
    Capital expenditures
   
(595
)    
(405
)
       Net cash used in investing activities
   
(452
)    
(9,251
)
Financing activities:
               
    Net proceeds from issuance of common stock
   
372
     
422
 
    Excess tax benefits from stock-based compensation
   
168
     
 
       Net cash provided by financing activities
   
540
     
422
 
Effect of exchange rates on cash
   
14
     
21
 
Net increase (decrease) in cash and cash equivalents
   
19,699
     
(11,400
)
Cash and cash equivalents, beginning of period
   
76,242
     
69,202
 
Cash and cash equivalents, end of period
 
$
95,941
   
$
57,802
 
  
 
 
See accompanying notes.
 

 
 
 
4


 
MIPS TECHNOLOGIES, INC.
 
 
Note 1.  Description of Business and Basis of Presentation.
 
MIPS Technologies, Inc. (MIPS) is a leading provider of industry-standard processor architectures and cores for home entertainment, networking, mobile and embedded applications. The MIPS architecture powers some of the world’s most popular electronic products. Our technology is used in products such as digital televisions, set-top boxes, Blu-ray players, broadband customer premises equipment (CPE), WiFi access points and routers, networking infrastructure and portable/mobile communications and entertainment products. Our customers are global semiconductor companies and system original equipment manufacturers (system OEMs). We offer our customers high-performance, easy-to-use functionality at a fraction of the cost and time to market that internal development would require. Our customers pay us license fees for architectural, product and patent rights, as well as royalties based on processor unit shipments.
 
Basis of Presentation. The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC) applicable to interim financial information. Certain information and footnote disclosures included in financial statements prepared in accordance with generally accepted accounting principles have been omitted in these interim statements as allowed by such SEC rules and regulations. The balance sheet at June 30, 2012 has been derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. However, we believe that the disclosures are adequate to make the information presented not misleading. The unaudited condensed consolidated financial statements included in this Form 10-Q should be read in conjunction with the audited consolidated financial statements and related notes for the fiscal year ended June 30, 2012, included in our 2012 Annual Report on Form 10-K.
 
The unaudited results of operations for the interim periods shown in these financial statements are not necessarily indicative of operating results for the entire fiscal year. In our opinion, the unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for each interim period shown.
 
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.
 
Revenue Recognition.
 
Royalty Revenue.
 
We classify all revenue that involves the sale of a licensee’s products as royalty revenue. Royalty revenue is recognized in the quarter in which we receive a report from a licensee detailing the shipments of products incorporating our IP components, which is generally in the quarter following the licensee’s sale of the product to its customer. Royalties are calculated either as a percentage of the revenue received by the seller on sales of such products or on a per unit basis, as specified in our agreement with the licensee. We periodically engage a third party to perform royalty audits of our licensees, and if these audits indicate any over- or under-reported royalties, we account for the results when they are resolved.
 
 
 
License and Contract Revenue.
  
We generally derive license revenue for the transfer of proven and reusable IP components on currently available technology, including in certain situations, a license to our patents. We enter into licensing agreements that provide licensees the right to incorporate our IP components in their products with terms and conditions that have historically varied by licensee. Each of these types of contracts includes a nonexclusive license for the underlying IP. Fees for contracts for currently available technology include: license fees relating to our IP, including processor designs and patents; maintenance and support, typically for one year; and royalties payable following the sale by our licensees of products incorporating the licensed technology. Generally, our customers pay us a single upfront fee that covers the license and first year maintenance and support. Our deliverables in these arrangements include (a) processor designs and related IP and (b) maintenance and support.

Contracts relating to technology under development also can involve delivery of a license to intellectual property, including processor designs.  However, in these arrangements we undertake to provide best-efforts engineering services intended to further develop technology that has yet to be developed into a final processor design.  Rather than paying an upfront fee to license completed technology, customers in these arrangements pay us milestone fees as we perform the engineering services.  If the development work results in completed technology in the form of a processor design and related intellectual property, the customer is granted a license to such completed technology at no additional fee.  These contracts typically include the purchase of first year maintenance and support commencing upon the completion of a processor design and related intellectual property for an additional fee, which fee is equal to the renewal rate specified in the arrangement.  The licensee is also obligated to pay us royalties following sale of products incorporating the licensed technology.  We continue to own the intellectual property that we develop and we retain the fees for engineering services regardless of whether the work performed results in a completed processor design.  Fees for engineering services in contracts for technology under development are recognized as revenue as the services are performed; however, we limit the amount of revenue recognized to the aggregate amount received or currently due pursuant to the milestone terms.   As engineering activities are best-efforts and at-risk and because the customer must pay an additional fee for the first year of maintenance and support if the activities are successful, the maintenance and support is a contingent deliverable that is not accounted for upfront under contracts relating to technology under development.
 
When we provide engineering services involving design and development of customized specifications, we recognize revenue on a percentage of completion basis from the signing of the agreement through the completion of all outstanding development obligations. The amount of revenue recognized is based on the total license fees under the license agreement and the percentage of completion is measured by the actual costs incurred to date on the project compared to the total estimated project cost. Revenue is recognized only when collectability is probable. The estimates of project costs are based on the IP specifications and prior experience with the same or similar IP development and are reviewed and updated regularly. Under the percentage of completion method, provisions for estimated losses on uncompleted contracts are recognized in the period in which the likelihood of such losses is determined. Licensing of existing IP that does not require any configuration is recognized upon delivery of the IP and when all other revenue recognition criteria have been met. Direct costs incurred in the design and development of the IP under these arrangements is included in cost of sales.

The amount of license and contract revenue we recognize in a given period is affected by our judgment as to whether an arrangement includes multiple deliverables and, if so, our determinations surrounding whether VSOE exists. We determine VSOE based on our normal pricing and discounting practices for the specific product or service when sold separately. In determining VSOE, we require that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range. In circumstances when VSOE does not exist, we then apply judgment with respect to whether we can obtain TPE. Generally, we are not able to determine TPE because our go-to-market strategy typically differs from that of our peers. When we are unable to establish selling price using VSOE or TPE, we use BESP in our allocation of arrangement consideration. In determining BESP, we apply significant judgment as we weigh a variety of factors, based on the facts and circumstances of the arrangement.  We typically arrive at BESP for license and contract revenue by considering historical and current evidence of pricing including bundled pricing practices, selling region, license term and number of uses allowed.
 
 

License and contract revenue is recorded as revenue when there is persuasive evidence of an arrangement, fees are fixed or determinable, delivery has occurred and collectability is reasonably assured. We assess the credit worthiness of each customer when a transaction under the agreement occurs. If collectability is not considered reasonably assured, revenue is recognized when the fee is collected. Other than maintenance and support, there is no continuing obligation under these arrangements after delivery of the IP.
 
 Maintenance and Support.
 
Certain arrangements include maintenance and support obligations. Under such arrangements, we provide unspecified upgrades, bug fixes and technical support. No other upgrades, products or other post-contract support are provided. These arrangements are generally renewable annually by the customer. Maintenance and support revenue is recognized at its fair value ratably over the period during which the obligation exists, typically 12 months.
 
Cash and Cash Equivalents and Short-Term Investments. Cash and cash equivalents consist mainly of cash, money market funds, and other highly liquid investments which have original maturities of three months or less at the time of acquisition.  Investments with original maturities of greater than 90 days at the time of acquisition but less than one year from the balance sheet date are classified as short-term investments.  The fair value of cash and cash equivalents approximates their carrying value at September 30, 2012.
 
 Available-for-sale securities are carried at fair value, based on quoted market prices, with the unrealized gains or losses reported, net of tax, in stockholders’ equity as part of accumulated other comprehensive income (loss). We determine the fair values for short-term investments (that principally consist of marketable debt and equity securities) using industry standard pricing services, data providers and other third-party sources and by internally performing valuation analyses (see Note 4).  The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, both of which are included in other income (expense), net. Realized gains and losses, if any, are recorded on the specific identification method and are included in other income (expense).
 
 We review our investments in marketable securities for possible other-than-temporary impairments on a regular basis. In determining if and when a decline in value below the adjusted cost of marketable debt and equity securities is other-than-temporary, we evaluate, on an ongoing basis the market conditions, trends of earnings, financial condition, credit ratings, any underlying collateral and other key measures for our investments. In addition, we consider: 1) our intent to sell the security, 2) if we intend to hold the security, whether it is more likely than not that we will be required to sell the security before recovery of the security’s amortized cost basis and 3) if we intend to hold the security, whether or not we expect to recover the entire amortized cost basis of the security. If any loss on investment is believed to be other-than-temporary, a charge will be recognized. Due to the high credit quality and short term nature of our investments, there have been no other-than-temporary impairments recorded to date.
 
Note 2.  Computation of Earnings Per Share
 
Basic earnings per share is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares that were outstanding during the period. Diluted earnings per share is computed giving effect to all dilutive potential common shares that were outstanding for any periods presented in these financial statements.
 
 
 
The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts):

   
Three Months Ended September 30,
 
   
2012
   
2011
 
Numerator:
           
Net income (loss)
 
$
(4,326
)  
$
523
 
Denominator:
               
Weighted-average shares of common stock outstanding
   
53,699
     
52,660
 
Effect of dilutive securities
   
     
1,030
 
Shares used in computing diluted net income (loss) per share
   
53,699
     
53,690
 
Net income (loss) per share, basic
 
$
(0.08
)  
$
0.01
 
Net income (loss) per share, diluted
 
$
(0.08
)  
$
0.01
 
Potentially dilutive securities from outstanding stock options and restricted stock units excluded from diluted net income (loss) per share because they are anti-dilutive (A)
   
1,460
     
3,336
 
 
 
(A)
For the three months ended September 30, 2011, we excluded approximately 3.3 million weighted average stock options and restricted stock units from the calculation of diluted earnings per common share because the exercise prices of these stock options and releases of restricted stock units were greater than or equal to the average market value of the common shares.  Some portion, or all, of the shares underlying these options and restricted stock units would be included in the calculation of earnings per share in future periods when we report net income if  they become dilutive.
 
For the three months ended September 30, 2012, dilutive securities were excluded from diluted net loss per share because they are anti-dilutive.
 
Note 3.  Comprehensive Income (Loss)
 
Total comprehensive income (loss) includes net income (loss) and other comprehensive income (loss), which primarily comprises foreign currency adjustments and changes in unrealized gains (losses) on short-term investments. Total comprehensive loss for the first quarter of fiscal year 2013 was $4.3 million and total comprehensive income for the comparable period in the prior year was $0.5 million. 

Note 4.  Fair Value
 
We invest in short-term investments which principally consist of marketable debt and equity securities.  Our financial assets are measured and recorded at fair value, except for equity investments in privately-held companies. These equity investments are generally accounted for under the cost method of accounting and are periodically assessed for other-than-temporary impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred. Our non-financial assets, such as goodwill, intangible assets, and property, plant and equipment, are recorded at cost and are assessed for impairment when an event or circumstance indicates that a decline in value may have occurred or at least annually in the case of goodwill.
 
 
 
Fair Value Hierarchy
 
The measurements of fair value were established based on a fair value hierarchy that prioritizes the utilized inputs. This hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. The guidance for fair value measurements requires that assets and liabilities carried at fair value be classified and disclosed in one of the following categories:
 
Level 1 – Quoted (unadjusted) prices in active markets for identical assets or liabilities.
 
Our Level 1 assets consist of U.S. Treasury bills, marketable equity securities and money market funds.
 
Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
 
Our Level 2 assets consist of time deposits, commercial paper, corporate bonds and government agency bonds.
 
Level 3 - Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.
 
We had no Level 3 assets as of September 30, 2012 or June 30, 2012.

Cash equivalents, short-term investments and non-qualified deferred compensation plan assets are measured at fair value on a recurring basis. The Company’s non-qualified deferred compensation plan assets consist of money market and mutual funds invested in domestic and international marketable securities that are directly observable in active markets.  The deferred compensation plan assets, which were all Level 1 assets, recorded as of September 30, 2012 and June 30, 2012 were $1.4 million and $1.3 million.
  
The following table presents our cash equivalents and short-term investments by the above pricing levels as of September 30, 2012 (in thousands):
  
   
Fair value measurement at reporting dates using
 
   
Total
   
Quoted Price in Active Markets for Identical Assets
   
Significant Other Observable Inputs
   
Significant Unobservable Inputs
 
         
(Level 1)
   
(Level 2)
   
(Level 3)
 
Money Market Funds (1)
 
$
91,212
   
$
91,212
   
$
   
$
 
Commercial Paper
 
$
17,871
     
     
17,871
   
$
 
Corporate Bonds
   
16,521
     
     
16,521
     
 
       Total Short-term Investments 
 
$
34,392
   
$
   
$
34,392
   
$
 
 
(1)  
At September 30, 2012, $91.2 million of money market funds were included in the cash and cash equivalents in our condensed consolidated balance sheet.
 
 
 
Available-for-sale securities, all of which were classified as short-term investments, held by the Company as of September 30, 2012 were as follows (in thousands):
 
   
September 30, 2012
 
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
Commercial Paper
 
$
17,870
   
$
1
   
$
   
$
17,871
 
Corporate Bonds
   
16,517
     
5
     
(1
)    
16,521
 
Total Short-term Investments
 
$
34,387
   
$
6
   
$
(1
)
 
$
34,392
 
 
The following table presents our cash equivalents and short-term investments by pricing category as of June 30, 2012 (in thousands):

   
Fair value measurement at reporting dates using
 
   
Total
   
Quoted Price in Active Markets for Identical Assets
   
Significant Other Observable Inputs
   
Significant Unobservable Inputs
 
         
(Level 1)
   
(Level 2)
   
(Level 3)
 
Money Market Funds (1)
 
$
65,884
   
$
65,884
   
$
   
$
 
Commercial Paper
 
$
11,493
   
$
   
$
11,493
   
$
 
Corporate Bonds
   
18,146
     
     
18,146
     
 
Government Agency
   
5,003
     
     
5,003
     
 
       Total Short-term Investments 
 
$
34,642
   
$
   
$
34,642
   
$
 
 
(1)  
At June 30, 2012, $65.9 million of money market funds were included in the cash and cash equivalents in our condensed consolidated balance sheet.
 
Available-for-sale securities, all of which were classified as short-term investments, held by the Company as of June 30, 2012 were as follows (in thousands):
 
   
June 30, 2012
 
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
Commercial Paper
 
$
11,493
   
$
   
$
   
$
11,493
 
Corporate Bonds
   
18,159
   
$
     
(13
)
   
18,146
 
Government Agency
   
5,003
     
     
     
5,003
 
       Total Short-term Investments
 
$
34,655
   
$
   
$
(13
)
 
$
34,642
 
 
All contractual maturities of the Company’s available-for-sale marketable securities at September 30, 2012 were within one year.  
 
 
  
Note 5.  Goodwill and Purchased Intangible Assets
 
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired through past business combinations.   Our goodwill balance of $565,000 is primarily attributable to the First Silicon Solutions acquisition that occurred in September 2005 and did not change in fiscal year 2012 and in the first three months of fiscal year 2013.
 
The balances of our acquisition related intangible assets, all relating to developed and core technology, and the basis in purchased software licenses were as follows (in thousands):
 
   
September 30, 2012
   
June 30, 2012
 
   
Gross Carrying
Value
   
Accumulated
Amortization
   
Net Carrying
Value
   
Gross Carrying
Value
   
Accumulated
Amortization
   
Net Carrying
Value
 
Developed and core technology
 
$
1,100
   
$
(1,073
)
 
$
27
   
$
1,100
   
$
(1,045
)
 
$
55
 
Purchased software licenses
   
2,383
     
(659
)
   
1,724
     
2,383
     
(511
)
   
1,872
 
Purchased intangible assets
 
$
3,483
   
$
(1,732
)  
$
1,751
   
$
3,483
   
$
(1,556
)
 
$
1,927
 
 
Developed and core technology is being amortized over its useful life of 10 years.  Purchased software licenses are being amortized over their useful lives of 3 to 6 years.
 
Estimated future amortization expense related to our existing acquisition related intangible assets and purchased software licenses is as follows:
 
   
in thousands
 
Fiscal Year
     
Remaining 2012
 
$
   
2013
   
436
 
2014
   
490
 
2015
   
300
 
2016
   
300
 
2017
   
225
 
Total
 
$
1,751
 
 
 
 
Note 6.   Other Long-Term Assets
 
The components of other long-term assets are as follows (in thousands):
 
   
September 30, 2012
   
June 30, 2012
 
Investment in privately held company
 
$
400
   
$
400
 
Long-term engineering design software licenses
   
6,440
     
7,224
 
Deferred compensation plan
   
1,438
     
1,345
 
Other
   
1,513
     
1,066
 
Total other assets 
 
$
9,791
   
$
10,035
 
 
Note 7.  Accrued and Other Long-Term Liabilities
 
The components of accrued liabilities are as follows (in thousands):
 
   
September 30, 2012
   
June 30, 2012
 
Accrued compensation and employee-related expenses 
 
$
3,743
   
$
5,593
 
Engineering design software licenses
   
2,386
     
2,686
 
Customer advance
   
     
900
 
Other accrued liabilities
   
3,622
     
2,673
 
Total accrued liabilities 
 
$
9,751
   
$
11,852
 
 
The components of other long-term liabilities are as follows (in thousands):
 
   
September 30, 2012
   
June 30, 2012
 
Deferred compensation
 
$
1,425
   
$
1,341
 
Long-term income tax liability
   
2,776
     
2,241
 
Long-term obligation related to engineering design software licenses
   
3,448
     
4,210
 
Long-term deferred revenue
   
1,705
     
1,738
 
Other
   
267
     
285
 
Total long-term liabilities 
 
$
9,621
   
$
9,815
 
 
 
 
Note 8.  Commitments and Contingencies
 
Purchase Commitments with Suppliers.  The Company has agreements with suppliers and other parties to purchase goods, services and long-lived assets. Unconditional obligations under these agreements for each of the four years from fiscal year 2013 through 2016 were approximately $6.0 million, $0.5 million, $0.3 million, and $0.3 million, respectively. These commitments are exclusive of purchased software licenses and engineering design software license contracts of $5.8 million that are reflected in the Company’s accrued liabilities (see Note 7).  In fiscal year 2011, we entered into a software license agreement where we may be obligated to pay an additional $0.2 million on an annual basis, depending upon the volume of future usage by end users from fiscal year 2013 to 2017. 
 
Operating Lease Commitments.  At September 30, 2012, the Company’s future minimum payments for operating lease obligations are as follows:
 
   
In thousands
 
Fiscal Year
     
Remaining 2013
 
$
993
 
2014
   
1,099
 
2015
   
1,095
 
2016
   
913
 
2017
   
64
 
Total
 
$
4,164
 
    
Litigation. From time to time, we receive communications from third parties asserting patent or other rights allegedly covering our products and technologies. Based upon our evaluation, we may take no action or we may seek to obtain a license, redesign an accused product or technology, initiate a formal proceeding with the appropriate agency (e.g., the U.S. Patent and Trademark Office) and/or initiate litigation. There can be no assurance in any given case that a license will be available on terms we consider reasonable or that litigation can be avoided if we desire to do so. If litigation does ensue, the adverse third party will likely seek damages (potentially including treble damages) and may seek an injunction against the sale of our products that incorporate allegedly infringing intellectual property or against the operation of our business as presently conducted, which could result in our having to stop the sale of some of our products or to increase the costs of selling some of our products. Such lawsuits could also damage our reputation. The award of damages, including material royalty payments, or the entry of an injunction against the sale of some or all of our products, could have a material adverse affect on us. Even if we were to initiate litigation, such action could be extremely expensive and time-consuming and could have a material adverse effect on us. We cannot assure you that litigation related to our intellectual property rights or the intellectual property rights of others can always be avoided or successfully concluded.
 
We have been notified by ten licensees of a potential infringement claim by Biax Corporation asserting two US patents, allegedly involving our products.  A number of these licensees have requested indemnification from us. Given the nature of these claims, we cannot yet determine the amount or a reasonable range of potential loss, if any.
 
In connection with the sale of our Analog Business Group to Synopsys, Inc. (Synopsys) in May 2009, we agreed to retain responsibility for certain actual or contingent liabilities and agreed to indemnify Synopsys against certain breaches of representations and warranties and other liabilities.  
 
 
 
Note 9.  Stock-Based Compensation
 
 The following table shows total stock-based employee compensation expense included in the condensed consolidated statements of operations for the three months ended September 30, 2012 and 2011 (in thousands):

   
Three months ended September 30,
 
   
2012
   
2011
 
Operating expenses:
               
Research and development
 
$
683
   
$
463
 
Sales and Marketing
   
499
     
496
 
General and administrative
   
682
     
582
 
Total stock-based compensation expense
 
$
1,864
   
$
1,541
 
 
In the three months ended September 30, 2012 and September 30, 2011 we issued 282,864 and 183,750 shares, respectively, of common stock for employee restricted stock awards and stock option exercises.
 
Stock Options
 
The following are significant weighted average assumptions used for estimating the fair value of the activity under our stock option plans:

   
Employee Stock Options for
three months ended September 30,
   
Employee Stock Purchase Plan for
three months ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Expected volatility
   
0.72
     
0.70
     
0.62
     
0.62
 
Risk-free interest rate
   
0.45
%
   
0.69
%
   
0.16
%
   
0.10
%
Expected dividends
   
0.00
%
   
0.00
%
   
0.00
%
   
0.00
%
Expected life (in years)
   
4.20
     
4.20
     
0.50
     
0.50
 
Weighted-average grant date fair value
 
$
3.38
   
$
2.67
   
$
2.09
   
$
2.69
 

Restricted Stock Units and Awards
 
For the three months ended September 30, 2012 and September 30, 2011, we granted 437,779 and 305,508 restricted stock units, respectively, with an average grant date fair value of $6.58 and $5.09, respectively.  
 
 
 
Note 10.  Income Taxes
 
    We recorded an income tax benefit of $0.4 million for the three-month period ended September 30, 2012 compared to an income tax expense of $0.5 million for the comparable period in fiscal year year 2012 primarily as a result of receiving $0.7 million of withholding tax refunds in the first quarter of fiscal year 2013. We continue to recognize a partial valuation allowance against net U.S. deferred tax assets as we believe that it is more likely than not that the majority of our deferred tax assets will not be recognized.  The portion of our U.S. net deferred tax assets that has no offsetting valuation allowance is recognized solely as an offset to liabilities recorded with respect to certain unrecognized tax benefits.
 
    Our annual income tax for fiscal year 2013 will consist of U.S. state income taxes, foreign income taxes and withholding taxes. Our annual income tax for fiscal year 2011 consisted of U.S. state income taxes, foreign income taxes, and withholding taxes.
 
    There were no material changes to our reserves for unrecognized tax benefits in our quarter ended September 30, 2012. The total amount of gross unrecognized tax benefits as of September 30, 2012 and June 30, 2012 was approximately $5.3 million and $5.2 million, respectively. We accrue interest and penalties related to uncertain tax positions as a component of the provision for income taxes. Accrued interest and penalties relating to income tax on the unrecognized tax benefits as of September 30, 2012 and June 30, 2012 was approximately $0.4 million, respectively. Also, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $1.4 million for the periods ended September 30, 2012 and June 30, 2012, respectively.
 
    Although we file tax returns in several overseas tax jurisdictions, our major tax jurisdiction is the United States where we file U.S. federal and state returns. Our fiscal year 2008 and subsequent tax years remain subject to examination by the IRS for U.S. federal tax purposes.  The Company does not expect any significant change in the total amount of uncertain tax benefits in the next 12 months.
 
Note 11. Subsequent events

On November 5, 2012, we entered into separate definitive agreements with Bridge Crossing, LLC (“Bridge Crossing”), an acquisition vehicle of Allied Security Trust I (“AST”), and Imagination Technologies Group plc (LSE: IMG) (“Imagination”) with anticipated net proceeds of approximately $7.31 per share in cash to each holder of MIPS common stock.

Both transactions are subject to customary closing conditions, including the approval of the Company’s shareholders, who will vote separately on each of the transactions. Approval of the Bridge Crossing transaction is not subject to shareholder approval of the Imagination acquisition. The proceeds of the transactions, which are subject to a fixed holdback of approximately $100 million to cover tax and other liabilities, will be distributed to the Company’s  shareholders on a pro-rata basis through a recapitalization of MIPS common stock.
 
 

Patent Sale Agreement with Bridge Crossing, LLC
 
Bridge Crossing will acquire 498 of the Company’s total 580 patent assets for gross proceeds of $350 million. The Company will retain the remaining 82 patent properties that are directly relevant and key to the Company’s architecture, and will also be granted a royalty-free, perpetual license under all of the patent properties sold to Bridge Crossing. The Company will also provide a restricted license to Bridge Crossing under the 82 retained patent properties.

Consummation of the patent sale is subject to various conditions, including, among others, adoption of the Patent Sale Agreement by the stockholders of the Company.

The Patent Sale Agreement contains termination rights for Bridge Crossing and the Company, and further provides that, upon termination of the Patent Sale Agreement under certain specified circumstances, the Company will be obliged to pay Bridge Crossing a termination fee of $10 million.  In addition, in certain circumstances involving a material breach of the Patent Sale Agreement, if the Company enters into an agreement with a third party to sell, assign or exclusively license a majority of (1) the Assigned Patents (as defined in the Patent Sale Agreement) and (2) the Retained Patents (as defined in the Patent Sale Agreement) within 12 months after a termination of the Patent Sale Agreement, the Company is required to pay to Bridge Crossing a breakup fee of $30 million (less the termination fee of $10 million if previously paid).

Agreement and Plan of Merger with Imagination Technologies Group plc. and Imagination Acquisition Sub, Inc.
 
Subject to consummation of the Bridge Crossing transaction, Imagination will acquire the operating business of the Company, the 82 aforementioned patent properties, and license rights to all of the remaining patent properties of the Company for $60 million.

Consummation of the merger is subject to various conditions, including, among others, (i) approval of the Merger Agreement by the stockholders of the Company, (ii) consummation of the patent sale, (iii) consummation of the recapitalization transaction and (iv) receipt of written approval from the Committee on Foreign Investment in the United States approving the merger.

The Merger Agreement contains termination rights for Imagination and the Company, and further provides that, upon termination of the Merger Agreement under certain specified circumstances, the Company will pay Imagination a termination fee of $2.75 million and reimburse out-of-pocket fees and expenses, not to exceed $2.0 million.

Acquisition Related costs.
 
The Company has  retained investment banking firms and advisory firms to advise us in connection with potential transactions and to evaluate whether the consideration to be received by the holders of our common stock pursuant to the transactions was fair, from a financial point of view, to such holders. The Company will incur investment banking fees and other advisory costs relating to the transactions up to the completion of the transactions.
 
 
 
 
 You should read the following discussion and analysis together with our unaudited condensed consolidated financial statements and the notes to those statements included elsewhere in this report. This discussion may contain forward-looking statements that involve risks and uncertainties. Forward-looking statements within this Quarterly Report on Form 10-Q include our expectations for future levels of operating expenses as well as other expenses and are identified by words such as “believes,” “anticipates,” “expects,” “intends,” “may” and other similar expressions. Our actual results could differ materially from those indicated in these forward-looking statements as a result of certain factors, including those described under “Risk Factors”, and other risks affecting our business. We undertake no obligation to update any forward-looking statements included in this discussion.
 
Overview
 
MIPS Technologies, Inc. is a leading provider of industry-standard processor architectures and cores for home entertainment, networking, mobile and embedded applications. Our offerings include flexible and widely-applicable single- and multi-threaded core processors that can be used in a wide variety of markets. Our technology is broadly used in products such as digital televisions, set-top boxes, Blu-ray players, broadband customer premises equipment, WiFi access points and routers, networking infrastructure and portable/mobile communications and entertainment products. Our customers are global semiconductor companies and system original equipment manufacturers (system OEMs). We offer our customers high-performance, easy-to-use functionality at a fraction of the cost and time to market that internal development would require. Our customers pay us license fees for architectural, product and patent rights, as well as royalties based on processor unit shipments.

We reported first quarter fiscal year 2013 revenue of $13.9 million, representing a 19% decrease compared to first quarter of fiscal year 2012. Royalty revenue in the first quarter of fiscal year 2013 was $10.5 million, a 19% decrease compared to the first quarter of fiscal year 2012. Total royalty units reported in the first quarter of fiscal year 2013 were 182 million, a 5% increase from our first quarter of fiscal year 2012. As our royalty revenue is reported one quarter in arrears, shipments and revenue reported in our first quarter of fiscal year 2013 represented our customer shipments from the quarter ended June 30, 2012.  License and contract revenue in the first quarter of fiscal year 2013 was $3.5 million, an 18% decrease compared to the first quarter of fiscal year 2012.  

Our total operating expense in the first quarter of fiscal year 2013 increased to $18.7 million, as compared to $16.3 million in the first quarter of fiscal year 2012.  This increase in operating expense for our first quarter of fiscal year 2013 compared to the same period of fiscal year 2012 was primarily due to the Company’s exploration of options related to patent monetization and other opportunities for increasing shareholder value and professional services fees related thereto.

We recorded a tax benefit of $0.4 million in first quarter of fiscal year 2013 compared to a tax provision of $0.5 million in fiscal year 2012.  Our tax provision consists mainly of U.S. federal and state taxes, foreign tax, and withholding tax expenses and refunds.  In the first quarter of fiscal year 2013, we received withholding tax refunds of $0.7 million.

Our cash, cash equivalents and short term investments as of September 30, 2012 were $130.3 million compared to $110.9 million at June 30, 2012. 
 
 
 
Results of Operations
 
Revenue.  Total revenue primarily consists of royalties and license and contract revenue. Royalties are based upon sales by licensees of products incorporating our technology. License and contract revenue consists of technology license fees generated from new and existing license agreements for developed technology and patents, associated maintenance agreements and engineering service fees generated from contracts for technology under development. Technology license fees vary based on, among other things, whether a particular technology is licensed for a single application or for multiple or unlimited applications, and whether the license granted covers a particular design or a broader architecture.
 
Our revenue in the three-month periods ended September 30, 2012 and September 30, 2011 was as follows (in thousands, except percentages):

 
Three Months Ended September 30,
 
 
2012
 
2011
 
Change in
 
Percent
 
Revenue
           
Royalties
 
$
10,473
   
$
12,979
     
-19
%
Percentage of Total Revenue
   
75
%
   
75
%
       
License and Contract Revenue
 
$
3,470
   
$
4,238
     
-18
%
Percentage of Total Revenue
   
25
%
   
25
%
       
Total Revenue
 
$
13,943
   
$
17,217
     
-19
%
 
Royalties.  Our royalty revenue in the first quarter of fiscal year 2013 decreased by 19% from the comparable period in fiscal year 2012. Total royalty units reported by our customers in the first quarter of fiscal year 2013 were 182 million, a 5% increase from our first quarter of fiscal year 2012. The royalty per unit for the current quarter was 5.8 cents compared to 7.5 cents in the year ago period.  The decline in royalty per unit was due to certain licensees reaching timing and volume tiers in their licenses that triggered lower royalty rates, a decline in average selling price for customers whose royalties are calculated as a percentage of their revenue, shifts in product mix at several of our licensees, and consolidation in the industry as certain of our smaller customers were acquired by larger customers with lower royalty rates. 
 
License and Contract Revenue
 
We license our embedded processor intellectual property in the form of both architectures and specific processor cores and in some cases our patents.  Our license agreements include both limited and unlimited uses of our products; however, all licenses contain a limitation in the number of years that license is valid and only cover those products specifically licensed and available at the time of the license.  Under unlimited use license agreements, customers typically pay a larger fixed, up-front fee for the unlimited use of (i) one or more of our MIPS-developed cores or (ii) our architecture to develop their own MIPS-compatible cores during the term of the agreement.   Architecture license agreements are not as common as core license agreements.  The company currently has 13 active architecture customers.  We recognize all license revenues under limited and unlimited use license agreements when there is persuasive evidence of an arrangement, fees are fixed or determinable, delivery has occurred and collectability is reasonably assured.  
 
Our license and contract revenue decreased by 18% in the first quarter of fiscal year 2013 from the comparable period in fiscal year 2012. There was one new license agreements executed in the first quarter of fiscal year 2013 compared to three in the first quarter of fiscal year 2012.   Unlimited use licenses accounted for $2.6 million of our license and contract revenue in our first quarter of fiscal year 2013, and had terms ranging from 5 to 9 years with an average term of approximately 7 years.  Contract revenue from unlimited use license agreements was $2.9 million in the same period of fiscal year 2012.  
 
 
 
Cost and Expenses
 
The following is a summary of certain consolidated statement of operations data for the periods indicated (in thousands, except percentages):

     
Three Months Ended September 30,
   
2012
   
2011
 
Change in Percent
   
(in thousands, except for percentages)
Cost and Expenses
                 
Cost of Sales
 
$
362
   
$
261
 
39%
Research and Development
 
$
8,298
   
$
7,906
 
5%
Sales and Marketing
 
$
4,425
   
$
4,831
 
-8%
General and Administrative
 
$
5,566
   
$
3,264
 
71%
 
Cost of Sales.  Cost of sales primarily includes labor and overhead related costs for contracts with engineering service requirements, material costs and costs associated with acquired third party software used in our products.  

The increase in cost of sales in the first quarter of fiscal year 2013 over the same period in fiscal year 2012 was primarily due to increased amortization of purchased third party software licenses in fiscal year 2013.

Research and Development.    Research and development expenses include salaries and contractor and consultant fees, as well as costs related to workstations, software, and computer aided design tools utilized in the development of new technologies. The costs we incur with respect to internally developed technology and engineering services are included in research and development expenses as they are incurred and are generally not directly related to any particular licensee, license agreement or license fee. 

The $0.4 million increase in research and development expense for the first quarter of fiscal year 2013 over the comparable period in fiscal year 2012 was primarily due to a $0.5 million increase in incentive compensation resulting from the Company meeting certain financial targets in the first quarter of fiscal year 2013.  There was also a $0.2 million increase in stock compensation expense related to timing and mix of grants to employees.  These increases were partially offset by a $0.3 million decrease in research and development porting projects in the first quarter of fiscal year 2013 over the comparable period in fiscal year 2012.

Sales and Marketing.    Sales and marketing expenses include salaries, commissions and costs associated with third party independent software development tools and applications, direct marketing and other marketing efforts. Our sales and marketing efforts are directed at establishing and supporting our licensing relationships.
 
The $0.4 million decrease in sales and marketing expense for first quarter of fiscal year 2013 over the comparable period in fiscal year 2012 was due to a mix of increases and decreases in various expenses, including (i) a $0.5 million decrease in consulting expenses, (ii) a $0.3 million decrease in severance costs, (iii) a $0.2 million increase in incentive compensation resulting from the Company meeting certain financial targets in the first quarter of fiscal year 2013, and (iv) a $0.2 million increase in ecosystem development activities.

General and Administrative.    General and administrative expenses comprise salaries, outside professional service fees, legal fees including those associated with the establishment and protection of our patent, trademark and other intellectual property rights which are integral to our business, expenses related to compliance with the reporting and other requirements of a publicly traded company including directors and officers liability insurance and financial audit fees.
 
 

The $2.3 million increase in our general and administrative expense for the  first quarter of fiscal year 2013 over the comparable period in fiscal year 2012 was due to increases of (i) $1.9 million in connection with the Company’s exploration of options related to patent monetization and other opportunities for increasing shareholder value (ii) $0.1 million stock compensation expense primarily resulting from the timing and mix of employee stock grants, and (iii) $0.3 million in incentive compensation resulting from the Company meeting certain financial targets in the first quarter of fiscal year 2013.
  
Other Income (Expense), Net. Other Income (Expense) was relatively flat at less than $0.1 million for the first quarter of fiscal year 2013 and the same period in fiscal year 2012.
 
 Income Taxes.  Our income tax primarily consists of U.S. state income taxes, foreign income taxes and withholding taxes.
 
We recorded an income tax benefit of $0.4 million for the three-month period ended September 30, 2012 compared to an income tax expense of $0.5 million for the comparable period in fiscal year 2012 primarily as a result of receiving $0.7 million of withholding tax refunds in the first quarter of fiscal year 2013. We continue to recognize a partial valuation allowance against net U.S. deferred tax assets as we believe that it is more likely than not that the majority of our deferred tax assets will not be recognized.  The portion of our U.S. net deferred tax assets that has no offsetting valuation allowance is recognized solely as an offset to liabilities recorded with respect to certain unrecognized tax benefits.
 
Liquidity and Capital Resources
 
At September 30, 2012, we had cash, cash equivalents and short term investments of $130.3 million, an increase of approximately $19.4 million from June 30, 2012.  
 
Operating Activities
 
Net cash provided by operating activities was $19.6 million for the three months ended September 30, 2012. Our net loss included the effects of non-cash charges of $1.9 million from stock compensation expense and $0.5 million in depreciation and amortization of intangible assets.  In addition, cash generated from operating activities increased primarily as a result of a $24.5 million decrease in accounts receivable, reflecting timing of customer billings and payments received, and an $0.4 million decrease in prepaid expenses and other current and long term assets, primarily reflecting the timing of engineering design software license payments as compared to the amortization of the associated licenses.  These increases in cash were offset by cash used as a result of (i) a $0.5 million decrease in long term liabilities, primarily reflecting timing of engineering design software design software license payments, (ii) a $2.4 million decrease in accounts payable and accrued liabilities, primarily due to the payment of our fiscal year 2012 incentive compensation in the first quarter of fiscal year 2013, and (iii) a $0.5 million decrease in deferred revenue, reflecting timing of customer payments compared to timing of revenue recognition.
 
Net cash used in operating activities was $2.6 million for the three months ended September 30, 2011. The cash used in operations was primarily a result of our positive net income net of non-cash expenses offset by net changes in our asset and liability balances. Our net income included the effects of non-cash charges of $1.5 million from stock compensation expense and $0.3 million in depreciation and amortization of intangible assets. We used cash in operating activities primarily as a result of (i) a $3.2 million decrease in accrued liabilities, primarily due to the payment of our fiscal year 2011 bonus and commissions in the first quarter of fiscal year 2012, (ii) a $1.8 million increase in accounts receivable, reflecting timing of customer billings and payments received and (iii) a $0.6 million decrease in accounts payable, due to the timing of vendor payments. These decreases were partially offset by cash provided by a $0.6 million decrease in prepaid expenses and other current and long term assets, primarily reflecting the timing of engineering design software license payments as compared to their amortization.
 
 

Investing Activities
 
 Net cash used in investing activities was $0.5 million for the three months ended September 30, 2012 as a result of $0.6 million used to purchase property, furniture and equipment partially offset by proceeds of $0.1 million from the net purchases of available-for-sale securities.
 
Net cash used in investing activities was $9.3 million for the three months ended September 30, 2011 as a result of usage of $8.8 million for the net purchases of available-for-sale securities and $0.4 million used to purchase property, furniture and equipment.   

Financing Activities
 
Net cash provided by financing activities was $0.5 million for the three months ended September 30, 2012.   This cash generated from financing activities resulted from $0.4 million from stock option exercises and $0.1 million of cash provided by excess tax benefits from options exercised.
  
Net cash provided by financing activities was $0.4 million for the three months ended September 30, 2011. This cash generated from financing activities resulted from stock option exercises. 

Liquidity
 
 Our future liquidity and capital requirements could vary significantly from quarter to quarter, depending on numerous factors, including, among others:
 
general economic and political conditions and specific conditions in the markets we address, including the continuing volatility in the technology sector and semiconductor industry, the recent global economic recession, and trends in the semiconductor markets in various geographic regions, including seasonality in sales of consumer products into which our products are incorporated;
 
our ability to continue to generate cash flow from operations;
 
litigation expenses, settlements and judgments;
 
required levels of research and development and other operating costs;
 
changes in our compensation policies;
 
the issuance of restricted stock units and the related cash payments we make for withholding taxes due from employees in future years;
 
the level of exercises of stock options and stock purchases under our employee stock purchase plan;
 
the timing and payment of taxes;
 
significant payments to suppliers including Computer Aided Design (CAD) system vendors required under long term purchase agreements as these payments vary and can be up to $1.0 million per quarter;
 
The costs associated with the Company’s exploration of options related to patent monetization and other opportunities for increasing shareholder value;

the costs associated with capital expenditures.
   
 
    Our short term investments are liquid, and in the event we need to access these funds, we will be able to do without a material loss.

    Our investment policy requires all investments with original maturities at the time of investment of up to 6 months to be rated at least A-1/P-1 by Standard & Poor’s/Moody’s, and specifies  higher minimum ratings for investments with longer maturities.  We continually monitor the credit risk in our portfolio and seek to mitigate our credit and interest rate exposures.  We intend to continue to closely monitor future developments in the credit markets and make appropriate changes to our investment policy as deemed necessary.  Based on our ability to liquidate our investment portfolio and our expected operating cash flows, we do not anticipate any liquidity constraints as a result of either the current credit environment or potential investment fair value fluctuations.
 
We believe that we have sufficient cash to meet our projected operating and capital requirements for the foreseeable future and at least the next twelve months. Our future capital requirements will depend on many factors including our rate of revenue growth, the timing and extent of spending to support development efforts, any expansion of sales and marketing activities and potential future acquisitions.
  
Our contractual obligations as of September 30, 2012 were as follows (in thousands):
 
   
Total
   
Less than 1 year
   
1-3 years
   
3-5 years
 
Operating lease obligations (1)
 
$
4,164
   
$
993
   
$
2,194
   
$
977
 
Purchase obligations (2)
   
12,986
     
8,428
     
4,033
     
525
 
Other long-term liabilities and obligations (3)
   
1,425
     
 —
     
1,425
     
 —
 
Total
 
$
18,575
   
$
9,421
   
$
7,652
   
$
1,502
 
 
(1)
We lease office facilities and equipment under non-cancelable operating leases including the lease for our headquarter facility in Sunnyvale, California. 
 
(2)
Our purchase obligations of approximately $13 million at September 30, 2012 decreased from our purchase obligations as of June 30, 2012 by $2.5 million.  Of the total, $5.8 million of the obligations relate to purchased software licenses or engineering design software license contracts that are reflected in the Company’s accrued liabilities. The remaining $7.2 million of purchase obligations includes approximately $6.0 million due by September 30, 2013 with the balance to be completed within four years.  

(3)
Long-term liabilities and obligations consist of amounts due to employees under a deferred compensation plan, under which distributions are elected by the employees.
    
The table above excludes aggregate of $2.8 million for uncertainty in income taxes as we are unable to reasonably estimate the ultimate amount or timing of settlement.
 
Critical Accounting Polices and Estimates
 
We prepare our financial statements in conformity with U.S. generally accepted accounting principles, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We regularly evaluate our accounting estimates and assumptions. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results inevitably will differ from the estimates, and such differences may require material adjustments to our financial statements. We believe there have been no significant changes to the items we disclosed as our critical accounting policies and estimates in our discussion and analysis of financial condition and results of operations in our 2012 Form 10-K.
 
 
 
 
We believe there have been no significant changes to the discussion of quantitative and qualitative disclosures about market risk in our 2011 Form 10-K. 
 
 
Evaluation of disclosure controls and procedures
 
 Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) were not effective as of September 30, 2012, because of the material weakness described in Part II, Item 9A, in our 2012 Annual Report on Form 10-K.  In that section, we describe the material weakness in our internal control over financial reporting as a result of the error found during the preparation of financial statements with regards to the process of accounting for income taxes.

We lacked adequate controls over the process of determining and reporting the provision for income taxes. Specifically, controls relating to the oversight and review of the Company’s calculation of its income tax provision for completeness and accuracy by qualified personnel were ineffective.

We have an ongoing process of analyzing and improving our internal controls, including this material weakness identified by management.  Our remediation plan includes: (a) implementing additional reviews of the provision for income taxes by qualified personnel experienced in application of tax rules and regulations and accounting for income taxes; and (b) implementing the use of a new provision model that is more automated with built-in checks and control mechanisms to identify potential errors.

Other than the changes implemented as part of the remediation plan discussed above, there were no changes in our internal control over the financial reporting that occurred during the first quarter of fiscal year 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
   
 
 
From time to time, we receive communications from third parties asserting patent or other rights allegedly covering our products and technologies. Based upon our evaluation, we may take no action or we may seek to obtain a license, redesign an accused product or technology, initiate a formal proceeding with the appropriate agency (e.g., the U.S. Patent and Trademark Office) and/or initiate litigation.  There can be no assurance in any given case that a license will be available on terms we consider reasonable or that litigation can be avoided if we desire to do so. If litigation does ensue, the adverse third party will likely seek damages (potentially including treble damages) and may seek an injunction against the sale of our products that incorporate allegedly infringing intellectual property or against the operation of our business as presently conducted, which could result in our having to stop the sale of some of our products or to increase the costs of selling some of our products. Such lawsuits could also damage our reputation. The award of damages, including material royalty payments, or the entry of an injunction against the sale of some or all of our products, could have a material adverse affect on us.  For additional information regarding intellectual property litigation, see Part II, Item 1A. Risk Factors—“We may be subject to litigation and other legal claims that could adversely affect our financial results.” and “We may be subject to claims of infringement.”
 
 
Our success is subject to numerous risks and uncertainties, including those discussed below. These factors could hinder our growth, cause us to sustain losses or have other adverse effects on us, which could individually or collectively cause our stock price to decline. The following list is not exhaustive and you should carefully consider these risks and uncertainties before investing in our common stock.
 
    Our business and results of operations may be affected by the announcement of the sale of certain of our patents to Bridge Crossing or our proposed acquisition by Imagination Technologies.
 
    On November 5, 2012, we entered into the patent sale agreement with Bridge Crossing, pursuant to which we will sell certain U.S. and foreign patents and patent applications to Bridge Crossing. On November 5, 2012, we entered into the merger agreement with Imagination Technologies and an acquisition subsidiary, pursuant to which the acquisition sub will merge with and into us, and we will continue as the surviving corporation and as a wholly owned subsidiary of Imagination Technologies. The terms of the patent sale agreement and the merger agreement, and the patent sale and the merger, which we refer to as the proposed transactions, are described in Note 11 of this Quarterly Report on Form 10-Q.
 
    The proposed transactions could have an adverse effect on our revenue in the near term if customers delay, defer, or cancel purchases until the completion of the proposed transactions. While we are attempting to mitigate this risk through communications with our customers, current and prospective customers could be reluctant to use and pay us license fees for architectural, product and patent rights, as well as royalties based on processor unit shipments. To the extent that the proposed transactions create uncertainty among customers or our employees such that any significant number of customers delay decisions to use our technology pending completion of the proposed transactions, or our employees depart the company or become distracted, our results of operations and ability to operate profitably could be negatively affected. Decreased revenue or a failure to be profitable could have a variety of adverse effects, including negative consequences to our relationships with, and ongoing obligations to, customers, suppliers, employees, business partners, and others with whom we have business relationships. In addition, our quarterly operating results could fail to meet the expectations of market analysts, which could cause our stock price to decline.
 
 
 
    We are also subject to additional risks in connection with the proposed transactions, including: (1) the occurrence of an event or circumstance that could give rise to the payment of a termination fee by us under the merger agreement of $2.75 million and the payment of Imagination Technologies’ out-of-pocket transaction-related expenses in an amount up to $2.0 million, in each case pursuant to and in accordance with the terms of the merger agreement, (2) the occurrence of an event or circumstance that could give rise to the payment of a termination fee by us under the patent sale agreement of $10 million, or $20 million if we wrongfully terminate the agreement but have already paid the termination fee of $10 million, or $30 million if we have not yet paid the termination fee of $10 million, in each case pursuant to and in accordance with the terms of the patent sale agreement, (3) the outcome of any legal proceedings that may be instituted against us, our directors and others relating to the proposed transactions, (4) the failure of the proposed transactions to close for any reason, including due to the failure to obtain the necessary stockholder approvals, (5) the restrictions imposed on our business, properties and operations pursuant to the affirmative and negative covenants set forth in the patent sale agreement and merger agreement and the potential impact of such covenants on our business, (6) the risk that the proposed transactions will divert management’s attention resulting in a potential disruption of our current business plan, and (7) potential difficulties in employee retention arising from the proposed transactions.
 
    We may suffer additional consequences if the proposed patent sale to Bridge Crossing or acquisition by Imagination Technologies are not completed.
 
    If the proposed transactions are not completed, we could suffer a number of consequences that may adversely affect our business, results of operations and stock price, including the following:

•  
activities relating to the proposed transactions and related uncertainties may divert our management’s attention from our day-to-day business and cause disruptions among our employees and to our relationships with customers and business partners, thus detracting from our ability to grow revenue and possibly leading to a loss of revenue and market position that we may not be able to regain if the proposed transactions do not occur;
 
•  
the market price of our common stock could decline following an announcement that the proposed transactions have been abandoned, to the extent that the current market price reflects a market assumption that the proposed transactions will be completed;
 
•  
if the patent sale agreement is terminated under certain circumstances, we may be required to pay a termination fee or a wrongful termination payment to Bridge Crossing, and if the merger agreement is terminated under certain circumstances, we may be required to pay a termination fee to Imagination Technologies and reimburse Imagination Technologies for its transaction-related expenses;
 
•  
certain costs related to the proposed transactions, including the fees and/or expenses of our legal, accounting and financial advisors, must be paid even if the proposed transactions are not completed;
 
•  
our stockholders may fail to approve the patent sale or the merger;
 
•  
we may be subject to legal proceedings related to the proposed transactions;
 
•  
we may be the subject of other patent sale or acquisition proposals that require management attention and that may be less favorable to us and our stockholders than the proposed transactions;
 
•  
the timing of the completion of the patent sale or the merger and the impact of the patent sale or the merger may negatively affect our capital resources, cash requirements, profitability, management resources and liquidity;
 
•  
we may not be able to take advantage of alternative business opportunities or effectively respond to competitive pressures; and
 
•  
a failed transaction may result in negative publicity and/or a negative impression of us in the investment community or business community generally.
 
 
 
    The success of our business depends on sustaining or growing our license and contract revenue.   License and contract revenue consists of technology license fees paid for access to our developed technology (and in some cases, our patents), associated maintenance agreements and engineering service fees related to technology under development. Our ability to secure the licenses from which our contract revenues are derived depends on our customers, including semiconductor companies and digital consumer, mobile, wireless, connectivity and business product manufacturers, adopting our technology and using it in the products they sell. As compared to the prior year, our license and contract revenue decreased by 9% in fiscal year 2010. However, our license and contract revenue increased by 12% in fiscal year 2011 and 35% in fiscal year 2012 as compared to prior years.  The fiscal year 2012 increase was due to a license agreement with a customer providing them the rights to use our patent license portfolio.  In the first quarter of fiscal year 2013, our license and contract revenue decreased by 18% as compared to the first quarter of fiscal year 2012.

Changes in the size and nature of the license agreements that we enter into in a given period could cause our operating results to differ significantly from one period to another.  We license our embedded processor intellectual property in the form of both architectures and specific processor cores.  Our license agreements include both limited and unlimited uses of our products; however, all licenses contain a limitation on the number of years that a license is valid and only cover those products specifically licensed and available at the time of the license. Under unlimited use license agreements, customers typically pay a larger fixed, up-front fee for the unlimited use of (i) one or more of our MIPS-developed cores or (ii) our architecture to develop their own MIPS-compatible cores during the term of the agreement.   Architecture license agreements are not as common as core license agreements.  The company currently has 13 active architecture customers.  In addition, in June 2012 we entered into a license agreement with a customer providing them the rights to use our patent license portfolio.  No assurance can be given that we will be able to enter into future license agreements related to our patent portfolio or that we will be successful in our strategic efforts around patent monetization.

We recognize all license revenues under limited and unlimited use license agreements upon execution of the agreement, provided all revenue recognition criteria have been met.  License revenue from unlimited use license agreements was 51% in fiscal year 2010, 61% in fiscal year 2011 and 86% in fiscal year 2012 of our total license and contract revenue. Additionally, in the first quarter of fiscal year 2013, license revenue from unlimited use license agreements was 73% of our total license and contract revenue.  
 
The revenue recognized by a license-based business can vary significantly from period to period, depending on the number and size of the license deals closed during the quarter.  As a result, it is difficult to predict the level of licensing activity in future periods. Our licensees are not obligated to license new or future generations of our products, so past license and contract revenue may not be indicative of the amount of such revenue in any future period. In addition, consolidation, merger and acquisition activity involving our customers and potential customers may limit our ability to enter into new license agreements, as such activity reduces the number of potential licensees for our products. If we cannot maintain or grow our contract revenue or if our customers do not adopt our technology and obtain corresponding licenses, our results of operations will be adversely affected. 
 
We compete against much larger companies in the microprocessor IP market that have larger market share and broader lines of products.  Some of our competitors, including Intel Corporation and ARM Holdings plc, have significant financial resources enabling them to market their products aggressively and to target our customers with special incentives. As long as Intel and ARM remain in their dominant position, we may be negatively impacted by their business practices, product mix and product introduction schedules, marketing strategies and exclusivity clauses with customers.  In addition, Intel and ARM have substantially greater financial resources than we do and, accordingly, spend substantially greater amounts on research and development and marketing than we do. We expect Intel and ARM to maintain their dominant market positions and to continue to invest heavily in marketing, research and development and in other technology companies. To the extent our competitors develop microprocessor products using more advanced process technologies or introduce competitive new products into the market before we do, our financial condition and operating results will be adversely impacted.
 
 
We may not be successful in our strategic efforts around patent monetization.  Our future success depends in part on our ability to monetize our patents.  In the fourth quarter of fiscal year 2012, we entered into a license agreement with Broadcom Corporation, pursuant to which we licensed our patents and received a license fee of $26.5 million.  We have historically not licensed our patent portfolio in connection with our licensing business model, and it is difficult to predict if we will be able to enter into future license agreements for our patent portfolio. If we do not enter into future patent license agreements, and we are not otherwise successful in alternative patent monetization strategies, our financial condition, revenue and results of operations could be adversely impacted in the future. In addition, our ability (or inability) to successfully conclude patent license agreements in any given quarter may have a significant impact on our quarterly revenue.  Furthermore, no assurance can be given that we will be able to enter into future license agreements related to our patent portfolio or that we will be successful in our strategic efforts around patent monetization. 

Our royalty revenue may be adversely affected by a number of factors.  Our royalty revenue may be adversely affected by a number of factors, including certain contractual provisions in our license agreements and consolidation activity in our customer base.  A number of our license agreements have provisions that allow a customer to pay a lower contractual royalty rate based on volume of customer products shipped or the passage of time.  In addition, consolidation activity in our customer base may also negatively impact our royalties. For example, one of our customers was recently acquired by one of our largest customers, and the acquiring customer has historically paid a lower royalty rate than the acquired customer.  In these situations, the combined entity will often seek to pay us royalties based on the lower royalty rate.  Furthermore, a combined entity will likely reach a volume-based royalty reduction (if applicable to such customer) at a faster pace, due to the higher number of units shipped by the combined entity.  Similar consolidation events in the future in our customer base would likely have an adverse effect on our royalties.  Further, our royalty revenue can be affected by the average prices at which our customers sell their products as some royalties are based on the revenue recognized by our customers.
 
Since a substantial portion of our revenue is derived from a few significant customers, the loss of a key customer or any significant delay in our customers’ product development plans could seriously impact our revenue and harm our business. In addition, if we are unable to continue to sell existing and new products to our key customers or to attract new significant customers, our future operating results could be adversely affected.  We have derived a substantial portion of our past revenue from sales to and royalties from a relatively small number of customers. As a result, the loss of any significant customer could materially and adversely affect our financial condition and results of operations.
 
Revenue from our five largest customers represented approximately 60% and 54% of our net revenue in the quarters ended September 30, 2012 and 2011, respectively. We expect that our largest customers will continue to account for a substantial portion of our net revenue for the foreseeable future.
 
In addition, consolidation, merger and acquisition activity involving our customers may increase our reliance on our largest customers.  Our largest customers, and their respective contributions to our net revenue, have varied from time to time and will probably continue to vary.
  
We may not be able to maintain or increase revenue from certain of our key customers for a variety of reasons, including the following:
 
·
our agreements with our customers typically do not provide for minimum royalties;
 
·
many of our customers have pre-existing or concurrent relationships with our current or potential competitors that may affect the customers’ decisions to purchase our products; and
 
·
some of our customers face intense competition from other manufacturers that do not use our products.
 
The loss of a key customer, a reduction in the contractual royalty rate of a customer based on volume or the passage of time, a reduction in royalty units used by any key customer, a significant delay in our customers’ product development plans or our inability to attract new significant customers could adversely impact our revenue and our results of operations.
 
 
  
Our financial results could be negatively impacted by economic conditions.   The markets served by the Company, and those of our customers, can be highly cyclical, and our financial results, both our royalty revenue and our ability to secure new contracts, could be impacted by consumer spending in the U.S. and global economies.  In addition, from time to time, the semiconductor industry has experienced significant downturns and our prospects and results are influenced in a significant way by conditions in this industry.  Royalty revenues depend significantly on worldwide economic conditions, including business and consumer spending, and license and contract revenues depend on the willingness of our potential customers to invest in new products, and both our royalty revenue and our license and contract revenue may be impacted by weak economic conditions in consumer spending and infrastructure spending. Some of the factors that could influence the levels of consumer and infrastructure spending include continuing increases in fuel and other energy costs, conditions in the real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence, the threat of sovereign default and other macroeconomic factors affecting consumer spending behavior. In addition, recent economic volatility could lead to a number of follow-on effects on our business, including insolvency issues with our customers or suppliers.  These and other economic factors could have a material adverse effect on demand for our products and services, and on our financial condition and operating results.
   
Our financial results are subject to significant fluctuations that could adversely affect our stock price.    Our financial results may vary significantly due to a number of factors. In addition, our revenue components are difficult to predict and may fluctuate significantly from period to period. Because our revenues are somewhat independent of our expenses in any particular period, it is difficult to accurately forecast our operating results. Our operating expenses are based, in part, on anticipated future revenue and a very high percentage of our expenses are fixed in the short term. As a result, if our revenue is below expectations in any quarter, the adverse effect may be magnified by our inability to adjust spending in a timely manner to compensate for the revenue shortfall. Therefore, we believe that quarter-to-quarter comparisons of our revenue and operating results may not be a good indication of our future performance. It is possible that in some future periods our results of operations may be below the expectations of securities analysts and investors. In that event, the price of our common stock may fall.
  
Factors that could cause our revenue and operating results to vary from quarter to quarter include:
 
·
our ability to identify attractive licensing opportunities and then enter into new licensing agreements (which may include licensing agreements related to our patent portfolio) on terms that are acceptable to us;
 
·
our ability to successfully conclude licensing agreements of any significant value in a given quarter;
 
·
the financial terms and delivery schedules of our contractual arrangements with our licensees, which may provide for significant up-front payments, payments based on the achievement of certain milestones or extended payment terms;
 
·
the demand for products that incorporate our technology;
 
·
our ability to develop, introduce and market new intellectual property;
 
·
the establishment or loss of licensing relationships with semiconductor companies or digital consumer, mobile, wireless, connectivity and business product manufacturers;
 
·
consolidation, merger and acquisition activity of our customer base, or customers developing competing products internally, which may cause delays or loss of sales;
 
·
the amount and timing of royalty payments;
 
 
 
·
the timing of new products and product enhancements by us and our competitors;
 
·
changes in development schedules, research and development expenditure levels and product support by us and semiconductor companies and digital consumer, mobile, wireless, connectivity and business product manufacturers; and
 
·
changes in economic and market conditions.
 
Our ability to achieve design wins may be limited unless we are able to develop enhancements and new generations of our intellectual property.  Our future success depends, in part, on our ability to develop enhancements and new generations of our processors, cores or other intellectual property that satisfy the requirements of specific product applications and introduce these new technologies to the marketplace in a timely manner. If our development efforts are not successful or are significantly delayed, or if the characteristics of our IP product offerings and related designs are not compatible with the requirements of specific product applications, our ability to achieve design wins may be limited. Our failure to achieve a significant number of design wins would adversely affect our business, results of operations and financial condition.
 
 Technical innovations of the type critical to our success are inherently complex and involve several risks, including:
 
·
our ability to anticipate and timely respond to changes in the requirements of semiconductor companies, and system original equipment manufacturers, or system OEMs, of digital consumer, mobile, wireless, connectivity and business products;
 
·
our ability to anticipate and timely respond to changes in semiconductor manufacturing processes;
 
·
changing customer preferences in the digital consumer, mobile, wireless, connectivity and business products markets;
 
·
the emergence of new standards in the semiconductor industry and for digital consumer, mobile, wireless, connectivity and business products;
 
·
the development of platforms, such as Android, by third parties and the selection of preferred solutions for such platforms;
 
·
the significant investment in a potential product that is often required before commercial viability is determined; and
 
·
the introduction by our competitors of products embodying new technologies or features.
 
Our failure to adequately address these risks could render our existing IP product offerings and related designs obsolete and adversely affect our business, results of operations and financial condition. In addition, we cannot assure you that we will have the financial and other resources necessary to develop IP product offerings and related designs in the future, or that any enhancements or new generations of the technology that we develop will generate revenue sufficient to cover or in excess of the costs of development.
 
 
  
Our stock price is volatile.  The market price of our common stock has fluctuated substantially in the past and is likely to continue to be highly volatile and subject to wide fluctuations. From January 1, 2008 through June 30, 2012 our common stock has traded at prices as low as $1.00 and as high as $18.19 per share. Fluctuations have occurred and may continue to occur in response to various factors, many of which we cannot control.
  
In addition, the market prices of securities of Internet-related, semiconductor and other technology companies have been and remain volatile. The market prices of securities of many technology companies have fluctuated significantly for reasons frequently unrelated to the operating performance of the specific companies. If our operating results do not meet the expectations of securities analysts or investors, who may derive their expectations by extrapolating data from recent historical operating results, the market price of our common stock will likely decline. Accordingly, you may not be able to resell your shares of common stock at or above the price you paid.
 
Due to the nature of our compensation programs, some of our executive officers sell shares of our common stock each quarter or otherwise periodically (including pursuant to Rule 10b5-1 stock trading plans). Sales of shares by our executive officers may not be indicative of their respective opinions of our performance at the time of sale or of our potential future performance. Nevertheless, the market price of our stock may be affected by sales of shares by our executive officers.
 
If we do not succeed in the market for mobile products, our revenue growth may be adversely impacted.  We believe that our future success depends in part on our ability to develop software, processor cores or other intellectual property that satisfies the requirements of developers, chip suppliers and manufacturers in the market for mobile products, such as handsets, tablet computers, portable media players and netbooks.   If our development efforts for mobile products are not successful or if our IP product offerings and related designs are not widely adopted, our ability to achieve design wins in this market may be limited, and this may in turn adversely affect our medium to long term revenue growth. In addition, the proliferation of the Android platform (and other mobile-related technologies) beyond the market for mobile handsets may increase our reliance on such technologies in attempting to achieve design wins in other markets, including the market for digital consumer products.  Further, with our focus on the mobile products market we are, to some extent, foregoing other uses of our research and development and marketing resources, and if this focus is not successful we may fail to capitalize on opportunities available in other markets.
 
If we do not succeed on key platforms, including Android, our ability to compete and grow may be adversely impacted.  Our future success may depend, in part, on our ability to develop software, processor cores or other intellectual property that satisfies the requirements of key platforms, such as Android.  If our development efforts are not successful or are significantly delayed, or if the characteristics of our IP product offerings and related designs are not compatible with the requirements of key platforms, our ability to achieve design wins may be limited. In addition, the proliferation of the Android platform and Android-based applications beyond the market for mobile handsets may increase our reliance on Android-related technology in attempting to achieve design wins in the market for digital consumer products, including high-end digital televisions. Competition for the development of technologies for the Android platform is rapidly developing and remains intense.
  
Our ability to remain competitive may be adversely affected if platform owners select competing technologies as preferred solutions for such platforms.  To date, most owners have not favored any particular technology for products based on their platform.  However, a decision by a platform owner to standardize on a technology offering provided by a competitor may affect the decisions of potential licensees when considering technology offerings provided by MIPS.
 
If we fail to achieve a significant number of design wins with respect to platforms like Android, our medium to longer term revenue growth may be adversely impacted. Furthermore, even if we are successful in developing technologies based on Android or other key platforms, those platforms and our technology offerings for such platforms may not be widely adopted in the industry, which may also limit our growth opportunities.
 
 
 
As international business is a significant component of our revenue, we are increasingly exposed to various legal, business, political and economic risks associated with our international operations.  For our first quarters of fiscal year 2013 and 2012, 56%  and 52% of our net revenue was derived from sales to customers outside the United States.  We have sales and operations in China as well as sales offices in Germany, Japan, Israel, Korea and Taiwan.
 
We intend to continue our international business activities. International operations are subject to many inherent risks, including but not limited to:
 
·
changes in tax laws, trade protection measures and import or export licensing requirements;
 
·
potential difficulties in protecting our intellectual property rights;
 
·
fluctuations in foreign currency exchange rates;
 
·
restrictions, or taxes, on transfers of funds between entities or facilities in different countries;
 
·
changes in a given country’s political, regulatory or economic conditions;
 
·
burdens of complying with a variety of foreign laws;
 
·
difficulties in staffing and managing international operations; and
 
·
difficulties in collecting receivables from foreign entities or delayed revenue recognition.
 
Any of the factors described above may have a material adverse effect on our ability to increase or maintain our foreign sales. Economic conditions in our primary overseas markets, particularly in Asia, may negatively impact the demand for our products abroad. All of our international sales to date have been denominated in U.S. dollars. Accordingly, an increase in the value of the U.S. dollar relative to foreign currencies could make our products less competitive in international markets or require us to assume the risk of denominating certain sales in foreign currencies. These factors could impact our business to a greater degree if we further expand our international business activities.
 
 
 
We rely on third-party technologies for the development of our products and if we were unable to use such technologies in the future, our ability to remain competitive could be harmed.   We rely on third parties for technologies that are integrated into our products. If we are unable to continue to use or license these technologies on reasonable terms, or if these technologies fail to operate properly, we may not be able to secure alternatives in a timely manner and our ability to remain competitive would be harmed. In addition, if we are unable to successfully license technology from third parties to develop future products, we may not be able to develop such products in a timely manner or at all.
 
We rely on the efforts of third parties to enhance our technology offerings and our ecosystem, and an inability to develop or maintain relationships with these parties would harm our ability to remain competitive.  We have developed relationships with third parties, including software developers, development tools providers, and third party IP suppliers, pursuant to which these parties provide operating systems, tool support, reference designs and other services that support the MIPS-based ecosystem for our licensees. We believe that these relationships enhance the attractiveness of our technology and improve our ability to achieve design wins.  If we are unable to develop or maintain these relationships, or if a product is discontinued by an existing ecosystem partner, our ability to achieve design wins in the future may be limited and our ability to remain competitive would be harmed.  In addition, the inability to maintain an attractive MIPS-based ecosystem could adversely affect our business, results of operations and financial condition.
   
Our business depends on royalties from the sale of products incorporating our technology, and we have limited visibility as to the timing and amount of such sales.   Our receipt of royalties from our licenses depends on our licensees incorporating our technology into their products, bringing those products to market, and the success of those products in the market. In the case of our semiconductor licensees, the amount of such sales is further dependent upon the sale of the products by their customers into which our licensees’ products are incorporated. Thus, our ability to achieve design wins and enter into licensing agreements does not assure us of future royalty revenue. Any royalties that we are eligible to receive are based on the sales of products incorporating the semiconductors or other products of our licensees, and as a result we do not have direct access to information that will help us anticipate the timing and amount of future royalties. Factors that negatively affect our licensees and their customers could adversely affect our business. The success of our direct and indirect customers is subject to a number of factors, including:
 
·
the competition these companies face and the market acceptance of their products;
 
·
the engineering, marketing and management capabilities of these companies and technical challenges unrelated to our technology that they face in developing their products; and
 
·
their financial and other resources.
 
Because we do not control the business practices of our licensees and their customers, we have little influence on the degree to which our licensees promote our technology and we do not set the prices at which products incorporating our technology are sold.  Further, the royalty revenues we report in any given quarter represent licensee and customer shipments one quarter in arrears, and we have very little visibility into our licensees’ and customers’ shipping of products incorporating our technology.
 
 
 
We rely on our licensees to correctly report to us the number or dollar value of products incorporating our technology that they have sold, as these sales are the basis for the royalty payments that they make to us. We have the right under our licensing agreements to perform a royalty audit of the licensee’s sales so that we can verify the accuracy of their reporting, and if we determine that there has been an over-reported or under-reported amount of royalty, we account for the results when they are identified.
 
We may be subject to litigation and other legal claims that could adversely affect our financial results.  From time to time, we are subject to litigation and other legal claims incidental to our business. In addition, it is standard practice for us to include some form of indemnification of our licensees in our core and architecture license agreements, and from time to time we respond to claims by our licensees with respect to these obligations. It is possible that we could suffer unfavorable outcomes from litigation or other legal claims, including those made with respect to indemnification obligations, that are currently pending or that may arise in the future. Any such unfavorable outcome could materially adversely affect our financial condition or results of operations.
 
We depend on our key personnel to succeed.  Our success depends to a significant extent on the continued contributions of our key management, technical, sales and marketing personnel, many of whom are highly skilled and difficult to replace. If we are unable to attract, retain and motivate such personnel in sufficient numbers and on a timely basis, we may experience difficulty in implementing our current business and product plans. In that event, we may be unable to successfully meet competitive challenges or to exploit potential market opportunities, which could adversely affect our business and results of operations.   In addition, we cannot assume that we will retain our other key officers and employees. Competition for qualified personnel, particularly those with significant experience in the semiconductor and processor design industries, remains intense.
 
We may be subject to claims of infringement.  Significant litigation regarding intellectual property rights exists in our industry. As we grow our business and expand into new markets that other companies are developing in, the risk that our technology may infringe upon the intellectual property rights of others increases. In addition, it is standard practice for us to include some form of indemnification of our licensees in our core and architecture license agreements.  We cannot be certain that third parties will not make a claim of infringement against us, our licensees, or our licensees’ customers in connection with the use of our technology. For example, we have been notified by ten licensees of a potential infringement claim by Biax Corporation asserting two US patents, allegedly involving MIPS products.  A number of these licensees have requested indemnification from MIPS. We are currently reviewing these claims, but to date, we have not incurred any losses in respect of such claims.  However, there can be no assurance that we will not incur future liabilities in connection with such claims, or that the amount of such liabilities will not be material.
 
Any claims, even those without merit, could be time consuming to defend, result in costly litigation and/or require us to enter into royalty or licensing agreements. These royalty or licensing agreements, if required, may not be available on acceptable terms to us or at all. A successful claim of infringement against us or one of our licensees in connection with its use of our technology could adversely affect our business.
 
 
  
From time to time, we receive communications from third parties asserting patent or other rights allegedly covering our products and technologies. Based upon our evaluation, we may take no action or we may seek to obtain a license, redesign an accused product or technology, initiate a formal proceeding with the appropriate agency (e.g., the U.S. Patent and Trademark Office) and/or initiate litigation. There can be no assurance in any given case that a license will be available on terms we consider reasonable or that litigation can be avoided if we desire to do so. If litigation does ensue, the adverse third party will likely seek damages (potentially including treble damages) and may seek an injunction against the sale of our products that incorporate allegedly infringing intellectual property or against the operation of our business as presently conducted, which could result in our having to stop the sale of some of our products or to increase the costs of selling some of our products. Such lawsuits could also damage our reputation. The award of damages, including material royalty payments, or the entry of an injunction against the sale of some or all of our products, could have a material adverse affect on us. Even if we were to initiate litigation, such action could be extremely expensive and time-consuming and could have a material adverse effect on us. We cannot assure you that litigation related to our intellectual property rights or the intellectual property rights of others can always be avoided or successfully concluded.
  
Even if we were to prevail, any litigation or claim for indemnification could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations, which could have a material adverse effect on us.
 
If we do not compete effectively in the market for SoC intellectual property cores and related designs, our business will be adversely affected.  Competition in the market for SoC intellectual property and related designs is intense. Our products compete with those of other designers and developers of IP product offerings, as well as those of semiconductor manufacturers whose product lines include digital, analog and/or mixed signal designs for embedded and non-embedded applications. In addition, we may face competition from the producers of unauthorized clones of our processor and other technology designs. The market for embedded processors in particular has recently faced downward pricing pressures on products. We cannot assure you that we will be able to compete successfully or that competitive pressure will not materially and adversely affect our business, results of operations and financial condition.
 
In order to be successful in marketing our products to semiconductor companies, we must differentiate our intellectual property cores and related designs from those available or under development by the internal design groups of these companies, including some of our current and prospective licensees. Many of these internal design groups have substantial engineering and design resources and are part of larger organizations with substantial financial and marketing resources. These internal design groups may develop products that compete with ours.
  
Some of our existing competitors, as well as a number of potential new competitors, have longer operating histories, greater brand recognition, and larger customer bases, as well as greater financial and marketing resources. This may allow them to respond more quickly than we can to new or emerging technologies and changes in customer requirements. It may also allow them to devote greater resources than we can to the development and promotion of their technologies and products.
 
As a result of one or more of these risks, our operating costs could increase substantially, our flexibility in operating our business could be impaired and our sales could be adversely affected. Any of these items could have an adverse affect on our financial condition or results of operations.
 
 
  
Our intellectual property may be misappropriated or expire, and we may be unable to obtain or enforce intellectual property rights.  We rely on a combination of protections provided by contracts, including confidentiality agreements, nondisclosure agreements and assignment agreements, copyrights, patents, trademarks, and common-law rights, such as trade secrets, to protect our intellectual property. We cannot assure you that any of the patents or other intellectual property rights that we own or use will not be challenged, invalidated or circumvented by others or be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage. Policing the unauthorized use of our intellectual property is difficult, and we cannot be certain that the steps we have taken will prevent the misappropriation or unauthorized use of our technologies, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. As part of our business strategy, we license our technology in multiple geographies including in countries whose laws do not provide as much protection for our intellectual property as the laws of the United States and where we may not be able to enforce our rights. In addition, intellectual property rights which we have obtained in particular geographies may and do expire from time to time, or may be subject to formal opposition proceedings or other challenges. As a result, we cannot be certain that we will be able to prevent other parties from designing and marketing unauthorized MIPS compatible products, that others will not independently develop or otherwise acquire the same or substantially equivalent technologies as ours, or that others will not use information contained in our expired patents to successfully compete against us. Moreover, cross licensing arrangements, in which we license certain of our patents but do not generally transfer know-how or other proprietary information, may facilitate the ability of cross-licensees, either alone or in conjunction with others, to develop competitive products and designs.
 
We also cannot assure you that any of our patent applications to protect our intellectual property will be approved, and patents that have issued do expire over time or may be subject to reexamination proceedings. Recent judicial decisions and legislation in the United States may increase the cost of obtaining patents, limit the ability to adequately protect our proprietary technology, and have a negative impact on the enforceability of our patents. In addition, effective trade secret protection may be unavailable or limited in certain countries. If we are unable to protect, maintain or enforce our intellectual property rights, our technology may be used without the payment of license fees and royalties, which could weaken our competitive position, reduce our operating results and increase the likelihood of costly litigation.
 
Our results of operations could vary as a result of the methods, estimates, and judgments that we use in applying our accounting policies.  The methods, estimates, and judgments that we use in applying our accounting policies have a significant impact on our results of operations (see “Critical Accounting Policies and Estimates” under Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”). Such methods, estimates, and judgments are, by their nature, subject to substantial risks, uncertainties, and assumptions, and factors may arise over time that lead us to change our methods, estimates, and judgments. Changes in these methods, estimates, and judgments could significantly affect our results of operations.
  
Changes in effective tax rates or adverse outcomes from examination of our income tax returns could adversely affect our results. Our future effective tax rates could be adversely affected by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws or regulations or in the interpretation of tax laws or regulations. We operate in the United States and internationally and occasionally face inquiries and examinations regarding tax matters in the countries that we operate in. There can be no assurance that the outcomes from examinations will not have an adverse effect on our operating results and financial condition. In addition, we are subject to certain withholding taxes relating to the repatriation of undistributed earnings from certain foreign subsidiaries.  Any changes in international laws or tax rulings in countries that we operate in could have an adverse impact on our operating results and financial condition.
 
 
  
If we experience security breaches, our reputation and business could suffer.  We retain technical, customer, design, employee and other  information on our IT systems, and it is critical to our business strategy that our facilities and infrastructure remain secure. Despite our security measures, our IT infrastructure may be vulnerable to physical break-ins, computer viruses, attacks by hackers or nefarious actors, or similar disruptive problems, including “hacktivism”. It is possible that we may have to expend additional financial and other resources to address any such problems that arise. Any physical or electronic break-in or other security breach or compromise of our IT systems and the information  retained in our IT systems could adversely affect our reputation and harm our business.
 
We may be subject to claims and liabilities in connection with the sale of our discontinued business.  In connection with the sale of our Analog Business Group to Synopsys, Inc. (Synopsys) in May 2009, we agreed to retain responsibility for certain actual or contingent liabilities and agreed to indemnify Synopsys against certain breaches of representations and warranties and other liabilities.  Our potential liability to Synopsys is subject to certain limitations, including limitations on the time period during which claims may be asserted and the amounts for which we are liable.  To date, we have not incurred any losses in respect of claims asserted by Synopsys in connection with this transaction. However, there can be no assurance that we will not incur future liabilities to Synopsys in connection with this transaction, or that the amount of such liabilities will not be material.
 
In May 2010, Synopsys delivered a letter to MIPS asserting breaches of certain representations and warranties and requesting compensation in an aggregate amount of approximately $3.7 million.  We responded to Synopsys in June 2010 and denied all claims set forth in the May 2010 letter.  In July 2010, Synopsys responded to our letter.  General discussions and exchange of information between the parties have occurred, however, there can be no assurance that the current dispute can be resolved on terms that are acceptable to us.
 
We cannot be assured that our past restructurings will sufficiently reduce our expenses relative to future revenue and may have to implement additional restructuring plans in order to reduce our operating costs.    We have implemented restructuring plans in the past to reduce our operating costs.   If we have not sufficiently reduced operating expenses or if revenues are below our expectations, we may be required to engage in additional restructuring activities, which could result in additional restructuring charges. These restructuring charges could harm our results of operations. Further, our restructuring plans could result in a potential adverse effect on employee capabilities that could harm our efficiency and our ability to act quickly and effectively in the rapidly changing technology markets in which we sell our products.
 
Catastrophic events may disrupt our business and harm our operating results.  Our corporate headquarters, a significant portion of our research and development activities, our data centers and certain other critical business operations are located in California. A disruption or failure of our operations in the event of a major natural disaster, telecommunications failure, cyber attack, civil unrest, acts of war, terrorist attack or other catastrophic event could cause system interruptions, delays in our product development and loss of critical data, and could prevent us from fulfilling our customers’ orders.  An earthquake or other catastrophic event that results in the destruction or disruption of any of our data centers or our critical business or IT systems would severely affect our ability to conduct normal business operations and, as a result, our operating results would be adversely affected.  In addition, the March 2011 earthquake and tsunami in Japan negatively impacted the operations, facilities, development plans, sales, and financial condition of our existing licensees and potential licensees with operations in Japan.  The Japan earthquake and tsunami and other future catastrophic events may adversely affect our ability to enter into new agreements with licensees and the ability of these licensees to complete product shipments upon which we earn royalty revenue.
 
 
 
We may incur impairments to long-lived assets.   We review our long-lived assets, including other intangible assets, for impairment annually in the fourth quarter or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable.  Significant negative industry or economic trends, including a significant decline in the market price of our common stock, or disruptions to our business could lead to an impairment charge of our long-lived assets, including the other intangible assets.
 
 Our consideration of impairment indicators and valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely heavily on projections of future operating performance. We operate in highly competitive environments and projections of future operating results and cash flows may vary significantly from results. Additionally, if our analysis results in impairment to our goodwill, intangible and long-lived assets, we may be required to record a charge to earnings in our financial statements during a period in which such impairment is determined to exist, which may negatively impact our results of operations.
  
The market value of our investment portfolio is exposed to fluctuations in interest rates and changes in credit ratings which could have a material adverse impact on our financial condition and results of operations.  Our cash and cash equivalents and short term investments represent significant assets that may be subject to fluctuating or even negative returns depending upon interest rate movements, changes in credit ratings, sovereign defaults and various financial market conditions. The global credit and capital markets have experienced significant volatility and disruption due to the instability in the global financial system and the current uncertainty related to global economic conditions.
 
 There is a risk that we may incur other-than-temporary impairment charges for certain types of investments, should the credit markets experience further deterioration or the underlying assets fail to perform as anticipated. Our future investment income may fall short of expectations due to changes in interest rates or a decline in fair values of our debt securities that is judged to be other-than-temporary. Furthermore, we may suffer losses in principal if we are forced to sell securities that have declined in market value due to changes in interest rates or financial market conditions.
 
The amount of our other income (expense), net could be adversely affected by macroeconomic conditions and other factors.  The amount of other income (expense), net in our consolidated statements of operations is subject to fluctuations in interest rates and changes in our cash and cash equivalent balances as well as fluctuations in foreign currency exchange rates.  These changes are, to a large extent, beyond our control and we have limited ability to predict them.
 
 
 
 
    (a)  Exhibits
 
 
 
 
 
*As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this Quarterly Report on Form 10-Q and are not deemed filed with the Securities and Exchange Commission and are not incorporated by reference in any filing of MIPS Technologies, Inc. under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any such filings.
 
 ITEMS 2 AND 3 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.

Item 4.
 Mine Safety Disclosures

Not Applicable

  ITEM 5 IS NOT APPLICABLE AND HAS BEEN OMITTED.


 
 
 
38

  
 
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.
 
 
MIPS Technologies, Inc., a Delaware corporation
 
       
November 9, 2012
By:
/s/ WILLIAM SLATER
 
   
William Slater
 
   
Vice President and Chief Financial Officer
 
   
 (Principal Financial Accounting Officer)