MOSAID Technologies Inc.
TSX : MSD

MOSAID Technologies Inc.

August 26, 2010 16:01 ET

MOSAID Reports Results for First Quarter Fiscal 2011 and Dividend

Quarterly dividend of $0.25 per share payable on October 8, 2010

OTTAWA, ONTARIO--(Marketwire - Aug. 26, 2010) -

Editors note: A link to a video is provided for this press release. Please go to: http://investorchannel.mosaid.com

MOSAID Technologies Incorporated (TSX:MSD) today announced financial results for the first quarter of fiscal 2011, ended July 31, 2010.

Q1 Fiscal 2011 Results

  • Q1 revenues of $18.5 million, up 14% from $16.2 million in Q1 fiscal 2010

  • Q1 pro forma net income of $8.6 million, up 29% from $6.6 million in Q1 fiscal 2010. Pro forma diluted EPS of $0.73, based on 11.84 million diluted shares, compared to $0.65 per diluted share in Q1 fiscal 2010, based on 10.25 million diluted shares

  • Q1 GAAP net income of $5.2 million, compared to $6.4 million in Q1 fiscal 2010. GAAP diluted EPS of $0.44, compared to $0.63 per diluted share in Q1 fiscal 2010

"MOSAID delivered a very strong first quarter to begin the new fiscal year," said John Lindgren, President and CEO. "Revenue growth was healthy and met our expectations. Pro forma net income growth was better than we anticipated, aided partially by lower expenses. During a period of economic uncertainty, our business is robust. Looking ahead, we are on track to meet our targets for fiscal 2011."

"Operationally, the early renewal of our patent license agreement with Nanya Technology – for a term that is two years longer than the current agreement – testifies to the strength of MOSAID's semiconductor patent portfolio. We also introduced a prototype Solid State Drive that uses our innovative HLNAND™ interface technology to achieve significantly improved performance. MOSAID's commitment to R&D is also generating a continuous flow of new patent applications."

MOSAID had cash and marketable securities of $103.6 million at the end of the first quarter of fiscal 2011, compared to $100.8 million at the end of the fourth quarter of fiscal 2010. In Q1 fiscal 2011, MOSAID returned $2.9 million to shareholders in quarterly dividend payments.

On August 26, 2010, MOSAID declared a quarterly dividend of $0.25 per share. The dividend, which is an eligible dividend, is payable on October 8, 2010 to shareholders of record as of September 24, 2010.

A reconciliation of pro forma net income to Canadian generally accepted accounting principles (GAAP) net income is included in the pro forma financial statements accompanying this press release.

First Quarter Operational Highlights

Semiconductor memory patent licensing: MOSAID signed a seven-year royalty bearing patent portfolio license agreement with Nanya Technology Corporation of Taiwan. Nanya's new agreement begins on October 1, 2010, following the expiration of its current five-year agreement on September 30, 2010. The new agreement grants Nanya a license under MOSAID's patents for all Dynamic Random Access Memory (DRAM) products sold worldwide under Nanya's brand name. MOSAID has licensed virtually 100% of the companies that make commodity DRAM chips to its semiconductor memory patents. Since 2007, MOSAID has had four opportunities to sign existing term licensees to new licenses: the Company has successfully signed new deals each time.

Innovation: MOSAID introduced a Solid State Drive (SSD) prototype that uses the Company's HyperLink NAND (HLNAND™) Flash architecture and interface. The HLNAND™ SSD, designed by MOSAID and its development partner INDILINX of Korea, demonstrates sustained per-channel input/output bandwidths an order of magnitude higher than SSD based on conventional NAND Flash interfaces. MOSAID inventors have filed 375 Flash patent applications, with 19 now issued as United States patents.

HLNAND™ license: MOSAID granted Scanimetrics Inc. of Alberta, a royalty bearing license to develop, manufacture and market MOSAID's HLNAND™ Flash memory chip and module, alone or designed into Scanimetrics' products.

Patent portfolio development: MOSAID had 2,050 patents and applications at the end of Q1 fiscal 2011, up 15% from 1,788 patents and applications one year ago. In late fiscal 2010, MOSAID purchased from Samsung Electronics Co. a large number of semiconductor patents, which will be added to MOSAID's portfolio when the selection process is completed.

Litigation update: MOSAID served LSI Corporation and Agere Systems, Inc. with a breach of contract complaint. The suit was originally filed on March 9, 2010 in the United States District Court for the District of Delaware, but only served on June 10, 2010.

Subsequent to the quarter-end, Cisco Systems Inc. on August 23, 2010, filed and served MOSAID with a Complaint for Declaratory Judgment in the United States District Court for the District of Delaware. In its complaint, Cisco is seeking a declaration of non-infringement and invalidity with respect to nine U.S. patents and one patent application owned by MOSAID, and which relate generally to Power-over-Ethernet technology.

Q2 and Fiscal 2011 Guidance

Management offers the following guidance for the second quarter of fiscal 2011:

  • Q2 revenues of $18.5 million to $20.0 million

  • Q2 pro forma net income of $7.0 million to $7.5 million, or $0.59 to $0.63 per diluted share, based on 11.9 million diluted shares

The Company is maintaining its previously announced guidance for fiscal 2011:

  • Fiscal 2011 revenues in the range of $77.0 million to $80.0 million

  • Fiscal 2011 pro forma net income of $27.8 million to $29.3 million, or $2.33 to $2.45 per diluted share, based on 11.95 million diluted shares

MOSAID's revenues result primarily from intellectual property agreements, which by their nature may actually close on dates other than those projected. MOSAID's priority and focus is on obtaining the best terms possible under its agreements, rather than on the particular timing of agreement closure. MOSAID's revenues depend upon, among other items, the continued ability of its licensees to pay amounts as they become due. The Company takes steps, including monitoring the creditworthiness of its licensees, in order to manage this risk.

Conference Call and Webcast

Management will hold a conference call and webcast on Thursday, August 26, 2010 at 5:00 p.m. ET. The webcast will be live at www.mosaid.com and may also be accessed by dialing 1-800-272- 0419. The webcast will be available on mosaid.com for 90 days following the event.

About MOSAID

MOSAID Technologies Inc. is one of the world's leading intellectual property companies. MOSAID licenses patented intellectual property in the areas of semiconductors and telecommunications systems and develops semiconductor memory technology. MOSAID counts many of the world's largest technology companies among its licensees. Founded in 1975, MOSAID is based in Ottawa, Ontario, Canada. Please visit www.mosaid.com and www.InvestorChannel.mosaid.com for more information.

Pro forma net income, a non-GAAP measure, is GAAP net income adjusted for stock-based compensation, patent amortization and imputed interest, foreign exchange gains and losses on "Other long-term liabilities," and any other non-recurring items. The Company uses pro forma measures internally to evaluate and manage operating performance, and to forecast and plan. Non-GAAP measures do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other issuers.

Forward Looking Information

This document and certain other public documents incorporated by reference in this document, contain forward-looking statements to the extent they relate to MOSAID or its management, including those identified by the expressions "anticipate," "believe," "could," "estimate," "expect," "foresee," "intend," "may," "plan," "will," "would" and similar expressions. Similarly, statements in this document that describe MOSAID's business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements. These forward-looking statements are not historical facts, but rather reflect MOSAID's current expectations regarding future events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results, performance or achievements to differ materially from those in such forward-looking statements. Assumptions made in preparing forward-looking statements and financial guidance include, but are not limited to, the following: MOSAID's continued expansion of its patent portfolio and of its opportunities for future patent licensing revenue as a result of MOSAID's acquisition of patents from third parties and from development of new inventions; semiconductor and telecommunications product vendors continuing to infringe MOSAID's patents; the timing and amount of MOSAID's litigation expenses; MOSAID's ability to sign new patent licensees; current assumptions as to the identification of products that are unlicensed to MOSAID's wireless patents; and the timing and amount of MOSAID's Research & Development expenses.

Factors that could cause actual results to differ materially from expected results include, but are not limited to, the following: MOSAID's ability to negotiate settlements with licensees; legal rulings and/or regulatory investigations, audits or complaints having an adverse impact on the validity, enforceability, royalty rates, potential royalty rates, and strength or breadth of coverage of MOSAID's essential and/or nonessential patents (including, but not limited to, adverse results from litigation or proceedings in patent offices and government regulatory agencies in various countries around the world); judicial, legislative or regulatory changes that impair the ability of patent holders to earn licensing revenues; worldwide economic conditions and demand for technology products; economic, social, and political conditions both globally and in the countries in which MOSAID or patent licensees operate, including conflict, war and, other security risks, health conditions, possible disruptions in transportation networks and fluctuations in foreign currency exchange rates; non-payment or delays in payment by or insolvency of licensees or other debtors; variability in patent licensees' sales of licensed products; failure to maintain and enforce MOSAID's existing patent portfolio, or failure to obtain valuable patents as a result of R&D activities, or failure to acquire valuable patents from third parties; MOSAID's ability to recruit and retain skilled personnel; change in MOSAID's financial position; consolidation of MOSAID's licensees; natural events, such as severe weather and earthquakes in the locations in which MOSAID or patent licensees operate; and changes in the tax rate applicable to MOSAID as the result of changes in the tax law in the jurisdictions in which profits are determined to be earned and taxed, the outcome of tax audits and the ability to realize deferred tax assets.

Except as may be required by applicable law or stock exchange regulation, we undertake no obligation to update publicly or release any revisions to these forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events. Accordingly, readers should not place undue reliance on forward-looking statements. If we do update one or more forward-looking statements, no inference should be drawn that additional updates will be made with respect to those or other forward-looking statements. Additional information identifying risks and uncertainties affecting MOSAID's business and other factors that could cause MOSAID's financial results to fluctuate are contained in MOSAID's Annual Information Form, under the section entitled "Risk Factors," and in MOSAID's other public filings available online at www.sedar.com.

MOSAID Technologies Incorporated
Unaudited Pro Forma Consolidated Financial Statements
For the Quarter Ended July 31, 2010

The attached consolidated financial statements have been prepared by Management of MOSAID Technologies Incorporated and have not been reviewed by an auditor.

MOSAID TECHNOLOGIES INCORPORATED
(Subject to the Canada Business Corporations Act)
CONSOLIDATED PRO FORMA STATEMENTS OF INCOME
(In thousands of Canadian Dollars, except per share amounts)
(Unaudited)
 
  Quarter ended   Quarter ended
  July 31, 2010   July 31, 2009
 
Revenues $18,488   $16,223
 
Operating expenses      
  Patent portfolio management 2,186   1,711
  Patent licensing and litigation 2,553   1,944
  Research and development 536   811
  General and administration 1,348   1,549
  Foreign exchange (gain) loss (74 ) 409
  6,549   6,424
 
Pro forma income from operations 11,939   9,799
Interest income 342   119
Pro forma income before income tax expense 12,281   9,918
Income tax expense 3,684   3,273
Pro forma net income $8,597   $6,645
 
Pro forma earnings per share      
  Basic $0.73   $0.65
  Diluted $0.73   $0.65
 
Weighted average number of shares      
  Basic 11,767,954   10,215,130
  Diluted 11,840,308   10,249,535
         

Pro forma net income is reconciled to GAAP net income as follows:

(Dollar amounts in thousands)      
  Quarter ended   Quarter ended  
  July 31, 2010   July 31, 2009  
GAAP net income $5,208   $6,454  
Add (deduct):        
Stock-based compensation 398   238  
Patent amortization and imputed interest 4,126   3,868  
Foreign exchange loss (gain) 618   (2,877 )
Income tax expense – for the above items (1,487 ) (802 )
Future income tax revaluation (200 ) -  
Discontinued operations (net of tax) (66 ) (236 )
Pro forma net income $8,597   $6,645  
         

Pro forma foreign exchange (gain) loss is reconciled to GAAP foreign exchange loss (gain) as follows:

       
(Dollar amounts in thousands)      
  Quarter ended   Quarter ended  
  July 31, 2010   July 31, 2009  
GAAP foreign exchange loss (gain) $ 544   $(2,469 )
Less: foreign exchange loss (gain) on long-term debt 618   (2,878 )
Pro forma foreign exchange (gain) loss $(74 ) $409  
 
 
 
MOSAID Technologies Incorporated
Unaudited Consolidated Financial Statements
For the Quarter Ended July 31, 2010
 

The attached consolidated financial statements have been prepared by Management of MOSAID Technologies Incorporated and have not been reviewed by an auditor.

 
MOSAID TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(In thousands of Canadian Dollars, except per share amounts)
(Unaudited)
 
  Quarter ended Quarter ended  
  July 31, 2010 July 31, 2009  
   
Revenues $18,488 $16,223  
   
Operating expenses      
  Patent portfolio management 2,186 1,711  
  Patent licensing and litigation 2,553 1,944  
  Research and development 536 811  
  General and administration 1,348 1,549  
  Foreign exchange loss (gain) 544 (2,469 )
  Stock-based compensation 398 238  
  Patent amortization and imputed interest 4,126 3,868  
  11,691 7,652  
   
Income from operations 6,797 8,571  
Interest income 342 119  
Income before income tax expense and discontinued operations 7,139 8,690  
Income tax expense 1,997 2,472  
Income before discontinued operations 5,142 6,218  
Discontinued operations income      
(net of tax) (Note 5) 66 236  
Net income 5,208 6,454  
Dividends 2,943 2,561  
Retained earnings, beginning of period 22,702 11,607  
Retained earnings, end of period $24,967 $15,500  
   
Earnings per share (Note 4)      
  Basic – before discontinued operations $0.44 $0.61  
  Diluted – before discontinued operations $0.43 $0.61  
   
  Basic – net earnings $0.44 $0.63  
  Diluted – net earnings $0.44 $0.63  
   
Weighted average number of shares      
  Basic 11,767,954 10,215,130  
  Diluted 11,840,308 10,249,535  
   
See accompanying Notes to the Consolidated Financial Statements  
 
 
 
MOSAID TECHNOLOGIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands of Canadian Dollars)
 
  As at As at
  July 31, 2010 April 30, 2010
  (unaudited) (audited)
 
Current Assets    
  Cash and cash equivalents $74,099 $70,732
  Marketable securities 29,513 30,096
  Accounts receivable 5,737 4,880
  Prepaid expenses 594 698
  Other asset 910 2,053
  Future income tax asset 10,835 10,930
  121,688 119,389
 
Property and equipment 226 257
Acquired intangible assets 77,379 80,685
Investment tax credits receivable 15,748 15,748
  $215,041 $216,079
 
 
Current Liabilities    
  Accounts payable and accrued liabilities $6,850 $7,734
  Deferred revenue 1,414 4,611
  Other liability 932 992
  Current portion of other long-term liabilities 9,469 8,294
  18,665 21,631
Deferred gain on sale-leaseback 775 828
Other long-term liabilities 33,409 33,132
Future income tax liability 5,983 6,147
 
  58,832 61,738
 
Shareholders' Equity    
  Share capital (Note 3) 126,694 126,573
  Contributed surplus 3,807 3,452
  Retained earnings 24,967 22,702
  Accumulated other comprehensive income 741 1,614
  156,209 154,341
  $215,041 $216,079
 
See accompanying Notes to the Consolidated Financial Statements
 
 
 
MOSAID TECHNOLOGIES INCORPORATED  
CONSOLIDATED STATEMENTS OF CASH FLOWS  
(In thousands of Canadian Dollars)  
(Unaudited)  
   
   
  Quarter ended   Quarter ended  
  July 31, 2010   July 31, 2009  
   
Operating        
  Income before discontinued operations $5,142   $6,218  
  Items not affecting cash        
    Amortization 3,411   3,014  
    Stock-based compensation 398   238  
    Unrealized foreign exchange loss (gain) on other long-term liabilities 618   (2,877 )
    Future income taxes and investment tax credits 228   57  
  9,797   6,650  
Change in non-cash working capital items from continuing operations (4,840 ) 4,739  
  4,957   11,389  
   
Investing        
  Acquisition of property and equipment and acquired intangibles (74 ) (112 )
  Acquisition of marketable securities (9,909 ) (316 )
  Proceeds on disposal and maturity of marketable securities 10,492   18,496  
  509   18,068  
   
Financing        
  Increase (decrease) in other long-term liabilities 747   (8,356 )
  Dividends paid (2,943 ) (2,561 )
  Issue of common shares 78   503  
  (2,118 ) (10,414 )
   
Net cash inflow from continuing operations 3,348   19,043  
Net cash inflow (outflow) from discontinued operations 19   (240 )
Net cash inflow 3,367   18,803  
Cash and cash equivalents, beginning of period 70,732   32,899  
Cash and cash equivalents, end of period $74,099   $51,702  
   
Supplementary Information:        
Cash on hand and bank balances $74,099   $ 9,966  
Short-term investments -   41,736  
Total cash and cash equivalents $74,099   $51,702  
 
See accompanying Notes to the Consolidated Financial Statements
 
 
 
MOSAID TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands of Canadian Dollars)
(Unaudited)
 
 
  Quarter ended Quarter ended
  July 31, 2010 July 31, 2009
 
Net income $5,208 $6,454
 
Other comprehensive income, net of tax:    
  Gains (losses) on derivatives designated as cash flow hedges (367) 1,248
  Gains (losses) on derivatives designated as cash flow hedges in prior periods transferred to earnings in the current period (506) (386)
Other comprehensive (loss) income (873) 862
 
Comprehensive income $4,335 $7,316
 
See accompanying Notes to the Consolidated Financial Statements
 
 
 
MOSAID TECHNOLOGIES INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Quarters ended July 31, 2010 and 2009
(tabular dollar amounts in thousands of Canadian Dollars, except per share amounts)
(unaudited)

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP) for interim financial information. Accordingly, they do not include all of the information and note disclosure required by GAAP for annual financial statements. These financial statements are based upon accounting principles consistent with those used in the annual consolidated financial statements with the exception of new accounting policies described in Note 3. Accordingly, these unaudited interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements and notes thereto for the year ended April 30, 2010.

The preparation of these unaudited interim consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. In the opinion of management, these unaudited interim consolidated financial statements reflect all adjustments necessary to state fairly the results for the periods presented. Actual results could differ materially from these estimates and the operating results for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the full fiscal year ending April 30, 2011.

2. Recently Issued Accounting Standards

International Financial Reporting Standards

The Accounting Standards Board of Canada (AcSB) plans to converge Canadian GAAP for publicly accountable enterprises with International Financial Reporting Standards (IFRS) over a transition period that will end effective January 1, 2011 with the adoption of IFRS. The AcSB announced on February 13, 2008 that IFRS will be required in 2011 for publicly accountable profit-oriented enterprises. The changeover date is for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. Starting with the first quarter of fiscal 2012, the Company will provide unaudited consolidated financial information in accordance with IFRS, including comparative figures for fiscal 2011.

The Company has completed a preliminary assessment of the accounting and reporting differences under IFRS as compared to Canadian GAAP. However, management has not yet finalized its determination of the impact of these differences on the consolidated financial statements. As this assessment is finalized, the Company intends to disclose such impacts in its future consolidated financial statements.

In the period leading up to the changeover, the AcSB will continue to issue accounting standards that are converged with IFRS, thus mitigating the impact of adopting IFRS at the changeover date. The International Accounting Standards Board will also continue to issue new accounting standards during the conversion period and, as a result, the final impact of IFRS on the Company's consolidated financial statements will only be measured once all the IFRS applicable standards at the conversion date are known.

Business Combinations

In January 2009, the CICA issued Section 1582, Business Combinations, replacing Section 1581, Business Combinations. This new Section will be applicable to financial statements relating to fiscal years beginning on or after January 1, 2011. Earlier application is permitted. The Section establishes standards for the accounting for a business combination. The Company does not anticipate that the adoption of the new standard will have a significant impact on the consolidated financial statements of the Company.

Consolidated Financial Statements

In January 2009, the CICA issued Section 1601, Consolidated Financial Statements, and Section 1602, Non- Controlling Interests, which together replace Section 1600, Consolidated Financial Statements. These new Sections will be applicable to financial statements relating to fiscal years beginning on or after January 1, 2011. Earlier adoption is permitted. Section 1601 establishes standards for the preparation of consolidated financial statements. Section 1602 establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. The Company is currently evaluating the impact of the adoption of these new Sections on the consolidated financial statements.

3. Shareholders' equity and other comprehensive income

The following are the changes in shareholders' equity for the quarter ended July 31, 2010 and for the year ended April 30, 2010:

  Common
Shares
(Number)
Common
Shares
($)
Contri-
buted
Surplus
($)
  Retained
Earnings
($)
  Accu-
mulated
Other
Compre-
hensive
Income
($)
  Total
($)
 
Balance at                    
April 30, 2010 11,763,626 $126,573 $3,452   $22,702   $1,614   $154,341  
Net income - - -   5,208   -   5,208  
Dividends - - -   (2,943 ) -   (2,943 )
Employee and Director                    
Stock Option Plan 4,625 90 (21 ) -   -   69  
Employee and Director                    
Stock Purchase Program 6,448 31 (22 ) -   -   9  
Stock-based                    
compensation - - 398   -   -   398  
Other comprehensive                    
income - - -   -   (873 ) (873 )
Balance at                    
July 31, 2010 11,774,699 $126,694 $3,807   $24,967   $741   $156,209  
                     
                     
                     
                     
                     
                     
                     
  Common
Shares
(Number)
Common
Shares
($)
  Contri-
buted
Surplus
($)
  Retained
Earnings
($)
  Accu-
mulated
Other
Compre-
hensive
Income
($)
Total
($)
 
Balance at April 30, 2009 10,184,323 $94,741   $3,753   $11,607   $446 $110,547  
Net income - -   -   21,750   - 21,750  
Dividends - -   -   (10,655 ) - (10,655 )
Employee and Director                    
Stock Option Plan 119,475 2,144   (882 ) -   - 1,262  
Employee and Director                    
Stock Purchase Program 22,328 496   (337 ) -   - 159  
Restricted share unit plan - (601 ) (271 ) -   - (872 )
Stock-based                    
compensation - -   1,189   -   - 1,189  
Equity financing 1,437,500 29,793   -   -   - 29,793  
Other comprehensive                    
income - -   -   -   1,168 1,168  
Balance at April 30, 2010 11,763,626 $126,573   $3,452   $22,702   $1,614 $154,341  

4. Earnings per Share

The following is a reconciliation of the numerator and denominator of the basic and diluted per share computations:

  Quarter ended Quarter ended
  July 31, 2010 July 31, 2009
 
Income before discontinued operations $5,142 $6,218
Discontinued operations (net of tax) 66 236
Net income $5,208 $6,454
Weighted average number of common shares outstanding 11,767,954 10,215,130
Net effect of stock options 72,354 34,405
Weighted average diluted number of common shares outstanding 11,840,308 10,249,535
Earnings per share    
  Basic – before discontinued operations $0.44 $0.61
  Diluted – before discontinued operations $0.43 $0.61
       
  Basic - net income $0.44 $0.63
  Diluted - net income $0.44 $0.63

For the quarters ended July 31, 2010 and July 31, 2009, 78,328 and 259,606 options, respectively, were excluded from the calculation of diluted earnings per share, as the exercise price of these options exceeded the average market price of the Company's common stock during this period and were therefore anti-dilutive.

There were 634,520 and 519,645 options issued and outstanding as at July 31, 2010 and July 31, 2009, respectively.

5. Discontinued operations

  Quarter ended Quarter ended
  July 31, 2010 July 31, 2009
 
Revenues $38 $ 18
 
Expenses - -
 
Gain from operations 38 18
Gain on sale of assets 53 333
Earnings before tax 91 351
Income tax expense 25 115
Discontinued operations (net of tax) $66 $236

6. Stock-based Compensation

The Company has an Employee and Director Stock Purchase Plan ("ESPP") whereby employees may elect to designate up to 5% of their annual salary to purchase shares of the Company at a 10% discount from the fair market value. The purchase price is deducted over a six month period via payroll. Directors are also eligible to participate in the ESPP.

Also, the Company has an Employee and Director Stock Option Plan ("ESOP"). The exercise price is no lower than the closing market price on the trading day immediately preceding the date of grant. Options granted under the ESOP expire within a period of six years of granting, with vesting periods determined by the Human Resources Committee.

The Company employs a fair value method of accounting for all options issued to employees and directors on or after April 27, 2002. The fair value of options issued in the quarter was calculated using the Black- Scholes option pricing model and the following assumptions:

  Quarter ended   Quarter ended  
  July 31, 2010   July 31, 2009  
Risk free interest rate 2.7 % 0.36 %
Expected life in years 4.9   5.5  
Expected dividend yield 4.64 % 6.97 %
Volatility 37.07 % 40.62 %

For the quarter ended July 31, 2010, the Company did not issue Deferred Share Units ("DSUs") in lieu of options to directors and officers of the Company under its DSU Plan. DSUs vest evenly over a four year period. DSUs do not have an exercise price and can only be settled using cash consideration.

For the quarter ended July 31, 2010, the Company did not issue Restricted Share Units (RSUs). The RSUs vest over three years. Under the RSU Plan, units are settled using common shares of the Company. The Company will fund an independent trustee to purchase the required shares. The Company recognizes compensation expense equal to the stock price on the grant date, over the vesting period.

7. Financial Instruments

The Company has exposure to the following risks from its use of financial instruments: credit risk, market risk and liquidity risk.

Credit Risk

Credit risk is the risk of financial loss to the Company if a licensee or counter-party to a financial instrument fails to meet its contractual obligations, and arises principally from the Company's accounts receivable and its foreign exchange contracts.

The Company provides extended payment terms to some licensees in the normal course of its operations. The Company's credit risk review includes performing periodic credit evaluations of its most significant licensees. In certain circumstances, the Company may utilize letters of guarantee or credit insurance to mitigate certain credit risks. Many of the Company's licensees are large national and international public companies. Due to the nature of the Company's operations, provisions for doubtful accounts are made on a licensee-by-licensee basis, based upon on-going review of licensee financial status.

Many of the Company's current licensees' operations are focused in the semiconductor industry. The semiconductor industry, particularly the DRAM and Flash memory segment, tends to be cyclical and, from time to time, suffers from economic difficulties due to pricing pressure as a result of an oversupply of memory devices.

Due to the long-term nature of many of the Company's licensing arrangements, in certain circumstances, the Company may not be able to obtain, at reasonable cost, credit insurance or other forms of credit risk mitigation instruments. A default of the remaining payments by one of the Company's licensees could have a materially adverse impact on the Company's future revenues, earnings, cash flow and financial position.

The Company limits its exposure to credit risk from counter-parties to derivative instruments by dealing only with major financial institutions. Management does not expect any counter-parties to fail to meet their obligations.

The Company invests its excess cash in investment grade securities, each with a maturity date not exceeding 12 months. The Company relies upon the credit rating of the counter-party to limit its credit risk. The Company does not invest in asset-backed commercial paper.

The carrying amount of financial assets represents the maximum credit exposure. The maximum credit exposure to credit risk at the reporting date was:

  July 31, 2010   April 30, 2010  
   
Cash and cash equivalents $ 74,099   $70,732  
Marketable securities 29,513   30,096  
Accounts receivable 5,737   4,880  
Other asset 910   2,053  
Other liability (932 ) (992 )
  $109,327   $106,769  

The aging of accounts receivable at the reporting date was:

  July 31, 2010 April 30, 2010
 
Current $1,322 $1,367
Past due 4,415 3,513
  $5,737 $4,880

Of the amount past due, a portion has been recognized as revenue as the Company expects to collect the amount under a credit insurance policy, and a portion has been recorded as deferred revenue as there is uncertainty regarding ultimate collection.

Marketable securities comprise the following:

     
 
  July 31, 2010 April 30, 2010
 
Bonds & debentures $17,301 $27,087
Discount notes 12,212 3,009
  $29,513 $30,096

Carrying values of bonds and debentures and discount notes include accrued interest and approximate market value. Investments in bonds and debentures and discount notes represent holdings in corporate and government short-term marketable securities as at July 31, 2010 and have a maturity date of one year or less.

Market Risk

Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates, will affect the Company's income or the value of its holding of financial instruments.

Foreign Exchange Risk

The Company's revenues are denominated primarily in U.S. dollars, giving rise to exposure to market risks from changes in foreign exchange rates. The Company is exposed to foreign currency fluctuations on its accounts receivable and future cash flows related to licensing arrangements denominated in U.S. dollars, as well as certain operating expenses and its other long-term liabilities obligations.

The Company's foreign exchange risk management includes the use of foreign exchange forward contracts to fix the exchange rates on certain foreign currency exposures. The Company's objective is to manage and control exposures and secure the Company's profitability on existing contracts and anticipated future cash flows. The Company does not utilize derivative instruments for trading or speculative purposes. The Company formally documents all relationships between derivative instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific firm contractually related commitments or anticipated transactions.

The Company also formally assesses, both at the inception and on an on-going basis, whether the derivatives that are used in hedging transactions are highly effective in off-setting changes in fair values or cash flows of hedged items. Hedge ineffectiveness is insignificant.

The forward foreign exchange contracts primarily require the Company to sell U.S. dollars for Canadian dollars at contractual rates. The Company had the following forward exchange contracts.

(In thousands of dollars)       July 31, 2010  
                 
Type Notional   Currency Maturity Equivalent to
CDN dollars
  Fair Value  
   
Sell $10,625   USD <3 months $11,370   $439  
Sell $17,975   USD 3-12 months $19,007   $471  
              $910  
Buy $(5,000 ) USD 3-12 months $(6,093 ) $(932 )
             
             
             
(In thousands of dollars)       April 30, 2010  
                 
Type Notional   Currency Maturity Equivalent to
CDN dollars
  Fair Value  
   
Sell $12,875   USD <3 months $13,836   $759  
Sell $21,225   USD 3-12 months $22,890   $1,294  
              $2,053  
Buy $(5,000 ) USD 3-12 months $(6,093 ) $(992 )

A one cent strengthening (weakening) of the U.S. dollar against the Canadian dollar would have decreased (increased) other comprehensive income by approximately $272,000 for Q1 fiscal 2011.

Interest Rate Risk

The Company is exposed to interest rate risk due to its holdings of interest-bearing marketable securities. It is the Company's policy to invest in securities with a maturity date of 12 months or less and Company practice to hold such securities, when possible, until maturity. A 1% increase (decrease) to the interest rate would result in an approximate $140,000 decrease (increase) in the fair value of the investments held as at the reporting date.

The Company is also exposed to interest rate risk due to its imputed interest on other long-term liabilities.

Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company's approach to managing liquidity risk is to ensure, as far as possible, that it will always have sufficient liquidity to meet liabilities when due. At July 31, 2010, the Company had $103.6 million of cash and marketable securities and had a secured bank credit facility of $10.0 million, less off balance sheet arrangements, as described in Note 18 to the fiscal 2010 Consolidated Financial Statements, to meet liabilities when due. The credit facility is collateralized by a general security agreement and contains no covenants.

All of the Company's financial liabilities, except for its "other long-term liabilities" and operating lease for its premises, have contractual maturities of less than 30 days.

The following chart indicates the contractual obligations to which the Company is bound over the following five years.

Payments Due by Period
(in thousands of dollars)
 
           
Contractual Obligations Total Less than
1 year
1-3
years
4-5
years
After 5
years
 
Operating leases $ 1,137 $248 $496 $393 -
 
Other long-term obligations $53,509 $10,805 $11,834 $25,725 $5,145
 
Total contractual obligations $54,646 $11,053 $12,330 $26,118 $5,145

Fair Value

The fair values of cash, marketable securities, accounts receivable, accounts payable and accrued liabilities approximates their carrying values due to their short-term maturity. The recorded amounts of long-term monetary liabilities approximate fair value, estimated by discounting expected cash flows at rates currently offered to the Company for debts of the same remaining maturities and conditions.

Fair value of the forward exchange contracts reflects the cash flow due to or from the Company if settlement had taken place on the reporting date.

The fair value of employee and director deferred stock units is determined using the market price of the Company's common stock on the reporting date.

8. Capital Management

The Company's objective is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. Management defines capital as the Company's shareholders' equity excluding accumulated other comprehensive income.

The Company has certain credit facilities with a Canadian chartered bank, which consist of an operating line, a foreign exchange forward contract facility and standby letters of credit. The Board of Directors does not establish quantitative return on capital criteria for management, but rather promotes year over year sustainable profitable growth. The Board of Directors also reviews on a quarterly basis the level of dividends paid to the Company's shareholders and monitors the share repurchase program activities. There were no changes in the Company's approach to capital management during the period. Neither the Company nor any of its subsidiaries is subject to externally imposed capital requirements.

9. Business Segment Information

The Company operates in one operating segment licensing patented intellectual property in the areas of semiconductors and telecommunications systems and developing semiconductor memory technology.

10. Subsequent Event

Subsequent to the quarter-end, Cisco Systems Inc. filed and served a Complaint for Declaratory Judgment in the United States District Court for the District of Delaware. In its complaint, Cisco is seeking a declaration of non-infringement and invalidity with respect to nine U.S. patents and one patent application owned by MOSAID, and which relate generally to Power-over-Ethernet technology.

Contact Information

  • MOSAID Technologies Inc.
    Michael Salter
    Director, Investor Relations and Corporate Communications
    613-599-9539 x1205
    salter@mosaid.com