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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 December 31, 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 January 31, 2013, the number of outstanding shares of the registrant’s common stock, $0.001 par value, was 54,507,113.
 


 
 
 
 
 
 


 
 
MIPS TECHNOLOGIES, INC.
 
 
(In thousands)
 
   
December 31, 2012
   
June 30, 2012
 
   
(unaudited)
       
ASSETS
           
Current assets:
           
    Cash and cash equivalents
 
$
131,299
   
$
76,242
 
    Short-term investments
   
     
34,642
 
    Accounts receivable, net
   
1,068
     
27,044
 
    Prepaid expenses and other current assets
   
2,985
     
1,793
 
       Total current assets
   
135,352
     
139,721
 
Equipment, furniture and property, net
   
3,214
     
2,892
 
Intangible assets, net
   
1,588
     
1,927
 
Goodwill
   
565
     
565
 
Other assets
   
9,003
     
10,035
 
       Total Assets
 
$
149,722
   
$
155,140
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
    Accounts payable
 
$
1,619
   
$
2,578
 
    Accrued liabilities
   
13,093
     
11,852
 
    Deferred revenue
   
769
     
1,259
 
       Total current liabilities
   
15,481
     
15,689
 
Long-term liabilities: 
               
    Other long-term liabilities
   
8,874
     
9,815
 
       Total long-term liabilities
   
8,874
     
9,815
 
Stockholders’ equity:
               
Common stock, $0.001 par value:  250,000,000 shares authorized at
December 31, 2012 and June 30, 2012; and 54,414,684 and 53,575,298 shares outstanding at December 31, 2012 and June 30, 2012, respectively, net of 193,625 and 121,297 reacquired shares at  December 31, 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
   
322,629
     
316,210
 
    Accumulated other comprehensive income
   
581
     
557
 
    Accumulated deficit
   
(197,897)
     
(187,184
)
       Total stockholders’ equity
   
125,367
     
129,636
 
       Total Liabilities and Stockholders’ Equity
 
$
149,722
   
$
155,140
 
 
 
See accompanying notes.
 
 
 
MIPS TECHNOLOGIES, INC.
 
 
(In thousands, except per share data)
 
 
     
Three Months Ended
   
Six Months Ended
 
     
December 31,
   
December 31,
 
     
2012
     
2011
   
2012
   
2011
 
Revenue:
                           
    Royalties
 
$
10,751
   
$
13,224
   
$
21,224
   
$
26,203
 
    License and contract revenue
   
3,840
     
2,077
     
7,310
     
6,315
 
       Total revenue
   
14,591
     
15,301
     
28,534
     
32,518
 
Operating Expenses:
                               
    Cost of sales
   
332
     
344
     
694
     
605
 
    Research and development
   
9,031
     
8,278
     
17,329
     
16,184
 
    Sales and marketing
   
4,141
     
3,892
     
8,566
     
8,723
 
    General and administrative
   
5,478
     
3,339
     
11,044
     
6,603
 
    Transaction related costs
   
1,918
     
     
1,918
     
 
       Total operating expenses
   
20,900
     
15,853
     
39,551
     
32,115
 
Operating income (loss)
   
(6,309
)
   
(552
)
 
 
(11,017
)
   
403
 
Other income, net
   
52
     
14
     
60
     
67
 
Income (loss) before income taxes
   
(6,257
)
   
(538
 )
   
(10,957
)
   
470
 
Provision (benefit) for income taxes
   
 
130
     
 
434
     
(244
)
   
919
 
Net loss
 
$
(6,387
)
  $
(972
 
)
 
$
(10,713
)
 
$
(449
)
Net loss per share, basic
 
$
(0.12
)
 
$
(0.02
)
 
$
(0.20
)
 
$
(0.01
)
Net income loss per share, diluted
 
$
(0.12
)
 
$
(0.02
)
 
$
(0.20
)
 
$
(0.01
)
Common shares outstanding, basic
   
54,109
     
52,886
     
53,904
     
52,773
 
Common shares outstanding, diluted
   
54,109
     
52,886
     
53,904
     
52,773
 
 
 
See accompanying notes.
 
  
 
MIPS TECHNOLOGIES, INC.
 
 
(In thousands)
 
     
Six Months Ended December 31,
 
     
2012
     
2011
 
Net loss
 
$
(10,713
 
$
(449
Other comprehensive income (loss), net of tax:
               
    Foreign currency translation adjustments, net of $0 tax in 2013 and 2012
   
12
     
(15
    Changes in unrealized gains (losses) on available-for-sale securities, net of $0 tax in 2013 and 2012
   
12
     
(28
Other comprehenstive income (loss)
   
24
     
(43
Comprehensive loss
   
(10,689
)    
(492
 

 
See accompanying notes.

 
 
MIPS TECHNOLOGIES, INC.
 
 
(In thousands)
 
 
   
Six Months Ended
December 31,
 
   
2012
   
2011
 
Operating activities:
           
    Net loss
 
$
(10,713
 
$
(449
    Adjustments to reconcile net loss to cash provided by operations:
               
       Depreciation
   
724
     
471
 
       Stock-based compensation
   
3,762
     
2,953
 
       Excess tax benefits from stock-based compensation
   
(168)
     
 
       Amortization of intangible assets
   
340
     
252
 
       Amortization of investment premium, net
   
164
     
265
 
       Other non-cash charges
   
124
     
139
 
       Changes in operating assets and liabilities:
               
          Accounts receivable
   
25,976
     
1,500
 
          Prepaid expenses
   
(1,260
   
(230
          Other assets
   
1,459
     
791
 
          Accounts payable
   
(1,074
   
(613
          Accrued liabilities
   
1,283
     
(3,620
          Deferred revenue
   
(572
   
(488
          Long-term liabilities
   
(1,196
)    
53
 
    Net cash provided by operating activities
   
18,849
     
1,024
 
Investing activities:
               
    Purchases of marketable securities
   
(16,857
   
(22,588
    Proceeds from sales of marketable securities
   
27,032
     
2,613
 
    Proceeds from maturities of marketable securities
   
24,419
     
26,000
 
    Capital expenditures
   
(966
   
(659
       Net cash provided in investing activities
   
33,628
     
5,366
 
Financing activities:
               
    Net proceeds from issuance of common stock
   
2,410
     
1,269
 
    Excess tax benefits from stock-based compensation
   
168
     
 
       Net cash provided by financing activities
   
2,578
     
1,269
 
Effect of exchange rates on cash
   
2
     
(32
Net increase in cash and cash equivalents
   
55,057
     
7,627
 
Cash and cash equivalents, beginning of period
   
76,242
     
69,202
 
Cash and cash equivalents, end of period
 
$
131,299
   
$
76,829
 
  
 
 
See accompanying notes.
 
 
 
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.

Pending Acquisition by Bridge Crossing LLC and Imagination Technologies Group plc 
 
    On November 5, 2012, MIPS entered into a patent sale agreement with Bridge Crossing, LLC (“Bridge Crossing”), an acquisition vehicle of Allied Security Trust I (“AST”), and a merger agreement with 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.  On December 9, 2012, MIPS entered into an amendment to its merger agreement with Imagination that increased the purchase price being paid by Imagination to $80 million (from an original purchase price of $60 million) and removed the conditions to closing requiring the approval of the Committee on Foreign Investment in the United States and that MIPS is not a real property holding corporation. As a result of the amendment, the net proceeds to each holder of MIPS common stock following the consummation of the proposed patent sale transaction with Bridge Crossing, the proposed recapitalization and the proposed merger, increased to approximately $7.64 per share in cash.  On December 16, 2012, MIPS entered into an amendment to its merger agreement with Imagination that increased the purchase price being paid by Imagination to $100 million.  As a result of the amendment, the net proceeds to each holder of MIPS common stock, following the consummation of the proposed patent sale transaction with Bridge Crossing, the proposed recapitalization and the proposed merger, has increased to approximately $7.94 per share in cash.
 
    The patent sale agreement contemplates the sale of all of our right, title and interest in most of our active issued patents and patent applications to Bridge Crossing and sublicensable rights to a smaller group of our patents and patent applications for a total of $350 million. The patents and patent applications sold pursuant to the patent sale agreement relate to, among other categories, features, functionality, instruction set architectures and microarchitectural characteristics of microprocessors and related semiconductor hardware.
 
 
 
    The merger agreement contemplates the merger of an acquisition subsidiary (of Imagination) with and into MIPS, with MIPS continuing as the surviving corporation and a wholly owned, indirect subsidiary of Imagination following the merger.  The merger agreement provides that following the closing of the patent sale but prior to the closing of the merger, MIPS will effect a recapitalization by amending its certificate of incorporation.  If the certificate of amendment is adopted, approved and filed, MIPS will distribute the proceeds from the patent sale agreement and all cash on hand, less a fixed holdback of approximately $100 million and MIPS stockholders will be entitled to receive 0.226276 shares of MIPS common stock (which shares will be converted into cash in connection with the merger) and a cash payment, without interest and less any applicable withholding taxes, for each share of MIPS common stock held by such stockholder at the time of filing of the certificate of amendment.  The amount payable to stockholders in connection with the recapitalization will be affected by the Company’s operating results, estimated transaction expenses, timing of the recapitalization and other factors.
 
    Both the patent sale transaction and the merger transaction are subject to customary closing conditions, including the approval of the Company’s stockholders, who will vote separately on each of the transactions and the recapitalization. Approval of the patent sale transaction is not subject to stockholder approval of the recapitalization or the merger transaction.  Approval of the recapitalization is subject to stockholder approval of the patent sale transaction and the merger transaction.  Approval of the merger transaction is subject to stockholder approval of the patent sale transaction and the recapitalization.
 
    Assuming the stockholders approve both transactions and the recapitalization, 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 stockholders on a pro-rata basis through a recapitalization of MIPS common stock. If the Company completes the patent sale transaction but does not complete the proposed merger transaction, the impact of the patent sale would be an increase to the Company’s cash balance by the proceeds of the patent sale and an increase to the Company’s liabilities to advisers with respect to the patent sale.  In addition, the gain that results from the patent sale would give rise to taxable income, which would be partially offset by the Company’s ability to realize, and therefore recognize, certain net U.S. deferred tax assets.
   
    The Company’s annual meeting is currently scheduled to be held on February 6, 2013.  At the annual meeting, stockholders will vote on a number of proposals, including the patent sale transaction, the recapitalization and the merger transaction.  
 
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 December 31, 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 had no available-for-securities as of December 31, 2012. 
 
 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. As of December 31, 2012, there were no available-for-sale securities.
 
 

Note 2.  Transaction Related Costs

   
Three Months Ended
December 31,
   
Six Months Ended
December 31,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Transaction related costs
 
$
1,918
   
$
   
$
1,918
   
$
 

    The Company retained investment banking firms to advise us in connection with potential transactions related to patent monetization and other opportunities for increasing shareholder value.  The Company incurred $1.6 million in legal fees, $0.1 million in banking fees and $0.2 million in professional costs in each of the three months and six months ended December 31, 2012 relating to the pending merger with Imagination, which have been reported as transaction related costs in the Company’s condensed consolidated statements of operations for the three months and six months ended December 31, 2012. At the effective time of the transaction, the Company is expected to incur additional aggregate fees of approximately $9.7 million to the investment banking firms based on the current transaction terms.
 
Note 3.  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 loss per share (in thousands, except per share amounts):

   
Three Months Ended
December 31,
   
Six Months Ended
December 31,
 
   
2012
   
2011
   
2012
   
2011
 
Numerator:
                       
Net loss
 
$
(6,387
 
$
(972
 
$
(10,713
 
$
(449
Denominator:
                               
Weighted-average shares of common stock outstanding
   
54,109
     
52,886
     
53,904
     
52,773
 
Effect of dilutive securities
   
     
     
     
 
Shares used in computing diluted net loss per share
   
54,109
     
52,886
     
53,904
     
52,773
 
Net loss per share, basic
 
$
(0.12
)  
$
(0.02
 
$
(0.20
)  
$
(0.01
Net loss per share, diluted
 
$
(0.12
 
$
(0.02
)  
$
(0.20
 
$
(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)
   
1,256
     
3,893
     
1,264
     
3,581
 
 
 (A)
For the three and six months ended December 31, 2012, dilutive securities were excluded from diluted net loss per share because they are anti-dilutive.
 
 

 
 
Note 4.  Comprehensive Loss
 
    Total comprehensive loss includes net loss and other comprehensive loss, which primarily comprises foreign currency adjustments and changes in unrealized gains (losses) on short-term investments. Total comprehensive loss for the second quarter of fiscal year 2013 was $6.4 million and total comprehensive loss for the six months of fiscal 2013 was $10.7 million compared to comprehensive loss for the second quarter of fiscal year 2012 was $1.0 million and total comprehensive loss for the six months of fiscal 2012 was $0.5 million. 
 
Note 5.  Fair Value
 
Historically, 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 December 31, 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 December 31, 2012 and June 30, 2012 were $1.5 million and $1.3 million, respectively.

We had no available-for-sale securities as of December 31, 2012 as a result of the sale and maturity of our investments in the three months ended December 31, 2012.   In the three and six months ended December 31, 2012 we recorded a realized gain of $12,300 on our investments as part of the sale of certain securities.
 
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
 
 
 
   
Note 6.  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 six 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):
 
   
December 31, 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
   
$
(1,100
)  
$
   
$
1,100
   
$
(1,045
)
 
$
55
 
Purchased software licenses
   
2,383
     
(795
)    
1,588
     
2,383
     
(511
)
   
1,872
 
Purchased intangible assets
 
$
3,483
   
$
(1,895
)  
$
1,588
   
$
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 2013
 
 $
272
 
2014
   
491
 
2015
   
300
 
2016
   
300
 
2017
   
225
 
Total
 
$
1,588
 
 
 
 
Note 7.   Other Long-Term Assets
 
The components of other long-term assets are as follows (in thousands):
 
   
December 31, 2012
   
June 30, 2012
 
Investment in privately held company
 
$
400
   
$
400
 
Long-term engineering design software licenses
   
5,663
     
7,224
 
Deferred compensation plan
   
1,480
     
1,345
 
Other
   
1,460
     
1,066
 
Total other assets 
 
$
9,003
   
$
10,035
 
 
Note 8.  Accrued and Other Long-Term Liabilities
 
The components of accrued liabilities are as follows (in thousands):
 
   
December 31, 2012
   
June 30, 2012
 
Accrued compensation and employee-related expenses 
 
$
4,618
   
$
5,593
 
Engineering design software licenses
   
2,386
     
2,686
 
Customer advance
   
     
900
 
Accrued legal and related fees
   
2,802
     
557
 
Other accrued liabilities
   
3,287
     
2,116
 
Total accrued liabilities 
 
$
13,093
   
$
11,852
 
 
The components of other long-term liabilities are as follows (in thousands):
 
   
December 31, 2012
   
June 30, 2012
 
Deferred compensation
 
$
1,475
   
$
1,341
 
Long-term income tax liability
   
2,809
     
2,241
 
Long-term obligation related to engineering design software licenses
   
2,685
     
4,210
 
Long-term deferred revenue
   
1,656
     
1,738
 
Other
   
249
     
285
 
Total long-term liabilities 
 
$
8,874
   
$
9,815
 
 
 
 
Note 9.  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 $4.8 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 $5.1 million and advisory fees of $0.5 million that were incurred as of December 31, 2012.  These items 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 December 31, 2012, the Company’s future minimum payments for operating lease obligations are as follows:
 
   
In thousands
 
Fiscal Year
     
Remaining 2013
 
$
669
 
2014
   
1,101
 
2015
   
1,097
 
2016
   
914
 
2017
   
64
 
Total
 
$
3,845
 
    
Litigation. From time to time, we are involved in disputes, litigation and other legal actions in the ordinary course of business. We continually evaluate uncertainties associated with legal matters and record charges equal to the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the loss or range of loss can be reasonably estimated.  MIPS believes it has adequate provisions for any such matters as of December 31, 2012 and it was not reasonably possible that an additional material loss had been incurred in an amount in excess of the total amount already recognized on MIPS's financial statements.

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.  

On November 29, 2012, an alleged stockholder filed a putative class action entitled Capgrowth Group v. Sandeep S. Vij, et al., Case No. 1:12-CV-236874, in the Superior Court of the State of California, Santa Clara County, which we refer to as the Capgrowth Action. The defendants are MIPS Technologies and the members of our board of directors. The complaint alleges that the individual defendants breached their fiduciary duties to MIPS Technologies stockholders in connection with the patent sale agreement with Bridge Crossing and the merger agreement with Imagination Technologies and the transactions contemplated thereby. Specifically, the complaint alleges, among other things, that the proposed transactions arise out of a flawed process, that the individual defendants engaged in self-dealing in relation to the proposed transactions, which resulted in a failure to maximize stockholder value. The complaint further alleges that MIPS Technologies and the individual defendants breached their fiduciary duties by omitting material facts from the preliminary proxy statement filed by MIPS Technologies with the Securities and Exchange Commission on November 20, 2012, in connection with the proposed transactions. The plaintiff seeks, among other things, an order enjoining the consummation of the merger, an award of compensatory or rescissory damages, and awarding attorneys’ fees and costs. On December 17, 2012, defendants filed a motion to stay the Capgrowth Action pending resolution of the more advanced Shankar Action (defined below).

On December 12, 2012, an alleged stockholder filed a putative class action entitled Frank Minjarez v. MIPS Technologies, Inc., et al., Case No. 1:12-CV-237719, in the Superior Court of the State of California, Santa Clara County, which we refer to as the Minjarez Action. The defendants are MIPS Technologies, the members of our board of directors, an acquisition subsidiary of Imagination Technologies (“Acquisition Sub”), AST and Bridge Crossing. The complaint alleges that MIPS Technologies and the individual defendants breached their fiduciary duties to MIPS Technologies stockholders in connection with the patent sale agreement and the merger agreement and the transactions contemplated thereby. Specifically, the complaint alleges, among other things, that the proposed transactions arise out of a flawed process, that the individual defendants engaged in self-dealing in relation to the proposed transactions, which resulted in a failure to maximize stockholder value. The complaint further alleges that MIPS Technologies and the individual defendants breached their fiduciary duties by omitting material facts from the preliminary proxy statement filed by MIPS Technologies with the Securities and Exchange Commission on November 20, 2012, in connection with the proposed transactions. The complaint further alleges Acquisition Sub, Bridge Crossing and AST aided and abetted the alleged breaches of fiduciary duty by MIPS Technologies and the individual defendants. The plaintiff seeks, among other things, an order enjoining the consummation of the proposed transactions, rescinding the proposed transactions if they are consummated, and awarding attorneys’ fees and costs.
 
 

On December 12, 2012, an alleged stockholder filed a putative class action entitled Ashish Shankar v. Kenneth L. Coleman, et al., Case No. 8103-VCN, in the Court of Chancery of the State of Delaware, which we refer as the Shankar Action. The defendants are MIPS Technologies, the members of our board of directors, Acquisition Sub, Imagination Technologies, AST, and Bridge Crossing. The complaint alleges that the individual defendants breached their fiduciary duties to MIPS Technologies stockholders in connection with the patent sale agreement and the merger agreement and the transactions contemplated thereby. Specifically, the complaint alleges, among other things, that the proposed transactions arise out of a flawed process, that the individual defendants engaged in self-dealing in relation to the proposed transactions, which resulted in a failure to maximize stockholder value. The complaint further alleges that the individual defendants breached their fiduciary duties by omitting material facts from the preliminary proxy statement filed by MIPS Technologies with the Securities and Exchange Commission on November 20, 2012, in connection with the proposed transactions. The complaint further alleges Imagination Technologies, Acquisition Sub, Bridge Crossing and AST aided and abetted the alleged breaches of fiduciary duty by the individual defendants. The plaintiff seeks, among other things, an order enjoining the consummation of the proposed transactions, rescinding the proposed transactions if they are consummated or awarding rescissory damages, awarding damages, and awarding attorneys’ fees and costs.

On December 14, 2012, MIPS Technologies and the individual defendants answered the complaint in the Shankar Action. On December 17, 2012, Imagination Technologies and Acquisition Sub entered their appearance in the Shankar Action. Also on December 17, the Court of Chancery entered an order governing the production and exchange of confidential and highly confidential information. On December 18, the Court of Chancery entered a scheduling order providing for, among other things, the certification of a non-opt out class in the Shankar Action. That scheduling order further provided, among other things, that plaintiff will file an amended complaint no later than three days after MIPS Technologies filed a revised preliminary proxy statement with the SEC. Also on December 18, Imagination Technologies and Acquisition Sub answered the complaint in the Shankar Action.

On December 18, 2012, the plaintiff in the Capgrowth action filed a first amended complaint adding Imagination Technologies, Acquisition Sub, and Bridge Crossing as defendants. The first amended complaint further added allegations that Imagination Technologies, Acquisition Sub, and Bridge Crossing aided and abetted the alleged breaches of fiduciary duty by MIPS Technologies and the individual defendants. The first amended complaint further added a claim against MIPS Technologies, in which plaintiff seeks attorneys' fees associated with the increase in the merger consideration that plaintiff alleges to have precipitated. Also on December 18, 2012, the plaintiff filed an application for a temporary restraining order seeking to enjoin the consummation of the proposed transactions.

On December 19, 2012, an alleged stockholder filed a putative class action entitled John Mahlke v. MIPS Technologies, Inc., Case No. 8127, in the Court of Chancery of the State of Delaware, which we refer to as the Mahlke Action. The defendants are MIPS Technologies, the members of our board of directors, Acquisition Sub, and Imagination Technologies. The complaint alleges that the individual defendants breached their fiduciary duties to MIPS Technologies stockholders in connection with the merger agreement and the transactions contemplated thereby. Specifically, the complaint alleges, among other things, that the proposed merger arises out of a flawed process which resulted in a failure to maximize stockholder value. The complaint further alleges that the individual defendants breached their fiduciary duties by omitting material facts from the preliminary proxy statement filed by MIPS Technologies with the Securities and Exchange Commission on November 20, 2012, in connection with the proposed merger. The complaint further alleges Imagination Technologies and Acquisition Sub aided and abetted the alleged breaches of fiduciary duty by the individual defendants. The plaintiff seeks, among other things, an order enjoining the consummation of the proposed merger, rescinding the proposed merger if it is consummated or awarding rescissory damages, awarding damages, and awarding attorneys’ fees and costs. On December 20, 2012, MIPS Technologies and the individual defendants answered the complaint in the Mahlke Action.  On December 21, 2012, Imagination Technologies and Acquisition Sub answered the complaint in the Mahlke Action. 
 
 

On December 21, 2012, MIPS Technologies and the individual defendants filed an amended motion to stay in the Capgrowth Action.

On December 24, 2012, plaintiff in the Shankar Action filed an amended complaint. On December 27, 2012, the Court of Chancery granted an order consolidating the Shankar action and the Mahlke action into one action entitled In re MIPS Technologies, Inc. Stockholder Litigation, Consolidated C.A. No. 8103-VCN, which we refer to as the Consolidated Action. Pursuant to the agreement of the parties in the Consolidated Action, the amended complaint in the Shankar Action was treated as the operative complaint for the Consolidated Action.

On December 28, 2012, an alleged stockholder filed a putative class action entitled Abhilash Joseph v. Sandeep S. Vij, et al., Case No. 1:12-cv-238629, in the Superior Court of the State of California, Santa Clara County, which we refer to as the Joseph Action. The defendants are MIPS Technologies and the members of our board of directors. The complaint alleges that the individual defendants breached their fiduciary duties to MIPS Technologies stockholders in connection with the patent sale agreement and the merger agreement and the transactions contemplated thereby. Specifically, the complaint alleges, among other things, that the proposed transactions arise out of a flawed process, that the individual defendants engaged in self-dealing in relation to the proposed transactions, which resulted in a failure to maximize stockholder value. The complaint further alleges that MIPS Technologies and the individual defendants breached their fiduciary duties by omitting material facts from both the preliminary proxy statement and the revised preliminary proxy statement filed by MIPS Technologies with the Securities and Exchange Commission on November 20 and December 20, 2012, in connection with the proposed transactions. The plaintiff seeks, among other things, an order declaring the merger agreement was entered into in breach of the individual defendants' fiduciary duties and that the merger agreement is unenforceable, enjoining the consummation of the proposed transactions, rescinding the merger agreement or the patent sale agreement to the extent either is already implemented, and awarding attorneys’ fees and costs.

On January 3, 2013, without admitting any wrongdoing and to avoid the burden, expense and disruption of continued litigation, MIPS Technologies, the individual defendants, Bridge Crossing, AST, Imagination Technologies and Acquisition Sub entered into a memorandum of understanding with the plaintiffs in the Consolidated Action providing for the settlement in principle of the claims brought on behalf of the class in the Consolidated Action. Pursuant to the memorandum of understanding, MIPS Technologies included additional disclosures in the definitive proxy statement requested by plaintiffs and agreed to waive certain provisions in standstill agreements applicable to two parties. The parties to the Consolidated Action are in the process of documenting the settlement and will present the settlement to the Court of Chancery for approval when that documentation is complete.

On January 11, 2013, MIPS Technologies entered into a stipulation with the plaintiffs in the Capgrowth Action and Minjarez Action in which the parties agreed that the settlement in the Consolidated Action in Delaware, plus certain supplemental disclosures made by the Company, resolve the claims asserted in the Capgrowth Action and the Minjarez Action.

We intend to defend vigorously against those suits that have not been settled in principle. However, because any lawsuits which have not been settled in principle are in the early stages, we cannot predict the outcome at this time, and we cannot be assured that the actions will not delay the consummation of the patent sale or the merger or result in substantial costs (which may include settlement costs); even a meritless lawsuit may potentially delay consummation of the patent sale and the merger.
 
 

Note 10.  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 and six months ended December 31, 2012 and 2011 (in thousands):

     
Three months ended December 31,
   
Six months ended December 31,
 
     
2012
     
2011
   
2012
   
2011
 
Operating expenses:
                               
Research and development
 
$
710
   
$
532
   
$
1,393
   
$
995
 
Sales and marketing
   
434
     
239
     
933
     
734
 
General and administrative
   
754
     
641
     
1,437
     
1,224
 
Total stock-based compensation expense
 
$
1,898
   
$
1,412
   
$
3,763
   
$
2,953
 
 
In the three months and six months ended December 31, 2012 we issued 556,522 and 839,386 shares, respectively, of common stock for employee stock purchase plan issuances, employee restricted stock awards and stock option exercises.  For the three months and six months ended December 31, 2011, we issued 234,505 and 418,255 shares, respectively, of common stock for employee stock purchase plan issuances, 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 December 31,
 
Employee Stock Options for
six months ended December 31,
Employee Stock Purchase Plan for
three months ended December 31,
 
Employee Stock Purchase Plan for
six months ended December 31,
   
2012
   
2011
   
2012
   
2011
 
2012
   
2011
     
2012
     
2011
 
Expected volatility
   
     
0.71
   
0.72
   
0.71
   
0.46
     
0.80
     
0.56
     
0.73
 
Risk-free interest rate
   
%
   
0.66
%
 
0.45
%
 
0.68
%
 
0.10
%
   
0.07
%
   
0.14
%
   
0.08
%
Expected dividends
   
%
   
0.00
%
 
0.00
 %
 
0.00
%
 
0.00
%
   
0.00
%
   
0.00
%
 
 
0.00
%
Expected life (in years)
     
 
   
4.2
   
4.2
   
4.2
   
0.37
     
0.50
     
0.45
     
0.50
 
Weighted-average grant date fair value
 
$
 
 
 
$
2.52
 
$
3.38
 
$
2.63
 
$
1.79
   
$
2.14
   
 
$
1.98
   
 
$
2.36
 

For the three months ended December 31, 2012, there were no options granted.
 
 

Restricted Stock Units and Awards
 
    For the three months and six months ended December 31, 2012, we granted 18,000 and 455,779 restricted stock units, respectively, with an average grant date fair value of $7.16 and $6.60, respectively.  For the three months and six months ended December 31, 2011, we granted 187,730 and 493,238 restricted stock units, respectively, with an average grant date fair value of $4.64 and $4.92, respectively.  
  
Note 11.  Income Taxes
 
    We recorded an income tax expense and benefit of $0.1 million and $0.2 million for the three-month and six-month periods ended December 31, 2012, respectively, compared to an income tax expense of $0.4 million and $0.9 million for the comparable periods in fiscal year 2012.  The expense decreased in both periods of fiscal 2013 as compared to the same periods of fiscal 2012 primarily as a result of less revenue being subject to withholding tax in fiscal 2013 and the Company 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 our 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 2013 will consist of U.S. state income taxes, foreign income taxes and withholding taxes, as did our annual income tax for fiscal 2012 .  
   
    During the quarter ended December 31, 2012, we entered into a definitive agreement with Bridge Crossing to sell certain patent properties for $350 million.  The gain that results from this transaction would give rise to taxable income that would allow us to realize, and therefore recognize, the majority of our existing net U.S. deferred tax assets.  The definitive agreement is subject to stockholder approval.  Pending that approval, we have not yet reversed the valuation allowance against our net U.S. deferred tax assets.
 
    There were no material changes to our reserves for unrecognized tax benefits in our quarter ended December 31, 2012. The total amount of gross unrecognized tax benefits as of December 31, 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 December 31, 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 $1.5 million and $1.4 million for the periods ended as of December 31, 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 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.
 
 
 
 
    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 second quarter fiscal 2013 revenue of $14.6 million, representing a 5% decrease compared to second quarter of fiscal 2012.  Royalty revenue in the second quarter of fiscal 2013 was $10.8 million, a 19% decrease compared to the second quarter of fiscal 2012.  Total royalty units reported in the second quarter of fiscal 2013 were 194 million, a 4% increase from our second quarter of fiscal 2012.  As our royalty revenue is reported one quarter in arrears, shipments and revenue reported in our second quarter of fiscal 2013 represented our customer shipments from the quarter ended September 30, 2012.  License and contract revenue in the second quarter of fiscal 2013 was $3.8 million, an 85% increase compared to the second quarter of fiscal 2012.  There were 7 new license agreements executed in the second quarter of fiscal 2013 compared to 4 in the second quarter of fiscal 2012. The increase in license revenue was driven primarily by higher deal volume in our second quarter of fiscal 2013 compared to the second quarter of fiscal 2012.  

Our operating loss for the second quarter of fiscal 2013 increased to $6.3 million from an operating loss of $0.6 million in our second quarter of fiscal 2012.  The increase in operating loss for our second quarter of fiscal 2013 compared to the same quarter of fiscal 2012 was primarily due to $2.0 million of expenses incurred in connection with the Company’s exploration of options related to patent monetization and other opportunities for increasing shareholder value prior to the announcement of the transaction on November 5, 2012 included in general and administrative expenses and $1.9 million of transaction related costs subsequent to the announcement.

We recorded a tax provision of $0.1 million in second quarter of fiscal year 2013 compared to a tax provision of $0.4 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.  
 
 

Our cash and cash equivalents as of December 31, 2012 were $131.3 million compared to $110.9 million of cash, cash equivalents and short-term investments at June 30, 2012.   We had no available-for-sale securities as of December 31, 2012 as a result of the sale and maturity of our investments in the three months ended December 31, 2012. 
 
Pending Acquisition by Bridge Crossing LLC and Imagination Technologies Group plc 
 
    On November 5, 2012, MIPS entered into a patent sale agreement with Bridge Crossing, LLC (“Bridge Crossing”), an acquisition vehicle of Allied Security Trust I (“AST”), and a merger agreement with 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.  On December 9, 2012, MIPS entered into an amendment to its merger agreement with Imagination that increased the purchase price being paid by Imagination to $80 million (from an original purchase price of $60 million) and removed the conditions to closing requiring the approval of the Committee on Foreign Investment in the United States and that MIPS is not a real property holding corporation. As a result of the amendment, the net proceeds to each holder of MIPS common stock following the consummation of the proposed patent sale transaction with Bridge Crossing, the proposed recapitalization and the proposed merger, increased to approximately $7.64 per share in cash.  On December 16, 2012, MIPS entered into an amendment to its merger agreement with Imagination that increased the purchase price being paid by Imagination to $100 million.  As a result of the amendment, the net proceeds to each holder of MIPS common stock, following the consummation of the proposed patent sale transaction with Bridge Crossing, the proposed recapitalization and the proposed merger, has increased to approximately $7.94 per share in cash.
 
    The patent sale agreement contemplates the sale of all of our right, title and interest in most of our active issued patents and patent applications to Bridge Crossing and sublicensable rights to a smaller group of our patents and patent applications for a total of $350 million. The patents and patent applications sold pursuant to the patent sale agreement relate to, among other categories, features, functionality, instruction set architectures and microarchitectural characteristics of microprocessors and related semiconductor hardware.
 
    The merger agreement contemplates the merger of an acquisition subsidiary (of Imagination) with and into MIPS, with MIPS continuing as the surviving corporation and a wholly owned, indirect subsidiary of Imagination following the merger.  The merger agreement provides that following the closing of the patent sale but prior to the closing of the merger, MIPS will effect a recapitalization by amending its certificate of incorporation.  If the certificate of amendment is adopted, approved and filed, MIPS will distribute the proceeds from the patent sale agreement and all cash on hand, less a fixed holdback of approximately $100 million and MIPS stockholders will be entitled to receive 0.226276 shares of MIPS common stock (which shares will be converted into cash in connection with the merger) and a cash payment, without interest and less any applicable withholding taxes, for each share of MIPS common stock held by such stockholder at the time of filing of the certificate of amendment.  The amount payable to stockholders in connection with the recapitalization will be affected by the Company’s operating results, estimated transaction expenses, timing of the recapitalization and other factors.
 
    Both the patent sale transaction and the merger transaction are subject to customary closing conditions, including the approval of the Company’s stockholders, who will vote separately on each of the transactions and the recapitalization. Approval of the patent sale transaction is not subject to stockholder approval of the recapitalization or the merger transaction.  Approval of the recapitalization is subject to stockholder approval of the patent sale transaction and the merger transaction.  Approval of the merger transaction is subject to stockholder approval of the patent sale transaction and the recapitalization.
 
 
 
    Assuming the stockholders approve both transactions and the recapitalization, 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 stockholders on a pro-rata basis through a recapitalization of MIPS common stock. If the Company completes the patent sale transaction but does not complete the proposed merger transaction, the impact of the patent sale would be an increase to the Company’s cash balance by the proceeds of the patent sale and an increase to the Company’s liabilities to advisers with respect to the patent sale.  In addition, the gain that results from the patent sale would give rise to taxable income, which would be partially offset by the Company’s ability to realize, and therefore recognize, certain net U.S. deferred tax assets.
 
    The Company’s annual meeting is currently scheduled to be held on February 6, 2013.  At the annual meeting, stockholders will vote on a number of proposals, including the patent sale transaction, the recapitalization and the merger transaction.  
 
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 and six-month periods ended December 31, 2012 and December 31, 2011 was as follows (in thousands, except percentages):

   
Three Months Ended December 31,
   
Six Months Ended December 31,
 
   
2012
   
2011
   
Change 
(in Percent)
   
2012
   
2011
   
Change 
(in Percent)
 
Revenue
                                   
Royalties
 
$
10,751
   
$
13,224
     
-19
%
   
21,224
   
$
26,203
     
-19
%
Percentage of Total Revenue
   
74
%
   
86
%
           
74
%
   
81
%
       
License and Contract Revenue
 
$
3,840
   
$
2,077
     
85
%
   
7,310
   
$
6,315
     
16
%
Percentage of Total Revenue
   
26
%
   
14
%
           
26
%
   
19
%
       
Total Revenue
 
$
14,591
   
$
15,301
     
-5
%
 
$
28,534
   
$
32,518
     
-12
%
 
 
 
Royalties.  Our royalty revenue in the second 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 second quarter of fiscal year 2013 were 194 million, a 4% increase from our second quarter of fiscal year 2012. The royalty per unit for the current quarter was 5.5 cents compared to 7.1 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.  Included in our royalties in the quarter ending December 31, 2012 were $0.2 million in royalty adjustments that were received from several of our customers compared  to $1.2 million in the year ago period received from one of our customers..
 
    Royalties in the first six months of fiscal 2013 were down 19% from the comparable period in fiscal 2012. The decrease was primarily due to decrease in royalty per unit. 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. Included in our royalties in the first half of fiscal 2013 were $0.4 million in royalty adjustments that were received from several of our customers compared to $2.8 million in the year ago period received from several of our customers.
 
    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 11 active architecture customers. We recognize all license revenues under limited and unlimited use license agreements upon execution of the agreement 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 increased by 85% in the second quarter of fiscal 2013 from the comparable period in fiscal 2012. There were 7 new license agreements executed in the second quarter of fiscal 2013 compared to 4 in the second quarter of fiscal 2012. Unlimited use licenses accounted for $2.4 million of our license and contract revenue in our second quarter of fiscal 2013, and had terms ranging from 1 to 4 years with an average term of approximately 3 years. Contract revenue from unlimited use license agreements was $0.6 million in the same period of fiscal 2012.
 
    License and contract revenue for the six months ended December 31, 2012 increased by 16% from the comparable period in fiscal 2012 which was primarily due to higher average selling price of licenses as compared to the first half of fiscal 2012. Unlimited use licenses accounted for $5.0 million of our license and contract revenue in the six months ended December 31, 2012. The range of terms of unlimited license agreements we completed in the first six months of fiscal 2012 was 1 to 9 years with an average term of approximately 4 years. Contract revenue from unlimited use license agreements was $3.5 million in the same period of fiscal 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 December 31,
   
Six Months Ended December 31,
 
   
2012
   
2011
   
Change (in Percent)
   
2012
   
2011
   
Change (in Percent)
 
Operating Expenses
                                   
Cost of Sales
 
$
332
   
$
344
     
(4
%)
 
$
694
   
$
605
     
15
%
Research and Development
 
$
9,031
   
$
8,278
     
9
%
 
$
17,329
   
$
16,184
     
7
%
Sales and Marketing
 
$
4,141
   
$
3,892
     
6
%
 
$
8,566
   
$
8,723
     
(2
%)
General and Administrative
 
$
5,478
   
$
3,339
     
64
%
 
$
11,044
   
$
6,603
     
67
%
Merger Related Costs
 
$
1,918
   
$
     
100
%
 
$
1,918
   
$
     
100
%
 
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 cost of sales was flat from the second quarter of fiscal year 2013 over the same period in fiscal year 2012.

The increase of $0.1 million in cost of sales for the first six months ended December 31, 2012 compared to the same period of fiscal 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 $0.8 million increase in research and development expense for the second quarter of fiscal year 2013 over the comparable period in fiscal year 2012 was primarily due to increases of (i)  $0.5 million in incentive compensation resulting from the Company meeting certain financial targets in the second quarter of fiscal year 2013, (ii) $0.2 million in stock compensation expense related to timing and mix of grants to employees, (iii) $0.2 million in facilities and depreciation expense, (iv) $0.1 million in salary expense, and (v) $0.1 million in other expenses. These increases were partially offset by a $0.3 million decrease in research and development porting programs in the second quarter of fiscal year 2013 over the comparable period in fiscal year 2012.  The porting programs ensure application compatibility with MIPS-based processors, and our spending on such programs fluctuates based on timing of development projects and product releases.
 
The $1.1 million increase in research and development for the six months ended December 31, 2012 compared to the same period in fiscal 2012 was primarily due to increases of (i) $1.0 million in incentive compensation resulting from the Company meeting certain financial targets in the first six months of fiscal year 2013, (ii) $0.4 million in stock compensation expense related to timing and number of shares granted to employees, and (iii) $0.4 million in facilities and depreciation expense. These increases were partially offset by a $0.7 million decrease in research and development porting projects in the first six months 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 $0.3 million increase in sales and marketing expense for second quarter of fiscal 2013 over the comparable period in fiscal 2012 was primarily due to increases of (i) $0.4 million in commission and incentive compensation resulting from the Company meeting certain financial targets in the second quarter of fiscal year 2013 and, (ii) $0.2 million in stock compensation expense related to timing and mix of grants to employees.  These increases were partially offset by $0.3 million decrease in consulting fees related to mobile and Android projects, which fluctuates based on timing of development projects and product releases.

The $0.2 million decrease in sales and marketing expense for the six months ended December 31, 2012 compared to the same period in fiscal 2012 was primarily due a $0.3 million decrease in severance costs and , a $0.7 million decrease in consulting fees related to mobile and Android projects.  These decreases were partially offset by a $0.6 million increase in commission and incentive compensation resulting from the Company meeting certain financial targets in the first six months of fiscal year 2013. There was also a $0.2 million increase in stock compensation expense related to timing and number of shares granted to employees.

            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 $2.1 million increase in our general and administrative expense for the second quarter of fiscal year 2013 over the comparable period in fiscal year 2012 was due to increases of (i) $2.0 million  in connection with the Company’s exploration of options related to patent monetization and other opportunities for increasing shareholder value prior to the announcement of the transaction on November 5, 2012, (ii) $0.3 million in incentive compensation resulting from the Company meeting certain financial targets in the second quarter of fiscal year 2013.  These increases were partially offset by $0.1 million decrease in consulting expense and a $0.1 million decrease in bad debt expense.

The $4.4 million increase in our general and administrative expense for the six months ended December 31, 2012 compared to the same period in fiscal 2012 was primarily due to an increases of  (i) $3.8 million  in connection with the Company’s exploration of options related to patent monetization and other opportunities for increasing shareholder value prior to the announcement of the transaction on November 5, 2012, (ii) $0.6 million in incentive compensation resulting from the Company meeting certain financial targets for the first six months of fiscal year 2013.

Transaction Related Costs.  Transaction and related costs comprise legal, banking fees and other professional charges subsequent to the announcement of the merger on November 5, 2012.
 
 

The $1.9 million increase in transaction related costs for the second quarter of fiscal 2013 over the comparable period in fiscal 2012 and for the six months ended December 31, 2012 compared to the same period in fiscal 2012 were related to legal, banking fees and other professional charges subsequent to the announcement of the transaction on November 5, 2012.
 
Other Income, Net. Other Income (Expense), was relatively flat for the second quarter of fiscal 2013 over the comparable period in fiscal 2012 and for the six months ended December 31, 2012 compared to the same period in fiscal 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 expense and benefit of $0.1 million and $0.2 million for the three-month and six-month periods ended December 31, 2012, respectively, compared to an income tax expense of $0.4 million and $0.9 million for the comparable periods in fiscal year 2012, respectively.  The expense decreased in both periods of fiscal 2013 as compared to the same periods of fiscal 2012 primarily as a result of less revenue being subject to withholding tax in fiscal 2013 and the Company 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.
 
    During the quarter ended December 31, 2012, we entered into a definitive agreement with Bridge Crossing to sell certain patent properties for $350 million.  The gain that results from this transaction would give rise to taxable income that would allow us to realize, and therefore recognize, the majority of our existing net U.S. deferred tax assets.  The definitive agreement is subject to stockholder approval.  Pending that approval, we have not yet reversed the valuation allowance against our net U.S. deferred tax assets.   

Liquidity and Capital Resources
 
At December 31, 2012, we had cash and cash equivalents and short term investments of $131.3 million, an increase of approximately $20.4 million from June 30, 2012.  
 
 

Operating Activities

Net cash provided by operating activities was $18.8 million for the six months ended December 31, 2012. Our net loss included the effects of non-cash charges of $3.8 million from stock compensation expense and $1.1 million in depreciation and amortization of intangible assets.  In addition, cash generated from operating activities increased primarily as a result of a $26.0 million decrease in accounts receivable, reflecting timing of customer billings and payments received, and an $0.2 million decrease in prepaid expenses and other current and long term assets, primarily reflecting the timing of engineering design software license payments and timing of fees pertaining to the pending merger, and a $0.2 million increase in accounts payable and accrued liabilities, primarily due to increased legal fees pertaining to the merger.  These increases in cash were offset by cash used as a result of (i) a $1.2 million decrease in long term liabilities, primarily reflecting timing of engineering design software design software license payments, and (ii) a $0.6 million decrease in deferred revenue, reflecting timing of customer payments compared to timing of revenue recognition. 

Net cash provided by operating activities was $1.0 million for the six months ended December 31, 2011.   Our loss in the first six months of fiscal 2012 was offset by non-cash charges of $3.0 million from stock compensation expense and $0.7 million in depreciation and amortization of intangible assets.  In addition, cash generated from operating activities increased primarily as a result of a (i) a $0.6 million decrease in prepaid expenses and other current and long term assets and (ii) a $1.5 million decrease in accounts receivable, reflecting timing of customer billings and payments received. These decreases were partially offset by cash used as a result of $4.2 million decrease in accounts payable and accrued liabilities, primarily due to the payment of our fiscal 2011 bonus in the first quarter of 2012. 

Investing Activities

 Net cash provided by investing activities was $33.6 million for the six months ended December 31, 2012 as a result of net proceeds of $34.6 million from the net sales and maturities of available-for-sale securities partially offset by $1.0 million used to purchase property, furniture and equipment.

 Net cash provided by investing activities was $5.4 million for the six months ended December 31, 2011 as a result of $6.0 million from the net maturities of available-for-sale securities and $0.7 million used to purchase property, furniture and equipment.  

Financing Activities

Net cash provided by financing activities was $2.6 million for the six months ended December 31, 2012.   This cash generated from financing activities resulted from $2.4 million from stock option exercises and purchases under our employee stock purchase plan and $0.2 million of cash provided by excess tax benefits from options exercised.

Net cash provided by financing activities was $1.3 million for the six months ended December 31, 2011.   This cash generated from financing activities resulted from stock option exercises and purchases under our employee stock purchase plan.
 
 
  
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 as well as costs relating to the proposed merger and proposed sale of patents;
 
the costs associated with capital expenditures.
 
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 December 31, 2012 were as follows (in thousands):
 
   
Total
   
Less than 1 year
   
1-3 years
   
3-5 years
 
Operating lease obligations (1)
 
$
3,845
   
$
669
   
$
2,198
   
$
978
 
Purchase obligations (2)
   
10,946
     
7,171
     
3,250
     
525
 
Other long-term liabilities and obligations (3)
   
1,475
     
 —
     
1,475
     
 —
 
Total
 
$
16,266
   
$
7,840
   
$
6,923
   
$
1,503
 
 
(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 $11.0 million at December 31, 2012 decreased from our purchase obligations as of June 30, 2012 by $4.5 million.  Of the total, $5.1 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 $5.9 million of purchase obligations includes approximately $4.8 million due by December 31, 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 and advisory fees of $0.5 million that were incurred as of December 31, 2012 and included in the Company’s accrued liabilities. 
 
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 December 31, 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.”
 
On November 29, 2012, an alleged stockholder filed a putative class action entitled Capgrowth Group v. Sandeep S. Vij, et al., Case No. 1:12-CV-236874, in the Superior Court of the State of California, Santa Clara County, which we refer to as the Capgrowth Action. The defendants are MIPS Technologies and the members of our board of directors. The complaint alleges that the individual defendants breached their fiduciary duties to MIPS Technologies stockholders in connection with the patent sale agreement with Bridge Crossing and the merger agreement with Imagination Technologies and the transactions contemplated thereby. Specifically, the complaint alleges, among other things, that the proposed transactions arise out of a flawed process, that the individual defendants engaged in self-dealing in relation to the proposed transactions, which resulted in a failure to maximize stockholder value. The complaint further alleges that MIPS Technologies and the individual defendants breached their fiduciary duties by omitting material facts from the preliminary proxy statement filed by MIPS Technologies with the Securities and Exchange Commission on November 20, 2012, in connection with the proposed transactions. The plaintiff seeks, among other things, an order enjoining the consummation of the merger, an award of compensatory or rescissory damages, and awarding attorneys’ fees and costs. On December 17, 2012, defendants filed a motion to stay the Capgrowth Action pending resolution of the more advanced Shankar Action (defined below).

On December 12, 2012, an alleged stockholder filed a putative class action entitled Frank Minjarez v. MIPS Technologies, Inc., et al., Case No. 1:12-CV-237719, in the Superior Court of the State of California, Santa Clara County, which we refer to as the Minjarez Action. The defendants are MIPS Technologies, the members of our board of directors, an acquisition subsidiary of Imagination Technologies (“Acquisition Sub”), AST and Bridge Crossing. The complaint alleges that MIPS Technologies and the individual defendants breached their fiduciary duties to MIPS Technologies stockholders in connection with the patent sale agreement and the merger agreement and the transactions contemplated thereby. Specifically, the complaint alleges, among other things, that the proposed transactions arise out of a flawed process, that the individual defendants engaged in self-dealing in relation to the proposed transactions, which resulted in a failure to maximize stockholder value. The complaint further alleges that MIPS Technologies and the individual defendants breached their fiduciary duties by omitting material facts from the preliminary proxy statement filed by MIPS Technologies with the Securities and Exchange Commission on November 20, 2012, in connection with the proposed transactions. The complaint further alleges Acquisition Sub, Bridge Crossing and AST aided and abetted the alleged breaches of fiduciary duty by MIPS Technologies and the individual defendants. The plaintiff seeks, among other things, an order enjoining the consummation of the proposed transactions, rescinding the proposed transactions if they are consummated, and awarding attorneys’ fees and costs.
 

 
 
On December 12, 2012, an alleged stockholder filed a putative class action entitled Ashish Shankar v. Kenneth L. Coleman, et al., Case No. 8103-VCN, in the Court of Chancery of the State of Delaware, which we refer as the Shankar Action. The defendants are MIPS Technologies, the members of our board of directors, Acquisition Sub, Imagination Technologies, AST, and Bridge Crossing. The complaint alleges that the individual defendants breached their fiduciary duties to MIPS Technologies stockholders in connection with the patent sale agreement and the merger agreement and the transactions contemplated thereby. Specifically, the complaint alleges, among other things, that the proposed transactions arise out of a flawed process, that the individual defendants engaged in self-dealing in relation to the proposed transactions, which resulted in a failure to maximize stockholder value. The complaint further alleges that the individual defendants breached their fiduciary duties by omitting material facts from the preliminary proxy statement filed by MIPS Technologies with the Securities and Exchange Commission on November 20, 2012, in connection with the proposed transactions. The complaint further alleges Imagination Technologies, Acquisition Sub, Bridge Crossing and AST aided and abetted the alleged breaches of fiduciary duty by the individual defendants. The plaintiff seeks, among other things, an order enjoining the consummation of the proposed transactions, rescinding the proposed transactions if they are consummated or awarding rescissory damages, awarding damages, and awarding attorneys’ fees and costs.

On December 14, 2012, MIPS Technologies and the individual defendants answered the complaint in the Shankar Action. On December 17, 2012, Imagination Technologies and Acquisition Sub entered their appearance in the Shankar Action. Also on December 17, the Court of Chancery entered an order governing the production and exchange of confidential and highly confidential information. On December 18, the Court of Chancery entered a scheduling order providing for, among other things, the certification of a non-opt out class in the Shankar Action. That scheduling order further provided, among other things, that plaintiff will file an amended complaint no later than three days after MIPS Technologies filed a revised preliminary proxy statement with the SEC. Also on December 18, Imagination Technologies and Acquisition Sub answered the complaint in the Shankar Action.

On December 18, 2012, the plaintiff in the Capgrowth action filed a first amended complaint adding Imagination Technologies, Acquisition Sub, and Bridge Crossing as defendants. The first amended complaint further added allegations that Imagination Technologies, Acquisition Sub, and Bridge Crossing aided and abetted the alleged breaches of fiduciary duty by MIPS Technologies and the individual defendants. The first amended complaint further added a claim against MIPS Technologies, in which plaintiff seeks attorneys' fees associated with the increase in the merger consideration that plaintiff alleges to have precipitated. Also on December 18, 2012, the plaintiff filed an application for a temporary restraining order seeking to enjoin the consummation of the proposed transactions.

On December 19, 2012, an alleged stockholder filed a putative class action entitled John Mahlke v. MIPS Technologies, Inc., Case No. 8127, in the Court of Chancery of the State of Delaware, which we refer to as the Mahlke Action. The defendants are MIPS Technologies, the members of our board of directors, Acquisition Sub, and Imagination Technologies. The complaint alleges that the individual defendants breached their fiduciary duties to MIPS Technologies stockholders in connection with the merger agreement and the transactions contemplated thereby. Specifically, the complaint alleges, among other things, that the proposed merger arises out of a flawed process which resulted in a failure to maximize stockholder value. The complaint further alleges that the individual defendants breached their fiduciary duties by omitting material facts from the preliminary proxy statement filed by MIPS Technologies with the Securities and Exchange Commission on November 20, 2012, in connection with the proposed merger. The complaint further alleges Imagination Technologies and Acquisition Sub aided and abetted the alleged breaches of fiduciary duty by the individual defendants. The plaintiff seeks, among other things, an order enjoining the consummation of the proposed merger, rescinding the proposed merger if it is consummated or awarding rescissory damages, awarding damages, and awarding attorneys’ fees and costs. On December 20, 2012, MIPS Technologies and the individual defendants answered the complaint in the Mahlke Action. On December 21, 2012, Imagination Technologies and Acquisition Sub answered the complaint in the Mahlke Action. 
 
 

On December 21, 2012, MIPS Technologies and the individual defendants filed an amended motion to stay in the Capgrowth Action.

On December 24, 2012, plaintiff in the Shankar Action filed an amended complaint. On December 27, 2012, the Court of Chancery granted an order consolidating the Shankar action and the Mahlke action into one action entitled In re MIPS Technologies, Inc. Stockholder Litigation, Consolidated C.A. No. 8103-VCN, which we refer to as the Consolidated Action. Pursuant to the agreement of the parties in the Consolidated Action, the amended complaint in the Shankar Action was treated as the operative complaint for the Consolidated Action.

On December 28, 2012, an alleged stockholder filed a putative class action entitled Abhilash Joseph v. Sandeep S. Vij, et al., Case No. 1:12-cv-238629, in the Superior Court of the State of California, Santa Clara County, which we refer to as the Joseph Action. The defendants are MIPS Technologies and the members of our board of directors. The complaint alleges that the individual defendants breached their fiduciary duties to MIPS Technologies stockholders in connection with the patent sale agreement and the merger agreement and the transactions contemplated thereby. Specifically, the complaint alleges, among other things, that the proposed transactions arise out of a flawed process, that the individual defendants engaged in self-dealing in relation to the proposed transactions, which resulted in a failure to maximize stockholder value. The complaint further alleges that MIPS Technologies and the individual defendants breached their fiduciary duties by omitting material facts from both the preliminary proxy statement and the revised preliminary proxy statement filed by MIPS Technologies with the Securities and Exchange Commission on November 20 and December 20, 2012, in connection with the proposed transactions. The plaintiff seeks, among other things, an order declaring the merger agreement was entered into in breach of the individual defendants' fiduciary duties and that the merger agreement is unenforceable, enjoining the consummation of the proposed transactions, rescinding the merger agreement or the patent sale agreement to the extent either is already implemented, and awarding attorneys’ fees and costs.

On January 3, 2013, without admitting any wrongdoing and to avoid the burden, expense and disruption of continued litigation, MIPS Technologies, the individual defendants, Bridge Crossing, AST, Imagination Technologies and Acquisition Sub entered into a memorandum of understanding with the plaintiffs in the Consolidated Action providing for the settlement in principle of the claims brought on behalf of the class in the Consolidated Action. Pursuant to the memorandum of understanding, MIPS Technologies included additional disclosures in the definitive proxy statement requested by plaintiffs and agreed to waive certain provisions in standstill agreements applicable to two parties. The parties to the Consolidated Action are in the process of documenting the settlement and will present the settlement to the Court of Chancery for approval when that documentation is complete.

On January 11, 2013, MIPS Technologies entered into a stipulation with the plaintiffs in the Capgrowth Action and Minjarez Action in which the parties agreed that the settlement in the Consolidated Action in Delaware, plus certain supplemental disclosures made by the Company, resolve the claims asserted in the Capgrowth Action and the Minjarez Action.

We intend to defend vigorously against those suits that have not been settled in principle. However, because any lawsuits which have not been settled in principle are in the early stages, we cannot predict the outcome at this time, and we cannot be assured that the actions will not delay the consummation of the patent sale or the merger or result in substantial costs (which may include settlement costs); even a meritless lawsuit may potentially delay consummation of the patent sale and the merger.
 
 
 
 
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.
 
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 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. The terms of the merger agreement were subsequently amended on December 9, 2012 and on December 16, 2012. 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 1 of this Quarterly Report on Form 10-Q. For additional information, also see the Company’s definitive proxy statement filed with the Securities and Exchange Commission on January 7, 2013.
 
 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  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 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 and reimburse Imagination 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.
 
 
 
Our business and results of operations may be affected by litigation related to the sale of certain of our patents to Bridge Crossing and our proposed acquisition by Imagination.  In addition, such litigation may delay the closing of the patent sale and the closing of the merger.

In connection with our proposed patent sale to Bridge Crossing and our proposed acquisition by Imagination, a total of five stockholder lawsuits have been filed against the Company.  Three of the lawsuits have been filed in the Superior Court of the State of California, Santa Clara County, and two of the lawsuits have been filed in the Court of Chancery of the State of Delaware.

On January 3, 2013, without admitting any wrongdoing and to avoid the burden, expense and disruption of continued litigation, MIPS Technologies, certain individual defendants, Bridge Crossing, Allied Security Trust, Imagination and a subsidiary of Imagination entered into a memorandum of understanding with the plaintiffs in the two Delaware actions providing for the settlement in principle of the claims brought on behalf of the class in the two Delaware actions. On January 11, 2013, the Company entered into a stipulation with the plaintiffs in two of the three California actions in which the parties agreed that the settlement in the two Delaware actions, plus certain supplemental disclosures made pursuant to a filing with the Securities and Exchange Commission, resolve the claims asserted in these two California actions.
 
We intend to defend vigorously against those suits that have not been settled in principle. However, because any lawsuits which have not been settled in principle are in the early stages, we cannot predict the outcome at this time, and we cannot be assured that the actions will not delay the consummation of the patent sale or the merger or result in substantial costs (which may include settlement costs); even a meritless lawsuit may potentially delay consummation of the patent sale and the merger.

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 with certain license rights to our patent portfolio.  In the second quarter of fiscal year 2013, our license and contract revenue increased by 85% as compared to the second 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 11 active architecture customers.  In addition, in June 2012 we entered into a license agreement with a customer providing them with certain license rights to our patent 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 (including the proposed patent sale to Bridge Crossing).
 
 
 
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 second quarter of fiscal year 2013, license revenue from unlimited use license agreements was 71% 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.

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 56% and 48% of our net revenue in the quarters ended December 31, 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.

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 (including the proposed patent sale to Bridge Crossing), 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 (including the proposed patent sale to Bridge Crossing). 
 
 
  
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 second quarters of fiscal year 2013 and 2012, 47%  and 55% 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:
 
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changes in tax laws, trade protection measures and import or export licensing requirements;
 
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potential difficulties in protecting our intellectual property rights;
 
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fluctuations in foreign currency exchange rates;
 
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restrictions, or taxes, on transfers of funds between entities or facilities in different countries;
 
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changes in a given country’s political, regulatory or economic conditions;
 
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burdens of complying with a variety of foreign laws;