S-1/A 1 d118905ds1a.htm AMENDMENT NO. 8 TO FORM S-1 Amendment No. 8 to Form S-1
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As filed with the Securities and Exchange Commission on July 23, 2012.

Registration No. 333-170711

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 8 to

FORM S-1

REGISTRATION STATEMENT

Under

THE SECURITIES ACT OF 1933

 

 

PEREGRINE SEMICONDUCTOR CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware   3674   86-0652659
(State or Other Jurisdiction of   (Primary Standard Industrial   (I.R.S. Employer
Incorporation or Organization)   Classification Code Number)   Identification Number)

9380 Carroll Park Drive San Diego, California 92121 Telephone: (858) 731-9400

 

 

(Address, including zip code and telephone number, including area code, of registrant’s principal executive offices)

Jay C. Biskupski

Chief Financial Officer

9380 Carroll Park Drive San Diego, California 92121 Telephone: (858) 731-9400

 

 

(Name, address, including zip code and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Gari L. Cheever

Jeffrey P. Higgins

John M. Tolpa

Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP
3570 Carmel Mountain Road, Suite 200

San Diego, California 92130
Telephone: (858) 436-8000

 

Eric C. Jensen

Jason L. Kent

Charles J. Bair

Cooley LLP

4401 Eastgate Mall

San Diego, California 92121

Telephone: (858) 550-6000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

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 definitions 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    ¨   Non-accelerated filer    x   Smaller reporting company    ¨

(Do not check if a smaller reporting company)

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION. DATED                     , 2012.

                 shares

 

LOGO

 

 

Common Stock

 

 

This is our initial public offering of shares of common stock of Peregrine Semiconductor Corporation. The selling stockholders named in this prospectus are offering an additional 159,220 shares of common stock. We will not receive any proceeds from the sale of shares by the selling stockholders.

Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $         and $        . We have applied to list our common stock on the Nasdaq Global Market under the symbol “PSMI.”

We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements. Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 9.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

     Per Share      Total  

Public offering price

   $                    $                

Underwriting discounts and commissions

   $         $     

Proceeds, before expenses, to us

   $         $     

Proceeds, before expenses, to selling stockholders

   $         $     

To the extent that the underwriters sell more than              shares of common stock, the underwriters have the option to purchase up to an additional              shares from us at the initial public offering price less the underwriting discount.

The underwriters expect to deliver the shares against payment in New York, New York on                      , 2012.

 

Deutsche Bank Securities     J.P. Morgan

 

 

 

RBC Capital Markets   Needham & Company       Oppenheimer & Co.   Pacific Crest Securities

 

                    , 2012


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LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     9   

Special Note Regarding Forward-Looking Statements

     34   

Use of Proceeds

     35   

Dividend Policy

     35   

Capitalization

     36   

Dilution

     38   

Selected Consolidated Financial Data

     40   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     42   

Business

     69   

Management

     83   

Certain Relationships and Related Party Transactions

     101   

Principal and Selling Stockholders

     102   

Description of Capital Stock

     106   

Shares Eligible for Future Sale

     110   

Material U.S. Federal Tax Considerations for Non-U.S. Holders

     112   

Underwriting

     116   

Industry and Market Data

     120   

Legal Matters

     120   

Experts

     120   

Where You Can Find More Information

     120   

Index to Consolidated Financial Statements

     F-1   

 

 

You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. We have not, and the underwriters have not, authorized anyone to provide you with additional or different information. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted.

No action is being taken in any jurisdiction outside the U.S. to permit a public offering of our common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in a jurisdiction outside the U.S. are required to inform themselves about, and to observe any restrictions as to, this offering and the distribution of this prospectus applicable to that jurisdiction.


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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. You should read the following summary together with the more detailed information appearing in this prospectus, including our consolidated financial statements and related notes, and our risk factors beginning on page 9, before deciding whether to purchase shares of our common stock. Unless the context otherwise requires, we use the terms “Peregrine,” the “company,” “we,” “us,” and “our” in this prospectus to refer to Peregrine Semiconductor Corporation and its subsidiaries.

Overview

We are a fabless provider of high performance radio frequency integrated circuits, or RFICs. Our solutions leverage our proprietary UltraCMOS® technology, which enables the design, manufacture, and integration of multiple radio frequency, or RF, mixed signal, and digital functions on a single chip. We believe our products deliver an industry leading combination of performance and monolithic integration. Our solutions target a broad range of applications in the aerospace and defense, broadband, industrial, mobile wireless device, test and measurement equipment, and wireless infrastructure markets. We have shipped over one billion RFICs based on our UltraCMOS technology since January 1, 2006.

Our UltraCMOS technology combines the ability to achieve the high levels of performance of traditional specialty processes, with the fundamental benefits of standard complementary metal oxide semiconductor, or CMOS, the most widely used semiconductor process technology. UltraCMOS technology utilizes a synthetic sapphire substrate, a near-perfect electrical insulator, providing greatly reduced unwanted electrical interaction between the RFIC and the substrate (referred to as parasitic capacitance), which enables high signal isolation and excellent signal fidelity with low distortion over a broad frequency range (referred to as broadband linearity). These two technical attributes result in RF devices with excellent high-frequency performance and power handling performance, and reduced crosstalk between frequencies. In addition, increased broadband linearity provides for faster data throughput and greater subscriber capacity over a wireless network, resulting in enhanced network efficiency. UltraCMOS technology also provides the benefits of standard CMOS, such as high levels of integration, low power consumption, reusable circuit libraries, widely available design tools and outsourced manufacturing capacity, and the ability to scale to smaller geometries. We own fundamental intellectual property, or IP, in UltraCMOS technology consisting of more than 125 U.S. and international issued and pending patents, and over 300 documented trade secrets covering basic circuit elements, RF circuit designs, manufacturing processes, and design know-how.

We leverage our extensive RF design expertise and systems knowledge to develop RFIC solutions that meet the stringent performance, integration, and reliability requirements of the rapidly evolving wireless markets. As of June 30, 2012, we offer a broad portfolio of more than 160 high performance RFICs including switches, digital attenuators, mixers / upconverters, prescalers, digitally tunable capacitors, or DTCs, and DC-DC converters, and we are currently developing power amplifiers, or PAs. During the year ended December 31, 2011, our products were sold to more than 1,500 module manufacturers, original equipment manufacturers, or OEMs, contract manufacturers, and other customers, including such companies as Ericsson AB, Flextronics International Ltd., Hitachi Metals, Ltd., Itron, Inc., Jabil Circuit Inc., LG Innotek Co., Ltd., Mini-Circuits, Inc., Motorola Solutions, Inc., Murata Manufacturing Company, Ltd., Northrop Grumman Corporation, Planet Technology Corp., Rockwell Collins, Inc., Rohde & Schwarz, Inc., SIPAT Co., Ltd., Skyworks Solutions, Inc., Sony Corporation, Source Photonics, Inc., TDK-EPC Corporation, Thales Alenia Space, and TriQuint Semiconductor, Inc. We believe our RFICs are included in products sold by many of the leading mobile handset OEMs. For the years ended December 25, 2010 and December 31, 2011, we generated net revenue of $91.1 million and $107.8 million, respectively, representing year-over-year growth of 18%. We generated net income of $3.8 million for the year ended December 25, 2010 and a net loss of $9.7 million for the year ended

 

 

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December 31, 2011. We recorded net revenue of $80.3 million and a net loss of $3.1 million for the six months ended June 30, 2012. As of June 30, 2012, we had an accumulated deficit of $231.3 million.

Industry Overview

Proliferation of wireless devices coupled with rapid advances in RF technologies have significantly enhanced wireless connectivity and revolutionized the mobile wireless, wireless infrastructure, broadband, and satellite communications markets. In addition, an array of other consumer, public safety, aerospace and defense, and industrial markets are increasingly incorporating advanced RF functionality into a wide variety of applications, resulting in increased demand for high performance RFICs in these markets. According to Frost & Sullivan, the worldwide market for RFICs across the aerospace and defense, broadband, industrial, mobile wireless device, test and measurement equipment, and wireless infrastructure industries is expected to grow from $12.2 billion in 2010 to $29.2 billion in 2015, representing a compound annual growth rate, or CAGR, of 19.1%.

The need for higher performance wireless solutions, combined with the increased demand for integrated components that reduce costs, overall power consumption, and size, has significantly increased the performance demands on the RF front-end subsystems used in wireless devices. However, the fundamental physical limitations of silicon have prevented standard CMOS solutions from meeting the high frequency and power handling requirements of high performance RF front-ends. As a result, RF front-end semiconductor manufacturers have historically utilized traditional specialty process technologies such as gallium arsenide, or GaAs, heterojunction bipolar transistor, or GaAs HBT, GaAs pseudomorphic high electron mobility transistor, or GaAs pHEMT, silicon-germanium, or SiGe, or bipolar junction transistor and CMOS, or BiCMOS. While discrete RF components produced with these processes may attain sufficient levels of performance, these technologies lack the ability to monolithically integrate multiple discrete components and digital logic, cannot leverage existing high volume standard CMOS manufacturing infrastructure, and are inherently limited in their ability to scale to smaller geometries as compared to standard CMOS.

Our Solution and Competitive Strengths

We design, develop, market, and sell high performance RFICs based on our patented UltraCMOS technology. Our UltraCMOS technology enables us to monolithically integrate multiple RF and mixed signal components and digital circuitry into high performance RFICs. Our UltraCMOS technology provides the fundamental benefits of standard CMOS, including high levels of integration, low power consumption, reusable circuit libraries, widely available design tools and outsourced manufacturing capacity, and the ability to scale to smaller geometries.

Our strengths that distinguish us from the competition include:

 

   

Unique, Proprietary UltraCMOS Technology. We pioneered the development of UltraCMOS technology for production of high performance RFICs and believe we are the only high volume commercial supplier of RFICs based on silicon-on-sapphire, or SOS.

 

   

Broad, System Level Integration Capabilities. Our extensive RFIC design experience allows us to approach the challenges of RF integration at the system level, as well as the component level. We have created a proprietary design platform that includes a comprehensive portfolio of cell libraries, reference designs, design tools, and other IP that allows the design, production, and integration of highly scalable RFICs.

 

   

Broad, Highly Differentiated IP Portfolio. We have more than 125 U.S. and international issued and pending patents encompassing a broad range of technologies that include basic materials processing, fundamental “building block” circuit elements enabled by our UltraCMOS material system, and higher-level circuit designs comprised of these unique circuit elements. In addition, we have substantial materials, process, design, packaging, and testing know-how that we retain as documented trade secrets.

 

 

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Proven and Efficient Fabless Model. Our UltraCMOS manufacturing process is highly portable to third-party foundries and allows us to scale our business, utilize established and proven standard CMOS production technologies, and transition to smaller geometries and larger wafer sizes relative to specialty process technologies.

 

   

Broad Markets and Diverse Customer Base. Our products address broad end markets, including aerospace and defense, broadband, industrial, mobile wireless device, test and measurement equipment, and wireless infrastructure markets. We offer over 160 different products across eight product families, and in 2011, our products were sold to more than 1,500 customers worldwide.

Our Strategy

Our goal is to be the market leader in large and growing markets where our UltraCMOS technology can provide a superior RFIC solution. Key elements of our strategy include:

 

   

Drive Integration Across RF Applications. We intend to continue to integrate additional discrete RF components and digital circuits into comprehensive single-chip solutions.

 

   

Expand our Served Addressable Market. We intend to continue to invest in the development of future generations of our products to meet the evolving performance, form factor, and cost demands of customers in our existing markets, while also expanding our product offerings to address the requirements of new products and markets.

 

   

Deepen Relationships with Existing Customers and Expand our Customer Base. We intend to enhance our global reach and increase our penetration of key customers in our target markets and continue to develop and broaden our relationships with key players in the wireless ecosystem, including wireless network operators, leading device and equipment OEMs, and reference design partners.

 

   

Leverage our Flexible, Scalable Outsourced Manufacturing Model. We have rapidly scaled our business by leveraging the high-volume manufacturing expertise and capacity of our third-party partners involved in the supply of key raw materials, wafer foundry, and assembly and testing services. We intend to continually expand and improve our efficient and robust global supply chain utilizing a variety of business partners located around the world.

Risks Affecting Us

Our business is subject to numerous risks, which are highlighted in the section titled “Risk Factors” immediately following this prospectus summary. These risks represent challenges to the successful implementation of our strategy and to the growth and future profitability of our business. Some of these risks are:

 

   

our operating results may fluctuate significantly and our future results are difficult to predict, which may cause us to fail to meet the expectations of investors;

 

   

we have incurred significant losses and may incur losses in the future;

 

   

we may be unable to sustain our historical net revenue growth rate and if net revenue growth falls short of our expectations, we may not be able to immediately reduce our operating expenses proportionately, which could eliminate our profitability;

 

   

changes in our product mix and in our manufacturing operations utilization may adversely affect our gross margins and operating results;

 

   

we rely on a small number of customers for a significant percentage of our net revenue, and the loss of, or a reduction in, orders from these customers could result in a significant decline in our net revenue;

 

   

if we fail to develop new or enhanced products that achieve market acceptance in a cost-effective and timely manner, our operating results could be adversely affected;

 

 

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our failure to continue to keep pace with new or improved semiconductor process technologies could impair our competitive position;

 

   

we depend on outside semiconductor foundries to manufacture our products and implement our fabrication processes, and any failure to maintain sufficient foundry capacity could significantly delay our ability to ship our products, damage our relationships with module manufacturers, OEMs, distributors, and contract manufacturers, reduce our sales, and increase our expenses;

 

   

we depend on limited sources of supply for some of the key components and materials in our products, and a limited number of suppliers for wafer preparation, which makes us susceptible to shortages, price fluctuations, and quality risks that could adversely affect our operating results;

 

   

if our principal end markets fail to grow or experience declines, our net revenue may decrease;

 

   

we are currently, and expect to be in the future, party to patent lawsuits and other intellectual property rights claims that are expensive and time consuming, and, if resolved adversely, could have a significant impact on our business, financial condition, or results of operations; and

 

   

claims by others that we infringe their proprietary technology could adversely affect our business.

For further discussion of these and other risks you should consider before making an investment in our common stock, see the section titled “Risk Factors” immediately following this prospectus summary.

Corporate Information

We were incorporated in Delaware in February 1990 and founded by Mark Burgener, Rory Moore, and Ron Reedy. Our principal executive offices are located at 9380 Carroll Park Drive, San Diego, California 92121. Our telephone number is (858) 731-9400. Our website address is www.psemi.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider information contained on our website to be part of this prospectus or in deciding whether to purchase shares of our common stock.

“Peregrine Semiconductor Corporation,” “Peregrine Semiconductor,” “Peregrine,” “UltraCMOS,” “HaRP,” “DuNE,” “STeP,” and other trademarks or service marks of Peregrine appearing in this prospectus are the property of Peregrine. This prospectus contains additional trade names, trademarks, and service marks of ours and of other companies. We do not intend our use or display of other companies’ trade names, trademarks, or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.

 

 

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The Offering

 

Common stock offered by us

                shares

 

Common stock offered by the selling stockholders

159,220 shares

 

Use of proceeds

We intend to use the net proceeds from this offering for working capital and other general corporate purposes. While we have not allocated the net proceeds of this offering to specified general corporate purposes, we may utilize such proceeds by allocating them amongst the following categories: finance our growth; develop new products; assert and defend our intellectual property rights; and fund capital expenditures. In addition, we may choose to repay our loan facility with Silicon Valley Bank or expand our current business through acquisitions of other businesses, products, or technologies. However, we do not have agreements or commitments for any specific acquisitions at this time. See “Use of Proceeds.” We will not receive any proceeds from the sale of shares of common stock by the selling stockholders. In connection with our initial public offering, eight employees are exercising options and selling a total of 159,220 shares issued upon exercise of these options. All of the options that are being exercised would otherwise expire during the 180-day lock-up period, when the holders would not be able to sell the shares, and therefore these holders are exercising these options and we are allowing them to sell these shares in our initial public offering.

 

Dividend policy

Currently, we do not anticipate paying cash dividends, and under our loan and security agreement, we may not pay dividends without the prior written consent of Silicon Valley Bank.

 

Risk factors

You should read the “Risk Factors” section of this prospectus for a discussion of factors that you should consider carefully before deciding to invest in shares of our common stock.

 

Proposed Nasdaq Global Market trading symbol

PSMI

The number of shares of our common stock to be outstanding following this offering is based on 25,229,301 shares of our common stock outstanding as of June 30, 2012, and excludes:

 

   

7,406,006 shares of common stock issuable upon the exercise of options outstanding under the Peregrine Semiconductor Corporation – 1996 Stock Plan, or 1996 Stock Plan, and the Peregrine Semiconductor Corporation – 2004 Stock Plan, or 2004 Stock Plan, as of June 30, 2012, at a weighted average exercise price of $4.48 per share;

 

   

196,090 shares of common stock issuable upon the exercise of common and convertible preferred stock warrants outstanding as of June 30, 2012, at a weighted average exercise price of $6.86 per share; and

 

 

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4,551,217 shares of common stock reserved for future issuance under our stock-based compensation plans, including 2,000,000 shares of common stock reserved for issuance under our 2012 Equity Incentive Plan, and 1,000,000 shares of common stock reserved for issuance under our 2012 Employee Stock Purchase Plan, subject in each case to automatic annual adjustment in accordance with the terms of the plan.

Unless otherwise indicated, this prospectus reflects and assumes the following:

 

   

the automatic conversion of all outstanding shares of our convertible preferred stock as of June 30, 2012, into 22,384,097 shares of common stock, upon the completion of this offering;

 

   

the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws immediately prior to completion of this offering;

 

   

no exercise by the underwriters of their over-allotment option; and

 

   

a 1-for-7.34 reverse stock split of our outstanding capital stock prior to the completion of this offering.

 

 

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Summary Consolidated Financial Data

The following tables set forth summary consolidated financial data. The consolidated statements of operations data for the years ended December 25, 2010 and December 31, 2011 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the six months ended June 25, 2011 and June 30, 2012, and the consolidated balance sheet data as of June 30, 2012 have been derived from our unaudited consolidated financial statements, included elsewhere in this prospectus. The unaudited financial statements include all adjustments, consisting of normal recurring accruals, which we consider necessary for a fair presentation of the financial position and the results of operations for these periods. You should read this summary consolidated financial data in conjunction with the sections titled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected for any future period.

 

     Fiscal Year Ended     Six Months Ended  
     December 25,
2010
    December 31,
2011
    June 25,
2011
    June 30,
2012
 
                 (unaudited)  
     (in thousands, except per share amounts)  

Consolidated Statement of Operations Data:

        

Net revenue

   $   91,071      $ 107,771      $ 45,729      $ 80,334   

Cost of net revenue (1)

     49,520        70,955        26,720        52,858   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     41,551        36,816        19,009        27,476   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expense

        

Research and development (1)

     18,040        22,730        10,248        14,163   

Selling, general and administrative (1)

     18,889        23,252        10,812        15,193   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expense

     36,929        45,982        21,060        29,356   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     4,622        (9,166     (2,051     (1,880

Interest expense

     (610     (318     (185     (1,076

Other income (expense), net

     (105     (2     66        (38
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     3,907        (9,486     (2,170     (2,994

Provision for income taxes

     147        196        125        74   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     3,760        (9,682     (2,295     (3,068

Net income allocable to preferred stockholders (2)

     (3,760                     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders

   $      $ (9,682   $ (2,295   $ (3,068
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net income (loss) per share attributable to common stockholders

   $      $ (3.57   $ (0.85   $ (1.10
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing basic and diluted net income (loss) per share

     2,504        2,715        2,693        2,790   
  

 

 

   

 

 

   

 

 

   

 

 

 

Unaudited pro forma net income (loss) per share attributable to common stockholders:

        

Basic

     $ (0.39     $ (0.12
    

 

 

     

 

 

 

Diluted

     $ (0.39     $ (0.12
    

 

 

     

 

 

 

Unaudited pro forma weighted average common shares outstanding:

        

Basic

       25,080          25,157   
    

 

 

     

 

 

 

Diluted

       25,080          25,157   
    

 

 

     

 

 

 

Footnotes on following page

 

 

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     As of June 30, 2012  
     Actual     Pro Forma      Pro Forma
As Adjusted
 
     (unaudited)  
    

(in thousands)

 

Consolidated Balance Sheet Data:

       

Cash and cash equivalents

   $ 42,918      $     42,918       $                

Working capital

     15,100        15,100      

Total assets

     131,504        131,504      

Obligations under capital leases, less current portion

     114        114         114   

Notes payable, less current portion

     310        310         310   

Other long-term liabilities

     5,391        4,583         4,583   

Convertible preferred stock

     172,907                  

Total stockholders’ equity (deficit)

     (143,594     30,121      

The pro forma column in the consolidated balance sheet data table above reflects the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 22,384,097 shares of common stock and the conversion of our remaining warrants to purchase convertible preferred stock into warrants to purchase common stock and the related reclassification of $808,000 of other long-term liabilities into stockholders equity (deficit).

The pro forma as adjusted column in the consolidated balance sheet data table above reflects (1) the automatic conversion of all outstanding shares of our convertible preferred stock as of June 30, 2012 into an aggregate of 22,384,097 shares of common stock upon completion of this offering, (2) the conversion of our remaining warrants to purchase convertible preferred stock into warrants to purchase common stock and the related reclassification of $808,000 of other long-term liabilities into stockholders equity (deficit), and (3) our sale of                  shares of common stock in this offering at an assumed initial public offering price of $           per share, the midpoint of the initial public offering price range reflected on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

Footnotes from prior page:

 

(1) Includes stock-based compensation as follows:

 

     Fiscal Year Ended      Six Months Ended  
     December 25,
2010
     December 31,
2011
     June 25,
2011
     June 30,
2012
 
                   (unaudited)  
     (in thousands)  

Cost of net revenue

   $ 407       $ 431       $ 208       $ 271   

Research and development

     556         762         332         567   

Selling, general and administrative

     1,554         1,891         943         1,126   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,517       $ 3,084       $ 1,483       $ 1,964   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) Please see Note 1 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to calculate net income allocable to preferred stockholders and net income (loss) attributable to common stockholders, including the method used to calculate the number of shares used in the computation of the per share amount.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including our consolidated financial statements and related notes, before deciding whether to purchase shares of our common stock. If any of the following risks is realized, our business, financial condition, results of operations, and prospects could be materially and adversely affected. In that event, the price of our common stock could decline and you could lose part or all of your investment.

Risks Related to Our Business and Industry

Our operating results may fluctuate significantly and our future results are difficult to predict, which may cause us to fail to meet the expectations of investors.

We operate in a highly dynamic industry and our future results could be subject to significant fluctuations, particularly on a quarterly basis. Our quarterly net revenue and operating results have fluctuated significantly in the past and may continue to vary from quarter-to-quarter due to a number of factors, many of which are not within our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. A significant percentage of our net revenue in each quarter is dependent on sales that are booked and shipped during that quarter, typically attributable to a large number of orders placed through our distributors for diverse end users and markets. As a result, accurately forecasting our operating results, including our total net revenue and gross margins, in any quarter is difficult. For example, it is difficult for us to forecast the demand for our products, in part because of the complex supply chain between us and the end users of our products. We have limited visibility into future module manufacturer, OEM, distributor, and contract manufacturer demand and the product mix that they will require, which could adversely affect our net revenue forecasts and operating margins.

In addition, our failure to accurately forecast demand can lead to product shortages that can impede production by the module manufacturers and OEMs, and harm our relationships with them and the distributors of our products. Conversely, our failure to forecast declining demand or shifts in product mix can result in excess or obsolete inventory. The rapid pace of innovation in our industry could also render significant portions of our inventory obsolete. Excess or obsolete inventory levels could result in unexpected expenses or increases in our reserves that could adversely affect our business, operating results, and financial condition. In contrast, if we were to underestimate demand or if sufficient manufacturing capacity were unavailable, we could forego net revenue opportunities, potentially lose market share, and damage our relationships with parties that use or distribute our products.

Additional factors that can contribute to fluctuations in our operating results include:

 

   

the rescheduling, increase, reduction, or cancellation of significant orders from module manufacturers, OEMs, distributors, or contract manufacturers;

 

   

our ability to develop, introduce, and ship in a timely manner new products and product enhancements that meet the requirements of module manufacturers, OEMs, or end users of our products, including performance, functionality, reliability, form factor, and cost requirements;

 

   

the rate at which module manufacturers, OEMs, and end users adopt our technologies in our target end markets;

 

   

the timing and success of the introduction of new products and technologies by us and our competitors, and the acceptance of our new products by module manufacturers, OEMs, and end users;

 

   

our gain or loss of a key module manufacturer, OEM, distributor, or contract manufacturer;

 

   

the availability, cost, and quality of materials and components that we purchase from third-party foundries and any problems or delays in the fabrication, wafer preparation, assembly, testing, or delivery of our products;

 

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fluctuations in manufacturing yields associated with new product introductions or changes in process technologies;

 

   

the quality of our products and any remediation costs, including costs associated with the return of previously sold products due to manufacturing defects; and

 

   

general economic conditions in our domestic and foreign markets.

Due to these and other factors, quarter-to-quarter comparisons of our historical operating results should not be relied upon as accurate indicators of our future performance.

We have incurred significant losses and may incur losses in the future.

As of June 30, 2012, we had an accumulated deficit of $231.3 million. Although we achieved profitability on a quarterly basis in 2010, and our net income for the year ended December 25, 2010 was $3.8 million, we incurred net losses of $9.7 million for the year ended December 31, 2011 and $3.1 million for the six months ended June 30, 2012, and we expect to continue to make significant expenditures related to the development of our business. These include expenditures to hire additional personnel related to the sales, marketing, and development of our products, and to maintain and expand our research and development facilities. We may not have sufficient net revenue growth to offset increased expenses or to achieve or maintain profitability in future periods.

We may be unable to sustain our historical net revenue growth rate and if net revenue growth falls short of our expectations, we may not be able to immediately reduce our operating expenses proportionately, which could eliminate our profitability.

Our net revenue has grown rapidly in recent years. Our net revenue grew from $38.2 million in 2006 to $53.4 million in 2007, and to $68.4 million in 2008. In 2009, our net revenue continued to grow to $70.5 million, but at a less rapid pace than the year prior. Over our history, we have experienced periods of relatively flat period-over-period growth, as well as periods of more rapid growth. From 2007 through 2011, our annual net revenue has increased at a CAGR of 19%. Our net revenue in the year ended December 31, 2011 increased by 18% over the corresponding period in 2010. We believe that in planning our growth, it is prudent to take into account the cyclical nature of some of the end markets that we serve, as well as the longer term historical patterns in the development of our business. Even if our net revenue increases to higher levels, we believe that a decline in the rate of growth of our net revenue is, to some extent, inevitable. Although we base our planned operating expenses in large part on our expectations of future net revenue, a substantial portion of our expenses is relatively fixed, and cannot immediately be eliminated if our net revenue falls short of our expectations. Thus, if the rate in growth of our net revenue in any quarter is substantially less than we had anticipated, we may be unable to reduce our operating expenses commensurately in that quarter, which could negatively affect our results of operations for that quarter. For instance, for the quarter ended March 26, 2011, our net revenue declined to $21.2 million from $23.4 million for the quarter ended December 25, 2010. In addition, we experienced net losses of $1.0 million, $1.3 million, $4.5 million, $2.7 million, and $3.0 million for the quarters ended March 26, 2011, June 25, 2011, September 24, 2011, December 31, 2011, and March 31, 2012, respectively, compared to a net income of $1.2 million for the quarter ended December 25, 2010.

Changes in our product mix and in our manufacturing operations utilization may adversely affect our gross margins and operating results.

Our products have a wide range of gross margins, and our overall gross margin in any period is highly dependent on the percentage of our net revenue attributable to higher or lower margin products in that period. The product mix that module manufacturers, OEMs, distributors, and contract manufacturers will require varies greatly from period-to-period and is difficult for us to predict, and a shift in product mix in any given period to a greater percentage of lower margin products would adversely affect our gross margins and operating results. For

 

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example, for the three month periods ended December 25, 2010, March 26, 2011, June 25, 2011, September 24, 2011, December 31, 2011, March 31, 2012, and June 30, 2012, our gross margins were 48%, 43%, 40%, 27%, 30%, 31%, and 37%, respectively. As a result of changes in product mix, our operating results will vary from period-to-period and could be adversely affected.

In addition, we are generally faced with a decline in the utilization of our manufacturing operations during periods of reduced demand, as a certain portion of our manufacturing costs are relatively fixed. During periods of reduced demand, these overhead costs are allocated over a smaller number of units, which will result in increased product cost. Reduced market demand in the future may adversely affect our utilization and consequently result in lower gross margins for our products. Fluctuations in our gross margins for our products could have a material negative impact on our business, financial condition and results of operations.

We rely on a small number of customers for a significant percentage of our net revenue, and the loss of, or a reduction in, orders from these customers could result in a significant decline in net revenue.

Although we have shipped our products to a large number of customers, we have historically depended on a small number of customers for a significant percentage of our annual net revenue. The composition of this group can change from year to year. Net revenue derived from our three largest direct customers as a percentage of our annual net revenue was 59% and 68% for the years ended December 25, 2010 and December 31, 2011, respectively, and 60% and 82% for the six months ended June 25, 2011 and June 30, 2012, respectively. Included in these percentages for our three largest direct customers are sales to two of our distributors. Based on records from our distributors of shipments to their customers, net revenue derived from our three largest end customers as a percentage of annual net revenue was 39% and 49% for the years ended December 25, 2010 and December 31, 2011, respectively, and 38% and 67% for the six months ended June 25, 2011 and June 30, 2012, respectively. Sales through our distributor Macnica to module manufacturer Murata represented 39% of our net revenue for the year ended December 31, 2011 and 61% of our net revenue for the six months ended June 30, 2012 and we believe substantially all of the products sold by Murata are to a limited number of mobile handset manufacturers. Any decrease in mobile handset sales by such manufacturers could have a material negative impact on our business, financial condition and results of operations. While the composition of our top customers varies from year to year, we expect that shipments to a limited number of customers will continue to account for a significant percentage of our net revenue for the foreseeable future.

With the exception of a supply and prepayment agreement with Murata, substantially all of our business, including that from our largest customers, is conducted through standard purchase orders, which provide no contractual guarantees beyond the purchase order itself. It is possible that any of our major customers could terminate its purchasing relationship with us or significantly reduce or delay the amount of our products that it orders, purchase products from our competitors, or develop its own products internally. The loss of, or a reduction in, orders from any major customer could cause a decline in net revenue and adversely affect our results of operations. To date, we have not experienced significant risk with respect to customer credit risk, but this could change as we expand our business in size and into new geographies in the future.

If we fail to develop new or enhanced products that achieve market acceptance in a cost-effective and timely manner, our operating results could be adversely affected.

The markets for our products are characterized by frequent new product introductions and changes in product and process technologies. The future success of our business will depend on our ability to develop new products for existing and new markets, introduce these products in a cost-effective and timely manner, have our products designed into the products of leading module manufacturers and OEMs, and have our products gain broad adoption by end users. The development of new high performance RFICs is highly complex, and from time-to-time we may experience delays in completing the development and introduction of new products or fail to efficiently manufacture such products in the early production phase. Our ability to successfully develop, introduce, and deliver new high performance RFICs will depend on various factors, including our ability to:

 

   

complete and introduce new product designs;

 

   

achieve design wins with module manufacturers and OEMs, and broad adoption by end users;

 

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meet the time pressures associated with the demands of the module manufacturers and OEMs to which we sell through our distributors and contract manufacturers;

 

   

accurately understand market requirements;

 

   

attract and retain skilled engineering, operations, and manufacturing personnel;

 

   

obtain adequate supplies of materials and components that meet our quality requirements; and

 

   

achieve adequate manufacturing yields and maintain sufficient supply through our third-party foundry relationships.

We believe that our UltraCMOS platform gives us a competitive advantage because it enables us to develop new products that integrate RF, analog, digital, and other functions on a single chip. However, if demand for integrated components in the future is smaller than anticipated, our competitive advantage would be diminished and our business could be adversely affected.

Our failure to continue to keep pace with new or improved semiconductor process technologies could impair our competitive position.

The semiconductor industry has historically been characterized by advancing technology through smaller geometries and larger wafer sizes, as well as through other proprietary and non-proprietary techniques. Although we have certain proprietary semiconductor processes, such as the application of silicon on a sapphire substrate in our UltraCMOS process, we constantly seek to develop new and improved techniques and methods internally and with the assistance of our suppliers. For example, we are currently working with numerous suppliers with respect to our next generation technologies. There can be no assurance that our efforts with these suppliers will ultimately be successful or result in next generation technologies that enable us to cost effectively produce our products in the future. For example, higher costs associated with the introduction and start up of new technologies could negatively impact our gross margins if the selling prices for our products based on new technologies do not sufficiently offset our higher costs for these technologies. For instance, we implemented new manufacturing processes in 2011 which resulted in low yields of certain wafers. As such, we recorded reductions to the carrying value of inventory as a result of a lower of cost or market valuation. Gross margins declined in our third and fourth quarter of fiscal 2011 as a result. Our future success depends in part upon our ability to continue to improve our semiconductor process technologies in order to adapt to emerging module manufacturer and OEM requirements and to competitive market conditions. If we fail for any reason to remain abreast of new and improved semiconductor process technologies as they emerge, we may lose market share which could adversely affect our operating results.

Standard CMOS is the semiconductor industry’s most broadly used manufacturing process technology and the semiconductor industry has committed significantly greater resources to standard CMOS, silicon on insulator, or SOI, and GaAs process technologies, as compared to our technology. Therefore, with the resources available to competitors using those technologies, they may more quickly adapt to emerging module manufacturer and OEM requirements and competitive market conditions than we can.

If the manufacturing yields that we realize in our production of integrated circuits, or ICs, were to decrease, our operating results could be adversely affected.

The manufacture and assembly of ICs, particularly high performance RFICs that we supply, is a highly complex process that is sensitive to a wide variety of factors, including the level of contaminants in the manufacturing environment, impurities in the materials used, and the performance of the fabrication equipment. As is typical in the semiconductor industry, we have from time to time experienced lower than anticipated manufacturing yields. In particular, we have in the past and may experience in the future lower manufacturing yields with respect to the introduction of new products, migration to smaller geometries, or the installation and start up of new process technologies. Our operating results could be adversely affected if we were unable to maintain current manufacturing yields through our third-party foundry relationships. For example, for the quarter ended September 25, 2011 we experienced lower than anticipated yields on certain wafers due to the implementation of new manufacturing processes and recorded an inventory write-down of $3.1 million as a result of a lower of cost or market valuation.

 

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We depend on LAPIS Semiconductor Co., Ltd., MagnaChip Semiconductor Ltd., Silanna Semiconductor Pty Ltd., and other outside semiconductor foundries to manufacture our products and implement our fabrication processes, and any failure to maintain sufficient foundry capacity could significantly delay our ability to ship our products, damage our relationships with module manufacturers, OEMs, distributors, and contract manufacturers, reduce our sales, and increase our expenses.

We do not own or operate any fabrication facilities and instead outsource fabrication of our products to independent foundries. Prior to June 2008, we owned and operated a manufacturing facility in Sydney, Australia. In June 2008, after achieving volume outsourced production of our UltraCMOS products, we sold our ownership interest in this manufacturing operation to Silanna Foundries Pty. Ltd. and entered into an outsourced manufacturing arrangement with this company. Silanna Foundries and its wafer manufacturing subsidiary are referred to in this prospectus as Silanna Semiconductor. LAPIS Semiconductor, MagnaChip Semiconductor, and Silanna Semiconductor manufactured 100% of the wafers used in our products for the years ended December 25, 2010 and December 31, 2011, and the six months ended June 30, 2012.

We place our purchase orders with foundries based on sales forecasts for our products. If any third-party foundry does not provide competitive pricing or is not able to meet our required capacity for any reason, or if our business relationship with LAPIS Semiconductor, MagnaChip Semiconductor, Silanna Semiconductor, or any other semiconductor foundry deteriorates, we may not be able to obtain the required capacity and would have to seek alternative foundries, which may not be available on commercially reasonable terms, or at all. The process for qualifying a new foundry is time consuming, difficult, and may not be successful, particularly if we cannot promptly integrate our proprietary process technology with the process used by the new foundry. Using a foundry with which we have no established relationship could expose us to potentially unfavorable pricing, unsatisfactory quality, or insufficient capacity allocation.

We face a number of other significant risks associated with outsourcing fabrication, including:

 

   

limited control over delivery schedules, quality assurance and control, and production costs;

 

   

discretion of foundries to reduce deliveries to us on short notice, allocate capacity to other customers that may be larger or have long-term customer or preferential arrangements with foundries we use;

 

   

inability of foundries to adequately allocate additional capacity to us based upon an increase in demand for our products;

 

   

unavailability of, or potential delays in accessing, key process technologies;

 

   

damage to equipment and facilities, power outages, equipment, or materials shortages that could limit manufacturing yields and capacity at the foundries;

 

   

potential unauthorized disclosure or misappropriation of IP, including use of our technology by the foundries to make products for our competitors;

 

   

financial difficulties and insolvency of foundries;

 

   

acquisition of foundries by third parties; and

 

   

lack of long-term manufacturing commitments by the foundries.

Any of the foregoing risks could delay shipment of our products, result in higher expenses and reduced net revenue, damage our relationships with module manufacturers, OEMs, distributors, and contract manufacturers, and otherwise adversely affect our operating results.

We depend on limited sources of supply for some of the key components and materials in our products, and a limited number of suppliers for wafer preparation, which makes us susceptible to shortages, price fluctuations, and quality risks that could adversely affect our operating results.

We purchase a number of key components and materials used in our products from limited source suppliers. For example, we currently obtain synthetic sapphire substrates from three third-party suppliers, including Kyocera Corporation, Rubicon Technology, Inc., and Maintech Japan Corporation. Our current consumption

 

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levels of synthetic sapphire represent less than approximately two percent of worldwide synthetic sapphire production. We believe that our suppliers currently have manufacturing capacity adequate to meet our foreseeable requirements. However, if competition for capacity were to increase, our suppliers could increase the lead times required to deliver materials to us or could seek to increase the prices of materials we purchase from them. For example, competition for synthetic sapphire wafer capacity has increased significantly in recent years due to the use of sapphire as a substrate for blue and white light-emitting diodes, or LEDs. This increasing demand for synthetic sapphire for use in LEDs has resulted in substantial increases in the cost of sapphire substrates and could adversely impact our manufacturing costs as well as the availability of sapphire substrate supply. In addition, we and our outside foundries use a limited number of suppliers for wafer preparation. For example, we currently obtain bonded SOS substrate from Soitec USA, Inc.

If our limited source suppliers and suppliers for wafer preparation were to experience difficulties that affected their manufacturing yields or the quality of the materials they supply to us, our cost of net revenue could be adversely affected. Longer lead times and quality problems experienced by our suppliers could also prevent us from fulfilling the demands of the module manufacturers, OEMs, distributors, and contract manufacturers for our products on a timely basis, and thus adversely affect our net revenue. The ability of our suppliers to meet our requirements could be impaired or interrupted by factors beyond their control, such as earthquakes or other natural phenomena, labor strikes or shortages, or political unrest. In the event one of our suppliers is unable to deliver products to us or is unwilling to sell materials or components to us, our operations may be adversely affected. We might also experience difficulty identifying alternative sources of supply for the materials or components used in our products or products we obtain through outsourcing. We could experience delays if we were required to test and evaluate products of potential alternative suppliers or products we obtain through outsourcing. Furthermore, financial or other difficulties faced by our suppliers, or significant changes in demand for the components or materials they use in the products they supply to us, could limit the availability of those products, components, or materials to us. Any of these occurrences could negatively impact our operating results and adversely affect our business.

If our principal end markets fail to grow or experience declines, our net revenue may decrease.

Although our products are used in a variety of end markets, our future growth depends to a significant extent on the success of our principal end markets. The rate at which these markets will grow is difficult to predict. These markets may fail to grow or decline for many reasons, including insufficient consumer demand, decreased demand for bandwidth, lack of access to capital, changes in the U.S. defense budget and procurement processes, and changes in regulatory environments. If demand for high performance RFICs or devices in which our products are incorporated declines, fails to grow, or grows more slowly than we anticipate, purchases of our products may be reduced, and our net revenue could decline.

In particular, a significant portion of our products are incorporated into mobile wireless devices. Accordingly, demand for our products is dependent on the ability of mobile wireless device manufacturers to successfully sell wireless devices that incorporate our products. We cannot be certain whether these manufacturers will be able to create or sustain demand for their wireless devices that contain our products or how long they will remain competitive in their business, if at all. The success of these mobile wireless device manufacturers and the demand for their wireless devices can be affected by a number of factors, including:

 

   

market acceptance of their mobile wireless devices that contain our products;

 

   

the impact of slowdowns or declines in sales of mobile wireless devices in general;

 

   

their ability to design products with features that meet the evolving tastes and preferences of consumers;

 

   

fluctuations in foreign currency;

 

   

relationships with wireless carriers in particular markets;

 

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the implementation of, or changes to, mobile wireless device certification standards and programs;

 

   

technological advancements in the functionality and capabilities of mobile wireless devices;

 

   

the imposition of restrictions, tariffs, duties, or regulations by foreign governments on mobile wireless device manufacturers;

 

   

failure to comply with governmental restrictions or regulations;

 

   

cost and availability of components for their products; and

 

   

inventory levels in the sales channels into which mobile wireless device manufacturers sell their products.

Our future net revenue growth depends on demand for bandwidth for many of our relevant markets, including mobile wireless device, wireless infrastructure, and aerospace and defense. However, such bandwidth demands are subject to market changes and the evolving requirements of end users and therefore may not occur.

If we fail to penetrate key players in our existing markets or fail to penetrate new markets, our net revenue, net revenue growth rate, if any, and financial condition could be materially and adversely affected.

We currently sell most of our products into the aerospace and defense, broadband, industrial, mobile wireless device, test and measurement equipment, and wireless infrastructure markets. Our net revenue growth, if any, will depend in part on our ability to penetrate key customers in these target markets and to continue to develop and broaden our relationships with key players in the wireless ecosystem including wireless network operators, leading device and equipment OEMs, and reference design partners. Each of the markets we serve presents distinct and substantial risks. If any of these markets does not develop as we currently anticipate or if we are unable to penetrate them successfully, it could materially and adversely affect our net revenue and net revenue growth rate, if any.

In addition, the markets for certain of our products, such as DC-DC converters and DTCs, are new, still developing and relatively small. We have sold or provided samples of limited quantities of our products into these markets and cannot predict how or to what extent demand for our products in these markets will develop. If we fail to penetrate these or other new markets upon which we target our resources, our net revenue and net revenue growth rate, if any, likely will decrease over time and our financial condition could suffer.

If module manufacturers or OEMs do not design our RFICs into their product offerings, or if such module manufacturers’ or OEMs’ product offerings are not commercially successful, we would have difficulty selling our RFICs and our business could be adversely affected.

Our products are sold directly and through our distributors and contract manufacturers to module manufacturers who include our RFICs in the products they supply to OEMs, and to OEMs who include our RFICs in their products. Our RFICs are generally incorporated into the module manufacturers’ and OEMs’ products at the design stage. As a result, we rely on module manufacturers and OEMs to design our RFICs into the products they sell. Without these design wins, our business would be materially and adversely affected. We often incur significant expenditures on the development of a new RFIC without any assurance that a module manufacturer or OEM will select our RFIC for design into its own product. Once a module manufacturer or OEM designs a competitor’s semiconductor into its product offering, it becomes significantly more difficult for us to sell our RFICs directly or indirectly to that module manufacturer or OEM because changing suppliers involves significant cost, time, effort, and risk for the module manufacturer or OEM. Furthermore, even if a module manufacturer or OEM designs one of our RFICs into its product offering, we cannot be assured that its product will be commercially successful and that we will receive any net revenue from that product. If the module manufacturers’ or OEMs’ products incorporating our RFICs fail to meet the demands of their customers or otherwise fail to achieve market acceptance, we will be unable to achieve broad adoption of our UltraCMOS technology. As a result, our net revenue and business would be adversely affected.

 

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We design custom RFICs to meet specific requirements of the module manufacturers and OEMs. The amount and timing of net revenue from such products can cause fluctuations in our quarterly operating results.

The design and sales cycle for our custom RFICs, from initial contact by our sales force to the commencement of shipments of those products in commercial quantities, is lengthy and can range from six months to as long as two years or more. As part of this process, our sales and application engineers work closely with either the module manufacturer or OEM to analyze their respective product requirements and establish a technical specification for the custom RFIC. We then evaluate test wafers and components, and establish assembly and test procedures before manufacturing in commercial quantities can begin. The length of this cycle is influenced by many factors, including the difficulty of the technical specification, the novelty and complexity of the design and the module manufacturers’ or OEMs’ procurement processes. Module manufacturers and OEMs typically do not commit to purchase significant quantities of a custom RFIC until they are ready to commence volume shipment of their own products, and volume purchases of our custom RFICs by module manufacturers or OEMs generally do not occur until they have successfully introduced the modules or products incorporating our RFICs. Our receipt of substantial net revenue from sales of a custom RFIC depends on the module manufacturer’s or OEM’s commercial success in manufacturing and selling its product incorporating our custom RFIC. As a result, a significant period may elapse between our investment of time and resources in a custom RFIC and our receipt of substantial net revenue from sales of that product.

The length of this process increases the risk that such module manufacturer or OEM will decide to cancel or change its product plans. Such a cancellation or change in plans by the module manufacturer or OEM could cause us to lose anticipated sales. In addition, our financial condition and results of operations would be adversely affected if a significant module manufacturer or OEM curtails, reduces, or delays orders during our sales cycle, chooses not to release equipment that contains our custom RFICs, or are themselves not successful in the sale and marketing of their products that incorporate our custom RFICs. Additionally, a module manufacturer or OEM occasionally requests that we create custom RFICs and they agree to purchase such products only if we provide periods of exclusivity during which we will provide those custom RFICs only to that customer. These exclusivity periods restrict our ability to generate sales of these products with other customers and may cause us to lose significant sales to other module manufacturers and OEMs. Finally, if we fail to achieve initial design wins in the module manufacturer’s or OEM’s qualification process, we may lose the opportunity for significant sales to that module manufacturer or OEM for a lengthy period of time because the module manufacturer or OEM may be unlikely to change its source for those products in the future due to the significant costs associated with qualifying a new supplier and potentially redesigning its product.

The average selling prices of RFICs in our markets have historically decreased over time and will likely do so in the future, which could adversely impact our net revenue and gross profits.

Average selling prices of RFICs in the markets we serve have historically decreased over time and we expect such declines to continue to occur. Our gross profits and financial results will suffer if we are unable to offset reductions in our average selling prices by reducing our costs, developing new or enhanced RFICs on a timely basis with higher selling prices or gross profits, or increasing our sales volumes. Additionally, because we do not operate our own manufacturing, assembly, or testing facilities, we may not be able to reduce our costs as rapidly as companies that operate their own facilities, and our costs may even increase, which could also reduce our margins. In the past, we have reduced the prices of our RFICs in anticipation of future competitive pricing pressures, new product introductions by us or our competitors, and other factors. We expect that we will have to continue to do so in the future.

Our financial results are exposed to the cyclicality of the semiconductor industry, and as a result, we may experience reduced net revenue or operating income during any future semiconductor industry downturn.

The semiconductor industry is highly cyclical and has historically experienced significant fluctuations in demand, resulting in product overcapacity, high inventory levels, and accelerated erosion of average selling prices. These conditions have sometimes lasted for extended periods of time. Downturns in our target markets

 

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have in the past contributed to weak demand for semiconductor products. We experienced slower growth during periods of weak demand in the past, and our operating results may be adversely impacted by any downturns in the future. Future downturns in the semiconductor industry could adversely impact our net revenue and adversely affect our business, financial condition, and results of operations.

The segment of the semiconductor industry in which we participate is intensely competitive, and our inability to compete effectively could adversely affect our business.

The markets for our products are extremely competitive, and are characterized by rapid technological advances, frequent new product introductions, evolving industry standards, price erosion, and the continuously evolving requirements of module manufacturers and OEMs. This competition could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses, and failure to increase, or the loss of, market share, any of which could adversely affect our business. We compete primarily with other suppliers of high performance RFICs. We currently compete in the mobile wireless device and wireless infrastructure markets with Avago Technologies Limited, Hittite Microwave Corporation, M/A-COM Technology Solutions Inc., NEC Corporation, Renesas Electronics Corporation, RF Micro Devices, Inc., Skyworks, Sony Corporation, Texas Instruments Incorporated, Toshiba Corporation, TriQuint Semiconductor, Inc., and others. In the broadband, test and measurement equipment, and industrial markets, we principally compete with Hittite, M/A-COM, Renesas, Skyworks, and others. Our principal competitors in the aerospace and defense markets include Analog Devices, Inc., Hittite, Intersil Corporation, M/A-COM, and others. We expect increased competition from other established and emerging companies if our market continues to develop and expand. For example, current or potential competitors have established or may establish financial and strategic relationships with each other or with existing or potential customers or other third parties to increase the ability of their products to address the needs of our prospective customers. Accordingly, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share, which would adversely affect our business. In addition, a competitor could acquire a partner to which we have licensed certain rights to sell products using our technology. There can be no assurance that we will be able to compete successfully against current or potential competitors, or that competition will not have a material adverse effect on our business, financial condition, and results of operations.

In addition, we may face competition because of the potential risks customers associate with purchasing products from sole sources. Because our products are manufactured using a proprietary technology, customers may be reluctant to purchase our products because they may view us as a sole source supplier for certain of their component parts. Customers generally prefer to incorporate components into their products that can be sourced from multiple suppliers.

We rely substantially on distributors for the sale of our products, and if we fail to retain or find additional distributors, or if these parties fail to perform as expected, it could reduce our future net revenue.

A significant portion of our net revenue is derived from a limited number of distributors, in particular, Macnica and Richardson. Our distributor sales to Macnica are primarily flow-through sales to Murata, since the vast majority of the sales of our products by Macnica are to Murata. For the year ended December 31, 2011, approximately 48% and 16% of our net revenue was derived from Macnica and Richardson, respectively, and for the six months ended June 30, 2012, Macnica and Richardson accounted for 66% and 14% of our net revenue, respectively. We anticipate that we will continue to be dependent upon a limited number of distributors, including a limited number of end customers purchasing from Macnica, for a significant portion of our net revenue in the foreseeable future. The portion of our net revenue attributable to certain distributors may also fluctuate in the future since we are unable to predict the extent to which these distributors will be successful in marketing and selling our products. Furthermore, termination of a relationship with a major distributor, either by us or by the distributor, could result in a temporary or permanent loss of net revenue. We may not be successful in finding suitable alternative distributors on satisfactory terms, or at all, and this could adversely affect our ability to sell in certain geographical locations or to certain end customers. Additionally, if we terminate our relationship with a major distributor, we may be obligated to repurchase unsold products, which could be difficult or impossible to sell to other end customers. Furthermore, distributors we do business with may face issues obtaining credit, which could impair their ability to make timely payments to us.

 

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In addition to distribution and sales activities, some of our distributors provide technical sales support to module manufacturers and OEMs. The activities of our distributors are not within our direct control. Our failure to manage our relationships with these distributors could impair the effectiveness of our sales, marketing, and support activities. A reduction in the sales efforts, technical capabilities, or financial viability of these parties, a misalignment of interest between us and them, or a termination of our relationship with our distributors could have a negative effect on our sales, financial results, and ability to support the OEMs and module manufacturers who purchase our products. We generally engage our distributors under short-term contracts, which typically may be terminated by either party upon 90 days’ notice. It generally takes approximately three months for a distributor to become educated about our products and capable of providing quality sales and technical support to the module manufacturers and OEMs. Recruiting and retaining qualified distributors and training them in our technology and product offerings requires significant time and resources. However, it may be difficult to terminate foreign distributors if they are not performing as expected. If our relationship with one of our other distributors were terminated for any reason, shipments to current and prospective module manufacturers and OEMs could be disrupted or delayed, and we could experience a diversion of substantial time and resources as we seek to identify, contract with, and train a replacement, all of which could adversely affect our operating results.

Defects and poor performance in our products could result in loss of module manufacturers and OEMs purchasing our products, decreased net revenue, unexpected expenses, and loss of market share, and we may face warranty and product liability claims arising from defective products.

Our products are complex and must meet stringent quality requirements. Products as complex as ours may contain undetected errors or defects, especially when first introduced or when new versions are released. Errors, defects, or poor performance can arise due to design flaws, defects in raw materials or components, or manufacturing difficulties, which can affect both the quality and the yield of the product. As our products become more complex, we face higher risk of undetected defects, because our testing protocols may not be able to fully test the products under all possible operating conditions. Any actual or perceived errors, defects, or poor performance in our products could result in the replacement or recall of our products, shipment delays, rejection of our products, damage to our reputation, lost net revenue, diversion of our engineering personnel from our product development efforts in order to address or remedy any defects, and increases in module manufacturer and OEM customer service and support costs, all of which could have a material adverse effect on our operations.

Furthermore, defective, inefficient, or poorly performing products may give rise to warranty and product liability claims against us that exceed any net revenue or profit we receive from the affected products. We could incur significant costs and liabilities if we are sued and if damages are awarded against us. Our agreements with the module manufacturers and OEMs who purchase our products through our distributors typically contain provisions designed to limit our exposure to potential product liability claims. However, the limitation of liability provisions contained in these agreements may still result in a significant financial exposure and may also not be effective as a result of federal, state, local, or foreign laws, or ordinances or unfavorable judicial decisions in the U.S. or other countries. In addition, even if ultimately unsuccessful, such claims against us could result in costly litigation, divert our management’s time and resources, and damage our relationships with the module manufacturers, OEMs, and distributors. Costs or payments we may make in connection with warranty and product liability claims or product recalls may adversely affect our financial condition and results of operations.

Our international sales and operations subject us to additional risks that can adversely affect our operating results.

The percentage of our net revenue attributable to customers based outside North America was 54% and 70% for the years ended December 25, 2010 and December 31, 2011, respectively, and 80% for the six months ended June 30, 2012. We expect that net revenue derived from customers outside North America will continue to account for a significant portion of our net revenue. Currently, we maintain international sales offices in Europe and Asia, and we rely on a network of third-party sales representatives and distributors to sell our products

 

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internationally. Moreover, we have in the past relied on, and expect to continue to rely on, suppliers, manufacturers, and subcontractors located in countries other than the U.S., including Australia, Japan and South Korea. For example, we have agreements with LAPIS Semiconductor, MagnaChip Semiconductor, and Silanna Semiconductor concerning the fabrication of certain of our semiconductor products. The LAPIS Semiconductor fabrication facility is located in Miyazaki, Japan, and the MagnaChip Semiconductor fabrication facility is located in Cheongju, South Korea. We also have an agreement with Silanna Semiconductor concerning the fabrication of certain of our semiconductor products at Silanna Semiconductor’s fabrication facility in Sydney, Australia. Accordingly, we are subject to several risks and challenges related to our international sales and operations, any of which could adversely affect our financial results. These risks and challenges include:

 

   

difficulties and costs of staffing and managing international operations across different geographic areas and cultures;

 

   

compliance with a wide variety of domestic and foreign laws and regulations, including anti-bribery laws and laws relating to the import or export of semiconductor products;

 

   

legal uncertainties regarding taxes, tariffs, quotas, export controls, export licenses, and other trade barriers;

 

   

seasonal reductions in business activities;

 

   

our ability to receive timely payment and collect our accounts receivable;

 

   

political, legal, and economic instability, foreign conflicts, and the impact of regional and global infectious illnesses in the countries in which we and the module manufacturers, OEMs, distributors, contract manufacturers, suppliers, manufacturers, and subcontractors with whom we do business are located;

 

   

legal uncertainties regarding protection for contractual and intellectual property rights in some countries, which increase the risk of unauthorized and uncompensated use of our products or technologies;

 

   

fluctuations in foreign currency exchange rates and interest rates, including risks related to any interest rate swap or other hedging activities we undertake; and

 

   

fluctuations in freight rates and transportation disruptions.

Any of these factors could adversely affect both our ability to effectively operate our foreign offices and the ability of our foreign suppliers to supply us with required materials or services. Any interruption or delay in the supply of our required components, products, materials, or services, or our inability to obtain these components, materials, products, or services from alternate sources at acceptable prices and within a reasonable amount of time, could impair our ability to meet scheduled product deliveries to module manufacturers, OEMs, distributors, and contract manufacturers and could cause them to cancel orders.

Additionally, most of our foreign sales, as well as our purchases of material from international suppliers, are denominated in U.S. dollars. An increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive for international module manufacturers, OEMs, distributors, and contract manufacturers to purchase, thus rendering the prices of our products less competitive. Conversely, a reduction in the value of the U.S. dollar relative to foreign currencies could increase our supply costs. At the present time, we do not have a foreign currency hedging policy in place.

Unfavorable economic conditions may adversely affect our net revenue, margins, and profitability.

Since 2008, the global economy has experienced significant financial turmoil and upheaval characterized by volatility and declines in prices of securities and commodities, diminished credit availability, declining consumer and business confidence, inability to access capital markets, proliferation of bankruptcies, and rising

 

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unemployment rates. It is not clear how long the uncertain economic conditions will continue, how quickly the economy and employment will recover, and how much adverse impact it will have on the global economy in general and, in particular, on the economies in North America, Europe, Asia, and other regions where we market and sell our products. Uncertain economic conditions may cause module manufacturers, OEMs, distributors, and contract manufacturers to reduce demand for our products, resulting from reduced demand of their customers, which would adversely affect our financial condition and results of operations.

Furthermore, consumer products that contain our RFIC products are discretionary purchases for consumers. Consumers are generally more willing to make discretionary purchases during favorable economic conditions. As a result of unfavorable economic conditions, including higher consumer debt levels and lower availability of consumer credit, consumers’ purchases of discretionary items may decline, which could adversely affect our net revenue.

If we lose key personnel or are unable to attract and retain personnel on a cost-effective basis, our business could be adversely affected.

Our performance is substantially dependent on the continued services and performance of our senior management and our highly qualified team of engineers, many of whom have numerous years of experience and specialized expertise in our business. Highly skilled RFIC design engineers, in particular, are in short supply. We expect to continue to hire additional engineering personnel in 2012 as we expand our RFIC design and system-level engineering capabilities. If we are not successful in hiring and retaining highly qualified engineers, we may not be able to extend or maintain our engineering expertise, and our future product development efforts could be adversely affected. Furthermore, the loss of members of our senior management could significantly delay or prevent the achievement of our strategic objectives, which could adversely affect our operating results.

Our future success also depends on our ability to identify, attract, hire, train, retain, and motivate highly skilled managerial, operations, sales, marketing, and customer service personnel. We have in the past maintained a rigorous, highly selective, and time-consuming hiring process. We believe that our approach to hiring has significantly contributed to our success to date. However, our highly-selective hiring process has made it more difficult for us to hire a sufficient number of qualified employees, and, as we grow, our hiring process may prevent us from hiring the personnel we need in a timely manner. Moreover, the cost of living in the San Diego area, where our corporate headquarters are located, has been an impediment to attracting new employees in the past, and we expect that this will continue to impair our ability to attract and retain employees in the future. If we fail to attract, integrate, and retain the necessary personnel, our ability to maintain and grow our business could suffer significantly.

We may not generate positive returns on our research and development investments.

Developing our products is expensive, and our investment in product development may involve a long payback cycle. In 2010 and 2011, our research and development expenses were $18.0 million, or approximately 20% of our total net revenue, and $22.7 million, or approximately 21% of our total net revenue, respectively. In the six-month period ended June 30, 2012, our research and development expenses were $14.2 million, or approximately 18% of our total net revenue. Our future plans include significant investments in research and development and related product opportunities. In addition, having the majority of research and development in the U.S. creates a cost disadvantage as compared to our competitors who may obtain significantly lower personnel and other costs by locating their research and development operations outside the U.S.

We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position. However, our ability to generate positive returns on these investments may take several years, if we are able to do so at all.

 

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If we fail to manage future growth effectively, our product quality, operations, and financial results could be adversely impacted.

We are experiencing a period of significant growth and expansion, which will continue to require the increased efforts of our management and other resources. We will also need to expand our office and facilities space to accommodate our growth in employees and operations. As of June 30, 2012, we had 340 employees, up from 164 employees as of December 31, 2005, and we shipped over 230 million RFICs in 2011, up from 14 million RFICs in 2005. This expansion has in the past required and may continue in the future to require substantial managerial and financial resources, and our efforts in this regard may not be successful. Our current systems, procedures, offices, facilities, and controls may not be adequate to support our future operations. If we fail to adequately manage our growth, or to improve our operational, financial, and management information systems, or fail to effectively hire, train, motivate, or manage our new and future employees, the quality of our products and the management of our operations could suffer, which could adversely affect our operating results.

We may encounter difficulties in operating a newly implemented enterprise resource planning, or ERP, system, which may adversely affect our operations and financial reporting.

We implemented a new ERP system in the third quarter of fiscal 2010 as part of our ongoing efforts to improve and strengthen our operational and financial processes and our reporting systems. Any difficulties in the operation of our current ERP system could cause significant issues in the management of our business. We may fail to meet, or incur higher costs to meet, customer demand for our products, or we could be delayed in our ability to meet our financial reporting obligations as a result of ERP system errors, any of which could materially adversely affect our results of operations.

We may engage in future acquisitions or dispositions that could disrupt our business, cause dilution to our stockholders, or adversely impact our financial condition and operating results.

In the future we may acquire companies or assets or dispose of portions of our business in order to enhance our market position or strategic strengths. A portion of the net proceeds from this offering may be used for acquisition purposes. We are not currently a party to any agreements or commitments and we have no understandings with respect to any such acquisitions or dispositions. Our ability as an organization to make acquisitions is unproven. We may not be able to find suitable acquisition candidates and we may not be able to complete acquisitions or dispositions on favorable terms, if at all, even after devoting substantial resources to them. If we do complete acquisitions or dispositions, we cannot be sure that they will ultimately strengthen our competitive position or that they will not be viewed negatively by customers, financial markets, or investors. In addition, any acquisitions that we make could lead to difficulties in integrating personnel and operations from the acquired businesses and in retaining and motivating key personnel from these businesses. Acquisitions or dispositions may disrupt our ongoing operations, divert management from day-to-day responsibilities, increase our expenses, and adversely impact our operating results or financial condition. Future acquisitions may reduce our cash available for operations and other uses and could result in an increase in amortization expense related to identifiable assets acquired, potentially dilutive issuances of equity securities, or the incurrence of debt, any of which could adversely effect our financial condition and operating results.

Global or regional political and social conditions could adversely affect our operating results.

External factors such as geopolitical and social turmoil, terrorist attacks, and acts of war in those parts of the world that serve as markets for our products, such as North America, Europe, Asia, or elsewhere, could significantly adversely affect our business and operating results in ways that cannot be predicted. These uncertainties could make it difficult for the module manufacturers, OEMs, distributors, and contract manufacturers who purchase our products and for us to accurately plan future business activities. The occurrence of any of these events or circumstances could adversely affect our operating results.

 

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We conduct substantially all of our design, marketing, and back-end test operations at our corporate headquarters in San Diego, California, and any fire, earthquakes, or other unanticipated events affecting our corporate headquarters could adversely impact our business, results of operations, or financial condition.

We conduct substantially all of our design, marketing, and back-end test operations at our corporate headquarters in San Diego, California. Our headquarters are subject to the risk of catastrophic loss due to unanticipated events such as fires or earthquakes. This facility and the equipment that we use there would be difficult to repair or replace and could require substantial lead time to do so. Any disruption or other unanticipated events affecting our corporate headquarters, and therefore our design, marketing, and back-end test operations, as well as administrative activities, would adversely impact our business, results of operations, and financial condition.

Our global business operations could be significantly impacted by natural disasters or global epidemics, or by interruptions resulting from manmade problems such as computer viruses or terrorism.

A number of our facilities and those of our third-party fabrication facilities are located in areas with above average seismic activity. Our primary facility and headquarters are located in San Diego, California, and we have an office in Tokyo, Japan for marketing and sales. We could suffer significant business disruption due to earthquakes, and the risk of an earthquake in Southern California or the Pacific Rim region is significant due to the proximity of major earthquake fault lines. We are not currently covered by insurance against business disruption caused by earthquakes. Furthermore, if our third-party fabrication facilities operated by LAPIS Semiconductor in Miyazaki, Japan, MagnaChip Semiconductor in Cheongju, South Korea, or Silanna Semiconductor in Sydney, Australia were to experience any problems or downtime, including those caused by fire, earthquake, floods, or other natural disasters, we would be unable to meet our production targets and our business would be adversely affected. For example, although the LAPIS Semiconductor manufacturing facility was not directly impacted by the massive earthquake and tsunami that hit northeastern Japan on March 11, 2011, LAPIS Semiconductor or our other suppliers or customers located in Japan could have experienced serious production delays in the aftermath of the disaster resulting from supply disruptions, transportation difficulties in Japan, rationing of electricity, or other reasons. In addition, if any piece of equipment were to break down or experience down-time, it could cause our production lines to go down. There is no assurance that we would be able to secure replacement wafer production capacity on a timely basis or at all, or that if available, it could be obtained on favorable terms. In addition, our servers are vulnerable to computer viruses, break-ins, and similar disruptions from unauthorized tampering with our computer systems. In addition, acts of terrorism could cause disruptions in our business or the respective businesses of the module manufacturers, OEMs, distributors, and contract manufacturers, who purchase or sell our products, or the economy as a whole. To the extent that such disruptions result in delays or cancellations of orders by the module manufacturers, OEMs, distributors, or contract manufacturers or delays the deployment of our products, our business, results of operations, and financial condition could be adversely affected.

The occurrence of any of the foregoing or other natural or man-made disasters could cause damage or disruption to us, our employees, operations, distribution channels, markets, and customers, which could result in significant delays in deliveries or substantial shortages of our products and adversely affect our business, results of operations, financial condition, or prospects.

Our insurance may not cover all losses, including losses resulting from business disruption or product liability claims.

We have limited product liability, general liability, or other business insurance coverage for our operations. In addition, we do not have any business insurance coverage for our operations to cover losses that may be caused by some natural disasters. Any occurrence of uncovered loss could harm our results of operations and financial condition.

 

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Potential changes in our effective tax rate could harm our future operating results.

We are subject to income taxes in the U.S. and various foreign jurisdictions, and our domestic and international tax liabilities are subject to the allocation of expenses in differing jurisdictions. Our tax rate is affected by changes in the mix of earnings and losses in countries with differing statutory tax rates, research tax credits, certain non-deductible expenses including those arising from the requirement to expense stock options, and the valuation of deferred tax assets and liabilities, including our ability to utilize our net operating loss, or NOL, carryforwards. Increases in our effective tax rate could adversely impact our results of operations.

Risks Related to Our Intellectual Property

We are currently, and expect to be in the future, party to patent lawsuits and other intellectual property rights claims that are expensive and time consuming, and, if resolved adversely, could have a significant impact on our business, financial condition, or results of operations.

The semiconductor industry is characterized by frequent claims and litigation, including claims regarding patent and other intellectual property rights. We are presently involved in two related patent infringement matters that we commenced, and we expect the number of patent and other intellectual property matters, including claims that may be asserted against us, to increase.

On February 14, 2012, we filed a complaint with the U.S. International Trade Commission, or ITC, and a lawsuit in the U.S. District Court for the Central District of California, which on April 13, 2012 we moved to the U.S. District Court for the Southern District of California. Each of these actions allege the infringement of five of our patents relating to RFICs and switching technology by RF Micro Devices, Inc., or RFMD, and Motorola Mobility, Inc., or Motorola Mobility. On May 11, 2012, we also amended the ITC complaint and filed an additional lawsuit in the U.S. District Court for the Southern District of California to add HTC Corporation, or HTC, to the previous actions. The complaints filed with the ITC claim that certain of RFMD’s products and certain of Motorola Mobility’s and HTC’s smartphones infringe our patents relating to SOI design technology for RFICs and seeks, among other remedies, an exclusion order preventing the importation and sale of infringing products in the U.S.   Separately, the suits we filed in the U.S. District Court allege infringement of the same patents and seeks, in addition to damages, to permanently enjoin RFMD, Motorola Mobility, and HTC from further infringement. On April 16, 2012, RFMD filed a lawsuit against us in the U.S. District Court for the Middle District of North Carolina, seeking a declaratory judgment that RFMD does not infringe the patents we have asserted in our actions against them or that these patents are invalid. The lawsuit filed by RFMD has been stayed pending the outcome of the ITC complaint.

Although the results of any litigation and claims cannot be predicted with certainty, we do not believe that the final outcome of intellectual property claims we are currently pursuing will have a material adverse effect on our business, financial condition, or results of operations. However, prosecuting and defending intellectual property claims is costly and can impose a significant burden on management and employees, we may receive unfavorable preliminary or interim rulings in the course of litigation, and there can be no assurance that favorable final outcomes will be obtained in all cases, if any. We may decide to settle any such lawsuits and disputes on terms that are unfavorable to us. Similarly, if any litigation to which we are a party is resolved adversely, we may be subject to an unfavorable judgment that may not be reversed on appeal. The terms of such a settlement or judgment may require us to license our technology to third parties, cease some or all of our operations or pay substantial amounts to a counterparty to such litigation. Our business, financial condition, or results of operations could be adversely affected as a result.

Claims by others that we infringe their proprietary technology could adversely affect our business.

In recent years there has been significant litigation involving intellectual property rights in many technology-based industries, including the semiconductor industry. Although we have not in the past been subject to claims that any of our products infringe any patents or other proprietary rights of third parties, we could be subject to such claims in the future. There can be no assurance that claims that may arise in the future

 

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can be amicably resolved, and it is possible that litigation could ensue. We do not know whether we would prevail in these proceedings given the complex technical issues and inherent uncertainties in intellectual property litigation.

Claims that our products, processes, or technology infringe third-party intellectual property rights, regardless of their merit or resolution, could be costly to defend or settle and could divert the efforts and attention of our management and technical personnel. If any pending or future proceedings result in an adverse outcome, we could be required to:

 

   

cease the manufacture, use, or sale of the infringing products, processes, or technology;

 

   

pay substantial damages for infringement;

 

   

expend significant resources to develop non-infringing products, processes, or technology;

 

   

license technology from the third-party claiming infringement, which license may not be available on commercially reasonable terms, or at all;

 

   

cross-license our technology to a competitor to resolve an infringement claim, which could weaken our ability to compete with that competitor; or

 

   

pay substantial damages to module manufacturers, OEMs, distributors, contract manufacturers, or end users to discontinue their use of or to replace infringing technology sold to them with non-infringing technology.

Any of the foregoing results could have a material adverse effect on our business, financial condition, and results of operations.

We could be required to incur significant costs to defend our intellectual property, which could have a negative impact on our business, financial condition, and results of operations.

We rely primarily on patent, copyright, trademark and trade secret laws, as well as nondisclosure and confidentiality agreements and other methods, to protect our proprietary information, technologies and processes, including our patent portfolio. Policing unauthorized use of our products, technologies and proprietary information is difficult and time consuming. We cannot be certain that the steps we have taken, or may take in the future, will prevent the misappropriation or unauthorized use of our proprietary information and technologies, particularly in foreign countries where the laws may not protect our proprietary intellectual property rights as fully as U.S. laws. We cannot be certain that the laws and policies of any country, including the United States, or the practices of any of the standard bodies, foreign or domestic, with respect to intellectual property enforcement or licensing or the adoption of standards, will not be changed in a way detrimental to the sale or use of our products or technology.

A substantial portion of our patents and patent applications relate to our UltraCMOS technology. We may need to litigate in the United States or elsewhere in the world to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of proprietary rights of others. As a result of any such litigation, we could lose our ability to enforce one or more patents or incur substantial unexpected operating costs. Any action we take to enforce our intellectual property rights could be costly and could absorb significant management time and attention, which, in turn, could negatively impact our operating results.

In addition, we license to certain of our foundry partners non-exclusive rights to manufacture and sell products using our technology in a particular field. In any potential dispute involving our patents or other intellectual property, our licensees could also become the target of litigation. We are bound to indemnify certain licensees under the terms of certain license agreements, and we may agree to indemnify others in the future. Our indemnification obligations could result in substantial expenses to us.

 

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If we are unable to protect our intellectual property rights, our competitive position could be adversely impacted, or we could be required to incur significant expenses to enforce our rights.

We depend on our ability to protect our proprietary technology. We rely on trade secret, patent, and trademark laws and confidentiality agreements with employees and third parties, all of which offer only limited protection. We had more than 125 U.S. and international patents issued or pending as of June 30, 2012 and have emphasized patents as a source of significant competitive advantage. Despite our efforts, the steps we have taken to protect our proprietary rights may not be adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights, and our ability to police such misappropriation or infringement is uncertain, particularly in certain foreign countries in which the laws may not protect our intellectual property rights to the same extent as they do in the U.S. We have not conducted an exhaustive search of existing patent rights; however, we are not aware of any patent rights or other intellectual property held by others that could impact our ability to operate. With respect to patent rights, we do not know whether any of our pending patent applications will result in the issuance of patents or whether the examination process will require us to narrow our claims, and even if patents are issued, they may be contested, circumvented, or invalidated. Moreover, the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages, and, as with any technology, competitors may be able to develop similar or superior technologies to our own now or in the future. Protecting against the unauthorized use of our products, trademarks, and other proprietary rights is expensive, difficult and, in some cases, impossible. Litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of management resources. Many of our current and potential competitors have the ability to dedicate substantially greater resources to enforce their intellectual property rights than we do. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property. We may use a portion of the net proceeds of this offering in the future to assert or defend our intellectual property rights.

Risks Related to Government Regulation

Our failure to comply with U.S. laws and regulations relating to the export and import of goods, technology, and software could subject us to penalties and other sanctions and restrict our ability to sell and develop our products.

We are obligated by law to comply with all U.S. laws and regulations governing the export and import of goods, technology, and services, including the International Traffic in Arms Regulations, or ITAR, the Export Administration Regulations, or EAR, regulations administered by the Department of Treasury’s Office of Foreign Assets Control, and regulations administered by the Bureau of Alcohol Tobacco Firearms and Explosives governing the importation of items on the U.S. Munitions Import List. Pursuant to these regulations, we are responsible for determining the proper licensing jurisdiction and export classification of our products, and obtaining all necessary licenses or other approvals, if required, for exports and imports of hardware, technical data, and software, or for the provision of technical assistance or other defense services to or on behalf of foreign persons. We are also required to obtain export licenses, if required, before employing or otherwise utilizing foreign persons in the performance of our contracts if the foreign person will have access to export-controlled technical data or software. The violation of any of the applicable laws and regulations could subject us to administrative, civil, and criminal penalties.

These regulations could restrict our ability to sell existing products and develop new product lines. For example, as a result of ITAR requirements, we are unable to supply certain products to China satellite companies or end users, which comprise a significant part of the overall satellite market. Changes in our products or changes in export and import regulations may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products throughout their global systems or, in some cases, prevent the export or import of our products to certain countries altogether. Any change in export or import regulations or related legislation, shift in approach to the enforcement or scope of existing

 

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regulations, or change in the countries, persons, or technologies targeted by such regulations, could result in decreased use of our products by, or our ability to export or sell our products to, existing or potential customers with international operations and decreased revenue. Additionally, failure to comply with these laws could result in sanctions by the U.S. government, including substantial monetary penalties, denial of export privileges, and debarment from government contracts.

Additionally, in September 2008, we received a Commodity Jurisdiction ruling from the U.S. Department of State that determined certain of our products sold in the aerospace and defense markets are subject to the ITAR rather than the EAR. Given this ruling, a number of past product shipments that we believed were subject to the EAR were exported without the required ITAR license. We also transferred ITAR technical data to one foreign person employee with the belief such data was subject to the EAR rather than the ITAR. We have taken steps to mitigate the impact of these violations. In December 2008, we submitted a voluntary disclosure to the U.S. Department of State to report the unlicensed exports. The U.S. Department of State encourages voluntary disclosures and generally affords parties mitigating credit under such circumstances. In addition, to reduce the likelihood of violations in the future, we have strengthened our export-related controls and procedures. For example, we implemented export classification training for employees and annual export compliance audits. As of the date of this prospectus, we have not received a response from the U.S. Department of State. Despite the steps we have taken, we could be subject to continued investigation and potential regulatory consequences related to these violations ranging from a no-action letter, government oversight of facilities and export transactions, monetary penalties, and in extreme cases, debarment from government contracting, denial of export privileges and criminal penalties.

If we fail to comply with government contracting regulations, we could suffer a loss of net revenue or incur price adjustments or other penalties.

Some of our net revenue is derived from contracts with agencies of the U.S. government and subcontracts with its prime contractors as well as contracts and grants with other governments. As a U.S. government contractor or subcontractor, we are subject to federal contracting regulations, including the Federal Acquisition Regulations, which govern the allowability of costs incurred by us in the performance of U.S. government contracts. We must comply with these regulations in order to bid successfully for government contracts. Additionally, the U.S. government is entitled after final payment on certain negotiated contracts to examine all of our cost records with respect to such contracts and to seek a downward adjustment to the price of the contract if it determines that we failed to furnish complete, accurate, and current cost or pricing data in connection with the negotiation of the price of the contract.

In connection with our U.S. and other government business, we are also subject to government review and approval of our policies, procedures, and internal controls for compliance with procurement regulations and applicable laws. In certain circumstances in which a contractor has not complied with the terms of a contract or with regulations or statutes, the contractor might be debarred or suspended from obtaining future contracts for a specified period of time, or could be subject to downward contract price adjustments, refund obligations or civil and criminal penalties. Any such suspension or debarment or other sanction could have an adverse effect on our operating results.

Our U.S. and other government contracts and subcontracts typically can be terminated by the government for its convenience. If a U.S. government contract is terminated for the convenience of the government, we may not be entitled to recover more than our costs incurred or committed, settlement expenses, and profit on work completed prior to termination.

Under some of our government subcontracts, we are required to maintain secure facilities and to obtain security clearances for personnel involved in performance of the contract, in compliance with applicable federal standards. If we were unable to comply with these requirements, or if personnel critical to our performance of these contracts were to lose their security clearances, we might be unable to perform these contracts or compete for other projects of this nature, which could adversely affect our net revenue.

 

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If we fail to comply with environmental regulations we could be subject to substantial fines or be required to suspend production, alter manufacturing processes, or cease operations.

We and our foundry partners are subject to a variety of international, federal, state, and local governmental regulations relating to the storage, discharge, handling, generation, disposal, and labeling of toxic or other hazardous substances used to manufacture our products. If we and our foundry partners fail to comply with these regulations, substantial fines could be imposed on us, and we could be required to suspend production, alter manufacturing processes, or cease operations, any of which could have a negative effect on our sales, income, and business operations. Failure to comply with environmental regulations could subject us to civil or criminal sanctions and property damage or personal injury claims. Furthermore, environmental laws and regulations could become more stringent over time, imposing even greater compliance costs and increasing risks and penalties associated with violations, which could seriously harm our financial condition and results of operations.

If we fail to comply with anti-bribery laws, including the U.S. Foreign Corrupt Practices Act, or FCPA, we could be subject to civil and/or criminal penalties.

As a result of our international operations we are subject to anti-bribery laws, including the FCPA, which prohibits companies from making improper payments to foreign officials for the purpose of obtaining or keeping business. If we fail to comply with these laws, the U.S. Department of Justice, the Securities and Exchange Commission, or SEC, or other U.S. or foreign governmental authorities could seek civil and/or criminal sanctions, including monetary fines and penalties against us or our employees, as well as additional changes to our business practices and compliance programs, which could have a material adverse effect on our business, results of operations, or financial condition.

Risks Related to this Offering and Ownership of Our Common Stock

The market price of our common stock may be volatile, which could result in substantial losses for investors purchasing shares in this offering.

Prior to this offering, there has not been a public market for our common stock, and an active market for our common stock may not develop or be sustained after this offering. The market price of our common stock after this offering may vary from its initial public offering price. Fluctuations in market price and volume are particularly common among securities of technology companies. As a result, you may be unable to sell your shares of common stock at or above the initial offering price. The market price of our common stock may fluctuate significantly in response to the following factors, among others, some of which are beyond our control:

 

   

general market conditions;

 

   

domestic and international economic factors unrelated to our performance;

 

   

actual or anticipated fluctuations in our quarterly operating results;

 

   

changes in or failure to meet publicly disclosed expectations as to our future financial performance;

 

   

changes in securities analysts’ estimates of our financial performance or lack of research and reports by industry analysts;

 

   

changes in market valuations or earnings of similar companies;

 

   

announcements by us or our competitors of significant products, contracts, acquisitions, or strategic partnerships;

 

   

developments or disputes concerning patents or proprietary rights, including increases or decreases in litigation expenses associated with intellectual property lawsuits we may initiate, or in which we may be named as defendants;

 

   

failure to complete significant sales;

 

   

any future sales of our common stock or other securities; and

 

   

additions or departures of key personnel.

 

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Our securities have no prior market and our stock price may decline after the offering.

Prior to this offering, there has been no public market for shares of our common stock. Although we have applied to list our common stock on the Nasdaq Global Market, or Nasdaq, an active public trading market for our common stock may not develop or, if it develops, may not be maintained after this offering. For example, Nasdaq imposes certain securities trading requirements, including requirements related to a minimum bid price, minimum number of stockholders, minimum number of trading market makers, and minimum market value of publicly traded shares. Our company and the representatives of the underwriters will negotiate to determine the initial public offering price. The initial public offering price may be higher than the trading price of our common stock following this offering. As a result, you could lose all or part of your investment.

Future sales of shares by existing stockholders could cause our stock price to decline.

Sales of substantial amounts of our common stock in the public market following this offering, or the perception that these sales could occur, could cause the market price of our common stock to decline. Based on shares outstanding as of June 30, 2012, upon completion of this offering, we will have                  outstanding shares of common stock (or                  outstanding shares of common stock assuming exercise of the underwriters’ over-allotment option in full). All of the shares sold pursuant to this offering will be immediately tradable without restriction under the Securities Act of 1933, as amended, or the Securities Act, unless held by “affiliates,” as that term is defined in Rule 144 under the Securities Act.

Substantially all of the holders of our equity securities have entered into lock-up agreements that restrict them from selling their shares for a period of at least 180 days following the date of this prospectus, although the representatives of the underwriters may, in their sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. After the lock-up agreements pertaining to this offer expire and based on shares outstanding as of June 30, 2012, an additional             shares will be eligible for sale in the public market. In addition, shares underlying options that are either subject to the terms of our stock-based compensation plans or reserved for future issuance under our stock-based compensation plans will become eligible for sale in the public market to the extent permitted by the provisions of various option agreements, the lock-up agreements, and Rules 144 and 701 under the Securities Act. As resale restrictions end, the market price of our common stock could decline if the holders of those shares sell them or are perceived by the market as intending to sell them.

Holders of approximately             shares, or         %, of our common stock following this offering will have rights, subject to some conditions, to require us to file registration statements covering the sale of their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We also intend to register the offer and sale of 11,957,223 shares of common stock that we may issue under our stock-based compensation plans. Once we register the offer and sale of shares for the holders of registration rights and option holders, they can be freely sold in the public market upon issuance, subject to the restrictions contained in the lock-up agreements described in the section of this prospectus captioned “Underwriting.”

In addition, in the future, we may issue additional shares of common stock or other equity or debt securities convertible into common stock in connection with a financing, acquisition, litigation settlement, employee arrangement, or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and could cause the trading price of our common stock to decline.

If securities or industry analysts do not publish research or publish misleading or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our stock would be negatively impacted. In the event we obtain securities or

 

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industry analyst coverage, if one or more of the analysts who covers us downgrades our stock or publishes misleading or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price or trading volume to decline.

Insiders will continue to have substantial control over us after this offering and will be able to influence corporate matters.

Upon completion of this offering, our directors and executive officers and their affiliates will beneficially own, in the aggregate, approximately     % of our outstanding common stock, assuming no exercise of the underwriters’ over-allotment option, compared to approximately     % represented by the shares sold in this offering, assuming no exercise of the underwriters’ over-allotment option. As a result, these stockholders will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit your ability to influence corporate matters and may have the effect of delaying or preventing a third-party from acquiring control over us. For information regarding the ownership of our outstanding stock by our executive officers and directors and their affiliates, please see the section titled “Principal and Selling Stockholders.”

We will incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could adversely affect our operating results.

As a public company we will incur significant legal, accounting, and other expenses that we did not incur as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, as well as new rules implemented by the SEC or Nasdaq. In addition, our management team will also have to adapt to the requirements of being a public company. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect compliance with these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are unable to currently estimate these costs with any degree of certainty. We also expect these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage than used to be available. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as our executive officers.

However, for as long as we remain an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We intend to take advantage of these reporting exemptions until we are no longer an “emerging growth company.”

Under the JOBS Act, “emerging growth companies” can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourself of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not “emerging growth companies.”

We will remain an “emerging growth company” for up to five years, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, we would cease to be an “emerging growth company” as of the following December 31.

 

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After we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, when applicable to us. In that regard, we currently do not have an internal audit function, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees, or as executive officers.

We will be required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, and any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we will be required to furnish a report by our management on our internal control over financial reporting at the later of the year following our first annual report required to be filed with the SEC, or the date we are no longer an “emerging growth company” as defined in the JOBS Act. We will remain an “emerging growth company” for up to five years, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, we would cease to be an “emerging growth company” as of the following December 31. When required, such report will contain, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. If we are unable to assert that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price. Furthermore, as a result of the extended time period afforded us as an “emerging growth company,” the effectiveness of our internal control over financial reporting may not be as transparent to our investors as they may otherwise expect of a public reporting company, which could further impact investor confidence in the accuracy and completeness of our financial reports.

Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until the later of the year following our first annual report required to be filed with the SEC, or the date we are no longer an “emerging growth company.” At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Our remediation efforts may not enable us to avoid a material weakness in the future.

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

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If we need additional capital in the future, it may not be available on favorable terms, or at all.

We have financed our operations primarily through the sale of convertible preferred stock, equipment term notes and leases, a credit facility, and in fiscal 2010, by cash generated from operations. However, we may require additional capital from equity or debt financing in the future to fund our operations, respond to competitive pressures, or strategic opportunities. Our continued growth is dependent upon increasing revenues and managing working capital to a level that is adequate to support our increased cost structure or obtaining adequate debt financing to fulfill our obligations as they become due. If we are unable to successfully manage our working capital and require additional financing, we may not be able to secure timely additional financing on favorable terms, or at all. The terms of additional financing may place limits on our financial and operating flexibility. If we raise additional funds through further issuances of equity, convertible debt securities, or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new securities we issue could have rights, preferences, and privileges senior to those of holders of our common stock, including shares of common stock sold in this offering. In addition, the terms of any new debt financing may include negative covenants or other restrictions on our business that could impair our operational flexibility, and would also require us to incur interest expense. If we are unable to obtain adequate financing or financing on terms satisfactory to us, if and when we require it, our ability to grow or support our business and to respond to business challenges could be significantly limited.

We could be the subject of securities class action litigation due to future stock price volatility, which could divert management’s attention and adversely affect our results of operations.

The stock market in general, and market prices for the securities of technology companies like ours in particular, have from time to time experienced volatility that often has been unrelated to the operating performance of the underlying companies. A certain degree of stock price volatility can be attributed to being a newly public company. These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our operating performance. In several recent situations where the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders were to bring a lawsuit against us, the defense and disposition of the lawsuit could be costly and divert the time and attention of our management and harm our operating results.

Anti-takeover provisions in our charter documents and Delaware law could discourage, delay, or prevent a change in control of our company and may affect the trading price of our common stock.

We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay, or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. For more information, see “Description of Capital Stock — Anti-Takeover Effects of Our Charter and Bylaws and Delaware Law.” In addition, our amended and restated certificate of incorporation and amended and restated bylaws may discourage, delay, or prevent a change in our management or control over us that stockholders may consider favorable. Our amended and restated certificate of incorporation and amended and restated bylaws, which will be in effect as of the closing of this offering:

 

   

authorize the issuance of “blank check” preferred stock that could be issued by our board of directors to thwart a takeover attempt;

 

   

establish a classified board of directors, as a result of which the successors to the directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following their election;

 

   

require that directors only be removed from office for cause;

 

   

provide that vacancies on the board of directors, including newly-created directorships, may be filled only by a majority vote of directors then in office;

 

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limit who may call special meetings of stockholders;

 

   

prohibit stockholder action by written consent, thereby requiring all actions to be taken at a meeting of the stockholders; and

 

   

require supermajority stockholder voting to effect certain amendments to our amended and restated certificate of incorporation and amended and restated bylaws.

Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.

Our management will have broad discretion to use the net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management might not apply the net proceeds of this offering in ways that increase the value of your investment. We intend to use the net proceeds from this offering for working capital and other general corporate purposes, including to finance our growth, develop new products, assert and defend our intellectual property rights, and fund capital expenditures. In addition, we may choose to repay our loan facility with Silicon Valley Bank or expand our current business through acquisitions of other businesses, products, or technologies. However, we do not have agreements or commitments for any specific acquisitions at this time. We have not allocated these net proceeds for any specific purposes. Our management might not be able to yield a significant return, if any, on any investment of these net proceeds. You will not have the opportunity to influence our decisions on how to use the net proceeds from this offering.

Further significant changes in our stockholder composition may jeopardize our ability to use some or all of our NOL and research tax credit carryforwards.

Pursuant to Sections 382 and 383 of the Internal Revenue Code, or the Code, annual use of our NOL and research tax credit carryforwards to offset future taxable income and tax, respectively, may be limited in the event of an ownership change as defined under Section 382 of the Code, which results from a cumulative change in ownership of 50% of certain stockholders occurring within a three-year period.

We completed a study to assess whether an ownership change has occurred since our formation through December 25, 2010. There were no significant transactions that would be expected to effect ownership changes during the year ended December 31, 2011 or the six months ended June 30, 2012. Based on this study, we concluded that we incurred ownership changes on September 29, 2000, August 2, 2002, and October 20, 2004. As a result of these changes, we expect the following tax attributes to expire unused: approximately $52.2 million in federal NOL carryforwards, approximately $17.5 million of state NOL carryforwards and approximately $3.0 million of federal research tax credit carryforwards. These tax attributes have been excluded from the U.S. federal and state NOL carryforwards and federal and state research tax credit carryforwards. We have $156.6 million in federal NOL carryforwards available as of December 31, 2011, of which $136.0 million in losses were available for immediate use and $1.6 million will be available each year from 2012 through 2024. Our state NOL carryforwards consist of $73.4 million for California and $32.3 million for various other states. Of our $73.4 million in California state NOL carryforwards available as of December 31, 2011, $62.3 million in losses were available for immediate use and $1.6 million will be available each year from 2012 through 2018. The availability and timing of utilization of the losses are subject to tax law changes that have occurred or may occur. All of our $32.3 million in non-California state NOL carryforwards were available for immediate use as of December 31, 2011, subject to any temporary deferrals due to state tax law changes.

Our initial public offering could result in another ownership change as defined under Section 382 of the Code. In addition, future sales of our shares by, or changes in ownership of our existing significant stockholders could cause us to undergo an ownership change as defined under Section 382 of the Code in the future. Consequently, whether we undergo an ownership change which results in a limitation on our ability to utilize our NOL and tax credit carryforwards may be a matter beyond our control.

 

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If our income tax provisions taken in the U.S. and foreign countries are not sustained under examination by tax authorities in these jurisdictions, our results of operations could be adversely affected.

We are subject to income taxes in the U.S. and foreign countries, and are subject to routine corporate income tax audits in many of these jurisdictions. We believe that our tax return positions are fully supported, but tax authorities could challenge certain positions, which may not be fully sustained. However, our income tax expense includes amounts intended to satisfy income tax assessments that result from these challenges. Determining the income tax expense for these potential assessments and recording the related assets and liabilities requires management judgment and estimates. We believe that our provision for uncertain tax positions, including related interest and penalties, is adequate based on information currently available to us. The amount ultimately paid upon resolution of audits could be materially different from the amounts previously included in income tax expense and therefore could have a material impact on our tax provision, net income and cash flows. Our overall provision requirement could change due to the issuance of new regulations or new case law, negotiations with tax authorities, resolution with respect to individual audit issues, or the entire audit, or the expiration of statutes of limitations.

Investors purchasing common stock in this offering will experience substantial dilution as a result of this offering and future equity issuances.

The initial public offering price per share is substantially higher than the pro forma net tangible book (deficit) value per share of our common stock outstanding prior to this offering. As a result, investors purchasing common stock in this offering will experience immediate substantial dilution of $             a share, assuming an initial public offering price of $         per share, the midpoint of the initial public offering price range reflected on the cover page of this prospectus. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of common stock. Investors purchasing shares of common stock in this offering will contribute approximately         % of the total amount we have raised since our inception, but will own only approximately         % of our total common stock immediately following the completion of this offering. In addition, we have issued options to acquire common stock at prices significantly below the initial public offering price. To the extent outstanding options are ultimately exercised, there will be further dilution to investors purchasing common stock in this offering. In addition, if the underwriters exercise their over-allotment option, if outstanding warrants to purchase our common stock are exercised, or if we issue additional equity securities, investors purchasing common stock in this offering will experience additional dilution.

We have never declared or paid dividends on our capital stock and we do not intend to do so for the foreseeable future and, consequently, the ability of investors purchasing common stock in this offering to achieve a return on their investment will depend on appreciation in the price of our common stock.

We have never declared or paid dividends on our capital stock and we do not intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Additionally, the terms of our loan facility with Silicon Valley Bank restrict our ability to pay dividends. Therefore, investors purchasing common stock in this offering are not likely to receive any dividends on our common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in our common stock’s value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” and “Compensation Discussion and Analysis.” Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, and the effects of competition. Forward-looking statements include all statements that are not historical facts and, in some cases, can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” or similar expressions and the negatives of those terms.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including those described in “Risk Factors” and elsewhere in this prospectus. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this prospectus. You should read this prospectus and the documents that we have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

Any forward-looking statement made by us in this prospectus speaks only as of the date on which it is made. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

This prospectus also contains estimates and other information concerning our industry, including market size and growth rates, that are based on industry publications, surveys and forecasts, including those generated by the Cisco Visual Networking Index, Frost & Sullivan, Gartner, Inc., and Infonetics. This information involves a number of assumptions and limitations. Although we believe the information in these industry publications, surveys, and forecasts is reliable, we have not independently verified the accuracy or completeness of the information. The industry in which we operate is subject to a high degree of uncertainty and risk due to variety of factors, including those described in “Risk Factors.” These and other factors could cause results to differ materially from those expressed in these publications, surveys, and forecasts.

 

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USE OF PROCEEDS

We estimate that our net proceeds from the sale of the common stock that we are offering will be approximately $           million, assuming an initial public offering price of $           per share, the midpoint of the initial public offering price range reflected on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares in this offering is exercised in full, we estimate that our net proceeds will be approximately $           million. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders. In connection with our initial public offering, eight employees are exercising options and selling a total of 159,220 shares issued upon exercise of these options. All of the options that are being exercised would otherwise expire during the 180-day lock-up period, when the holders would not be able to sell the shares, and therefore these holders are exercising these options and we are allowing them to sell these shares in our initial public offering.

We intend to use the net proceeds to us from this offering for working capital and other general corporate purposes. While we have not allocated the net proceeds of this offering to specified general corporate purposes, we may utilize such proceeds by allocating them amongst the following categories: finance our growth; develop new products; assert and defend our intellectual property rights; and fund capital expenditures. In addition, we may choose to repay our loan facility with Silicon Valley Bank or expand our current business through acquisitions of other businesses, products, or technologies. However, we do not have agreements or commitments for any specific acquisitions at this time. Our loan facility with Silicon Valley Bank provides us with a revolving line of credit and also an equipment line. The revolving line of credit has a maturity date of December 30, 2014, and carries an annual interest rate equal to the prime rate plus 0.50%, subject to an interest rate floor of 3.75% and an interest rate ceiling of 7.50%. The equipment line is available until December 31, 2012 and has a maturity date of 36 months from the date of each draw. The equipment line carries an annual interest rate equal to 4.75%.

The expected use of net proceeds of this offering represents our current intentions based upon our present plans and business conditions. The amounts we actually expend in these areas may vary significantly from our current intentions and will depend upon a number of factors, including future sales growth, success of our engineering efforts, cash generated from future operations, if any, and actual expenses to operate our business. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to be received upon the closing of this offering. Accordingly, our management will have broad discretion in the application of the net proceeds, and investors will be relying on the judgment of our management regarding the application of the net proceeds of this offering.

Pending use of proceeds from this offering, we intend to invest the proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments.

DIVIDEND POLICY

We have never declared or paid cash dividends on our common or preferred stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to compliance with certain covenants under our loan facility with Silicon Valley Bank, which restrict or limit our ability to pay dividends, and will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors may deem relevant.

 

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CAPITALIZATION

The table below sets forth our cash and cash equivalents and capitalization as of June 30, 2012:

 

   

on an actual basis;

 

   

our pro forma capitalization after giving effect to (1) the automatic conversion of all outstanding shares of our convertible preferred stock as of June 30, 2012, into an aggregate of 22,384,097 shares of common stock upon the completion of this offering,* (2) the conversion of our remaining warrants to purchase convertible preferred stock into warrants to purchase common stock and the related reclassification of $808,000 of other long-term liabilities into stockholders’ equity (deficit), and (3) the filing of an amended and restated certificate of incorporation upon the completion of this offering; and

 

   

our pro forma as adjusted capitalization reflecting (1) our pro forma capitalization, and (2) the sale of              shares of common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the initial public offering price range reflected on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

You should read the information in this table together with our financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.

 

    As of June 30, 2012  
    Actual     Pro Forma      Pro Forma As
    Adjusted    
 
    (unaudited)  
   

(in thousands, except share and per share amounts)

 

Obligations under capital leases, including current portion

  $ 436      $ 436      $ 436  

Notes payable, including current portion

    1,192        1,192        1,192   

Other long-term liabilities

    5,391        4,583        4,583   

Convertible preferred stock, $0.001 par value:

     

Series A1 convertible preferred stock, 5,967,577 shares authorized; 5,762,851 shares issued and outstanding, liquidation preference of $29,324, actual; no shares issued and outstanding, pro forma and pro forma as adjusted

    31,837                 

Series B1 convertible preferred stock, 1,642,281 shares authorized; 1,628,936 shares issued and outstanding, liquidation preference of $11,000, actual; no shares issued and outstanding, pro forma and pro forma as adjusted

    11,298                 

Series C1 convertible preferred stock, 6,113,655 shares authorized; 6,107,910 shares issued and outstanding, liquidation preference of $35,134, actual; no shares issued and outstanding, pro forma and pro forma as adjusted

    35,469                 

Series D1 convertible preferred stock, 9,148,073 shares authorized; 8,884,400 shares issued and outstanding, liquidation preference of $96,937, actual; no shares issued and outstanding, pro forma and pro forma as adjusted

    94,303                 

Stockholders’ equity (deficit):

     

Common stock, $0.001 par value: 35,101,752 shares authorized; 2,845,204 shares issued and outstanding, actual; 35,101,752 shares authorized, 25,229,301 shares issued and outstanding pro forma; 35,101,752 shares authorized,              shares issued and outstanding pro forma as adjusted

    3        25     

Additional paid-in capital

    87,900        261,593     

Accumulated deficit

    (231,275     (231,275     (231,275

Accumulated other comprehensive loss

    (222     (222 )       (222
 

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(143,594

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30,121

 

 

 

 

 

 

  

 
 

 

 

   

 

 

   

 

 

 

Total capitalization

 

 

 

 

$

 

 

 

36,332

 

 

 

  

 

 

 

 

$

 

 

 

36,332

 

 

 

  

 

 

 

 

$

 

 

 

 

 

 

 

  

 

 

 

   

 

 

   

 

 

 

 

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* All outstanding shares of convertible preferred stock automatically convert into shares of common stock at the then applicable conversion rate upon (1) the consummation of a firm commitment underwritten public offering of our common stock pursuant to a registration statement filed with the SEC pursuant to the Securities Act where the aggregate sales price is not less than $25,000,000 and the per share sales price is not less than $27.31 (subject to appropriate adjustment for stock splits, stock dividends, recapitalizations, reclassifications, and similar events), or (2) the affirmative vote or written consent of a majority of the outstanding shares of convertible preferred stock.

Each $1.00 increase (decrease) in the assumed public offering price of $         per share, the midpoint of the initial public offering price range reflected on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity, and total capitalization by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity, and total capitalization by approximately $         million, assuming that the assumed initial public offering price remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The as adjusted information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

The number of shares of our common stock to be outstanding following this offering is based on 25,229,301 shares of our common stock outstanding as of June 30, 2012, and excludes:

 

   

7,406,006 shares of common stock issuable upon the exercise of options outstanding as of June 30, 2012 under the 1996 Stock Plan and the 2004 Stock Plan at a weighted average exercise price of $4.48 per share;

 

   

196,090 shares of common stock issuable upon the exercise of common and convertible preferred stock warrants outstanding as of June 30, 2012, at a weighted average exercise price of $6.86 per share; and

 

   

4,551,217 shares of common stock reserved for future issuance under our stock-based compensation plans, including 2,000,000 shares of common stock reserved for issuance under our 2012 Equity Incentive Plan, and 1,000,000 shares of common stock reserved for issuance under our 2012 Employee Stock Purchase Plan, subject in each case to automatic annual adjustment in accordance with the terms of the plan.

 

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DILUTION

At June 30, 2012, our net tangible book value (deficit) was approximately $(143.6) million, or $(50.47) per share of common stock. Net tangible deficit per share represents the amount of our tangible assets less our liabilities, divided by the shares of common stock outstanding at June 30, 2012. As of June 30, 2012, the pro forma net tangible book value of our common stock was approximately $30.1 million, or approximately $1.19 per share of our pro forma outstanding common stock after giving effect to the conversion of all outstanding shares of our convertible preferred stock as of June 30, 2012 into an aggregate of 22,384,097 shares of common stock upon the completion of this offering and the conversion of our remaining warrants to purchase convertible preferred stock into warrants to purchase common stock and the related reclassification of $0.8 million of other long-term liabilities into stockholders’ equity (deficit).

Purchasers of common stock in this offering will incur immediate, substantial dilution. After giving effect to (1) the sale of              shares of common stock in this offering at an assumed initial public offering price of $         per share, the mid-point of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering costs payable by us, and (2) the pro forma transactions and other adjustments described in the preceding paragraph, our pro forma as adjusted net tangible book value of our common stock as of June 30, 2012 would have been approximately $         million, or approximately $         per share of our pro forma as adjusted outstanding common stock. This represents an immediate increase in pro forma as adjusted net tangible book value of $         per share to our existing stockholders and an immediate dilution in the pro forma as adjusted net tangible book value of $         per share to purchasers of common stock in this offering. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

     $            

Historical net tangible book value (deficit) per share as of June 30, 2012

   $ (50.47  

Pro forma increase in net tangible book value (deficit) per share attributable to pro forma transaction described in the first preceding paragraph

     51.66     
  

 

 

   

Pro forma net tangible book value per share before this offering

     1.19     

Increase in pro forma net tangible book value per share attributable to investors participating in this offering

    
  

 

 

   

Pro forma as adjusted net tangible book value per share after this offering

    
    

 

 

 

Pro forma as adjusted dilution per share to purchasers of common stock in this offering

     $     
    

 

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) our pro forma net tangible book value by $         million, or $         per share, and the pro forma dilution per share to purchasers of common stock in this offering by $         per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase of 1,000,000 shares in the number of shares offered by us would increase our pro forma net tangible book value by approximately $         million, or $         per share, and the pro forma dilution per share to purchasers of common stock in this offering would be $         per share, assuming that the assumed initial public offering price remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, a decrease of 1,000,000 shares in the number of shares offered by us would decrease our pro forma net tangible book value by approximately $         million, or $         per share, and the pro forma dilution per share to purchasers of common stock in this offering would be $         per share, assuming that the assumed initial public offering price remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

 

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If the underwriters exercise their option to purchase additional shares of our common stock in full in this offering, the pro forma net tangible book value per share after this offering would be $         per share, the increase in pro forma net tangible book value per share to existing stockholders would be $         per share and the dilution to purchasers of common stock in this offering would be $         per share.

The following table presents, on a pro forma basis as of June 30, 2012, the differences between existing stockholders and the purchasers of common stock in the offering with respect to the number of shares purchased from us, the total consideration paid and the average price paid per share:

 

                                                                                                                                                          
    Shares Purchased     Total Consideration     Average Price
Per Share
 
    Number     Percent     Amount     Percent    

Existing stockholders

      25,229,301        %      $ 244,296,000        %      $ 9.68   

Purchasers of common stock in this offering

         
 

 

 

   

 

 

   

 

 

   

 

 

   

Totals

                100.0%      $                    100.0%     
 

 

 

   

 

 

   

 

 

   

 

 

   

The foregoing tables exclude:

 

   

7,406,006 shares of common stock issuable upon the exercise of options outstanding as of June 30, 2012 under the 1996 Stock Plan and the 2004 Stock Plan at a weighted average exercise price of $4.48 per share;

 

   

196,090 shares of common stock issuable upon the exercise of common and preferred stock warrants outstanding as of June 30, 2012, at a weighted average exercise price of $6.86 per share; and

 

   

4,551,217 shares of common stock reserved for future issuance under our stock-based compensation plans, including 2,000,000 shares of common stock reserved for issuance under our 2012 Equity Incentive Plan, and 1,000,000 shares of common stock reserved for issuance under our 2012 Employee Stock Purchase Plan, subject in each case to automatic annual adjustment in accordance with the terms of the plan.

If all of these stock options and warrants were exercised, then our existing stockholders, including the holders of these options and warrants, would own         % and purchasers of common stock in this offering would own         % of the total number of shares of our common stock outstanding upon completion of this offering. The total consideration paid by our existing stockholders, including the holders of these stock options and warrants, would be approximately $         million, or         %, and the total consideration paid by purchasers of common stock in this offering would be $         million, or         %. The average price per share paid by our existing stockholders, including holders of these stock options and warrants, would be $         and the average price per share paid by purchasers of common stock in this offering would be $        .

If the underwriters exercise their option to purchase additional shares of our common stock in full, our existing stockholders would own         % and purchasers of common stock in this offering would own         % of the total number of shares of our common stock outstanding upon completion of this offering. The total consideration paid by existing stockholders would be approximately $244.3 million, or         %, and the total consideration paid by purchasers of common stock in this offering would be $         million, or         %.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following tables set forth selected consolidated financial data. We derived the selected consolidated statement of operations data for the years ended December 25, 2010 and December 31, 2011, and the selected consolidated balance sheet data as of December 25, 2010 and December 31, 2011 from our audited consolidated financial statements and related notes included elsewhere in this prospectus. We derived the consolidated statement of operations data for the six months ended June 25, 2011 and June 30, 2012, and the consolidated balance sheet data as of June 30, 2012, from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited financial statements include all adjustments, consisting of normal recurring accruals, which we consider necessary for a fair presentation of the financial position and the results of operations for these periods. Our historical results are not necessarily indicative of the results to be expected for any future period.

The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     Fiscal Year Ended     Six Months Ended  
     December 25,
2010
    December 31,
2011
    June 25,
2011
    June 30,
2012
 
                 (unaudited)  
    

(in thousands, except per share amounts)

 

Consolidated Statement of Operations Data:

        

Net revenue

   $ 91,071      $ 107,771      $ 45,729      $ 80,334   

Cost of net revenue (1)

     49,520        70,955        26,720        52,858   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     41,551        36,816        19,009        27,476   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expense:

        

Research and development (1)

     18,040        22,730        10,248        14,163   

Selling, general and administrative (1)

     18,889        23,252        10,812        15,193   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expense

     36,929        45,982        21,060        29,356   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     4,622        (9,166     (2,051     (1,880

Interest expense

     (610     (318     (185     (1,076

Other income (expense), net

     (105     (2     66        (38
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     3,907        (9,486     (2,170     (2,994

Provision for income taxes

     147        196        125        74   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     3,760        (9,682     (2,295     (3,068

Net income allocable to preferred stockholders

     (3,760                     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders

   $      $ (9,682   $ (2,295   $ (3,068
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net income (loss) per share attributable to common stockholders

   $      $ (3.57   $ (0.85   $ (1.10
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing basic and diluted net income (loss) per share

     2,504        2,715        2,693        2,790   
  

 

 

   

 

 

   

 

 

   

 

 

 

Unaudited pro forma net income per share attributable to common stockholders:

        

Basic

     $ (0.39     $ (0.12
    

 

 

     

 

 

 

Diluted

     $ (0.39     $ (0.12
    

 

 

     

 

 

 

Unaudited pro forma weighted average common shares outstanding:

        

Basic

       25,080          25,157   
    

 

 

     

 

 

 

Diluted

       25,080          25,157   
    

 

 

     

 

 

 

Footnotes on the following page.

 

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     As of  
     December 25,
2010
    December  31,
2011
    June 30,
2012
 
                 (unaudited)  
    

(in thousands)

 

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 15,226      $ 12,119      $ 42,918   

Working capital

     28,390        18,914        15,100   

Total assets

     62,349        70,858        131,504   

Obligations under capital leases, less current portion

     529        189        114   

Notes payable, less current portion

     1,623        757        310   

Convertible preferred stock (2)

     172,430        172,430        172,907   

Stockholders’ deficit

     (136,172     (142,600     (143,594

 

  Footnotes

 

  (1) Includes stock-based compensation expense related to options granted to employees and others as follows:

 

    Fiscal Year Ended     Six Months Ended  
    December 25,
2010
    December 31,
2011
    June 25,
2011
    June 30,
2012
 
          (unaudited)  
   

(in thousands)

 

Cost of net revenue

  $ 407      $ 431      $
208
  
  $
271
  

Research and development

    556        762        332        567   

Selling, general and administrative

    1,554        1,891        943        1,126   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $   2,517      $   3,084      $   1,483      $   1,964   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

  (2) Upon certain change of control events that may be outside of our control, including liquidation, sale or transfer of control, holders of the convertible preferred stock can cause its redemption. Accordingly, these shares are considered contingently redeemable and have been classified as temporary equity on our balance sheet.

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the “Selected Consolidated Financial Data” and our consolidated financial statements and notes thereto appearing elsewhere in this prospectus. In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results could differ materially from those anticipated by these forward-looking statements as a result of many factors. We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this prospectus, including these set forth under “Risk Factors” and “Special Note Regarding Forward-Looking Statements.”

Overview

We are a fabless provider of high performance RFICs. Our solutions leverage our proprietary UltraCMOS technology, which enables the design, manufacture, and integration of multiple RF, mixed signal, and digital functions on a single chip. We believe our products deliver an industry leading combination of performance and monolithic integration. Our solutions target a broad range of applications in the aerospace and defense, broadband, industrial, mobile wireless device, test and measurement equipment, and wireless infrastructure markets. We have shipped over one billion RFICs based on our UltraCMOS technology since January 1, 2006.

Our UltraCMOS technology combines the ability to achieve the high levels of performance of traditional specialty processes, with the fundamental benefits of standard CMOS, the most widely used semiconductor process technology. UltraCMOS technology utilizes a synthetic sapphire substrate, a near-perfect electrical insulator, providing greatly reduced unwanted electrical interaction between the RFIC and the substrate (referred to as parasitic capacitance), which enables high signal isolation and excellent signal fidelity with low distortion over a broad frequency range (referred to as broadband linearity). These two technical attributes result in RF devices with excellent high-frequency performance and power handling performance, and reduced crosstalk between frequencies. In addition, increased broadband linearity provides for faster data throughput and greater subscriber capacity over a wireless network, resulting in enhanced network efficiency. UltraCMOS technology also provides the benefits of standard CMOS, such as high levels of integration, low power consumption, reusable circuit libraries, widely available design tools and outsourced manufacturing capacity, and the ability to scale to smaller geometries. We own fundamental IP in UltraCMOS technology consisting of more than 125 U.S. and international issued and pending patents, and over 300 documented trade secrets covering basic circuit elements, RF circuit designs, manufacturing processes, and design know-how.

We leverage our extensive RF design expertise and systems knowledge to develop RFIC solutions that meet the stringent performance, integration, and reliability requirements of the rapidly evolving wireless markets. As of June 30, 2012, we offer a broad portfolio of more than 160 high performance RFICs including switches, digital attenuators, mixers / upconverters, prescalers, DTCs, and DC-DC converters, and we are currently developing PAs. During the year ended December 31, 2011, our products were sold to more than 1,500 module manufacturers, OEMs, contract manufacturers, and other customers, including such companies as Ericsson, Flextronics, Hitachi Metals, Itron, Jabil, LG Innotek, Mini-Circuits, Motorola Solutions, Murata, Northrop Grumman, Planet Technology, Rockwell Collins, Rohde & Schwarz, SIPAT, Skyworks, Sony Corporation, Source Photonics, TDK-EPC, Thales Alenia Space, and TriQuint. We believe our RFICs are included in products sold by many of the leading mobile handset OEMs. For the years ended December 25, 2010 and December 31, 2011, we generated net revenue of $91.1 million, and $107.8 million, respectively, representing year-over-year growth of 18%. We generated net income of $3.8 million for the year ended December 25, 2010 and a net loss of $9.7 million for the year ended December 31, 2011. We recorded net revenue of $80.3 million and a net loss of $3.1 million for the six months ended June 30, 2012. As of June 30, 2012, we had an accumulated deficit of $231.3 million.

 

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Under the JOBS Act, “emerging growth companies” can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourself of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not “emerging growth companies.”

Key Financial Measures

Net Revenue. Our net revenue is derived primarily from the sale of our products, which include both our application specific standard products and customer specific standard products. We develop application specific standard products from our own specifications, and we sell these products through our direct sales force, our network of sales representatives, and our distributors. For higher volume markets, we also develop customer specific standard products to meet the specialized requirements of individual customers, and we sell these products through our direct sales organization. We sell our products worldwide through our direct sales force and field applications engineering staff, our network of domestic and international independent sales representatives, and both worldwide and regional distribution partners. Each of these channels is supported by our customer service and marketing organizations. Prior to a customer’s selection and purchase of our products, our direct sales force and field applications engineers provide our customers technical assistance in the use of our products for the design of their equipment. Our network of sales representatives and distributors have been selected based on their focus on and knowledge of RFICs, their ability to provide a high level of field application engineering support or their regional logistical support capabilities. We provide ongoing technical training for new products to our sales representatives and distributors to keep them informed of product enhancements and new product releases. We share product information and technical specifications with our customers using web-based tools. We plan to expand our direct sales and support capabilities and our network of independent sales representatives in key regions domestically and internationally.

Our sales channel depends on the type of customer (module manufacturer, OEM, or contract manufacturer), the volume and types of products purchased by the customer, and the regional location of the customer. For larger module manufacturer and OEM customers, we endeavor to sell our products through both our direct sales force and our sales representatives. For sale of products to Asia-based customers, we use a logistics provider and distributor to facilitate local stocking of our products to meet changes in demand, and to facilitate the billing, customs, and duties administration for these transactions. For customers that order less frequently, we use distributors on a worldwide basis as our sales channel. We monitor the purchase levels of the end customers of our distributors, and from time-to-time we may convert these end customers to direct customers to the extent that their unit volume and sales support requirements justify selling to them directly.

We also receive a portion of our net revenue from customer or government sponsored research and development activities, and from wafer services provided to third-parties who develop their own ICs using our UltraCMOS processes, both of which we refer to as “net other revenue.” Research and development activities range from development activities to investigate technological capabilities, in which we receive funded research for IC design techniques or new semiconductor technologies at the request of a customer, to custom development projects in which we are paid to enhance or modify an existing product or develop a new product to meet a customer’s specifications. The amount of this type of net revenue we record in any period is not expected to be significant, and the amount recorded will vary from period to period depending on the timing of third-party development activity opportunities, and the related effort we incur in each period.

Our net revenue has grown rapidly in recent years. The principal driver of our net revenue growth has been increased volume sales of our products, which is attributable to the increasing breadth and diversity of our product offerings, the growing market acceptance of products we introduced in prior periods, and the expansion of our domestic and international sales efforts. Our customers generally do not enter into long-term contracts with us. Our commercial relationships with our customers vary, from single purchases of our products through a distributor to large volume purchases of our products directly from us. Large volume customers provide us with periodic longer term forecasts of their expected needs. These forecasts do not commit the customer to minimum purchases, and generally may be revised without penalty.

 

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A significant portion of our net revenue in each quarter is attributable to purchase orders for products that are received and fulfilled within the same quarter, often including a large number of orders from diverse customers and end markets. Our forecasting of sales of products takes into account a number of factors, including historical sales patterns for each individual product, our assessment of overall market conditions, and our knowledge of the current requirements and purchasing practices of our larger customers.

Although we believe we have multiple opportunities for additional net revenue growth and are planning our business accordingly, our future net revenue levels will be impacted by our ability to achieve design wins with module manufacturers and OEMs, as well as the success of OEM devices that incorporate our products. A large portion of our shipments are made to intermediary manufacturers, such as module manufacturers and contract manufacturers, who incorporate our product into their products, which are in turn sold to OEMs. OEMs have a variety of alternative solutions available to meet their needs, and often diversify their supply chain by ordering products from more than one module or contract manufacturer, and shifting demand between them to achieve cost reductions and performance improvements. As the end markets where our products are used are very competitive, we expect to experience shifts in our net revenue between customers and regions where we ship products, and changes in demand for our products as a result of module manufacturer or OEM changes in designs and supply chain decisions.

Although we have shipped our products to a large number of customers, we have historically depended on a small number of customers for a significant percentage of our annual net revenue. The composition of this group can change from year-to-year. Net revenue derived from our three largest direct customers as a percentage of our annual net revenue was 59% and 68% for the years ended December 25, 2010 and December 31, 2011, respectively, and 60% and 82% for the six months ended June 25, 2011 and June 30, 2012, respectively. Included in these percentages for our three largest direct customers are sales to two of our distributors. Based on records from our distributors of shipments to their customers, net revenue derived from our three largest end customers as a percentage of annual net revenue was 39% and 49% for the years ended December 25, 2010 and December 31, 2011, respectively, and 38% and 67% for the six months ended June 25, 2011 and June 30, 2012, respectively. While the composition of our top customers varies from year-to-year, we expect that shipments to a limited number of customers will continue to account for a significant percentage of our net revenue for the foreseeable future. Our largest customers typically use our products in multiple systems or programs for different OEM end customers, each having differing product life cycles, end users, and market dynamics.

Cost of Net Revenue. Cost of net revenue consists primarily of the cost of purchasing sapphire substrates, wafer processing, and testing and packaging. Cost of net revenue also includes manufacturing related personnel costs, which include stock-based compensation expenses, facilities, supplies and equipment costs, and quality assurance costs.

One of our most important objectives is maintaining and improving our gross margin, which we define as gross profit expressed as a percentage of our net revenue. Our total gross margin in any period can be materially affected by product mix, that is, the percentage of our net revenue in that period that is attributable to higher or lower margin products, and by other factors, some of which are not under our control. Due to these factors, our gross margins have fluctuated from quarter-to-quarter. For example, gross margin declined in the second half of fiscal 2011 due to implementation of new manufacturing processes, product mix, and low yields of certain wafers, which resulted in reductions to the carrying value of inventory as a result of a lower of cost or market valuation.

The factors that can influence the gross margins of any individual product, include the following:

 

   

the pricing that the features and performance of our products can command;

 

   

the volume of products produced using the same manufacturing overhead structure for procurement, test, and quality support, and their related costs;

 

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the competitive pressures on the pricing of our products from similar product offerings from other semiconductor manufacturers; and

 

   

the costs and yields of semiconductor wafers, packages, and other materials used in manufacturing our products; fabrication costs; assembly and test costs; factory equipment utilization; and operating efficiencies.

Research and Development. Research and development expense consists primarily of personnel-related expenses of our research and development organization, which include stock-based compensation expense, and costs for development wafers and mask sets, license fees for computer-aided design software, costs of development testing and evaluation, and allocated facilities costs. We incur research and development costs for the development of our products and for improvements of our UltraCMOS technology.

Selling, General and Administrative. Selling, general and administrative expense includes personnel-related costs, which include stock-based compensation expense, and sales commissions paid to our independent sales representatives, costs of advertising and corporate marketing promotions, travel costs, professional and consulting fees, legal fees, allocated facilities costs and other corporate expenses.

Interest Income. Interest income consists of interest earned on our cash and cash equivalent balances.

Interest Expense. Interest expense is associated with our borrowings, imputed interest on capital leases and customer deposit financing arrangement, and changes in fair value of warrant liabilities.

Other Income (Expense). Other income (expense) consists of currency gains (losses) on conversion of non-U.S. dollar transactions into U.S. dollars and other income (expense) generated from minor non-operating transactions.

Provision for Income Taxes. The provision for income taxes consists of our estimated federal, state and foreign income taxes based on our pre-tax income. We have recorded a valuation allowance for the full amount of our domestic net deferred tax assets, as the realization of our domestic net deferred tax assets is uncertain.

At December 31, 2011, we have U.S. federal and state NOL carryforwards of approximately $156.6 million and $105.6 million, respectively, after taking into consideration the impact of Code section 382 as discussed below. The federal NOL carryforwards will expire between 2021 and 2029, unless previously utilized. The state NOL carryforwards will expire between 2015 and 2029, unless previously utilized. We have federal and state research tax credit carryforwards of approximately $3.9 million and $5.7 million, respectively, at December 31, 2011. The federal credits will begin to expire in 2024. The state credits do not expire.

Pursuant to Sections 382 and 383 of the Code, annual use of our NOL and research and development tax credit carryforwards may be limited in the event a cumulative change in ownership of 50% of certain stockholders occurs within a three year period. An ownership change may limit the amount of NOL and research and development tax credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders.

We completed a study to assess whether an ownership change has occurred since our formation through December 25, 2010. There were no significant transactions that would be expected to effect ownership changes during the year ended December 31, 2011 or the six months ended June 30, 2012. Based on this study, we concluded that we incurred ownership changes on September 29, 2000, August 2, 2002, and October 20, 2004. As a result of these changes, we expect the following tax attributes to expire unused: approximately $52.2 million in federal NOL carryforwards; approximately $17.5 million of state NOL carryforwards; and approximately $3.0 million of federal research tax credit carryforwards. These tax attributes have been excluded

 

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from the U.S. federal and state NOL carryforwards and federal and state research tax credit carryforwards discussed above. Of our $156.6 million in federal NOL available as of December 31, 2011, $136.0 million in losses were available for immediate use and $1.6 million will be available each year from 2012 through 2024. Our state NOL carryforwards consist of $73.4 million for California and $32.3 million for various other states. Of our $73.4 million in California state NOL carryforwards available as of December 31, 2011, $62.3 million in losses available for immediate use and $1.6 million will be available each year from 2012 through 2018. All of our $32.3 million in non-California state NOL carryforwards were available for immediate use as of December 31, 2011. Future ownership changes may further limit our ability to utilize our remaining tax attributes.

Critical Accounting Policies and Estimates

Our consolidated financial statements and related notes included elsewhere in this prospectus are prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, net revenue, and expenses, and any related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Changes in accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and our actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected.

We believe that the following accounting policies involve a greater degree of judgment and complexity than our other accounting policies. Accordingly, these are the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations.

Revenue Recognition

Our net revenue is primarily generated from sales of RFICs. We recognize net revenue when each of the following have occurred: (1) there is persuasive evidence that an arrangement with our customer exists, which is generally a customer purchase order; (2) the products are delivered, which generally occurs when the products are shipped and risk of loss has been transferred to the customer; (3) the selling price is fixed or determinable; and (4) collection of the customer receivable is deemed reasonably assured.

We record revenue based on facts available at the time of sale. Amounts that are not probable of collection once the product has shipped and title has transferred to the customer are deferred until the amount that is probable of collection can be determined. Items that are considered when determining the amounts that will be ultimately collected are the customer’s overall creditworthiness and payment history.

For distributors with rights of return, revenue is not recognized until product is shipped to the end customer of the distributor and the amount that will ultimately be collected is determinable. On shipments where net revenue is not recognized, we record an accounts receivable and deferred net revenue for the selling price as there is a legally enforceable right to payment. Inventory at distributors remains on our books at carrying value until sold by the distributor at which time we recognize the net revenue and cost of net revenue.

We record reductions of revenue for estimated product returns in the same period that the related revenue is recorded. The amount of these reductions is based on historical sales returns, analysis of credit memo data, and other factors known at the time. Additional reductions of revenue would result if actual product returns exceed our estimates. To date, product returns have not been significant.

We offer our distributors rights of return, price protection, and in some situations, credits on pricing depending on their end customer (ship and debit credits). For these distributors revenue is not recognized until product is shipped to the end customer of the distributor and the amount that will ultimately be collected is

 

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determinable. On shipments where net revenue is not recognized, we record an accounts receivable and deferred net revenue for the selling price as there is a legally enforceable right to payment. Inventory at distributors remains on our books at carrying value until sold by the distributor at which time we recognize the net revenue and cost of net revenue. Revenues to these distributors are recorded net of any pricing adjustments for price protection or ship and debit credits in the same period as the sale of goods to their customers. The amount of any pricing adjustment is based on the difference between the price at which the distributor originally purchased our inventory and either: (1) a lower distribution price then being offered on those products for price protection; or (2) a special price offered to the distributor in order to meet competitive pressures in the marketplace for ship and debit credits. We do not currently offer rebates or other pricing incentives, except for volume purchase pricing at the time of sale, to direct customers or distributors.

We also maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. If the financial condition of any customer were to deteriorate, resulting in an impairment of its ability to make payments, additional allowances could be required.

We record net revenue for cost reimbursable service contracts as the services are performed. On a limited basis, certain of our net revenue arrangements include additional elements, such as future product deliveries or services. Judgment is required to properly identify the accounting units of the multiple deliverable transactions and to determine the manner in which revenue should be allocated among the accounting units. When we enter into an arrangement that includes multiple elements, the allocation of value to each element is derived based on management’s best estimate of selling price when vendor specific evidence or third party evidence is unavailable.

Vendor Consideration Received

In certain situations we enter into license agreements related to our UltraCMOS technology simultaneously with foundry agreements with outsourced manufacturers. When we receive consideration for the license and cannot sufficiently separate the identifiable benefit attributable to the license or reasonably estimate the fair value of the license provided from the inventory purchases, we classify the consideration received as a reduction to cost of net revenues over the period that the consideration is earned.

Inventory Valuation

We continually assess the recoverability of our inventory based on assumptions about demand and market conditions. Forecasted demand is determined based on historical sales and expected future sales. We value our inventory at the lower of cost or market value, with cost determined on a first-in, first-out basis. We reduce our inventory to the estimated lower of cost or market value to account for its obsolescence or lack of marketability. Reductions are calculated as the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. Determination of the market value may be complex, and therefore requires management to make assumptions and to apply judgment. In order for management to make the appropriate determination of market value, the following items are commonly considered: inventory turnover statistics; inventory quantities on hand in our facilities and customer inventories; unfilled customer order quantities; forecasted customer demand; competitive pricing; seasonality factors; consumer trends; and performance of similar products or accessories. Subsequent changes in facts or circumstances do not result in the reversal of previously recorded reserves. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required that may adversely affect our operating results. If actual market conditions are more favorable, we may have higher gross profits when products are sold.

Warranty Accrual

We generally provide a warranty on our products for a period of one year; however, it may be longer for certain customers. Accordingly, we establish provisions for estimated product warranty costs at the time net revenue is recognized based upon our historical activity and, additionally, for any known product warranty

 

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issues. Warranty provisions are recorded as a cost of net revenue. The determination of such provisions requires us to make estimates of product return rates and expected costs to replace or rework the products under warranty. When the actual product failure rates, cost of replacements and rework costs differ from our estimates, revisions to the estimated warranty accrual are made. Actual claims are charged against the warranty reserve.

Income Taxes

We account for income taxes under the asset and liability approach. We record a valuation allowance to reduce our deferred tax assets to the amount we believe is more likely than not to be realized. In assessing the need for a valuation allowance, we consider all positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Forming a conclusion that a valuation allowance is not required is difficult when there is negative evidence such as cumulative losses in recent years. As a result of our cumulative losses in the U.S., we have concluded that a full valuation allowance against our net deferred tax assets is appropriate. In foreign jurisdictions we do not have cumulative losses, and we have not recorded a valuation allowance to reduce our net deferred tax assets. Realization of our deferred tax assets is dependent primarily upon our future U.S. taxable income. Our judgments regarding our future profitability may change due to the trend of our operating results, future market conditions, changes in U.S. or international tax laws, and other factors. These changes, if any, may require possible material adjustments to these deferred tax assets, resulting in a reduction in net income or an increase in net loss in the period when such determinations are made.

We are subject to income taxes in the U.S. and foreign countries, and are subject to routine corporate income tax audits in many of these jurisdictions. We believe that our tax return positions are fully supported, but tax authorities could challenge certain positions, which may not be fully sustained. However, our income tax expense includes amounts intended to satisfy income tax assessments that result from these challenges. Determining the income tax expense for these potential assessments and recording the related assets and liabilities requires management judgment and estimates. We believe that our provision for uncertain tax positions, including related interest and penalties, is adequate based on information currently available to us. The amount ultimately paid upon resolution of audits could be materially different from the amounts previously included in income tax expense and therefore could have a material impact on our tax provision, net income and cash flows. Our overall provision requirement could change due to the issuance of new regulations or new case law, negotiations with tax authorities, resolution with respect to individual audit issues, or the entire audit, or the expiration of statutes of limitations.

Stock-Based Compensation

We measure stock-based compensation cost at the grant date, based on the estimated fair value of the award. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires us to estimate certain key assumptions including future stock price volatility, expected term of the options, risk free interest rates, and dividend yields. The resulting cost is recognized over the period during which the employee is required to provide services in exchange for the award, which is usually the vesting period. We recognize compensation expense over the vesting period using the straight-line method and classify these amounts in the statement of operations based on the department to which the related employee is assigned.

Stock options issued to non-employees are accounted for at their estimated fair value determined using the Black-Scholes option pricing model. The fair value of options granted to non-employees is re-measured as they vest, and the resulting increase in value, if any, is recognized as expense during the period the related services are rendered.

 

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For each of the years ended December 25, 2010 and December 31 2011, and the six months ended June 25, 2011 and June 30, 2012, we estimated the grant date fair value of stock options using the Black-Scholes option pricing model with the following weighted-average assumptions:

 

     Fiscal Year Ended     Six Months Ended  
     December  25,
2010
    December 31,
2011
    June 25,
2011
    June 30,
2012
 
                 (unaudited)  

Risk-free interest rate

     2.07     1.26     2.37     0.84

Dividend yield

                            

Expected term (years)

     6.08        5.24        6.08        5.00   

Volatility

     60     61     59     62

We based our expected volatility on the expected volatilities of a peer group of public companies within the semiconductor industry that are similar except for having publicly traded securities. When making the selections of our industry peer companies to be used in our expected volatility determination, we also considered the stage of development, size, and financial leverage of such peer companies.

We calculated the weighted-average expected term using the SEC Staff’s Simplified Method for options granted through September 2011. In October 2011 we revised our estimates to utilize data of peer companies to determine the weighted average life. We believe this change in estimate more accurately reflects the expected term of our options by basing the estimate on the specific experience of our peers.

We derived the risk-free interest rate assumption from the yield as of the grant date for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. We based the assumed dividend yield on the expectation that we will not pay cash dividends in the foreseeable future.

We estimated forfeitures at the time of grant and will revise these estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We utilized our historical forfeiture rates to estimate our future forfeiture rate at 2% for 2010 and through September 2011 and 3% starting in October 2011. We will continue to evaluate the appropriateness of estimating the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior, and other factors. Quarterly changes in the estimated forfeiture rate can have a significant effect on stock-based compensation expense as the cumulative effect of adjusting the rate for all stock-based compensation expense amortization is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the stock-based compensation expense recognized in the consolidated financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the stock-based compensation expense recognized in the consolidated financial statements. The effect of forfeiture adjustments during fiscal 2010 and 2011 was insignificant. We will continue to use judgment in evaluating the expected term, volatility, and forfeiture rate related to our stock-based compensation on a prospective basis and incorporating these factors in the Black-Scholes option pricing model.

If in the future we determine that other methods are more reasonable, or other methods for calculating these assumptions are prescribed by authoritative guidance, the fair value calculated for our stock options could change significantly. Higher volatility and longer expected award lives result in an increase to stock-based compensation expense determined at the date of grant. Stock-based compensation expense affects our cost of net revenue research and development expense, and our selling, general and administrative expense.

In order to determine the grant date fair value of stock options, we are required to estimate the fair value of our common stock. The exercise price for all stock options granted was at or above the estimated fair value of the underlying common stock as determined on the date of grant by our board of directors.

 

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The following table summarizes, by quarter, the number of stock options granted since December 26, 2009 and the associated per share exercise price, and per share fair value of our common stock as determined by our board of directors, with input from management, during each of these quarters:

 

Grant During the Quarter Ended

   Number of
Options Granted
     Exercise Price
Per Share
     Fair Value Per
Share
 

March 27, 2010

     134,319       $ 5.73       $ 5.73   

June 26, 2010

     242,220       $ 6.61       $ 6.61   

September 25, 2010

     998,574       $ 7.12       $ 7.12   

December 25, 2010

     137,605       $ 8.95       $ 8.95   

March 26, 2011

     61,025       $ 8.95       $ 8.95   

June 25, 2011

     98,077       $ 8.95       $ 8.95   

September 24, 2011

     138,134       $ 9.76       $ 9.76   

December 31, 2011

     1,051,924       $ 9.76       $ 8.66   

March 31, 2012

     48,899       $ 10.13       $ 10.13   

June 30, 2012

     236,550       $ 14.02       $ 14.02   

Given the absence of an active trading market for our common stock, our board of directors was required to estimate the fair value of our common stock at the time of each grant, with the assistance of management. Our board of directors, which includes members who are experienced in valuing securities, considered objective and subjective factors in determining the estimated fair value of our common stock on each option grant date. Factors considered by our board of directors included the following:

 

   

the price of our convertible preferred stock sold to outside investors in arm’s-length transactions;

 

   

the rights, preferences, and privileges of our convertible preferred stock relative to those of our common stock;

 

   

our operating and financial performance;

 

   

general economic outlook and specific industry conditions;

 

   

our actual financial condition and results of operations relative to our formal operating plan during the relevant period, as well as forecasts of our financial results;

 

   

the range of market multiples of comparable companies;

 

   

the fact that option grants involve illiquid securities in a private company;

 

   

the risks inherent in the development of our products and in the expansion of our target markets;

 

   

contemporaneous independent valuations performed at periodic intervals; and

 

   

the likelihood of achieving a liquidity event, such as an initial public offering or sale of our company, given prevailing market conditions.

At the date of each option grant, our board of directors determined that the exercise price for each option was equivalent to or above the then-existing fair value of our common stock. During the quarter ended December 31, 2011, after considering the factors identified above our board of directors concluded that the per share fair value of our common stock was $8.66. Our board of directors decided to maintain the per share exercise price of $9.76 from the quarter ended September 24, 2011 for stock options granted during the quarter ended December 31, 2011.

Starting in February 2006, our board of directors has also considered a number of different factors, including contemporaneous valuations of our common stock for purposes of granting stock options in a manner consistent with the methods outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.

 

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Since August 2006, we considered a probability-weighted expected return method, or PWERM, to estimate the value of the common stock. This valuation method was considered to be most appropriate given the status of our business and the anticipated liquidity events. Under the PWERM method, management assigned probabilities and timing estimates to potential liquidity events for us based on a variety of factors, including primarily our recent operating history, the amount of cash held by us, and the preferences held by the preferred stock relative to our common stock. Three principal scenarios were examined: a merger or acquisition, or M&A, scenario; an initial public offering, or IPO, scenario; and a scenario in which the company continues to operate as a private entity. For each valuation date, we prepared a financial forecast to be used in the computation of the enterprise value. The financial forecasts took into account our past experience and future expectations.

 

   

To arrive at a value for common shares under the M&A scenario and the IPO scenario, the Guideline Public Company Method was used to estimate our total shareholder value at the time of the respective anticipated liquidity event. The Guideline Public Company Method estimates the fair value of a company by applying to that company market revenue multiples of publicly traded firms in similar lines of business. When choosing the comparable companies to be used for the Guideline Public Company Method, we focused on companies in the semiconductor industry. Some of the specific criteria we used to select and analyze comparable companies within our industry included the business description, business size, projected growth, financial condition, and historical operating results. We analyzed the business and financial profiles of the selected companies for relative similarity to us, and once such differences and similarities were determined and proper adjustments were made, we selected an appropriate total shareholder value revenue multiple for us. This revenue multiple was applied to the trailing twelve months’ revenue at the time of the anticipated future liquidity event to arrive at our anticipated total shareholder value at the time of the respective liquidity event. The total shareholder value was then allocated amongst share classes based on the amount of liquidation preferences, and the resulting equity values were discounted to the present using a discount rate which accounted for the market cost of capital and risk.

 

   

To estimate the value of the common shares under the continuing to operate as a private company scenario, we used two approaches: a Guideline Public Company Method and a Discounted Cash Flow approach. The Guideline Public Company Method, as discussed previously, was applied at the valuation date to estimate the total shareholder value of the company at the present. Under the Discounted Cash Flow approach, we analyzed the forecast of our expected future financial performance, and discounted those to a present value using an appropriate discount rate which reflected the then-current company’s cost of capital. We weighed the total shareholder values determined by the Guideline Public Company Method and the Discounted Cash Flow approach to arrive at a single enterprise value for the continuing to operate as a private company scenario. Subsequently, we apportioned this total shareholder value to the various share classes, based on their respective liquidation preferences, to arrive at a value for the common shares under the continuing to operate as a private company scenario. Finally, we applied a marketability discount to reflect the fact that our common stockholders were unable to liquidate their holdings at will, or possibly at all, which resulted in a value for the common shares under the continuing to operate as a private entity scenario.

 

   

Lastly, we probability-weighed the common shareholder values under each of the scenarios to arrive at an indication of value for our common equity.

The factors described above were considered by our board of directors each time it determined the fair value of our common stock. The following additional factors had particular relevance in connection with the board of directors’ determination during each of the following periods:

 

December 27, 2009 — March 27, 2010: $5.73 per share fair value

 

   

Improvement by the last quarter of fiscal 2009 and first quarter of fiscal 2010 of general macroeconomic conditions as the U.S. economy and global financial markets began to recover and capital and debt markets continued to improve;

 

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continued improvement in our financial performance, as reflected by the establishment of a low but stable level of profitability and general stabilizing of net revenue;

 

   

our updated company financial outlook reflecting expected net revenue growth and profitability improvement;

 

   

updated liquidity scenarios, including increased likelihood of our undertaking a public offering during the last quarter of fiscal 2010 or the first two quarters of fiscal 2011; and

 

   

the most recent independent contemporaneous valuation report as of December 31, 2009.

March 28, 2010 — June 26, 2010: $6.61 per share fair value

 

   

The slowing pace of the general recovery of the U.S. economy and global financial markets relative to the rate of improvement during the last quarter of fiscal 2009;

 

   

an improved initial public offering market for private semiconductor companies;

 

   

a consistent financial outlook for our business relative to our outlook three months earlier; and

 

   

the most recent independent contemporaneous valuation report as of March 31, 2010.

June 27, 2010 — September 25, 2010: $7.12 per share fair value

 

   

A decline in peer company valuations, resulting from general concerns about the U.S. economy and global financial markets during the second quarter of fiscal 2010;

 

   

a reduction in our financial projections based on the slower than expected short-term ramp of net revenue, and expected delays in additional net revenue from new customers;

 

   

continued possibility of our commencing the process of undertaking a public offering in the last quarter of 2010; and

 

   

the most recent independent contemporaneous valuation report as of June 26, 2010.

September 26, 2010 — December 25, 2010: $8.95 per share fair value

 

   

Increased likelihood of commencing a public offering in 2011;

 

   

consistent financial outlook for our business; and

 

   

the most recent independent contemporaneous valuation report as of September 25, 2010.

December 26, 2010 — March 26, 2011: $8.95 per share fair value

 

   

A reduction in our financial projections based on slower than expected short-term ramp of net revenue;

 

   

increased valuations of our peer companies;

 

   

updated liquidity scenarios which reflected an increased likelihood of a delay in the possible timing of potential liquidity events during the second half of fiscal 2011; and

 

   

the most recent independent contemporaneous valuation report as of January 31, 2011.

March 27, 2011 — June 25, 2011: $8.95 per share fair value

 

   

Consistent valuations of our peer companies;

 

   

a slight reduction in the financial outlook for our business;

 

   

updated liquidity scenarios which reflected potential liquidity events during the second half of fiscal 2011; and

 

   

the most recent independent contemporaneous valuation report as of March 26, 2011.

 

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June 26, 2011 — September 24, 2011: $9.76 per share fair value

 

   

Updated liquidity scenarios which reflected liquidity events taking place at a later stage of our revenue ramp up;

 

   

consistent financial outlook for our business;

 

   

consistent valuations of our peer companies; and

 

   

the most recent independent contemporaneous valuation report as of June 25, 2011.

September 25, 2011 — December 31, 2011: $8.66 per share fair value

 

   

Reduced valuations of our peer companies;

 

   

updated liquidity scenarios which reflected a reduced likelihood of commencing a public offering in 2011 or during the first half of fiscal 2012;

 

   

a reduction in our financial projections based on slower than expected revenue growth; and

 

   

the most recent independent contemporaneous valuation report as of September 24, 2011.

January 1, 2012 — March 31, 2012: $10.13 per share fair value

 

   

An increase in our financial projections based on our growing net revenue;

 

   

a slight reduction in valuations of our peer companies;

 

   

updated liquidity scenarios which reflected a consistent likelihood of commencing a public offering in fiscal 2012; and

 

   

the most recent independent contemporaneous valuation report as of December 31, 2011.

April 1, 2012 — June 30, 2012: $14.02 per share fair value

 

   

An increase in our financial projections based on our growing net revenue;

 

   

increased valuations of our peer companies;

 

   

updated liquidity scenarios which reflected a consistent likelihood of commencing a public offering in fiscal 2012; and

 

   

the most recent independent contemporaneous valuation report as of March 31, 2012.

Our calculations are sensitive to highly subjective assumptions that we were required to make at each valuation date relating to an appropriate present value discount rate. The following table summarizes these assumptions at the end of each quarter since December 26, 2009:

 

Valuation Date

   Present Value
Discount Rate
 

March 27, 2010

     29

June 26, 2010

     29

September 25, 2010

     28

December 25, 2010

     28

March 26, 2011

     25

June 25, 2011

     22

September 24, 2011

     22

December 31, 2011

     21

March 31, 2012

     20

June 30, 2012

     18

 

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Our present value discount rate was determined using a Capital Asset Pricing Model, or CAPM. The discount rate was based on an analysis of comparable companies in the semiconductor industry. We also compared the results of the CAPM discount rate to discount rates published in various studies of venture capital required rated of return for investments in companies of an equivalent stage of development.

Determining the fair market value of our common stock involves complex and subjective judgments including estimates of revenue, assumed market growth rates and estimated costs, as well as appropriate discount rates. At the time of each valuation, the significant estimates used in the discounted cash flow approach included estimates of our revenue and revenue growth rates for several years into the future. Although each time we prepared such forecasts for use in the preparation of a valuation report, we did so based on assumptions that we believed to be reasonable and appropriate, there can be no assurance that any such estimates for earlier periods or for future periods will prove to be accurate. There is also significant volatility in the semiconductor industry. Our valuations incorporate the volatility in the markets based on the Guideline Public Company Method described above. We also experience fluctuations in our own financial forecasts on a quarter to quarter basis which impacts the related valuations.

As a result of our fair value calculations using Black-Scholes option pricing model and the allocation of value to the vesting periods using the straight-line vesting attribution method, we recognized employee stock-based compensation in the statements of operations as follows:

 

     Fiscal Year Ended      Six Months Ended  
      December 25,
2010
     December 31,
2011
     June 25,
2011
     June 30,
2012
 
            (unaudited)  
     (in thousands)  

Cost of net revenue

   $ 407       $ 431       $ 208       $ 271   

Research and development

     556         762         332         567   

Selling, general and administrative

     1,554         1,891         943         1,126   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $   2,517       $   3,084       $   1,483       $   1,964   
  

 

 

    

 

 

    

 

 

    

 

 

 

The total compensation cost related to unvested stock option grants not yet recognized as of June 30, 2012 was $8.8 million, and the weighted-average period over which these grants are expected to vest is 2.1 years.

Based on an assumed initial public offering price of $         per share, the midpoint of the initial public offering price range reflected on the cover page of this prospectus, the intrinsic value of stock options outstanding at June 30, 2012 was $         million, of which $         million and $         million related to stock options that were vested and unvested, respectively, at that time.

Fair Value of Warrants to Purchase Convertible Preferred Stock and Common Stock

We classify outstanding warrants to purchase shares of our convertible preferred stock and our estimate of warrants issuable to purchase common stock as other long-term liabilities and adjust their carrying values to fair value at the end of each reporting period. The value of each warrant is determined using the Black-Scholes valuation model which has a number of variables including risk-free interest rates, volatility, remaining contractual warrant term and the fair value of our common stock. Our board of directors estimates the fair value of the underlying common stock by evaluating and considering a number of objective and subjective factors. There is inherent uncertainty in these estimates and the valuation of each warrant is sensitive to movements in the underlying value of our stock. If we had made different assumptions and estimates, the fair value amounts recorded for our warrants could have been materially different.

Accounting Periods

We use a 52- or 53-week fiscal year ending on the last Saturday in December. Fiscal 2010 was a 52-week year ending on December 25, 2010. Fiscal year 2011 was a 53-week year ending on December 31, 2011. Our first six months for fiscal year 2011 and 2012 were 26-week periods ending on June 25, 2011 and June 30, 2012, respectively. Fiscal year 2012 will be a 52-week year ending on December 29, 2012.

 

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Results of Operations

The following table sets forth, for the periods indicated, certain statements of operations data (in thousands). Our historical results are not necessarily indicative of our results of operations to be expected for any future period.

 

     Fiscal Year Ended     Six Months Ended  
     December 25,
2010
    December 31,
2011
    June 25,
2011
    June 30,
2012
 
                 (unaudited)  

Net revenue

   $   91,071      $ 107,771      $   45,729      $   80,334   

Cost of net revenue

     49,520        70,955        26,720        52,858   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     41,551        36,816        19,009        27,476   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expense:

        

Research and development

     18,040        22,730        10,248        14,163   

Selling, general and administrative

     18,889        23,252        10,812        15,193   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expense

     36,929        45,982        21,060        29,356   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     4,622        (9,166     (2,051     (1,880

Interest income

     13        7        5        42   

Interest expense

     (610     (318     (185     (1,076

Other income (expense), net

     (118     (9     61        (80
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     3,907        (9,486     (2,170     (2,994

Provision for income taxes

     147        196        125        74   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $   3,760      $ (9,682   $ (2,295   $ (3,068
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table sets forth, for the periods indicated, certain statements of operations data as a percentage of net revenue. Our historical results are not necessarily indicative of our results of operations to be expected for any future period.

 

     Fiscal Year Ended     Six Months Ended  
     December 25,
2010
    December 31,
2011
    June 25,
2011
    June 30,
2012
 
                 (unaudited)  

Net revenue

     100     100     100     100

Cost of net revenue

     54        66        58        66   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     46        34        42        34   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expense:

        

Research and development

     20        21        22        18   

Selling, general and administrative

     21        22        24        19   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expense

     41        43        46        37   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     5        (9     (4     (3

Interest income

                            

Interest expense

     (1            (1     (1

Other income (expense), net

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     4        (9     (5     (4

Provision for income taxes

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     4     (9 )%      (5 )%      (4 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Comparison of the Six Months Ended June 25, 2011 and June 30, 2012

Net Revenue

 

     Six Months Ended         
     June 25,
2011
     June 30,
2012
     % Change  
     (unaudited)         
     (in thousands)         

Product net revenue

   $     43,621       $   80,255         84

Other net revenue

     2,108         79         (96 )% 
  

 

 

    

 

 

    

Total net revenue

   $ 45,729       $ 80,334         76
  

 

 

    

 

 

    

A significant portion of our net revenue results from the sale of our antenna and broadband and general purpose RF switches used in mobile wireless device, wireless infrastructure, broadband, industrial and other markets. The balance of our product sales being derived from digital attenuators, synthesizers, mixers / upconverters, and prescalers used in broadband, industrial, wireless infrastructure, test and measurement equipment, and aerospace and defense markets. For the six months ended June 30, 2012, our product net revenue increased by $36.6 million, or 84% compared to the same period in fiscal 2011. Product net revenue from switches used in handset antenna applications increased by $36.2 million compared to the same period in fiscal 2011, as products sold through one of our distributors for Asia (Macnica) significantly increased. This increase in volume of our antenna switches resulted mainly from additional design wins by a module manufacturer (Murata) who incorporates our products into its modules which are then sold to OEMs. Product net revenue also increased by $2.9 million from sales of antenna and broadband switches used in broadband applications due to increased shipments through North American distributors. This increase was partially offset by reduced net revenue for synthesizers of $2.5 million due to less products sold into aerospace and defense markets.

Other net revenue for the six months ended June 30, 2012 decreased by $2.0 million compared to the same period in fiscal 2011, primarily due the completion of a government research and development contract in the second quarter of fiscal 2011.

We market and sell our products worldwide. We attribute net revenue to the geographic region where the customer, or its business unit that makes the purchase, is based. Our net revenue by geographic region for the periods indicated was as follows:

 

     Six Months Ended  
     June 25, 2011     June 30, 2012  
     (unaudited)  
     (in thousands)  

United States

   $ 17,998         39   $ 16,403         20

Japan

     15,769         34        52,630         66   

Germany

     1,582         3        1,414         2   

All others

     10,380         24        9,887         12   
  

 

 

    

 

 

   

 

 

    

 

 

 
   $   45,729               100   $   80,334               100
  

 

 

    

 

 

   

 

 

    

 

 

 

Cost of Net Revenue and Gross Profit

 

     Six Months Ended        
     June 25,
2011
    June 30,
2012
    % Change  
     (unaudited)        
     (in thousands)        

Cost of net revenue

   $   26,720      $   52,858        98

% of net revenue

     58     66  

Gross profit

   $ 19,009      $ 27,476        45

% of net revenue

     42     34  

 

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Cost of net revenue for the six months ended June 30, 2012 increased by $26.1 million compared to the same period in fiscal 2011 primarily due to increased product cost. We incurred higher product cost due to the implementation of new manufacturing processes in fiscal 2011 and higher volume. Gross margin for the six months ended June 30, 2012 decreased to 34% from 42% compared to the same period in fiscal 2011. The gross margin decline of 8% was mainly due to increased product cost and a change in the mix of products sold. Our product cost was negatively impacted by lower than anticipated yields and expedite fees in the new manufacturing processes. We expect our gross margin will fluctuate from quarter to quarter in the future based on changes in the mix of products we sell, the impact of competitive pricing pressure, variations in our manufacturing costs, or market volatility leading to fluctuations in the volumes we ship.

Included in our cost of net revenue are costs related to our other net revenue of $1.5 million for the six months ended June 25, 2011. Costs related to other net revenue for the six months ended June 30, 2012 decreased by $1.5 million compared to the same period in fiscal 2011 mainly due to lower activity in 2012 and the completion of a government research and development contract in the second quarter of fiscal 2011, for which we include the cost of performing the contracted activity in cost of net revenue.

Research and Development

 

     Six Months Ended        
     June 25,
2011
    June 30,
2012
    % Change  
     (unaudited)        
     (in thousands)        

Research and development

   $ 10,248      $ 14,163        38

% of net revenue

     22     18  

Research and development expense for the six months ended June 30, 2012 increased by $3.9 million compared to the same period in fiscal 2011. The increase was in part due to increased compensation expense of $1.3 million as a result of higher headcount. Other non-personnel related research and development expenditures increased by $2.6 million due to the number of new product development and existing product enhancement initiatives undertaken during the six months ended June 30, 2012. We expect our research and development expense to increase in absolute dollars as we continue to expand our product portfolio, enhance existing products, and improve our UltraCMOS technology.

Selling, General and Administrative

 

     Six Months Ended        
     June 25,
2011
    June 30,
2012
    % Change  
     (unaudited)        
     (in thousands)        

Selling, general and administrative

   $ 10,812      $ 15,193        41

% of net revenue

     24     19  

Selling, general and administrative expense for the six months ended June 30, 2012 increased by $4.4 million compared to the same period in fiscal 2011. The increase was in part attributable to additional compensation costs of $1.6 million mainly as a result of an increase in sales headcount compared to the prior year period. Other increases included additional professional fees of $1.6 million and a number of other smaller increases. We expect our selling, general and administrative expense to increase in absolute dollars in the future as we add sales, finance, and administrative personnel and as we incur incremental expense associated with being a public company.

 

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Other Income (Expense)

 

     Six Months Ended  
     June 25,
2011
    June 30,
2012
 
     (unaudited)  
     (in thousands)  

Interest income

   $ 5        42   

Interest expense

   $ (185   $ (1,076

Other income (expense), net

   $ 61      $ (80

Interest expense for the six months ended June 30, 2012 increased by $0.9 million compared to the same period in fiscal 2011 mainly due to the change in fair value of our warrant liability and imputed interest on our customer deposit financing arrangement. The details of this arrangement is discussed in “Liquidity and Capital Resources.”

Other income (expense), net consists primarily of realized foreign exchange gains and losses. Other income (expense), net for the six months ended June 30, 2012 decreased by $0.1 million compared to the same period in fiscal 2011, primarily due to lower realized foreign exchange gains.

Comparison of the Fiscal Years Ended December 25, 2010 and December 31, 2011

Net Revenue

 

     Fiscal Year Ended         
     December 25,
2010
     December 31,
2011
     % Change  
     (in thousands)         

Product net revenue

   $     87,538       $   104,889         20

Other net revenue

     3,533         2,882         (18 )% 
  

 

 

    

 

 

    

Total net revenue

   $ 91,071       $ 107,771         18
  

 

 

    

 

 

    

A significant portion of our net revenue results from the sale of our antenna and broadband and general purpose RF switches used in mobile wireless device, wireless infrastructure, broadband, industrial and other markets, with the balance of our product sales being derived from digital attenuators, synthesizers, mixers / upconverters, and prescalers used in broadband, industrial, wireless infrastructure, test and measurement equipment, and aerospace and defense markets.

For the year ended December 31, 2011, our product net revenue increased by $17.4 million or 20% compared to fiscal 2010. Product net revenue from switches used in handset antenna applications increased by $14.3 million compared to fiscal 2010. Shipments of switches used in handsets decreased in the first half of fiscal 2011 compared to fiscal 2010. However, products sold through one of our distributors for Asia (Macnica) significantly increased in the second half of fiscal 2011 compared to the first half of fiscal 2011, resulting in an overall increase of $14.3 million. Product net revenue from antenna and broadband switches used in broadband applications increased by $3.6 million due to higher shipments through both North American and Asian distributors. Digital attenuator product net revenue increased by $2.4 million as a result of additional design wins with various OEMs. These increases were partially offset by a decrease of $2.9 million due to changes in various other product families.

Other net revenue for the year ended December 31, 2011 decreased by $0.7 million compared to fiscal 2010, primarily due the completion of a government research and development contract in the second quarter of fiscal 2011.

 

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We market and sell our products worldwide. We attribute net revenue to the geographic region where the customer, or its business unit that makes the purchase, is based. Our net revenue by geographic region for the periods indicated was as follows:

 

     Fiscal Year Ended  
     December 25, 2010      December 31, 2011  
     (in thousands)  

United States

   $ 41,794         46%       $ 31,921         30%   

Japan

     29,917         33%         52,062         48%   

Germany

     5,954         7%         3,510         3%   

All others

     13,406         14%         20,278         19%   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $   91,071               100%       $ 107,771               100%   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cost of Net Revenue and Gross Profit

 

    Fiscal Year Ended        
    December 25,
2010
    December 31,
2011
    % Change  
    (in thousands)        

Cost of net revenue

  $   49,520      $   70,955          43

% of net revenue

    54     66  

Gross profit

  $ 41,551      $ 36,816        (11 )% 

% of net revenue

    46     34  

Cost of net revenue for the year ended December 31, 2011 increased by $21.4 million compared to fiscal 2010 primarily due to increased product cost. We incurred higher product cost due to the implementation of new manufacturing processes. In addition, our product cost was negatively impacted by inventory write downs of $3.4 million during the second half of fiscal 2011. These write downs were the result of lower than anticipated yields of certain wafers in the new manufacturing processes. Gross margin for the year ended December 31, 2011 decreased to 34% from 46% compared to fiscal 2010. The gross margin decline of 12% for fiscal 2011 was mainly due to increased product cost and a change in the mix of products sold. We expect our gross margin will fluctuate from quarter to quarter in the future based on changes in the mix of products we sell, the impact of competitive pricing pressure, variations in our manufacturing costs, or market volatility leading to fluctuations in the volumes we ship.

Included in our cost of net revenue are costs related to our other net revenue of $2.4 million and $1.6 million for the years ended December 25, 2010 and December 31, 2011, respectively. The decrease was mainly due to lower activity in 2011 and the completion of a government research and development contract in the third quarter of fiscal 2011, for which we include the cost of performing the contracted activity in cost of net revenue.

Research and Development

 

     Fiscal Year Ended        
     December 25,
2010
    December 31,
2011
    % Change  
     (in thousands)        

Research and development

   $ 18,040      $ 22,730        26

% of net revenue

     20     21  

Research and development expense for the year ended December 31, 2011 increased by $4.7 million compared to fiscal 2010. The increase was primarily due to increased compensation expense of $1.6 million as a result of higher headcount. Other non-personnel related research and development expenditures increased by $3.1 million due to the number of new product development and existing product enhancement initiatives undertaken

 

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during fiscal 2011. We expect our research and development expense to increase in absolute dollars as we continue to expand our product portfolio, enhance existing products, and improve our UltraCMOS technology.

Selling, General and Administrative

 

     Fiscal Year Ended        
     December 25,
2010
    December 31,
2011
    % Change  
     (in thousands)        

Selling, general and administrative

   $   18,889      $   23,252        23

% of net revenue

     21     22  

Selling, general and administrative expense for the year ended December 31, 2011 increased by $4.4 million compared to fiscal 2010. Approximately half of the increase was attributable to incremental compensation costs of $2.3 million mainly as a result of an increase in sales headcount compared to fiscal 2010. Other increases included additional professional fees of $0.2 million, additional travel expense of $0.5 million, additional stock-based compensation of $0.3 million, and a number of other smaller increases. We expect our selling, general and administrative expense to increase in absolute dollars in the future as we add sales, finance, and administrative personnel and as we incur incremental expense associated with being a public company.

Other Income (Expense)

 

     Fiscal Year Ended  
     December 25,
2010
    December 31,
2011
 
     (in thousands)  

Interest income

   $ 13      $ 7   

Interest expense

   $ (610   $ (318

Other expense, net

   $ (118   $ (9

Interest income for the year December 31, 2011 decreased compared to the same period in 2010, due to reduced yields and lower cash and cash equivalent balances.

Interest expense for the year ended December 31, 2011 decreased by $0.3 million compared to fiscal 2010 mainly due to lower levels of borrowing through the majority of fiscal 2011 as well as the change in fair value of our warrant liability.

Other expense, net consists primarily of realized foreign exchange gains and losses. Other expense for the year ended December 31, 2011 decreased by $0.1 million compared to fiscal year 2010, primarily due to lower realized foreign exchange losses.

 

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Table of Contents

Selected Quarterly Results

The following table presents our unaudited consolidated statements of operations data for each of the ten quarters up to the period ended June 30, 2012. The quarterly data have been prepared on the same basis as the audited consolidated financial statements appearing elsewhere in this prospectus. You should read this information together with our consolidated financial statements and related notes included elsewhere in this prospectus.

 

    Three Months Ended  
    March 27,
2010
    June 26,
2010
    September 25,
2010
    December 25,
2010
    March 26,
2011
    June 25,
2011
    September 24,
2011
    December 31,
2011
    March 31,
2012
    June 30,
2012
 
    (unaudited)  
   

(in thousands)

       

Net revenue

  $   22,896      $   23,597      $   21,139      $   23,439      $ 21,200      $ 24,529      $ 26,495      $ 35,547      $   36,695      $   43,639   

Cost of net revenue (1)

    13,186        12,855        11,244        12,235        11,992        14,728        19,370        24,865        25,460        27,398   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    9,710        10,742        9,895        11,204        9,208        9,801        7,125        10,682       
11,235
  
    16,241   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expense:

                   

Research and development (1)

    4,220        4,659        4,801        4,360        4,776        5,472        6,044        6,438        6,442        7,721   

Selling, general and administrative (1)

    3,982        4,417        4,840        5,650        5,467        5,345        5,733        6,707        7,112        8,081   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expense

    8,202        9,076        9,641        10,010        10,243        10,817        11,777        13,145     

 

13,554

  

    15,802   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    1,508        1,666        254        1,194        (1,035     (1,016     (4,652     (2,463  

 

(2,319

    439   

Interest income

    2        2        4        5        4        1        2                      42   

Interest expense

    (350     (243     (129     112        (32     (153     71        (204     (680     (396

Other income (expense), net

    (112     (21     35        (20     59        2        (27     (43  

 

6

  

    (86
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    1,048        1,404        164        1,291        (1,004     (1,166     (4,606     (2,710  

 

(2,993

    (1

Provision (benefit) for income taxes

    29        37        32        49        21        104        69        2     

 

49

  

    25   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 1,019      $ 1,367      $ 132      $ 1,242      $   (1,025   $   (1,270   $   (4,675   $   (2,712   $ (3,042   $ (26
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1) Includes stock-based compensation expense related to options granted to employees and others as follows:

 

    Three Months Ended  
    March 27,
2010
    June 26,
2010
    September 25,
2010
    December 25,
2010
    March 26,
2011
    June 25,
2011
    September 24,
2011
    December 31,
2011
    March 31,
2012
    June 30,
2012
 
    (unaudited)  
    (in thousands)        

Cost of net revenue

  $ 90      $ 91      $ 111      $ 115      $     115      $ 93      $ 94      $     129      $     143      $     128   

Research and development

    124        121        145        166        179        153        177        253        268        299   

Selling, general and administrative

    356        304        402        492        516        427        405        543        569        557   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $     570      $     516      $     658      $     773      $ 810      $     673      $     676      $ 925      $ 980      $ 984   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table presents certain unaudited quarterly information as a percentage of our net revenue for each of the ten quarters up to the period ended June 30, 2012 on a historical basis:

 

    Three Months Ended  
    March 27,
2010
    June 26,
2010
    September 25,
2010
    December 25,
2010
    March 26,
2011
    June 25,
2011
    September 24,
2011
    December 31,
2011
    March 31,
2012
    June 30,
2012
 
    (unaudited)  

Net revenue

    100     100     100     100     100     100     100     100     100     100

Cost of net revenue

    58        54        53        52        57        60        73        70        69        63   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

    42        46        47        48        43        40        27        30        31        37   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expense:

                   

Research and development

    19        20        23        19        22        22        23        18        18        18   

Selling, general and administrative

    17        19        23        24        26        22        21        19        19        18   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expense

    36        39        46        43        48        44        44        37        37        36   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    6        7        1        5        (5     (4     (17     (7     (6     1   

Interest income

                                                                     

Interest expense

    (2     (1                          (1            (1     (2     (1

Other income (expense), net

                                                                     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    4        6        1        5        (5     (5     (17     (8     (8       

Provision for income taxes

                                              1                        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    4     6     1     5     (5 )%      (5 )%      (18 )%      (8 )%      (8 )%     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

We believe net revenue has generally increased over the ten quarters presented due to increased end market demand for our products, continued new product introductions during the period, our success in acquiring new customers, and increased sales to existing customers in our target markets.

Gross margin has fluctuated over the past nine quarters between 27% in the third quarter of fiscal 2011 and 48% in the fourth quarter of fiscal 2010. Gross margin increased throughout fiscal 2010 mainly due to reductions in manufacturing costs attributable to efficiencies from increased volumes, the sale of previously reserved inventory, and improved yields. Gross margin declined in the first three quarters of fiscal 2011 due to the implementation of new manufacturing processes, product mix, and low yields of certain wafers, which resulted in reductions to the carrying value of inventory as a result of a lower of cost or market valuation. Gross margin increased in the fourth quarter of 2011 and continued to increase in the first two quarters of fiscal 2012 compared to the third quarter of fiscal 2011 as we implemented improvements to our new manufacturing processes to improve yields. We anticipate that gross margin will fluctuate from quarter-to-quarter due to changing product mix, competitive pressures on selling prices, actual product yields, and our ability to reduce manufacturing costs.

In general, research and development expense and selling, general and administrative expense as a percentage of net revenue have remained materially consistent over the past nine quarters. As our net revenue increases, research and development expense and selling, general and administrative expense are expected to decrease as a percentage of net revenue.

Liquidity and Capital Resources

Our principal source of liquidity as of June 30, 2012 consisted of our cash and cash equivalent holdings of $42.9 million. We have financed our operations primarily through the sale of convertible preferred stock, equipment term notes, leases, a credit facility, a customer deposit financing arrangement, and in fiscal 2010, by cash generated from operations. We continue to focus on monitoring our cash usage, controlling operating expense growth, and satisfying liquidity requirements. As of June 30, 2012, we have an accumulated deficit of $231.3 million. We have financed our historical operations primarily through the sale of convertible preferred stock, debt financing, and through cash generated from operations. We believe our cash and cash equivalents, together with cash generated from operations and our access to existing debt facility will be sufficient to meet our liquidity requirements through June 30, 2013. Our continued growth is dependent upon increasing revenues and managing working capital to a level that is adequate to support our increased cost structure or obtaining adequate debt financing to fulfill our obligations as they become due.

 

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We use cash primarily to fund operating expenses, purchase inventory, and acquire property and equipment. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses as reflected in the change in our outstanding accounts payable and accrued expenses and excludes the impact of non-cash items such as depreciation and stock-based compensation.

One of our primary sources of cash is cash receipts on accounts receivable from our shipment of products to our customers. Aside from the growth in amounts billed to our customers, net cash collections of accounts receivable are impacted by the efficiency of our cash collection process, which can vary from period to period depending on the payment cycles of our major customers.

During the six months ended June 30, 2012 we entered into a supply and prepayment agreement with Murata. The agreement is for an initial term of 18 months. Under the terms of the agreement, Murata agreed to prepay on its purchase orders placed through a third party distributor and to pay us a total deposit of $14.0 million between March and July 2012. We will repay the deposit at a rate based on the number of RFICs purchased by Murata over the four quarters starting from the fourth quarter of fiscal 2012 of up to $14.0 million. As of June 30, 2012, we received $12.0 million in deposits under the supply and prepayment agreement. In addition, our balance of received prepayments on purchase orders from the third party distributor was $31.1 million as of June 30, 2012.

Below is a summary of our cash flows used in operating activities, investing activities, and financing activities for the periods indicated:

 

     Fiscal Year Ended     Six Months Ended  
     December 25,
2010
    December 31,
2011
    June 25,
2011
    June 30,
2012
 
                 (unaudited)  
    

(in thousands)

 

Net cash provided by (used in) operating activities

   $ 7,751      $ (97   $ 3,096      $ 22,934   

Net cash used in investing activities

     (3,445     (4,330     (2,015     (6,126

Net cash provided by (used in) financing activities

     (3,724     1,302        (1,250     13,988   

Effect of exchange rates on cash and cash equivalents

     (73     18        71        3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 509      $ (3,107   $ (98   $ 30,799   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Cash Provided by (Used in) Operating Activities

Net cash provided by operating activities amounted to $7.8 million during the year ended December 25, 2010, and was primarily attributable to our net income of $3.8 million, depreciation and amortization of $3.6 million, stock-based compensation of $2.5 million, and an increase in our deferred revenue of $1.4 million, offset by an increase in inventory of $3.1 million. Deferred revenue increased as our revenue grew and our distributors carried higher inventory balances. Our inventory grew due to our increased purchasing activity in support of our increasing sales forecasts.

Net cash used in operating activities amounted to $0.1 million during the year ended December 31, 2011, and was primarily attributable to our depreciation and amortization of $4.0 million, stock-based compensation of $3.1 million, and an increase in accounts payable and accrued liabilities of $13.0 million, offset by our net loss of $9.7 million, an increase in accounts receivable of $1.3 million, an increase in inventory of $7.5 million, and an increase in prepaids and other current and noncurrent assets of $2.3 million. Our accounts payable and accrued liabilities increased along with our increased production volumes and overall growth in operations. Accounts receivable increased due to higher net revenues in the fourth quarter of fiscal 2011. Inventory increased to support our growing sales volume and due to longer cycle time and higher cost of implementing new manufacturing processes. Prepaids and other current and noncurrent assets increased due to higher volume of wafers sold to our wafer preparation suppliers and timing of payment.

Net cash provided by operating activities amounted to $22.9 million during the six months ended June 30, 2012, and was primarily attributable to customer deposits of $31.1 million, an increase in accounts payable and accrued liabilities of $15.9 million, depreciation and amortization of $1.9 million, stock-based compensation of $2.0 million, and our revaluation of our preferred warrants to fair value of $0.6 million, offset by our net loss of

 

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$3.1 million, an increase in accounts receivable of $5.0 million, an increase in inventory of $12.7 million, and an increase in prepaids and other current and noncurrent assets of $8.4 million. Our accounts payable and accrued liabilities increased along with our increased production volumes and overall growth in operations. Accounts receivable increased due to timing and higher volume of products shipped to our distributors in the first half of fiscal 2012. Inventory increased to support our growing sales volume and due to longer cycle time and higher cost of implementing new manufacturing processes. Prepaids and other current and noncurrent assets increased due to higher volume of wafers sold to our wafer preparation suppliers, prepayments made to suppliers, and timing of payment.

Net Cash Used in Investing Activities

Net cash used in investing activities during the years ended December 25, 2010 and December 31, 2011 and the six months ended June 30, 2012 consisted primarily of purchases of property and equipment of $3.5 million, $4.4 million, and $6.1 million, respectively, to support growth in our operations. Net cash used in investing activities during the year ended December 25, 2010 consisted of $1.1 million of capitalized software development costs associated with our new ERP system implementation and $2.3 million of purchases of property and equipment. The majority of our capital expenditures in 2011 and the six months ended June 30, 2012 related to new testing machinery and equipment.

Net Cash Provided by (Used in) Financing Activities

For the year ended December 25, 2010, net cash used in financing activities amounted to $3.7 million and was primarily attributable to payments on product financing arrangement of $3.2 million, payments on our notes payable of $2.1 million, payments on leases of $0.7 million, and costs paid in connection with our initial public offering of $0.8 million, offset by proceeds from notes payable of $2.6 million and proceeds from stock option exercises of $0.6 million. In June 2010, we amended our existing loan and security agreement, which increased the line of credit availability to $10.0 million in accounts receivable financing and to $3.0 million in equipment financing available until December 31, 2010. We are obligated to pay interest at the rate of prime plus 0.50%, subject to an interest rate floor and ceiling of 3.75% and 7.50%, respectively. The interest is payable monthly, with the principal due at the maturity date, June 23, 2013. We were obligated to pay interest at a fixed rate of 5.75% on our note payable for the equipment financing through March 31, 2011. We are obligated to pay interest at a fixed rate of 4.75% for the equipment financing from April 1, 2011 through the maturity date. Principal and interest is due in 36 equal monthly payments from the date of each draw. At December 25, 2010, the outstanding balance under the line of credit was $3.2 million, and there was $6.3 million available. At December 25, 2010, there was $2.4 million outstanding under the note payable, and there was $0.6 million available. We did not draw on the remaining amount available before the equipment financing availability expired on December 31, 2010.

Net cash provided by financing activities amounted to $1.3 million during the year ended December 31, 2011, and was primarily attributable to proceeds from our line of credit of $4.5 million, offset by costs paid in connection with our initial public offering of $1.8 million, payments on notes payable of $0.8 million, and payments on capital leases of $0.7 million. At December 31, 2011, the outstanding balance under the line of credit was $7.7 million, and there was $1.8 million available. At December 31, 2011, there was $1.6 million outstanding under the note payable, and there was no remaining borrowing capacity. We were in compliance with our loan covenants at December 31, 2011.

As of December 25, 2010 and December 31, 2011, we maintained outstanding standby letters of credit in total of $0.4 million as collateral in relation to a software lease agreement. The total amount has been collateralized by our line of credit.

In January 2012, we amended the existing loan and security agreement, which increased the line of credit availability to $20.0 million in accounts receivable financing and to $4.0 million in equipment financing available until December 31, 2012. In February 2012, we drew an additional $3.0 million from our line of credit. We are

 

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obligated to pay interest at the rate of prime plus 0.50%, subject to an interest rate floor and ceiling of 3.75% and 7.50%, respectively, for the accounts receivable financing. Interest is payable monthly with the principal due at the maturity date, December 30, 2014. We are obligated to pay interest at a fixed rate of 4.75% for the equipment financing. Principal and interest is due in 36 equal monthly payments from the date of each draw. The agreement contains certain financial covenants, including covenants relating to our required liquidity ratio, minimum tangible net worth, and minimum EBITDA.

Net cash provided by financing activities amounted to $14.0 million during the six months ended June 30, 2012, and was primarily attributable to proceeds from customer deposits from Murata of $12.0 million and proceeds from our line of credit of $3.0 million, offset by payments on notes payable of $0.4 million, costs paid in connection with our initial public offering of $0.4 million, and payments on capital leases of $0.3 million. Murata agreed to pay us a total customer deposit of $14.0 million between March and July 2012. We will repay the customer deposit over the four quarters starting from the fourth quarter of fiscal 2012. At June 30, 2012, the outstanding balance under the line of credit was $10.7 million, and there was $7.1 million available. At June 30, 2012, there was $1.2 million outstanding under the note payable, and there was $4.0 million available. We were in compliance with our loan covenants at June 30, 2012.

Contractual Obligations, Commitments, and Contingencies

The following table summarizes our outstanding contractual obligations as of December 31, 2011 and the effect those obligations are expected to have on our liquidity and cash flows in future periods:

 

     Payments Due by Period  

Contractual Obligations

   Total      Less Than
1 Year
     1-3
Years
     3-5
Years
     More Than
5 Years
 
     (in thousands)  

Notes payable

   $   1,618       $ 861       $   757       $       $   

Capital lease obligations

     760         555         205                       —   

Operating lease obligations

     4,995           1,928         2,094         973           

Inventory purchase obligations

     21,995         21,995                           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 29,368       $ 25,339       $  3,056       $     973       $   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2011, we had recorded liabilities of $2.0 million for uncertain tax positions and $0.1 million for potential interest and penalty, which are not included in the table because we are unable to reliably estimate the amount of payments in individual years that will be made in connection with these uncertain tax positions.

In March 2012, we entered into a supply and prepayment agreement with Murata. The agreement is for an initial term of 18 months. Under the terms of the agreement, Murata agreed to prepay on its purchase orders placed through a third party distributor and to pay us a total deposit of $14.0 million between March to July 2012. We will repay the deposit at a rate based on the number of RFICs purchased by Murata over the four quarters starting from the fourth quarter of fiscal 2012 of up to $14.0 million. As of June 30, 2012 we had received $12.0 million in deposits under the supply and prepayment agreement with Murata.

In May 2012, we amended our existing operating lease agreement to lease additional office space in San Diego, CA. Additional future minimum annual payments under the operating lease for fiscal 2013, 2014, and 2015 are approximately $0.3 million.

Contingencies

In September 2008, we received a Commodity Jurisdiction ruling from the U.S. Department of State that determined certain of our products sold in the aerospace and defense markets are subject to ITAR rather than the EAR. Given this ruling, a number of past product shipments that we believed were subject to the EAR were

 

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exported without the required State Department ITAR license. We also transferred ITAR technical data to one foreign person employee with the belief such data was subject to the EAR rather than the ITAR. We have taken steps to mitigate the impact of these violations. In December 2008, we submitted a voluntary disclosure to the U.S. Department of State to report the unlicensed exports. The U.S. Department of State encourages voluntary disclosures and generally affords parties mitigating credit under such circumstances. In addition, to reduce the likelihood of violations in the future, we have strengthened our export-related controls and procedures. For example, we implemented export classification training for employees and annual export compliance audits. As of the date of this prospectus, we have not received a response from the U.S. Department of State. Despite the steps we have taken, we could be subject to continued investigation and potential regulatory consequences related to these violations ranging from a no-action letter, government oversight of facilities and export transactions, monetary penalties, and in certain cases, debarment from government contracting, denial of export privileges, and criminal penalties. No claims have been asserted and no amounts have been accrued for this contingency in the consolidated financial statements.

Commitments

In November 2009, we entered into a software capital lease associated with the implementation of a new ERP system for a term of three years beginning in January 2010. The present value of the capital lease obligation was $0.7 million as of December 26, 2009. Future minimum annual payments under the capital lease for fiscal 2012 is approximately $0.3 million. In July 2010, we amended the existing operating lease agreement for our facility in San Diego, California. The amendment included a lease term extension of our existing facility from August 1, 2012 until December 31, 2015. In addition, we leased 23,209 additional square feet of office space from January 1, 2011 through December 31, 2015. Future minimum annual payments under the operating lease for fiscal 2012, 2013, 2014, and 2015 are approximately $0.9 million, $0.7 million, $0.8 million, and $0.8 million, respectively.

In June 2010, we signed a new foundry agreement with Silanna Semiconductor obligating us to purchase $5.4 million of wafer services from Silanna Semiconductor over a period of 24 months beginning July 1, 2010.

On February 14, 2012, we filed a complaint with the ITC and a lawsuit in the U.S. District Court for the Central District of California, which on April 13, 2012 we moved to the U.S. District Court for the Southern District of California. Each of these actions allege the infringement of five of our patents relating to RFICs and switching technology by RFMD and Motorola Mobility. On May 11, 2012, we also amended the ITC complaint and filed an additional lawsuit in the U.S. District Court for the Southern District of California to add HTC to the previous actions. The complaints filed with the ITC claim that certain of RFMD’s products and certain of Motorola Mobility’s and HTC’s smartphones infringe our patents relating to SOI design technology for RFICs and seeks, among other remedies, an exclusion order preventing the importation and sale of infringing products in the U.S.   Separately, the suits we filed in the U.S. District Court allege infringement of the same patents and seeks, in addition to damages, to permanently enjoin RFMD, Motorola Mobility, and HTC from further infringement. On April 16, 2012, RFMD filed a lawsuit against us in the U.S. District Court for the Middle District of North Carolina, seeking a declaratory judgment that RFMD does not infringe the patents we have asserted in our actions against them or that these patents are invalid. Pursuing these actions is costly and could impose a significant burden on management and employees. We may receive unfavorable interim rulings in the course of this litigation and there can be no assurance that a favorable outcome will ultimately be obtained.

Off Balance Sheet Arrangements

As of June 30, 2012, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, variable interest, or special purpose, which would have been established for the purpose of facilitating off-balance-sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded

 

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contracts. As such, we are not materially exposed to any financing, liquidity, market, or credit risk that could arise if we had engaged in such relationships. We do not have relationships or transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk in the ordinary course of business, which consists primarily of interest rate risk associated with our cash and cash equivalents, our debt, and foreign exchange rate risk.

Interest rate risk. The primary objective of our investment activity is to preserve principal, provide liquidity, and maximize income without increasing risk. Our investments have limited exposure to market risk. To minimize this risk, we maintain our portfolio of cash equivalents consisting of U.S. Treasuries money market funds. The interest rates are variable and fluctuate with current market conditions. The risk associated with fluctuating interest rates is limited to our cash and cash equivalents portfolio. We do not believe that we have any material exposure to changes in the fair value of cash and cash equivalents as a result of changes in interest rates due to their short-term nature. Declines in interest rates, however, will reduce future interest income.

Our exposure to market risk also relates to the changes in the amount of interest expense we must pay on our bank debt and borrowings on our bank credit facility. We are obligated to pay interest on our line of credit at the prime rate plus 0.50%, subject to an interest rate floor and ceiling of 3.75% and 7.50%, respectively. A 1% change in interest rates on our variable debt at June 30, 2012 would have resulted in interest expense fluctuating by an immaterial amount.

Foreign currency risk. Our sales to international customers, as well as our purchases of material from international suppliers, have been denominated primarily in U.S. dollars. Accordingly, we have limited exposure to foreign currency exchange rates and do not enter into foreign currency hedging transactions. The functional currency of our foreign operations in Europe and Asia is the local currency, and as such, any fluctuation in the exchange rates of these net assets, denominated in local currency, would be reflected in the translation gains or losses, which are accounted for in other comprehensive income in our statements of changes in equity. Our inventory purchases are also denominated in U.S. dollars. We do not believe that a change of 10% in the foreign currency exchange rates would have a material impact on our financial position or results of operations.

Recent Accounting Pronouncements

In September 2009, the FASB reached a consensus on Accounting Standards Update, or ASU, 2009-13, Revenue Recognition (Topic 605) – Multiple-Deliverable Revenue Arrangements, or ASU 2009-13, and ASU 2009-14, Software (Topic 985) – Certain Revenue Arrangements That Include Software Elements, or ASU 2009-14. ASU 2009-13 modifies the requirements that must be met for an entity to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered. ASU 2009-13 eliminates the requirement that all undelivered elements must have either: (1) vendor specific objective evidence, or VSOE, or (2) third-party evidence, or TPE, before an entity can recognize the portion of overall arrangement consideration that is attributable to items that already have been delivered. In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, entities will be required to estimate the selling prices of those elements. Overall arrangement consideration will be allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entity’s estimated selling price. The residual method of allocating arrangement consideration has been eliminated. ASU 2009-14 modifies the software revenue recognition guidance to exclude from its scope tangible products that contain both software and non-software components that function together to deliver a product’s essential functionality. These new updates are effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption was permitted. The adoption of these ASUs as of December 26, 2010 did not have a material impact on our consolidated financial statements.

 

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In March 2010, the FASB ratified the final consensus that offers an alternative method of revenue recognition for milestone payments. The guidance states that an entity can make an accounting policy election to recognize a payment that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. The guidance will be effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2010 with early adoption permitted, provided that the revised guidance is applied retrospectively to the beginning of the year of adoption. The guidance may be applied retrospectively or prospectively for milestones achieved after the adoption date. The adoption of this guidance as of December 26, 2010 did not have a material impact on our consolidated financial statements.

In 2011, the FASB issued amended standards to increase the prominence of items reported in other comprehensive income. These amendments eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity and require that all changes in stockholders’ equity—except investments by, and distributions to, owners—be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. These new standards are effective for us beginning in the first quarter of 2012 and are to be applied retrospectively. These amended standards will impact the presentation of other comprehensive income (loss) but will not impact our consolidated financial position or consolidated results of operations.

 

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BUSINESS

Our Company

We are a fabless provider of high performance RFICs. Our solutions leverage our proprietary UltraCMOS technology which enables the design, manufacture, and integration of multiple RF, mixed signal, and digital functions on a single chip. We believe our products deliver an industry leading combination of performance and monolithic integration. Our solutions target a broad range of applications in the aerospace and defense, broadband, industrial, mobile wireless device, test and measurement equipment, and wireless infrastructure markets. We have shipped over one billion RFICs based on our UltraCMOS technology since January 1, 2006.

Our UltraCMOS technology combines the ability to achieve the high levels of performance of traditional specialty processes, with the fundamental benefits of standard CMOS, the most widely used semiconductor process technology. UltraCMOS technology utilizes a synthetic sapphire substrate, a near-perfect electrical insulator, providing greatly reduced unwanted electrical interaction between the RFIC and the substrate (referred to as parasitic capacitance), which enables high signal isolation and excellent signal fidelity with low distortion over a broad frequency range (referred to as broadband linearity). These two technical attributes result in RF devices with excellent high-frequency performance and power handling performance, and reduced crosstalk between frequencies. In addition, increased broadband linearity provides for faster data throughput and greater subscriber capacity over a wireless network, resulting in enhanced network efficiency. UltraCMOS technology also provides the benefits of standard CMOS, such as high levels of integration, low power consumption, reusable circuit libraries, widely available design tools and outsourced manufacturing capacity, and the ability to scale to smaller geometries. We own fundamental IP in the UltraCMOS technology consisting of more than 125 U.S. and international issued and pending patents, and over 300 documented trade secrets covering basic circuit elements, RF circuit designs, manufacturing processes, and design know-how.

We leverage our extensive RF design expertise and systems knowledge to develop RFIC solutions that meet the stringent performance, integration, and reliability requirements of the rapidly evolving wireless markets. As of June 30, 2012, we offered a broad portfolio of more than 160 high performance RFICs including switches, digital attenuators, mixers / upconverters, prescalers, DTCs, and DC-DC converters, and were developing PAs. During the year ended December 31, 2011, our products were sold to more than 1,500 module manufacturers, OEMs, contract manufacturers, and other customers, including such companies as Ericsson, Flextronics, Hitachi Metals, Itron, Jabil, LG Innotek, Mini-Circuits, Motorola Solutions, Murata, Northrop Grumman, Planet Technology, Rockwell Collins, Rohde & Schwarz, SIPAT, Skyworks, Sony Corporation, Source Photonics, TDK-EPC, Thales Alenia Space, and TriQuint. We believe our RFICs are included in products sold by many of the leading mobile handset OEMs. For the years ended December 25, 2010 and December 31, 2011, we generated net revenue of $91.1 million and $107.8 million, respectively, representing year-over-year growth of 18%. We generated net income of $3.8 million for the year ended December 25, 2010 and a net loss of $9.7 million for the year ended December 31, 2011. We recorded net revenue of $80.3 million and a net loss of $3.1 million for the six months ended June 30, 2012. As of June 30, 2012, we had an accumulated deficit of $231.3 million.

Industry Overview

Wireless is Everywhere

Proliferation of wireless devices coupled with rapid advances in RF technologies have significantly enhanced wireless connectivity and revolutionized the mobile wireless, wireless infrastructure, broadband, and satellite communications markets. In addition, an array of other consumer, public safety, aerospace and defense and industrial markets are increasingly incorporating advanced RF functionality into a wide variety of applications. According to Frost & Sullivan, the worldwide market for RFICs across the aerospace and defense, broadband, industrial, mobile wireless device, test and measurement equipment, and wireless infrastructure industries is expected to grow from $12.2 billion in 2010 to $29.2 billion in 2015, representing a CAGR of 19.1%.

 

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The following graphic shows the broad array of applications in which advanced, high performance RFICs are currently being deployed:

 

LOGO

Growing worldwide demand for mobile wireless communications and mobile multimedia applications is driving the proliferation of mobile devices. According to Gartner Research, approximately 2.0 billion mobile handsets are expected to be produced worldwide in 2012, in addition to other mobile wireless devices.* The evolution of mobile wireless networks from predominantly voice-centric networks to advanced high-speed networks that deliver voice, video, and data, is enabling consumers to access bandwidth intensive rich media content on mobile devices through applications such as videoconferencing, streaming media, and interactive gaming. As a result, mobile wireless devices have evolved from supporting only a single cellular standard, operating on two or three frequencies and utilizing a single antenna, to supporting multiple wireless protocols, supporting up to 10 frequency bands and integrating multiple antennas. According to Gartner Research, the number of smartphone units produced worldwide is expected to grow from 653 million units in 2012 to 1,341 million units in 2016, representing a CAGR of 20%.*

The combination of an increasing global subscriber base, expansion of advanced wireless networks, and the proliferation of powerful devices offering high-speed wireless Internet access, has dramatically increased mobile data traffic. According to the Cisco Visual Networking Index forecast, global mobile data traffic is expected to increase 18 times between 2011 and 2016. Mobile data traffic is expected to grow at a CAGR of 78% from 2011 to 2016, reaching 10.8 exabytes per month by 2016. This increase in data traffic is straining the existing wireless network infrastructure. As a result, operators are expanding their network capacity by acquiring additional wireless spectrum, deploying more third generation, or 3G, base stations, extending coverage with microcell technologies such as femtocells to improve localized coverage, and introducing fourth generation, or 4G, technologies, such as Long Term Evolution, or LTE, and Worldwide Interoperability for Microwave Access, or WiMAX. In addition, the demand for global wireless connectivity is driving operators to deploy network infrastructure in new geographies. Infonetics projects second generation, 3G, and 4G (LTE and WiMAX) base station deployments worldwide will grow from 947,120 units in 2009 to 2.7 million units in 2014, representing a CAGR of 24%, and sales of femtocell products will increase from 175,975 units in 2009 to 37.7 million units in 2014, representing a CAGR of 193%.

 

* Gartner report: Forecast Analysis: Mobile Phones and Consumer Electronics, Worldwide, 1Q12 Update
     Published: 12 April 2012
     Analyst(s): Marielena Oppenheimer, Jon Erensen, Paul O’Donovan, Ben Lee, Amy Teng, Hiroyaki Shimizu

 

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In addition to the mobile wireless handset and infrastructure markets, high performance RFICs are increasingly being deployed in a variety of other wired and wireless market applications. The increasing data transfer requirements of broadband communications, satellite communications, and test and measurement equipment; the high reliability and radiation-hard performance requirements of aerospace and defense communications; and the ruggedness, high temperature, and electrostatic discharge, or ESD, tolerance of automotive and industrial applications have resulted in increased demand for high performance RFICs in these markets. Accordingly, advanced RF semiconductor solutions are evolving to deliver increased functionality, performance, and reliability across a broad array of markets while simultaneously achieving smaller form factors and lower cost per function.

Requirements of the RF Semiconductor Market

Significant market opportunities exist for RFIC suppliers that address the stringent requirements of wireless systems such as:

 

   

Better Performance. Wireless systems require components that can consistently deliver better signal quality, higher data rates, lower noise and system interference, and less power consumption across a variety of operating conditions and applications. High performance RFICs must interoperate with other wireless system components to avoid performance issues such as dropped calls, slower than expected transfer rates and poor battery life.

 

   

Increasing Functionality. To enable higher data rates, compatibility with legacy networks, and simultaneous voice and data communications, wireless systems must support multiple protocols and frequency bands. This increases overall design complexity and can increase the number of components, size and power consumption of wireless systems. For example, smartphones often utilize as many as 10 frequency bands to support a variety of wireless protocols and require separate RF components for each band.

 

   

Higher Reliability. Module manufacturers and OEMs demand that high performance RFICs perform reliably for long periods of time under a variety of conditions. In particular, manufacturers of wireless network infrastructure, and aerospace and defense products must meet stringent reliability standards that require specialized design, manufacturing, quality assurance, and testing processes.

 

   

Smaller Form Factor and More Cost Effective Solutions. High performance RFICs must enable module manufacturers and OEMs to design wireless products with an increasingly smaller form factor while also reducing overall product cost, both of which require increasing levels of integration.

Challenges Facing RF Semiconductor Suppliers

The need for higher performance wireless solutions, combined with the increased demand for integrated components that reduce costs, overall power consumption and size, has put significant pressure on wireless component suppliers. A typical wireless device contains three primary subsystems – the digital baseband processor, the transceiver, and the RF front-end. Baseband processors, and more recently transceivers, are implemented in standard silicon-based CMOS. However, fundamental physical limitations of silicon have prevented standard silicon-based CMOS solutions from meeting the high frequency and power handling requirements of high performance RF front-ends. As a result, RF front-end semiconductor manufacturers have historically utilized specialty process technologies such as GaAs HBT, GaAs pHEMT, SiGe, or BiCMOS. While discrete RF components produced with these processes can attain sufficient levels of performance, these technologies face the following significant challenges:

 

   

Inability to Monolithically Integrate. An RF front-end module consists of a number of discrete components, including PAs, low noise amplifiers, switches, filters, control interfaces, power regulators, diplexers and passive elements, most of which are manufactured using different specialty process technologies. As a result, traditional RFICs cannot monolithically integrate these discrete components,

 

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leading to RF front-end modules with higher component counts, greater system design complexity, larger overall form factor, and lower module yields. This inability to monolithically integrate also limits cost reduction opportunities.

 

   

Lack of Digital Integration. Specialty process technologies are generally not capable of integrating digital circuitry on the same IC as the RF components. As the digital content of the RF front-end increases and OEMs demand greater levels of configurability, the inability to monolithically integrate digital logic, memory, and other mixed-signal functions on an RFIC manufactured using specialty process technologies can limit performance improvements and reductions in device size, and result in a higher component count for the same functionality.

 

   

Manufacturing Inefficiencies. Suppliers of traditional RFICs typically operate their own fabrication facilities using highly customized process technologies for each type of RFIC product. This not only requires significant investment in process equipment by these suppliers, but also limits their ability to reduce costs by leveraging the existing high volume standard CMOS manufacturing infrastructure currently used by much of the broader semiconductor industry.

 

   

Lack of Scalability. Specialty process technologies, such as GaAs HBT, GaAs pHEMT, SiGe, and BiCMOS, are inherently limited in their ability to scale to smaller geometries as compared to standard CMOS and therefore IC suppliers utilizing these process technologies are increasingly unable to achieve reductions in manufacturing costs and form factors, lower power consumption, or higher performance.

Advanced wireless system module manufacturers and OEMs continue to implement more complex system architectures to achieve higher levels of performance, which in turn requires them to seek out more integrated solutions that are beyond the capabilities of RFICs produced using specialty process technologies.

Our Solution

We design, develop, market, and sell high performance RFICs based on our patented UltraCMOS technology. Our UltraCMOS technology enables us to monolithically integrate multiple RF and mixed signal components and digital circuitry into high performance RFICs. Our UltraCMOS technology provides the fundamental benefits of standard CMOS including high levels of integration, low power consumption, reusable circuit libraries, widely available design tools and outsourced manufacturing capacity, and the ability to scale to smaller geometries. Furthermore, our UltraCMOS technology utilizes a synthetic sapphire substrate, which enables the low parasitic capacitance, high signal isolation, and excellent broadband linearity required for high frequency and high power RF devices. As of June 30, 2012, we offered a broad portfolio of more than 160 high performance RFICs including switches, digital attenuators, mixers / upconverters, prescalers, DTCs, and DC-DC converters, and were developing PAs.

We leverage our extensive design and process expertise and systems knowledge to develop RFICs that meet the stringent performance, integration, and reliability requirements of the rapidly evolving wireless markets. For example, our monolithic RFICs enable smaller and more power efficient mobile wireless devices. In the wireless base station market, our RFICs enable the management of multiple bands which are driven by growth in 3G and 4G wireless networking protocols.

 

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The following graphic illustrates how a 3G antenna switch built using our UltraCMOS technology (shown on the left) is much smaller, eliminates the complexity of wirebonding, and integrates all functionality on a single chip, compared with a similar switch built using a typical GaAs based approach (shown on the right).

 

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Our Competitive Strengths

Our strengths that distinguish us from our competitors include:

 

   

Unique, Proprietary UltraCMOS Technology. We pioneered the development of UltraCMOS technology and have invested significant resources to optimize the technology for volume production of high performance RFICs. With our UltraCMOS technology, we enjoy the substantial benefits of standard CMOS while achieving RFIC performance equal to or better than the performance achieved with specialty process technologies. We believe we are the only high volume commercial supplier of RFICs based on SOS.

 

   

Broad, System Level Integration Capabilities. Our UltraCMOS technology enables high levels of monolithic RFIC integration, allowing the discrete components found in a typical RF front-end to be incorporated into one chip using a single process technology. Our extensive RFIC design experience allows us to approach the challenges of RF integration at the system level, as well as the component level. We have created a proprietary process design platform that includes a comprehensive portfolio of cell libraries, reference designs, design tools, and other intellectual property that allows the design, production, and integration of highly scalable RFICs.

 

   

Broad, Highly Differentiated IP Portfolio. We own fundamental IP in UltraCMOS technology and its implementation. We have more than 125 issued and pending patents encompassing a broad range of technologies that include basic materials processing, fundamental “building block” circuit elements enabled by our UltraCMOS material system, and higher-level circuit designs comprised of these unique circuit elements. In addition we have substantial materials, process, design, packaging, and testing know-how that we retain as documented trade secrets.