** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

**FORM 10-Q/A**

**(Amendment No. 1)**

 

| (Mark One) |
|------------|
|       |   |   |
| **ý** | ** ** | **Quarterly report pursuant to Section 13 or 15(d) of the Securities  Exchange Act of 1934** |

 

Forthe quarterly period ended September 30, 2005.

 

**OR**

 

| **o** | ** ** | **Transition report pursuant to Section 13 or 15(d) of the Securities  Exchange Act of 1934** |
|-------|------------|-----------------------------------------------------------------------------------------------|

 

Forthe transition period from                    to

 

**Commission file number000-51560**

 

**MathStar, Inc.**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                     | ** ** | **41-1881957**       |
|----------------------------------|------------|----------------------|
| (State  or other jurisdiction of |       | (I.R.S.  Employer    |
| incorporation  or organization)  |       | Identification  No.) |

 

| **5900 Green Oak Drive, Minnetonka, Minnesota** | ** ** | **55343**   |
|-------------------------------------------------|------------|-------------|
| (Address  of principal executive offices)       |       | (Zip  Code) |

 

**(952) 746-2200**

(Registrant’stelephone number, including area code)

 

**N/A**

(Formername, former address, and former fiscal year, if changed since last report)

 

Indicate by check mark whether theregistrant: (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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.  o  Yes    ý  No

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  o  Yes    ý  No

 

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

 

Shares outstanding of the Registrant’scommon stock:

 

| **Class**                      | ** ** | **Outstanding at  November 16, 2005** |
|--------------------------------|------------|--------------------------------------------|
|                           |       |                                       |
| Common  stock, $0.01 par value |       | 15,745,535                                 |

 

 

----

 

**Explanatory Note**

 

This Amendment No. 1 on Form10-Q/A (the “Amendment”) to the Quarterly Report on Form 10-Q for the periodended September 30, 2005, which was originally filed with the Securities andExchange Commission on November 22, 2005 (the “Original Filing”), is beingfiled to amend the Original Filing to correct the following amounts in our CondensedStatements of Operations:  gross marginfor the three months ended September 30, 2005, the nine months ended September30, 2004 and 2005, and cumulative for the period from inception (April 14,1997) through September 30, 2005; operating loss for the three months endedSeptember 30, 2005; and interest expense for the cumulative period frominception (April 14, 1997) through September 30, 2005.

 

Except for the amendmentsdescribed above, this Amendment does not modify or update other disclosures in,or exhibits to, the Original Filing.

 

----

 
| ** **                         | **Page** |
|------------------------------------|----------|
| PART I  FINANCIAL INFORMATION |     |
|                               | Item 1.  | Financial  Statements (Unaudited) |   |
|                               |     | Condensed  Balance Sheets as of December 31, 2004 and September 30, 2005 | 1 |
|                               |     | Condensed Statements of  Operations for the Three and Nine Months Ended September 30, 2004 and  September 30, 2005 and Cumulative for the period from Inception (April  14, 1997) through September 30, 2005 | 2 |
|                               |     | Condensed Statements of Cash  Flows for the Nine Months Ended September 30, 2004 and September 30, 2005 and  Cumulative for the period from Inception (April 14, 1997) through September  30, 2005 | 3 |
|                               |     | Notes to Condensed  Consolidated Financial Statements | 4 |
|                               |     |   |   |
| SIGNATURES                         | 9        |

 

----

 

**MathStar, Inc.**

**(Adevelopment stage company)**

**CondensedBalance Sheets**

**(Unaudited)**

 
| ** **                                                                                                                                                                | ** ** | **December 31,**          | ** ** | **September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                | ** ** | **2004**                       | ** ** | **2005**               | ** ** |
| ** **                                                                                                                                                                | ** ** | **(in thousands,**        | ** ** |
| ** **                                                                                                                                                                | ** ** | **except per share** | ** ** |
| ** **                                                                                                                                                                | ** ** | **amounts)**                   | ** ** |
| **Assets**                                                                                                                                                                |       |                           |       |                   |       |
| Current  assets                                                                                                                                                           |       |                           |       |                   |       |
| Cash and cash equivalents                                                                                                                                                 |       | $                              | 4,132      |                   | $          | 298 |   |
| Accounts receivable                                                                                                                                                       |       | 29                             |       | 88                     |       |
| Prepaid expenses and other current assets                                                                                                                                 |       | 230                            |       | 1,022                  |       |
| Total current assets                                                                                                                                                      |       | 4,391                          |       | 1,408                  |       |
| Property and  equipment, net                                                                                                                                              |       | 109                            |       | 60                     |       |
| Other assets                                                                                                                                                              |       | 4                              |       | 15                     |       |
| Total assets                                                                                                                                                              |       | $                              | 4,504      |                   | $          | 1,483 |   |
|                                                                                                                                                                      |       |                           |       |                   |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                            |       |                           |       |                   |       |
| Current  liabilities                                                                                                                                                      |       |                           |       |                   |       |
| Accounts payable                                                                                                                                                          |       | $                              | 251        |                   | $          | 1,079 |   |
| Accrued expenses                                                                                                                                                          |       | 236                            |       | 552                    |       |
| Convertible notes payable                                                                                                                                                 |       | —                         |       | 3,120                  |       |
| Total liabilities                                                                                                                                                         |       | 487                            |       | 4,751                  |       |
| Commitments  and contingencies                                                                                                                                            |       |                           |       |                   |       |
| Stockholders’ equity                                                                                                                                                 |       |                           |       |                   |       |
| Preferred stock, $0.01 par value; 10,000  shares authorized; no shares issued and outstanding                                                                             |       | —                         |       | —                 |       |
| Common stock, $0.01 par value; 90,000  shares authorized; 11,140 and 11,236 shares issued and outstanding at  December 31, 2004 and September 30, 2005, respectively |       | 111                            |       | 113                    |       |
| Additional paid-in capital                                                                                                                                                |       | 68,465                         |       | 72,861                 |       |
| Deficit accumulated during the development  stage                                                                                                                         |       | (64,559                        | )          | (76,242                | )          |
| Total stockholders’ equity (deficit)                                                                                                                                 |       | 4,017                          |       | (3,268                 | )          |
| Total liabilities and stockholders’ equity                                                                                                                           |       | $                              | 4,504      |                   | $          | 1,483 |   |

 

The accompanying notes are an integral part of thesefinancial statements.

 

1

----

 

**MathStar, Inc.**

**(A development stage company)**

**Condensed Statements of Operations**

**(Unaudited)**

** **
| ** **                                             | ** ** | ** **                                | ** ** | ** **                                      | ** ** | ** **                      | ** ** | ** ** | ** ** | **Cumulative**                 | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------------|------------|---------------------------------|------------|------------|------------|--------------------------------|------------|
| ** **                                             | ** ** | ** **                                | ** ** | ** **                                      | ** ** | ** **                      | ** ** | ** ** | ** ** | **for the Period**   | ** ** |
| ** **                                             | ** ** | ** **                                | ** ** | ** **                                      | ** ** | ** **                      | ** ** | ** ** | ** ** | **from Inception**        | ** ** |
| ** **                                             | ** ** | ** **                                | ** ** | ** **                                      | ** ** | ** **                      | ** ** | ** ** | ** ** | **(April 14, 1997)** | ** ** |
| ** **                                             | ** ** | **Three  Months Ended  September 30,**    | ** ** | **Nine  Months Ended  September 30,** | ** ** | **Through  September 30,** | ** ** |
| ** **                                             | ** ** | **2004**                                  | ** ** | **2005**                                        | ** ** | **2004**                        | ** ** | **2005**   | ** ** | **2005**                       | ** ** |
| ** **                                             | ** ** | (in thousands, except  per share amounts) | ** ** |
| Revenue                                                |       | $                                         | 100        |                                            | $          | 15                              |       | $          | 100        |                           | $          | 55 |   | $ | 801 |   |
| Cost of goods sold                                     |       | 45                                        |       | —                                          |       | 45                              |       | 15         |       | 68                             |       |
| Gross margin                                           |       | 55                                        |       | 15                                              |       | 55                              |       | 40         |       | 733                            |       |
| Operating expenses:                                    |       |                                      |       |                                            |       |                            |       |       |       |                           |       |
| Research and development                               |       | 1,342                                     |       | 1,806                                           |       | 3,502                           |       | 6,384      |       | 27,617                         |       |
| Selling, general and administrative                    |       | 973                                       |       | 1,519                                           |       | 2,796                           |       | 3,977      |       | 17,193                         |       |
|                                                   |       | 2,315                                     |       | 3,325                                           |       | 6,298                           |       | 10,361     |       | 44,810                         |       |
| Operating loss                                         |       | (2,260                                    | )          | (3,310                                          | )          | (6,243                          | )          | (10,321    | )          | (44,077                        | )          |
| Interest income                                        |       | 14                                        |       | 7                                               |       | 47                              |       | 7          |       | 1,087                          |       |
| Interest expense                                       |       | —                                    |       | (900                                            | )          | —                          |       | (1,369     | )          | (1,395                         | )          |
| Other income, net                                      |       | —                                    |       | —                                          |       | —                          |       | —     |       | 17                             |       |
| Net loss from continuing operations                    |       | (2,246                                    | )          | (4,203                                          | )          | (6,196                          | )          | (11,683    | )          | (44,368                        | )          |
| Loss from discontinued operations                      |       | —                                    |       | —                                          |       | —                          |       | —     |       | (31,874                        | )          |
| Net loss                                               |       | $                                         | (2,246     | )                                               | $          | (4,203                          | )          | $          | (6,196     | )                              | $          | (11,683 | ) | $ | (76,242 | ) |
|                                                   |       |                                      |       |                                            |       |                            |       |       |       |                           |       |   |   |   |   |
| Basic and diluted net loss per share                   |       | $                                         | (0.24      | )                                               | $          | (0.37                           | )          | $          | (0.69      | )                              | $          | (1.04 | ) | — |   |
| Weighted average basic and diluted shares  outstanding |       | 9,469                                     |       | 11,233                                          |       | 8,968                           |       | 11,195     |       | —                         |       |

 

The accompanying notesare an integral part of these financial statements.

 

2

----

** **

**MathStar, Inc.**

**(Adevelopment stage company)**

**Condensed Statements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                                                          |   |                            |   |                   |   | **Cumulative**                 |   |
|---------------------------------------------------------------------------------------------------------------------|--------|---------------------------------|--------|------------------------|--------|--------------------------------|--------|
| ** **                                                                                                          |   |                            |   |                   |   | **for the Period**   |   |
| ** **                                                                                                          |   |                            |   |                   |   | **from Inception**        |   |
| ** **                                                                                                          |   |                            |   |                   |   | **(April 14, 1997)** |   |
| ** **                                                                                                          |   | **Nine Months Ended** |   | **Through**            |   |
| ** **                                                                                                          |   | **September 30,**          |   | **September 30,** |   |
| ** **                                                                                                          |   | **2004**                        |   | **2005**               |   | **2005**                       |   |
| ** **                                                                                                          |   | **(in thousands)**              |   |
| **Cash flows from operating activities**                                                                            |   |                            |   |                   |   |                           |   |
| Net loss                                                                                                            |   | $                               | (6,196 | )                      | $      | (11,683                        | )      | $ | (76,242 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities Depreciation                            |   | 137                             |   | 49                     |   | 1,509                          |   |
| Amortization of convertible notes discount  - beneficial conversion feature and value of warrants issued with notes |   | —                          |   | 1,061                  |   | 1,061                          |   |
| Amortization of discount on  held-to-maturity securities                                                            |   | —                          |   |                   |   | (233                           | )      |
| Acquired in-process research and  development                                                                       |   | —                          |   |                   |   | 4,300                          |   |
| Stock-based compensation                                                                                            |   | —                          |   | 546                    |   | 1,610                          |   |
| Goodwill impairment                                                                                                 |   | —                          |   | —                 |   | 13,306                         |   |
| Change in operating assets and liabilities,  net of effects of acquisition                                     |   |                            |   |                   |   |                           |   |
| Accounts receivable                                                                                                 |   | (13                             | )      | (60                    | )      | 56                             |   |
| Prepaid expenses and other assets                                                                                   |   | 144                             |   | (803                   | )      | (898                           | )      |
| Accounts payable                                                                                                    |   | 19                              |   | 828                    |   | 931                            |   |
| Accrued expenses                                                                                                    |   | (576                            | )      | 505                    |   | 719                            |   |
| Net cash used in operating activities                                                                               |   | (6,485                          | )      | (9,557                 | )      | (53,882                        | )      |
| **Cash flows from investing activities**                                                                            |   |                            |   |                   |   |                           |   |
| Cash used in acquisition, net of cash  acquired                                                                     |   | —                          |   | —                 |   | (791                           | )      |
| Purchase of property and equipment                                                                                  |   | —                          |   | —                 |   | (1,408                         | )      |
| Proceeds from sale of discontinued  operations                                                                      |   | —                          |   | —                 |   | 1,752                          |   |
| Purchases of held-to-maturity securities                                                                            |   | —                          |   | —                 |   | (10,000                        | )      |
| Sales of held-to-maturity securities                                                                                |   | —                          |   | —                 |   | 10,233                         |   |
| Net cash used in investing activities                                                                               |   | —                          |   | —                 |   | (214                           | )      |
| **Cash flows from financing activities**                                                                            |   |                            |   |                   |   |                           |   |
| Proceeds from issuance of common stock, net  of offering costs                                                      |   | 7,533                           |   | —                 |   | 41,414                         |   |
| Proceeds from issuance of convertible notes                                                                         |   | —                          |   | 5,500                  |   | 5,500                          |   |
| Proceeds from issuance of warrants to  purchase common stock, net of offering costs                                 |   | 536                             |   | —                 |   | 5,304                          |   |
| Proceeds from exercise of warrants                                                                                  |   | —                          |   | 223                    |   | 2,896                          |   |
| Collection of subscription receivable                                                                               |   | —                          |   | —                 |   | 27                             |   |
| Proceeds from exercise of stock options                                                                             |   | —                          |   | —                 |   | 1                              |   |
| Principal payments on notes receivable from  stockholders                                                           |   | —                          |   | —                 |   | 245                            |   |
| Principal payments on notes payable to  stockholders                                                                |   | —                          |   | —                 |   | (250                           | )      |
| Repurchase of common stock                                                                                          |   | —                          |   | —                 |   | (257                           | )      |
| Payments on capital lease obligations                                                                               |   | —                          |   | —                 |   | (486                           | )      |
| Net cash provided by financing activities                                                                           |   | 8,069                           |   | 5,723                  |   | 54,394                         |   |
| Net (decrease) increase in cash and cash  equivalents                                                               |   | 1,584                           |   | (3,834                 | )      | 298                            |   |
| **Cash and cash equivalents**                                                                                       |   |                            |   |                   |   |                           |   |
| Beginning of period                                                                                                 |   | 2,805                           |   | 4,132                  |   | -0-                            |   |
| End of period                                                                                                       |   | $                               | 4,389  |                   | $      | 298                            |   | — |   |
|                                                                                                                     |        |                                 |        |                        |        |                                |        |  |  |  |

 

The accompanying notesare an integral part of these financial statements.

 

3

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** **

**MathStar, Inc.**

**(A development stagecompany)**

**Notes to FinancialStatements**

**(in thousands, exceptshare and per share amounts)**

** **

**1.**                                      Basis ofPresentation and Going Concern

 

The accompanying interimcondensed financial statements of MathStar, Inc. (“MathStar” or the “Company”)have been prepared in conformity with United States (U.S.) generally acceptedaccounting principles, consistent in all material respects with those appliedin the Company’s Registration Statement on Form S-1, as amended,which was declared effective on October 26, 2005.  The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

The interim financialinformation is unaudited, but it reflects all normal adjustments that are, inthe opinion of management, necessary to provide a fair statement of results forthe interim periods presented.  Theinterim financial results are not necessarily indicative of results to beexpected in future interim or annual periods.  The interim financial statements should beread in conjunction with the financial statements in the Company’s RegistrationStatement on Form S-1, as amended, which was declared effective onOctober 26, 2005.

 

The Company wasincorporated as a Minnesota corporation in April 1997 and reincorporatedunder Delaware law in June 2005.  Sinceits inception, the Company has devoted substantially all of its efforts tobusiness planning, research and development, recruitment of management andtechnical staff, acquiring operating assets and raising capital.  The Company has generated only nominalrevenues from the sale of development kits that support customer development ofapplications for one of the Company’s products, the sale of product prototypesand contractual research and development services.  Accordingly, the Company is considered to bein the development stage as defined by Statement of Financial Accounting Standards(“SFAS”) No. 7, *Accounting andReporting by Development Stage Enterprises*.

 

The accompanyingfinancial statements have been prepared on a basis which assumes that theCompany will continue as a going concern and which contemplates the realizationof assets and the satisfaction of liabilities and commitments in the normalcourse of business.  The Company has alimited operating history and has incurred losses and negative cash flows fromoperations since inception.  The Companyexpects to incur additional losses at least through 2005.

 

On November 1,2005, the Company closed on its initial public offering of 4,000,000 shares ofits common stock at $6.00 per share, resulting in net proceeds to the Companyof approximately $22,100.

** **

4

----

 

**2.             New Accounting Pronouncements**

 

In November 2004,the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 151,*Inventory Cost*.  SFAS No. 151 amends the guidance inAccounting Research Bulletin (“ARB”) No. 43, Chapter 4, *Inventory Pricing*, to clarify the accounting for abnormalamounts of idle facility expense, freight, handling costs and wasted materialor spoilage.  Paragraph 5 of ARBNo. 43, Chapter 4, previously stated that “under some circumstances, itemssuch as idle facility expense, excessive spoilage, double freight, andrehandling costs may be so abnormal as to require treatment as current periodcharges.”  SFAS No. 151 requiresthat those items be recognized as current period charges regardless of whetherthey meet the criterion of “so abnormal.” In addition, SFAS No. 151 requires that allocation of fixedproduction overheads to the costs of conversion be based on the normal capacityof the production facilities.  Theprovisions of SFAS No. 151 will be effective for the Company in the firstquarter of 2006, which begins January 1, 2006.  The Company does not expect adoption of SFASNo. 151 to have a material effect on its consolidated financialstatements.

 

In December 2004,the FASB issued SFAS No. 123R, *Share-Based Payment*.  SFAS No. 123R revised SFAS No. 123and supersedes Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees* (“APB OpinionNo. 25”).  The revised statementaddresses the accounting for share-based payment transactions with employeesand other third parties, eliminates the ability to account for share-basedpayments using APB Opinion No. 25 and requires that the compensation costsrelating to such transactions be recognized in the statement of operationsbased upon the grant-date fair value of those instruments.  The revised statement is effective for theCompany in the first quarter of 2006 which begins on January 1, 2006.  The Company expects that adoption of SFASNo. 123R will result in additional charges to operations beginning in2006.  However, the Company has not yetdetermined the amount of such charges.

 

UnderSFAS No. 123R, the Company must determine the appropriate fair valuemodel to be used for valuing share-based payments, the amortization method forcompensation costs and the transition method to be used at the date ofadoption.  The transition methods includeprospective and retroactive adoption alternatives.  The Company expects to apply the prospectiveadoption method.  Because the Company hashistorically followed the “minimum value” method permitted by SFASNo. 123, the prospective method will require the Company to recordcompensation expense only for options issued after adoption of SFASNo. 123R.

** **

**3.             Stock-Based Compensation**

 

In accordance with SFASNo. 123, *Accounting for Stock-BasedCompensation*, the Company has elected to account for stock-basedcompensation to employees using the intrinsic value method prescribed inAccounting Principles Board Opinion No. 25, (“APB 25”), *Accounting for Stock Issued to Employees*,and related interpretations. Accordingly, compensation cost for stock options granted to employees ismeasured as the excess, if any, of the fair value of the Company’s stock at thedate of the grant over the amount an employee must pay to acquire thestock.  The Company accounts forstock-based compensation to nonemployees using the fair value method prescribedby SFAS No. 123.  Compensation costfor stock options granted to nonemployees is measured based on the fair valueof the option at the date of grant, with the unvested portion revalued at eachbalance sheet date.  Compensation costs,if any, are amortized over the underlying option vesting terms.

 

# **Restricted Stock**

 

In 2004, the Company issued83,570 shares of restricted stock to certain employees of the Company.  During the nine months endedSeptember 30, 2005, the Company issued 408,335 shares of restricted stockto certain employees.  The restrictedstock terms provided for vesting upon either a change of control (as defined bythe restricted stock agreement) of the Company or an initial public offering ofthe Company’s common stock. Notwithstanding the foregoing, the Company had the power to delay thevesting of the restricted stock up to one year after a change in control or aninitial public offering of the Company’s common stock.  During the quarter ended September 30,2005, the Company’s Board of Directors elected to delay vesting of all sharesof restricted stock until one year after the effectiveness of the Company’sregistration statement (which occurred on October 26, 2005).  In accordance with APB 25, the Company willrecord compensation expense of up to $2,740 related to these restricted sharesover a one-year vesting period of these shares, beginning on the November 1, 2005 closingdate of the Company’s initial public offering.

 

5

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The following tablepresents the pro forma effect on net loss if the Company had applied the fairvalue recognition provisions for SFAS No. 123 (minimum value method) tostock-based employee compensation:

 
| ** **                                                                                                                | ** ** | ** **                       | ** ** | ** **            | ** ** | ** **             | ** ** | ** ** | ** ** | **Cumulative**                 | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-----------------------|------------|------------------------|------------|------------|------------|--------------------------------|------------|
| ** **                                                                                                                | ** ** | ** **                       | ** ** | ** **            | ** ** | ** **             | ** ** | ** ** | ** ** | **for the Period**   | ** ** |
| ** **                                                                                                                | ** ** | ** **                       | ** ** | ** **            | ** ** | ** **             | ** ** | ** ** | ** ** | **from Inception**        | ** ** |
| ** **                                                                                                                | ** ** | ** **                       | ** ** | ** **            | ** ** | ** **             | ** ** | ** ** | ** ** | **(April 14, 1997)** | ** ** |
| ** **                                                                                                                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** | **Through**            | ** ** |
| ** **                                                                                                                | ** ** | **September 30,**           | ** ** | **September 30,**     | ** ** | **September 30,** | ** ** |
| ** **                                                                                                                | ** ** | **2004**                         | ** ** | **2005**              | ** ** | **2004**               | ** ** | **2005**   | ** ** | **2005**                       | ** ** |
| ** **                                                                                                                | ** ** | ** **                       | ** ** |
| Net loss as reported                                                                                                      |       | $                                | (2,246     | )                     | $          | (4,203                 | )          | $          | (6,196     | )                              | $          | (11,683 | ) | $ | (76,242 | ) |
| Add: Total stock-based employee compensation expense  included in net loss, as reported                                   |       | —                           |       | (39                   | )          | —                 |       | 138        |       | 1,009                          |       |
| Deduct: Total stock-based employee compensation  expense determined under fair value based method for all employee awards |       | (43                              | )          | (212                  | )          | (131                   | )          | (569       | )          | (2,354                         | )          |
| Pro forma net loss                                                                                                        |       | $                                | (2,289     | )                     | $          | (4,454                 | )          | $          | (6,327     | )                              | $          | (12,114 | ) | $ | (77,587 | ) |
| Basic and diluted loss per share:                                                                                         |       |                             |       |                  |       |                   |       |       |       |                           |       |
| As reported                                                                                                               |       | $                                | (0.24      | )                     | $          | (0.37                  | )          | $          | (0.69      | )                              | $          | (1.04 | ) |   |   |
| Pro forma                                                                                                                 |       | $                                | (0.24      | )                     | $          | (0.40                  | )          | $          | (0.71      | )                              | $          | (1.08 | ) |   |   |

** **

For the purpose of determining fair values using theminimum value method for employee grants as prescribed by SFAS No. 123,the Company used the Black-Scholes option pricing model with the followingweighted average assumptions:

 
| ** **                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| ** **                  | ** ** | **2004**               | ** ** | **2005**              | ** ** | **2004** | ** ** | **2005** | ** ** |
|                        |       |                   |       |                  |       |   |   |   |   |
| Expected option term        |       | 5 Years                |       | 5 Years               |       | 5 Years |   | 5 Years |   |
| Expected volatility  factor |       | 0                      | %          | 0                     | %          | 0 | % | 0 | % |
| Expected dividend yield     |       | 0                      | %          | 0                     | %          | 0 | % | 0 | % |
| Risk free interest rate     |       | 3.61                   | %          | 4.04                  | %          | 3.52 | % | 3.93 | % |

 

The Company used the Black-Scholes option pricingmodel with the minimum value method for measuring the fair value of options priorto completion of its initial public offering. The minimum value method assumes no volatility in the application of theBlack-Scholes model.  The Company will berequired to include a volatility factor in determining the fair value ofoptions granted after completion of its initial public offering.

 

**4.             Selected Balance Sheet Information**

 

Thefollowing presents prepaid expenses and other current assets:

 
| ** **                                                | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|-----------------------------------------------------------|------------|------------------|------------|-------------------|------------|
| ** **                                                | ** ** | **2004**         | ** ** | **2005**          | ** ** |
| ** **                                                | ** ** | ** **       | ** ** | ** **        | ** ** |
| Prepaid license fees                                      |       | $                | 205        |              | $          | 102 |   |
| Prepaid insurance                                         |       | 25               |       | 16                |       |
| Deferred convertible  note fees and public offering costs |       | —           |       | 790               |       |
| Prepaid rent                                              |       | —           |       | 114               |       |
|                                                      |       | $                | 230        |              | $          | 1,022 |   |

 

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The following presents property and equipment, net:

 
| ** **                         | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|------------------------------------|------------|------------------|------------|-------------------|------------|
| ** **                         | ** ** | **2004**         | ** ** | **2005**          | ** ** |
| ** **                         | ** ** | ** **       | ** ** | ** **        | ** ** |
| Computer equipment                 |       | $                | 896        |              | $          | 896 |   |
| Purchased software                 |       | 425              |       | 425               |       |
| Furniture and fixtures             |       | 165              |       | 165               |       |
|                               |       | $                | 1,486      |              | $          | 1,486 |   |
| Less: Accumulated  depreciation    |       | (1,377           | )          | (1,426            | )          |
| Total property and  equipment, net |       | $                | 109        |              | $          | 60 |   |

 

Depreciation expense was $33 and $14 for the threemonths ended September 30, 2004 and 2005, respectively, $137 and $49 for thenine months ended September 30, 2004 and 2005, respectively and $1,509cumulative for the period from inception (April 14, 1997) to September 30,2005.

 

The following presents accrued expenses:

 
| ** **             | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|------------------------|------------|------------------|------------|-------------------|------------|
| ** **             | ** ** | **2004**         | ** ** | **2005**          | ** ** |
| ** **             | ** ** | ** **       | ** ** | ** **        | ** ** |
| Accrued rent           |       | $                | 146        |              | $          | 158 |   |
| Accrued interest       |       | —           |       | —            |       |
| Accrued compensation   |       | 90               |       | 243               |       |
| Other                  |       | —           |       | 151               |       |
| Total accrued expenses |       | $                | 236        |              | $          | 552 |   |

 

**5.             Stockholders’Equity**

 

On November 1, 2005, the Company closed on its initialpublic offering of 4,000,000 shares of its common stock at $6.00 per share, resultingin net proceeds to the Company of approximately $22,100.  For the three and nine months ended September30, 2005, the Company granted options totaling 291,167 shares and 1,049,501shares, respectively.  Additionally, forthe three and nine months ended September 30, 2005, the Company grantedrestricted stock awards for 10,000 and 408,335 shares, respectively.

 

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**6.Subsequent Events**

 

InApril 2005, the Company issued convertible notes totaling $5,500.  The notes, which are due in November 2006,bear interest at 8% per year but are convertible into shares of the Company’scommon stock at a price per share of $4.80 (equal to 80% of the issuance priceof the Company’s stock in its initial public offering).  Following completion of the Company’s initialpublic offering, the note holders elected to convert $5,416 of the notes andaccrued interest into 1,128,401 shares of common stock, and the remaining $331of notes and accrued interest will be repaid in accordance with the terms ofthe notes.  The remaining unamortizeddiscount on these notes of $2,566 at September 30, 2005 will be charged tointerest expense during the quarter ending December 31, 2005.

 

During October 2005, theCompany borrowed $340 from a bank.  Theseborrowings, which bear interest at 4.8%, were collateralized by a certificateof deposit supplied by the Company’s President and Chief Executive Officer, whois also a shareholder.  These borrowingswere repaid in November 2005 following the closing of the Company’s initial publicoffering.

 

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** **

**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                         | Mathstar, Inc. |
|------------------------------|----------------|
|                         | (Registrant)   |
|                         |           |   |
|                         |           |   |
| Date: November 22, 2005 | By:            | /s/ James W. Cruckshank |   |
|                         |           | James W. Cruckshank |
|                         |           | Vice President of Administration and |
|                         |           | Chief Financial Officer |
|                         |           | (Principal Financial Officer and Principal |
|                         |           | Accounting Officer) |

 

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**EXHIBIT INDEX**

 
| **Exhibit No.** | ** ** | **Description of Exhibit**                                                                                                                                  | ** ** | **Page** |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| 31.1                 |       | Certification of Chief  Executive Officer pursuant to Rules 13a-14(a)/15d-14(a) under the Securities  Exchange Act of 1934 (filed herewith electronically). |       |     |
|                 |       |                                                                                                                                                        |       |     |
| 31.2                 |       | Certification of Chief  Financial Officer pursuant to Rules 13a-14(a)/15d-14(a) under the Securities  Exchange Act of 1934 (filed herewith electronically). |       |     |

 

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